<PAGE>
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 March 31, 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)
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)
(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. [ ] Yes [X] No
As of April 15, 1999, the Registrant had 20,943,051 shares of Common Stock,
$.001 par value per share, outstanding.
1
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INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
- Balance sheets at December 31, 1998 and March 31, 1999
- Statements of operations for the three months ended
March 31, 1998 and 1999
- Statements of cash flows for the three months ended
March 31, 1998 and 1999
- Notes to financial statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative
Disclosure regarding Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CHEAP TICKETS, INC.
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,974 $ 51,634
Marketable securities 4,935 4,994
Trade accounts and other receivables 924 4,329
Ticket inventories 286 174
Other current assets 726 881
--------------- ---------------
Total current assets 9,845 62,012
Property and equipment, net 2,999 4,404
Other assets 381 479
--------------- ---------------
$ 13,225 $ 66,895
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 4,681 $ 10,164
Accrued salaries 399 778
Accrued vacation 421 476
Accrued expenses and other liabilities 222 285
Current installments of long-term debt 221 375
Current installments of capital lease obligations 288 654
Deferred revenue, current 0 400
Income taxes payable 140 645
--------------- ---------------
Total current liabilities 6,372 13,777
Long-term debt, excluding current installments 586 580
Capital lease obligations, excluding current installments 652 1,585
Deferred revenue, noncurrent 0 1,500
Other noncurrent liabilities 94 99
--------------- ---------------
Total liabilities 7,704 17,541
---------------- ----------------
Mandatorily redeemable cumulative preferred stock, $1 par value
(aggregate involuntary liquidation preference of $4,250,
plus unpaid cumulative dividends). Issued and outstanding
425 shares at December 31, 1998 and none at
March 31, 1999 (Note 3). 4,136 0
---------------- ----------------
Stockholders' Equity:
Common Stock, $.001 par value. Authorized 70,000 shares;
issued and outstanding 14,474 shares at December 31, 1998
and 20,943 shares at March 31, 1999 (Note 4) 10 21
Additional paid-in capital 1,247 48,900
Unearned compensation (696) (658)
Retained earnings 824 1,091
--------------- ---------------
Total stockholders' equity 1,385 49,354
--------------- ---------------
$ 13,225 $ 66,895
================ ===============
</TABLE>
3
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CHEAP TICKETS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------
1998 1999
<S> <C> <C>
Non-published fares $ 30,449 $ 55,962
Published fare commissions and bonuses 1,949 4,567
------------- ------------
Net revenues 32,398 60,529
Cost of sales 25,959 47,852
------------- ------------
Gross profit 6,439 12,677
Selling, general and administrative expenses 6,430 11,157
------------- ------------
Net operating income 9 1,520
Other income (deductions):
Interest income 68 145
Interest expense (38) (36)
Other, net 5 15
------------- ------------
Earnings before income taxes 44 1,644
Income taxes 18 674
------------- ------------
Net earnings 26 970
Preferred dividends (85) (79)
Accretion of mandatorily redeemable
cumulative preferred stock discount (44) (37)
Redemption of mandatorily redeemable
cumulative preferred stock - (587)
------------- ------------
Income (loss) available to common shares $ (103) $ 267
============= ============
Basic earnings (loss) per common share $ (0.01) $ 0.02
============= ============
Average common shares outstanding 14,847 15,082
============= ============
Diluted earnings (loss) per common share $ (0.01) $ 0.01
============= ============
Average diluted common shares outstanding 17,817 18,504
============= ============
</TABLE>
4
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CHEAP TICKETS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<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 - - - 970 970
14-for-1 common stock split 4 (4) - - -
Accretion to mandatorily redeemable
cumulative preferred stock redemption price - - - <37> <37>
Accrual of dividends on mandatorily
redeemable preferred stock - - - (79) (79)
Redemption of mandatorily redeemable
cumulative preferred stock - - - (587) (587)
Exercise of common stock warrants 3 (1) - - 2
Sale of common stock under public offering,
net of expenses 4 47,660 - - 47,664
Amortization and forfeiture of stock option
compensation - (2) 38 - 36
---- ------- ------ ------ -------
Balance, March 31, 1999 $ 21 $48,900 $ (658) $1,091 $49,354
==== ======= ====== ====== =======
</TABLE>
5
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CHEAP TICKETS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 26 $ 970
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 135 250
Stock option compensation 5 36
Amortization of discount on marketable securities - (59)
Changes in operating assets and liabilities 3,344 4,388
-------- --------
Net cash provided by operating activities 3,510 5,585
-------- --------
Cash flows from investing activities:
Capital expenditures (120) (257)
-------- --------
Net cash used in investing activities (120) (257)
-------- --------
Cash flows from financing activities:
Redemption of mandatorily redeemable cumulative preferred stock - (4,838)
Proceeds from issuance of common stock, net of expenses paid - 48,119
Proceeds from issuance of long-term debt 307 236
Principal payments on long-term debt (13) (88)
Principal payments on capital lease obligations (33) (97)
-------- --------
Net cash provided by financing activities 261 43,332
-------- --------
Net increase in cash and cash equivalents 3,651 48,660
Cash and cash equivalents at beginning of period 6,254 2,974
-------- --------
Cash and cash equivalents at end of period $ 9,905 $ 51,634
======== ========
Supplemental cash flow information:
Noncash investing and financing activities:
Acquisitions of new equipment through capital leases $ - $ 1,396
Accrued and unpaid dividends on mandatorily redeemable
cumulative preferred stock 85 -
</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' Registration Statement on Form S-1 filed with the Securities
and Exchange Commission, which became effective on March 18, 1999. The results
of operations for the three months ended March 31, 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 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.
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.
7
<PAGE>
Volume bonus and override revenues are recognized at the end of each
monthly or quarterly measurement period if the specified target has been
achieved.
New Pronouncements
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.
2. Net Income (Loss) Per Share
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows (in thousands,
except per share data).
<TABLE>
<CAPTION>
Income Shares Per Share
Three months ended March 31, (Numerator) (Denominator) Amount
------------ -------------- ----------
<S> <C> <C> <C>
1998:
Basic
Loss available to common shares $ (103) 14,847 $ (0.01)
=========
Effect of dilutive securities -
Common stock warrants 2,970
Diluted
---------- ------------
Net loss and assumed conversions $ (103) 17,817 $ (0.01)
========== ============ =========
1999:
Basic
Income available to common shares $ 267 15,082 $ 0.02
=========
Effect of dilutive securities
Common stock warrants 2,672
Stock options, including overallotment to
underwriters under initial public offering 750
Diluted -------- ------------
Net income and assumed conversions $ 267 18,504 $ 0.01
======== ============ =========
</TABLE>
Net income (loss) 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. Investors paid total consideration of $4,250,000 for
the preferred stock and warrants.
8
<PAGE>
Net proceeds to Cheap Tickets of $3,875,482 (after reflecting transaction
costs of $374,518), were allocated $510,652 to the warrants (recorded as
additional paid in capital) and $3,364,830 to the preferred stock. The value
attributable to the warrants was recorded as additional paid-in capital. The
$510,652 attributed to the warrants and the transaction costs of $374,518 were
being accreted by periodic charges to retained earnings. At December 31, 1998,
the cumulative accretion amounted to $261,198 and unamortized accretion was
$623,972.
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.
4. Stockholder's 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.
Initial Public Offering
On March 19, 1999 Cheap Tickets completed an initial public offering of
it's 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 that were
exercised. The total number of shares of common stock outstanding at March 31,
1999 was 20,943,051.
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. The common stock
outstanding after this transaction amounted to 21,468,051.
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.
9
<PAGE>
5. 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 under the 1997 Stock Option Plan.
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 expense included in selling, general and
administrative expenses, was $26,325 for the year ended December 31, 1998 and
$36,919 for the quarter ended March 31, 1999. Compensation costs of $657,720
will be amortized over the future vesting periods of the options. The granted
options have a five-year vesting period. Options outstanding at March 31, 1999
after forfeitures of $33,600 and additions of $13,000 in the first quarter were
707,400. No further options will be granted under the 1997 Stock Option Plan.
The Cheap Tickets' 1999 Stock Incentive Plan was adopted by the Board of
Directors in February 1999 and approved by the Cheap Tickets stockholders prior
to the initial public offering. All future grants 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 are reserved for
issuance under the 1999 Stock Incentive Plan. Under the 1999 Stock Incentive
Plan the exercise price 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. 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 has
adopted the 1999 non-employee Director Option Program. Under the 1999 Stock
Incentive Plan, each non-employee director appointed to the Board will receive
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.
The four non-employee directors on the Cheap Tickets Board each received an
option to purchase up to 1,500 shares of common stock on March 19, 1999 at an
exercise price of $15 per share. These options to purchase up to 6,000 shares in
the aggregate were the only options granted at March 31, 1999 under the 1999
Stock Incentive Plan.
10
<PAGE>
Item 2. MANAGEMENT'S 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 have been generated by ticket sales through its
four call centers, its internet site at www.cheaptickets.com, and, to a lesser
--------------------
extent, through 12 walk-in retail stores. At March 31, 1999 Cheap Tickets had
over 750,000 registered online users, with over 332,000 registering in the three
months ended March 31, 1999. Internet gross bookings in the first three months
of 1999 accounted for 22% of total gross bookings and 19% of net revenues,
compared with 15% of gross bookings and 12% of net revenues in the fourth
quarter of 1998.
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 period-to-period 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
are earned primarily on published air fares sold and include incentive overrides
and certain other payments based on the volume of transactions.
11
<PAGE>
Substantially all of Cheap Tickets' gross bookings represent sales of
airline tickets. For the three months ended March 31, 1999, approximately 99%
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' selling, general and administrative expenses include all
operating and corporate expenses. Major 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 for the
Three months ended March 31, 1999 and March 31, 1998
Net Revenues. Net revenues for the three months ended March 31, 1999 were
the highest of any quarter in Cheap Tickets' history. Better than expected
demand for leisure travel, improving recognition of the Cheap Tickets brand
name, a record quarter in bookings on the Internet, and sales in this quarter
from one call center not open in the first three months of 1998 were all
contributing factors to the quarter's success.
Net revenues for the quarter ended March 31, 1999 increased 86.8%, from
$32.4 to $60.5 million, an increase of $28.1 million. By category of net
revenues, non-published fares increased 83.8%, from $30.4 to $56.0 million, an
increase of $25.6 million, and commissions from published fares including
incentive overrides and certain other payments based on volume of transactions
increased 134.3%, from $1.9 million to $4.6 million, or an increase of $2.7
million. The increase in commissions of $2.7 million was primarily attributable
to an increase of approximately $1.7 million in volume bonuses and also
reflected an increase of 51.4%, from $22.3 million to $33.8 million, in gross
bookings of published fares.
Cheap Tickets' net revenues through call centers and retail operations
increased 51.2%, from $31.0 million to $46.9 million, an increase of $15.9
million. A fourth call center not open in the first quarter of 1998 accounted
for $10.0 million of the $15.9 million increase. Net revenues through the
Internet increased nearly tenfold, from $1.2 million to $11.8 million, an
increase of $10.6 million. Internet revenues accounted for 19% of total net
revenues in the first quarter of 1999, compared with 4% in the same period last
year. Approximately $1.7 million of the $28.1 million in increased net revenues
was attributable to volume bonuses, which have not been allocated between call
centers and the Internet.
Gross Profit. Gross profit for the quarter ended March 31, 1999 increased
96.9%, from $6.4 to $12.7 million, an increase of $6.2 million. The increased
margin was attributable to a positive volume variance on both non-published and
published fares of $4.6 million and increases in overrides and other volume
based fees of $1.7 million. As a percentage of net revenues, gross profit
increased from 19.9% to 20.9%. The change in percent was primarily attributable
to an increase in commissions as a percentage of net revenues from 6.0% to 7.5%.
Such increases are directly reflected in increased gross profit margins because
commissions are recorded as net revenues without any accompanying cost. These
factors were partially offset by a decrease in gross margins of 0.4 percentage
points on non-published fares.
12
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended March 31, 1999 increased 73.5%,
from $6.5 million to $11.2 million, an increase of $4.7 million, and decreased
as a percentage of net revenues from 19.9% to 18.4%.
The major components of the increase were compensation, advertising, credit
card and bank fees, and outside services. The increase in advertising costs was
primarily due to brand building and to increase Internet awareness. Increased
compensation costs reflected the addition of a fourth call center in the second
quarter of 1998, as well as increased staffing in the other call centers and
supporting departments. Credit card and bank fees reflect an increased
percentage of tickets sold by mail, which carry a higher interchange rate than
that charged for walk-in retail sales. The costs of outside services included
consultants fees related to the implementation of integrated voice response and
intelligent call routing systems to increase reservation agents' productivity.
Beginning in the second quarter of 1998, Cheap Tickets granted stock
options to employees to purchase up to an aggregate of 728,000 shares of Cheap
Tickets' common stock, of which 660,800 had an exercise price of $0.18 per share
and 67,200 had an exercise price of $1.57 per share. Total compensation
associated with these options amounted to $722,600, which was recorded as
deferred compensation, most of which was scheduled to be amortized as
compensation expense over the five-year term of the options. In the year ended
December 31, 1998, deferred compensation of $26,325 was charged to operations.
At the closing of Cheap Tickets' initial public offering on March 19, 1999, an
additional $1,062 was charged, at which time 140,000 options vested by their
terms. In the three months ended March 31, 1999, deferred compensation charges
amounted to $36,919, compared with none in the first three months of 1998.
Net Earnings (Loss). Cheap Tickets had net earnings for the three months
ended March 31, 1999 of $970,000, compared with net earnings of $26,000 for the
three months ended March 31, 1998. The increase in net earnings was attributable
to increased net revenues, a higher gross profit margin, and a decrease in
selling, general and administrative expenses as a percentage of net revenues
from 19.8% to 18.4%.
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.
13
<PAGE>
Liquidity and Capital Resources
The most significant factor in the generation of cash during the three
months ended March 31, 1999 was the initial public offering of 3,500,000 shares
of Cheap Tickets' common stock. Net proceeds from the offering of $47.7 million
after reduction for underwriters fees and other costs of issuance, less the
expenditure of $4.8 million to redeem mandatorily redeemable preferred stock and
pay accumulated dividends thereon, produced a net increase in funds of $42.8
million.
During 1999, Cheap Tickets intends to use approximately $9 million of the
proceeds from the initial public offering for advertising and brand development
expenditures and approximately $9 million for development of Cheap Tickets'
technological infrastructure in order to support growth. The balance of the
remaining proceeds will be used for general corporate purposes, including
working capital, and to fund additional advertising and brand development
expenditures and technological infrastructure. Cheap Tickets may apply an
undetermined amount of the proceeds toward the acquisition of complementary
businesses. Cheap Tickets has no agreements or understandings with respect to
any such acquisition. Management retains broad discretion as to the allocation
of the use of proceeds from the initial public offering. Pending application,
the net proceeds will continue to be invested in short-term investment grade,
interest-bearing obligations.
During the three months ended March 31, 1999, cash generated from
operations was $5.6 million compared with $3.5 million generated in the three
months ended March 31, 1998. For the first three months of 1999, cash generated
from operating activities was comprised principally of increases in accounts
payable of $5.5 million, partially offset by net increases in other operating
assets of $1.1 million, and of net earnings plus depreciation of $1.2 million.
For the first three months of 1998, cash generated from operating activities was
comprised principally of net changes in working capital and other accounts of
$3.3 million and net earnings plus depreciation of $161,000.
After all other account balance changes there was a net increase in cash of
$48.7 million in the three months ended March 31, 1999.
At March 31, 1999 Cheap Tickets had on hand cash and cash equivalents of
$51.6 million and marketable securities of $5.0 million. Cheap Tickets net
working capital was $48.2 million. Trade accounts receivable were $4.3 million
and accounts payable primarily for payment of airline tickets purchased for sale
were $10.2 million. Both were current according to terms. Cheap Tickets had
long-term debt outstanding of $2.2 million net of current installments. Of this
amount, $1.6 million was capital lease obligations and $580,000 was in notes
payable, which was principally a mortgage on one of the call centers. 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. There were no drawdowns against
this facility at March 31, 1999.
14
<PAGE>
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: (a) reservations database systems, (b)
PC/LAN systems and (c) 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 completed phases one and
two on these systems and is currently in the process of completing phase three.
In addition, Cheap Tickets has already completed all four phases for
several of its systems including SABRE reservations, TravelBase Accounting,
Payroll, Credit Card Processing Software and Credit Card Processor. Other
critical component systems, such as PC/LAN Hardware, PC/LAN Software and
Telecommunications Systems are in the process of having necessary changes made
to be Year 2000 compliant. Management anticipates that it will complete phase
four for all of Cheap Tickets' significant computer systems by the end of the
second quarter of 1999. If the systems material to Cheap Tickets' operations
have not been made Year 2000 compliant upon completion of phases three and four,
the Year 2000 issue could have a material and adverse effect on Cheap Tickets'
business, results of operations and financial condition.
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. Cheap Tickets intends to implement all changes
required by SABRE for Cheap Tickets to be Year 2000 compliant by the end of the
second quarter of 1999. 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 is currently in the process of replacing all
of its PC/LAN computing systems with a completion date scheduled for the second
quarter of 1999. 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
15
<PAGE>
because, to Cheap Tickets' knowledge, these systems already are Year 2000
compliant or will have Year 2000 upgrades available beginning in the first
quarter of 1999. 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 not yet evaluated
its non-informational technology systems. However, Cheap Tickets is working with
facilities management in each of its operational centers to seek to achieve Year
2000 compliance for these systems before the end of the second quarter of 1999.
In addition, 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. The FAA's state of Year 2000
readiness may 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.
The FAA reports that it has created the FAA Year 2000 Program Office. This
office is responsible for all of the FAA's Year 2000 efforts and has established
a schedule requiring all FAA systems to be Year 2000 compliant by June 30, 1999.
In addition, according to the FAA, contingency plans are being developed for
each FAA system, and for the agency itself.
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
16
<PAGE>
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.
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.
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
17
<PAGE>
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 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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
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.
Item 6. Exhibits and Reports on Form 8-K filed during the three months ended
--------------------------------------------------------------------
March 31, 1999
--------------
(a) Exhibits
--------
27.1 Financial Data Schedule
(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.
19
<PAGE>
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)
Date: May 14, 1999 /s/ Michael J. Hartley
----------------------
Michael J. Hartley
Chairman of the Board, Chief Executive Officer and
President (Principal Executive Officer)
Date: May 14, 1999 /s/ Dale K. Jorgenson
---------------------
Dale K. Jorgenson
Chief Financial Officer and Vice President
(Principal Financial Officer and Principal
Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
-----------
27.1 Financial Data Schedule
21
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 51,634
<SECURITIES> 4,994
<RECEIVABLES> 4,329
<ALLOWANCES> 0
<INVENTORY> 174
<CURRENT-ASSETS> 62,012
<PP&E> 6,123
<DEPRECIATION> 1,719
<TOTAL-ASSETS> 66,895
<CURRENT-LIABILITIES> 13,777
<BONDS> 2,165
0
0
<COMMON> 21
<OTHER-SE> 49,333
<TOTAL-LIABILITY-AND-EQUITY> 66,895
<SALES> 55,962
<TOTAL-REVENUES> 60,529
<CGS> 47,852
<TOTAL-COSTS> 11,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 1,644
<INCOME-TAX> 674
<INCOME-CONTINUING> 970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 970
<EPS-PRIMARY> .02
<EPS-DILUTED> .01
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