<PAGE>
As filed with the Securities and Exchange Commission on March 16, 1999
Registration No. 333-70841
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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CHEAP TICKETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<S> <C> <C>
Delaware 561599 99-0338363
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1440 Kapiolani Boulevard, Honolulu, Hawaii 96814
(808) 945-7439
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Michael J. Hartley
Chairman of the Board, Chief Executive Officer and President
Cheap Tickets, Inc.
1440 Kapiolani Boulevard, Honolulu, Hawaii 96814
(808) 945-7439
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to be sent to:
<TABLE>
<S> <C>
Henry M. Fields, Esq. Arthur J. Simon, Esq.
Victor H. Sim, Esq. Diane Bono, Esq.
Mavis L. Yee, Esq. SONNENSCHEIN NATH & ROSENTHAL
MORRISON & FOERSTER LLP 8000 Sears Tower, Chicago, Illinois 60606
555 West Fifth Street, Los Angeles, California (312) 876-8000
90013-1024
(213) 892-5200
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered(1) per unit(1) offering price(2) fee(2)
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<S> <C> <C> <C> <C>
Common Stock, par value $.001........ 4,025,000 shares $13.00 $52,325,000 $14,546.35(3)
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</TABLE>
(1) Includes 525,000 shares which the underwriters have options to purchase to
cover, if any, over-allotments.
(2) Estimated solely for purpose of calculating the amount of the registration
fee. This estimate is made in accordance with Rule 457 under the Securities
Act of 1933, as amended.
(3) A fee of $15,841 was previously paid with the initial filing on January 20,
1999.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+Information in this prospectus is not complete and may be changed. We may not +
+sell these securities until the time the registration statement filed with +
+the Securities and Exchange Commission becomes effective. This prospectus is +
+not an offer to sell the securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted or +
+would be unlawful prior to registration or qualification under the securities +
+laws of any such state. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS
3,500,000 Shares
[LOGO OF CHEAP TICKETS INC. APPEARS HERE]
www.cheaptickets.com
Common Stock
Cheap Tickets, Inc. is offering 3,500,000 shares of its common stock.
This is our initial public offering, and no market currently exists for our
shares. We anticipate that the initial public offering price will be between
$11.00 and $13.00 per share. The offering price may not reflect the market
price of our shares after the offering. We will list the common stock on the
Nasdaq National Market under the trading symbol "CTIX."
This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss. See "Risk Factors" commencing on Page
7.
-------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
The Offering Per Share Total
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<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discounts....................................... $ $
Proceeds to Cheap Tickets, Inc. ............................. $ $
</TABLE>
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We have granted the underwriters the right to purchase an additional 525,000
shares at the public offering price, less the underwriting discount within 30
days from the date of this prospectus to cover over-allotments.
William Blair & Company Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
The date of this prospectus is , 1999
<PAGE>
[PICTURE OF CHEAP TICKETS' INTERNET HOME PAGE]
Cheap Tickets' Home Page serves the discount travel needs of consumers for
airfare, hotels and car rentals. The fully-functional Internet site sold
nearly 100,000 tickets in 1998.
[PICTURE OF CHEAP TICKETS' INTERNET REQUEST PAGE]
In addition to calling any of the Company's over 300 sales agents at its four
call centers, the customer can easily schedule domestic and international
travel on the web site.
[PICTURE OF CHEAP TICKETS' INTERNET FARES PAGE]
The customer is presented with a broad array of fare possibilities, including
proprietary "non-published" fares representing excess airline capacity. Cheap
Tickets buys these fares from over 25 domestic and international airlines.
Also, a full menu of regularly published fares through the SABRE reservations
system is available.
Certain persons participating in this offering may engage in transactions
which stabilize, maintain or otherwise affect the price of common stock of the
Company including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids. For a discussion of these activities, see
"Underwriting." These transactions may be made on the Nasdaq National Market or
otherwise. Stabilizing, if commenced, may be discontinued at any time.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Cheap Tickets' actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
CHEAP TICKETS, INC.
We are a leading retail seller of discount tickets for domestic leisure air
travel. In 1998, we sold approximately 963,000 airline tickets through call
centers, retail stores and our Internet site at "www.cheaptickets.com." We
believe we are the leading seller of non-published fares for regularly
scheduled domestic routes. Non-published fares are tickets that we buy from
airlines and resell to consumers at significant discounts off published fares.
Sales of non-published fares accounted for approximately 59% of our airline
gross bookings in 1998. We have rights to buy these fares under contracts from
over 30 airline carriers, including America West, American, Continental,
Northwest TWA and US Airways. Our airline contracts, which typically run for a
term of 1 1/2 years or less and can be cancelled on short notice, do not
require the airlines to deal with us exclusively or to provide a specific
quantity of tickets. Under the contracts, we purchase tickets only when we
resell to customers, so that we do not have inventory carrying costs. We also
offer a full complement of regularly published fares, affording customers a
breadth of choice in leisure travel tickets at attractive prices that we
believe is unmatched in the industry. In addition, we sell cruise tickets, auto
rentals and hotel reservations.
We began selling tickets over the Internet in October 1997. In 1998, we sold
97,000 tickets through our website, generating $25 million in gross bookings.
Internet sales represented approximately 9% of our gross bookings in 1998 and
15% in the fourth quarter of 1998, reflecting the rapid increase in Internet
sales as a percentage of gross bookings. At February 22, 1999, we had over
575,000 registered online users, with 155,000 registering since December 1998.
Since 1986, we have provided an efficient distribution channel for airlines
to sell excess capacity without eroding their published fare structures.
Domestic airlines had average excess system capacity of 32.5% from 1995 to
1997, and excess capacity is estimated to be 29.3% in 1998. We seek to match
excess capacity with consumer demand for the lowest price available. Currently,
we offer approximately 375,000 non-published fares at any given time, covering
most major domestic and international routes. We set prices on these fares
lower than those available on published fares to meet the demands of leisure
travelers. These fares contain restrictions typically making them unattractive
for full fare passengers, who seek the convenience of tickets that can be
exchanged or cancelled and that do not have advance purchase or minimum stay
requirements. We believe our track record of selling excess capacity without
compromising the airlines' fare structures provides a strong incentive for the
airlines to continue to use us for the sale of domestic non-published fares.
We also offer to customers a full menu of regularly published fares in
addition to non-published fares. In 1994, we became the first non-airline to
file our non-published fares through the Airline Tariff Publishing Corporation.
This allows us to integrate our non-published fares with published fares in a
special area of the SABRE reservations system to which only we have access.
This system
3
<PAGE>
automatically sorts through millions of fares, including our non-published
fares, to identify the lowest fares available for the desired itinerary. These
fares are then posted in ascending price order for use by our reservation
agents and Internet customers.
The travel industry is large and growing. Consumers in the United States
spent $126 billion on travel through travel agencies in 1997, up from $101
billion in 1995. Airline travel continues to be the largest segment of the
industry with $70.5 billion, or 56%, of total travel booked through travel
agencies in 1997. Increasingly, the Internet has become an attractive method to
sell travel tickets directly to the public. Currently, travel represents the
second largest online retail category sold over the Internet. Online airline
travel bookings were $1.6 billion in 1998 and are expected to grow at a
compounded annual growth rate of 46%, reaching $10.6 billion in 2003.
Our growth strategy is to expand our customer base, significantly increase
our brand awareness, expand our strategic relationships and increase call
center productivity. First, we plan to capitalize on our position in selling
non-published fares to rapidly grow our Internet ticket sales. We intend to
broaden our online visibility with Internet content, commerce and service
providers. Second, we plan to aggressively expand brand recognition nationally
and internationally. To accomplish this goal, we intend to augment our
successful print media marketing and increase advertising on leading websites
and in other media. Third, we plan to expand existing and establish new
strategic relationships with airlines to increase sales of their excess
capacity. We also intend to seek new relationships with other travel suppliers,
certain Internet portals and travel-related websites. Finally, we plan to
expand our call center capacity through improved productivity. We intend to
invest substantial resources in developing, acquiring and implementing
technological enhancements to our call centers.
Our executive offices are located at 1440 Kapiolani Boulevard, Honolulu,
Hawaii 96814; our telephone number is (808) 945-7439 and our facsimile number
is (808) 946-3844. We were incorporated in Hawaii in 1986 and reincorporated in
Delaware on February 1, 1999.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by the Company.................... 3,500,000 shares
Common stock to be outstanding after the offering...... 20,943,132 shares(1)
Use of proceeds........................................ For advertising and brand
development; for development of
technological infrastructure; to
redeem outstanding mandatorily
redeemable preferred stock; and
for general corporate purposes.
For a more detailed discussion of
the use of proceeds, please refer
to "Use of Proceeds" on page 21.
</TABLE>
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(1) Based on the number of shares outstanding as of December 31, 1998.
Excludes 1,979,642 shares reserved for issuance under the 1997 Stock
Option Plan as of December 31, 1998. Includes 2,969,456 shares of common
stock issuable upon the exercise of warrants outstanding as of December
31, 1998. It is anticipated that all the warrants will be exercised
immediately prior to the closing of the offering. Excludes 1,260,000
shares reserved for issuance under the 1999 Stock Incentive Plan. For a
more detailed discussion of our capital stock and stock option plans
please refer to notes 6 and 12 to the financial statements on pages F-15
and F-20, "Management--Employee Stock Plans" on page 53, and "Description
of Capital Stock" on page 59.
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4
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share and operating data)
Set forth below are summary financial data of Cheap Tickets for the periods
indicated, which have been derived from Cheap Tickets' audited financial
statements. The operating data were not audited. The summary financial data set
forth below should be read in conjunction with Cheap Tickets' financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
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<S> <C> <C> <C>
Results of Operations:
Non-published fares................................ $58,982 $ 96,379 $159,846
Commissions........................................ 5,614 6,470 11,268
------- -------- --------
Net revenues(1).................................. 64,596 102,849 171,114
Gross profit....................................... 15,428 21,479 35,047
Selling, general and administrative expenses(2).... 14,352 23,091 33,411
------- -------- --------
Net operating income (loss)...................... 1,076 (1,612) 1,636
Net earnings (loss)................................ $ 674 $ (1,009) $ 1,065
Basic earnings (loss) per share(3)................. $ 0.05 $ (0.09) $ 0.04
Shares used in computing basic earnings (loss) per
share(3).......................................... 14,249 14,847 14,567
Diluted earnings (loss) per share(3)............... $ 0.05 $ (0.09) $ 0.03
Shares used in computing diluted earnings (loss)
per share(3)...................................... 14,249 14,847 17,921
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Actual As Adjusted(4)
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<S> <C> <C>
Balance Sheet Data:
Net working capital ..................................... $ 3,473 $36,975
Total assets............................................. 13,226 46,728
Long-term debt........................................... 1,238 1,238
Mandatorily redeemable preferred stock(5)................ 4,136 --
Stockholders' equity(5).................................. 1,385 39,023
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
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<S> <C> <C> <C>
Operating Data (unaudited):
Gross bookings (in thousands)(6)
Non-published fares............................... $ 58,982 $ 96,379 $159,846
Published fares................................... 46,962 57,295 110,287
-------- -------- --------
Total gross bookings............................. $105,944 $153,674 $270,133
======== ======== ========
Airline tickets sold:............................... 357,551 554,403 963,007
Call centers...................................... 357,551 552,383 865,661
Internet.......................................... -- 2,020 97,346
Registered Internet users........................... -- 18,891 420,023
</TABLE>
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(1) Net revenues consist of sales of non-published fares and commissions. Net
revenues from sales of non-published fares represent revenues from the sale
of tickets purchased from the airlines. Cost of sales consists of the net
fare cost paid to carriers to purchase non-published fares. Commissions,
including incentive overrides, are earned primarily on published fares sold
and include certain other payments based on the volume of transactions.
(2) In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price
of $1.57 per share. Total compensation associated with these options
amounted to $722,600 of which $26,325 has been charged to operations in
1998. The remainder will be charged over
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<PAGE>
the remaining five-year vesting period of the options, with the exception
of $1,062, which will be charged at the closing of the offering at which
time 140,000 options vest by their terms.
(3) Please refer to notes 1 and 6 to the financial statements for the
calculation of earnings per share, including an explanation of the number
of shares used in computing the amount of basic and diluted earnings per
share.
(4) As adjusted to reflect (1) the receipt of net proceeds of the offering;
(2) the redemption of the mandatorily redeemable preferred stock
(including a charge for the unaccreted discount); (3) the exercise of
warrants to purchase up to 2,969,456 shares of common stock at an
aggregate exercise price of $2,121 and (4) the immediate recognition of
unearned compensation related to certain stock options that fully vest
upon the completion of this offering.
(5) The mandatorily redeemable preferred stock is required to be redeemed upon
the closing of this offering. The redemption price upon the closing of
this offering will be approximately $4.8 million. The preferred stock was
issued at a discount of $885,170. Cheap Tickets is accreting the discount
over a five year period. Upon redemption, the unaccreted discount will be
charged directly to stockholders' equity and have a dilutive effect on the
calculation of earnings per share.
(6) Gross bookings represent the aggregate retail value of tickets sold under
non-published fares and published fares. The difference between gross
bookings and revenues as reported in Cheap Tickets' statement of
operations derives solely from the difference in revenue treatment
accorded to sales of published fares. With respect to published fares,
Cheap Tickets records as revenue in its statement of operations only the
commissions earned by Cheap Tickets on the sale of such fares. Gross
bookings represents the retail value of the sales of published fares. With
respect to non-published fares, revenues as reported in Cheap Tickets
statement of operations is equivalent to gross bookings, which is the
retail value of such fares. Management uses gross bookings as a key
indicator of general business activity, success of promotional efforts,
capacity to handle customer demand and efficiency of reservation agents.
In addition, management believes that gross bookings provide a useful
comparison between historical periods, and year-to-year changes in such
information provide a useful measure of market acceptance of Cheap Tickets
products.
6
<PAGE>
RISK FACTORS
In addition to the other information we provide in this prospectus, you
should carefully consider the following risks before deciding whether to invest
in our common stock. These are not the only risks we face. Some risks are not
yet known to us and there are others we do not currently believe are material
but could later turn out to be so. All of these could hurt our business. The
trading price of our common stock could decline because of general market
conditions or if any or all of these risks came to pass, and you could lose all
or part of your investment. In evaluating the risks of investing in us, you
should also evaluate the other information set forth in this prospectus,
including our financial statements.
For access to non-published fares, we depend on travel suppliers with which we
have no long-term contracts.
In 1998, approximately 98% of our gross bookings came from the sale of
airline tickets. Non-published fares represented about 59% of our airline gross
bookings and 93% of our net revenues, and we believe that our continuing
ability to obtain non-published fares is key to our success. Our business could
be hurt by:
. Refusals by airlines to renew contracts for supply of non-published
fares;
. Lack of available excess capacity for an extended time period;
. Renewals of the contracts on less favorable terms; or
. Cancellation of contracts.
Non-published fares are tickets we acquire from the airlines and resell to
consumers at substantial discounts off published fares. The airlines sell us
tickets at these non-published fares primarily to dispose of excess capacity
without eroding published fare structures. We have contracts with more than
30 airlines that permit us to acquire non-published fares on routes designated
in the contracts at specified prices. These contracts do not require airlines
to provide a specific quantity of tickets or to deal with us exclusively.
Although the terms vary, the typical contract is for a period from one to one
and a half years, and many are cancelable on 30 days' notice or less. We have a
consistent record of renewing these contracts, but airlines may decide not to
do business with us or to dispose of excess capacity themselves or through
others. At times in the past, airlines have renewed contracts with us on less
favorable terms and this may continue to occur in the future. In addition,
there may be times when they have less excess capacity to sell.
A large percentage of our sales of non-published fares currently comes from
three suppliers.
In 1998, approximately 49% of our sales of non-published fares came from
tickets we bought from three airlines: Continental represented approximately
25%, and America West and TWA represented approximately 12% each. If one or
more of these carriers were to discontinue to supply non-published fares to us,
our business could be hurt.
The percentages of non-published fare sales represented by our leading
carriers are likely to change from year to year depending upon a variety of
factors, including the availability of excess capacity from each carrier and
the breadth of routes on which non-published fares are available. We typically
engage in ongoing discussions with existing carriers about increasing the
routes available for sale of non-published fares. From time to time, we also
discuss potential new relationships for the supply of non-published fares with
carriers with whom we currently do not have contracts. Although these
discussions are at times successful, we do not anticipate that the percentages
for non-published fare sales among the leading carriers will change
significantly in the foreseeable future.
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<PAGE>
Our travel suppliers may be acquired and then not continue to deal with us.
We believe that our continued ability to obtain non-published fares is key
to our success. The acquisition of a key supplier could, however, adversely
change that supplier's relationship with us and hurt our business.
Because many of our contracts are short-term and can be cancelled on short
notice, we depend on our relationships with our suppliers for a continued
supply of non-published fares. We also depend on continuation of our suppliers'
policy of selling excess capacity through non-published fares. The acquisition
of one of our suppliers could hurt our relationship with that supplier and/or
could change that supplier's policy of dealing with excess capacity.
A decline in airline commission rates or the elimination of commissions could
hurt our business.
We earned approximately 24% of our gross profit in 1998 from commissions
paid by airlines. However, they are not required to pay any particular
commission rates or any commissions at all. If air carriers reduce, restrict or
eliminate altogether commissions or impose surcharges for tickets not sold by
them at any time, it could hurt our business. In recent years, airlines have
reduced rates and capped per-ticket commissions. In addition, they have further
reduced rates and capped commissions for online reservations.
Potential fluctuations in our financial results makes financial forecasting
difficult.
Our annual or quarterly results of operations may be below the expectations
of public market analysts and investors. This could result in a decline in the
value of our common stock.
Our business is seasonal due to customers' leisure travel patterns and
changes in the availability of non-published fares. We typically have higher
sales and gross profit in the second and third quarters and lower sales and
gross profit in the fourth quarter, and historically we have experienced losses
in net income in the fourth quarter. During periods of high-volume air travel,
such as occur in the fourth quarter of each year, we historically have had
access to fewer non-published fares, and such fares on certain major routes may
be unavailable. Online gross bookings may also tend to be seasonal and may
decline or grow less rapidly in the summer months. The seasonal sales cycle is
fairly predictable, but the cycle may shift year-to-year, corresponding to
changes in the economy or other factors affecting the market such as price
wars. This could lead to unusual volatility in revenues and earnings.
Gross profit may be impacted by a number of different factors, including:
. the amount of fares sold;
. the percentage of gross bookings represented by non-published fare
sales;
. the gross margin percentages on non-published fare sales. These
percentages in turn can be impacted by the sales mix of airlines,
whose net fare prices to us vary, and by competitive factors on
various routes and the possible elimination of profitable routes;
.rates of commissions on published fare sales; and
.the amount of volume bonuses.
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Any change in these factors could materially affect our gross margins and
operating results in future periods. Other events outside our control,
including those set forth in other risk factors, may cause us to experience
significant fluctuations in revenues and earnings.
We intend to increase operating expenses in anticipation of future sales. If
these increased sales do not occur or occur only in subsequent periods, we may
experience downward fluctuations in our earnings.
A decline in leisure travel or disruptions in travel generally could hurt our
business.
We earn almost all our revenues from the travel industry, particularly from
leisure travel. Leisure travel is highly sensitive to personal discretionary
spending levels and thus tends to decline during general economic downturns. In
addition, other adverse trends or events that tend to reduce leisure travel are
likely to hurt our business. These may include:
.Political instability;
.Regional hostilities;
.Terrorism;
.Fuel price escalation;
.Travel-related accidents;
.Bad weather; or
.Airline or other travel related strikes.
A number of airlines are currently in various stages of negotiation with
unions representing their employees. If those negotiations fail and the unions
elect to strike or effect a slowdown, our business could be harmed.
We face actual and potential competition from many sources.
We compete in ticket sales against travel wholesalers, consolidators, online
travel companies, airlines and travel agents based on price and the quality of
service to the customer. In the leisure travel market, we also compete against
frequent flyer awards and charter flights. Increased competition may result in
reduced operating margins, loss of market share and decreased brand
recognition. Ultimately, we may not be able to compete successfully against
current and future competitors.
Among other factors, our success depends heavily on our access to non-
published fares, on our brand recognition and on the ability of our systems to
integrate our non-published fares with published fares to offer customers a
broad choice. Some of our competitors, including the air carriers themselves,
have longer histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do.
These competitors may be able to replicate the factors that make us successful.
They may also enter into strategic or commercial relationships with larger,
established and well-financed companies. They may be able to induce one or more
of our suppliers of non-published fares to cease doing business with us, or to
do business with us on less favorable terms. They might also be able to build
strong brand recognition in the leisure travel market, through widespread
advertising and other marketing efforts. Certain of our competitors may be able
to devote greater resources to marketing and promotional campaigns on the
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Internet. Competitors may also devote substantially more resources to website
and systems development than we do. Any or all of these developments could
bring heavy competitive pressures to bear on us.
We also face the prospect of competition from potential competitors not yet
in the leisure travel market. We believe that potential competitors are likely
to be large, well-financed companies with existing brand name recognition and
proven retail distribution ability. Potential competitors are also likely to
need well developed Internet capabilities to compete effectively with us.
Without these characteristics, or without significant amounts of capital to
create them, we believe it would be relatively difficult, although not
impossible, for potential competitors to enter our market. Potential
competitors would have to convince air carriers to use them to distribute
excess capacity effectively without eroding existing fare structures. We
believe our suppliers have confidence in us in this regard based on our
historical results, but these suppliers could be induced to change their method
of distribution, if offered higher returns, broad distribution capability and
protection against fare erosion by potential competitors.
For a more complete description of the competitive environment in which we
operate, please refer to "Business--Competition" on pages 45 and 46.
The success of our business will depend on continued growth of online commerce
and internet infrastructure.
Our future revenues and profits depend, to a certain degree, upon the
widespread acceptance and use of the Internet and online services as a medium
for commerce by customers and sellers. If acceptance and growth of Internet use
does not continue, it will hurt our business.
Rapid growth in the use of the Internet and online services is a recent
phenomenon. This growth may not continue. A sufficiently broad base of
customers may not accept, or continue to use, the Internet as a medium of
commerce. Demand for and market acceptance of recently introduced products and
services over the Internet are subject to a high level of uncertainty. There
are few proven products and services. For us to achieve significant growth,
customers who have historically used traditional means of commerce will instead
need to elect to purchase products and services online, and sellers of products
and services will need to accept or expand use of the Internet as a channel of
distribution. Our revenues and profits depend on customers visiting our website
and actually purchasing tickets. Customers could potentially use the site for
route information and choose to purchase tickets directly from the airlines or
elsewhere.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and security,
and the timely development of complementary products, such as high-speed
modems, for providing reliable Internet access and services.
Major online service providers and the Internet itself have experienced
outages and other delays as a result of software and hardware failures and
could face such outages and delays in the future. Outages and delays are likely
to affect the level of Internet usage and the processing of transactions on the
Cheap Tickets website. It is unlikely that we could make up for the level of
orders lost in those circumstances by increased phone orders. In addition, the
Internet could lose its viability by
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reason of delays in the development or adoption of new standards to handle
increased levels of activity or of increased government regulation. The
adoption of new standards or government regulation may require us to incur
substantial compliance costs.
Our brand may not achieve the broad recognition necessary to succeed.
We believe that we must maintain and enhance the Cheap Tickets brand to
continue to attract and expand business. Failure to maintain and enhance our
brand could hurt our business.
The success of the Cheap Tickets brand will depend to a certain extent on
our ability to enhance our advertising programs. The number of Internet sites
that offer competing services increases the importance of establishing and
maintaining our brand name recognition. Many online sites already have well-
established brands in online services or the travel industry generally. We may
find it necessary to increase substantially our financial commitment to
advertising and publicity. This could adversely affect our results of
operations.
We may be unable to manage our rapid growth effectively.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion. Our inability to manage growth effectively could
hurt our business.
We have recently added a number of key managerial and technical employees,
and we expect to add additional key personnel in the future. This expansion has
placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources. To manage the expected growth
of our operations and personnel, we plan to:
. improve and upgrade transaction-processing, operational, customer
service and financial systems, procedures and controls;
. maintain and expand our relationships with various travel service
suppliers, Internet portals and other travel-related website
companies and other third parties necessary to our business;
. expand our finance, administrative and operations staff;
. continue to attract, train and manage our employee base; and
. implement a disaster recovery program.
Our current and planned personnel, systems, procedures and controls may be
inadequate to support our planned growth, and our management may not be able to
identify, manage and exploit existing and potential market opportunities
successfully.
We may not be able to keep up with the industry's rapid technological and other
changes.
The industry in which we compete is characterized by:
. rapid technological change;
. changes in user and customer requirements and preferences;
. frequent new product and service introductions embodying new
technologies;
. the emergence of new industry standards and practices; and
. the emerging importance of the Internet and the proliferation of
companies offering Internet-based products and services.
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These developments could render our existing online sites and proprietary
technology and systems quickly obsolete. Our inability to modify or adapt our
infrastructure in a timely manner or the expenses incurred in making such
adaptions could hurt our business.
As a result, we will be required to continually improve the performance,
features and reliability of our services, particularly in response to
competitive offerings. Our success will depend, in part, on our ability to
enhance our existing services and develop new services in a cost-effective and
timely manner. The development of proprietary technology entails significant
technical and business risks and requires substantial expenditures and lead
time. We may not be able to adapt successfully to customer requirements or
emerging industry standards. In addition, the widespread adoption of Internet,
networking or telecommunications technologies or other technologies could
require us to incur substantial expenditures to modify or adapt our services or
infrastructure.
Our computer and communications systems are vulnerable to business
interruptions.
Our ability to receive and fill orders through our call centers or online
and provide high-quality customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems.
The occurence of interruptions, delays, loss of data or the inability to accept
and confirm customer reservations could hurt our business.
Our online servers are located in San Jose, California, SABRE's computers
are located in Tulsa, Oklahoma, our communication systems are located at four
call centers, and our accounting systems' computers are located in Hawaii.
These systems and operations are vulnerable to damage or interruption from
power loss, telecommunications failure, break-ins, natural disasters and
similar events.
We currently do not have back-up systems and do not carry adequate business
interruption insurance. In addition, although we back up data on a regular
basis, we do not have a formal disaster recovery plan. Although we have adopted
network security measures, our servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. These kinds of events
could lead to interruptions, delays, loss of data or the inability to accept
and confirm customer reservations. The occurrence of any of the foregoing risks
could hurt our business.
Interruptions in service from third parties could hurt our business.
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the
airline and hotel industries to make airline ticket and hotel room
reservations. Any interruption in these third-party services or a deterioration
in their performance could hurt our business. If our arrangement with any of
these third parties is terminated, we may not find an alternative source of
systems support on a timely basis or on commercially reasonable terms.
We rely on third parties to print our airline tickets and arrange for their
delivery. We rely on iXL Holdings to host our online system's infrastructure,
web and database servers.
We use an internally developed system for our website and substantially all
aspects of transaction processing. We currently rely on The SABRE Group for our
general reservations system, including customer profiling, making reservations
and credit card verification and confirmations. Currently, over 90% of our
computing transactions are processed through the SABRE systems. Our technology
relationship with SABRE for Internet operations will further increase our
dependency. If
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we or SABRE ever elect to terminate the existing relationship, we would be
forced to convert to another provider. This conversion could require a
substantial commitment of time and resources and hurt our business.
Our current reservation systems may not be able to handle all calls adequately.
During traffic peaks, our call centers have not been able to answer all
calls or service all inquiries adequately. Our systems' lack of capacity to
handle the demands of our customers can cause unanticipated system disruptions,
slower response times, poor customer service, impaired quality and speed of
reservations and confirmations and delays in reporting accurate financial
information. These problems could hurt our business.
We intend to use part of the proceeds of this offering to upgrade our
systems and increase our processing capability, both online and through our
call centers, to accommodate anticipated increases in customer ticket sales.
However, if we experience a substantial increase in our web traffic or in
reservations beyond expected levels, we may need to expand and upgrade our
technology, transaction-processing systems and network infrastructure. If we
fail to expand and upgrade in a timely manner, our business could be hurt. We
believe that our contemplated systems enhancements will be sufficient to handle
increases in expected demand, but we may not be able to:
. project accurately the rate or timing of such increases;
. upgrade our systems and infrastructure to accommodate future traffic
levels;
. integrate successfully any newly developed or purchased technology
with our existing systems; or
. upgrade and expand our systems in a timely or efficient manner.
Online security breaches could hurt our business.
In our business, secured transmission of confidential information over
public networks is essential to maintain consumer and supplier confidence. If
any compromise of our security were to occur, it could hurt our business.
Concerns over the security of transactions conducted on the Internet and the
potential compromise of customer privacy may inhibit the growth of commercial
online services as a means of conducting commercial transactions. We have
expended significant resources to protect against security breaches and to
alleviate problems caused by such breaches, and we may need to make further
expenditures for this purpose in the future. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to transmit securely confidential information,
such as customer credit card numbers. In addition, we maintain an extensive
confidential database of customer profiles and transaction information. Our
current security measures may not be adequate and advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the methods we use to
protect customer transaction and personal data. A party who can circumvent our
security might be able to misappropriate proprietary information or cause
interruptions in our operations. Security breaches could also expose us to a
risk of loss or litigation and possible liability for failing to secure
confidential customer information.
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If we lose our key personnel or cannot recruit additional personnel, our
business may suffer.
We depend substantially on the continued services and performance of our
senior management, particularly Michael J. Hartley, the Chairman of the Board,
Chief Executive Officer and President, and certain other key personnel. The
loss of the services of any of these executive officers or other key employees
could hurt our business.
We do not have employment agreements with any of our key personnel. In
addition, most members of our senior management group have been recruited and
hired over the past 18 months. These individuals may not be able to fulfill
their responsibilities adequately and may not remain with us.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate other highly skilled technical, managerial,
marketing and customer service personnel. Competition for such personnel is
intense. The location of our headquarters in Hawaii may also make it more
difficult to attract qualified personnel from the mainland. We may not able to
attract, assimilate or retain sufficiently qualified personnel. In particular,
we may encounter difficulties in attracting a sufficient number of qualified
software developers for our online services and transaction-processing systems.
The failure to retain and attract necessary technical, managerial, marketing
and customer service personnel could hurt our business and impair our growth
strategy.
Although none of our employees is represented by a labor union, our
employees may join or form a labor union. For a more detailed description of
our management and key employees, please refer to "Management" on page 47.
Our business could be hurt if we do not offer new services successfully.
We plan to introduce new and expanded services. Our inability to generate
revenues from such expanded services or products sufficient to offset their
development or offering cost could hurt our business. In 1998, approximately 2%
of our gross bookings came from the sale of cruise tickets, auto rentals and
hotel reservations. Our business strategy is to increase the percentage of such
alternate travel offerings as a percentage of our revenues. We may not be able
to offer such services in a cost-effective or timely manner and our efforts may
not be successful. Further, any new service that is not favorably received by
customers could damage our reputation or brand name. Expansion of our services
could also require significant additional expenses and may strain our
management, financial and operational resources. If we cannot obtain alternate
travel offerings in the future, we may not be able to benefit fully from our
growth strategy.
Our business could be hurt if we make acquisitions that are not successful.
We may in the future broaden the scope and content of our business through
the acquisition of existing complementary businesses. We may not be successful
in overcoming problems encountered in connection with such acquisitions, and
our inability to do so could hurt our business.
Although we are not currently contemplating any acquisitions, we may
consider the acquisition of companies providing similar services in
international markets or in other sectors of the travel industry in the future.
Future acquisitions would expose us to increased risks. These include risks
associated with:
. the assimilation of new operations, sites and personnel;
. the diversion of resources from our existing businesses, sites and
technologies;
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. the inability to generate revenues from new sites or content
sufficient to offset associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and
policies; and
. the impairment of relationships with employees and customers as a
result of integration of new businesses.
Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses.
Our business could be hurt if our international expansion is not successful.
One component of our growth strategy is to expand internationally.
International expansions will present us with special problems of adapting to
foreign business customs and regulations and of managing staff effectively from
a distance. If we do not address these problems adequately, our international
expansion may not produce desired results. This could hurt our business. We may
expend significant financial and management resources to establish local
offices overseas, create localized user interfaces and comply with local
customs and regulations. If the revenues generated by these international
operations are insufficient to offset the expense of establishing and
maintaining them, our business could be hurt. To date, we have no experience in
developing localized versions of our online sites or offshore call centers and
only limited experience in marketing and distributing our travel services
internationally. We may not be able to expand our operations successfully in
such markets. Conducting business on an international level also involves
certain inherent risks, such as unexpected changes in regulatory requirements,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, political instability, currency rate fluctuations, seasonality in
leisure travel in certain countries and potentially adverse tax consequences.
We may be unable to meet our future capital requirements.
We may not be able to fund our expansion, develop or enhance our products or
services or respond to competitive pressures if we lack adequate funds. This
could hurt our business. Based on our current operating plan, we anticipate
that the net proceeds of this offering, together with our available funds and
bank lines, will be sufficient to satisfy our anticipated needs for working
capital, capital expenditures and business expansion for the foreseeable
future. After that time, we may need additional capital. Alternatively, we may
need to raise additional funds sooner in order to fund more rapid expansion, to
develop new or enhanced services, or to respond to competitive pressures. If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be diluted. Further, any new
securities could have rights, preferences and privileges senior to those of the
common stock.
We currently do not have any commitments for additional financing. We cannot
be certain that additional financing will be available in the future to the
extent required or that, if available, it will be on acceptable terms. For more
information on how the proceeds from this offering are intended to be used,
please refer to "Use of Proceeds" on page 21 and for more information on
management's view of liquidity and capital resources, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" on page 32.
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Year 2000 risks may harm our business.
The risks posed by Year 2000 issues could hurt our business in a number of
significant ways. Our information technology system could be substantially
impaired or cease to operate due to Year 2000 problems. Additionally, we rely
on information technology supplied by third parties, and our participating
sellers are also heavily dependent on information technology systems and on
their own third party vendors' systems. The main supplier of our reservations
system is SABRE. Currently, over 90% of our transactions are processed through
SABRE. Year 2000 problems experienced by us or any such third parties could
hurt our business. Additionally, the Internet could face serious disruptions
arising from the Year 2000 problem.
We are evaluating our internal information technology systems and contacting
our information technology suppliers and participating sellers to ascertain
their Year 2000 status. However, our own systems may not be Year 2000 compliant
in a timely manner, any of our participating sellers or other website vendors
may not be Year 2000 compliant in a timely manner, and there may be significant
interoperability problems among information technology systems. Consumers may
not be able to visit our website without serious disruptions arising from the
Year 2000 problem. Given the pervasive nature of the Year 2000 problem,
disruptions in other industries and market segments may hurt our business.
Moreover, the costs related to Year 2000 compliance could be significant.
Finally, Year 2000 issues may impact other entities with which we do
business, including, for example, those responsible for maintaining telephone
and Internet communications. Accordingly, we cannot predict the effect of the
Year 2000 problem on such entities. If these other entities fail to take
preventive or corrective actions in a timely manner, the Year 2000 issue could
hurt our business. For more information on management's view of the Year 2000
risks, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance" on page 33.
Our success depends on our ability to protect our intellectual property.
Trademarks, copyrights and trade secrets
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success. Claims, infringement
or misappropriation by third parties may hurt our business. We rely on a
combination of laws and contractual restrictions, including trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to establish and
protect our proprietary rights. However, laws and contractual restrictions may
not be sufficient to prevent misappropriation of our technology or deter others
from developing similar technologies. We pursue the registration of certain of
our key trademarks and service marks in the United States. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our products and services are made available. The steps
we have taken to protect our proprietary rights may not be adequate, third
parties may infringe or misappropriate our copyrights, trademarks, trade dress
and similar proprietary rights, and we may be required to incur significant
expenses preserving our rights. In addition, other parties may assert
infringement claims against us. We may be subject to legal proceedings and
claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by us. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
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Domain names
We currently hold the Internet domain name "www.cheaptickets.com," as well
as various other related names. Third parties may acquire domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights which may hurt our business. Domain names generally are
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is subject to change. Regulatory bodies
could establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. The
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. As a result, we may not
acquire or maintain the "www.cheaptickets.com" domain name in all of the
countries in which we conduct business.
Regulatory and legal uncertainties could harm our business.
Certain segments of the travel industry are heavily regulated by the United
States and other governments. Accordingly, certain services offered by us are
affected by such regulations. New legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and commercial online services could hurt our business.
We are subject to federal regulations prohibiting unfair and deceptive
practices. In addition, federal regulations concerning the display and
presentation of information currently applicable to airline booking services
could be extended to us in the future, as well as other laws and regulations
aimed at protecting customers accessing online or other travel services. In
California, Hawaii and certain other states, we are required to register as a
seller of travel, comply with certain disclosure requirements and participate
in the state's restitution fund.
We are also subject to regulations applicable to businesses generally and
laws or regulations applicable to online commerce. Currently, few laws and
regulations directly apply to the Internet and commercial online services.
However, it is possible that laws and regulations may be adopted with respect
to the Internet or commercial online services covering issues such as user
privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Further, the growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws. Such laws would likely impose additional
burdens on companies conducting business online. The adoption of any additional
laws or regulations may decrease the growth of the Internet or commercial
online services. In turn, this could decrease the demand for our products and
services and increase our cost of doing business, or otherwise hurt our
business.
Moreover, in many states, there is currently great uncertainty whether or
how existing laws governing issues such as property ownership, sales and other
taxes, libel and personal privacy apply to the Internet and commercial online
services. These issues may take years to resolve. For example, tax authorities
in a number of states, as well as a Congressional advisory commission, are
currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject us to additional
state sales and income taxes.
Federal legislation imposing certain limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, imposes on electronic commerce a
three-year moratorium on state and local taxes imposed after October 1, 1998
but only where such taxes are discriminatory on Internet access. It is possible
that the legislation could not be renewed when it terminates in October 2001.
Failure to renew the
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legislation could allow state and local government to impose taxes on Internet-
based sales, and such taxes could hurt our business.
Our business could be hurt if management uses the proceeds of this offering
inappropriately.
The net proceeds of this offering are estimated to be approximately $38.3
million at an assumed initial public offering price of $12.00 per share and
after deducting the estimated underwriting discount and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, the
net proceeds are estimated to be approximately $44.1 million. Our management
will retain broad discretion as to the allocation of approximately $15.5
million of the proceeds of this offering. For more information on our use of
proceeds from this offering, please refer to "Use of Proceeds" on page 21.
Our stock price is likely to be very volatile.
Prior to this offering, you could not buy or sell our common stock publicly.
An active market for our common stock may not develop or be sustained after
this offering because stockholders may elect not to trade their shares. With
the underwriters, we will determine the offering price for our common stock.
That price may bear no relationship to the price at which the common stock will
trade after completion of this offering. The market price of the common stock
is likely to be volatile and could be subject to significant fluctuations in
response to factors such as the following, some of which are beyond our
control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities
analysts and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in market valuations of other travel, Internet or online
service companies;
. announcements of technological innovations or new services by us or
our competitors;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of one or more major travel suppliers;
. additions or departures of key personnel;
. future sales of our common stock; and
. stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price and
volume fluctuations. These fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, may adversely affect the market price of our common stock.
The market prices for stocks of Internet-related and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the operating performance of these companies. These
market prices generally are not sustainable and are subject to wide variations.
If our common stock trades to such levels following this offering, it likely
will thereafter experience a material decline.
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In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
The market price of our stock could be adversely affected because a significant
portion of our stock is closely controlled.
Upon consummation of this offering, Michael J. Hartley, Chairman of the
Board, Chief Executive Officer and President of Cheap Tickets, and Sandra T.
Hartley, Vice President, Employee Relations and Director and wife of Michael J.
Hartley, together with their respective affiliates, will beneficially own
approximately 64.0 percent of our outstanding common stock, subject to certain
adjustments. If the underwriters' over-allotment option is exercised in full,
Michael J. Hartley and Sandra T. Hartley will beneficially own approximately
62.4 percent of our outstanding common stock. Such ownership could discourage
others from initiating potential merger, takeover or other change of control
transactions. As a result, the market price of our common stock could be
adversely affected. If they act together, they will have the ability to control
the outcome on all matters requiring stockholder approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets, and to control our management and affairs.
For more information on beneficial ownership of stock, please refer to
"Principal Stockholders" on page 57.
Anti-takeover provisions affecting us could prevent or delay a change of
control.
Upon the closing of this offering our Board of Directors will have the
authority to issue up to 10,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
This could have an adverse impact on the market price of our common stock. We
have outstanding 425,000 shares of mandatorily redeemable preferred stock, all
of which are required to be redeemed by us upon the closing of the offering. We
have no present plans to issue any additional shares of preferred stock, but we
may do so. The rights of the holders of common stock may be subject to, and
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Moreover, the issuance of preferred stock may have
the effect of delaying, deferring or preventing a change of control of Cheap
Tickets without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. Further, certain
provisions of our charter documents, including provisions permitting
stockholders to take action by written consent with a two-thirds vote and
limiting the ability of stockholders to raise matters at a meeting of
stockholders without giving advance notice, may have the effect of delaying or
preventing changes in control or management of Cheap Tickets. These governance
provisions also could hurt the market price of our common stock. For more
information on our capital stock, please refer to "Description of Capital
Stock" on page 59.
Substantial sales of our common stock could adversely affect our stock price.
Sales of substantial amounts of our common stock in the public market after
this offering could adversely affect the prevailing market price of the common
stock. Immediately upon the effectiveness of this offering, 3,500,000 shares
will be freely tradable. Commencing 180 days following the date of this
offering, an additional 17,443,132 shares will become freely tradable upon the
expiration of agreements not to sell such shares, subject to compliance with
Rule 144
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promulgated under the Securities Act of 1933, as amended, assuming the exercise
of warrants to purchase 2,969,456 shares of common stock. William Blair &
Company, L.L.C. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these agreements.
Immediately after this offering, we intend to register approximately 3,239,642
shares of our common stock reserved for issuance under our stock option plans.
Sales of common stock by stockholders upon expiration of the lock-up agreements
may adversely affect the market price of the common stock. For more information
regarding the terms upon which our common stock will be underwritten, please
refer to "Underwriting" on pages 63 and 64.
As of the effective date of the registration statement, holders of 2,969,456
shares of common stock will be entitled to registration rights with respect to
their shares. Holders of such shares can require us to register the shares at
any time following 180 days after the effective date, subject to certain
conditions.
You will experience immediate and substantial dilution.
The initial public offering price is expected to be substantially higher
than book value per share of the outstanding common stock. Investors purchasing
shares of common stock will incur immediate substantial dilution in the amount
of $10.14 per share. In addition, investors purchasing shares in the offering
will incur additional dilution to the extent outstanding options are exercised.
For more information on the dilution of our common stock, please refer to
"Dilution" on page 23.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends," "
anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the
date of this prospectus.
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USE OF PROCEEDS
The net proceeds to Cheap Tickets from the offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by Cheap Tickets, are estimated to be $38.3 million at an assumed initial
public offering price of $12.00 per share. If the underwriters exercise their
over-allotment option in full, the net proceeds are estimated to be $44.1
million. During 1999, Cheap Tickets intends to use approximately $9 million of
such proceeds for advertising and brand development expenditures and
approximately $9 million for development of Cheap Tickets' technological
infrastructure in order to support growth. An additional use of proceeds will
be the redemption of the existing mandatorily redeemable preferred stock for
approximately $4.8 million, the substantial majority of which is held by
Phillips-Smith Specialty Retail Group III, L.P. Two of Cheap Tickets' directors
are principals of that group. The balance of the 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. Pending
application, the net proceeds will be invested in short-term, investment grade,
interest-bearing obligations.
DIVIDEND POLICY
Cheap Tickets has never declared or paid dividends on its common stock and
anticipates for the foreseeable future that all earnings will be retained for
use in its business. The payment of any future dividends will be at the
discretion of the Board of Directors.
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CAPITALIZATION
The following table sets forth the capitalization of Cheap Tickets as of
December 31, 1998, and as adjusted to give effect to the sale of 3,500,000
shares of common stock offered by Cheap Tickets and the application of net
proceeds therefrom, and the exercise of warrants for 2,969,456 shares of common
stock. This assumes that the underwriters will not exercise their over-
allotment option. The number of shares outstanding used throughout the
prospectus reflect a 14-for-one stock split. For more information on our
anticipated use of proceeds of this offering, please refer to "Use of Proceeds"
on page 21. The table should be read in conjunction with the financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Actual As Adjusted(1)
------ --------------
(in thousands)
<S> <C> <C>
Long-term debt, excluding current installments...... $ 586 $ 586
Capital lease obligations, excluding current
installments....................................... 652 652
------ -------
Total debt (2).................................... 1,238 1,238
------ -------
Mandatorily redeemable preferred stock, $1 par value
(aggregate involuntary liquidation preference of
$4,250,000 plus unpaid cumulative dividends),
425,000 shares issued and outstanding (actual);
none issued or outstanding (as adjusted)(3)........ 4,136 --
------ -------
Stockholders' equity:
Preferred stock, $.01 par value--authorized
5,000,000 shares (actual), 10,000,000 shares (as
adjusted); none issued or outstanding (as
adjusted)(4)..................................... -- --
Common stock, $.001 par value; 70,000,000 shares
authorized, 14,473,676 shares issued and
outstanding (actual); 20,943,132 shares issued
and outstanding (as adjusted)(5)................. 10 75
Additional paid-in capital........................ 1,247 39,444
Unearned compensation............................. (696) (695)
Retained earnings................................. 824 199
------ -------
Total stockholders' equity........................ 1,385 39,023
------ -------
Total capitalization............................ $6,759 $40,261
====== =======
</TABLE>
- --------
(1) As adjusted to reflect the receipt of the net proceeds of the offering of
$38,260,000, the redemption of the preferred stock (which includes a charge
to retained earnings of $623,972 unaccreted issuance costs and discount),
the exercise of 2,969,456 warrants at an aggregate exercise price of $2,121
and the immediate recognition of unearned compensation of $1,062 related to
certain stock options that fully vest upon the completion of this offering.
(2) Total debt excludes Cheap Tickets' current installments of long-term debt
of $221,469 and current installments of capital lease obligations of
$287,809.
(3) The mandatorily redeemable preferred stock amount is presented net of
unaccreted issuance costs and discount aggregating $623,972, and includes
unpaid cumulative dividends, which are required to be paid at redemption of
$510,000. Total redemption value, including dividends of $595,000 upon the
closing of this offering is expected to be $4,845,000. After redemption,
Cheap Tickets will have 10,000,000 authorized shares of preferred stock,
which may be issued with or without mandatory redemption features.
(4) This reflects an increase in the authorized preferred stock and reduction
in par value anticipated to occur before the offering.
(5) This reflects a reduction in par value anticipated to occur before the
offering in conjunction with the stock split. As of December 31, 1998,
there were stock options outstanding to purchase an aggregate of
728,000 shares of common stock of which 660,800 have an exercise price of
$0.18 per share and 67,200 have an exercise price of $1.57 per share and
1,251,642 shares were reserved for future issuance under Cheap Tickets'
employee stock plan. In addition, there were warrants outstanding to
purchase an aggregate of 2,969,456 shares of common stock at an aggregate
exercise price of $2,121.
22
<PAGE>
DILUTION
As of December 31, 1998, Cheap Tickets had a historical and pro forma net
tangible book value of approximately $1,385,000 or $0.10 per share of common
stock, and approximately $763,000 or $0.04 per share of common stock,
respectively. Pro forma net tangible book value represents total tangible
assets less total liabilities, including the effect of the redemption of
mandatorily redeemable preferred stock and the exercise of certain warrants,
divided by the number of shares of common stock outstanding at that date
including shares of common stock to be issued upon the exercise of warrants.
Without taking into account any other changes in the pro forma net tangible
book value after December 31, 1998, other than to give effect to the receipt by
Cheap Tickets of the net proceeds from the sale of the 3,500,000 shares of
common stock offered by Cheap Tickets hereby at the initial public offering
price of $12 per share, the pro forma net tangible book value at December 31,
1998 would have been approximately $39,023,000 or $1.86 per share. This
represents an immediate increase in net tangible book value of $1.82 per share
to existing stockholders and an immediate dilution of $10.14 per share to new
investors purchasing shares of common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $12.00
Net tangible book value per common share as of December 31,
1998........................................................ .10
Effect of pro forma adjustments:.............................
Redemption of mandatorily redeemable preferred stock....... (.04)
Exercise of warrants....................................... (.02)
-----
Pro forma net tangible book value per share.................. .04
Increase per share attributable to new investors............. 1.82
-----
Pro forma net tangible book value per share after the
offering.................................................... 1.86
------
Dilution per share to new investors.......................... $10.14
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1998, the differences between the number of shares of common stock purchased
from Cheap Tickets, the aggregate consideration paid and the average price per
share paid by existing stockholders and new investors purchasing shares of
common stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Considerations
---------------------- ---------------------- Average
Number Amount Price
(in thousands) Percent (in thousands) Percent Per Share
-------------- ------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)...... 17,443 83.3% $ 1,259 2.9% $ 0.07
New investors(1)...... 3,500 16.7 42,000 97.1 12.00
------ ----- ------- -----
Total................ 20,943 100.0% $43,259 100.0%
====== ===== ======= =====
</TABLE>
- --------
(1) The foregoing tables include an aggregate of 2,969,456 shares issuable upon
exercise of warrants outstanding as of December 31, 1998 at an aggregate
exercise price of $2,121, all of which are expected to be exercised
immediately prior to the closing of this offering. Also includes the
redemption of 425,000 shares of preferred stock outstanding as of December
31, 1998. Excludes (a) 728,000 shares issuable upon exercise of outstanding
options at a weighted average exercise price of $0.31 per share as of
December 31, 1998, and (b) an aggregate of 1,251,642 shares available for
future issuance under the 1997 Stock Option Plan.
23
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following selected financial data for the years ended December 31, 1996,
1997 and 1998 and as of December 31, 1997 and 1998 have been derived from Cheap
Tickets' financial statements included elsewhere in this prospectus which have
been audited by PricewaterhouseCoopers LLP, independent public accountants. The
following selected financial data for the years ended December 31, 1994 and
1995 and as of December 31, 1994, 1995 and 1996 have been derived from the
audited financial statements of Cheap Tickets not included in this prospectus.
The operating data are derived from information compiled by Cheap Tickets and
are unaudited. The following information is qualified by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
included elsewhere in the prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Non-published fares........... $ -- (2) $66,340 $ 58,982 $ 96,379 $159,846
Commissions................... -- (2) 2,738 5,614 6,470 11,268
------- ------- -------- -------- --------
Net revenues(1)............. -- (2) 69,078 64,596 102,849 171,114
Cost of sales(1).............. -- (2) 56,424 49,168 81,370 136,067
------- ------- -------- -------- --------
Gross profit.................. 8,128 12,654 15,428 21,479 35,047
Selling, general and
administrative expenses(3)... 7,947 11,921 14,352 23,091 33,411
------- ------- -------- -------- --------
Net operating income (loss)... 181 733 1,076 (1,612) 1,636
Other income (deductions)..... 31 (709) 37 (3) 169
------- ------- -------- -------- --------
Earnings (loss) before income
taxes........................ 212 24 1,113 (1,615) 1,805
Income taxes.................. 60 7 439 (606) 740
------- ------- -------- -------- --------
Net earnings (loss)........... $ 152 $ 17 $ 674 $ (1,009) $ 1,065
======= ======= ======== ======== ========
Basic earnings (loss) per
share(4)..................... $ 0.01 $ 0.00 $ 0.05 $ (0.09) $ 0.04
Shares used in computing basic
earnings (loss) per
share(4)..................... 14,100 14,100 14,249 14,847 14,567
Diluted earnings (loss) per
share(4)..................... $ 0.01 $ 0.00 $ 0.05 $ (0.09) $ 0.03
Shares used in computing
diluted earnings (loss) per
share(4)..................... 14,100 14,100 14,249 14,847 17,921
Balance Sheet Data:
Net working capital........... $ 451 $ 182 $ 466 $ 2,356 $ 3,473
Total assets.................. 2,954 3,740 5,999 11,204 13,226
Long-term debt................ 653 537 1,715 948 1,238
Mandatorily redeemable
preferred stock(5)........... -- -- -- 3,622 4,136
Stockholders' equity(5)....... 849 866 1,544 812 1,385
Operating Data (unaudited):
Gross bookings (in
thousands)(6)
Non-published fares......... $ -- (2) $66,340 $ 58,982 $ 96,379 $159,846
Published fares............. -- (2) 25,654 46,962 57,295 110,287
------- ------- -------- -------- --------
Total gross bookings...... $52,951(2) $91,994 $105,944 $153,674 $270,133
======= ======= ======== ======== ========
Airline tickets sold:......... 180,656 313,863 357,551 554,403 963,007
Call centers................ 180,656 313,863 357,551 552,383 865,661
Internet.................... -- -- -- 2,020 97,346
Registered Internet users..... -- -- -- 18,891 420,023
</TABLE>
24
<PAGE>
- --------
(1) Net revenues consist of sales of non-published fares and commissions. Net
revenues from sales of non-published fares represent revenues from the sale
of tickets purchased from the airlines. Cost of sales consists of the net
fare cost paid to carriers to purchase non-published fares. Commissions,
including incentive overrides, are earned primarily on published fares sold
and include certain other payments based on the volume of transactions.
(2) Net revenues for 1994 were not separately identified from gross bookings
and are not available. In addition, cost of sales for 1994 was previously
accounted for on a gross bookings basis and is not available on a GAAP
basis.
(3) In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price
of $1.57 per share. Total compensation associated with these options
amounted to $722,600 of which $26,325 has been charged to operations. The
remainder will be charged over the remaining five-year vesting period of
the options, with the exception of $1,062, which will be charged at the
closing of the offering at which time 140,000 options vest by their terms.
(4) Please refer to notes 1 and 6 to the financial statements for the
calculation of earnings per share, including an explanation of the number
of shares used in computing the amount of basic and diluted earnings per
share.
(5) The mandatorily redeemable preferred stock is required to be redeemed upon
the closing of this offering. The redemption price upon the closing of this
offering will be approximately $4.8 million. The preferred stock was issued
at a discount of $885,170. Cheap Tickets is accreting the discount over a
five-year period. At redemption, it is anticipated that the unaccreted
discount will be $580,439. Upon redemption, the unaccreted discount will be
charged directly to stockholders' equity, and have a dilutive effect on the
calculation of earnings per share.
(6) Gross bookings represent the aggregate retail value of tickets sold under
non-published fares and published fares. The difference between gross
bookings and revenues as reported in Cheap Tickets' statement of operations
derives solely from the difference in revenue treatment accorded to sales
of published fares. With respect to published fares, Cheap Tickets records
as revenue in its statement of operations only the commissions earned by
Cheap Tickets on the sale of such fares. Gross bookings represents the
retail value of the sales of published fares. With respect to non-published
fares, revenues as reported in Cheap Tickets statement of operations is
equivalent to gross bookings, which is the retail value of such fares.
Management uses gross bookings as a key indicator of general business
activity, success of promotional efforts, capacity to handle customer
demand and efficiency of reservation agents. In addition, management
believes that gross bookings provide a useful comparison between historical
periods, and year-to-year changes in such information provide a useful
measure of market acceptance of Cheap Tickets products.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements of Cheap Tickets. In evaluating the risks of investing in Cheap
Tickets, prospective investors should also evaluate the other information set
forth in this prospectus, including the Risk Factors.
Overview
Cheap Tickets is principally engaged in the sale of discount tickets for
domestic leisure air travel. A majority of its gross bookings have historically
come from the sale of non-published fares, which Cheap Tickets acquires from
airlines and resells to the public at a profit. Cheap Tickets purchases non-
published fares only when it resells them to customers, so that it has no
inventory carrying costs. On these fares, Cheap Tickets sets its resale prices
to meet the demands of leisure travelers who are looking for the lowest price.
Cheap Tickets also sells published fares for which it receives commissions from
the airlines. Sales of non-published fares generally carry higher margins as a
percentage of gross bookings than commissions on published fare bookings.
Cheap Tickets' revenues 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 have
experienced significant month-to-month growth in 1998 and accounted for
approximately 9% of total gross bookings in 1998 and approximately 15% in the
last quarter of 1998. At December 31, 1998, Cheap Tickets had over 420,000
registered online users, with 180,000 registering in the fourth quarter of
1998. Cheap Tickets expects online gross bookings and net revenue 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.
Substantially all of Cheap Tickets' gross bookings represent sales of
airline tickets. For the year ended December 31, 1998, approximately 98% of
gross bookings arose from airline ticket sales. The
26
<PAGE>
remaining gross bookings arose from sales of cruise tickets, auto rentals,
hotel reservations and other travel related products. Cheap Tickets expects
gross bookings from sources other than airline ticket sales to increase in
future periods.
Cheap Tickets' selling, general and administrative expenses include all
operating and corporate overhead. Major expense categories include
compensation, advertising, communications, credit card bank fees, occupancy and
delivery costs. Selling, general and administrative expenses also include
compensation charges related to the issuance of stock options.
Results of Operations
The following table sets forth, for the years ended December 31, 1995, 1996,
1997 and 1998, information derived from the statement of operations of Cheap
Tickets expressed as a percentage of net revenues, and the percentage change in
such items and in gross bookings for the years ended December 31, 1996, 1997
and 1998 compared with the prior period. Any trends illustrated in the
following table are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Percentage Increase
As a Percentage (Decrease) Over
of Net Revenues Prior Periods
-------------------------- -------------------------
Year Ended December 31, Year Ended December 31,
-------------------------- -------------------------
1995 to 1996 to 1997 to
1995 1996 1997 1998 1996 1997 1998
----- ----- ----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Non-published fares..... 96.0% 91.3% 93.7% 93.4% (11.1)% 63.4% 65.9%
Commissions............. 4.0 8.7 6.3 6.6 105.0 15.2 74.2
----- ----- ----- -----
Net revenues.......... 100.0 100.0 100.0 100.0 (6.5) 59.2 66.4
Gross profit............ 18.3 23.9 20.9 20.5 21.9 39.2 63.2
Selling, general and
administrative
expense................ 17.2 22.2 22.5 19.5 20.4 60.9 44.7
----- ----- ----- -----
Earnings (loss) from
operations........... 1.1 1.7 (1.6) 1.0 46.8 (249.8) 201.5
Net earnings (loss)..... 0.0 1.0 (1.0) 0.6 *nm (249.7) 205.6
Operating Data
(unaudited):
Gross bookings.......... -- -- -- -- 15.2% 45.1% 75.8%
</TABLE>
- --------
*nm--not meaningful
Years Ended December 31, 1998 and December 31, 1997
Net Revenues. Net revenues for the year ended December 31, 1998 increased
$68.3 million, or 66.4%, to $171.1 million. By category of net revenue, non-
published fare sales increased $63.5 million, or 65.9%, to $159.8 million, and
commissions from published fares increased $4.8 million, or 74.2%, to
$11.3 million. The increase in commissions reflected an increase of $53.0
million, or 92.5%, to $110.3 million in gross bookings of published fares,
partially offset by a decrease in commission rates from an average of 9.0% in
1997 to 7.8% in 1998.
The increase in net revenue benefited overall from industry-wide growth in
the leisure travel market and improving recognition of the Cheap Tickets brand
name from marketing and advertising efforts and word of mouth. Net revenue at
call centers also benefited from better productivity by call center reservation
agents and the opening of a fourth call center in Colorado Springs in May of
1998.
Cheap Tickets' net revenues through call centers and retail operations
(including incentive bonuses) increased $56.4 million, or 54.9%, to $159.2
million. Net revenues through the Internet
27
<PAGE>
were $11.9 million in 1998 compared with $176,000 in 1997. Net revenues through
the Internet represented 7.0% of net revenues for the year ended December 31,
1998 and 17.2% of the total increase in net revenues from 1997 to 1998.
Internet net revenues for the four quarters of operations grew as follows:
first quarter 1998, $1.2 million; second quarter 1998, $2.3 million; third
quarter 1998, $3.8 million, and fourth quarter 1998, $4.7 million.
Gross Profit. Gross profit increased $13.6 million, or 63.2%, to $35.0
million, consistent with the rate of increase of gross bookings. As a
percentage of net revenues, gross profit decreased from 20.9% to 20.5%. This
decrease was primarily attributable to a decrease in gross margins of
0.7 percentage points on non-published fares. The decrease in non-published
fare margins was primarily attributable to a contract renewal with one carrier
at a less favorable rate. A decline in the proportion of non-published fares
sold, partially offset by increased volume bonuses, also contributed to the
reduction in gross profit.
Selling, General and Administrative Expenses. For the year ended December
31, 1998, selling, general and administrative expenses increased $10.3 million,
or 44.7%, to $33.4 million, and decreased as a percentage of net revenues from
22.5% to 19.5%. The major components of these increases were compensation,
credit card and bank fees, and advertising costs. The increase in advertising
costs was primarily attributable to Cheap Tickets' website launch in October
1997, including promotions on Yahoo, Travelocity and other websites. Internet
marketing costs can be expected to increase significantly in future periods to
promote Internet sales. Credit card fees increased as a result of volume and
rate increases charged by Cheap Tickets' charge card associations. The decrease
in selling, general and administrative expenses as a percentage of net revenues
was primarily attributable to the leverage from increased sales.
In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price of
$1.57 per share. Total compensation associated with these options amounted to
$722,600, of which $26,325 has been charged to operations for the year ended
December 31, 1998. The remainder will be charged over the remaining five-year
vesting period of the options, with the exception of $1,062, which will be
charged at the closing of the offering, at which time 140,000 options vest by
their terms.
Net Earnings (Loss). Cheap Tickets had net earnings of $1.1 million for the
year ended December 31, 1998, compared with the prior year's loss of $1.0
million. This increase was attributable to increased net revenues, with a
proportionately lower increase in selling, general and administrative expenses,
partially offset by lower gross profit percentages.
Years Ended December 31, 1997 and December 31, 1996
Net Revenues. Net revenues increased $38.3 million, or 59.2%, to $102.8
million, primarily from continued industry-wide growth in the leisure travel
industry and enhanced recognition of the Cheap Tickets brand name from
marketing and advertising efforts. The increase was also associated with
increases in capacity, including the expansion of existing call centers and
higher reservation agent productivity.
During 1997, the increase in net revenues reflected the growth of non-
published fare sales by $37.4 million, or 63.4%, to $96.4 million. By contrast,
net revenues from commissions increased only $856,000, or 15.2%, to $6.5
million. The slower growth of net revenues from commissions was
28
<PAGE>
attributable to slower growth in gross bookings of published fares and a
decrease from 10% to 8% in commissions on published fares implemented by a
number of air carriers during 1997.
In 1997, nearly all of Cheap Tickets' net revenues were generated through
call centers, with the exception of approximately $176,000 from Internet sales
following the launch of Cheap Tickets' website in October 1997. Net revenues
from non-published fare sales in 1997 represented 62.7% of gross bookings,
compared with 55.7% in 1996.
Gross Profit. Gross profit increased $6.1 million or 39.2% to $21.5 million
and decreased as a percentage of net revenues from 23.9% to 20.9%. The 3%
decrease was primarily attributable to a reduction in published fares margins
of 2.4% of net revenues. A combination of a reduction in commissions as a
percentage of net revenues and an overall industry reduction in published fare
commission rates accounted for the decrease. A further decrease of 0.6% of net
revenues from non-published fares was the result of a termination in 1997 of
certain profitable routes and the imposition of various restrictions by a major
carrier.
Selling, General and Administrative Expenses. Cheap Tickets' selling,
general and administrative expenses increased $8.7 million, or 60.9%, to $23.1
million and increased as a percentage of net revenues from 22.2% to 22.5%.
These increases resulted primarily from increased employees and infrastructure
to support higher levels of sales. The increase in compensation and employee
benefits reflected the hiring of over 119 new employees, largely reservation
agents and, to a lesser extent, support staff. Other major components of the
increase were telephone expense, advertising costs, delivery expenses, and
credit card and bank fees. Occupancy costs also rose, with the opening of three
additional retail locations and the expansion of space in Honolulu and
Los Angeles.
Net Earnings (Loss). Cheap Tickets incurred a net loss in 1997 of $1.0
million, compared with net earnings of $674,000 in 1996. The decrease in net
earnings was primarily attributable to the decrease in gross profit as a
percentage of net revenues.
Years Ended December 31, 1996 and December 31, 1995
Net Revenues. Net revenues decreased $4.5 million, or 6.5%, to $64.6
million. The decrease corresponded to a reduction in sales of non-published
fares of $7.4 million, or 11.1%, to $59.0 million. Net revenues from
commissions increased by $2.9 million, or 105.0%, to $5.6 million. The
reduction in non-published fare sales was primarily attributable to the
termination of a contract provision with one carrier that had required Cheap
Tickets to sell non-published fares through certain travel agents at low
margins, resulting in $10.5 million in net revenues from such sales in 1995,
compared with $617,000 in 1996. The reduction in non-published fare sales was
partially offset by increased sales of published fares and the commissions
resulting therefrom. Overall gross bookings in 1996 increased $14.0 million, or
15.2% to $105.9 million, as the increase in gross bookings of published fares
exceeded the decrease in gross bookings of non-published fares.
Gross Profit. Gross profit increased $2.8 million or 21.9% to $15.4 million
and increased as a percentage of net revenues from 18.3% to 23.9%. This
increase was primarily attributable to 1) increases from published fares and
volume bonuses of 4.7% of net revenues due to an increase in the proportion of
these components as a percentage of total gross profit and 2) an increase in
non-published fares attributable to the procurement of a favorable contract
with a major carrier and cessation of the sales of low margin non-published
fares to certain travel agents.
29
<PAGE>
Selling, General and Administrative Expenses. Cheap Tickets' selling,
general and administrative expenses increased $2.4 million, or 20.4%, to $14.4
million and increased as a percentage of net revenues from 17.2% to 22.2%. The
largest component of the increase was compensation expense, which was primarily
attributable to the opening of the Lakeport call center in January 1996.
Net Earnings (Loss). Net earnings increased from $17,000 to $674,000. Higher
margins on both non-published and published fare sales contributed to the
increase. In addition, there was non-recurring income of $37,000 in 1996,
compared with non-recurring expense in 1995 of $709,000.
Seasonality and Quarterly Financial Information.
Cheap Tickets' business is seasonal due primarily to customers' leisure
travel patterns and changes in the availability of non-published fares. As a
result, Cheap Tickets typically has higher sales and gross profit in the second
and third quarters and lower sales and gross profit in the fourth quarter.
During periods of high-volume air travel, such as occur in the fourth quarter
of each year, Cheap Tickets historically has had access to fewer non-published
fares, and such fares on certain major routes may be blacked out or otherwise
unavailable. Online gross bookings may also tend to be seasonal and may decline
or grow less rapidly in the summer months. The seasonal sales cycle is fairly
predictable, but the cycle may shift year-to-year, corresponding to changes in
the economy or other factors affecting the market such as price wars. This
could lead to unusual volatility in revenues and earnings.
30
<PAGE>
The following table sets forth selected unaudited quarterly financial
information for each of the eight quarters in the period ended December 31,
1998, as well as such data expressed as a percentage of Cheap Tickets' net
revenues for the periods presented. This information has been derived from
unaudited statements of operations data that, in the opinion of management, are
stated on a basis consistent with the audited financial statements and include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information in accordance with GAAP. Cheap Tickets'
results of operations for any quarter are not necessarily indicative of the
results to be expected in any future period.
<TABLE>
<CAPTION>
Quarter Ended
(unaudited)
--------------------------------------------------------------------
1997 1998
---------------------------------- --------------------------------
Sept. Sept.
Mar. 31 June 30 30 Dec. 31 Mar. 31 June 30 30 Dec. 31
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Non-published fares..... $17,798 $27,126 $28,789 $22,666 $30,449 $45,722 $46,823 $36,852
Commissions............. 1,381 1,691 1,602 1,796 1,949 2,491 3,614 3,215
------- ------- ------- ------- ------- ------- ------- -------
Net revenues.......... 19,179 28,817 30,391 24,462 32,398 48,213 50,437 40,067
Cost of sales........... 15,104 22,782 24,097 19,386 25,959 39,016 39,572 31,520
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 4,075 6,035 6,294 5,076 6,439 9,197 10,865 8,547
Selling, general and
administrative
expenses............... 4,389 5,735 6,439 6,530 6,430 8,128 9,535 9,319
------- ------- ------- ------- ------- ------- ------- -------
Net operating income.... (314) 300 (145) (1,454) 9 1,069 1,330 (772)
Other income
(deductions)........... 9 (47) 9 27 35 22 32 80
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes........... (305) 253 (136) (1,427) 44 1,091 1,362 (692)
Income taxes............ (125) 104 (56) (529) 18 447 559 (283)
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $ (180) $ 149 $ (80) $ (898) $ 26 $ 644 $ 803 $ (409)
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings (loss)
per share.............. $ (0.02) $ 0.01 $ (0.01) $ (0.07) $ (0.01) $ 0.04 $ 0.05 $ (0.04)
Diluted earnings (loss)
per share.............. $ (0.02) $ 0.01 $ (0.01) $ (0.07) $ (0.01) $ 0.03 $ 0.04 $ (0.03)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Gross bookings ......... $28,361 $40,764 $42,959 $41,590 $52,754 $70,431 $75,930 $71,018
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As a Percentage of Net Revenues
Quarter Ended
(unaudited)
--------------------------------------------------------------------
1997 1998
---------------------------------- --------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-published fares..... 92.8% 94.1% 94.7% 92.7% 94.0% 94.8% 92.8% 92.0%
Commissions............. 7.2 5.9 5.3 7.3 6.0 5.2 7.2 8.0
----- ----- ----- ----- ----- ----- ----- -----
Net revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 78.8 79.1 79.2 79.3 80.1 80.9 78.5 78.7
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 21.2 20.9 20.8 20.7 19.9 19.1 21.5 21.3
Selling, general and
administrative
expenses............... 22.9 19.9 21.3 26.6 19.9 16.9 18.9 23.2
----- ----- ----- ----- ----- ----- ----- -----
Net operating income.... (1.7) 1.0 (0.5) (5.9) 0.0 2.2 2.6 (1.9)
Other income
(deductions)........... 0.1 (0.1) 0.1 0.1 0.1 0.1 0.1 0.2
----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) before
income taxes........... (1.6) 0.9 (0.4) (5.8) 0.1 2.3 2.7 (1.7)
Income taxes............ (0.7) 0.4 (0.1) (2.1) 0.0 1.0 1.1 (0.7)
----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss)..... (0.9)% 0.5% (0.3)% (3.7)% 0.1% 1.3% 1.6% (1.0)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
31
<PAGE>
Liquidity and Capital Resources
For the year ended December 31, 1998, Cheap Tickets generated cash from
operating activities of $2.0 million, compared with $1.5 million for the year
ended December 31, 1997. For the year ended December 31, 1998, cash generated
from operating activities was comprised principally of net earnings plus
depreciation of $1.6 million and net changes in working capital and other
accounts. For the year ended December 31, 1997, cash generated from operating
activities was comprised principally of an increase in accounts payable of $2.5
million adjusted by changes in other accounts. For that period, there was a net
loss of $1.0 million, offset by depreciation of $370,000. 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 1996, Cheap Tickets generated cash from operating activities of
$411,000. This cash was generated primarily from the sum of net earnings and
depreciation of $878,000, partially offset by changes in operating accounts.
For the year ended December 31, 1998, Cheap Tickets used cash from investing
activities of $4.8 million, while in the prior period it used cash in investing
activities of $486,000. Cash used in investing activities for the year ended
December 31, 1998 included net purchases of short term marketable securities
for $4.9 million. Capital expenditures for the years ended December 31, 1998
and 1997 were $485,000 and $496,000, respectively. In 1998, Cheap Tickets
received $496,000 in proceeds from the sale of a condominium office formerly
used as a company office, of which $489,000 was used to pay the outstanding
mortgage on the property. In 1997, Cheap Tickets raised $3.9 million net of
issuance expenses from a private placement of preferred stock. In 1996, Cheap
Tickets made $1.3 million in capital expenditures, primarily consisting of the
furnishing and equipping of a new call center in Lakeport, California and the
acquisition of additional equipment.
At December 31, 1998, Cheap Tickets maintained on hand cash and cash
equivalents of $3.0 million and short term marketable securities of $4.9
million. Cheap Ticket's net working capital was $3.5 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 December 31, 1998. Cheap Tickets had
outstanding long-term debt net of current installments of $586,000 and capital
lease obligations of $652,000. Long-term debt included $541,000 for a mortgage
on the Lakeport, California call center.
Cheap Tickets believes that the net proceeds from this offering, together
with its current cash and cash equivalents, short term marketable securities
and anticipated cash flow from operations will be sufficient to meet its
anticipated cash needs for the required redemption of preferred stock, working
capital, debt service and capital expenditures, at least for the foreseeable
future. Cheap Tickets has budgeted approximately $9 million for capital
expenditures in 1999 from proceeds of this offering, nearly all of which is
intended to be used for technological improvements and upgrades. Cheap Tickets
currently is seeking an increase in its bank lines, which are currently
undrawn. If cash generated from internal operations is not sufficient to
satisfy CheapTickets' liquidity requirements, Cheap Tickets may seek to
increase available bank lines or sell additional equity or debt securities. The
sale of convertible debt or equity securities could result in additional
dilution to Cheap Tickets' shareholders. There is no assurance that financing
will be available in amounts or on terms acceptable to Cheap Tickets, if at
all.
32
<PAGE>
Recently Issued Accounting Standards
In 1998, Cheap Tickets adopted SFAS No. 130 "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS No. 130 states that all items that are
required to be recognized under generally accepted accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of SFAS No. 130 did not have an effect on Cheap Tickets' financial statements
since Cheap Tickets does not have elements of comprehensive income other than
net earnings.
SFAS No. 131 requires disclosures regarding segments of an enterprise and
related information that reflects the different types of business activities in
which the enterprise engages and the different economic environments in which
it operates. The effect of implementing SFAS No. 131 was not significant as
Cheap Tickets manages its business as a single operating segment, Cheap Tickets
is domiciled entirely in the U.S. and substantially all of Cheap Tickets'
revenues are derived from the sales of airline tickets.
SFAS No. 132 standardized the disclosure requirements for pension and other
postretirement benefits. The adoption of SFAS No. 132 does not change existing
measurement or recognition standards for Cheap Tickets' defined contribution
plan and does not have a material effect on Cheap Tickets' financial
statements.
In June 1998, the Financial Accounting Standards Board 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. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Currently, Cheap Tickets does not hold derivative instruments or
engage in hedging activities. The adoption of this standard is not expected to
have a material effect on Cheap Tickets' financial statements.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." In April 1998, the committee issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." These standards are effective for Cheap Tickets'
year ending December 31, 1999. Cheap Tickets has not determined the impact of
the implementation of these pronouncements.
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.
33
<PAGE>
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
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.
34
<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. 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 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.
35
<PAGE>
BUSINESS
Cheap Tickets is a leading retail seller of discount tickets for domestic
leisure air travel. In 1998, Cheap Tickets sold approximately 963,000 airline
tickets through call centers, retail stores and its Internet site at
"www.cheaptickets.com." Cheap Tickets has rights to buy these fares under
contracts from over 30 airline carriers, including America West, American,
Continental, Northwest, TWA and US Airways.
Industry Background.
Consumers in the United States spent $126 billion on travel through travel
agencies in 1997, up from $101 billion in 1995, according to the Travel Weekly
1998 U.S. Travel Agency Survey. According to the same source, the leisure
travel component of this market is also growing rapidly, as leisure travel
accounted for $64.5 billion, or 51%, of total travel in 1997. Leisure travel
bookings increased 30% from 1995 to 1997, the largest increase in recent years.
Management believes that the growth in leisure travel has been driven by a
number of factors, including an increase in disposable income levels in the
United States, the aging of the population and the availability of affordable
airfares. Airline travel (including business and leisure travel) continues to
be the largest segment of the travel industry, with $70.5 billion, or 56%, of
total travel booked through travel agencies in 1997.
Airline Ticket Sales.
Published Fares. Historically, airlines have sold tickets directly or
through travel agencies on a commission basis. The traditional travel agency
channel of distribution is highly fragmented, with few nationally recognized
brands. According to The American Society of Travel Agents, over 23,000 travel
agencies operate in more than 33,000 locations in the United States, and the
average travel agency generates approximately $3.8 million in annual gross
bookings per location.
Travel agents are compensated primarily through commissions paid by airlines
on tickets sold. Some travel agencies also charge service fees to their
customers. Travel agents generally receive commissions of 8% of total ticket
price, although these commissions are frequently capped at $25 for a domestic
U.S. one-way ticket and $50 for a domestic round trip ticket. Airlines also
generally pay approximately 5% in commissions for online sales. In addition,
travel agencies can earn performance-based incentive compensation.
Commissions are determined in the sole discretion of the airlines and are
subject to frequent change. In recent years, airlines have reduced rates and
capped per-ticket commissions generally payable to travel agencies. In
addition, they have further reduced rates and capped commissions for online
reservations. The downward pressure on commission rates may cause traditional
travel agencies to charge service fees to their customers, shift their focus to
higher margin, non-air travel services or reduce the level of customer service.
Travel agencies typically book reservations through electronic global
distribution services such as the SABRE system and Galileo International
Partnership's Apollo system. Global distribution services provide real-time
access for agents to extensive data on fares, availability, schedules and other
travel information. This data is constantly changing, with as many as one
million airfare changes made daily. Customers have historically had to rely on
travel agents to access and interpret this rapidly changing information.
Non-Published Fares. According to the American Transport Association,
airline excess capacity in the United States was 32.5% from 1995 to 1997, and
excess capacity is estimated to be 29.3% in 1998. The airlines can predict
excess capacity up to a year in advance for specific routes
36
<PAGE>
and times. Airlines are motivated to sell excess capacity at prices
substantially lower than published tariffs because the marginal cost of filling
excess seats is minimal. However, to succeed in this strategy, the airlines
need assurance that sales of excess capacity at lower prices do not erode
published fare structures. The ability to sell such seats without eroding
published fare structures is a source of incremental profits for airlines.
Management believes that it would be difficult for airlines to market their
excess capacity directly to the public at discount prices because their
discount fares would compete with their own regular published fares, and they
would also risk drawing immediate price competition from other airlines. In
fact, airlines generally have not sold excess capacity directly to the public,
except in extremely limited situations, usually involving last-minute special
offers and the use of frequent flier awards. Management believes that leisure
travelers are particularly suited to the products offered by Cheap Tickets, as
they are highly price sensitive and willing to be flexible on carriers, routes
and times of travel.
Airlines generally have sold excess capacity indirectly through
intermediaries in a manner designed not to erode their published fare
structures while at the same time maximizing incremental excess revenues. They
have accomplished this by selling excess capacity to independent third parties
under net fare contracts. The tickets are then resold by these third parties to
the public at prices set by them, generally at a substantial discount below
regularly published fares. The prices of these tickets are not published unless
they have been published directly by the reseller in the media or otherwise,
and the fares are not available from the airlines directly. Hence, they are
referred to as "non-published fares." The profit margins on non-published fare
sales generally exceed the commissions payable for sales of tickets on an
agented basis.
Non-published fares are restricted to specific routes and times, cannot be
canceled or refunded, and generally contain other restrictions which, while
making them unattractive for full-fare travelers, are acceptable to price
sensitive leisure travelers with flexible itineraries.
For international routes, management believes that the market for the sale
of non-published fares is highly competitive, with numerous participants
offering deeply discounted fares. For domestic routes, there are few sellers,
and they generally have contracts with a small number of carriers for a limited
number of routes. Among these, management believes Cheap Tickets is the leading
seller of non-published fares for regularly scheduled domestic routes. Cheap
Tickets has contracts with carriers covering most major domestic and
international routes.
The Growth of Internet Commerce, Products and Services.
The enormous growth and acceptance of the Internet as a medium of
communication and commerce presents significant opportunities for Cheap
Tickets. According to Dataquest, more than 43 million households in America
currently have Internet access and that number is projected to grow to nearly
95 million households by 2001. The factors driving this growth include the
increasing number and decreasing cost of personal computers in homes and
offices, technological innovations providing easier, faster and cheaper access
to the Internet, the proliferation of content and services being provided on
the Internet and the increasing use of the Internet by business and consumers
as a medium for conducting business.
The Internet possesses a number of unique and commercially powerful
characteristics that differentiate it from traditional media: users communicate
or access information without geographic limitations; users access dynamic and
interactive content on a real-time basis; and users communicate and interact
instantaneously. The Internet has created a dynamic and particularly attractive
medium
37
<PAGE>
for commerce, empowering customers to gather more comparative purchasing data
than is feasible with traditional commerce systems, to shop in a more
convenient manner and to interact with sellers in many new ways. Forrester
Research estimates that online retail revenues will increase from approximately
$4.8 billion in 1998 to approximately $17.4 billion by 2001.
Online Travel Market.
As a result of pressures on traditional travel distribution channels and the
emergence of new "e-commerce" opportunities, the online travel industry has
grown rapidly. The Internet provides a convenient and efficient medium for
sales of airline tickets by affording customers direct access to up-to-the-
minute travel information, including changing fares and routes, the ability to
engage in competitive shopping, and the capacity to purchase tickets. According
to Forrester Research, the online travel market is the second largest by dollar
volume and fastest growing area of Internet commerce. Online airline travel
bookings were $1.6 billion in 1998 and are expected to grow at a compounded
annual growth rate of 46%, reaching $10.6 billion in 2003.
In the online travel services market, Cheap Tickets competes for published
fares with other entities that contain similar commercial websites, such as
Expedia, which is operated by Microsoft Corporation, Travelocity, which is
operated by SABRE Group Holdings Inc., a majority-owned subsidiary of American
Airlines, Preview Travel, Inc., and Priceline.com, Inc. Many airlines also have
established commercial websites for their published fares. With limited
exceptions including, Priceline.com, Inc., to management's knowledge, non-
published fares for regularly scheduled domestic routes are not currently
offered by online travel companies.
Cheap Tickets Business Strategy.
Cheap Tickets' objective is to provide travel products to leisure travelers
at discount prices and to enhance its position as a leading provider of non-
published and published fares for domestic leisure travel. Cheap Tickets also
seeks to benefit travel providers by selling airlines' otherwise unused excess
capacity at high incremental margins without diluting their published fare
structure. The principal elements of Cheap Tickets' strategy are:
Broad Selection of Discounted Fares for Customers. Cheap Tickets offers a
broad selection of non-published and published fares for regularly scheduled
domestic routes at discounted prices, which management believes is unmatched in
the industry. Cheap Tickets has access to domestic and international non-
published fares for regularly scheduled flights through contracts with over 30
carriers, including America West, American, Continental, TWA and US Airways.
Customers may book these fares up to a year in advance. Currently, Cheap
Tickets offers approximately 375,000 non-published fares at any given time for
most major domestic and international routes at discounts attractive for the
leisure traveler. In addition, through the SABRE reservations system, Cheap
Tickets offers approximately 45 million published airfares, including those of
all major domestic and international commercial airlines. Cheap Tickets' non-
published fares are integrated with these published fares on a special area of
SABRE, to which only Cheap Tickets has access, permitting Cheap Tickets'
reservation agents and its Internet customers to choose the least expensive
itinerary.
Established Direct Sale Business to Consumers. Cheap Tickets has been
selling airline tickets directly to the public since its inception in 1986 and
has an established infrastructure to execute its direct sales strategy. It
sells its tickets through call centers, retail stores and the Internet. Cheap
Tickets operates four call centers staffed by approximately 380 employees in
Colorado Springs,
38
<PAGE>
Honolulu, Los Angeles and Lakeport, California, 12 retail stores and a customer
service center in Honolulu. The call centers provide toll-free telephone
support and reservation services seven days a week at "1-800-OK-CHEAP." Online
customers can access Cheap Tickets' easy-to-use website at
"www.cheaptickets.com" at their convenience. Through its call centers, Cheap
Tickets assists online customers to ensure that they have the full benefit of
its services. Tickets are shipped on a next-day basis, and Cheap Tickets is
planning to offer "E-tickets" by mid-1999.
Established History of Yield Management for Airline Carriers. Cheap Tickets
has consistently provided an efficient distribution channel to assist carriers
in selling excess capacity without eroding fare structures. Cheap Tickets
provides airlines with a yield management solution, enabling them to increase
profits through incremental revenues accompanied by low marginal costs and, in
some cases, to gain market share at the expense of competitors. Cheap Tickets
targets leisure travelers who are willing to travel on certain routes to fill
flights which normally have a low load factor. Restrictions placed on non-
published fares allow Cheap Tickets to sell non-published fares aggressively to
the public while leaving the airlines and travel and online agencies to service
full fare customers who demand the convenience of tickets that can be exchanged
or canceled and do not have advance purchase or minimum stay requirements.
Demonstrated Ability to Match Excess Capacity to Consumer Demand. Cheap
Tickets has proven to airlines that it can efficiently match airlines' excess
capacity to consumer demand for leisure travel by selling increasing volumes of
non-published fares. From 1996 through 1998, Cheap Tickets sold non-published
fares of $59.0 million, $96.4 million, and $159.8 million, respectively.
Management believes that Cheap Tickets' track record of selling excess capacity
without compromising the airlines' fare structures provide a strong incentive
for the airlines to continue to use Cheap Tickets for sale of domestic non-
published fares.
Cheap Tickets Growth Strategy.
Cheap Tickets seeks to become the leading provider of discount travel
products and services to leisure travelers. Cheap Tickets' growth strategy is
to grow its customer base aggressively, expand strategic alliances, improve
call center productivity, broaden its leisure travel offerings and consider
possible selective acquisitions. The key elements of Cheap Tickets' growth
strategy are as follows:
Rapidly Expand Internet Bookings. Cheap Tickets intends to capitalize on its
position in selling non-published fares to rapidly expand its Internet ticket
sales. Management plans to accomplish this through increased marketing to
heighten awareness of Cheap Tickets' product offerings and the Cheap Tickets
brand. Cheap Tickets plans to broaden its online visibility and customer base
through relationships with additional Internet content, commerce and service
providers. Online access for Cheap Tickets' products began in October 1997. As
of February 22, 1999, over 575,000 online users had registered at Cheap
Tickets' website, 155,000 of them since December 1998. Internet gross bookings
grew rapidly during 1998, from $2.2 million in the first quarter to $10.8
million in the fourth quarter. Approximately 15% of Cheap Tickets' gross
bookings were made over the Internet in the fourth quarter. In 1998, Cheap
Tickets had approximately $25 million in gross bookings from 97,000 Internet
ticket sales. Management believes that Cheap Tickets' gross bookings from the
Internet will continue to grow rapidly.
Aggressively Build Brand Recognition Nationally and Internationally. Cheap
Tickets has promoted itself almost exclusively through print media, primarily
in Los Angeles, New York, San Francisco and Honolulu. In addition, a recent
customer survey commissioned by Cheap Tickets
39
<PAGE>
determined that 54% of customers learned of Cheap Tickets by word of mouth.
This has translated into relatively low customer acquisition costs. The same
survey reported that approximately 60% of Cheap Tickets' customers surveyed are
from California, New York/New Jersey and Hawaii. With Cheap Tickets having
established strong brand recognition regionally, management believes that the
demand for discounted air travel presents opportunities for it to expand
nationally. Among other initiatives, Cheap Tickets plans to broaden its news
media advertising to other cities, including Chicago, Atlanta, Denver and
St. Louis. In addition, Cheap Tickets also intends to explore avenues for
international expansion. Cheap Tickets' strategy is to promote, advertise and
broaden its brand recognition through a variety of marketing techniques.
Enhance and Expand Strategic Relationships. Cheap Tickets currently has
contractual relationships with more than 30 airlines, including America West,
American, Continental, Northwest, TWA and US Airways. These relationships give
Cheap Tickets access to non-published fares, which has helped Cheap Tickets to
become a leading seller of non-published domestic fares to consumers. Cheap
Tickets intends to continue to build these relationships through increased
sales of excess capacity and seeks new relationships with other airlines,
travel suppliers, Internet portals and travel-related website companies.
Through these existing and new strategic relationships, Cheap Tickets seeks to
broaden access to non-published fares and to reach additional customers. In
addition, Cheap Tickets intends to build on its relationship with SABRE to
enable it to continue to provide ease of access to what management believes to
be the broadest available menu of discounted fares for regularly scheduled
domestic routes.
Expand Call Center Capacity through Improved Productivity. Cheap Tickets
intends to continue to invest substantial resources in developing technological
enhancements to its call centers. These will include a more automated front-end
application for its reservation agents that will reduce errors and increase
productivity; an intelligent call routing system to link Cheap Tickets' four
call centers and to direct calls to specific agents best able to service
particular customer needs and prioritize calls to reduce hold times; and an
interactive voice response system to reduce the need for agents to answer
general questions, thereby increasing the number of calls Cheap Tickets can
service and the sales productivity of reservation agents. Management believes
that such enhancements will increase sales and substantially improve operating
efficiency.
Broaden Existing Products and Services. Cheap Tickets currently realizes 98%
of its gross bookings through airline ticket sales. However, it recently began
selling cruise tickets, auto rentals and hotel reservations. Cheap Tickets
intends to capitalize on its market leadership in non-published fares, brand
recognition, Internet site, service infrastructure and customer base to promote
these additional travel products. Cheap Tickets' product expansion strategy
will be to focus on complementary products that require minimal incremental
resources to sell and distribute.
Make Selective Acquisitions. Cheap Tickets will consider the acquisition of
companies which will add to its customer base, product lines, strategic
relationships or distribution. Cheap Tickets currently has no agreements or
understandings with respect to any such acquisitions.
Products and Services.
Leisure Airline Tickets. Cheap Tickets has the right to acquire non-
published fares pursuant to contracts from carriers. Cheap Tickets then resells
these tickets at profit margins which exceed the typical commissions payable
for the sale of tickets on an agented basis. The prices Cheap Tickets offers to
customers are generally at a substantial discount to published fares. Cheap
Tickets purchases
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these fares only when it resells them to customers, so that it does not have
inventory carrying costs. Cheap Tickets' non-published fares are not available
to consumers directly from the airlines and are not published, except as
advertised by Cheap Tickets. Availability of non-published fares varies from
route to route based on availability from the airline carriers. Cheap Tickets
currently offers approximately 375,000 non-published fares at any given time,
covering most major domestic and international routes. Cheap Tickets sells
these tickets with limitations and restrictions that make them unattractive for
full fare travelers, who seek the convenience of tickets that can be exchanged
or canceled and do not have advance purchase or minimum stay requirements.
In 1998, approximately 59% of Cheap Tickets' airline gross bookings were
from non-published fares. For customers who are unable to find a non-published
fare for a particular itinerary, Cheap Tickets also offers a full menu of
regularly published fares. In 1994, Cheap Tickets became the first non-airline
to file its non-published fares through the Airline Tariff Publishing
Corporation. This allows Cheap Tickets to integrate its non-published fares
with published fares in a special area of the SABRE reservations system to
which only Cheap Tickets has access. This system automatically sorts through
millions of fares, including Cheap Ticket's own non-published fares, to
identify the lowest fares available for the desired itinerary. These fares are
then posted in ascending price order for use by Cheap Tickets' reservation
agents and Internet customers.
For published fares, Cheap Tickets receives commissions on gross bookings.
Airlines generally pay commissions of 8% of total ticket price, although these
commissions are frequently capped at $25 for a domestic U.S. one-way ticket and
$50 for a domestic round trip ticket. Airlines also generally pay approximately
5% in commissions for online sales. Cheap Tickets receives commissions at least
as favorable as those received by travel agents, and with many carriers Cheap
Tickets has negotiated more favorable commission rates. In addition, Cheap
Tickets frequently benefits from performance-based override commissions.
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The following table demonstrates the breadth and availability of Cheap
Tickets' product and the cost advantages of its non-published fares. It
compares the lowest roundtrip restricted fares for all domestic routes listed
by The New York Times and The Wall Street Journal in their fare tables for the
dates shown. Cheap Tickets' fares were lower than or comparable to the lowest
available prices reported by the above publications in all the routes, with an
average discount of approximately $65.50 or 20.1%.
<TABLE>
<CAPTION>
Cheap
Lowest Tickets Cost Savings
Availability Published Lowest ---------------
Travel Segment Date(1) Source Fare(2) Fare(3) Dollars Percent
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York--Burlington,
Vt..................... 12/28/98 NY Times $150 $148 $ 2 1.3%
New York--Chicago....... 12/28/98 NY Times 221 185 36 16.3
New York--Ft. Myers,
Fla.................... 12/28/98 NY Times 190 178 12 6.3
New York--San Diego..... 12/28/98 NY Times 275 197 78 28.4
New York--Tucson........ 12/28/98 NY Times 398 228 170 42.7
Boston--Washington...... 12/28/98 NY Times 114 114 -- --
Denver--Las Vegas....... 12/28/98 NY Times 178 174 4 2.2
Houston--Orlando........ 12/28/98 NY Times 198 191 7 3.5
Los Angeles--Portland,
Ore.................... 12/28/98 NY Times 198 169 29 14.6
San Francisco--Austin,
Tx..................... 12/28/98 NY Times 324 173 151 46.6
New York--Los Angeles... 01/05/99 Wall St. Journal 286 218 68 23.8
Boston--San Francisco... 01/05/99 Wall St. Journal 315 268 47 14.9
Los Angeles--Dallas..... 01/05/99 Wall St. Journal 293 199 94 32.1
San Diego--Denver....... 01/05/99 Wall St. Journal 477 211 266 55.8
Boston--San Francisco... 01/05/99 Wall St. Journal 315 268 47 14.9
Atlanta--Boston......... 01/05/99 Wall St. Journal 298 140 158 53.0
Orlando--Detroit........ 01/05/99 Wall St. Journal 168 168 -- --
New York--Miami......... 01/05/99 Wall St. Journal 176 166 10 5.7
</TABLE>
- --------
(1) Represents the date on which the fares listed were available for sale.
(2) Represents the lowest roundtrip restricted fare available for the travel
segment and on the date indicated, as reported in the January 3, 1999
edition of The New York Times and the January 8, 1999 edition of The Wall
Street Journal, as applicable. The Wall Street Journal fares were stated to
be the lowest available, but not all small carriers were included. Advance
purchase, midweek departure, length of stay and other restrictions may
apply.
(3) The prices shown were those available on Cheap Tickets' reservation
database system for the dates and routes indicated.
Other Travel Products and Services. Cheap Tickets has contractual
relationships to sell cruises on Carnival Cruises and Princess Cruises. In
1998, gross bookings from cruises were approximately $3.3 million. Cheap
Tickets also has contractual relationships with major auto rental companies to
provide reservations. In 1998, gross bookings from auto rental reservations
were approximately $1.4 million. Cheap Tickets has recently entered into a
number of contracts to sell hotel room reservations. In 1998, gross bookings
from hotel reservations were negligible. Cheap Tickets sees these other travel
products and services as potential areas of future growth.
Call Center Operations. At December 31, 1998, Cheap Tickets had
approximately 380 reservation agents and other call center employees at its
four call centers. Facilities are located in Honolulu, Colorado Springs, Los
Angeles and Lakeport, California. Reservation agents at these call centers
receive all in-bound calls to Cheap Tickets' toll free number "1-800-OK-CHEAP."
On
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average, the call centers receive approximately 120,000 calls per day.
Reservation agents currently conduct fare searches for requested itineraries,
sell airline tickets, explain rules and restrictions applicable to fares and
ticket delivery details, identify retail ticket locations, and provide other
assistance. The call centers also provide customer service for both call center
customers and Internet users.
Management intends to implement its intelligent call routing and interactive
voice response technology in the second quarter of 1999 to increase the
productivity of agents by giving callers automated fare search capability and
answers to common information requests. Cheap Tickets compensates reservation
agents on an incentive basis to maximize their productivity. Call centers are
segmented into teams, which Cheap Tickets awards for the highest productivity
and operating effectiveness.
Internet Operations. Cheap Tickets' online reservations and ticketing
service through its website at "www.cheaptickets.com" provides its customers
access to information on schedules, availability and non-published and
published fares and enables them to book their own travel arrangements at their
convenience. The website is designed to provide customers with quick,
efficient, and flexible service in a manner that facilitates comparison
shopping. Cheap Tickets' online service automates the processing of customer
orders, interacts with the systems of third party travel suppliers, and allows
Cheap Tickets to gather, store and use customer and transaction information in
a comprehensive and cost-efficient manner. The website allows customers to
dispense with providing personal profile and payment information after their
initial registration. The website has permitted Cheap Tickets to expand its
customer base through better service while reducing transactional costs.
The website contains customized software applications that interface the
website with the electronic booking system and database. Cheap Tickets has
contracted with SABRE for the development and hosting of the site, the
development of the customized software applications, and access to the
electronic booking system and database. Cheap Tickets also has developed its
own proprietary customized software applications that interfaces the website
directly with the SABRE electronic booking system and database.
Cheap Tickets maintains a relational database containing information
compiled from customer profiles, shopping patterns and sales data. Cheap
Tickets analyzes information in this database to develop targeted marketing
programs and provide personalized and enhanced customer service. Its database
is scaleable to permit large transaction volumes with no significant software
changes. Cheap Tickets' systems support automated e-mail communications with
customers to facilitate confirmations of orders, provide customer support,
obtain customer feedback and engage in targeted marketing programs.
Cheap Tickets uses a combination of proprietary and industry-standard
encryption and authentication measures designed to protect a customer's
information. Cheap Tickets maintains an Internet firewall to protect its
internal systems and all credit card and other customer information.
Strategic Relationships.
Airline Relationships. Cheap Tickets currently has contracts with more than
30 airlines. In 1998, Continental accounted for approximately 25% of Cheap
Tickets' sales of non-published fares, and America West and TWA, 12% each.
Cheap Tickets sells non-published fares purchased under these contracts, with
minimum stay and advance purchase requirements, as non-refundable, non-
endorsable and non-changeable tickets and without frequent flyer mileage or
upgrades. Generally, the
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airline contracts range from one to one and a half years in length and can be
cancelled on short notice. None of these carriers has any obligation to renew
the contracts at their expiration, but Cheap Tickets has consistently been
successful in obtaining renewals. Management believes that Cheap Tickets' track
record of selling excess capacity without compromising the airlines' fare
structures provides a strong incentive for the airlines to continue to use
Cheap Tickets for the sale of domestic non-published fares. Management believes
that Cheap Tickets' success in matching excess capacity to consumer demand for
low ticket prices comes from its strategy of directing its marketing efforts to
leisure travelers and selling restricted tickets directly to the public in high
volumes through call centers and over the Internet. Although Cheap Tickets has
a consistent history of renewing its contracts, there are no assurances that
any one or several of them will be renewed.
SABRE Relationship. SABRE is a world leader in the electronic distribution
of travel-related products and services and is a leading provider of
information technology solutions for the travel and transportation industry.
SABRE's electronic booking system and database contains flight schedules,
availability, and published fare information for more than 400 airlines, 50
auto rental companies, 35,000 hotel properties, and dozens of railways, tour
companies, passenger ferries, and cruise lines located throughout the world.
Through the SABRE reservations system, Cheap Tickets offers approximately 45
million published airfares, including those of all major domestic and
international commercial airlines. In addition, SABRE's electronic booking
system and database hosts Cheap Tickets' non-published fare information through
a unique arrangement that permits Cheap Tickets to integrate its non-published
fares with published fares on a special area of the SABRE reservations system
to which only Cheap Tickets has access. This system automatically sorts through
millions of fares, including Cheap Ticket's own non-published fares, to
identify the lowest fares available for the desired itinerary. These choices
are then posted in ascending price order for use by Cheap Tickets' reservation
agents and Internet customers. Cheap Tickets is currently negotiating a new
five-year agreement with SABRE to continue use of SABRE's system.
Marketing and Brand Awareness.
Cheap Tickets' marketing strategy is to aggressively build the Cheap
Tickets' brand name, enhance customer awareness and add new customers, both
through call centers and online. Cheap Tickets has established Cheap Tickets as
a leading discount travel services brand through limited marketing and
promotion. In 1998, Cheap Tickets spent $3.8 million for sales and marketing
expenses. It has promoted itself almost exclusively through print media,
primarily in Los Angeles, New York, San Francisco and Honolulu. Cheap Tickets
has advertised in The New York Times, The Washington Post, The Los Angeles
Times, The Seattle Post Intelligencer, The San Diego Tribune, and The Orange
County Register, among other publications. In addition, a recent customer
survey commissioned by Cheap Tickets determined that 54% of customers learned
of Cheap Tickets by word of mouth. Cheap Tickets' growth of Internet customers
was primarily through media advertisements and limited online advertising.
Cheap Tickets has advertised on Yahoo, Excite, Lycos, HotBot, Snap, OnSale and
Travelocity, among others. Cheap Tickets has purchased various keywords and
banners, typically under contracts of 30 to 90 days in duration. As limited
funds were spent on Internet promotions, Cheap Tickets has experienced
relatively low customer acquisition costs.
In the future, Cheap Tickets' strategy is to promote, advertise and broaden
its brand recognition through a variety of marketing techniques. In 1999, it
plans to spend a significant amount of the proceeds from this Offering to
increase advertising in news media and on leading websites. Additionally, Cheap
Tickets plans to broaden its news media advertising to Chicago, Atlanta, Denver
and St. Louis.
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Competition.
Competition for Non-Published Fares.
Sellers of Non-Published Fares. Cheap Tickets' existing direct competition
for non-published fares comes largely from companies that specialize in the
distribution of discounted fares in the form of regularly scheduled and
chartered flights. Management believes that the market for the sale of non-
published fares is highly fragmented. For international routes, it is highly
competitive, with numerous participants offering deeply discounted fares. For
domestic routes, there are few sellers, and they generally have net fare
contracts with a small number of carriers for a limited number of routes. Among
these, management believes Cheap Tickets is the leading seller of non-published
fares for regularly scheduled domestic routes. Cheap Tickets has contracts with
many carriers covering most major domestic and international routes. As the
domestic airline industry continues to evolve, other competitors could increase
their share of the market, or new ones could enter the market.
Online Travel Companies. Online travel companies are rapidly increasing
their shares of airline ticket sales, but, with limited exceptions including
Priceline.com, Inc., to management's knowledge, non-published fares for
regularly scheduled domestic routes are not currently offered by online travel
companies. If airlines were to make such fares generally available to online
travel companies, presumably they would risk eroding published fare structures.
However, there can be no assurance that one or more online companies, a number
of which possess larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than Cheap
Tickets, will not succeed in accessing non-published fares.
Airlines and Travel Agents. Airlines do not generally offer non-published
fares directly or indirectly through affiliates or travel agents for regularly
scheduled travel, presumably to prevent the erosion of their published fare
structure. Some airlines do offer limited special discounted fares through
their Internet sites that are not generally made available to travel agents.
These fares are typically offered only on a last-minute, "special sale" basis.
In addition, some airlines offer special promotional fares, combining low base
prices and the use of frequent flyer awards. Airlines may expand their offering
of special promotional fares, enter the non-published fare market or sell non-
published tickets through travel agents.
Certain Competitive Factors Affecting Non-Published Fares.
Published fares also compete with Cheap Tickets' non-published fares. They
effectively establish price ceilings for Cheap Tickets' non-published fares.
From time to time, airlines also offer special fares, which may compete
directly with Cheap Tickets' discounted non-published fares. Direct competition
also comes from the airlines when fare wars break out.
Competition for Published Fares.
In the sale of published fares, Cheap Tickets currently competes with
airlines, traditional travel agents, online travel services and travel industry
reservation databases. The online travel services market is new, rapidly
evolving and intensely competitive, and Cheap Tickets expects such competition
to intensify in the future. In the online travel services market, Cheap Tickets
competes for published fares with similar commercial websites of other
companies, such as Expedia, which is operated by Microsoft Corporation,
Travelocity, which is operated by SABRE Group Holdings Inc., a majority-owned
subsidiary of American Airlines, Preview Travel, Inc., Cendant Corporation,
TravelWeb, which is operated by Pegasus, Internet Travel Network, Biztravel.com
and TheTrip.com, among others. Several traditional travel agencies, including
larger travel agencies such as American
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Express Travel Related Services Co. Inc., Uniglobe Travel and Carlson Wagonlit
Travel, have established, or may establish in the future, commercial websites
offering online travel services. Several airlines also have established
commercial websites to sell their tickets and offer other online travel
services.
Employees.
As of December 31, 1998, Cheap Tickets had approximately 380 reservation
agents and other call center employees, approximately 55 retail stores and
cruise employees and approximately 155 corporate and administrative employees
for a company-wide total of approximately 590 employees. Cheap Tickets' ability
to attract and retain highly qualified employees will be the principal
determinant of its success. Cheap Tickets has a policy of using performance-
based and equity-based compensation programs to reward and motivate significant
contributors among its employees. Competition for qualified personnel in the
industry is intense. There can be no assurance that Cheap Tickets' current and
planned staffing will be adequate to support its future operations or that
management will be able to hire, train, retain, motivate and manage required
personnel. Although none of Cheap Tickets' employees is represented by a labor
union, there can be no assurance that its employees will not join or form a
labor union. However, Cheap Tickets has not experienced any work stoppages and
considers its relations with its employees to be good.
Facilities.
Cheap Tickets is headquartered in Honolulu, Hawaii where it leases an
aggregate of approximately 16,100 square feet of space housing its corporate
offices and a call center. Cheap Tickets' leases for such space expire in
November 2000 and December 2003, with an option to renew such leases covering
approximately 13,300 square feet for an additional five years. Cheap Tickets
also leases an aggregate of approximately 5,400 square feet of retail or
storage space in six other locations in Hawaii. In July 1994, Cheap Tickets
entered into a lease for approximately 9,600 square feet in Los Angeles,
California, to serve as one call center. In March 1998, Cheap Tickets entered
into a lease for approximately 13,000 square feet in Colorado Springs,
Colorado, to serve as another call center. Such leases expire in September 2004
and September 2003, respectively. Cheap Tickets is currently in negotiations
for a new lease in the Colorado Springs area, which it anticipates will result
in improved cost and space efficiencies. Cheap Tickets also leases an aggregate
of approximately 8,800 square feet of retail and administrative space in five
other locations in California, approximately 975 square feet of retail space in
Seattle in one location, and approximately 1,650 square feet of retail and
administrative space in New York in two locations. Cheap Tickets owns a 20,000
square-foot facility in Lakeport, California, which serves as a fourth call
center. Cheap Tickets anticipates that it will require additional headquarters'
space within the next 12 months. There can be no assurance that such additional
space will be available on commercially reasonable terms, if at all.
Legal Proceedings.
Cheap Tickets is not currently subject to any material legal proceedings.
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.
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MANAGEMENT
Directors and Executive Officers
The names, ages and positions of Cheap Tickets' directors and officers as of
February 22, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael J. Hartley...... 49 Chairman of the Board, Chief Executive Officer and President
F. Michael Bartholomew.. 51 Chief Operating Officer
Dale K. Jorgenson....... 59 Chief Financial Officer and Vice President of Finance
Tammy A. Ishibashi...... 31 Executive Vice President of Ticket Distribution
Donald K. Klabunde...... 42 Vice President of Systems & Technology
Ronald L. McElfresh..... 49 Vice President of Online Services
Sandra T. Hartley....... 49 Vice President of Employee Relations and Director
Lester R. Stiefel....... 47 Director of Human Resources
LaMont C. Brewer........ 42 Director of Call Centers
Ronald J. Tsolis, Jr. .. 30 Director of Pricing and Yield Management
Giles H. Bateman(3)..... 53 Director, Nominee
George R. Mrkonic(3).... 46 Director, Nominee
Donald J.
Phillips(1)(2)......... 59 Director
Cece Smith(1)(2)........ 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Anticipated members of the Audit and Compensation Committees upon the
completion of the offering.
Michael J. Hartley, a co-founder of Cheap Tickets, has served as Chief
Executive Officer, President and Director of the Company since Cheap Tickets'
inception in August 1986, and has served as Chairman of the Board since January
1999. Mr. Hartley is the husband of Sandra T. Hartley, Cheap Tickets' Vice
President of Employee Relations and the uncle of Tammy A. Ishibashi, Cheap
Tickets' Executive Vice President of Ticket Distribution. Prior to founding
Cheap Tickets, Mr. Hartley founded and sold one charter airline and served as
an organizer of two other airlines.
F. Michael Bartholomew has served as Chief Operating Officer of Cheap
Tickets since January 1999. He joined the Company in December 1997 as Senior
Vice President of Operations. From April 1994 to September 1997, Mr.
Bartholomew was Vice President of Customer Management, at Providian Financial
Corporation, a $10 billion public consumer financial services company. From May
1991 to April 1994, Mr. Bartholomew was President of Sierra Technology, a
specialized management consulting company. Prior to that, Mr. Bartholomew was a
Senior Advisor of the U.S. Special Forces, Navy Seals, U.S. Navy. Mr.
Bartholomew holds a B.S. degree in Finance from St. Louis University.
Dale K. Jorgenson joined Cheap Tickets in May 1998 as Chief Financial
Officer and Vice President of Finance. Prior to that, from 1988 to 1998, he was
Chief Financial Officer and Vice President of Finance, of Interpacific Hawaii
Retail Group and DFS, Ltd. Hawaii Region, both large retail chains in Hawaii.
Prior to that, he held similar positions for 14 years with Castle & Cooke,
Inc., now Dole Food Co. Mr. Jorgenson holds a B.A. degree in Business
Administration from the University of Washington and an M.B.A. degree from
Golden Gate University. He is a certified public accountant.
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Tammy A. Ishibashi has served as Executive Vice President of Ticket
Distribution since February 1995 and is responsible for managing the retail
stores and ticket distribution process, which includes fare filings with the
Airline Tariff Publishing Corporation, ticket distribution, refunds and ARC
reporting, and for overseeing the five departments necessary to accomplish this
process. She joined Cheap Tickets as Treasurer in September 1990, a position
she held until November 1993 when she was appointed to Second Vice President.
Ms. Ishibashi served as a Director of Cheap Tickets from September 1990 until
February 1999. Ms. Ishibashi is the niece of Michael J. Hartley, Cheap Tickets'
Chairman of the Board, Chief Executive Officer and President, and Sandra T.
Hartley, Cheap Tickets' Vice President of Employee Relations.
Donald K. Klabunde has served as Vice President of Systems & Technology
since January 1999. He joined Cheap Tickets in February 1998 as Director of
Systems & Technology, to direct the day-to-day and strategic operation of the
information and technology department in the planning, development,
implementation, and support of technological/systems enhancements throughout
the company. Prior to joining the Company, he worked for Deluxe Corporation, a
financial services company, since 1980 in a variety of technical support and
information and technology positions. Mr. Klabunde holds a B.A. degree from the
University of Minnesota.
Ronald L. McElfresh joined Cheap Tickets in January 1998 as Vice President
of Online Services, to design, develop, implement and maintain Cheap Tickets'
website. From 1996 to 1997, he worked at Digital Island, a global Internet
service provider, as the Director of Marketing. From June 1995 to June 1996, he
served as general manager at Hawaiian On-Line GTE, an Internet company. From
October 1994 to June 1995, he worked at GTE, a telecommunications company, as
an international services product manager, where he developed and managed
telephony and worked on product development for GTE's original Internet
services. From April 1989 to July 1993, Mr. McElfresh was the Director of
Product Marketing of Brite Voice Systems, Inc., a telecommunications company.
In October 1981, Mr. McElfresh co-founded INFOCOM, a multimedia development
company, where he held various product development and marketing positions,
most recently as General Manager, until October 1987. Mr. McElfresh holds a
B.A. degree from Blackhawk College.
Sandra T. Hartley, a co-founder of Cheap Tickets, has served as Vice
President of Employee Relations since January 1999. Her responsibilities
include employee relations and benefits, corporate functions and public
relations. She served as Chief Executive Officer of Cheap Tickets from August
1986 until September 1998. From August 1986 until January 1999, she has served
as Chairman of the Board of Directors. Ms. Hartley is the wife of Michael J.
Hartley, Cheap Tickets' Chairman of the Board, Chief Executive Officer and
President, and the aunt of Tammy A. Ishibashi, Cheap Tickets' Executive Vice
President of Ticket Distribution.
Lester R. Stiefel joined Cheap Tickets in April 1998 as Director of Human
Resources, to head the human resources function and to ensure that policies and
practices comply with employment laws and regulations and company standards.
Prior to joining the company he worked at Citibank, a financial institution, as
Vice President of Senior Resources Manager from 1986 to 1998, and at The Bank
of Nova Scotia, a financial institution, from 1984 to 1986. Mr. Stiefel holds a
B.A. degree from Herbert Lehman College and a Masters degree from Yeshiva
University.
LaMont C. Brewer joined Cheap Tickets in September 1998 as Call Center
Manager for the Honolulu, Hawaii location. From February 1999, Mr. Brewer has
served as Director of Call Centers. Prior to joining Cheap Tickets, he worked
at Michigan Bell/Ameritech, a telecommunications company, since 1985 in
different positions including general manager of a 380 station call center,
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<PAGE>
quality assurance manager and training supervisor. Mr. Brewer holds a B.A.
degree from Wayne State University.
Ronald J. Tsolis, Jr. joined Cheap Tickets in May 1998 as Director of
Pricing and Yield Management to maximize the profitability of retail fares
offered by the Company. From July 1993 to May 1998, he held management
positions in Pricing, Planning, and Sales at US Airways. Mr. Tsolis holds a
B.S. degree in Business Logistics from Pennsylvania State University.
Giles H. Bateman has been nominated to serve as a Director of Cheap Tickets
effective immediately upon the closing of this offering. He has served as a
director of CompUSA Inc. since December 1991 and as Chairman of the Board of
Directors since December 1993. Since January 1992, Mr. Bateman has been an
investor in and director of other public and private companies, including
Boatracs, Inc. and Beverages and More, Inc. In 1991, Mr. Bateman was a visiting
professor at the University of San Diego Olin Hall School of Business
Administration. Mr. Bateman was co-founder of The Price Company, the operator
of The Price Club chain of warehouse club retail superstores. He served as a
director and Chief Financial Officer of The Price Company from 1976 to 1991 and
as Vice Chairman from 1986 to 1991. Since 1998, Mr. Bateman has volunteered as
the Chairman of the Board of Trustees of The Hoffman Institute in Northern
California. Mr. Bateman holds a B.A. degree from Oxford University and an
M.B.A. degree from Harvard University.
George R. Mrkonic has been nominated to serve as a Director of Cheap Tickets
effective immediately upon the closing of this offering. He has served as the
Vice Chairman of Borders Group, Inc. since December 1994, and a director since
its formation in August 1994. He also served as President of Borders Group,
Inc. from December 1994 until January 1997. Prior to joining Borders,
Mr. Mrkonic served as Executive Vice President of Specialty Retailing Group of
Kmart Corporation, where he had overall responsibility for the specialty
retailing operations of Kmart including, among others, Borders, Inc. and Walden
Book Company, Inc., from November 1990 to November 1994. Mr. Mrkonic is also a
director of Champion Enterprises, Inc., a manufacturer and seller of
manufactured homes and Syntel, Inc., a computer software and development
company.
Donald J. Phillips has been a Director of Cheap Tickets since June 1998.
Since 1986, Mr. Phillips has been a general partner of Phillips-Smith Specialty
Retail Group, a retail venture capital investment firm. Mr. Phillips serves as
a director on the Board of Directors for several private companies, including
Garden Escape, Inc. He previously served as a director of publicly-held
retailers CompUSA, Inc., PETsMART, Inc. and A Pea in the Pod, Inc. Mr. Phillips
holds a B.B.A. degree in Economics from Western Michigan University and an
M.B.A. degree from Harvard University.
Cece Smith has been a Director of Cheap Tickets since July 1997. Since 1986,
Ms. Smith has been a general partner of Phillips-Smith Specialty Retail Group,
a retail venture capital investment firm. Ms. Smith serves as a director on the
Board of Directors of Hot Topic, Inc., a public specialty retailer of music-
related apparel and accessories for young men and women, and a number of
private retail companies. She previously served as a director of publicly-held
retailers BizMart, Inc. and A Pea in the Pod, Inc. Ms. Smith holds a B.B.A.
degree in Business Administration from the University of Michigan and an M.L.A.
degree in Liberal Arts from Southern Methodist University. Ms. Smith served as
a director from 1992 to 1997 and as Chairman from 1994 to 1996 of the Federal
Reserve Bank of Dallas.
49
<PAGE>
Members of the Board of Directors are elected each year at the Company's
annual meeting of stockholders and serve until the following annual meeting of
the stockholders and until their respective successors have been elected and
qualified.
Prior to his founding of Cheap Tickets in 1986, Mr. Hartley served from 1973
to 1978 as President and Chief Operating Officer of a commuter airline
operating within Hawaii, which he subsequently sold. From 1974 to 1978, he also
operated a Hawaii-based aviation center, which provided fuel and maintenance
services and flight instruction. In 1977, Mr. Hartley pled guilty to the charge
of conspiracy with the intent to distribute a controlled substance stemming
from an event that occurred in 1975, when he was 25. He served a 90-day work
release program and two and one half years' probation. From 1981 to 1986, Mr.
Hartley was one of several founders of two start-up Hawaii-California airlines,
Hawaii Express and Air-Hawaii. Eight months after Mr. Hartley had been
dismissed as President by a dissident board, Hawaii Express failed in 1983. Mr.
Hartley served as an outside consultant to Air Hawaii until its initial flight
in November of 1985. Air Hawaii faced major fare wars from its competitors
prior to filing for bankruptcy in the spring of 1986.
Committees of the Board of Directors
In January 1999, the Board established an Audit Committee and a Compensation
Committee. The Audit Committee monitors the corporate financial reporting and
the internal and external audits of Cheap Tickets. The Audit Committee
currently consists of Directors Phillips and Smith. The Compensation Committee
makes recommendations regarding Cheap Tickets' employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of Cheap Tickets. The Compensation Committee currently consists of
Directors Phillips and Smith. It is anticipated that Giles Bateman and George
Mrkonic will become members of both committees upon the closing of this
offering.
Director Compensation
Nonemployee directors receive $2,500 for each Board meeting and $1,000 for
each committee meeting attended in person as compensation for their services as
directors. Further, directors are reimbursed for certain reasonable expenses
incurred in attending Board or committee meetings. Each non-employee director
will receive upon joining the Company an option to acquire 1,500 shares of
common stock at an exercise price equal to the then fair market value. These
options shall vest in equal increments over three years. Each non-employee
director will also receive automatic annual grants of options to acquire
$25,000 worth of common stock based on an exercise price equal to the fair
market value of the common stock at the date of grant. Such options will vest
in equal increments over three years. For more information on Cheap Tickets'
1999 Stock Incentive Plan please refer to "Employee Stock Plans--1999 Stock
Incentive Plan" on page 54.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between Cheap Tickets' Board of
Directors or Compensation Committee and any member of any other company's board
of directors or compensation committee, nor has any such interlocking
relationship existed in the past.
Limitation of Liability and Indemnification Matters
Limitation of liability under Certificate of Incorporation. Pursuant to the
provisions of the Delaware General Corporation Law, Cheap Tickets' Certificate
of Incorporation provides that
50
<PAGE>
directors and officers of Cheap Tickets shall not be personally liable for
monetary damages to Cheap Tickets or its stockholders for a breach of fiduciary
duty as a director or officer, except for liability for:
. a breach of the duty of loyalty to Cheap Tickets or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and
. transactions from which the director or officer derived an improper
personal benefit.
The limitation of liability provided in the Certificate of Incorporation does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
Indemnification Agreements. Cheap Tickets' Certificate of Incorporation, as
amended, also authorizes Cheap Tickets to indemnify its officers, directors and
other agents, by bylaws, agreements or otherwise, to the fullest extent
permitted under Delaware law. Cheap Tickets has entered into separate
indemnification agreements with its directors and officers which may, in some
cases, be broader than the specific indemnification provisions contained in the
Delaware General Corporation Law. The indemnification agreements may require
Cheap Tickets, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance if available on reasonable
terms.
Indemnification under Bylaws. Cheap Tickets' Bylaws, as amended, require
Cheap Tickets to indemnify its directors and officers and permit Cheap Tickets
to indemnify its other employees to the fullest extent permitted by law. Cheap
Tickets believes that indemnification under its Bylaws, as amended, covers at
least negligence and gross negligence on the part of the indemnified party.
Indemnification under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of Cheap Tickets pursuant to the foregoing
provisions, or otherwise, Cheap Tickets has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Pending indemnification proceedings. At present, there is no pending
litigation or proceeding involving a director, officer, employee or agent of
Cheap Tickets where indemnification will be required or permitted. Cheap
Tickets is not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
51
<PAGE>
Executive Compensation--Summary Compensation Table
The following table sets forth all compensation paid by Cheap Tickets during
fiscal 1998, 1997 and 1996 to (a) Cheap Tickets' principal executive officer
during fiscal 1998, (b) up to four other most highly compensated executive
officers of Cheap Tickets during fiscal 1998, and (c) up to two additional
individuals who would have been among Cheap Tickets' four most highly
compensated executive officers, but for the fact that they were not serving as
executive officers of Cheap Tickets at the end of fiscal 1998.
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------
Annual Compensation
---------------------- Securities
Name and Principal Underlying All Other
Position Year Salary(1) Bonus Options/SARs(#) Compensation($)
------------------ ---- --------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael J. Hartley(2)... 1998 $243,783 $50,000 -- $ --
Chairman of the Board,
Chief Executive 1997 229,090 -- -- --
Officer and President 1996 154,170 15,750 -- --
Sandra T. Hartley(3).... 1998 235,500 12,500 -- --
Vice President,
Employee Relations 1997 233,050 -- -- --
1996 213,400 15,750 -- --
F. Michael
Bartholomew(4)......... 1998 165,000 41,250 -- --
Chief Operating
Officer 1997 6,875 -- -- --
1996 -- -- -- --
Dale K. Jorgenson(5).... 1998 78,366 21,875 -- --
Chief Financial
Officer and 1997 -- -- -- --
Vice President,
Finance 1996 -- -- -- --
Tammy A. Ishibashi...... 1998 100,008 25,000 -- --
Executive Vice
President, 1997 73,110 -- -- --
Ticket Distribution 1996 56,600 5,000 -- --
Paul Ouyang(6).......... 1998 201,923 -- -- --
1997 225,000 -- -- 59,854(7)
1996 28,125 -- -- 45,895(8)
</TABLE>
- --------
(1) Amounts shown are on a full-year basis and include cash and noncash
compensation.
(2) For fiscal year 1999, Mr. Hartley's annual salary will be approximately
$387,000.
(3) For fiscal year 1999, Mrs. Hartley's annual salary will be approximately
$75,000.
(4) Mr. Bartholomew's annual salary for 1997 would have been $165,000 if he had
been with Cheap Tickets for the entire year. He joined Cheap Tickets in
December 1997. For fiscal year 1999, Mr. Bartholomew's annual salary will
be approximately $190,000.
(5) Mr. Jorgenson's annual salary and bonus for 1998 would have been $150,000
and $45,000, respectively, if he had been with Cheap Tickets for the entire
year. He joined Cheap Tickets in May 1998. For fiscal year 1999, Mr.
Jorgenson's annual salary will be approximately $175,000.
(6) Mr. Ouyang was the Chief Financial Officer of Cheap Tickets until March 23,
1998, at which time he left Cheap Tickets.
(7) Includes reimbursement for legal fees and taxes.
(8) Includes compensation in the form of stock issuances.
52
<PAGE>
Option Grants During 1998
The following table sets forth certain information regarding stock options
granted in 1998 to the officers named in the table on page 52.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term(4)
---------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted(1) Fiscal Year(2) Per Share Date(3) 5% 10%
- ---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
F. Michael Bartholomew.. 140,000 19.2% $0.18 11/21/07 $ 15,848 $ 40,162
Dale K. Jorgenson....... 140,000 19.2% $0.18 5/19/08 15,848 40,162
</TABLE>
- --------
(1) Options generally have a ten-year term and vest at a rate 20% per annum.
(2) Cheap Tickets granted options for a total of 728,000 shares of common stock
to employees of Cheap Tickets during 1998.
(3) Options may terminate before their expiration dates if optionee's status as
an employee or consultant is terminated or upon the optionee's death or
disability.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent Cheap Tickets' estimate or projection of future prices of its
common stock prices. The actual value realized may be greater or less than
the potential realizable values set forth in the table.
Aggregate Option Exercises in 1998 and Year-End Option Values
The following table sets forth for each of the officers named in the table
on page 52 certain information concerning the number of shares subject to both
exercisable and unexercisable stock options as of December 31, 1998. Also
reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding options and the
fair market value of Cheap Tickets' common stock as of December 31, 1998. None
of these officers exercised options during 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1998 December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Hartley......... -- -- $ -- $ --
Sandra T. Hartley.......... -- -- -- --
F. Michael Bartholomew..... 28,000 112,000 280,560 1,122,240
Dale K. Jorgenson.......... -- 140,000 -- 1,402,800
Tammy A. Ishibashi......... -- -- -- --
Paul Ouyang................ -- -- -- --
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1998 and the exercise
price of the named officer's option. The fair market value at December 31,
1998 was deemed to be 85% of $12.00, the mid-point of the proposed initial
public offering price range ($10.20).
Employee Stock Plans
1997 Stock Option Plan
Cheap Tickets' 1997 Stock Option Plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended and for the granting of nonstatutory stock
options to employees, directors and consultants. The 1997
53
<PAGE>
plan was approved by the Board of Directors in February 1998 and by Cheap
Tickets' shareholders in April 1998. Unless terminated sooner, the 1997 plan
will terminate automatically in 2008. A total of 1,979,642 shares of common
stock were reserved for issuance pursuant to the 1997 plan. As of December 31,
1998, options to purchase 728,000 shares of common stock were outstanding under
the 1997 plan, and 1,251,642 shares of common stock remained available under
the 1997 plan. No further options will be granted under the 1997 plan after the
effective date of the offering.
The 1997 plan may be administered by the Board of Directors or a committee
of the Board, which serves as the plan administrator. The plan administrator
has the power to determine the terms of the options granted, including the
number of shares subject to each option, the exercisability thereof, and the
form of consideration payable upon such exercise.
Options granted under the 1997 plan are not generally transferable by the
optionee. Generally each option is exercisable during the lifetime of the
optionee only by him or her. Unless otherwise specified in the option
agreement, options granted under the 1997 plan must be exercised within three
months of the end of the optionee's status as an employee or consultant of
Cheap Tickets', or within twelve months after his or her termination by death
or disability, but in no event later than the expiration of the option's term.
The exercise price of all incentive stock options granted under the 1997
plan must be at least equal to the fair market value of the common stock on the
date of the grant. The exercise price of nonstatutory stock options must be at
least equal to 85% of the fair market value of the common stock on the date of
the grant. With respect to any optionee who owns stock possessing more than 10%
of the voting power of all classes of Cheap Tickets' outstanding capital stock,
the exercise price of any option must equal at least 110% of the fair market
value of the common stock on the date of the grant and the term of any
incentive stock option may not exceed five years. The term of other options
under the 1997 plan may not exceed ten years. The consideration to be paid for
the shares of common stock upon exercise of an option will be determined by the
plan administrator and may include, cash, check, promissory note, shares of
common stock, or the assignment of part of the proceeds from the sale of shares
acquired upon exercise of the option.
The 1997 plan provides that in the event of a merger or a sale of all or
substantially all of Cheap Tickets' assets the plan administrator has the
authority to provide for the full automatic vesting and exercisability of each
option, including shares as to which the option would not otherwise be
exercisable. If an option becomes exercisable in full in the event of a merger
or sale of assets, the plan administrator will notify the optionee that the
option is fully exercisable for a specified period from the date of the notice,
and the option will terminate upon the expiration of that period. To the extent
the option has not been previously exercised, each option will terminate
immediately prior to the consummation of the merger or sale of assets.
During 1998, Cheap Tickets granted to F. Michael Bartholomew an option to
acquire 140,000 shares of common stock at an exercise price of $0.18 per share.
Upon the completion of this offering, the option will be fully vested and
exercisable. For more information on our capitalization before and after the
offering, please refer to "Capitalization" on page 22. For more information on
the dilution of Cheap Tickets common stock, please refer to "Dilution" on page
23.
1999 Stock Incentive Plan
Cheap Tickets' 1999 Stock Incentive Plan, which was adopted by the Board of
Directors in February 1999, is expected to be approved by Cheap Tickets'
stockholders prior to the offering. From and after the offering, all further
option grants will be made solely under the 1999 plan.
54
<PAGE>
Initially, 1,260,000 shares of common stock, plus an annual increase to be
added on the first day of Cheap Tickets' fiscal year beginning in 2000 equal to
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 plan are
reserved for issuance under the 1999 plan. However the maximum number of shares
available for grant of incentive stock options under the 1999 plan initially is
1,260,000 shares of common stock, plus an annual increase to be added on the
first day of Cheap Tickets' fiscal year beginning in 2000 equal to the lesser
of (a) 700,000 shares of common stock, (b) two percent of the number of shares
outstanding as of such date; or (c) a lesser number of shares determined by the
plan administrator of the 1999 plan.
With respect to 1999 awards granted to directors or officers, the 1999 plan
is administered by the Board of Directors or a committee designated by the
Board of Directors constituted to permit 1999 awards to be exempt from Section
16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder. With
respect to 1999 awards granted to other participants, the 1999 plan is
administered by the Board of Directors or a committee designated by the Board
of Directors. In each case, the respective plan administrator shall determine
the provisions, terms and conditions of each 1999 awards, including, but not
limited to, the 1999 award vesting schedule, repurchase provisions, rights of
first refusal, forfeiture provisions, form of payment (cash, shares of common
stock, or other consideration) upon settlement of the 1999 award, payment
contingencies and satisfaction of any performance criteria.
The exercise price of options under the 1999 plan must be at least equal to
the fair market value of the common stock on the date of grant, and the term of
the option must not exceed ten years. The term of other 1999 awards will be
determined by the respective plan administrator. With respect to an employee
who owns stock possessing more than 10% of the voting power of all classes of
Cheap Tickets' outstanding capital stock, the exercise price of any incentive
stock option must equal at least 110% of the fair market value of the common
stock on the grant date and the term of the option must not exceed five years.
The exercise price or purchase price, if any, of other 1999 awards will be
determined based on current market prices for Cheap Tickets' common stock by
the respective plan administrator. The consideration to be paid for the shares
of common stock upon exercise or purchase of a 1999 award will be determined by
the plan administrator and may include cash, check, promissory note, shares of
common stock, or the assignment of part of the proceeds from the sale of shares
acquired upon exercise or purchase of the 1999 award.
Pursuant to the 1999 plan, the Board of Directors has adopted the 1999 Non-
Employee Director Option Program. Under this program, each non-employee
director serving on Cheap Tickets' Board of Directors upon the offering and
each non-employee director appointed to the Board following the offering 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. In addition, following each annual stockholders' meeting commencing
with the annual meeting in 2000, each non-employee director who continues as a
director following the meeting and who has served as a director for at least
eight months will receive an option to acquire the number of shares equal to
$25,000 divided by the fair market value per share on the date of such annual
meeting rounded down to the next whole share in the case of any fractional
share. These options will vest and become exercisable in three equal
installments on each yearly anniversary of the grant date. In the event of a
merger, sale of all or substantially all of Cheap Tickets' assets, the
liquidation or dissolution of Cheap Tickets, the acquisition by any person or
related groups of persons of securities possessing more than 50% of the voting
power of Cheap Tickets' outstanding securities with certain exceptions, and
certain changes in the composition of the Board of the Directors over a period
of 36 months,
55
<PAGE>
such options will vest and become fully exercisable. The plan administrator may
provide for the full automatic vesting and exercisability of unvested options
in anticipation of such a transaction.
Each automatic option grant will have a term of ten years and will be
transferable to the extent provided in the agreement evidencing the option.
401(k) Plan
Cheap Tickets has a 401(k) plan pursuant to which eligible employees may
elect to reduce their current salary by up to the statutorily prescribed annual
limit and have the amount of such reduction contributed to the 401(k) plan.
Contributions to the 401(k) plan by Cheap Tickets are discretionary. The 401(k)
plan is intended to qualify under Section 401 of the Internal Revenue Code so
that contributions by participants to the 401(k) plan, and income earned on
plan contributions, are not taxed to participants until withdrawn from the
401(k) plan.
Employment Agreements
Cheap Tickets does not have any employment agreements with any of its key
personnel. Cheap Tickets has severance agreements with Michael J. Hartley and
Sandra T. Hartley. Each of the severance agreements requires Cheap Tickets to
pay the respective individual an amount equal to the lesser of (a) twice his or
her respective annual salary or (b) $400,000 in the event that their employment
is terminated either by Cheap Tickets without cause or by them for good reason.
CERTAIN TRANSACTIONS
During the last fiscal year, Cheap Tickets did not enter into any
transaction required to be disclosed pursuant to Item 404 of Regulation S-K.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Cheap Tickets' common stock as of February 22, 1999,
and is adjusted to reflect the sale of the shares offered hereby by (a) each
person (or group of affiliated persons) who is known by Cheap Tickets to own
beneficially more than 5% of Cheap Tickets' common stock, (b) each of Cheap
Tickets' directors, (c) each of the Named Executive Officers, and (d) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage
Beneficially
Number of Owned(1)(2)
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned(1) Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Michael J. Hartley (3)......................... 13,395,032 92.6% 64.0%
Sandra T. Hartley (4).......................... 13,395,032 92.6 64.0
Donald J. Phillips (5)......................... 2,960,552 17.0 14.1
Cece Smith (6)................................. 2,960,552 17.0 14.1
Tammy A. Ishibashi (7)......................... 704,998 4.9 3.4
Paul Ouyang (8)................................ 373,646 2.6 1.8
F. Michael Bartholomew (9)..................... 140,000 * *
Dale K. Jorgenson.............................. -- * *
All directors and executive officers as a group
(12 persons).................................. 17,200,582 97.9 81.6
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable within 60 days of February 23, 1999 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person.
Except as indicated in the footnote to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting power and investment power with respect to the shares set forth
opposite such stockholder's name.
(2) Based on 14,473,676 shares of common stock outstanding prior to the
offering and 20,943,132 outstanding upon the completion of the offering
(assumes no exercise of Underwriters' over-allotment option) and the
exercise of warrants to purchase 2,969,456 shares of common stock.
(3) Includes 1,903,510 shares of common stock held by the Michael J. Hartley
Living Trust, 4,794,006 shares of common stock held by the Hartley
Investments Limited Partnership (held for the benefit of Michael J.
Hartley) and 6,697,516 shares of common stock held by Sandra T. Hartley.
Mr. Hartley is the husband of Sandra T. Hartley, Cheap Tickets' Vice
President, Employee Relations who owns 6,697,516 shares of common stock.
Mr. Hartley's address is 1440 Kapiolani Boulevard, Honolulu, Hawaii 96814.
See note (4).
(4) Includes 1,903,510 shares of common stock held by the Sandra T. Hartley
Living Trust, 4,794,006 shares of common stock held by the Hartley
Investments Limited Partnership (held for the benefit of Sandra T. Hartley)
and 6,697,516 shares of common stock held by Michael J. Hartley. Ms.
Hartley is the wife of Michael J. Hartley, Cheap Tickets' Chairman of the
Board, Chief Executive Officer and President who owns 6,697,516 shares of
common stock. Ms. Hartley's address is 1440 Kapiolani Boulevard, Honolulu,
Hawaii 96814. See note (3).
57
<PAGE>
(5) Represents warrants held by Phillips-Smith Specialty Retail Group III, L.P.
to purchase 2,960,552 shares of common stock exercisable at or within 60
days of February 22, 1999. Mr. Phillips is a co-founder and general partner
of Phillips-Smith Specialty Retail Group III, L.P. Mr. Phillips' address is
c/o Phillips-Smith Specialty Retail Group, 5080 Spectrum Drive, Suite 805,
West Addison, Texas 75001. Phillips-Smith Specialty Retail Group III, L.P.
is the holder of the majority of the 425,000 shares of mandatorily
redeemable preferred stock. See note (6).
(6) Represents warrants held by Phillips-Smith Specialty Retail Group III, L.P.
to purchase 2,960,552 shares of common stock exercisable at or within 60
days of February 22, 1999. Ms. Smith is a co-founder and general partner of
Phillips-Smith Specialty Retail Group III, L.P. Ms. Smith's address is c/o
Phillips-Smith Specialty Retail Group, 5080 Spectrum Drive, Suite 805,
West Addison, Texas 75001. Phillips-Smith Specialty Retail Group III, L.P.
is the holder of the majority of the 425,000 shares of mandatorily
redeemable preferred stock. See note (5).
(7) Ms. Ishibashi is the niece of Michael J. Hartley, Cheap Tickets' Chairman
of the Board, Chief Executive Officer and President, and Sandra T. Hartley,
Cheap Tickets' Vice President, Employee Relations. See notes (3) and (4).
(8) Represents 373,646 shares held in the name of Paul Ouyang and Deborah
Ouyang, Trustees of the Ouyang 1990 Trust.
(9) Represents stock options held by Mr. Bartholomew to purchase 140,000 shares
of common stock exercisable upon the closing of this offering, of which
28,000 are currently exercisable.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Cheap Tickets consists of 70,000,000 shares
of common stock, par value $0.001 per share and 10,000,000 shares of preferred
stock par value $0.01 per share, of which all issued and outstanding preferred
stock prior to the initial public offering shall be redeemed upon the closing
of this offering.
The following description of Cheap Tickets' capital stock does not purport
to be complete and is subject to and qualified in its entirety by Cheap
Tickets' Certificate of Incorporation and Bylaws and by the provisions of
applicable Delaware law.
The Certificate of Incorporation and Bylaws contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
Cheap Tickets unless such takeover or change in control is approved by the
Board of Directors.
Common Stock
As of December 31, 1998, there were 14,473,676 shares of common stock
outstanding and those shares were held of record by four stockholders. Holders
of common stock are entitled to one vote per share on all matters to be voted
upon by the stockholders. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event of
a liquidation, dissolution or winding up of Cheap Tickets, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior liquidation rights of preferred stock,
if any, then outstanding. The holders of common stock have the preemptive right
to purchase their pro rata portion of any additional shares of common stock
whether then or thereafter authorized. The common stock has no conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and the shares of common stock to be outstanding after the offering
will be fully paid and non-assessable.
Preferred Stock
Upon the closing of this offering, 10,000,000 shares of preferred stock will
be authorized without any shares being issued and outstanding. The Board of
Directors has the authority, without further action by the stockholders, to
issue the shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking and purchase fund provisions, and the number of shares
constituting any series and the designations of such series. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of Cheap Tickets. Cheap Tickets has no present
plan to issue any additional shares of preferred stock.
Mandatorily Redeemable Preferred Stock
As of December 31, 1998, there were 425,000 shares outstanding of
mandatorily redeemable preferred stock. All of these shares will be redeemed
upon the completion of this offering.
59
<PAGE>
Options
As of December 31, 1998, (a) options to purchase a total of 728,000 shares
of common stock were outstanding; and (b) up to 1,251,642 additional shares of
common stock may be subject to options granted in the future under the 1997
Stock Option Plan. No further options will be granted under the 1997 Stock
Option Plan after the offering. Options granted after the offering will be
granted under the 1999 Stock Incentive Plan.
Warrants
As of December 31, 1998, Cheap Tickets had warrants outstanding to purchase
an aggregate of 2,969,456 shares of common stock at an aggregate exercise price
of $2,121. The warrants are subject to adjustment for stock splits, stock
dividends and the like and expire on July 15, 2002. Cheap Tickets anticipates
that the warrants will be exercised immediately prior to the closing of the
offering.
Registration Rights
As of the effective date of the registration statement, holders of 2,969,456
shares of common stock will be entitled to registration rights with respect to
their shares. Holders of such shares can require Cheap Tickets to register the
shares at any time following 180 days after the offering, subject to certain
conditions.
Delaware Anti-Takeover Law and Certain Charter Provision
Delaware Anti-Takeover Law
Cheap Tickets is subject to Section 203 of the Delaware General Corporation
Law. This is an anti-takeover law that restricts certain transactions and
business combinations between a corporation and an interested stockholder
owning 15% or more of the corporation's outstanding voting stock, for a period
of three years from the date the stockholder becomes an interested stockholder.
Subject to certain exceptions, unless the transaction is approved by the board
of directors and the holders of at least two-thirds of the outstanding voting
stock of the corporation, excluding shares held by the interested stockholder,
this law prohibits significant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial benefits by
the interested stockholder, or any other transaction that would increase the
interested stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation. This calculation does not include shares held by persons who are
both directors and officers or by certain employee stock plans.
Action by Written Consent
Upon completion of this offering, Cheap Tickets' Certificate of
Incorporation will provide that the holders of two-thirds of the outstanding
voting capital stock can take action by written consent or at a duly called
annual or special meeting of stockholders. This provision may have the effect
of deterring hostile takeovers or delaying changes in control or management of
Cheap Tickets.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Securities
Transfer and Trust, Inc., a Colorado corporation.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Cheap Tickets will have approximately
20,943,132 shares of common stock outstanding assuming (a) no exercise of the
underwriters' over-allotment option, (b) no exercise of outstanding options,
and (c) the exercise of warrants to purchase an aggregate of 2,969,456 shares
of common stock. Effective upon the consummation of this offering, assuming no
exercise of outstanding options, Cheap Tickets will have outstanding options to
purchase approximately 728,000 shares of common stock.
Of the common stock outstanding upon completion of this offering, the
3,500,000 shares of common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
for any shares purchased by "affiliates" of Cheap Tickets, as that term is
defined under the Securities Act and the regulations promulgated thereunder.
The remaining 17,443,132 shares of common stock held by officers, directors,
employees, consultants and other stockholders of Cheap Tickets were sold by
Cheap Tickets in reliance on exemptions from the registration requirements of
the Securities Act and are "restricted securities" within the meaning of Rule
144 under the Securities Act. Any shares of common stock issued upon the
exercise of options or warrants held by any of such persons will constitute
restricted securities. None of the outstanding shares of common stock that are
restricted securities will be eligible for sale in the public market as of the
date of this prospectus in reliance on Rule 144(k) under the Securities Act.
All 17,443,132 shares of common stock held by existing stockholders are subject
to lock-up agreements with the representatives. None of the shares subject to
such lock-up agreements may be sold or transferred during the applicable lock-
up period without the consent of the underwriters except for transfers pursuant
to gifts or certain partnership distributions and similar transfers in which
the transferee enters into a substantially similar lock-up agreement. Upon the
expiration of the lock-up agreements, all of such locked-up shares will become
eligible for sale 180 days, respectively, after the date of this prospectus
subject to the provisions of Rules 144(k), 144 or 701. The representatives may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to these lock-up agreements.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned restricted securities for a period of at
least one year from the later of the date such restricted securities were
acquired from Cheap Tickets or the date they were acquired from an affiliate,
is entitled to sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly trading
volume in the common stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions relating to the
number and notice of sale, manner of sale and the availability of current
public information about Cheap Tickets.
Further, under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from Cheap
Tickets and the date they were acquired from an affiliate of Cheap Tickets, a
holder of such restricted securities who is not an affiliate at the time of the
sale and has not been an affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately after the date of this
prospectus without regard to the volume and manner of sale limitations
described above. Any employee, director or consultant to Cheap Tickets who
purchased his or her shares pursuant to a written compensation plan or contract
is entitled to rely on the resale provisions of Rule 701. This permits non-
affiliates to sell their Rule 701 shares beginning 90 days after the date of
this prospectus without having to comply with the volume limitations and
61
<PAGE>
holding period restrictions of Rule 144. As of December 31, 1998, there were
outstanding options to purchase approximately 728,000 shares which under
certain circumstances would be available for sale pursuant to Rule 701, of
which all of the shares underlying such options are subject to lock-up
agreements.
Prior to this offering, there has been no public market for the common stock
of Cheap Tickets, and any sale of substantial amounts of common stock in the
open market, or the availability of shares for sale, may adversely affect the
market price of the common stock and the ability of Cheap Tickets to raise
funds through equity offerings in the future.
As of the effective date of the registration statement, holders of 2,969,456
shares of common stock will be entitled to registration rights with respect to
their shares. Holders of such shares can require Cheap Tickets to register the
shares at any time following 180 days after the date of this prospectus,
subject to certain conditions.
62
<PAGE>
UNDERWRITING
The several underwriters named below, for which William Blair & Company,
L.L.C. and Dain Rauscher Wessels, a Division of Dain Rauscher Incorporated, are
acting as representatives, have severally agreed, subject to the terms and
conditions set forth in the underwriting agreement by and among Cheap Tickets
and the underwriters, to purchase from Cheap Tickets, and Cheap Tickets has
agreed to sell to each of the underwriters, the respective number of shares of
common stock set forth opposite each underwriters' name in the table below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
William Blair & Company, L.L.C. ...................................
Dain Rauscher Wessels..............................................
---------
Total............................................................
=========
</TABLE>
In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the common stock
being sold pursuant to the Underwriting Agreement if any of the common stock
being sold pursuant to the underwriting agreement is purchased. There is,
however, no obligation to purchase the shares covered by the over-allotment
option granted in the underwriting agreement. In the event of default by any
underwriter, the underwriting agreement provides that, in certain
circumstances, the purchase commitments of the non-defaulting Underwriters
shall be increased or the underwriting agreement may be terminated.
The representatives of the underwriters have advised Cheap Tickets that the
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and to
selected dealers at such price less a concession of not more than $ per
share. The underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ per share to certain other dealers. After commencement of
the initial public offering, the public offering price, and other selling terms
may be changed by the representatives.
Cheap Tickets has granted to the underwriters an option, exercisable within
30 days after the date of this prospectus, to purchase up to an aggregate of
525,000 additional shares of common stock at the same price per share to be
paid by the underwriters for the other shares offered hereby for the purpose of
covering the sale of shares in excess of the shares initially allocated in the
offering. If the underwriters purchase any such additional shares pursuant to
this option, each of the underwriters will be committed to purchase such
additional shares in approximately the same proportion as set forth in the
table above. The underwriters may exercise the option only for the purpose of
covering excess sales, if any, made in connection with the distribution of the
shares of common stock offered hereby.
Stockholders of Cheap Tickets, who hold in the aggregate 17,443,132 shares
of common stock, and Cheap Tickets have agreed that for a period of 180 days
after the date of this prospectus, without the prior written consent of the
representatives, they will not, directly or indirectly, offer, sell, assign,
transfer, encumber, pledge, contract to sell, grant an option to purchase, or
otherwise dispose of, other than by operation of law, any shares of common
stock or securities convertible or exchangeable into, or exercisable for,
common stock. This agreement does not extend to bona fide gifts to immediate
family members of such persons who agree to be bound by such restrictions, or
to limited partners or shareholders, who agree to be bound by such
restrictions. In considering a request for its consent to a sale or transfer
within the 180-day period, the representatives will take into account
63
<PAGE>
various factors, including, but not limited to, the number of shares requested
to be sold, the anticipated manner and timing of sale, the potential impact of
the sale on the market for the common stock, and market conditions generally.
Cheap Tickets may grant options and issue common stock under existing stock
option or stock purchase plans and issue unregistered shares in connection with
any outstanding convertible securities or options during the lock-up period.
For information on shares available for sale following the offering, please
refer to "Risk Factors--Substantial sales of our common stock could adversely
affect our stock price" on pages 19 and 20.
Cheap Tickets has agreed to indemnify the underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the underwriters may be required to make in
respect thereof.
The representatives have informed Cheap Tickets that the underwriters will
not confirm, without client authorization, sales to their client accounts as to
which they have discretionary authority.
Prior to this offering, there was no public market for the common stock of
Cheap Tickets. Consequently, the initial public offering price for the common
stock will be determined by negotiations among Cheap Tickets and the
representatives. Among the factors which will be considered in such
negotiations are the prevailing market conditions, the results of operations of
Cheap Tickets in recent periods, the market capitalizations and stages of
development, and recent market prices of securities, of other companies which
Cheap Tickets and the representatives believe to be comparable to Cheap
Tickets, estimates of the business potential of Cheap Tickets, the present
state of Cheap Tickets' development, the general condition of the securities
markets at the time of this offering, and other factors which are deemed
relevant. There can be no assurance that an active trading market will develop
for the common stock or that the common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
During and after this offering, the underwriters may purchase and sell the
common stock in the open market in order to facilitate this offering.
Specifically, the underwriters may over-allot or otherwise sell more shares of
common stock than have been sold to them by Cheap Tickets pursuant to the
underwriting agreement. The underwriters may elect to cover any such excess
sales position by purchasing shares of common stock in the open market or by
exercising the over-allotment option granted to them by Cheap Tickets. The
underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of shares of common
stock sold in this offering for their account may be reclaimed by the syndicate
if such shares are repurchased by the syndicate in stabilizing or covering
transactions.
The activities described above may stabilize, maintain, or otherwise affect
the market price of the common stock and make such price higher than it might
otherwise be in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales
thereof. These activities, if commenced, may be discontinued at any time
without notice and may be effected on the Nasdaq Stock Market or otherwise.
Neither Cheap Tickets nor any of the underwriters makes any representation or
prediction as to whether the underwriters will engage in such transactions or
choose to discontinue any transactions engaged in or the direction or magnitude
of any effect that such transactions may have on the price of the common stock.
64
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Morrison & Foerster LLP, Los Angeles, California. Certain matters in connection
with this offering will be passed upon for the underwriters by Sonnenschein
Nath & Rosenthal, Chicago, Illinois.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
In August 1998, Cheap Tickets selected PricewaterhouseCoopers LLP as its
principal independent auditors to replace KPMG LLP. The decision to retain
PricewaterhouseCoopers LLP was recommended by the Board of Directors. In
connection with the audit for the years ended December 31, 1996 and 1997, and
the period through August 1998, there were no disagreements with KPMG LLP on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which, if not resolved to the
satisfaction of KPMG LLP, would have caused them to make reference to the
matter in their report. The report of KPMG LLP on the financial statements of
Cheap Tickets for the years ended December 31, 1996 and 1997 did not contain
any adverse opinion or disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope or accounting principles.
ADDITIONAL INFORMATION
Cheap Tickets has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered hereby. This prospectus does not contain all of
the information set forth in the registration statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to Cheap Tickets and the shares of common
stock offered hereby, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. Copies of such materials may be examined without charge at, or
obtained upon payment of prescribed fees from, the Public Reference Section of
the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 (telephone 202-942-8090), and at the Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at 7 World Trade Center, 13th Floor, New York New York
10048. The Commission maintains a World Wide Website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov. Reports, proxy statements and other information concerning
Cheap Tickets may also be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington D.C. 20006.
65
<PAGE>
CHEAP TICKETS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to the Financial Statements.......................................... F-8
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
The Stockholders and Board of Directors
Cheap Tickets, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly,
in all material respects, the financial position of Cheap Tickets, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Cheap Tickets' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
February 15, 1999
F-2
<PAGE>
CHEAP TICKETS, INC.
BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Assets (Note 4)
Current Assets:
Cash and cash equivalents.......................... $ 6,254,406 $ 2,973,988
Marketable securities.............................. -- 4,935,229
Trade accounts and other receivables............... 663,969 924,348
Refundable income taxes............................ 663,209 --
Ticket inventories................................. 119,771 286,331
Other current assets............................... 259,719 725,692
----------- -----------
Total current assets............................. 7,961,074 9,845,588
Property and equipment, net (Note 3)................. 2,520,046 2,999,418
Property held for sale............................... 550,000 --
Other assets......................................... 172,470 380,846
----------- -----------
$11,203,590 $13,225,852
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable................................... $ 4,385,778 $ 4,681,055
Accrued salaries................................... 337,455 399,167
Accrued vacation................................... 79,168 421,288
Accrued expenses and other liabilities............. 140,905 222,321
Current installments of long-term debt (Note 4).... 528,825 221,469
Current installments of capital lease obligations
(Note 9).......................................... 132,722 287,809
Income taxes payable............................... -- 139,640
----------- -----------
Total current liabilities........................ 5,604,853 6,372,749
Long-term debt, excluding current installments (Note
4).................................................. 598,139 585,556
Capital lease obligations, excluding current
installments (Note 9)............................... 349,542 652,359
Other noncurrent liabilities......................... 217,598 93,961
----------- -----------
Total liabilities................................ 6,770,132 7,704,625
----------- -----------
Commitments (Notes 8, 9 and 12)
Mandatorily redeemable cumulative preferred stock, $1
par value (aggregate involuntary liquidation
preference of $4,250,000, plus unpaid cumulative
dividends). Issued and outstanding 425,000 shares at
December 31, 1997 and 1998 (Note 5)................. 3,621,896 4,136,028
----------- -----------
Stockholders' Equity (Notes 5, 6, 11 and 12):
Preferred stock, $1 par value. Authorized 5,000,000
shares; none issued at December 31, 1997 and 1998
(except for 425,000 shares of mandatorily
redeemable cumulative preferred stock shown
above)............................................ -- --
Common stock, $0.01 par value. Authorized
70,000,000 shares; issued and outstanding
14,847,322 shares at December 31, 1997 and
14,473,676 shares at December 31, 1998............ 10,605 10,338
Additional paid-in capital......................... 547,017 1,246,937
Unearned compensation.............................. (19,127) (696,275)
Retained earnings.................................. 273,067 824,199
----------- -----------
Total stockholders' equity....................... 811,562 1,385,199
----------- -----------
$11,203,590 $13,225,852
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Non-published fares................... $58,981,893 $96,379,304 $159,845,855
Published fare commissions and
bonuses.............................. 5,613,761 6,470,082 11,268,472
----------- ----------- ------------
Net revenues........................ 64,595,654 102,849,386 171,114,327
Cost of sales......................... 49,167,998 81,370,511 136,067,182
----------- ----------- ------------
Gross profit.......................... 15,427,656 21,478,875 35,047,145
Selling, general and administrative
expenses
(Notes 10, 11 and 12)................ 14,351,321 23,091,193 33,411,112
----------- ----------- ------------
Net operating income (loss)........... 1,076,335 (1,612,318) 1,636,033
Other income (deductions):
Gain (loss) on sale or disposal of
property and equipment............. 3,680 (2,164) (48,786)
Interest income..................... 81,987 183,723 374,269
Interest expense.................... (91,488) (185,428) (148,253)
Other, net.......................... 42,185 994 (7,731)
----------- ----------- ------------
36,364 (2,875) 169,499
----------- ----------- ------------
Earnings (loss) before income taxes... 1,112,699 (1,615,193) 1,805,532
Income taxes (Note 7)................. 438,997 (606,633) 740,268
----------- ----------- ------------
Net earnings (loss)................... 673,702 (1,008,560) 1,065,264
Preferred dividends................... -- (170,000) (340,000)
Accretion of mandatorily redeemable
cumulative preferred stock discount.. -- (87,066) (174,132)
----------- ----------- ------------
Income (loss) available to common
shares............................... $ 673,702 $(1,265,626) $ 551,132
=========== =========== ============
Basic earnings (loss) per common
share................................ $ 0.05 $ (0.09) $ 0.04
=========== =========== ============
Average common shares outstanding..... 14,249,480 14,847,322 14,567,084
=========== =========== ============
Diluted earnings (loss) per common
share................................ $ 0.05 $ (0.09) $ 0.03
=========== =========== ============
Average diluted common shares
outstanding.......................... 14,249,480 14,847,322 17,920,868
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Unearned Retained Stockholders'
Stock Capital Compensation Earnings Equity
------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $ 1,000 $ -- $ -- $ 865,066 $ 866,066
Net earnings.......... -- -- -- 673,702 673,702
Issuance of common
stock (Note 11)...... 53 45,842 (45,895) -- --
Amortization of
unearned compensation
(Note 11)............ -- -- 3,824 -- 3,824
------- ---------- --------- ---------- ----------
Balance at December 31,
1996................... 1,053 45,842 (42,071) 1,538,768 1,543,592
Net loss.............. -- -- -- (1,008,560) (1,008,560)
Issuance of warrants
(Note 5)............. -- 510,652 -- -- 510,652
Accretion to
mandatorily
redeemable cumulative
preferred stock
redemption price
(Note 5)............. -- -- -- (87,066) (87,066)
1000-for-1 common
stock split (Note
6)................... 9,477 (9,477) -- -- --
Stock dividend (Note
6)................... 75 -- -- (75) --
Accrual of dividends
on mandatorily
redeemable cumulative
preferred stock (Note
5)................... -- -- -- (170,000) (170,000)
Amortization of
unearned compensation
(Note 11)............ -- -- 22,944 -- 22,944
------- ---------- --------- ---------- ----------
Balance at December 31,
1997................... 10,605 547,017 (19,127) 273,067 811,562
Net earnings.......... -- -- -- 1,065,264 1,065,264
Accretion to
mandatorily
redeemable cumulative
preferred stock
redemption price
(Note 5)............. -- -- -- (174,132) (174,132)
Accrual of dividends
on mandatorily
redeemable preferred
stock (Note 5)....... -- -- -- (340,000) (340,000)
Reversal of
amortization of
unearned compensation
(Note 11)............ -- -- (3,820) -- (3,820)
Forfeiture of common
stock (Note 11)...... (267) (22,680) 22,947 -- --
Stock option
compensation (Note
12).................. -- 722,600 (722,600) -- --
Amortization of
unearned stock option
compensation (Note
12).................. -- -- 26,325 -- 26,325
------- ---------- --------- ---------- ----------
Balance at December 31,
1998 .................. $10,338 $1,246,937 $(696,275) $ 824,199 $1,385,199
======= ========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................... $ 673,702 $(1,008,560) $ 1,065,264
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Deferred income taxes................ 11,263 (19,053) (102,049)
Depreciation and amortization........ 204,552 370,237 563,514
Stock option compensation............ -- -- 26,325
Stock compensation expense
(benefit)........................... 3,824 22,944 (3,820)
Amortization of discount on
marketable securities............... -- -- (51,029)
Loss (gain) on sale or disposal of
property and equipment.............. (3,680) 2,164 48,786
Changes in--
Trade accounts and other
receivables........................ (632,912) 152,199 (269,202)
Refundable income taxes............. 39,004 (663,209) 663,209
Ticket inventories.................. (260,023) 142,998 (166,560)
Other current assets................ (42,540) (105,790) (289,087)
Other noncurrent assets............. (67,924) (26,267) (242,743)
Accounts payable.................... 384,344 2,516,670 295,276
Accrued salaries.................... 17,667 92,702 61,712
Accrued vacation.................... 18,622 31,460 342,120
Income taxes payable................ 200,336 (200,336) 139,640
Accrued expenses and other
liabilities........................ (174,119) 89,606 81,416
Other noncurrent liabilities........ 38,440 64,952 (155,284)
----------- ----------- -----------
Net cash provided by operating
activities........................ 410,556 1,462,717 2,007,488
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................... (1,295,832) (496,406) (484,817)
Proceeds from sale of property and
equipment............................. 36,349 10,075 551,214
Purchase of marketable securities...... -- -- (4,884,200)
----------- ----------- -----------
Net cash used in investing
activities........................ (1,259,483) (486,331) (4,817,803)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of mandatorily
redeemable cumulative preferred stock
and common stock warrants, net........ -- 3,875,482 --
Decrease in bank overdraft............. (233,777) -- --
Proceeds from issuance of long-term
debt.................................. 928,213 -- 307,200
Principal payments on long-term debt... (54,019) (56,960) (627,138)
Proceeds from issuance of other debt... -- 500,000 --
Principal payments on other debt....... -- (500,000) --
Principal payments on capital lease
obligations........................... (46,117) (123,786) (150,165)
----------- ----------- -----------
Net cash provided by (used in)
financing activities.............. 594,300 3,694,736 (470,103)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................. (254,627) 4,671,122 (3,280,418)
Cash and cash equivalents at beginning
of period.............................. 1,837,911 1,583,284 6,254,406
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 1,583,284 $ 6,254,406 $ 2,973,988
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest........................................ $ 91,488 $185,428 $145,447
Income taxes, net of refunds received........... 188,394 275,965 39,467
Noncash investing and financing activities:
Unearned compensation for stock options
granted........................................ -- -- 722,600
Satisfaction of debt obligation (Note 10)....... -- 250,000 --
Acquisitions of new equipment through capital
leases......................................... 501,423 150,744 608,069
Unearned compensation for stock compensation
arrangement (Note 11).......................... 45,895 -- --
Accrued and unpaid dividends on mandatorily
redeemable preferred stock..................... -- 170,000 340,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
Cheap Tickets, Inc. ("Cheap Tickets" or "the Company") was incorporated
under the laws of the state of Hawaii on August 20, 1986, for the primary
purpose of providing travel services, including airline tickets, cruise
tickets, auto rentals, hotel reservations and other travel products. In
February 1999, Cheap Tickets reincorporated in the state of Delaware. Cheap
Tickets operates in Hawaii, California, New York and Washington, with
approximately 18%, 10% and 8% of sales activity to customers residing in the
state of Hawaii for the years ended December 31, 1996, 1997 and 1998,
respectively. Cheap Tickets deals with over 100 airline carriers. Revenues from
non-published fares through three of these airline carriers accounted for
approximately 61%, 60% and 49% of total non-published fares for the years ended
December 31, 1996, 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the estimated fair value of property held
for sale, the valuation allowance for deferred tax assets and the allowance for
doubtful receivables. Management believes that such provisions and allowances
have been appropriately determined in accordance with generally accepted
accounting principles.
Cash Equivalents
Cheap Tickets considers all highly liquid debt securities with original
maturities of three months or less to be cash equivalents.
Marketable Securities
Cheap Tickets' marketable securities are categorized as available-for-sale
securities as defined by Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities are reported at fair value with unrealized
holding gains and losses excluded from earnings and reported in a separate
component of stockholders' equity.
Ticket Inventories
Ticket inventories, consisting of prepaid Hawaii inter-island airline
coupons, are stated at the lower of cost or market. Cheap Tickets does not
carry any other airline ticket inventories. Inventory cost is the acquisition
price of the coupons or tickets. The specific identification method is used to
determine the basis of inventory and cost of coupons or tickets removed from
inventory.
Trade Accounts and Other Receivables
Trade accounts and other receivables primarily consist of commissions and
volume bonuses from travel service providers. There were no allowances for
doubtful accounts receivable at December 31, 1997 and 1998.
F-8
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are carried at cost. Equipment held under capital
leases is stated at the lower of the present value of minimum lease payments or
estimated fair value of the equipment at the inception of the lease.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements and equipment held under capital leases are amortized on the
straight-line method over the estimated useful life of the asset or the lease
term, whichever is shorter.
The estimated depreciable lives of major classes of property and equipment
are as follows:
<TABLE>
<S> <C>
Building and improvements................................... 40 years
Leasehold improvements...................................... 5 to 40 years
Furniture, fixtures and office equipment.................... 5 to 7 years
Computer equipment.......................................... 3 to 5 years
Vehicles.................................................... 5 years
</TABLE>
Property Held for Sale
In 1995, Cheap Tickets moved its Hawaii operations to larger leased
premises. The Company's commercial condominium office facility from which it
moved, was held for sale at December 31, 1997. This property was stated at
estimated fair value, less costs to sell. A write-down of $94,904 was recorded
in 1995. The property was sold in August 1998 and a loss of $56,000 was
recorded thereon.
Revenue Recognition
Revenues consist of non-published fares, commissions and overrides on
published fares, and volume bonuses from a travel service network. Non-
published fares are fares that are bought by Cheap Tickets under negotiated net
fare contracts from various airline carriers and other travel service providers
and resold to consumers at fares determined by Cheap Tickets generally at a
significant discount off published fares. Cheap Tickets also sells travel
services at regular published fares and earns a commission on such sales.
Cheap Tickets recognizes revenues and commissions when earned, which is at
the time the reservation is ticketed and payment is received. Such revenues are
reported net of an allowance for cancellations and refunds. Due to the
restrictive nature of Cheap Tickets' sales, which are generally noncancelable
and nonrefundable, cancellations and refunds are not significant.
Volume bonus and override revenues are recognized at the end of each monthly
or quarterly measurement period if the specified target has been achieved.
Advertising
Advertising costs are expensed as incurred. Advertising expenses amounted to
$1,453,392, $2,495,325 and $3,823,150 for the years ended December 31, 1996,
1997 and 1998, respectively.
F-9
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Cheap Tickets adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective January 1, 1996. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
(undiscounted and without interest) expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on Cheap Tickets' financial position,
results of operations, or liquidity.
Fair Value of Financial Instruments
The fair values of Cheap Tickets' long-term debt approximates carrying
values based on current financing for similar loans available to the Company.
The fair values of marketable securities are based on quoted prices.
Accounting for Stock Based Compensation
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations, as permitted by SFAS No. 123,
"Accounting for Stock Based Compensation."
F-10
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Per Share Data
The following is a reconciliation of the numerator and denominators of the
basic and diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
Income Shares Per Share
Years ended December 31, (Numerator) (Denominator) Amount
------------------------ ----------- ------------- ---------
<S> <C> <C> <C>
1996:
Basic
Income available to common shares.... $ 673,702 14,249,480 $ 0.05
======
Effect of dilutive securities.......... -- --
----------- ----------
Diluted
Net income and assumed conversions... $ 673,702 14,249,480 $ 0.05
=========== ========== ======
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1997:
Basic
Loss available to common shares...... $(1,265,626) 14,847,322 $(0.09)
======
Effect of dilutive securities.......... -- --
----------- ----------
Diluted
Net loss and assumed conversions..... $(1,265,626) 14,847,322 $(0.09)
=========== ========== ======
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1998:
Basic
Income available to common shares.... $ 551,132 14,567,084 $ 0.04
======
Effect of dilutive securities
Common stock warrants................ -- 2,969,456
Stock options........................ -- 384,328
----------- ----------
Diluted
Net loss and assumed conversions..... $ 551,132 17,920,868 $ 0.03
=========== ========== ======
</TABLE>
Net earnings (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Warrants
to purchase 2,969,456 shares of common stock were outstanding in 1997 but were
not included in the computation of diluted loss per share for the year ended
December 31, 1997 since it would have had an antidilutive effect. Such warrants
had a dilutive effect for the year ended December 31, 1998.
F-11
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
New Pronouncements
In 1998, Cheap Tickets adopted SFAS No. 130 "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS No. 130 states that all items that are
required to be recognized under generally accepted accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of SFAS No. 130 did not have an effect on Cheap Tickets' financial statements
since the Company does not have elements of comprehensive income other than net
earnings.
SFAS No. 131 requires disclosures regarding segments of an enterprise and
related information that reflects the different types of business activities in
which the enterprise engages and the different economic environments in which
it operates. The effect of implementing SFAS No. 131 was not significant as
Cheap Tickets manages its business as a single operation segment, is domiciled
entirely in the U.S. and substantially all of the Company's revenues are
derived from sales of airline tickets.
SFAS No. 132 standardized the disclosure requirements for pension and other
postretirement benefits. The adoption of SFAS No. 132 (which does not change
existing measurement or recognition standards for Cheap Tickets' defined
contribution plan) did not have a material effect on Cheap Tickets' financial
statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and measurement of those
derivative instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Currently, Cheap
Tickets does not hold derivative instruments or engage in hedging activities.
The adoption of this standard is not expected to have a material effect on
Cheap Tickets' financial statements.
In March 1998, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." In April 1998, the AcSEC issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." These standards are effective
for Cheap Tickets' year ending December 31, 1999. Cheap Tickets has not
determined the impact of the implementation of these pronouncements.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
net loss as previously reported.
2. Marketable Securities
Marketable securities at December 31, 1998 comprised U.S. government agency
debt securities having contractual maturities of less than one year. The fair
value of the debt securities approximated amortized cost. There were no sales
of securities in 1996, 1997 and 1998.
F-12
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
A summary of property and equipment at December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Land.................................................. $ 158,239 $ 158,239
Building improvements................................. 741,761 741,761
Leasehold improvements................................ 339,807 358,737
Furniture, fixtures and office equipment (Note 9)..... 2,089,861 3,088,240
Vehicles.............................................. 122,916 122,916
---------- ----------
3,452,584 4,469,893
Less accumulated depreciation and amortization........ 932,538 1,470,475
---------- ----------
$2,520,046 $2,999,418
========== ==========
</TABLE>
Depreciation and amortization amounted to $204,552, $370,237 and $563,514
for the years ended December 31, 1996, 1997 and 1998, respectively.
4. Debt
Long-term debt at December 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- --------
<S> <C> <C>
Bank Debt-
3.125% above an indexed rate (total rate of 8.125% at
December 31, 1998) note payable in monthly installments of
$5,773 including interest, due May 1, 2012, collateralized
by a first mortgage on land and building.................. $ 585,816 $564,890
1.5% above bank's base rate mortgage note, payable in
monthly installments of $6,000 including interest,
collateralized by property held for sale. The note was
repaid in 1998............................................ 496,316 --
10% note payable in monthly installments of $1,413
including interest, balance due January 26, 2001,
collateralized by a vehicle............................... 44,832 31,785
Other-
8.25% note payable in monthly installments of $13,930
including interest, due February 28, 2000................. -- 210,350
---------- --------
Total long-term debt..................................... 1,126,964 807,025
Less current installments of long-term debt................ 528,825 221,469
---------- --------
Long-term debt, excluding current installments............. $ 598,139 $585,556
========== ========
</TABLE>
F-13
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The aggregate maturities of long-term debt subsequent to December 31, 1998
are as follows:
<TABLE>
<S> <C>
Year ending December 31
1999.............................................................. $221,469
2000.............................................................. 69,774
2001.............................................................. 29,995
2002.............................................................. 30,935
2003.............................................................. 33,545
Later years....................................................... 421,307
--------
$807,025
========
</TABLE>
Cheap Tickets has available a $3,000,000 credit facility with a bank
expiring on December 5, 1999. Borrowings under the credit facility accrue
interest at either (1) the bank's base rate (7.75% at December 31, 1998) or
(2) LIBOR plus an applicable margin, as defined, at the Company's option. The
credit facility is collateralized by deposit accounts with the bank, accounts
receivable, inventory, furniture and equipment and intangible assets. The
credit facility contains restrictive covenants which include requirements to
maintain minimum tangible net worth and meet certain financial ratios. There
were no outstanding borrowings under the credit facility at December 31, 1997
and 1998.
5. Mandatorily Redeemable Cumulative Preferred Stock
In July 1997, Cheap Tickets issued and sold 425,000 shares of mandatorily
redeemable cumulative preferred stock, with detachable warrants to purchase an
aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate
exercise price of $2,121, in exchange for cash consideration of $4,250,000
(the "Equity Transaction").
The net proceeds of $3,875,482, after reflecting transaction costs of
$374,518, were allocated between the warrants and preferred stock based on
their relative fair values, resulting in an allocation of $510,652 and
$3,364,830 to the warrants and preferred stock, respectively. The value
attributable to the warrants was recorded as additional paid-in capital. The
excess of the redemption value of the preferred stock of $4,250,000 over the
initial carrying value of $3,364,830 is being accreted by periodic charges to
retained earnings through July 25, 2002. The accretion amounted to $87,066 and
$174,132 for the years ended December 31, 1997 and 1998, respectively.
The preferred stock has a par value of $1 per share, is nonvoting and
accrues cumulative annual dividends of $.80 per share. The dividends are
payable in quarterly installments commencing on July 25, 2002. Accrued
dividends amounted to $170,000 and $340,000 for the years ended December 31,
1997 and 1998, respectively. Undeclared cumulative dividends amounted to
$170,000 and $510,000 as of December 31, 1997 and 1998, respectively, and have
been accrued as an addition to preferred stock in the accompanying balance
sheets. The preferred stock has a liquidation preference such that in the
event of any liquidation, dissolution or winding up of the Company, the
preferred stockholders will be entitled to redeem each share for $10, plus all
accrued and unpaid dividends thereon as of the liquidation date before any
distribution to other stockholders. Accordingly, retained earnings may be
restricted at the liquidation date if the amounts due to the preferred
stockholders exceed the carrying value of the preferred stock.
F-14
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Mandatory quarterly redemption of the lesser of one-twelfth of the largest
number of shares of preferred stock outstanding at any time prior to July 25,
2002, or the number of shares outstanding on such scheduled redemption date,
commences on July 25, 2002, at $10 per share, plus accrued and unpaid dividends
thereon. Upon the closing of an initial public offering of Cheap Tickets'
common stock, the sale of substantially all of the assets of the Company, or
consolidation or merger involving Cheap Tickets, the Company will be required
to redeem all outstanding shares of the preferred stock, plus all accrued and
unpaid dividends thereon. Cheap Tickets also has the option to redeem all or
part of the outstanding shares of preferred stock at any time for $10 per
share, plus accrued and unpaid dividends thereon as of the date Cheap Tickets
decides to redeem such shares. All redemptions will be settled with cash. Cheap
Tickets does not have the option to settle redemptions with common stock.
Redemption requirements, excluding accrued and unpaid dividends, subsequent
to December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31
1999............................................................ $ --
2000............................................................ --
2001............................................................ --
2002............................................................ 708,333
2003............................................................ 1,416,667
Later years..................................................... 2,125,000
----------
$4,250,000
==========
</TABLE>
6. Stockholders' Equity
Common Stock Warrants
The detachable common stock warrants issued in conjunction with the
mandatorily redeemable cumulative preferred stock (see Note 5) are currently
exercisable and provide the preferred stockholders the option to purchase an
aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate
exercise price of $2,121. The number of shares purchasable on the exercise of
the warrants will be proportionately adjusted in the event of stock dividends,
distributions, subdivisions, combinations, or other changes in common stock,
warrants, issuance of convertible securities or other rights, as more fully
described in the warrant agreement. Appropriate adjustments will also be made
to the purchase price payable per share, but the aggregate purchase price
payable of $2,121 shall remain the same. The warrants expire on July 15, 2002,
except that the warrants terminate immediately upon the closing of an initial
public offering of Cheap Tickets' common stock, the sale of substantially all
of the assets of Cheap Tickets, or the consolidation or merger of Cheap Tickets
in which at least 50% of the voting power of Cheap Tickets is transferred. In
addition to any adjustments made to the number of shares purchasable as
previously described, if immediately prior to the first to occur of an initial
public offering, a sale or an acquisition (each, a "Transfer") and if the value
of the consideration to be received by the warrant holder for its shares
(assuming exercise of the warrant) in connection with the Transfer plus all
dividends received by the warrant holder on its preferred stock as of the date
of the Transfer are less than the redemption value of the warrant holder's
preferred stock multiplied by 1.25n, where n equals the number of years
(rounded to the
F-15
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
nearest one hundredth of a year) between the date of the Transfer and the issue
date of the warrant, then the number of shares purchasable on the exercise of
the warrant shall be increased to eliminate such deficiency. The increase
necessary to eliminate such deficiency may not result in the warrant holders
owning over 30% of the common stock on a fully diluted basis as of the date of
the Transfer. In such case, all additional sums necessary to eliminate such
deficiency shall be paid by the Company to the warrant holder in cash upon, and
as a condition to the consummation of, the Transfer.
Common Stock
On June 24, 1997, Cheap Tickets' Board of Directors approved an amendment to
Cheap Tickets' articles of incorporation wherein the authorized common stock of
Cheap Tickets was increased from 5,000 shares at $1 par value to 5,000,000
shares at $0.01 par value, and to effect a 1000-for-1 stock split. In
connection with the stock split, $9,477 was transferred to common stock from
additional paid-in capital, representing the adjustment to reflect the
aggregate common stock par value subsequent to the aforementioned amendment.
Subsequent to the stock split, a stock dividend was declared and issued to
the common stockholders on a pro rata basis so that the common stock warrants,
if and when exercised, would reflect a 15% common equity interest, considering
the shares of common stock outstanding and the 1,979,642 shares of common stock
to be reserved for issuance under the stock option plan established in April
1998 (see Note 12).
In connection with Cheap Tickets' planned initial public offering of its
common stock in February 1999, the authorized common stock of Cheap Tickets was
increased from 5,000,000 shares at $0.01 par value to 70,000,000 shares at
$0.001 par value. The Company also effected a 14-for-one stock split.
In these financial statements, all per share amounts and number of shares
have been restated to reflect the stock splits and stock dividend described
above.
As described in Note 11, 373,646 shares were forfeited by an officer upon
his resignation in March 1998.
Preferred Stock
In February 1999, the authorized preferred stock of Cheap Tickets was
increased from 5,000,000 shares at $1 par value to 10,000,000 shares at $0.01
par value. The board of directors has the authority to issue shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, and liquidation preferences.
Restriction on Declaration and Payment of Dividends
In connection with the Equity Transaction, written approval from a majority
of the holders of preferred stock, common stock warrants, and common stock
issued upon exercise of warrants, is required for the declaration or payment of
dividends to common stockholders.
F-16
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996, 1997 and
1998 was as follows:
<TABLE>
<CAPTION>
Federal State Total
--------- --------- ---------
<S> <C> <C> <C>
Years ended December 31
1996:
Current................................ $ 340,761 $ 86,973 $ 427,734
Deferred............................... 8,889 2,374 11,263
--------- --------- ---------
$ 349,650 $ 89,347 $ 438,997
========= ========= =========
1997:
Current................................ $(468,136) $(119,444) $(587,580)
Deferred............................... (15,465) (3,588) (19,053)
--------- --------- ---------
$(483,601) $(123,032) $(606,633)
========= ========= =========
1998:
Current................................ $ 741,237 $ 101,080 $ 842,317
Deferred............................... (54,232) (47,817) (102,049)
--------- --------- ---------
$ 687,005 $ 53,263 $ 740,268
========= ========= =========
</TABLE>
Deferred tax benefit for the year ended December 31, 1997 includes a tax
benefit of $36,247 for operating loss carryforwards. The actual income tax
expense (benefit) for the years ended December 31, 1996, 1997 and 1998 differed
from the expected income tax expense (benefit) computed by applying the U.S.
federal income tax rate of 34% to earnings (loss) before income taxes due to
the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
Federal "expected" income tax expense
(benefit).................................... $378,318 $(549,166) $613,881
State franchise and income taxes, net of
federal income tax effect.................... 60,679 (81,201) 93,888
Other......................................... -- 23,734 32,499
-------- --------- --------
$438,997 $(606,633) $740,268
======== ========= ========
</TABLE>
F-17
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1997 and 1998 are presented
below:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for decline in value of property held for sale
not deductible for tax purposes......................... $ 38,121 $ --
Accrued rent not deductible for tax purposes............. 27,203 21,201
Accrued vacation not deductible for tax purposes......... 31,211 165,145
State tax credit carryforward............................ -- 34,129
Unearned compensation not deductible for tax purposes.... -- 10,319
Net operating loss carryforward.......................... 36,247 --
-------- --------
Total gross deferred tax assets........................ 132,782 230,794
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to differences
between accounting and tax depreciation and
amortization............................................ (59,662) (63,166)
Unearned compensation deductible for tax purposes........ (7,541) --
-------- --------
Total gross deferred tax liabilities................... (67,203) (63,166)
-------- --------
Net deferred tax asset................................. $ 65,579 $167,628
======== ========
Deferred tax assets and liabilities are presented in the
accompanying balance sheets as follows:
Other current assets..................................... $ 31,211 $199,274
Other noncurrent assets.................................. 34,368 --
Other noncurrent liabilities............................. -- (31,646)
-------- --------
$ 65,579 $167,628
======== ========
</TABLE>
There was no valuation allowance provided for deferred tax assets as of
December 31, 1996, 1997 and 1998. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not Cheap
Tickets will realize the benefits of these deductible differences. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income are reduced.
8. Profit Sharing and 401(k) Plan
Cheap Tickets sponsors a defined contribution profit sharing plan covering
all employees who attained the age of 20 and completed one year of service.
Vesting occurs at a rate of 20% per year commencing in the second year of
participation. Contributions to the plan were at the discretion of the board of
directors. Cheap Tickets did not contribute to the plan in 1996.
F-18
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1997, Cheap Tickets converted the profit sharing plan
into a qualified 401(k) defined contribution plan. The 401(k) defined
contribution plan allows for voluntary participant contributions of up to 15%
of eligible compensation. Employer contributions are discretionary and fully
vest to the participant upon the participant's completion of seven years of
service. Cheap Tickets did not contribute to the 401(k) defined contribution
plan in 1997 and 1998.
9. Lease Commitments
Cheap Tickets is obligated under capital leases for office equipment that
expire at various dates through 2004. At December 31, 1997 and 1998, the gross
amounts of office equipment and related accumulated amortization recorded under
capital leases are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Office equipment....................................... $652,167 $1,260,237
Less accumulated amortization (amortization expense
charged to depreciation and amortization)............. 144,570 384,869
-------- ----------
$507,597 $ 875,368
======== ==========
</TABLE>
Cheap Tickets has noncancelable operating leases, primarily for office
space, that expire at various dates through 2009. These leases generally
contain renewal options for periods ranging from one to five years. Rent
expense incurred for all operating leases amounted to $519,560, $851,709, and
$1,175,289 for the years ended December 31, 1996, 1997 and 1998, respectively.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
Year ending December 31
1999................................................ $ 335,435 $ 923,400
2000................................................ 321,287 933,100
2001................................................ 268,323 621,700
2002................................................ 56,371 532,500
2003................................................ 49,133 533,300
Later years......................................... 14,435 1,984,400
---------- ----------
Total minimum lease payments...................... 1,044,984 $5,528,400
==========
Less amounts representing interest (at rates ranging
from 7.75% to 14.05%)................................ 104,816
----------
Present value of net minimum capital lease
payments........................................... 940,168
Less current installments of capital lease
obligations.......................................... 287,809
----------
Capital lease obligations, excluding current
installments....................................... $ 652,359
==========
</TABLE>
F-19
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
10. Incentive Reimbursements from Local Governments
In 1996, Cheap Tickets commenced operations of a new reservation center in
Lakeport, California. As an incentive for Cheap Tickets to operate at the
location, the local government agreed to reimburse Cheap Tickets for certain
payroll costs related to training. Estimated reimbursements associated with
payroll costs incurred of approximately $458,000 and $28,000 in 1996 and 1997,
respectively, have been recorded by Cheap Tickets as a reduction of selling,
general and administrative expenses in the accompanying statements of
operations. At December 31, 1996, $353,164 of these incentive reimbursements
were to be collected from the local government. In 1997, $250,000 of the
incentive reimbursements receivable was settled by offsetting the receivable
with an outstanding debt obligation to the local government of $250,000, with
the remaining receivable balance collected in full. No gain or loss was
recognized on the offsetting of such amounts.
Additional incentives provided by the local government included the waiver
of certain expenses, including lease rent and property taxes totaling
approximately $99,000 and $12,000 in 1996 and 1997, respectively. Cheap Tickets
also received $95,400 associated with additional lease rent incentives in 1996
and had recorded this amount as a reduction of selling, general and
administrative expenses in 1996.
11. Stock Compensation Arrangement
In November 1996, Cheap Tickets entered into a Restricted Stock Grant and
Shareholder Agreement (Agreement) whereby 747,292 shares of common stock, after
giving effect to the stock splits and a common stock dividend (see Note 6),
were granted to an officer of Cheap Tickets as compensation for his employment.
There was a two year vesting period whereby the shares vested 50 percent after
each year of service with Cheap Tickets. The estimated fair value of the common
stock shares on the date of grant of $45,895 was being amortized as
compensation expense over the two year vesting period.
In March 1998, the officer resigned from Cheap Tickets. In connection with
the resignation, the officer forfeited his nonvested shares of common stock
issued under the Agreement. Such forfeited common stock amounted to 373,646
shares. The officer's forfeiture of the common shares resulted in a benefit of
$3,820 in 1998 for the recovery of compensation expense previously taken and
decreases in common stock and additional paid-in capital of $267 and $22,680,
respectively.
12. Stock Option Plans
Cheap Tickets established a stock option plan in April 1998 which provides
for a maximum of 1,979,642 shares of common stock to be issued under the plan.
In 1998 Cheap Tickets granted options for 728,000 shares of common stock
with exercise prices less than the estimated market prices on the grant dates.
The weighted-average grant-date fair value of options granted in 1998 was
$1.30. The estimated compensation cost for these options amounted to $722,600
at the grant dates. Stock option compensation expense, included in selling,
general and administrative expenses, was $26,325 for the year ended December
31, 1998. The remaining unamortized compensation cost of $696,275 at
December 31, 1998 will be amortized over the future vesting periods of the
options. The granted options have a five year vesting period, however, options
F-20
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
to purchase up to 140,000 shares will fully vest should Cheap Tickets complete
an initial public offering of its stock. The granted options have a ten-year
exercise period from the date of the grant.
The following table summarizes activity under the stock option plan for 1998
and the status at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding
---------------------
Average
Exercise
Shares Price
---------- ----------
<S> <C> <C>
Balance at December 31, 1997......................... -- $ --
Options granted...................................... 728,000 0.31
---------- --------
Balance at December 31, 1998......................... 728,000 $ 0.31
========== ========
</TABLE>
At December 31, 1998, options for 660,800 shares have an exercise price of
$0.18 per share with a weighted average remaining contractual life of 9.4 years
and options for 67,200 shares have an exercise price of $1.57 per share with a
weighted-average remaining contractual life of 9.8 years. No options were
exercisable at December 31, 1998.
Under SFAS No. 123, the fair value of each grant was estimated on the grant
date using the minimum value method based on the following weighted-average
assumptions:
<TABLE>
<S> <C>
Expected dividend yield.......................................... 0.00%
Risk-free interest rate.......................................... 5.80%
Expected life of the options..................................... 10 years
</TABLE>
Compensation cost has been charged against income for the stock option plan
under APB No. 25. The pro forma net income and pro forma earnings per share for
the year ended December 31, 1998 had Cheap Tickets elected to adopt the fair-
value based method of accounting prescribed by SFAS No. 123 is presented below:
<TABLE>
<S> <C>
Net income:
As reported.................................................. $1,065,264
Pro forma.................................................... $1,061,513
Basic earnings per share:
As reported ................................................. $ 0.04
Pro forma.................................................... $ 0.04
Diluted earnings per share:
As reported.................................................. $ 0.03
Pro forma.................................................... $ 0.03
</TABLE>
Cheap Tickets is establishing another stock option plan which is expected to
be approved by Cheap Tickets' stockholders prior to Cheap Tickets' planned
initial public offering of its common stock.
F-21
<PAGE>
[CHEAP TICKETS, INC. LOGO WITH
PICTURES OF WORLDWIDE DESTINATIONS]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is set forth in this prospectus. We are offering to sell shares of
common stock and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of the prospectus or of any sale of common
stock.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Financial Data................................................... 5
Risk Factors............................................................. 7
Forward Looking Statements............................................... 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 36
Management............................................................... 47
Certain Transactions..................................................... 56
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 Shares
www.cheaptickets.com
Common Stock
-----------------
PROSPECTUS
, 1999
-----------------
William Blair & Company
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the Offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
Registration fee.................................................. $ 15,985
NASD filing fee................................................... 6,250
Nasdaq National Market listing fee................................ 60,000
Printing and Engraving expenses................................... 150,000
Legal fees and expenses........................................... 300,000
Blue Sky qualification fees and expenses.......................... 5,000
Accounting fees and expenses...................................... 100,000
Directors' and Officers' liability insurance...................... 100,000
Transfer Agent and registrar fees................................. 15,000
Miscellaneous..................................................... 47,765
--------
Total........................................................... $800,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL contains detailed provisions on indemnification of
directors and officers against expenses, judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection with legal
proceedings. Section 102(a)(7) of the DGCL permits a provision in the
certificate of incorporation of each corporation organized thereunder, such as
the Company, eliminating or limiting, with certain exceptions, the personal
liability of a director of the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. The Certificate of
Incorporation of the Company eliminates the liability of each of its directors
to its stockholders or the Company for monetary damages for breach of fiduciary
duty to the full extent provided by the Delaware General Corporation Law (the
"DGCL"), as such law exists or may hereafter be amended.
Indemnification applies to any threatened, pending or completed action, suit
or proceeding, whether, civil, criminal, administrative or investigative.
Indemnification may include all expenses (including attorneys' fees, judgments,
fines, ERISA excise taxes and amounts paid in settlement) reasonably incurred
by the indemnified person.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement...................................... 1.1
Certificate of Incorporation........................................ 3.1
Form of First Amended and Restated Certificate of Incorporation..... 3.2
Bylaws.............................................................. 3.3
Form of First Amended and Restated Bylaws........................... 3.4
Form of Indemnification Agreements.................................. 10.4
</TABLE>
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
From January 1, 1996 through December 31, 1998, the Company has issued and
sold the following securities: (a) the Company issued and sold 5,950,000 shares
of 8% Mandatorily Redeemable Preferred Stock and warrants to purchase up to
2,969,456 shares of Common Stock to Phillips-Smith Specialty Retail Group III,
L.P. and Craig Foley for an aggregate purchase price of $4,250,000; and (b) the
Company issued 373,646 shares of Common Stock to a former officer of the
Company as compensation with an aggregate value of $22,948.
The issuances described about were deemed exempt from registration under the
Securities Act in reliance upon Sections 4(2) or 3(a) of the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Company.
Item 16. Exhibits and Financial Statements
(a) Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Form of First Amended and Restated Certificate of Incorporation.
3.3* Bylaws.
3.4* Form of First Amended and Restated Bylaws.
4.1* Specimen Stock Certificate.
5.1 Opinion of Morrison & Foerster LLP.
10.1* 1997 Stock Option Plan.
10.2* 1999 Stock Option Plan.
10.3* Form of Severance Agreement for Michael J. Hartley and Sandra T.
Hartley.
10.4* Form of Indemnification Agreement.
10.5* The Commerce Tower Office Lease dated July 2, 1995 between Tosei Shoji
Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the
Commerce Tower Office Lease dated June 14, 1996 and the 2nd Amendment
to the Commerce Tower Office Lease dated October 9, 1997.
10.6* Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap
Tickets, Inc.
10.7* Lease Agreement dated January 19, 1994 between Airport Center
Associates LP and Cheap Tickets, Inc., as amended by the 1st Amendment
to Lease dated July 20, 1994 and the 2nd Amendment to Lease dated
April 25, 1997.
10.8* Lease dated March 31, 1998 between Executive Tower of Colorado
Springs, LLC and Cheap Tickets, Inc.
10.9+ 1994 Net Fare/Commission Agreement dated October 18, 1993 between
Continental Airlines, Inc. and Cheap Tickets, Inc., as amended by
Addendum dated November 12, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.10+ 1999 Net Consolidator Agreement dated November 1, 1998 between Trans
World Airlines, Inc. and Cheap Tickets, Inc.
10.11+ Consolidator Agreement dated December 14, 1998 between America West
Airlines, Inc. and Cheap Tickets, Inc.
10.12* Credit Agreement dated November 26, 1997 between Bank of Hawaii and
Cheap Tickets, Inc., as amended by First Loan Modification Agreement
dated as of June 15, 1998; and Security Agreement dated November 26,
1997 between Bank of Hawaii and Cheap Tickets, Inc.
10.13+ Subscriber Agreement dated December 31, 1998 between The SABRE Group,
Inc. and Cheap Tickets, Inc., as amended by Amendment No. 1 to SABRE
Subscriber Agreement dated December 31, 1998.
10.14+ Agreement for Negotiated Fares Maintenance dated July 15, 1994 between
SABRE Travel Information Network and CTI Corporation.
10.15 Sabre TravelBase System Lease Agreement between SABRE Travel
Information Network and Cheap Tickets, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Morrison & Foerster LLP (included in the opinion filed
herewith as Exhibit 5.1).
24.1* Power of attorney (included on the signature page).
27.1* Financial Data Schedule.
99.1* Consent of Giles H. Bateman dated as of January 19, 1999.
99.2* Consent Letter of KPMG LLP dated January 19, 1999.
99.3* Consent of George R. Mrkonic dated as of February 23, 1999.
</TABLE>
- --------
* Previously filed.
+ Portions have been omitted pursuant to a confidential treatment request.
(b) Financial Statement Schedules
No schedules are included because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
In accordance with Rule 430A of Regulation C under the Securities Act of
1933, as amended (the "Securities Act"), the undersigned registrant hereby
undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
(b) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item
15 above, or otherwise, the registrants have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of either registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling
II-3
<PAGE>
person in connection with the securities being registered, the registrants
will, unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(d) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Honolulu, County of Honolulu, State of Hawaii, as of March 16, 1999.
CHEAP TICKETS, INC.
By: /s/ Michael J. Hartley
_________________________________
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Honolulu, County of Honolulu, State of Hawaii, as of March 16, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Michael J. Hartley Chief Executive Officer,
____________________________________ President and Chairman of
Michael J. Hartley the Board of Directors
/s/ Dale K. Jorgenson Vice President of Finance
____________________________________ and Chief Financial Officer
Dale K. Jorgenson
* Executive Vice President
____________________________________
Tammy A. Ishibashi
* Director
____________________________________
Sandra T. Hartley
* Director
____________________________________
Donald J. Phillips
* Director
____________________________________
Cece Smith
</TABLE>
*By: /s/ Michael J. Hartley
__________________________
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Form of First Amended and Restated Certificate of Incorporation.
3.3* Bylaws.
3.4* Form of First Amended and Restated Bylaws.
4.1* Specimen Stock Certificate.
5.1 Opinion of Morrison & Foerster LLP.
10.1* 1997 Stock Option Plan.
10.2* 1999 Stock Option Plan.
10.3* Form of Severance Agreement for Michael J. Hartley and Sandra T.
Hartley.
10.4* Form of Indemnification Agreement.
10.5* The Commerce Tower Office Lease dated July 2, 1995 between Tosei Shoji
Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the
Commerce Tower Office Lease dated June 14, 1996 and the 2nd Amendment
to the Commerce Tower Office Lease dated October 9, 1997.
10.6* Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap
Tickets, Inc.
10.7* Lease Agreement dated January 19, 1994 between Airport Center
Associates LP and Cheap Tickets, Inc., as amended by the 1st Amendment
to Lease dated July 20, 1994 and the 2nd Amendment to Lease dated
April 25, 1997.
10.8* Lease dated March 31, 1998 between Executive Tower of Colorado
Springs, LLC and Cheap Tickets, Inc.
10.9+ 1994 Net Fare/Commission Agreement dated October 18, 1993 between
Continental Airlines, Inc. and Cheap Tickets, Inc., as amended by
Addendum dated November 12, 1998.
10.10+ 1999 Net Consolidator Agreement dated November 1, 1998 between Trans
World Airlines, Inc. and Cheap Tickets, Inc.
10.11+ Consolidator Agreement dated December 14, 1998 between America West
Airlines, Inc. and Cheap Tickets, Inc.
10.12* Credit Agreement dated November 26, 1997 between Bank of Hawaii and
Cheap Tickets, Inc., as amended by First Loan Modification Agreement
dated as of June 15, 1998; and Security Agreement dated November 26,
1997 between Bank of Hawaii and Cheap Tickets, Inc.
10.13+ Subscriber Agreement dated December 31, 1998 between The SABRE Group,
Inc. and Cheap Tickets, Inc., as amended by Amendment No. 1 to SABRE
Subscriber Agreement dated December 31, 1998.
10.14+ Agreement for Negotiated Fares Maintenance dated July 15, 1994 between
SABRE Travel Information Network and CTI Corporation.
10.15 SABRE TravelBase System Lease Agreement between SABRE Travel
Information Network and Cheap Tickets, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Morrison & Foerster LLP (included in the opinion filed
herewith as Exhibit 5.1).
24.1* Power of attorney (included on the signature page).
27.1* Financial Data Schedule.
99.1* Consent of Giles H. Bateman dated as of January 19, 1999.
99.2* Consent Letter of KPMG LLP dated January 19, 1999.
99.3* Consent of Geroge R. Mrkonic dated as of February 23, 1999.
</TABLE>
- --------
* Previously filed.
+ Portions have been omitted pursuant to a confidential treatment request.
<PAGE>
EXHIBIT 1.1
CHEAP TICKETS, INC.
3,500,000 Shares Common Stock/1/
Underwriting Agreement
______________, 1999
William Blair & Company, L.L.C.
Dain Rauscher Wessels
As Representatives of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Section 1. Introductory. Cheap Tickets, Inc., a Delaware corporation
("Company"), has an authorized capital stock consisting of 10,000,000 shares of
Preferred Stock, par value $0.01 per share, of which 425,000 shares of Preferred
Stock were outstanding as of ___________, 1999 and 70,000,000 shares of Common
Stock, par value $0.001 per share ("Common Stock"), of which 14,473,676 shares
were outstanding as of such date. The Company proposes to issue and sell an
aggregate of 3,500,000 shares of its authorized but unissued Common Stock to the
several underwriters named in Schedule A as it may be amended by the Pricing
----------
Agreement hereinafter defined ("Underwriters"), who are acting severally and not
jointly. Such total of 3,500,000 shares of Common Stock proposed to be sold by
the Company is hereinafter referred to as the "Firm Shares." In addition, the
Company proposes to grant to the Underwriters an option to purchase up to
525,000 additional shares of Common Stock ("Option Shares") as provided in
Section 4 hereof. The Firm Shares and, to the extent such option is exercised,
the Option Shares, are hereinafter collectively referred to as the "Shares."
You have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Shares as soon as you deem
advisable after the registration statement hereinafter referred to becomes
effective, if it has not yet become effective, and the Pricing Agreement
hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company and the Representatives, acting on behalf of the
several Underwriters, shall enter into an agreement substantially in the form of
Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the
- ---------
form of an exchange of any standard form of written telecommunication between
the Company and the Representatives and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
---------
will be governed by this Agreement, as supplemented by the Pricing Agreement.
From and after the date of the execution and delivery of
_____________
/1/ Plus an option to acquire up to 525,000 additional shares from the Company
to cover overallotments.
<PAGE>
the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing
Agreement.
The registration statement referred to in Section 2(a) below (as amended,
if applicable) at the time it becomes effective and the prospectus constituting
a part thereof (including the information, if any, deemed to be part thereof
pursuant to Rule 430A(b) and/or Rule 434), as from time to time amended or
supplemented, are hereinafter referred to as the "Registration Statement," and
the "Prospectus," respectively, except that if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares which differs from the Prospectus on file at the
Commission at the time the Registration Statement became or becomes effective
(whether or not such revised prospectus is required to be filed by the Company
pursuant to Rule 424(b)), the term Prospectus shall refer to such revised
prospectus from and after the time it was provided to the Underwriters for such
use. If the Company elects to rely on Rule 434 of the 1933 Act, all references
to "Prospectus" shall be deemed to include, without limitation, the form of
prospectus and the term sheet, taken together, provided to the Underwriters by
the Company in accordance with Rule 434 of the 1933 Act ("Rule 434 Prospectus").
Any registration statement (including any amendment or supplement thereto or
information which is deemed part thereof) filed by the Company under Rule 462(b)
("Rule 462(b) Registration Statement") shall be deemed to be part of the
"Registration Statement" as defined herein, and any prospectus (including any
amendment or supplement thereto or information which is deemed part thereof)
included in such registration statement shall be deemed to be part of the
"Prospectus," as defined herein, as appropriate. The Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission thereunder
are hereinafter collectively referred to as the "Exchange Act."
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 2. Representations and Warranties of the Company. Except as
disclosed in the Registration Statement or the Prospectus, as the case may be,
the Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-70841) and a
related preliminary prospectus with respect to the Shares have been
prepared and filed with the Securities and Exchange Commission
("Commission") by the Company in conformity with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "1933 Act;" unless indicated to
the contrary, all references herein to specific rules are rules promulgated
under the 1933 Act); and the Company has so prepared and has filed such
amendments thereto, if any, and such amended preliminary prospectuses as
may have been required to the date hereof and will file such additional
amendments thereto and such amended prospectuses as may hereafter be
required. There have been or will promptly be delivered to you three
signed copies of such registration statement and amendments, three copies
of each exhibit filed therewith, and conformed copies of such registration
statement and amendments (but without exhibits) and of the related
preliminary prospectus or prospectuses and final forms of prospectus for
each of the Underwriters.
(b) The Company does not have any subsidiaries as defined in Rule
1.02 of Regulation S-X.
2
<PAGE>
(c) The Company has not received any order of the Commission
preventing or suspending the use of any preliminary prospectus, and has not
received any notice that proceedings for that purpose are pending or
contemplated by the Commission, and each preliminary prospectus has
conformed in all material respects with the requirements of the 1933 Act
and, as of its date, has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein not misleading; and when the Registration Statement became or
becomes effective, and at all times subsequent thereto, up to the First
Closing Date or the Second Closing Date hereinafter defined, as the case
may be, the Registration Statement, including the information deemed to be
part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable, and the Prospectus and any amendments or
supplements thereto, contained or will contain all statements that are
required to be stated therein in accordance with the 1933 Act and in all
material respects conformed or will in all material respects conform to the
requirements of the 1933 Act, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, included or will
include any untrue statement of a material fact or omitted or will omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company
makes no representation or warranty as to information contained in or
omitted from any preliminary prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives specifically for use
in the preparation thereof.
(d) The Company has been duly incorporated and are validly existing
as corporations in good standing under the laws of its place of
incorporation, with the corporate power and authority to own its properties
and conduct its business as described in the Prospectus; the Company is
duly qualified to do business as a foreign corporation under the
corporation law of, and is in good standing as such in, each jurisdiction
in which it owns or leases properties, has an office, or in which business
is conducted and such qualification is required except in any such case
where the failure to so qualify or be in good standing would not have a
material adverse effect upon the condition (financial or otherwise),
business, assets, results of operations or prospects of the Company or upon
the Company's ability to perform its obligations under this Agreement or
the transactions contemplated hereby (a "Material Adverse Effect"); and no
proceeding of which the Company has knowledge has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
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(e) As of the date of this Agreement, the Company has an authorized
and outstanding capitalization as described under the caption
"Capitalization" in the Prospectus. The issued and outstanding shares of
capital stock of the Company as set forth in the Prospectus have been duly
authorized and validly issued, are fully paid and nonassessable, and
conform in all material respects to the description thereof contained in
the Prospectus; and except as described in the Prospectus, there is no
commitment, plan or arrangement to issue, and no outstanding option,
warrant or other right calling for the issuance of, any share of capital
stock of the Company; and except as described in the Prospectus, there is
outstanding no security or other instrument that by its terms is
convertible into or exchangeable for capital stock of the Company, and
there is no commitment, plan or arrangement to issue such a security or
instrument.
(f) The Shares to be sold by the Company have been duly authorized
and when issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and will conform in all
material respects to the description thereof contained in the Prospectus.
(g) The making and performance by the Company of this Agreement and
the Pricing Agreement have been duly authorized by all necessary corporate
action and will not violate any provision of the Company's charter or
bylaws and will not result in the breach, or be in contravention, of any
provision of any material agreement, franchise, License (as hereinafter
defined), indenture, mortgage, deed of trust, or other instrument to which
the Company is a party or by which the Company or its property may be bound
or affected, or any order, rule or regulation applicable to the Company of
any court (foreign, federal, state, local or otherwise), arbitration or
other alternative dispute forum, foreign, federal, state, local or other
government or governmental department, agency, board, commission, bureau or
instrumentality or other regulatory authority (collectively, "Governmental
Authority") having jurisdiction over the Company or any of its properties,
or any order of any Governmental Authority entered in any proceeding to
which the Company was or is now a party or by which it is bound. No
consent, approval, authorization or other order of any Governmental
Authority is required for the execution and delivery of this Agreement or
the Pricing Agreement or the consummation of the transactions contemplated
herein or therein, except for compliance with the 1933 Act and state or
province securities laws applicable to the public offering of the Shares by
the several Underwriters and clearance of such offering with the National
Association of Securities Dealers, Inc. ("NASD"). This Agreement has been
duly executed and delivered by the Company.
(h) The accountants who have expressed their opinions with respect to
the financial statements and schedules included in the Registration
Statement are independent accountants as required by the 1933 Act.
(i) The financial statements and schedules of the Company included in
the Registration Statement, including the notes thereto, present fairly the
financial position of the Company as of the respective dates of such
financial statements, and the results of operations and cash flows of the
Company for the respective periods covered thereby, all in conformity with
generally accepted accounting principles consistently applied throughout
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the periods involved, except as disclosed in the Prospectus; and the
financial information set forth in the Prospectus under the captions
"Summary Financial Data" and "Selected Financial Data" presents fairly on
the basis stated in the Prospectus, the information set forth therein.
(j) The Company is not in violation of its charter or bylaws or in
default under any consent decree, order, writ, judgment, award or
injunction of any Governmental Authority, or in default with respect to any
material provision of any lease, loan agreement, note, franchise, License
(as hereinafter defined), permit or other contract obligation to which it
is a party; and there does not exist any state of facts which constitutes
an event of default as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default, in each
case, except for defaults which neither singly nor in the aggregate are
material to the Company.
(k) There are no material legal or governmental proceedings pending,
or to the Company's knowledge, threatened to which the Company is or may be
a party or of which material property owned or leased by the Company is or
may be the subject, or which are related to environmental or discrimination
matters which are not disclosed in the Prospectus, or which question the
validity of this Agreement or the Pricing Agreement or any action taken or
to be taken pursuant hereto or thereto.
(l) Except as described in the Prospectus, there are no holders of
securities of the Company having rights to registration thereof, preemptive
rights or rights of first refusal to purchase Common Stock from the
Company. All such holders of registration rights have waived such rights
with respect to the offering being made by the Prospectus.
(m) The Company has good and marketable title to all the properties
and assets reflected as owned in the financial statements hereinabove
described (or elsewhere in the Prospectus), subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except those, if any, reflected
in such financial statements (or elsewhere in the Prospectus) or which are
not material to the Company. The Company holds its leased properties which
are material to the Company under valid and binding leases.
(n) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares.
(o) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
contemplated by the Prospectus, the Company has not incurred any material
liabilities or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and there has
not been any material adverse change in their condition (financial or
otherwise), business, assets, results of operations or prospects nor any
material change in their capital stock, short-term debt or long-term debt.
Except as disclosed in writing to the Representatives prior to the date
hereof, the Company has not received notice (either formally or informally)
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of the non-renewal or anticipated non-renewal of one or more contracts
currently maintained by the Company with any of its suppliers or customers,
which non-renewal(s) would or could be expected to have a Material Adverse
Effect.
(p) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required.
(q) The Company owns and possesses all right, title and interest in
and to, or has duly licensed from third parties a valid, enforceable right
to use, all patents, patent rights, trade secrets, inventions, know-how,
trademarks, trade names, copyrights, service marks and other proprietary
rights ("Trade Rights") material to the business of the Company. The
Company has not received any notice of infringement, misappropriation or
conflict from any third party as to such material Trade Rights which has
not been resolved or disposed of and the Company has not infringed,
misappropriated or otherwise conflicted with material Trade Rights of any
third parties, which infringement, misappropriation or conflict would have
a Material Adverse Effect.
(r) The conduct of the business of the Company is in compliance in
all respects with applicable foreign, federal, state, local and other laws
and regulations, except where the failure to be in compliance would not
have a Material Adverse Effect. The Company has no knowledge of, nor has
the Company received notice of, any violation or alleged violation by the
Company of any such laws or regulations.
(s) All offers and sales of the Company's capital stock prior to the
date hereof were at all relevant times exempt from the registration
requirements of the 1933 Act and were duly registered with or the subject
of an available exemption from the registration requirements of the
applicable state or province securities laws.
(t) The Company have filed all necessary foreign, federal and state
income, franchise, value-added, sales and use and similar tax returns and
have paid all taxes shown as due thereon, and there is no tax deficiency
that has been, or to the knowledge of the Company might be, asserted
against the Company or any of its properties or assets that would or could
be expected to have a Material Adverse Effect.
(u) A registration statement relating to the Common Stock has been
declared effective by the Commission pursuant to the Exchange Act and the
Common Stock is duly registered thereunder. The Shares have been approved
for listing on the Nasdaq National Market, subject to notice of issuance or
sale of the Shares, as the case may be.
(v) The Company is not, and does not intend to conduct its businesses
in a manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940, as amended ("Investment
Company Act").
(w) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-
198, An Act Relating to Disclosure
-----------------------------
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of Doing Business with Cuba, and the Company further agrees that if it
---------------------------
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported in the Prospectus, if any,
concerning the Company's business with Cuba or with any person or affiliate
located in Cuba changes in any material way, the Company will provide the
Department notice of such business or change, as appropriate, in a form
acceptable to the Department.
(x) The Company has obtained all material licenses, permits,
certificates, authorizations, approvals or consents (collectively, the
"Licenses") required by any Governmental Authority to properly and legally
operate or conduct the business in which it is engaged on the date hereof
and which are necessary or desirable for the successful conduct of its
business as conducted and as proposed to be conducted. Each License has
been duly obtained, is valid and in full force and effect, is renewable by
its terms or in the ordinary course of business without the need to comply
with any special qualifications or procedures or to pay any amount other
than routine filing fees. The Company (i) is not subject to any pending or
threatened administrative or judicial proceeding to revoke, cancel or
declare any License granted to it invalid in any respect, (ii) is not
acting outside the scope and authority granted to it pursuant to any such
License, and is not otherwise in default or in violation with respect to
any such License, and no event has occurred which constitutes, or with due
notice or lapse of time or both may constitute, a default by it or a
violation of, any License and (iii) has not permitted any License granted
to it to lapse since its original effective date, except where such lapse
did not have a Material Adverse Effect. The Company has completed and
submitted, on a timely basis, all reports and filings associated with its
business as are required by any Governmental Authority.
(y) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and
the value of their properties and as is customary for companies engaged in
similar businesses in similar industries.
Section 3. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (a) on the cover page of the
Prospectus with respect to price, underwriting discount and terms of the
offering and (b) under "Underwriting" in the Prospectus was furnished to the
Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and is correct and complete in all
material respects.
Section 4. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters named in Schedule A hereto, and the Underwriters agree, severally
----------
and not jointly, to purchase 3,500,000 Firm Shares from the Company at the price
per share set forth in the Pricing Agreement. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number of
Shares set forth opposite the name of such Underwriter in Schedule A hereto.
----------
The initial public offering price and the purchase price shall be set forth in
the Pricing Agreement.
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Delivery to you of certificates for the Firm Shares through the facilities
of The Depository Trust Company shall be made against receipt of a wire transfer
reference number issued by the Federal Reserve System evidencing payment of the
purchase price therefore by the several Underwriters by wire transfer of
immediately available funds, to an account specified in writing by the Company,
at or before 11:00 A.M., Chicago Time, (a) on the third business day after the
effective date of this Agreement, (b) if this Agreement is executed and
delivered and becomes effective after 3:30 P.M., Chicago Time, the fourth
business day after the effective date of this Agreement, or (c) at such other
time on such other day, not later than ten business days after the effective
date of this Agreement, as shall be agreed upon by the Representatives and the
Company (the "First Closing Date"). Such certificates will be in such
denominations and registered in such names as you request by notice to the
Company prior to 10:00 A.M., Chicago Time, on the second business day preceding
the First Closing Date.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 525,000 Option Shares, at the
same purchase price per share to be paid for the Firm Shares, for use solely in
covering any overallotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the date of the
initial public offering upon notice by you to the Company setting forth the
aggregate number of Option Shares as to which the Underwriters are exercising
the option, the names and denominations in which the certificates for such
shares are to be registered and the time and place at which such certificates
will be delivered. Such time of delivery (which may not be earlier than the
First Closing Date), being herein referred to as the "Second Closing Date,"
shall be determined by you, but if at any time other than the First Closing
Date, shall not be earlier than three nor later than 10 full business days after
delivery of such notice of exercise. The number of Option Shares to be
purchased by each Underwriter shall be determined by multiplying the number of
Option Shares to be sold by the Company pursuant to such notice of exercise by a
fraction, the numerator of which is the number of Firm Shares to be purchased by
such Underwriter as set forth opposite its name in Schedule A and the
----------
denominator of which is the total number of Firm Shares (subject to such
adjustments to eliminate any fractional share purchases as you in your absolute
discretion may make). The manner of payment for and delivery of the Option
Shares shall be the same as for the Firm Shares as specified in the preceding
paragraph.
You have advised the Company that each Underwriter has authorized you to
accept delivery of its Shares, to make payment and to receipt therefor. You,
individually and not as the Representatives of the Underwriters, may make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by you by the First Closing Date or the Second Closing Date,
as the case may be, for the account of such Underwriter, but any such payment
shall not relieve such Underwriter from any obligation hereunder.
Section 5. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will advise you promptly of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the
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institution of any proceedings for that purpose, or of any notification of
the suspension of qualification of the Shares for sale in any jurisdiction
or the initiation or threatening of any proceedings for that purpose, and
will also advise you promptly of any request of the Commission for
amendment or supplement of the Registration Statement, of any preliminary
prospectus or of the Prospectus, or for additional information.
(b) The Company will give you notice of its intention to file or
prepare any amendment to the Registration Statement (including any post-
effective amendment) or any Rule 462(b) Registration Statement or any
amendment or supplement to the Prospectus (including any revised prospectus
which the Company proposes for use by the Underwriters in connection with
the offering of the Shares which differs from the prospectus on file at the
Commission at the time the Registration Statement became or becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) and any term sheet as contemplated by Rule 434) and
will furnish you with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file any such amendment or supplement or use any such
prospectus to which you or counsel for the Underwriters shall reasonably
object.
(c) If the Company elects to rely on Rule 434 of the 1933 Act, the
Company will prepare a term sheet that complies with the requirements of
Rule 434. If the Company elects not to rely on Rule 434, the Company will
provide the Underwriters with copies of the form of prospectus, in such
numbers as the Underwriters may reasonably request, and file with the
Commission such prospectus in accordance with Rule 424(b) of the 1933 Act
by the close of business in New York City on the second business day
immediately succeeding the date of the Pricing Agreement. If the Company
elects to rely on Rule 434, the Company will provide the Underwriters with
copies of the form of Rule 434 Prospectus, in such numbers as the
Underwriters may reasonably request, by the close of business in New York
on the business day immediately succeeding the date of the Pricing
Agreement.
(d) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result of
which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend or
supplement the Prospectus, including any amendments or supplements thereto
and including any revised prospectus which the Company proposes for use by
the Underwriters in connection with the offering of the Shares which
differs from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with
the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
(in form and substance satisfactory to counsel for the Underwriters) which
will correct such statement or omission or an amendment which will effect
such compliance; and, in case any Underwriter is required to deliver a
prospectus nine months or more after the effective date of the Registration
Statement, the Company upon request, but at the expense of such
Underwriter, will prepare promptly such prospectus or
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prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the 1933 Act.
(e) The Company will not, prior to the earlier of the Second Closing
Date or termination or expiration of the option relating to the Option
Shares, enter into any material transaction, other than in the ordinary
course of business, except as contemplated by the Prospectus.
(f) The Company will not acquire any capital stock of the Company
prior to the earlier of the Second Closing Date or termination or
expiration of the option relating to the Option Shares nor will the Company
declare or pay any dividend or make any other distribution upon the Common
Stock payable to stockholders of record on a date prior to the earlier of
the Second Closing Date or termination or expiration of the option relating
to the Option Shares, except in either case as contemplated by the
Prospectus.
(g) As soon as practicable, but in any event not later than 15 months
after the effective date of the Registration Statement, the Company will
make generally available to its security holders an earnings statement
(which need not be audited) covering a period of at least 12 months
beginning after the effective date of the Registration Statement, which
will satisfy the provisions of the last paragraph of Section 11(a) of the
1933 Act.
(h) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (d) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and
all amendments and supplements to any such documents in each case as soon
as available and in such quantities as you may reasonably request, for the
purposes contemplated by the 1933 Act.
(i) The Company will cooperate with the Underwriters in qualifying or
registering the Shares for sale under the securities laws of such
jurisdictions as you designate, and will continue such qualifications in
effect so long as reasonably required for the distribution of the Shares.
In connection with such qualification or registration of the Shares, the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any such jurisdiction where
it is not currently qualified or where it would be subject to taxation as a
foreign corporation.
(j) During the period of five years hereafter, the Company will
furnish you and each of the other Underwriters with a copy (i) as soon as
practicable after the filing thereof, of each report filed by the Company
with the Commission, any securities exchange or the NASD, (ii) as soon as
practicable after the release thereof, of each material press release in
respect of the Company, (iii) as soon as available, of each report of the
Company mailed to stockholders and (iv) any additional information of a
public nature concerning the Company or its business that you may
reasonably request.
(k) The Company will use the net proceeds received by it from the
sale of the
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Shares being sold by it in the manner specified in the Prospectus.
(l) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule
430A and/or Rule 434, then immediately following the execution of the
Pricing Agreement, the Company will prepare, and file or transmit for
filing with the Commission in accordance with such Rule 430A, Rule 424(b)
and/or Rule 434, copies of an amended Prospectus, or, if required by such
Rule 430A and/or Rule 434, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted. If required, the Company will prepare and file, or transmit for
filing, a Rule 462(b) Registration Statement not later than the date of the
execution of the Pricing Agreement. If a Rule 462(b) Registration
Statement is filed, the Company shall make payment of, or arrange for
payment of, the additional registration fee owing to the Commission
required by Rule 111.
(m) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act and the Nasdaq National Market
which may from time to time be applicable to the Company.
(n) The Company agrees not to sell, contract to sell or otherwise
dispose of any Common Stock or securities convertible into Common Stock
(except Common Stock issued pursuant to currently outstanding options,
warrants or convertible securities) for a period of 180 days after this
Agreement becomes effective without the prior written consent of William
Blair & Company, L.L.C. The Company has obtained similar agreements from
each of its officers and directors. At or before the time the Pricing
Agreement is executed, the Company shall have delivered to you a lock-up
agreement substantially in the form of Exhibit B hereto from each of the
---------
Company's officers, directors and stockholders in which each such person
agrees not to offer, sell, contract to sell or otherwise dispose of any
Common Stock or any securities exercisable for or convertible into Common
Stock for a period of 180 days after the date of such lock-up agreement
without the prior written consent of William Blair & Company, L.L.C.
(o) The Company will promptly deliver to the Representatives copies
of all correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Shares under the 1933
Act.
(p) Prior to the First Closing Date, the Company will issue no press
release or other communication to the public, directly or indirectly, with
respect to the Company or any of its subsidiaries or with respect to the
financial condition, results of operations, business, properties, assets or
liabilities of any of them, or the offering of the Shares, without your
prior consent, which consent shall not be unreasonably withheld.
Section 6. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as to
all of its provisions or is terminated, the Company agrees to pay (i) all costs,
fees and expenses (other than legal fees and disbursements of counsel for the
Underwriters and the expenses incurred by the Underwriters) incurred in
connection with the performance of the Company's obligations hereunder,
including
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without limiting the generality of the foregoing, all fees and expenses of legal
counsel for the Company and of the Company's independent accountants, all costs
and expenses incurred in connection with the preparation, printing, filing and
distribution of the Registration Statement, each preliminary prospectus and the
Prospectus (including all exhibits and financial statements) and all amendments
and supplements provided for herein, this Agreement, the Pricing Agreement and
the blue sky memorandum, (ii) all costs, fees and expenses (including reasonable
legal fees and disbursements of counsel for the Underwriters) incurred by the
Underwriters in connection with qualifying or registering all or any part of the
Shares for offer and sale under applicable state or province securities laws,
including the preparation of a blue sky memorandum relating to the Shares and
clearance of such offering with the NASD; and (iii) all fees and expenses of the
Company's transfer agent, printing of the certificates for the Shares and all
transfer taxes, if any, with respect to the sale and delivery of the Shares to
the several Underwriters.
Section 7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
on the First Closing Date and the Option Shares on the Second Closing Date shall
be subject to the accuracy of the representations and warranties on the part of
the Company herein set forth as of the date hereof and as of the First Closing
Date or the Second Closing Date, as the case may be, to the accuracy of the
statements of officers of the Company made pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder, and to the
following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M.,
Chicago Time, on the first full business day after the date of this
Agreement, or such later time as shall have been consented to by you but in
no event later than 1:00 P.M., Chicago Time, on the third full business day
following the date hereof; and prior to the First Closing Date or the
Second Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending
or, to the knowledge of the Company or you, shall be contemplated by the
Commission. If the Company has elected to rely upon Rule 430A and/or Rule
434, the information concerning the initial public offering price of the
Shares and price-related information shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed period
and the Company will provide evidence satisfactory to the Representatives
of such timely filing (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with
the requirements of Rules 430A and 424(b)). If a Rule 462(b) Registration
Statement is required, such Registration Statement shall have been
transmitted to the Commission for filing and become effective within the
prescribed time period and, prior to the First Closing Date, the Company
shall have provided evidence of such filing and effectiveness in accordance
with Rule 462(b).
(b) The Shares shall have been qualified for sale under the state or
province securities laws of such jurisdictions as shall have been specified
by the Representatives.
(c) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the
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Shares, the execution and delivery of this Agreement and the Pricing
Agreement, and all corporate proceedings and other legal matters incident
thereto, and the form of the Registration Statement and the Prospectus
(except financial statements) shall have been approved by counsel for the
Underwriters.
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the opinion of counsel for
the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or necessary to make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any change, or any development involving a
prospective change, in or affecting particularly the business or properties
of the Company or its subsidiaries, whether or not arising in the ordinary
course of business, which, in the judgment of the Representatives, makes it
impractical or inadvisable to proceed with the public offering or purchase
of the Shares as contemplated hereby.
(f) There shall have been furnished to you, as Representatives of the
Underwriters, on the First Closing Date or the Second Closing Date, as the
case may be, except as otherwise expressly provided below:
(i) An opinion of Morrison & Foerster LLP, counsel for the
Company, addressed to the Underwriters and dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
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(1) the Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware and has full corporate power and authority to own its
properties and conduct its business as described in the
Prospectus. The Company is duly qualified to transact business
as a foreign corporation, and is in good standing in the States of
Hawaii, California, Colorado and New York. There are no other
jurisdictions other than the above where the failure to qualify to
do business as a foreign corporation would have a Material Adverse
Effect;
(2) this Agreement and the Pricing Agreement have been duly
authorized, executed and delivered by the Company and constitute
the legal, valid and binding obligations of the Company;
(3) the Shares have been duly authorized and, upon delivery to
the Underwriters against payment therefor in accordance with the
terms of this Agreement and the Pricing Agreement, will be validly
issued, fully paid and nonassessable and will be free of any
pledge, lien, encumbrance, claim, or rights of first refusal in
favor of, stockholders with respect to any of the Shares or the
issuance or sale thereof (other than any pledge, lien,
encumbrance, claim or right of first refusal of a purchaser of
Shares), and the issuance of the Shares is not subject to
preemptive rights. The Shares to be sold hereunder have been duly
and validly authorized and qualified for inclusion on the Nasdaq
National Market, subject to notice of issuance;
(4) all outstanding shares of the Company's Common Stock have
been duly authorized, validly issued and are fully paid and
nonassessable and free of preemptive rights;
(5) the execution and delivery of this Agreement and the
Pricing Agreement and the performance by the Company of its terms
will not violate any federal or applicable state securities law or
will not materially violate any statute, order, rule or regulation
of any Governmental Authority having jurisdiction over the
Company;
(6) the execution and delivery of this Agreement and the
Pricing Agreement and the performance by the Company of their
terms do not violate or result in a violation of the Company's
certificate of incorporation or bylaws or any judgment, order or
decree, known to such counsel, of any court or arbiter, to which
the Company is a party, and, to such counsel's knowledge, will not
constitute a material breach of the terms, conditions or
provisions of or constitute a default under any contract,
undertaking, indenture, License or other agreement or instrument
by which the Company or its property is now bound or to which the
Company is now a party;
(7) the authorized capital stock of the Company, of which
there is outstanding the amount set forth in the Registration
Statement and the
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Prospectus, conforms in all material respects to the description
thereof contained under the heading "Description of Capital Stock"
in the Prospectus;
(8) the Registration Statement has become effective under the
1933 Act, and such counsel is not aware after reasonable inquiry
and investigation that any stop order suspending the effectiveness
thereof has been issued or any proceedings for that purpose have
been instituted or are pending or threatened under the 1933 Act;
(9) the Registration Statement and Prospectus, as of the
effective date thereof, complied as to form in all material
respects with the requirements of the 1933 Act (except as to the
financial statements, supporting schedules, footnotes and other
financial and statistical information included therein, as to
which such counsel expresses no opinion). Such counsel does not
know of any statutes, rules and regulations required to be
described or referred to in the Registration Statement or the
Prospectus that are not described;
(10) the statements under the captions "Management -- Stock
Option Plan" and "-- 401(k) Plan," "Description of Capital Stock"
and "Risk Factors -- Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, are accurate
summaries and fairly and correctly present, in all material
respects, the information required to be disclosed with respect to
such documents and matters by the 1933 Act and the rules and
regulations thereunder;
(11) there are no legal or governmental proceedings pending or
threatened, and no contract or other document, known to such
counsel of a character required to be described in the
Registration Statement or Prospectus or to be filed as an exhibit
to the Registration Statement that is not described or filed, as
required;
(12) no authorization, approval or consent of any court or
governmental authority or agency is required in connection with
the transactions contemplated by this Agreement and the Pricing
Agreement, except such as have been obtained under the Act and
such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Shares by the
several Underwriters;
(13) to such counsel's knowledge after reasonable inquiry and
investigation, the Company is not in violation of its charter or
is in breach of, or in default under (nor has any event occurred
which, with notice, lapse of time or both would constitute a
breach of, or default under) any indenture, lease, credit
agreement or other agreement or instrument to which the Company is
a party or by which the Company's properties may be bound are
affected, where such violation or breach or default could have a
Material
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Adverse Effect;
(14) except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue, or
register pursuant to the 1933 Act, any shares of capital stock of
the Company, in connection with the issuance and sale of the
Shares to be sold by the Company to the Underwriters pursuant to
this Agreement;
(15) the Company is not an "investment company" or a person
"controlled by" an "investment company" within the meaning of the
Investment Company Act; and
(16) to such counsel's knowledge after reasonable inquiry and
investigation, the Company has obtained all material Licenses
required by any Governmental Authority to properly and legally
operate or conduct the business in which it is engaged on the
Closing Date and which are necessary or desirable for the
successful conduct of its business as it is conducted and proposed
to be conducted, and each such material License has been duly
obtained, is valid and in full force and effect, and is renewable
by its terms or in the ordinary course of business without the
need to comply with any special qualification procedures or to pay
any amount other than routine filing fees. To such counsel's
knowledge after reasonable inquiry and investigation, the Company
(a) is not subject to any pending or threatened administrative or
judicial proceeding to revoke, cancel or declare any material
License granted to it invalid in any respect, (b) is not acting
outside the scope and authority granted to it pursuant to any such
License, or otherwise in default or in violation with respect to
any such material License, and no event has occurred which
constitutes, or with due notice or lapse of time or both may
constitute, a default by it or a violation of, any material
License and (c) has not permitted any material License granted to
it to lapse since its original effective date.
In addition, such counsel shall state that they have
participated in conferences with the Representatives and with
representatives of the Company and its accountants concerning the
Registration Statement and the Prospectus and have considered the
matters required to be stated therein and the statements contained
therein, although such counsel has not independently verified the
accuracy, completeness or fairness of such statements. Based upon and
subject to the foregoing, such counsel has no reason to believe that
either the Registration Statement (including the information deemed to
be part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b) and/or Rule 434, if applicable) or the
Prospectus, or the Registration Statement or the Prospectus as amended
or supplemented (except for the financial statements and other
statistical or financial data included therein as to which such
counsel need express no opinion), as of their respective effective or
issue dates, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
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necessary to make the statements therein not misleading or that the
Prospectus as amended or supplemented, if applicable, as of the First
Closing Date or the Second Closing Date, as the case may be, contained
any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein not misleading
in light of the circumstances under which they were made.
In rendering such opinion, such counsel may state that they
are relying upon the certificate of the Company's Chief Executive
Officer, and the transfer agent for the Common Stock, as to the number
of shares of Common Stock at any time or times outstanding. Such
counsel may also rely upon the opinions of competent local counsel
satisfactory to counsel to the Underwriters as to legal matters in
jurisdictions other than those in which they are domiciled and, as to
factual matters, on certificates of officers of the Company and of
state or province officials, in which case their opinion is to state
that they are so doing and copies of such opinions or certificates are
to be attached to the opinion unless such opinions or certificates
(or, in the case of certificates, the information therein) have been
furnished to the Representatives in other form.
(ii) Such opinion or opinions of Sonnenschein Nath & Rosenthal,
counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares to be sold by
the Company, the Registration Statement and the Prospectus and other
related matters as you may reasonably require, and the Company shall
have furnished to such counsel such documents and shall have exhibited
to them such papers and records as they request for the purpose of
enabling them to pass upon such matters.
(iii) A certificate of the chief executive officer and the
principal financial officer of the Company, dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) the representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied at or prior to such
Closing Date; and
(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary prospectus
filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the knowledge of
the respective signers after reasonable inquiry and investigation,
no proceedings for that purpose have been instituted or are
pending or contemplated under the 1933 Act.
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The delivery of the certificate provided for in this
subparagraph shall be and constitute a representation and warranty of
the Company as to the facts required in the immediately foregoing
clauses (1) and (2) of this subparagraph to be set forth in such
certificate.
(iv) At the time the Pricing Agreement is executed and also on
the First Closing Date or the Second Closing Date, as the case may be,
there shall be delivered to you a letter addressed to you, as
Representatives of the Underwriters, from PricewaterhouseCoopers LLP,
independent auditors, the first one to be dated the date of the
Pricing Agreement, the second one to be dated the First Closing Date
and the third one (in the event of a second closing) to be dated the
Second Closing Date, to the effect set forth in Schedule B. There
----------
shall not have been any change or decrease specified in the letters
referred to in this subparagraph which makes it impractical or
inadvisable in the judgment of the Representatives to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(v) At or before the time the Pricing Agreement is executed,
there shall be delivered to you a lock-up agreement substantially in
the form of Exhibit B hereto from each of the Company's officers,
---------
directors and stockholders, in which each such person agrees not to
offer, sell, contract to sell or otherwise dispose of any Common Stock
or any securities exercisable for or convertible into Common Stock for
a period of 180 days after the date of such lock-up agreement without
the prior written consent of William Blair & Company, L.L.C.
(vii) Such further certificates and documents as you may
reasonably request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Sonnenschein Nath & Rosenthal, counsel for the Underwriters, which approval
shall not be unreasonably withheld. The Company shall furnish you with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as you request.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification to the Company without liability
on the part of any Underwriter or the Company, except for the expenses to be
paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except
to the extent provided in Section 10 hereof.
Section 8. Reimbursement of Underwriters' Expenses. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
any condition of the Underwriters' obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, unless such
failure to satisfy such condition or to comply with any provision hereof is due
to the default or omission of any Underwriter, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
reasonably incurred by you and them in connection
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with the proposed purchase and sale of the Shares. Any such termination shall be
without liability of any party to any other party except that the provisions of
this Section, Section 6 and Section 10 shall at all times be effective and shall
apply.
Section 9. Effectiveness of Registration Statement. You and the Company
will use your and its best efforts to cause the Registration Statement to become
effective, if it has not yet become effective, and to prevent the issuance of
any stop order suspending the effectiveness of the Registration Statement and,
if such stop order be issued, to obtain as soon as possible the lifting thereof.
Section 10. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the 1933 Act or the Exchange Act against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the 1933 Act,
the Exchange Act or other foreign, federal or state statutory law or regulation,
at common law or otherwise (including in settlement of any litigation if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, including the information
deemed to be part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A and/or Rule 434, if applicable, any preliminary
prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that (i) any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives, specifically for use therein; or (ii) if such statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus and (1) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus to such person
at or prior to the confirmation of the sale of such Shares in any case where
such delivery is required by the 1933 Act. In addition to their other
obligations under this Section 10(a), the Company agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 10(a), it will
reimburse the Underwriters on a monthly basis for all reasonable legal and other
expenses incurred for one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters which shall be designated in
writing by William Blair & Company, L.L.C. in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
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<PAGE>
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. This indemnity agreement
will be in addition to any liability which the Company may otherwise have. The
Company shall not be liable for any settlement of such action, suit or
proceeding effected without its written consent, which consent shall not be
unreasonably withheld.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the 1933 Act or the Exchange Act, against any losses, claims, damages or
liabilities to which the Company, or any such director, officer or controlling
person may become subject under the 1933 Act, the Exchange Act or other foreign,
federal or state statutory law or regulation, at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus, or any amendment or
supplement thereto in reliance upon and in conformity with Section 3 of this
Agreement or any other written information furnished to the Company by such
Underwriter through the Representatives specifically for use in the preparation
thereof; and will reimburse any legal or other expenses reasonably incurred by
the Company, or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action. In addition to their other obligations under this Section 10(b), the
Underwriters agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 10(b), they will reimburse the Company on a monthly basis for all
reasonable legal and other expenses incurred for one separate firm of attorneys
(in addition to any local counsel) at any time for the Company which shall be
designated in writing by the Company in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. This indemnity agreement will be
in addition to any liability which such Underwriter may otherwise have. No
Underwriter shall be liable for any settlement of such action, suit or
proceeding effected without the written consent of all of the Underwriters,
which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent that
the indemnifying party was prejudiced by such failure to notify. In case any
such action is brought
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<PAGE>
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with all other indemnifying parties
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, or the
indemnified and indemnifying parties may have conflicting interests which would
make it inappropriate for the same counsel to represent both of them, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defense and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defense in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel, approved by the
Representatives in the case of paragraph (a) representing all indemnified
parties not having different or additional defenses or potential conflicting
interest among themselves who are parties to such action), (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the
21
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Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion in the
case of the Company as the total price paid to the Company for the Shares by the
Underwriters (net of underwriting discount but before deducting expenses), and
in the case of the Underwriters as the underwriting discount received by them
bears to the total of such amounts paid to the Company and received by the
Underwriters as underwriting discount in each case as contemplated by the
Prospectus. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section, no Underwriter shall be required
to contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section are several in proportion to their respective underwriting commitments
and not joint.
(e) The provisions of this Section shall survive any termination of this
Agreement.
Section 11. Default of Underwriters. It shall be a condition to the
agreement and obligation of the Company to sell and deliver the Shares
hereunder, and of each Underwriter to purchase the Shares hereunder, that,
except as hereinafter in this paragraph provided, each of the Underwriters shall
purchase and pay for all Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Representatives of all such Shares in accordance
with the terms hereof. If any Underwriter or Underwriters default in their
obligations to purchase Shares hereunder on the First Closing Date and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10 percent of the total number of
Shares which the Underwriters are obligated to purchase on the First Closing
Date, the Representatives may make arrangements satisfactory to the Company for
the purchase of such Shares by other persons, including any of the Underwriters,
but if no such arrangements are made by such date the nondefaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares which such defaulting Underwriters agreed but
failed to purchase on such date. If any Underwriter or Underwriters so default
and the aggregate number of Shares with respect to which such default or
defaults occur is more than the above percentage and arrangements satisfactory
to the Representatives and the Company for the purchase of such Shares by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any nondefaulting Underwriter or the
Company, except for the expenses to be paid by the Company pursuant to Section 6
hereof and except to the extent provided in Section 10 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right
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to postpone the First Closing Date for not more than seven business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
Section 12. Effective Date. This Agreement shall become effective upon
execution and delivery of this Agreement and the Pricing Agreement.
Section 13. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof) or
of any Underwriter to the Company.
(b) This Agreement may also be terminated by you prior to the First
Closing Date, and the option referred to in Section 4, if exercised, may be
cancelled at any time prior to the Second Closing Date, if (i) trading in
securities on the New York Stock Exchange shall have been suspended or
minimum prices shall have been established on such exchange, or (ii) a
banking moratorium shall have been declared by Illinois, New York, or
United States authorities, or (iii) there shall have been any change in
financial markets or in political, economic or financial conditions which,
in the opinion of the Representatives, either renders it impracticable or
inadvisable to proceed with the offering and sale of the Shares on the
terms set forth in the Prospectus or materially and adversely affects the
market for the Shares, or (iv) there shall have been an outbreak of major
armed hostilities between the United States and any foreign power which in
the opinion of the Representatives makes it impractical or inadvisable to
offer or sell the Shares. Any termination pursuant to this paragraph (b)
shall be without liability on the part of any Underwriter to the Company or
on the part of the Company to any Underwriter (except for expenses to be
paid or reimbursed pursuant to Section 6 hereof and except to the extent
provided in Section 10 hereof).
Section 14. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, principals, members, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Shares sold hereunder.
Section 15. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters will be mailed, delivered, telecopied or telegraphed
and confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606, Attn: Mark A.
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Timmerman, Fax (312) 368-9418, with a copy to Arthur J. Simon, Sonnenschein Nath
& Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, Fax (312) 876-7934; and
if sent to the Company will be mailed, delivered or telegraphed and confirmed to
the Company at its corporate headquarters with a copy to Henry M. Fields, Esq.,
Morrison & Foerster LLP, 555 West Fifth Street, Suite 3500, Los Angeles,
California 90013-1024, Fax (213) 892-5454.
Section 16. Successors. This Agreement and the Pricing Agreement will
inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section 10,
and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any of
the Underwriters merely by reason of such purchase.
Section 17. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with this financing,
and any action under or in respect of this Agreement taken by you will be
binding upon all the Underwriters.
Section 18. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
Section 19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
Section 20. Applicable Law. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State of
New York.
[Remainder of page intentionally left blank]
24
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
CHEAP TICKETS, INC.
By: ___________________________________
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
DAIN RAUSCHER WESSELS
Acting as Representatives of the
several Underwriters named in
Schedule A.
WILLIAM BLAIR & COMPANY, L.L.C.
By: _____________________________
A Principal
25
<PAGE>
Schedule A
<TABLE>
<CAPTION>
====================================================================================
Underwriter Number of Firm
- ----------- Shares to be
Purchased
---------------------
<S> <C>
- ------------------------------------------------------------------------------------
William Blair & Company, L.L.C............................
- ------------------------------------------------------------------------------------
Dain Rauscher Wessels.....................................
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
----------
- ------------------------------------------------------------------------------------
TOTAL..................................................... ==========
====================================================================================
</TABLE>
26
<PAGE>
Schedule B
Comfort Letter for Cheap Tickets, Inc.
To Be Delivered by PricewaterhouseCoopers LLP
(1) They are independent public accountants with respect to the Company and
its subsidiaries within the meaning of the 1933 Act.
(2) In their opinion the financial statements and schedules of the Company
and its subsidiaries included in the Registration Statement and the financial
statements of the Company from which the information presented under the
captions "Summary Financial Data" and "Selected Financial Data" has been derived
which are stated therein to have been examined by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company responsible for financial and accounting matters
as to transactions and events subsequent to December 31, 1998, a reading of
minutes of meetings of the stockholders and directors of the Company since
December 31, 1998, a reading of the latest available interim unaudited financial
statements of the Company (with an indication of the date thereof) and other
procedures as specified in such letter, nothing came to their attention which
caused them to believe that (i) the unaudited financial statements of the
Company included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act or
that such unaudited financial statements are not fairly presented in accordance
with generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Registration Statement, (ii) the amounts in "Summary Financial Data" and
"Selected Financial Data" included in the Prospectus do not agree with or are
not derivable from the corresponding amounts in the audited financial statements
or unaudited financial statements (as applicable) from which such amounts were
derived, and (iii) at a specified date not more than five days prior to the date
thereof in the case of the first letter and not more than two business days
prior to the date thereof in the case of the second and third letters, there was
any change in the capital stock or long-term debt or short-term debt (other than
normal payments) of the Company on a basis or any decrease in net current assets
or stockholders' equity as compared with amounts shown on the latest unaudited
balance sheet of the Company included in the Registration Statement or for the
period from the date of such balance sheet to a date not more than five days
prior to the date thereof in the case of the first letter and not more than two
business days prior to the date thereof in the case of the second and third
letters, there were any decreases, as compared with the corresponding period of
the prior year, in net sales, income before income taxes or in the total or per
share amounts of net income except, in all instances, for changes or decreases
which the Prospectus discloses have occurred or may occur or which are set forth
in such letter.
(4) They have carried out specified procedures, which have been agreed to by
the Representatives, with respect to certain information in the Prospectus
specified by the Representatives, and on the basis of such procedures, they have
found such information to be in agreement with the general accounting records of
the Company.
<PAGE>
EXHIBIT A
CHEAP TICKETS, INC.
___________ Shares Common Stock/2/
PRICING AGREEMENT
-----------------
__________, 1999
William Blair & Company, L.L.C.
Dain Rauscher Wessels
As Representatives of the Several
Underwriters
c/o William Blair & Company
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated ____________, 1999
(the "Underwriting Agreement") relating to the sale by the Company and the
purchase by the several Underwriters for whom William Blair & Company and Dain
Rauscher Wessels are acting as representatives (the "Representatives"), of the
above Shares. All terms herein shall have the definitions contained in the
Underwriting Agreement except as otherwise defined herein.
Pursuant to Section 4 of the Underwriting Agreement, the Company agrees
with the Representatives as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $_________, being an amount equal to the initial public
offering price set forth above less $________ per share.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original and all
of which together shall be considered one and the same agreement.
______________
/2/ Plus an option to acquire up to ____________ additional shares to cover
overallotments.
<PAGE>
Very truly yours,
CHEAP TICKETS, INC.
By: ______________________________
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
DAIN RAUSCHER WESSELS
Acting as Representatives of the
several Underwriters named in
Schedule A.
WILLIAM BLAIR & COMPANY, L.L.C.
By: _____________________________
A Principal
<PAGE>
EXHIBIT B
CHEAP TICKETS, INC.
LOCK-UP AGREEMENT
-----------------
William Blair & Company & Dain Rauscher Wessels,
as Representatives
c/o William Blair & Company
222 West Adams Street
Chicago, IL 60606
Re: Cheap Tickets, Inc.
-------------------
Ladies and Gentlemen:
In order to induce William Blair & Company and Dain Rauscher Wessels (the
"Representatives") to enter in to a certain underwriting agreement with Cheap
Tickets, Inc., a Delaware corporation (the "Company"), with respect to the
public offering of shares of the Company's Common Stock, par value $ 0.001 per
share ("Common Stock"), the undersigned hereby agrees that for a period of 180
days following the date of the final prospectus filed by the Company with the
Securities and Exchange Commission in connection with such public offering, the
undersigned will not, without the prior written consent of the Representatives,
directly or indirectly, (i) offer, sell, assign, transfer, encumber, pledge,
contract to sell, grant an option to purchase or otherwise dispose of, other
than by operation of law, any shares of Common Stock (including, without
limitation, Common Stock which may be deemed to be beneficially owned by the
undersigned in accordance with the rules and regulations promulgated under the
Securities Act of 1933, as the same may be amended or supplemented from time to
time (such shares, the "Beneficially Owned Shares") or (ii) enter into any swap
or similar agreement that transfers, in whole or in part, the economic risk of
ownership of the Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. Notwithstanding the foregoing, this Lock-Up
Agreement (the "Agreement") shall not apply to shares of the Company's Common
Stock (i) acquired through the Company's directed shares program or (ii)
acquired on the open market and that shares so acquired may be sold or otherwise
disposed of without regard to this Agreement.
Notwithstanding the foregoing, if the undersigned is an individual, he or
she may transfer any Shares either during his or her lifetime or on death by
will or intestacy to his or her immediate family or to a trust the beneficiaries
of which are exclusively the undersigned and/or a member or of his or her
immediate family or to a charitable organization; provided, however, that in any
such case it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
transferred subject to the provisions of this Agreement, and there shall be no
further transfer of such Shares except in accordance with this Agreement. For
purposes of this Agreement, "immediate family" shall
<PAGE>
mean spouse, lineal descendant, father, mother, brother or sister of the
transferor and "charitable organization" shall mean an organization described in
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, if the undersigned is a partnership, the
partnership may transfer any Shares to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner, and any partner who is an
individual may transfer such Shares by gift, will or intestate succession to his
or her spouse or lineal descendants or ancestors; and if the undersigned is a
corporation, the corporation may transfer such Shares to any shareholder or
subsidiary of such corporation and any shareholder who is an individual may
transfer Shares by gift, will, or intestate succession to his or her immediate
family or to a charitable organization; provided, however, that in any such
case, it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
subject to the provisions of this Agreement, and there shall be no further
transfer of such Shares except in accordance with this Agreement.
The undersigned agrees that the provisions of this agreement shall be
binding also upon the successors, assigns, heirs and personal representatives of
the undersigned. The undersigned agrees and consents to the placing of legends
and/or the entry of stop transfer instructions with the Company's transfer agent
against the transfer of any shares of Common Stock or Beneficially Owned Shares
held by the undersigned except in compliance with this Agreement.
It is understood that, if the Underwriting Agreement does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
and delivery of the Shares, you will release us from our obligations under this
Agreement.
<PAGE>
This Agreement shall terminate and be of no further force or effect in the
event that the offering contemplated by the Underwriting Agreement is not
completed on or before October 31, 1999.
Very truly yours,
__________________________
(Signature)
__________________________
(Title)
__________________________
(Date)
<PAGE>
Exhibit 5.1
[On Morrison & Foerster Letterhead]
[March, 10, 1999]
Cheap Tickets, Inc.
1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
Re: Registration Statement on Form S-1
No. 333-70841
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1 of
Cheap Tickets, Inc., a Delaware corporation (the "Company"), initially filed
with the Securities and Exchange Commission on January 20, 1999, and all
amendments thereto (collectively, the "Registration Statement"), relating to the
registration under the Securities Act of 1933, as amended, of up to 4,025,000
shares (the "Stock") of the Company's common stock, $.001 par value (including
up to 525,000 shares subject to the underwriters' over-allotment option). The
Stock is to be sold to the underwriters named in the Registration Statement for
resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale by the Company of the Stock.
We are of the opinion that the shares of Stock to be offered and sold by
the Company have been duly authorized and, when issued and sold by the Company
in the manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
issued, fully paid and nonassessable.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and any amendments thereto and to the reference to our
firm under the caption "Legal Matters" in the prospectus included therein.
Very truly yours,
/s/ Morrison & Foerster LLP
Morrison & Foerster LLP
<PAGE>
Exhibit 10.9
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 this Company's confidential treatment
request.
[LETTERHEAD OF CONTINENTAL AIRLINES, INC.]
1994 NET FARE/COMMISSION AGREEMENT
WHOLESALER: C.T.I. dba CHEAP TICKET
738 Kaheka Street, #301
Honolulu, HI 96814
ARC #: 12-601676 CONTRACT #: C094 4026
---------
The following agreement is hereby entered into between Continental
Airlines, Inc. ("Continental"), and the Wholesaler/Consolidator ("Agent")
identified above:
Continental and the Agent agree as follows:
1. Continental will provide the Agent with a net airfare program and/or
a commission program to the applicable origin and destination points listed as
"unpublished tariffs" in Attachment A hereto. The Agent agrees to comply with
the special terms and conditions of each individual unpublished tariff as listed
in Attachment A1 hereto.
2. Upon receipt of this signed agreement, Continental will assign the
Agent special fare basis codes and/or authorization codes, which must be marked
on all tickets issued by the Agent. Tickets must be issued in accordance with
the ticketing procedures as stated on Attachment B hereto.
3. This agreement shall be valid upon execution by a duly authorized
Continental Airlines representative, and shall be effective until further
written notice.
4. This agreement is subject to cancellation by either party at any time
without penalty, upon a thirty (30) day written notice.
5. Tickets issued in conjunction with this agreement may be issued only
at the ARC number(s) noted above and all branch locations of that home office
locations as reported to Continental by the Airline Reporting Corporation (ARC).
Unauthorized ticketing at other ARC locations will result in debit memos at the
lowest applicable retail fare on the date ticket was issued in the class of
service booked and the termination of this agreement. Full payment will be made
for all tickets in accordance with and through standard ARC reporting
procedures. Tickets will be limited to confirmed seating. Open tickets will not
be allowed. Tickets must be issued on standard ARC stock and must be validated
on Continental.
6. Tickets issued in conjunction with this agreement must be sold as
part of a bona fide tour program, unless otherwise specified in the applicable
attachments. Tour programs must include a prepaid land portion consisting of a
two night minimum hotel stay. The minimum retail price for inclusive tours must
be greater than Continental's lowest published airfare in
<PAGE>
applicable markets. Net airfares and/or commission levels may not be sold,
advertised or promoted in any way as "air only", unless otherwise specified in
the applicable attachments. Failure to comply with this provision shall result,
upon notice, in immediate cancellation of this agreement.
7. In the event of flight delays, cancellations or passenger rerouting,
the same amenities will be provided by Continental to passengers hereunder as
are customarily provided by Continental under involuntary re-route procedures to
regular economy fare passengers on scheduled service.
8. If Continental's service in any market covered by this agreement is
(1) terminated, (2) canceled or (3) suspended, this agreement will be terminated
with respect to such market.
9. If the Agent or Continental uses the other's name or trademarks in
advertising or promotion, the material must clearly state the Agents ticketing
and refund responsibility as well as Continental's limitation of liability and
conditions of carriage.
10. All advertising and promotional material relating to the services of
either party must be approved in writing by the other party prior to its use,
including but not limited to the use of logos, trademarks, trade names or
service marks.
11. Agent agrees to indemnify Continental against any expense, loss,
damage, claim or suit (including reasonable attorney's fees) arising hereunder,
made or brought against Continental by reason of Agent's default or failure to
perform hereunder or claims based on the tour programs, except such matters as
arise out of the air transportation provided by Continental.
12. Continental has the right to terminate, suspend or modify this
agreement in the event of an assignment, sale, transfer or change in the Agent
ownership during the term of this agreement. Agent may not assign any right or
delegate any duty hereunder without the express written consent of Continental.
13. Increases and/or reductions in net fare programs and/or commission
programs will be effective twenty-one (21) days from the date of notice from
Continental to the Agent. Continental reserves the right to increase net
airfares and/or reduce commission levels on five (5) days notice if fuel prices
rise more than 10% in any given period of time. Passengers booked and ticketed
prior to the effective ticketing date of a net airfare increase and/or reduction
of commission may travel using previous fare/commission levels. Passengers
booked and not ticketed prior to the effective ticketing date of a net airfare
increase and/or reduction of commission must be ticketed at the new levels.
14. Increase/reductions to or additions of tax, fees and or surcharge
amounts will be effective immediately for all passengers not ticketed and it
will be the responsibility of the Agent to collect all such taxes, fees and
surcharges at the time of ticketing.
<PAGE>
15. Agent will advise passengers in writing that OnePass and or any
other type of upgrade/discount certificates are not permitted in conjunction
with the net airfares provided herein. OnePass mileage accrual is permitted,
unless otherwise stated herein.
16. The net airfares and/or commission levels on Attachment "A" do not
automatically apply to groups of 10 or more. All groups must be requested and
booked through the preferred accounts department at 1-800-243-4366 and are
subject to approval by Continental Airlines. Agents with commission programs
may not use commission levels on negotiated group rates. Tour Conductor tickets
are not applicable to nets/commissions on Attachment "A", unless otherwise
specified.
17. Both Continental and Agent shall be considered as independent
contractors, and nothing contained herein shall be construed so as to create an
agency relationship, partnership or joint venture, and each party shall be
responsible for their respective actions.
18. Continental shall have no responsibility or liability to Agent for
any loss, damage, delay or prevention of the completion of any flight subject to
this agreement, resulting from any occurrences or acts beyond the control of
Continental.
19. The terms and conditions of this agreement are strictly
confidential. Any breach of confidentiality, duplication, use or disclosure of
this agreement in whole or in part shall immediately render this agreement null
and void at the option of the non-breaching party.
20. This agreement shall be governed by the laws of the State of Texas.
Agreement with, and acceptance of, the above conditions is indicated by
the signatures below.
<TABLE>
<CAPTION>
<S> <C>
C.T.I. dba CHEAP TICKET CONTINENTAL AIRLINES, INC.
/s/ Michael J. Hartley /s/ Richard L. Ensign
- ------------------------------ ----------------------------------
Name Richard L. Ensign
Sr. Director-Leisure Sales
General Manager
- ------------------------------
Title
Date: 10/21/93 Date: 10/25/93
------------------------- -----------------------
</TABLE>
<PAGE>
[LETTERHEAD OF CONTINENTAL AIRLINES, INC.]
ADDENDUM
NOVEMBER 12, 1998
MR. MICHAEL HARTLEY
C.T.I.-CHEAP TICKETS
1440 KAPIOLANI BLVD #800
HONOLULU, HI 96814
REF: NET FARES CONTRACT #: CO944026
ARC: 12601676
DEAR MR. HARTLEY:
This letter and the enclosed Attachment A(s) will serve as an addendum to the
above mentioned contract and is subject to the terms, conditions, rules, and
regulations of that contract.
The enclosed Attachment A(s) include:
SEE ATTACHMENT
Your agreement to this addendum is indicated by the signature below. Please sign
both originals of this addendum and return both copies, including all
attachments to the address below. Failure to sign and return this addendum
within five(5) days will void the above mentioned contract:
Continental Airlines
ATTN: JIM COMPTON
2929 ALLEN PARKWAY, SUITE 1227
Houston, TX 77019
Thank you for your cooperation and support.
C.T.I. CONTINENTAL AIRLINES, INC.
CHEAP TICKETS
/s/ Michael Hartley /s/ Jim Compton
- ---------------------- ----------------------
NAME JIM COMPTON
STAFF V.P. PRICING
President & CEO
- ----------------------
Title
11/17/98 11/24/98
- ---------------------- ----------------------
Date Date
<PAGE>
CONTINENTAL AIRLINES
1998/99 DOMESTIC CONSOLIDATOR UPFRONT COMMISSION
DESTINATION: MAINLAND U.S./CANADA (serviced by CO/CO Express)
- --------------------------------------------------------------
ATTACHMENT A // ORIGINAL
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
TICKETS CAN ONLY BE ISSUED ON OR AFTER: 06NOV98
TICKETS CAN ONLY BE ISSUED ON OR BEFORE: 29DEC98
TRAVEL MUST COMMENCE ON OR AFTER: 06NOV98
TRAVEL MUST BE COMPLETED ON OR BEFORE: 31DEC99
- ----------------------------------------------------------------------------------------------------------------------------------
MARKETS: TO/FROM any mainland U.S./Canadian city serviced by CO and CO Express
NOTE: Commission program does -not- apply when booking travel via a Continental
code-share partner. (i.e., AC, F9, GP, HP, etc.)
- -----------------------------------------------------------------------------------------------------------------------------------
TRAVEL DATES: See travel dates listed above. All travel must be completed on/before 31DEC99.
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISCOUNT: [*]
- -----------------------------------------------------------------------------------------------------------------------------------
FARES: Commission/Discount level applies to any roundtrip coach class fare.
Commission/Discount level does-not-apply to YONEPASS, First or Businessfirst. Not
valid in "Q" class.
- -----------------------------------------------------------------------------------------------------------------------------------
BLACKOUT DATES: Applicable published fare blackout dates WILL APPLY.
- -----------------------------------------------------------------------------------------------------------------------------------
BOOKING CLASS: All space MUST be booked in the applicable published fare class of service, excluding
"Q" class.
- -----------------------------------------------------------------------------------------------------------------------------------
TICKET DESIGNATOR: D046 Must be placed after the published fare basis in the FARE BASIS/TICKET DESIGNATOR
BOX.
(EXAMPLE: BNE71P/D046)
- -----------------------------------------------------------------------------------------------------------------------------------
AUTHORIZATION CODE: [*] Must be placed in the TOUR CODE BOX of each ticket issued.
- -----------------------------------------------------------------------------------------------------------------------------------
ADVANCE PURCHASE: PUBLISHED FARES -WITH- AN ADVANCE PURCHASE REQUIREMENT:
------------------------------------------------------
Tickets must be issued at least [*] prior to scheduled departure date.
PUBLISHED FARES WITHOUT AN ADVANCE PURCHASE REQUIREMENT:
----------------------------------------------------------------------------------------
Applicable published far rules apply.
- -----------------------------------------------------------------------------------------------------------------------------------
MINIMUM STAY: Two (2) night stay with a Friday or Saturday night stay-O-applicable published fare
rule, whichever is more restricted.
- -----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM STAY: Appl. pub. fare apply -OR- tvi completed on/before 31DEC99, whichever is first.
- -----------------------------------------------------------------------------------------------------------------------------------
ONE-WAY TRAVEL: NOT PERMITTED. ALL TRAVEL MUST BE ON A ROUNDTRIP BASIS.
- -----------------------------------------------------------------------------------------------------------------------------------
UPGRADES: NOT allowed. NO EXCEPTIONS.
- -----------------------------------------------------------------------------------------------------------------------------------
CHILDREN'S FARES: NOT allowed. NO EXCEPTIONS.
- -----------------------------------------------------------------------------------------------------------------------------------
FARE RULES: ALL other published fare rules WILL APPLY.
- -----------------------------------------------------------------------------------------------------------------------------------
NAME CHANGES: Once a PNR has been booked, name changes WILL -NOT- be allowed.
- -----------------------------------------------------------------------------------------------------------------------------------
TICKETING: Tickets must be plated on CO (005), reported through ARC and must clearly indicate
the following:
- -----------------------------------------------------------------------------------------------------------------------------------
FARE BASIS/TICKET DESIGNATOR: (Published fare basis)/ D046
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS OF SERVICE BOX: (Fare class which corresponds with the published fare used)
- -----------------------------------------------------------------------------------------------------------------------------------
NOT VALID BEFORE: (Date of departure)
- -----------------------------------------------------------------------------------------------------------------------------------
NOT VALID AFTER: (Appl. max. stay from date of departure -OR- 31DEC99, whichever is first)
- -----------------------------------------------------------------------------------------------------------------------------------
FARE/TAX/TOTAL: (Published FARE/TAX/TOTAL -MUST- appear on ALL coupons)
- -----------------------------------------------------------------------------------------------------------------------------------
FARE COLLECTION BOX: (Fare amount collected)
- -----------------------------------------------------------------------------------------------------------------------------------
SURCHARGES/PFC'S: (MUST appear on ALL coupons)
- -----------------------------------------------------------------------------------------------------------------------------------
COMMISSION BOX: [*]
- -----------------------------------------------------------------------------------------------------------------------------------
TOUR CODE BOX: [*]
- -----------------------------------------------------------------------------------------------------------------------------------
ENDORSEMENT BOX: Valid [*] only/nonend/nontrans/(appl pnlty)
- -----------------------------------------------------------------------------------------------------------------------------------
FORM OF PAYMENT: (Form of payment)/ Refundable by Tour Operator ONLY
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL RULES: Tickets issued at published airfare levels that do not correspond with the class of
service booked will be debited at the unrestricted coach class fare for the entire
itinerary. This commission program applies to published fares -ONLY-. This commission
program is -NOT- combinable with any other discount programs, coupons, certificates,
etc. Continental reserves the right to cancel this program at any time. If canceled,
a cancellation notice will be sent in writing from CO Leisure Marketing.
Verbal changes to the contract, fares or rules and guidelines will -NOT- be honored.
All changes are valid -ONLY- when received in writing from CO Leisure Marketing.
HUB TRAFFIC: Percent of total passengers not to exceed 10% from EWR/CLE/IAH. (As reported by CO)
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
. 1998/99 DOMESTIC CONSOLIDATOR NET FARE PROGRAM: Q CLASS ATTACHMENT
A // REVISION 1
. 1998/99 SUMMER DOMESTIC CONSOLIDATOR NET FARE PROGRAM: Q CLASS
ATTACHMENT A // REVISION 1
. 1998/99 DOMESTIC CONSOLIDATOR NET FARE PROGRAM: V CLASS ATTACHMENT A //
REVISION 2
. 1998/99 SUMMER DOMESTIC CONSOLIDATOR NET FARE PROGRAM: V CLASS
ATTACHMENT A // REVISION 2
**CHANGE: ONEWAY FARES NOT PERMITTED.
<PAGE>
CONTINENTAL AIRLINES, INC.
1998/1999 DOMESTIC CONSOLIDATOR PROGRAM
ATTACHMENT A // REVISION 1
CHANGE: ONEWAYS NOT PERMITTED.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C>
TICKETS ISSUED ON OR AFTER: 11DEC98
TICKETS ISSUED ON OR BEFORE: 28DEC99
TRAVEL COMMENCE ON OR AFTER: 11DEC98
TRAVEL COMPLETE ON OR BEFORE: 31DEC99
- --------------------------------------------------------------------
</TABLE>
ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*]
ZONE 2 AL / GA / NC / SC / TN
ZONE 3 FL
ZONE 4 IL / IN / KY / OH (EXCLUDING CLE)
ZONE 5 MI / MN / NE / WI
ZONE 6 AR / MS / LA
ZONE 7 KS / MO / OK / TX (EXCLUDING IAH)
ZONE 8 AZ / CO / NV / NM /UT
ZONE 9 CA / OR / WA / Alberta / British Columbia
ZONE 10 HI / AK
ZONE 11 EWR
ZONE 12 CLE
ZONE 13 IAH
FARE CODE: NU076
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13
- ------------------------------------------------------------------------------------------
1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
</TABLE>
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and
guidelines)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
FARE VALIDITY: [*]
- -----------------------------------------------------------------------------------------------------------------------------------
BLACKOUT DATES: NOV 25, 28, 29, 30; DEC 18-23, 27-30 1998; JAN 1-3; JUL 1-AUG 22; NOV 24, 28, 29;
DEC 19-23, 27-30 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
ADVANCE PURCHASE: [*] advance purchase required.
- -----------------------------------------------------------------------------------------------------------------------------------
BOOKING CLASS: "Q" class, subject to availability.
- -----------------------------------------------------------------------------------------------------------------------------------
TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges.
- -----------------------------------------------------------------------------------------------------------------------------------
COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE.
- -----------------------------------------------------------------------------------------------------------------------------------
MINIMUM STAY: [*] night stay required.
- -----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM STAY: None.
- -----------------------------------------------------------------------------------------------------------------------------------
ONE-WAY FARES: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is not
available, then the net far does not apply. Fares listed are valid via CO/CO Express
ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC, F9, GP, HP,
etc.)
- -----------------------------------------------------------------------------------------------------------------------------------
OPENJAWS: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
CIRCLE TRIPS: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance.
- -----------------------------------------------------------------------------------------------------------------------------------
CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee.
- -----------------------------------------------------------------------------------------------------------------------------------
STANDBY: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
CONTINENTAL AIRLINES, INC.
1999 SUMMER DOMESTIC CONSOLIDATOR PROGRAM
ATTACHMENT A // REVISION 1
CHANGE: ONEWAYS NOT PERMITTED, CORRECTED TRAVEL COMMENCE ON OR AFTER DATE.
<TABLE>
<CAPTION>
- -------------------------------------------------
<S> <C>
TICKETS ISSUED ON OR AFTER: 11DEC98
TICKETS ISSUED ON OR BEFORE: 20AUG99
TRAVEL COMMENCE ON OR AFTER: 01JUL99
TRAVEL COMPLETE ON OR BEFORE: 22AUG99
- -------------------------------------------------
</TABLE>
ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*]
ZONE 2 AL / GA / NC / SC / TN
ZONE 3 FL
ZONE 4 IL / IN / KY / OH (EXCLUDING CLE)
ZONE 5 MI / MN / NE / WI
ZONE 6 AR / MS / LA
ZONE 7 KS / MO / OK / TX (EXCLUDING IAH)
ZONE 8 AZ / CO / NV / NM /UT
ZONE 9 CA / OR / WA / Alberta / British Columbia
ZONE 10 HI / AK
ZONE 11 EWR
ZONE 12 CLE
ZONE 13 IAH
FARE CODE: NU078
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13
- ------------------------------------------------------------------------------------------
1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------------------------------
</TABLE>
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and
guidelines)
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
FARE VALIDITY: [*]
- ------------------------------------------------------------------------------------------------------------------------------------
BLACKOUT DATES: JUL 4, 6
- ------------------------------------------------------------------------------------------------------------------------------------
ADVANCE PURCHASE: [*] advance purchase required.
- ------------------------------------------------------------------------------------------------------------------------------------
BOOKING CLASS: "Q" class, subject to availability.
- ------------------------------------------------------------------------------------------------------------------------------------
TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges.
- ------------------------------------------------------------------------------------------------------------------------------------
COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE.
- ------------------------------------------------------------------------------------------------------------------------------------
MINIMUM STAY: [*] night stay required.
- ------------------------------------------------------------------------------------------------------------------------------------
MAXIMUM STAY: None.
- ------------------------------------------------------------------------------------------------------------------------------------
ONE-WAY FARES: NOT PERMITTED.
- ------------------------------------------------------------------------------------------------------------------------------------
RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is
not available, then the net far does not apply. Fares listed are valid via CO/CO
Express ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC,
F9, GP, HP, etc .)
- ------------------------------------------------------------------------------------------------------------------------------------
OPENJAWS: NOT PERMITTED.
- ------------------------------------------------------------------------------------------------------------------------------------
CIRCLE TRIPS: NOT PERMITTED.
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance.
- ------------------------------------------------------------------------------------------------------------------------------------
CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee.
- ------------------------------------------------------------------------------------------------------------------------------------
STANDBY: NOT PERMITTED.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
CONTINENTAL AIRLINES, INC.
1998/1999 DOMESTIC CONSOLIDATOR PROGRAM
ATTACHMENT A // REVISION 2
CHANGE: ONEWAYS NOT PERMITTED.
- --------------------------------------------
TICKETS ISSUED ON OR AFTER: 11DEC98
TICKETS ISSUED ON OR BEFORE: 28DEC99
TRAVEL COMMENCE ON OR AFTER: 11DEC98
TRAVEL COMPLETE ON OR BEFORE: 31DEC99
- --------------------------------------------
ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*]
ZONE 2 AL / GA / NC / SC / TN
ZONE 3 FL
ZONE 4 IL / IN / KY / OH (EXCLUDING CLE)
ZONE 5 MI / MN / NE / WI
ZONE 6 AR / MS / LA
ZONE 7 KS / MO / OK / TX (EXCLUDING IAH)
ZONE 8 AZ / CO / NV / NM /UT
ZONE 9 CA / OR / WA / Alberta / British Columbia
ZONE 10 HI / AK
ZONE 11 EWR
ZONE 12 CLE
ZONE 13 IAH
FARE CODE: NU077
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13
- ---------------------------------------------------------------------------------------------
1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
</TABLE>
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and
guidelines)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
FARE VALIDITY: [*]
- -----------------------------------------------------------------------------------------------------------------------------------
BLACKOUT DATES: NOV 25, 28, 29, 30; DEC 18-23, 27-30 1998; JAN 1-3; JUL 1-AUG 22; NOV 24, 28, 29; DEC 19-23,
27-30 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
ADVANCE PURCHASE: [*] advance purchase required.
- -----------------------------------------------------------------------------------------------------------------------------------
BOOKING CLASS: "V" class, subject to availability.
- -----------------------------------------------------------------------------------------------------------------------------------
TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges.
- -----------------------------------------------------------------------------------------------------------------------------------
COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE.
- -----------------------------------------------------------------------------------------------------------------------------------
MINIMUM STAY: [*] night stay required.
- -----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM STAY: None.
- -----------------------------------------------------------------------------------------------------------------------------------
ONE-WAY FARES: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is not
available, then the net far does not apply. Fares listed are valid via CO/CO Express
ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC, F9, GP, HP,
etc.)
- -----------------------------------------------------------------------------------------------------------------------------------
OPENJAWS: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
CIRCLE TRIPS: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance.
- -----------------------------------------------------------------------------------------------------------------------------------
CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee.
- -----------------------------------------------------------------------------------------------------------------------------------
STANDBY: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
CONTINENTAL AIRLINES, INC.
1999 SUMMER DOMESTIC CONSOLIDATOR PROGRAM
ATTACHMENT A // REVISION 2
CHANGE: ONEWAYS NOT PERMITTED.
- ----------------------------------------------
TICKETS ISSUED ON OR AFTER: 11DEC98
TICKETS ISSUED ON OR BEFORE: 20AUG99
TRAVEL COMMENCE ON OR AFTER: 01JUL99
TRAVEL COMPLETE ON OR BEFORE: 22AUG99
- ----------------------------------------------
ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*]
ZONE 2 AL / GA / NC / SC / TN
ZONE 3 FL
ZONE 4 IL / IN / KY / OH (EXCLUDING CLE)
ZONE 5 MI / MN / NE / WI
ZONE 6 AR / MS / LA
ZONE 7 KS / MO / OK / TX (EXCLUDING IAH)
ZONE 8 AZ / CO / NV / NM /UT
ZONE 9 CA / OR / WA / Alberta / British Columbia
ZONE 10 HI / AK
ZONE 11 EWR
ZONE 12 CLE
ZONE 13 IAH
FARE CODE: NU078
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13
- ---------------------------------------------------------------------------------------------
1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
</TABLE>
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and
guidelines)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
FARE VALIDITY: [*]
- -----------------------------------------------------------------------------------------------------------------------------------
BLACKOUT DATES: JUL 4, 6
- -----------------------------------------------------------------------------------------------------------------------------------
ADVANCE PURCHASE: [*] advance purchase required.
- -----------------------------------------------------------------------------------------------------------------------------------
BOOKING CLASS: "V" class, subject to availability.
- -----------------------------------------------------------------------------------------------------------------------------------
TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges.
- -----------------------------------------------------------------------------------------------------------------------------------
COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE.
- -----------------------------------------------------------------------------------------------------------------------------------
MINIMUM STAY: [*] night stay required.
- -----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM STAY: None.
- -----------------------------------------------------------------------------------------------------------------------------------
ONE-WAY FARES: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is
not available, then the net far does not apply. Fares listed are valid via CO/CO
Express ONLY. Fares are NOT valid via a Continental code-share partner (i.e.,
AC, F9, GP, HP, etc .)
- -----------------------------------------------------------------------------------------------------------------------------------
OPENJAWS: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
CIRCLE TRIPS: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance.
- -----------------------------------------------------------------------------------------------------------------------------------
CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee.
- -----------------------------------------------------------------------------------------------------------------------------------
STANDBY: NOT PERMITTED.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
CONTINENTAL AIRLINES
ATTACHMENT A1.1//ORIGINAL
1997 DOMESTIC WHOLESALE RULES AND GUIDELINES
(All other terms and conditions of the net fare agreement apply)
COMBINABILITY: Net fare levels are not combinable with published fares,
- -------------
other net fare programs, group/convention discounts,
coupon/certificate offers, override commission programs or
any other type of discount/negotiated fare. Net fare levels
are combinable with other net fare levels within the same
program.
RESERVATIONS: Names are due at the time of booking. Reservations must be
- ------------
booked in the class of service indicated by the alpha net
airfare indicator. EXAMPLE: "Q" net fares must be booked in
"Q" class of service and "V" net fares must be booked in "V"
class of service.
GROUPS: FOR GROUP PROCEDURES SEE ATTACHMENT "A1.2"
- ------
PREPAIDS: NOT PERMITTED. NO EXCEPTIONS.
- --------
UPGRADES: NOT PERMITTED: NO EXCEPTIONS
- --------
CHILDREN'S FARES: NOT PERMITTED, unless otherwise specified on Attachment "A"
- ----------------
fare sheet.
TICKETING
PROCEDURES: SEE ATTACHMENT "B".
- ----------
NAME CHANGES: Once a PNR has been booked, name changes will not be allowed.
- ------------
Clerical changes (ie. spellings) are permitted.
AIRPORT/FUEL
SURCHARGES: Surcharges must appear on all flight coupons and must be
- ----------
remitted through ARC.
PASSENGER FACILITY
CHARGES (PFC'S): PFC charges apply to all net tickets when an approved PFC
- ---------------
city is included in the itinerary. PFC's ARE-NOT-ABSORBED IN
CONNECTING MARKETS.
ILLNESS EXTENSION
OF VALIDITY: NOT ALLOWED.
- -----------
REFUNDS: Totally unused tickets are refundable with a fifty dollar
- -------
($50) cancellation penalty unless otherwise specified on
Attachment "A".
Passengers may incur penalties from the tour operator.
LOST TICKETS: Standard lost ticket application procedures-will-apply.
- ------------
Service charge may apply.
VERBAL CHANGES TO THE CONTRACT, FARES OR RULES AND GUIDELINES WILL-NOT-BE
HONORED. ALL CHANGES ARE VALID ONLY WHEN RECEIVED IN WRITING FROM CONTINENTAL
LEISURE MARKETING.
<PAGE>
CONTINENTAL AIRLINES
ATTACHMENT A1.2// ORIGINAL
1997 DOMESTIC AND INTERNATIONAL WHOLESALE GROUP PROCEDURES
(All other terms and conditions of the net fare agreement apply)
GROUPS: The net airfares and/or commission levels on Attachment "A"
- ------
do-not-automatically apply to groups of 10 or more. All
groups must be requested and booked through the Preferred
Accounts Desk at 1-800-243-4366, and are subject to approval
by CO. The appropriate class of service, as stated on
Attachment "A", must be available and booked on all flights
for the net/published fare used.
------------------------------------------------------------
Agents with commission programs may not use override
commission levels on negotiated group rates. Tour conductor
tickets are -not-applicable, unless otherwise specified on
Attachment "A".
-----------------------------------------------------------
THE FOLLOWING PROCEDURES WILL APPLY TO ALL FUTURE GROUP BOOKINGS
ASSOCIATED WITH THE NET AIRFARES LISTED ON ATTACHMENT "A".
"AGENT" AGREES TO PAY APPLICABLE PENALTIES PER EACH SEAT NOT UTILIZED.
DEPOSITS: GROUPS BOOKED 91 OR MORE DAYS PRIOR TO DEPARTURE:
- --------
- A $25.00 per person refundable deposit is required.
- Deposit is due fourteen (14) days after booking -OR- 90
days prior to departure, whichever is first.
- Deposit must be remitted in the form of an MCO. The MCO
should be sent to the following address:
CONTINENTAL AIRLINES
ATTN: Preferred Accounts Desk Supervisor
P.O. Box 60455
Houston, TX 77205-0455
- Deposit will be returned to the "Agent" at least 21 days
prior to departure for ticket issuance.
GROUPS BOOKED WITHIN 91 DAYS OF DEPARTURE:
- Deposit -not- required.
*NOTE: Deposit guarantees seats only. Fare is subject to change (see Net Fare
Agreement - paragraph #13)
DUE DATE
FOR NAMES: GROUPS BOOKED 21 OR MORE DAYS PRIOR TO DEPARTURE:
- --------- - All names are due 21 days prior to departure.
GROUPS BOOKED 20-7 DAYS PRIOR TO DEPARTURE:
- All names are due within 72 hours of booking -OR- seven
(7) days prior to departure, whichever is first.
GROUPS BOOKED WITHIN 7 DAYS OF DEPARTURE:
- All names are due at the time of booking.
UTILIZATION: GROUPS BOOKED 45 OR MORE DAYS PRIOR TO DEPARTURE:
- ----------- - 80% utilization is required of space held at 45 days. If
group drops below 80% between 45 days and the departure
date, "Agent" will be debited for $40.00 per each seat not
utilized.
GROUPS BOOKED WITHIN 45 DAYS OF DEPARTURE:
- 80% utilization is required of space held at the time of
booking. If group drops below 80% between the time of
booking and the departure date, "Agent" will be debited
for $40.00 per each seat not utilized.
<PAGE>
CONTINENTAL AIRLINES
ATTACHMENT B// ORIGINAL
"BULK" TICKETING PROCEDURES // REVISED
TICKETS MUST BE PLATED ON CONTINENTAL (005), REPORTED THROUGH ARC AND MUST
CLEARLY INDICATE THE FOLLOWING:
- ------------------------------
- -------------------------------------------------------------------------------
FARE BASIS BOX: (Corresponding fare code/by segment/as shown on
Attachment "A"
- -------------------------------------------------------------------------------
CLASS OF SERVICE BOX: (Fare class which corresponds with the net fare
used)
- -------------------------------------------------------------------------------
NOT VALID BEFORE: (Date of departure)
- -------------------------------------------------------------------------------
NOT VALID AFTER: (Appl. max. stay from date of departure, per
Attachment "A")
- -------------------------------------------------------------------------------
FARE/TAX/TOTAL: FARE/TAX/TOTAL must appear on AGENTS/AUDITORS
coupons ONLY. "BULK" must appear on all passenger
coupons.
- -------------------------------------------------------------------------------
SURCHARGES/PFC'S: (Must appear on -ALL- coupons)
- -------------------------------------------------------------------------------
COMMISSION BOX: "0" (Zero)
- -------------------------------------------------------------------------------
TOUR CODE BOX: (Blank)
- -------------------------------------------------------------------------------
*ENDORSEMENT BOX: Valid CO/COEX only/NONEND/NONTRANS/NOCHGS/APPL PNLTY
- -------------------------------------------------------------------------------
FORM OF PAYMENT: (Form of Payment) / REFUNDABLE BY TOUR OPERATOR ONLY
- -------------------------------------------------------------------------------
*NOTE: Endorsement Box must include applicable restrictions as listed on
Attachment "A". The above listed restrictions are to be used as an example.
TICKETS ISSUED AT THE AIRFARE LEVELS LISTED ON ATTACHMENT "A" THAT
DO NOT CORRESPOND WITH THE CLASS OF SERVICE BOOKED WILL BE DEBITED
AT THE LOWEST UNRESTRICTED COACH CLASS FARE FOR THE ENTIRE ITINERARY.
- -------------------------------------------------------------------------------
PFC PROCEDURES: PFC's must appear in the "TAX" BOX of all tickets
coupons as "XF". If other fees are collected in
addition to the PFC's, "XT" and the TOTAL AMOUNT
must appear in the "TAX" BOX of all ticket coupons.
---------------------------------------------------
SHOWING PFC'S ON A MANUAL TICKET:
--------------------------------
Show the "XF" in the "FROM/TO" BOX, leave the
"CARIRER" BOX blank. In the "FARE CALCULATION" BOX
list, in itinerary order, the AIRPORT CODE followed
by the AMOUNT INDICATOR for the PFC amount
collected.
---------------------------------------------------
SHOWING PFC'S ON AN AUTOMATED TICKET:
At the end of the fare calculation enter "XF", the
AIRPORT CODE and AMOUNT INDICATOR for each airport
to which the PFC applies.
- -------------------------------------------------------------------------------
<PAGE>
Exhibit 10.10
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.
--------------------------
1999 NET CONSOLIDATOR PROGRAM
================================================================================
<TABLE>
<S> <C> <C> <C>
YOUR FIRM: CTI Proposal Date: January 19, 1998
1440 Kapiolani Blvd. Your Firm ARC: 1260167/05-51326
8th Floor Effective Date: November 1, 1998
Honolulu, HI 96814 Termination Date: October 31, 1999
(hereinafter "Your Firm") DISTRICT: LAX
AGREEMENT NO: CON99005
</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.
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;
however, for bookings made within [*] days of departure ticketing must
occur within [*] hours.
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 departure date weather conditions or TWA encounters
operational difficulties which result in 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>
1999 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
day of the date TWA signed 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 and shall not qualify for TWA Aviator Program mileage
credit.
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 $100.00 fee provided origin and destination do not
change, minimum/maximum stay requirements are met, and space in appropriate booking class is available.
CANCELLATION: A $150.00 service charge applies refunded tickets provided the reservation was cancelled prior to
- ------------ departure. Refund does not apply 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, there will be no penalty 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 GFAXX (OSI) Field.
- ----------
Remarks (Endorsement Box) - Valid only on TWA/$100.00 change fee apply/$150.00 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 NONE
(See seasonal fare page) [*] NF99 NONE
</TABLE>
AGREED TO AND ACCEPTED BY: Trans World Airlines, Inc.
NAME: /s/ Michael J. Hartley /s/ Richard G. McBee
------------------------
TITLE: President & CEO Richard G. McBee
------------------------
DATE: 9-24-98 Staff Vice President - Sales Programs
------------------------
<PAGE>
CONSOLIDATOR
WINTER SEASON ROUNDTRIP NET FARES
---------------------------------
November 1, 1998 - March 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 RIC ROC SDQ SJU
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 LAX LAS ONT PDX PHX RNO SAN SAT SEA
SFO SJC SLC SMF SNA
=============================================================================
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.
=============================================================================
<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: VLCONS
DISCOUNTS: NONE
OPEN JAW: Single open-jaw travel permitted provided the applicable one-way fares are used.
STOP OVERS: NONE
SURCHARGE: TRAVEL ORIGINATING DECEMBER 15-24, 1998 [*]
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
CONSOLIDATOR SHOULDER SEASON ROUNDTRIP NET FARES
------------------------------------------------
APRIL 1, - MAY 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 RIC ROC SDQ SJU
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 LAX LAS ONT PDX PHX RNO SAN SAT SEA
SFO SJC SLC SMF SNA
================================================================================
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.
================================================================================
<TABLE>
<S> <C>
AIRFARES: Round-trip U.S. Origin Travel
BOOKING CLASS: "T"
FARE BASIS: TKCONS
SELLUP: INTO "V" CLASS [*] ONE-WAY / [*] ROUND-TRIP
FARE BASIS: VLKCONS
DISCOUNTS: NONE
OPEN JAW: Single open-jaw travel permitted provided the applicable one-way fares are used.
STOP OVERS: NONE
SURCHARGE: TRAVEL ORIGINATING FRIDAY/SATURDAY/SUNDAY [*]
</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>
Exhibit 10.11
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.
AMERICA WEST AIRLINES
CONSOLIDATOR AGREEMENT
This Agreement is made on this 14th day of December, 1998, between America
West Airlines, Inc., a Delaware corporation, at 4000 East Sky Harbor Boulevard,
Phoenix, Arizona 85034 (herein "America West") and Cheap Tickets, Inc., a Hawaii
corporation, at 1440 Kapiolani Blvd., Suite 800, Honolulu, Hawaii 96814 (herein
"Customer"). The parties agree on the following mutual covenants:
1. Fares:
a. Seats sold will be at specific fare levels in markets specified by
America West and under the conditions stated in Attachments A and B herein.
b. The net fares herein shall be applicable for travel wholly over the
services of America West and America West Express, all other codeshare flights
are not applicable. Net fares are as shown on Net Fare Sheets under Attachment
A, herein.
c. Net fares are subject to change at the sole and complete discretion of
America West. Written notice shall be provided to Customer not less than five
(5) business days prior to the effective ticketing date of any net fare change,
or two (2) business days for electronic filing of fares. Customer agrees that
it will pay the changed fare amounts for all tickets issued as of the effective
date of such net fare change. By signing and returning the confirmation page of
all Bulk Program Advisories, Customer acknowledges receipt of said advisories.
Failure to sign and return confirmation does not release customer from adherence
to any revisions made on such advisories.
d. The [*] Fare [*] allows Customer to take applicable commission
levels on published fares. Restrictions and commission are as stated in
Attachment B, herein.
e. Fares do not include the following: US Transportation or International
Taxes; Fuel Surcharges; Passenger Facility Charges; and/or other
city/governmental surcharges.
2. Payment/Reporting:
Customer agrees to issue tickets on standard industry ticket stock.
In accordance with ARC policies and procedures, tickets will be reported and
funds due for tickets will be remitted through ARC each week. Invoices for
other than ticket sales shall be due and payable within fifteen (15) days from
the date of invoice, and shall not be subject to any offset or deduction for
any purposes.
3. Advertising:
Customer agrees that it will not use the America West trade name or service
marks in any advertising, promotional material, brochures, printed matter or
signs or internet web sites without the prior review and written approval of
such material by America West.
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
4. Internet:
If customer utilizes an Internet website to facilitate the sale of America
West seats, customer agrees to the following:
a) A complete list of all Internet website addresses connected to the
sale of the America West seats will be provided to America West within
ten (10) business days of submission of this signed Agreement. Any
additions, deletions or corrections to this list must be communicated
to America West within ten (10) business days of said additions,
deletions or corrections.
b) If a website contains restricted pages that are used to facilitate
business, customer agrees to provide passwords necessary to gain
access to restricted pages.
5. Contract Non-Compliance:
a. America West is entitled to receive compensation for the full value of
the coach fare in the event that inventory sold is not ticketed in accordance
with Attachment A and B.
b. Compensation due America West will be invoiced to Customer due and
payable (15) business days after notification.
c. Revenue Accounting will continue to advise Customer through issuance of
debit memos or invoices of compensation due America West when reservations are
found booked and/or ticketed in the wrong class of service, or for other booking
or ticketing irregularities including but not limited to individual CRS bookings
that qualify as a group, and booking published fares without ticketing in
accordance with tariff rules. America West will recover CRS fees as well as
full ticket value of any booking irregularity.
6. Default:
In the event Customer fails to make payment as required by this Agreement,
America West shall provide written notice to customer to cure such default
within five (5) working days from the date of such notice. In the event such
non-payment is not cured within said five (5) days, this Agreement shall be
terminated immediately. If Customer fails to perform any other terms of this
Agreement and is in default thereof, this Agreement may be terminated after
thirty (30) days written notice of those matters in default being given and the
failure of Customer to cure such default. America West shall be free to pursue
all legal and equitable remedies available for any default.
7. Terms and Termination:
a. The term of this Agreement is from January 1, 1999 through December 31,
1999, with all travel completed by January 31, 2000, and either party may
terminate this Agreement without cause by giving not less than thirty (30) days
prior written notice of their intention to do so. Such termination shall not
relieve either party from payment of amounts currently due and owing, and
neither party may terminate this Agreement if that party is in default in the
performance of this Agreement.
b. Should Customer fail to perform it's duties as outlined in this
Agreement and such default shall continue after thirty (30) days written notice
to correct such default, then America West may terminate this Agreement.
8. Lost Tickets:
When a passenger loses his/her America West ticket, the passenger may
purchase a replacement ticket for the portion lost, and will be refunded the
price of the replacement ticket, provided the itinerary (flight number, travel
date, city) of the replacement ticket is exactly the same as the lost ticket.
If a replacement ticket is not purchased for the exact itinerary, no refund
will be made.
9. Confidentiality:
The terms and conditions of this Agreement are strictly confidential. Any
breach of Confidentiality, duplication of the Agreement and/or its Attachments,
use or disclosure of this Agreement in whole or in part for any purpose shall
immediately render this Agreement null and void and subject to immediate
cancellation at the option of America West.
<PAGE>
10. Entire Agreement:
This Agreement represents the entire understanding between the parties. No
waiver, alteration, or modification of any of the provisions herein shall be
binding unless in writing and signed by and authorized agent or representative
of the parties.
11. Assignment and Binding Effect:
The provisions of this Agreement shall be binding upon any successor to
either of the parties, but shall not be assignable by Customer.
12. Attorney's Fees:
In the event that an action is necessary to enforce the terms of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonably attorney's fees and costs.
13. Applicable Law:
The laws of the State of Arizona shall govern this Agreement.
14. ARC Numbers:
A current and complete list of ARC numbers included under this Agreement
must be provived to America West within ten (10) business days of submission of
this signed Agreement. This information should be either mailed or e-mailed to:
Laura Loveland
America West Airlines
4000 E. Sky Harbor Blvd. HY-SPO
Phoenix, Arizona 85034
E-mail address: [email protected]
-------------------
If the number of ARC locations exceeds ten (10), Customer agrees to provide ARC
numbers on a 3 1/2" IBM compatible diskette in MS Excel format. The file will
also include the address and phone number for each 8-digit ARC number. Any
additions, deletions or corrections to this ARC list must be submitted to
America West within ten (10) business days of said additions, deletions or
corrections.
CHEAP TICKETS, INC. AMERICA WEST AIRLINES, INC.
By: /s/ Michael J. Hartley By: /s/ Ron L. Cole
----------------------------- ----------------------------
Michael J. Hartley Ron L. Cole
President & CEO Vice President, Sales
Date: 12-18-98 Date: 1-20-99
--------------------------- --------------------------
Initial: /s/ L.G.
-----------------------
L. Gardner
Initial: /s/ J.C.
-----------------------
J. Carhart
Initial: /s/ J.S.
-----------------------
J. Schmidt
<PAGE>
ATTACHMENT A, NET FARE PROGRAM
------------------------------
<TABLE>
<CAPTION>
PROGRAM TITLE: Cheap Tickets, Inc.
- --------------
<S> <C>
Address: 1440 Kapiolani Boulevard, Suite 800, Honolulu, Hawaii 96814
Primary ARC Number(s): 12601676, 12916120, 033514526, 33965750, 36975820, 50523911
Automation System: Sabre
Contact: Michael J. Hartley
Phone: (808) 945-7439
Fax: (808) 946-0610
E-mail: [email protected]
RESERVATIONS: Booked by Customer Only, through automation. Bookings made [*] are permitted with [*]
- ------------ non-commissionable surcharge.
Booking Class: Day: V class Night: KN class
Groups: Not Permitted.
OSI Entries: 3 OSI HP CTCT 808-945-7439 CHEAP TICKETS, INC.
3 OSI HP CHANGES THROUGH CONSOLIDATOR ONLY
3 OSI HP FLIGHTFUND CREDIT NOT PERMITTED
3 OSI HP TKNA 401 xxxx xxx xxx
TICKET INFORMATION:
- ------------------
Changes: $100, non-commissionable fee per ticket. Ticket reissuance by tour operator only, prior to
original travel date only. Changes to name, origin, or destination are not permitted. Once
travel has commenced, changes to return are not permitted (standby travel only).
Fares: As listed on Consolidator Net Fare list. All net fares are subject to change with five (5)
business days notice or two (2) business days for electronic filing of fares.
Fares are round-trip net, non-commissionable, and do not include taxes.
Tax/PFC/Fuel surcharges are not included.
Net fares are subject to change until ticketed.
Advance purchase required as stated on current advisory.
**Night fares will apply for LAX to East Coast when using the LAX-CMH non-stop flight only.
Because the LAS-CMH non-stop only connects to day flights, the night fare may be used when
the connecting flight out of CMH departs at or before 8:50 a.m. Applicable East Coast cities
are BOS, BWI, DCA, EWR, LGA, MDW, PHL.
Fare Basis Code: Round Trip Day Flights: Off Peak: VLPOCN Peak: VLPPCN
Round Trip Night Flights: Off Peak: KNLPOCN Peak: KNLPPCN
One Way Day Flights: Off Peak: VLPOCNO Peak: VLPPCNO
One Way Night Flights: Off Peak: KNLPOCNO Peak: KNLPPCNO
IT Code: ITLPCTI (in tour code box)
Restrictions: Non-refundable with the exception of cases of Death of the passenger (properly documented).
Non-transferable.
Ticketing Agency: Cheap Tickets, Inc.
Ticket Time Limit: All tickets must be issued [*].
Ticket Entries: 1. Base Net Fare, Tax and Total on Auditor's Coupon Only.
2. Flight coupons shall show zero (0) or BULK plus applicable XF charges.
3. Itinerary in linear on all coupons followed by the Base Net Fare.
(i.e., [*] is shown as [*])
4. Not valid before date of travel.
5. Not valid after return date of travel.
PROGRAM SPECIFICS:
- -----------------------
<S> <C>
Days/Travel Off Peak: [*] in both directions.
Peak: [*] in both directions.
Flight Fund: Not Permitted
Markets: Systemwide
Minimum Stay: Night flights: [*] / Day Flights: [*]
Maximum Stay: 30 days
Open Jaw: Permitted
Open Returns: Not Permitted
PTA/TBM Not Permitted
Routing: Published HP routings only. Codeshare flights are not applicable.
Rule 240: Permitted
Standby: $100 non-commissionable fee collected at airport. Permitted on night flights only,
within 30 days of original travel date.
Stopover: Not Permitted
Waitlists: Not Permitted
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
ATTACHMENT B, PUBLISHED OVERRIDE (Individual Travel)
----------------------------------------------------
<TABLE>
<CAPTION>
RESERVATIONS:
- ------------
<S> <C>
Booking Class: Applicable to published fare type.
Groups: Not Permitted.
Reservations: Booked by Tour Operator only.
TICKET INFORMATION:
- ------------------
Applicable Fares: America West published fares in effect at the time of ticketing, and according to the Tariff
rules of that published fare (except as stated below). See `Restriction' below.
*Disclaimer: Certain short-term, introductory or other published promotional fares may not
apply.
Restrictions: All published rules/fares apply, except the following:
Companion Fares do not apply.
Promotional/Other discounts do not apply. (Senior Discounts, vouchers, etc.)
F class excursion fares do not apply. (FE14 etc.)
[*] [*]
Fare Basis Code: Applicable to the published fare used.
IT Code: ITLPCTIPBA. Must be shown in Tour Code Box.
Ticketing Agency: Cheap Tickets, Inc.
Primary ARC Number(s): 12601676, 12916120, 033514526, 33965750, 36975820, 50523911
Ticket Entries: All published fare ticket entries are required, with the exception of the following:
The discounted published fare may be omitted from the Base, Tax and Total box of the
passenger coupons only. The discounted published fare must be shown on all auditors coupons.
PROGRAM SPECIFICS:
- -----------------
Markets: Same markets as listed on attached consolidator pricing list.
Routing: Published HP routings only. Codeshare flights are not applicable.
</TABLE>
All published rules apply, unless otherwise stated above.
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
Exhibit 10.13
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.
SABRE SUBSCRIBER AGREEMENT - (UNITED STATES)
This SABRE* Subscriber Agreement (the "Agreement") is entered into by and
between The SABRE Group, Inc. ("TSG") and the undersigned ("Customer"),
effective as of December 31, 1998 ("Effective Date") regarding the provision of
products and services set forth herein to Customer's locations within the United
States and its territories.
1. LEASE TERM
1.1 Lease. For the term specified in Article 1.2 below, TSG shall lease to
Customer the System, as defined herein.
1.2 Term. The lease term of the System identified on Schedule A shall commence
on the Effective Date and shall continue for 60 months ("Initial Term"). The
lease term of any additional System installed prior to the twenty-fourth (24th)
month after the Effective Date shall terminate at the end of the Initial Term.
Commencing on the twenty-fifth (25th) month, any additional System installed
shall have a term of sixty (60) months from the date of its installation
("Additional Term"). Any additional System installed after the Effective Date
shall be subject to the same terms and conditions as this Agreement.
2. DEFINITIONS
The following terms shall have the following meanings in this Agreement:
2.1 Agreement means this SABRE Subscriber Agreement, and all Amendments,
Schedules and Supplements made a part hereof.
2.2 Charges has the meaning given in Article 3.2.
2.3 Communication Protocol means the rules or standards on how data
transmission takes place across computer networks.
2.4 Confidential Information means this Agreement, any and all applicable rights
to patents, copyrights, trademarks and trade secrets, proprietary and
confidential information of TSG or Customer, their affiliates, subsidiaries,
successors or assigns concerning their past, present or future research,
development, business activities or affairs, finances, properties, methods of
operation, processes and systems, agreements (including without limitation
private fare or special discount agreements) related to the business of TSG or
Customer.
2.5 Information Provider means any party, other than Customer, which provides
information for inclusion in the SABRE System, including, without limitation,
Reed Elsevier Inc., the publisher of the Official Airline Guide.
2.6 Instructions means any and all manuals, operating procedures,
manufacturer's recommendations, rules, and instructions delivered or made
available to Customer by TSG either in hard-copy or via the SABRE System, and
which must be complied with by Customer. Such Instructions may be unilaterally
revised or amended by TSG at any time.
2.7 Internet means the global computer network commonly referred to as the
"Internet".
2.8 Internet Connection means any connection between the Internet and the SABRE
System or System for the purpose of allowing clients of Customer to make direct
reservations for the products and services offered in the SABRE System.
2.9 ISP means any third party computer network which connects Customer or its
employees to the SABRE System or the System via the Internet. ISPs and ISP
supplied equipment such as datalines or browser software are not included in the
definitions of the SABRE System or the System.
- -----------------
*SABRE is a registered trademark of a subsidiary of The SABRE Group, Inc.
<PAGE>
2.10 Non-SABRE Traffic means data other than that passing to and from the SABRE
System which is transmitted and received by Customer using the System.
2.11 Non-Standard System means any hardware, software, communication access
devices or firmware not acquired from TSG, including any such Non-Standard
System acquired from an ISP.
2.12 PNR means a passenger name record created in the SABRE System.
2.13 Participant means any air carrier (including scheduled, charter, domestic
and international airlines), car rental company, surface transportation carrier,
hotel or lodging provider, railroad, steamship company, cruise or tour operator
or other vendor of travel related products, information or services which has an
agreement with TSG for the display of information regarding its products or
services in the SABRE System.
2.14 Prohibited Segment means a Travel Service Segment for which no
corresponding space has been reserved within the transporting carrier's internal
reservation system.
2.15 SABRE Booking means an airline, hotel, tour, rental car or cruise Segment
that obligates a Participant to pay a booking fee to TSG and that is created in
or processed through the SABRE System by Customer during any one calendar month
or that is secured to Customer's location, less cancellations made prior to the
Segment Activity Date. SABRE Bookings are credited in the latter of (i) the
calendar month in which the Segment Activity Date occurs or (ii) the calendar
month in which the Segment is actually processed by the SABRE System for billing
to the Participant. SABRE Bookings may include additional product or service
Segments in the future at TSG's sole discretion.
2.16 SABRE Component means all memory, disk storage space, ports and any other
element of the Standard Equipment.
2.17 SABRE Licensee means a person or entity licensed to market the SABRE System
in a designated area of the world.
2.18 SABRE Subscriber means a person or entity, other than an airline, which
utilizes the SABRE System to make reservations. The term "SABRE Subscriber"
shall include any person or entity making reservations through any version of
the SABRE System or through a SABRE Licensee.
2.19 SABRE System means TSG's global distribution system (commonly referred to
as a computerized reservation system) which collects, stores, processes,
displays and distributes information through computer terminals concerning air
and ground transportation, lodging and other travel related products and
services offered by travel suppliers and which enables SABRE Subscribers to (i)
reserve or otherwise confirm the use of, or make inquiries or obtain information
in relation to, such products and services and/or (ii) issue tickets for the
acquisition or use of such products and services.
2.20 Schedule A means the document reflecting the Charges and any applicable
discounts for the System as amended by any additional documents.
2.21 Segment means (a) for airline bookings, each separate flight segment
reservation identified by a separate flight number in a PNR, multiplied by the
number of passengers booked in such PNR for such flight segment; (b) for hotel
bookings, each separate reservation that is processed through the SABRE System
with an action status code of HK, KK or KL regardless of the number of rooms,
suites or other accommodations or the number of persons or the duration of the
stay; (c) for car rental bookings, each separate reservation that is processed
through the SABRE System with an action status code of HK, KK or KL regardless
of the number of vehicles or persons or the duration of the rental; and (d) for
cruise and tour bookings, each separate reservation that is created in or
processed through the SABRE System and confirmed by that Participant, regardless
of the number of cabins or travelers or the duration of the cruise or tour. The
term Segment does not include Prohibited Segments.
2.22 Segment Activity Date means the first date listed in a PNR for the relevant
Segment.
2.23 Site means Customer's location at which the System is to be installed as
identified on Schedule A.
<PAGE>
2.24 Standard Equipment means the items of hardware and communication access
devices, including, without limitation, communication data lines and networks,
leased to Customer by TSG in accordance with this Agreement and identified on
Schedule A.
2.25 Supplement means a document reflecting any changes to the System, and/or
Charges or discounts related thereto, all as agreed to by the parties. A
Supplement will be provided by TSG upon request of Customer.
2.26 System means the Standard Equipment, SABRE Component, System Software
and/or Internet Connection.
2.27 System Software means that software delivered by TSG to Customer.
2.28 Transaction means a grouping of characters transmitted to the SABRE System
whether such transmission is made in the SABRE System manually or automated,
including transmissions made through an Internet Connection. Each transmission
to the SABRE System from Customer constitutes one Transaction. No input message
may exceed three hundred (300) characters in length.
2.29 Transaction Limit has the meaning given in Article 10.3.
2.30 Transaction Ratio has the meaning given in Article 3.3.
2.31 Travel Service Segment means a SABRE Booking entered in the SABRE System
with an action status code of GK, GL, BK, BL, HN, YK, HK*, or HL*.
3. CHARGES AND PAYMENTS
3.1 Prepayment. Upon execution of this Agreement by Customer, Customer shall
pay to TSG the non-refundable prepayment as shown on Schedule A. If the System
is installed, the prepayment shall be credited against the Customer's first
Charges.
3.2 Charges. All amounts payable to TSG ("Charges") shall be due and payable
in United States dollars within fifteen (15) days of the date of TSG's invoice,
without setoff or counterclaim.
3.3 Additional Charges. Customer agrees to pay to TSG additional Charges at
TSG's then prevailing rate for services and materials including without
limitation the following: (a) the installation or removal of Standard
Equipment; (b) Standard Equipment relocation within the Site; (c) each Site
disconnect or relocation to different premises; (d) modifications, upgrades,
enhancements or additions of Standard Equipment and/or System Software; (e) any
applicable fees for non-compliance with any payment terms; (f) installation of
peripheral devices requested by Customer; (g) processing Transactions which
exceed the level of one hundred thirty (130) Transactions per SABRE Booking
("Transaction Ratio"); (h) materials for use with the Standard Equipment,
including, but not limited to, ticket stock for use with thermal ticket
printers; and (i) connecting the System to other TSG approved networks or
systems. The Transaction Ratio is subject to change by TSG upon thirty (30)
days advance notice to Customer.
3.4 Variables. If Customer elects to use certain variables including, without
limitation, Ticketing and Invoice/Itinerary functions or Microfiche, Customer
shall pay all Charges for much variables based an TSG's then prevailing rate.
3.5 Increases. TSG shall have the right to increase, the Charges, other than
the Fixed Monthly Charges identified on Schedule A, for the remaining term of
this Agreement upon thirty (30) days advance written notice to Customer. If the
increase exceeds ten percent (10%) of the Charges in any consecutive twelve
month period, Customer may terminate this Agreement upon written notice to TSG
within fifteen days of receipt of TSG's notice of the increase. Notwithstanding
the foregoing, the Charges for data lines or other communication access devices,
shall be subject to increase, at any time and without limitation, to cover any
increase in the cost imposed upon TSG by the telecommunications vendor.
3.6 Modifications. TSG's completion of any modification to the System or
Customer's payment of any revised Charges related thereto, whichever occurs
first, constitutes acceptance and ratification of the modifications to the
System and the revised Charges and/or discounts related thereto.
<PAGE>
3.7 Interest. Charges not paid when due shall accrue interest at the rate of
eighteen percent (18%) per annum or the highest rate permitted by the governing
law indicated in Article 15.1, whichever is less.
3.8 Taxes. Customer shall pay any taxes, or assessments including any interest
or penalty thereon levied as a result of this Agreement, excluding taxed
measured by the net income of TSG. Customer shall indemnify and hold harmless
TSG from all costs, fines and expenses (including reasonable legal costs)
incurred by TSG resulting from Customer's failure to pay taxes as provided in
this Article.
4. INSTALLATION AND DELIVERY
4.1 Delivery. TSG shall arrange for delivery of the System F.O.B. the Site, on
the estimated installation date, as identified on Schedule A.
4.2 Installation. Subject to Article 4.3, TSG shall install, or cause to be
installed, the System at the Site. Customer shall allow installation of the
System at the Site. Customer's failure to do so or to give adequate assurance
that it will do so on the estimated installation date will constitute an Event
of Default pursuant to Article 14.1.2.
4.3 Customer's Obligations Prior to Installation. Customer, at its expense,
shall be responsible for preparing, on or before the estimated installation
date, the Site for the System in accordance with the Instructions. If
installation of the System is prevented or delayed because of Customer's failure
to prepare the Site, TSG shall use reasonable efforts to install the System upon
Customer's compliance with this Article and upon payment of all reasonable
expenses incurred by TSG resulting from Customer's failure to prepare the Site.
4.4 Relocation and Possession. Customer shall at all times keep the System in
its sole possession and control at the Site. Customer shall not move any part
of the System from the Site without first obtaining the written consent of TSG.
Such consent will not be unreasonably withhold.
4.5 Communication Access. Except when Customer utilizes an ISP to access the
SABRE System, TSG or its designated third party shall install the necessary
communication access device to connect the System to the SABRE System and other
approved systems or networks. All such devices are either owned by TSG or such
third-party, are subject to this Agreement, and shall be returned to TSG or the
third-party as TSG directs upon termination of the Agreement.
4.6 Non-Standard System.
4.6.1 Subject to Customer's compliance with all other terms and conditions
of this Agreement, TSG agrees to allow Customer to connect or use Non-Standard
System with the System without TSG's prior written consent, except to the extent
that such Non-Standard System consists or communications data lines, emulator
boards, gateways, routers, ticket printers or other devices connecting directly
to the System or SABRE System ("Reserved Equipment"). TSG consent for Reserved
Equipment shall be conditioned upon TSG certification and approval prior to its
use with the System. Such consent may be withheld in order to preserve the
integrity of the SABRE System and the System.
4.6.2 Customer shall represent and warrant to TSG that the Non-Standard
System and its connection to the System conforms in all respects to TSG's Non-
Standard System standards and specifications, a copy of which Customer may
request from TSG, and will not be altered or modified without prior notice to
TSG.
4.6.3 Customer shall remove all Non-Standard System placed on or within
the Standard Equipment prior to TSG's removing such Standard Equipment from
Customer's Site. TSG disclaims, and Customer hereby waives and indemnifies, any
responsibility or liability on the part of TSG, under any theory whatsoever, for
any Non-Standard System that Customer has failed to remove from the Standard
Equipment prior to TSG's removing such Standard Equipment from Customer's site.
4.6.4 Customer shall not use Non-Standard System in conjunction with the
System for any function not specifically outlined in this Agreement and any use
or attempted use for any other function shall constitute an Event of Default
under Article 14.1.2.
<PAGE>
4.6.5 Customer shall also ensure that TSG has access to Customer's Site on
request for conducting on-site inspections, testing or to oversee installation
of the Non-Standard System. Customer is responsible for ensuring that any
Standard Equipment at Customer's Site is connected to the System for the
purposes of performing testing and diagnostics on such Standard Equipment by
TSG's designated agent. If TSG reasonably determines that the Non-Standard
System is causing, or contributing to, a problem with the System, the SABRE
System or another SABRE Subscriber's access to or operation of the SABRE System,
then TSG has the right to immediately restrict access to the SABRE System upon
notice to Customer as provided for in this Agreement and TSG shall have no
liability to Customer for such restriction of access.
4.6.6 Customer agrees that its continued right to maintain the connection
between the Non-Standard System and the System and/or the SABRE System and to
use the Non-Standard System in connection with the Standard Equipment shall be
dependent upon Customer's full cooperation with requests by TSG to repair,
alter, modify, or where necessary, de-install the Non-Standard System if TSG
reasonably determines that the Non-Standard System, or a component thereof, is
impairing the System, the SABRE System or another SABRE Subscriber's access to
or operation of the SABRE System.
4.6.7 Customer shall pay TSG's then prevailing rate for all employee
resources expended by TSG for, but not limited to, TSG's monitoring of the
installation of the Non-Standard System and/or expended in connection with on-
site, inspection and/or testing of the Non-Standard System after installation,
service calls and any travel and incidental expenses incurred by TSG's personnel
or vendors for the conduct of such monitoring, inspecting, testing or service
calls; provided, however, that after the initial installation of the Non-
Standard System, TSG will make such on-site inspections or test only where it
reasonably believes that the Non-Standard System is impairing the System, the
SABRE System or another SABRE Subscriber's access to or operation of the SABRE
System.
4.6.8 Customer agrees that TSG has first and complete access to the SABRE
Component. If, as a result of Customer's use of Non-Standard System, an upgrade
of the SABRE Component is required, Customer shall comply with the applicable
provisions of this Agreement.
4.6.9 TSG reserves the right to modify the SABRE System or the System,
even if such modification requires changes in Customer's Non-Standard System.
TSG will make reasonable efforts to notify Customer in advance of such changes.
Any expenses incurred in modifying Customer's Non-Standard System to conform to
the SABRE System or System modifications shall be the sole responsibility of
Customer.
4.7 Acceptance of System. Upon installation of the System and establishment of
a successful connection with the SABRE System and any other TSG approved systems
or networks, Customer shall be deemed to have accepted the System. Any use of
the System, additional System and/or Non-Standard System further constitutes
acceptance of this Agreement by Customer.
5. REPAIRS AND MAINTENANCE
5.1 Repairs and Maintenance. Upon prompt notification from Customer, TSG or
its designated agent shall promptly repair and maintain or replace the Standard
Equipment provided that the Standard Equipment has been subject to reasonable
operation. Customer shall not make any modifications nor attempt to perform
repairs or maintenance of any kind to the System.
5.2 Limitation. TSG is not responsible for repairs and maintenance of any Non-
Standard System or other hardware, software or communication access devices at
Customer's Site or at the locations of other TSG approved systems or networks
beyond the point at which they are connected to the System and/or the SABRE
System.
5.3 Notification. Customer shall promptly inform TSG of any breakdown of the
Standard Equipment by contacting SABRE Customer Services. Customer shall
maintain a record of all occasions upon which repair or maintenance service is
performed and make such records available to TSG upon request.
<PAGE>
5.4 Charges. Repair or maintenance services on Standard Equipment during
normal business hours (9:00 a.m. to 6:00 p.m. local time, Monday through Friday,
excluding legal holidays) are included in the Charges, provided that the
Customer has not been negligent and the Standard Equipment has been subject to
reasonable operation; otherwise, Customer will be charged a service fee in
accordance with TSG's or its independent contractor's then prevailing rates.
5.5 Non-Standard System. All maintenance of the Non-Standard System shall be
the sole responsibility of the Customer. TSG will accept calls to SABRE
Customer Services regarding a malfunction of the Non-Standard System if TSG
determines that the malfunction is not attributable to the Non-Standard System.
Customer shall pay TSG's then prevailing maintenance charges for any maintenance
calls for the SABRE System or the System if TSG reasonably determines that the
problems were caused by or attributable to the Non-Standard System.
6. TITLE AND OWNERSHIP OF SYSTEM
The System leased hereunder shall remain the property of TSG. Customer shall
not in any other manner dispose of the System or any part thereof or suffer any
lien or legal process to be incurred or levied on the System.
7. INSURANCE
7.1 General. Customer shall take all necessary precautions to protect the
System installed at Customer's Site.
7.2 At its own cost, Customer shall procure and maintain insurance, from an
insurer and on terms and conditions acceptable to TSG, insuring the System
against all risk of loss or damage, including, without limitation, the risk of
fire, theft and any other such risks as are customarily insured in a standard
all risk policy. Such insurance shall also provide the following:
7.2.1 Full replacement value coverage for the Standard Equipment, which
value is set forth on Schedule A;
7.2.2 An endorsement naming TSG as a co-insured and as a loss payee to the
extent of its interest in the Standard Equipment; and
7.2.3 An endorsement requiring the insurer to give TSG at least thirty
(30) days prior written notice of any intended cancellation, non-renewal,
material change in coverage or, within thirty (30) days of the event, written
notice of any default in the payment of a premium.
7.3 Risk of loss for and damage to the System shall pass to the Customer upon
delivery of the System to the Site.
7.4 TSG may request at any time proof of such insurance and/or other form of
surety from Customer. The failure of Customer to produce such proof or surety
within thirty (30) days of the request by TSG will be considered an Event of
Default as defined in Article 14.1.2 herein.
8. TITLE AND OWNERSHIP OF CONFIDENTIAL INFORMATION
8.1 Each party's Confidential Information shall remain that party's exclusive
property.
8.2 Each party shall maintain the confidentiality of the other party's
Confidential Information at all times during and after the term or this
Agreement. Neither party shall use, sell, sublicense, transfer, publish,
disclose, display, or otherwise make available to others, except as authorized
in this Agreement the Confidential Information of the other party or any other
material relating to the Confidential Information of the other party nor shall
either party permit its officers, employees, agents, contractors or
subcontractors to divulge the other party's Confidential Information without
that party's prior written consent.
8.3 Customer shall use the data, other then Non-SABRE Traffic, transmitted
under this Agreement ("Data") solely for the benefit of itself and its customers
in connection with rendering the following services: (i) air carrier, hotel,
car and rail reservations, including schedule quotations; (ii) customer
accounting and record
<PAGE>
keeping activities; or (iii) the sale of or reservations for other miscellaneous
products or services offered in the SABRE System. Customer shall not publish,
disclose or otherwise make available to any third party any compilation of Data
obtained from the SARRE System. However, Customer may use specific Data for the
benefit of its customers in connection with any reservation or schedule
quotation production of a hard copy travel itinerary, invoice, statement or
ticket.
8.4 Nothing in this Agreement shall be interpreted to limit in any way TSG's
right to use, market, sell or publish any booking related data subject only to
any applicable laws or regulations.
9. SYSTEM SOFTWARE LICENSE
9.1 Ownership of System Software. Customer acknowledges that TSG or the
original manufacturer of the System Software, as applicable, owns or has
licensed from the owner, copyrights in the respective System Software and that
ownership and title are retained by the manufacturer or its licensor. All
applicable rights to patents, copyrights, trademarks, and trade secrets inherent
in the System Software and pertinent thereto are and shall remain TSG's or the
original manufacturer's sole and exclusive property. Any copy of such System
Software must incorporate any copyright, trade secret, or trademark notices or
legends appearing in the original version delivered to Customer.
9.2 Grant of License. Subject to the provisions of this Agreement and for the
term specified in Article 1.2, either TSG or the original manufacturer grants to
Customer a non-transferable, non-exclusive limited license to use the System
Software subject to the following restrictions: (a) Customer shall use the
System Software solely in connection with its use of the SABRE System, (b) the
System Software shall be used and installed solely at the Site and solely used
on the Standard Equipment or Non-Standard System authorized under Article 4.6,
(c) the System Software shall be used solely for internal purposes and only in
the ordinary course of business, (d) Customer shall not compile, reverse
compile, decompile, disassemble, reverse assemble or reverse engineer the System
Software or any portion thereof, (e) the System Software shall not be copied or
reprinted in whole or in part except (i) a reasonable number of copies of each
program may be made in machine readable form for reasonable archival or backup
purposes or (ii) when TSG has granted permission to do so, (f) Customer shall
not lease, sell, license, sublicense or otherwise transfer the System Software
to any other party, and (g) the terms of this Agreement shall govern the System
Software license unless modified by a license which may be associated with a
particular software product, wherein the license associated with that particular
software product shall govern.
9.3 Modification Rights. Customer shall not modify the System Software or
merge such software into other programs or create derivative works based on such
software. Additionally, Customer shall not delete or cause to be deleted the
System Software from the Standard Equipment. Notwithstanding anything to the
contrary contained herein, noncompliance with this provision shall constitute an
Event of Default under this Agreement and this Agreement shall immediately
terminate and Customer shall be obligated to pay TSG damages as specified in
Article 14.2 hereof.
9.4 Upgrades and Modifications. All tangible objects containing or relating to
the System Software are the sole and exclusive property of TSG or the
manufacturer. In the event TSG modifies the System Software, it may deliver
such modified System Software to Customer at its then current charge, if any,
and Customer shall promptly return to TSG any and all tangible objects relating
to all previous versions of the System Software as provided in Article 15.7.
Customer shall be solely responsible for protecting all software not obtained
from TSG hereunder and the data related thereto in the event of a software
upgrade. Customer, in order to receive an upgraded or updated program, shall
comply with any and all terms, conditions and Instructions requested by
TSG.
9.5 Operating Program.
9.5.1 Customer acknowledges that the System Software may incorporate, in
part, copyrighted materials pertinent to the Operating Program as identified on
Schedule A ("Operating Program"). Customer agrees that such copyrighted
portions shall be subject to the Operating Program copyright and license.
<PAGE>
9.5.2 If Customer requires additional Operating Programs, Customer shall
notify TSG and TSG will provide Customer with additional copies to support
additional video agent sets pursuant to this Agreement.
9.5.3 Customer will look only to TSG and not to the manufacturer for any
support, maintenance, assistance and upgrades and the like with respect to the
Operating Program and the manufacturer shall have no liability to Customer in
relation to the Operating Program.
9.5.4 No action, regardless of form, arising out of the license of the
Operating Program may be brought more then two years after the cause of action
has arisen.
9.5.5 Customer shall physically retain a copy of the Conditions of Use for
SABRE Users (Attachment I) with each applicable video agent set or dedicated
fileserver/processor eligible to use such Operating Program.
10. OPERATION OF THE SABRE SYSTEM AND THE SYSTEM
10.1 Operation of System.
10.1.1 The SABRE System and the System shall be operated by Customer or
solely for the purposes and functions expressly permitted by this Agreement and
in strict accordance with the Instructions. Customer shall not in any way
utilize the System for the direct or indirect purpose of bypassing or
circumventing the SABRE System in communicating in any way with Participants.
Any violation of this provision will be deemed an Event of Default under Article
14.1.2.
10.1.2 Customer may use the System to transmit and receive Non-SABRE
Traffic only from those systems or networks approved in writing by TSG.
Customer acknowledges that in cases of communications capacity limits being
reached, data transmission through the System with the SABRE System will be
given priority over any Non-SABRE Traffic.
10.1.3 Customer shall access the SABRE System only through the System, an
ISP or another system or device authorized in writing by TSG.
10.1.4 Customer shall take all precautions necessary to prevent
unauthorized operation or misuse of the SABRE System or the System, including
without limitation, speculative booking, shell bookings, reservation of space in
anticipation of demand, or improper record or access. In the event of misuse of
the SABRE System or the System, TSG reserves the right, in addition to all
rights under the Agreement, to immediately terminate the Agreement.
10.1.5 Customer shall not enter any Prohibited Segments into the SABRE
System. Prohibited Segments so entered shall not be calculated in determining
productivity levels under the Agreement. All Travel Services Segments shall be
removed from the SABRE System should corresponding space be canceled direct via
telephone with the transporting carrier.
10.2 Non-Exclusivity. This Agreement is not exclusive and nothing in the
Agreement is intended to preclude or prohibit Customer from using any other
computerized [illegible] expected use of the System is the Fixed Monthly
Discount Booking Level stated in Schedule A.
10.3 Transaction Volume. Notwithstanding the provisions of Article 3.3(g), TSG
shall have the right, upon thirty (30) days notice to Customer to limit Customer
to generating no more then one hundred thirty (130) Transactions per SABRE
Booking ("Transaction Limit"). The Transaction Limit may be changed by TSG upon
thirty (30) days advance notice to Customer.
10.4 Training. TSG will make available introductory SABRE System training
during the installation process. For purposes of this Article, the installation
process is defined as anytime between contract signing by both Customer and TSG
through two months after installation is complete.
10.4.1 Upon written request from Customer, at such time that installation
is complete, additional training may be offered subject to availability and at
TSG's then prevailing rate per person, per class. The additional training
charge will be assessed on Customer's monthly invoice.
<PAGE>
10.4.2 The training described in Article 10.4 shall be performed at a
location designated by TSG.
10.4.3 Except as otherwise provided herein, Customer is responsible for
all training of all its employes in the proper use of the SABRE
System.
10.4.4 In addition to the training described in Article 10.4, TSG may offer
to Customer supplemental training programs on a local level at TSG's then
prevailing rate and method of delivery. Such training may consist of, but
not be limited to, workshops, seminars, self-paced instruction and
individual consultations.
10.4.5 Customer and its trainees agree to comply with all training
procedures and rules established by TSG, and TSG reserves the right to
remove any Customer trainee from the training program if such trainee fails
to comply with such procedures and rules.
10.4.6 TSG may, at its discretion, monitor or test Customer's employee's
training levels. If TSG determines the training level of any one or more of
Customer's employees to be insufficient, then Customer will institute such
additional training at its own expense (including, if necessary, additional
training by TSG at TSG's then prevailing charges) as may be necessary to
bring Customer's employees to the level of training required by TSG.
11. WARRANTY, AND LIMITATION OF WARRANTY, LIABILITY AND REMEDY
11.1 SABRE Warranty. TSG agrees to use reasonable efforts to maintain the
availability of the SABRE System, but shall have no liability for interruptions
in the operation of the SABRE System except as specifically provided herein.
Subject to the terms hereof, in the event that the SABRE System is not operable
ninety-five percent (95%) of the total normal business hours each month,
excluding periods for maintenance of Standard Equipment or other scheduled down
time ("Normal Time"), TSG will reduce the monthly Charges (on a pro-rata basis
according to the percentage of Normal Time during which the SABRE System was not
operable at least ninety-five percent (95%) of the Normal Time. For purposes of
this article, normal business hours shall be 9:00 a.m. to 6:00 p.m., local time,
Monday through Saturday. The SABRE System shall be deemed inoperable if Customer
is unable, after calling SABRE Customer Service to make any SABRE Bookings as a
result of a failure attributable to the SABRE System. To request a reduction
under this Article, Customer shall submit a written record to TSG and request an
adjustment in the monthly charges. Customer's written records must be submitted
in a timely manner and include, at a minimum, the date and time of the outage,
the time the outage was reported to SABRE Customer Service, the time the SABRE
System was restored (within normal business hours as defined above) and the type
of outage.
11.2 Limited Warranty of the System. In the event of a material malfunction or
defect in an unaltered component of the System that substantially affects
performance of the System that is reported by Customer to TSG and that can be
reproduced by TSG, TSG will use reasonable efforts to correct such malfunction
or defect without additional charge to Customer. THE FOREGOING SHALL BE
CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY MALFUNCTION OR DEFECT IN THE
SYSTEM. IF SUCH MALFUNCTION OR DEFECT MATERIALLY IMPAIRS CUSTOMER'S USE OF THE
SYSTEM AND CANNOT BE CURED AS PROVIDED IN THIS SECTION, THEN CUSTOMER'S
ALTERNATE SOLE AND EXCLUSIVE REMEDY SHALL BE TO TERMINATE THIS AGREEMENT
WITHOUT FURTHER LIABILITY TO TSG FOR DAMAGES HEREUNDER.
11.3 Exclusion of Other Warranties. EXCEPT AS SPECIFICALLY PROVIDED IN THIS
ARTICLE, THE USE OF THE SABRE SYSTEM, THE DATA DERIVED FROM THE SABRE SYSTEM,
THE SYSTEM AND/OR ANY COMPONENTS THEREOF ARE PROVIDED TO CUSTOMER BY TSG, ANY
INFORMATION PROVIDER OR THE OWNER OF ANY ELEMENT OF THE SYSTEM (AS THE CASE MAY
BE) "AS IS AND WITH ALL FAULTS". ALL OTHER WARRANTIES ARE HEREBY DISCLAIMED
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF ACCURACY, COMPLETENESS AND
NON-INFRINGEMENT OF THE DATA DERIVED FROM THE SABRE SYSTEM, ANY IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY
IMPLIED WARRANTIES ARISING OUT OF COURSE OF PERFORMANCE, COURSE OF DEALING OR
USAGE OF TRADE.
11.4 Limitation of Liability.
11.4.1 NEITHER TSG NOR ANY INFORMATION PROVIDER NOR ANY OWNER OF ANY
ELEMENT OF THE SYSTEM OR THE SABRE SYSTEM SHALL BE LIABLE TO CUSTOMER OR ANY
THIRD PARTY FOR ANY INJURY, LOSS, CLAIM OR DAMAGE CAUSED IN WHOLE OR IN PART BY
THE NEGLIGENCE OF TSG OR ANY INFORMATION PROVIDER OR BY ANY OWNER OF ANY ELEMENT
OF THE SYSTEM OR BY EVENTS BEYOND THE CONTROL OF TSG OR OF ANY OF THOSE OTHER
PERSONS.
11.4.2 IF A PASSENGER USES A CONFIRMED TICKET FOR AIR TRANSPORTATION ISSUED
PURSUANT TO A RESERVATION MADE BY CUSTOMER BY MEANS OF THE SABRE SYSTEM AND IS
REFUSED CARRIAGE BECAUSE OF AN OVERSALE OF SEATS OR THE LACK OF RECORD OF SUCH
RESERVATION, THE SOLE REMEDY OF CUSTOMER SHALL BE AS SET FORTH IN THE TARIFF OF
THE REFUSING CARRIER OR APPLICABLE TERMS AND CONDITIONS OF THE CARRIER'S
CONTRACT OF CARRIAGE.
11.4.3 TO THE EXTENT THAT TSG HAS ANY LIABILITY UNDER THIS AGREEMENT OR
UNDER ANY THEORY OF LIABILITY, TSG'S CUMULATIVE LIABILITY FOR DAMAGES TO
CUSTOMER HEREUNDER SHALL BE LIMITED TO THE LESSER OF (1) CUSTOMER'S DIRECT
DAMAGES, (2) THE TOTAL AMOUNT OF CHARGES ACTUALLY PAID BY CUSTOMER TO TSG
PURSUANT TO THIS AGREEMENT OVER THE TERM OF THIS AGREEMENT, OR (3) ONE MILLION
DOLLARS ($1,000,000).
11.4.4 NEITHER TSG NOR ANY INFORMATION PROVIDER NOR ANY OWNER OF ANY
ELEMENT OF THE SYSTEM SHALL BE LIABLE TO CUSTOMER UNDER ANY THEORY OF LIABILITY
OR ANY FORM OF ACTION, INCLUDING NEGLIGENCE FOR ANY INCIDENTAL, SPECIAL,
PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES UNDER ANY CIRCUMSTANCES, INCLUDING
BUT NOT LIMITED TO LOST PROFITS, REVENUE OR SAVINGS, OR THE LOSS OF USE OF ANY
DATA, EVEN IF THAT PERSON THAT WOULD HAVE BEEN LIABLE IN THE ABSENCE OF THIS
SECTION HAD BEEN ADVISED OF, KNEW, OR SHOULD HAVE KNOWN, OF THE POSSIBILITY
THEREOF.
11.5 NON-SABRE TRAFFIC. CUSTOMER ACKNOWLEDGES THAT IT IS SOLELY LIABLE FOR THE
CONTENT, ACCURACY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-
INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OR OTHER THIRD PARTY RIGHTS, OF
THE NON-SABRE TRAFFIC. CUSTOMER WARRANTS THAT THE TRANSMISSION AND RECEIPT OF
NON-SABRE TRAFFIC BY CUSTOMER IS NOT IN CONTRAVENTION OF ANY LAWS, RULES OR
REGULATIONS. FURTHER, CUSTOMER HEREBY WARRANTS THAT IT HAS ENTERED INTO SUCH
SEPARATE AGREEMENTS AS IT DEEMS NECESSARY OR APPROPRIATE WITH THE SYSTEMS OR
NETWORK PROVIDERS FOR THE TRANSMISSION AND RECEIPT BY CUSTOMER OF THE NON-SABRE
TRAFFIC AND, IN PARTICULAR, CUSTOMER WARRANTS THAT IT SHALL BE SOLELY LIABLE TO
THESE PROVIDERS FOR ANY MALFUNCTION OR OTHER ADVERSE IMPACT EXPERIENCED BY SAID
PROVIDERS AS A RESULT OF THE TRANSMISSION AND RECEIPT BY CUSTOMER OF THE NON-
SABRE TRAFFIC.
12. INDEMNIFICATION
12.1 Customer and TSG ("Indemnitor") hereby agree to indemnity and hold each
other, their affiliates, subsidiaries, successors end assigns and their
officers, directors, agents and employees ("Indemnitees") harmless from and
against third-party liabilities, including, but not limited to, attorneys' fees,
and other expenses incident, thereto, ("Claims") which may be threatened
against, or recoverable from the Indemnitees by reason of any
<PAGE>
injuries to or death of persons or loss of, damage to, or destruction of
property to the extent arising out of or in connection with any act, or omission
of the Indemnitor.
12.2 Customer will indemnify TSG for any Claims, including debt memos issued by
Participants, arising from Customer's misuse of the SABRE System including,
without limitation, making fraudulent bookings and/or failing to honor
Participant ticketing and fare rules.
13. ASSIGNMENT
13.1 Assignment Or Sublease By Customer. Customer shall not sublease, transfer
or assign this Agreement or any portion thereof, or any right or obligation
hereunder, unless customer has obtained the prior written consent of TSG, which
consent shall not be unreasonably withheld. Any attempted assignment in
violation of this Article shall be void.
13.2 Assignment by TSG. TSG shall have the right to sell, transfer, assign or
delegate its, interests, rights and/or obligations, without the prior consent of
Customer, and, provided that such transferee or assignee assumes all of TSG's
obligations, TSG shall be released of all obligations after the effective date
of such sale, transfer, delegation or assignment.
14. TERMINATION AND DEFAULT
14.1 Default By Customer. The occurrence of any one or more of the following
events shall constitute a non-exclusive event of default (the "Event of
Default") pursuant to the terms of this Agreement:
14.1.1 Customer falls to pay any amount when due;
14.1.2 Any representation by Customer is discovered to be materially
misleading or inaccurate, or Customer fails to perform any material covenant,
agreement, obligation, term or condition contained herein;
14.1.3 Customer terminates or cancels this Agreement or any portion
thereof, except as expressly permitted in this Agreement;
14.1.4 Customer ceases to do business as a going concern, makes an
assignment for the benefit of creditors, admits in writing its inability to pay
debts as they become due, acquiesces in the appointment of a trustee, receiver
or liquidator for it or any substantial part of its assets or properties, or
executes an agreement to sell all or substantially all of its assets without
obtaining the consent for assignment of this Agreement under Article 13.1;
14.1.5 Customer fails to secure and maintain Airlines Reporting
Corporation ("ARC") accreditation for ticketing of reservations;
14.1.6 Events of Default described in 14.1.1, 14.1.2 and 14.1.4 shall not
be cause for termination if Customer cures such failure within fifteen (15) days
after date of written notice from TSG. If Customer cures its failure as provided
in this provision, said failure shall not be considered to be an Event of
Default for the purposes of Article 14.2.
14.2 TSG's Rights Upon Termination. Upon the occurrence of an Event of Default
and subject to Article 14.1.6, TSG shall have the right to any one or more of
the following remedies; (i) terminate this Agreement and Customer's access to
the SABRE System, the System and any other approved systems or networks; (ii)
seek all legal and equitable remedies to which it is entitled; and (iii) retake
immediate possession of the System. If Customer's Event of Default results in
termination, Customer agrees to pay to TSG damages suffered by TSG as a result
of such Event of Default.
14.3 Termination By Customer. In the event that TSG breaches any material term
of this Agreement, which breach continues for a period of fifteen (15) days
after TSG receives from Customer written notice which sets forth the specific
breach and Customer's intent to terminate the Agreement if such breach is not
cured, then Customer may immediately terminate the Agreement upon separate
written notice to TSG. Customer may not otherwise cancel, terminate, modify,
repudiate, excuse or substitute this Agreement without TSG's prior written
<PAGE>
consent, which TSG may withhold in its absolute discretion.
15. MISCELLANEOUS
15.1 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF TEXAS AND THE UNITED STATES OF AMERICA. CUSTOMER HEREBY SUBMITS AND CONSENTS
TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF TEXAS AND THE COURTS OF THE STATE OF TEXAS IN ANY DISPUTE
ARISING OUT OF THIS AGREEMENT AND AGREES THAT SERVICE OF PROCESS SHALL BE
SUFFICIENT IF MADE ON THE SECRETARY OF STATE OF THE STATE OF TEXAS WITH A COPY
TO BE SENT, REGISTERED MAIL TO THE CUSTOMER AT THE ADDRESS SET FORTH IN SCHEDULE
A OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO TSG.
15.2 Binding Effect. Except as otherwise provided, this Agreement shall inure
to the benefit of and bind the successors and assigns of the parties hereto.
15.3 Deletion of Equipment. During the term of the Agreement, Customer may
delete up to [*] of the installed productive video agent sets, video agent set
terminal addresses and printers, contingent upon the following: (a) Customer
provides documentation of a substantial decrease in the number of SABRE
Bookings, which decrease is the result of the loss of its commercial accounts
and/or customer base; (b) Customer notifies TSG, in writing, of the description
and location of the equipment to be deleted (the "Deleted Equipment"); (c)
Customer pays to TSG the then current de-installation charges for the Deleted
Equipment plus any outstanding Charges for such Deleted Equipment up through the
Stop Billing Date which TSG will specify to Customer; and (d) Customer will
forfeit all right and equity, if any, in the Deleted Equipment removed from
Customer's location.
15.3.1 If Customer complies with the requirements identified in 15.3
above, TSG shall de-install the Deleted Equipment and disconnect it from the
System.
15.3.2 TSG shall defer all Charges related to the Deleted Equipment
("Deferred Charges") from the Stop Billing Date to the termination date of this
Agreement on the following conditions: (a) the Additional Term and all other
terms and conditions of this Agreement that would have applied to the Deleted
Equipment shall apply to any Standard Equipment added to the System after the
Stop Billing Date, up to an amount equal in number and type to the Deleted
Equipment or such lesser amount agreed to by TSG ("Re-installed Equipment"); and
(b) Customer shall pay TSG all applicable Charges for the Re-installed
Equipment, including installation, lease, maintenance and use Charges, at TSG's
then current rates.
15.3.3 The Deferred Charges shall be deemed waived by TSG at the end of the
Initial Term of the Agreement or any renewal thereof if Customer has not
breached this Agreement. Interest shall accrue on the Deferred Charges at the
maximum rate allowed by applicable law from the date of the deferral until
payment. In addition to all other rights under Article 14.2, TSG shall be
entitled to immediate payment of the Deferred Charges plus interest upon default
by Customer.
15.4 Entire Agreement. This Agreement and the Instructions constitute the
entire agreement of the parties as to the matter set forth herein and shall
supersede any previous understandings, agreements, representations, statements,
negotiations and undertakings, whether written or oral, between the parties
relating to the matters set forth herein. Any amendment to this Agreement must
be in writing and signed by the authorized representatives of both parties.
15.5 Force Majeure. TSG and Customer shall be relieved of their obligations
hereunder in the event and to the extent and only so long as that performance is
delayed or prevented by any cause reasonably beyond their control, including,
but not limited to, acts of God, public enemies, war, civil disorder, fire,
flood, explosion, labor disputes or strikes, or any acts or orders of any
governmental authority, inability to obtain supplies and materials (including
without limitation computer hardware) or any delay or deficiency caused by the
electrical or telephone line suppliers or other third parties.
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
15.6 Notices. Unless otherwise stated, notices given or required under this
Agreement must be in writing and shall be deemed delivered upon deposit through
the United States Mail, to TSG at P.O. Box 619815, MD 3558, Dallas/Fort Worth,
Texas, 75261-9615 (to be sent to the attention of SABRE Travel Information
Network, Financial Services) or to the Customer at the address set forth in
Schedule A.
15.7 Return of System. Upon the termination of this Agreement for any reason,
Customer, at its sole cost and expense, shall return the System and all
Confidential information as requested by TSG, in good repair, condition and
working order, less normal and ordinary wear and tear, by delivering it to a
common carrier selected and designated by TSG, F.O.B. the destination designated
by TSG in writing.
15.8 SABRE System Modification. TSG retains the right to modify the SABRE
System, at its discretion at any time during the term of this Agreement.
However, such modifications will not materially impair Customer's ability to
access and use the SABRE System in the manner expressly permitted in this
Agreement.
15.9 Severability. Any provision of this Agreement which may be determined by a
court or other competent governmental authority to be prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective, only to the extent of such prohibition or unenforceability, without
invalidating the remaining provisions thereof, unless said prohibition or
unenforceability materially alters the rights or obligations of either party.
15.10 Subsequent Acts of Government. In the event that there is any change in
any statute, rule, regulation or order governing the operation of computerized
reservations systems, or air transportation generally or the SABRE System, which
in any way materially impairs the benefits of this Agreement to TSG, then the
parties hereto will commence consultation in order to determine what, if any,
changes to this Agreement are necessary or appropriate, including, but not
limited to, early termination of this Agreement. If the parties hereto are
unable to agree upon changes in the Agreement in response to such new statute,
rule, order or regulation within thirty (30) days after commencement of such
consultation, this Agreement may be canceled by TSG upon giving Customer ninety
(90) days prior written notice of such cancellation. If TSG elects to terminate
the Agreement pursuant to this Article, except for Customer's obligation to pay
any and all Charges incurred through the date of termination, each party shall
be relieved of any future obligations under this Agreement as of the effective
date of cancellation. each party shall bear its own costs and expenses incurred
as a result of said termination. Customer does not have the right to terminate
the Agreement under this provision.
15.11 Surviving Sections. If the term of the Agreement expires or is
terminated for any reason before Customer has paid to TSG all of the sums due,
the Agreement shall survive such expiration or termination to the extent
necessary to protect TSG's rights until all sums owed to TSG have been paid.
Notwithstanding anything to the contrary referenced herein, Articles 6, 8, 11
and 12 shall survive the termination of this Agreement.
15.12 Waiver. A failure or delay of either party to require strict performance
to enforce a provision of this Agreement or a previous waiver or forbearance by
either party shall in no way be construed as a waiver or continuing waiver of
any provision of this Agreement.
15.13 Acknowledgment. Customer hereby acknowledges that TSG has offered
Customer a SABRE Subscriber Agreement with three (3) year term with reasonable
terms and conditions.
16. INTERNET CONNECTIONS
16.1 Limited License. Customer may establish an Internet Connection using TSG's
products or a third party application. Customer is hereby given a limited
license to utilize data transmitted from the SABRE System for purposes of
developing, operating and maintaining a reservation booking site solely for the
use of its customers and according to the other limitations contained in the
Agreement, including, without limitation, Article 8.3. All uses of the SABRE
System through an Internet Connection will be considered uses by Customer under
this Agreement. Customer may not utilize any data transmitted from the SABRE
System for purposes of developing, operating or maintaining a reservation
booking site or any other redisplay of SABRE System data for any third party
including any un-affiliated travel agencies.
16.2 Termination. The limited license granted in Article 16.1 may be
terminated by TSG for any reason upon
<PAGE>
five (5) days written notice to Customer. Upon such termination Customer must
immediately remove the Internet Connection and cease utilizing data transmitted
under the Agreement for purposes of developing, operating or maintaining a
reservation booking site.
16.3 Branding. Customer agrees to adhere to the branding standards and
requirements as communicated by TSG which may be modified from time to time upon
thirty (30) days advance notice to Customer.
16.4 Charges. Customer will pay a Charge for each PNR created through an
Internet Connection at TSG's then current rate.
17. TSG RESERVES THE RIGHT TO CHANGE SABRE GUARANTEE PROGRAM RULES,
REGULATIONS, AND SPECIAL OFFERS WITHOUT NOTICE, AND TO END SABRE GUARANTEE
PROGRAMS WITHOUT NOTICE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth below.
ALL SIGNATURES MUST BE IN BLACK INK
CUSTOMER
By: /s/ Mike Hartley
---------------------------------------
(Signature)
Name: Mike Hartley
------------------------------------
(Print Name)
Title: President
-----------------------------------
Agency Name: Cheap Tickets, Inc.
-----------------------------
Pseudo City Code: 2 DF0
------------------------
THE SABRE GROUP, INC.
By: /s/ Darla K. Couture
--------------------------------------
(Signature)
Name: Darla K. Couture
------------------------------------
(Print Name)
Title: Finance Mgr.
-----------------------------------
3/11/99
<PAGE>
ATTACHMENT I
Conditions of Use for SABRE Users
1. QUALIFYING USE. The manufacturer has made this package available to you
through The SABRE Group, whether directly or indirectly, on the understanding
that it is being supplied to you primarily for use with the SABRE System, and
not with a view to resale or other re-marketing.
2. COPYRIGHT AND OTHER RIGHTS.
The manufacturer's programs contain material in which the manufacturer and in
many cases the manufacturer's suppliers, retain proprietary rights. The
manufacturer wants these programs to be fully useable by you for the purpose for
which they are supplied, that is, in connection with a computer. No
infringement of the rights of the manufacturer or of the manufacturer's
suppliers will occur provided that the following conditions are observed with
respect to each program:
a. The program is used only on:
(i) a single machine; or
(ii) on any workstation connected to a single fileserver which is
primarily used in connection with the SABRE System.
b. The program is copied into machine-readable or printed form for backup
or modification purposes only in support of use on a single machine, or on
a workstation connected to the SABRE System;
c. However, certain diskettes marked "Copy Protected" may include
mechanisms to limit or inhibit copying of the program;
d. The program is modified or merged into another program only for use on
a single machine or on a workstation connected to the SABRE System. Any
portion so merged continues to be subject to these conditions;
e. The copyright notice is reproduced and included in any copy or
modifications made of the program and in any program merged into other
programs; and
f. If the program package is transferred to another party, all copies and
modifications made of the program must be transferred or destroyed. You do
not retain any right with respect to the transferred package. The other
party agrees to observes all of these Conditions of Use.
Any other act involving reproduction or use of, or other dealing in the program
is prohibited.
You are reminded that it may be necessary to obtain local and United States
licenses to export or re-export this package.
No statements contained in this package shall affect the statutory rights of any
person.
<PAGE>
AMENDMENT NO. 1 TO SABRE SUBSCRIBER AGREEMENT
This Amendment to that certain SABRE Subscriber Agreement is made and
entered into this 31st day of December, 1998, between The SABRE Group, Inc.
("TSG") and Cheap Tickets, Inc. ("Customer").
RECITALS
WHEREAS, TSG and Customer have entered into that certain SABRE Subscriber
Agreement, dated as of 31 December 1998 (the "Agreement"); and
WHEREAS, it is in the best interest of the parties to modify certain
provisions of the Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
TSG and Customer hereby agree as follows:
1. Effective Date. The effective date of this Amendment is 31 December
1998.
2. Cash Advance. TSG agrees to pay to Customer the following, as SABRE
Promotional Support, pursuant to the schedule set out below contingent upon the
Agreement and this Amendment have been signed by both Customer and TSG:
[*] within [*] after the Agreement and this Amendment have been signed
by both parties.
If an Event of Default as defined in Article 14.1 of the Agreement occurs, TSG's
obligations under this Amendment are nullified and Customer will be immediately
obligated to repay to TSG all monies paid by TSG to Customer pursuant to this
Amendment.
3. Line of Credit. TSG shall extend to Customer a line of credit in the
following amount, which amount will be applied automatically toward the payment
of TSG Charges. Such line of credit shall be applied each month until the total
amount is exhausted. Unless an Event of Default as defined in Article 14.1 of
the Agreement occurs, any unused portion of this line of credit shall be applied
in its entirety as a line of credit to the subsequent SABRE subscriber agreement
between TSG and Customer, with the conditions as set forth in this paragraph. If
an Event of Default as defined in Article 14.1 of the Agreement occurs, or upon
termination of this Agreement without concurrent execution of a subsequent SABRE
subscriber agreement, any unused portion of this line of credit shall revert to
TSG and be unavailable for Customer's use.
<TABLE>
<CAPTION>
[*] Line of Credit
------- ----------------
<S> <C> <C>
1 [*] [*]
2 [*] [*]
3 [*] [*]
4 [*] [*]
5 [*] [*]
</TABLE>
4. Current and Expansionary Devices. Upon the Effective Date of this
Amendment and provided Customer meets the terms and conditions as set forth
below and in the Agreement TSG shall provide, each month during the term hereof,
fixed monthly discounts to offset the charges for the services and products
listed below that are either currently installed or installed subsequent to the
Effective Date of the Agreement:
(a) data lines, fileservers, gateways, SABRE video agent sets, SABRE
Printers, Satellite Ticket Printers (STP's) or any other equipment standard to
the SABRE System, provided the following:
(i) TSG will not provide fileservers, gateways or SABRE video agent
sets at Customer call center locations;
(ii) TSG will provide currently installed equipment at Customer
locations other than at Customer call centers;
(iii) TSG will provide expansionary SABRE gateways and SABRE video
agent sets at Customer locations other than at Customer call centers, [*]
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
based on total Customer SABRE Bookings and Customer SABRE gateways and SABRE
video agent sets on the Effective Date of this Agreement at Customer locations
other than at Customer call centers;
(iv) TSG will provide expansionary SABRE Printers and Satellite Ticket
Printers (STP's) [*] based on total Customer SABRE Bookings and Customer SABRE
Printers and Satellite Ticket Printers (STP's) on the Effective Date of this
Agreement;
(v) TSG will provide expansionary SABRE data lines [*] based on total
Customer SABRE Bookings and Customer SABRE data lines on the Effective Date of
this Agreement. Equivalent Data Line is defined as [*];
(vi) TSG will not provide maintenance for equipment that is not owned by
TSG;
(b) SABREscribe;
(c) installation, de-installation, move and relocation charges (excluding
charges associated with moves or relocations outside the ordinary course of
business which shall be determined by Customer's past practices, which shall be
billed to Customer at TSG's then prevailing rate);
(d) variable charges for Branch Access, Bargain Finder Plus, FACTS Report,
Option 6 Interface, Invoice and Itinerary, Microfiche, Ticketing, ARC Report,
SABRE Report Managers, Classified Fares, STARS and SABRE Re-Check;
(e) [*] of the monthly lease and SMU Charges for SABRE TravelBase
equipment, operating system licenses and software license fee sufficient to
process [*] SABRE Bookings per year [*]; provided, however, that if TSG does not
offer, [*]. Offset of charges related to SABRE TravelBase or other back-office
product is contingent upon Customer's agreement to the conditions as set forth
in (i) Appendix A to this Agreement and (ii) the SABRE TravelBase System Lease
Agreement between Customer and TSG which his effective at that time;
(f) [*] SABRE TravelBase workstations in Year One of this Agreement,
increasing up to a total of not more than [*] SABRE TravelBase workstations by
Year Five of the Agreement, as TSG and Customer jointly determine that a need
for such SABRE TravelBase workstations exists; in addition, TSG will provide to
Customer sufficient software licenses for Customer-owned SABRE TravelBase
workstations.
5. Additional Standard Equipment. TSG agrees to allow Customer to add Standard
Equipment in excess of that provided for in paragraph 4, and Customer and TSG
agree that all Standard Equipment added under this paragraph 5 will be charged
on a monthly basis at TSG's then prevailing rate. Customer and TSG agree that
the rate charged is the rate that applies to the actual piece of Standard
Equipment most recently added by Customer. TSG agrees to allow Customer to
choose to pay for this additional Standard Equipment with either cash or funds
from Customer's Line of Credit.
6. Booking Threshold Adjustments. TSG agrees to offer Customer, as new products
are introduced, the option to pay for those products at standard
non-discriminatory rates as described in the product offering.
7. Booking Threshold. Notwithstanding anything contained herein, TSG shall have
no obligation to perform the undertakings set forth in paragraph 4 unless: (a)
the Standard Equipment is available for purchase by TSG on reasonable terms and
conditions from the manufacturer, and (b) Customer processes a minimum of the
following number of SABRE Bookings [*] (the "[*]Volume Threshold") during the
term of the Agreement:
<TABLE>
<CAPTION>
[*] Minimum SABRE Bookings
------- --------------------------------
<S> <C> <C>
1 [*] [*]
2 [*] [*]
3 [*] [*]
4 [*] [*]
5 [*] [*]
</TABLE>
Notwithstanding anything contained herein, TSG shall have no obligation to
perform the undertakings set forth in paragraph 9 unless Customer achieves the
Monthly Booking Threshold as described herein.
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
8. SABRE Bookings Below [*] Volume Threshold. In the event Customer fails to
achieve the [*] Volume Threshold in paragraph 7 for each [*] measurement period,
Customer shall pay to TSG an amount equal to the prevailing booking fee that TSG
charges to airlines that participate in the full availability features of the
SABRE System multiplied by the difference between the [*] Volume Threshold and
the actual SABRE Bookings at all the Customer's locations. Measurement of the
[*] Volume Threshold shall be performed by TSG on a [*] basis commencing on the
Effective Date of the Agreement.
9. [*] (Base Bookings). TSG and Customer agree that if Customer processes
SABRE Bookings as described in the table below, [*]. [*] may be [*], provided
however, Customer is current in its payments due to TSG. [*] upon the happening
of an Event of Default under the terms of the Agreement. Customer and TSG agree
that TSG is under no obligation to provide any credits, offsets or discounts of
any kind to Customer beyond the Initial Term of the Agreement.
<TABLE>
<CAPTION>
[*] SABRE Booking Level [*]
----- --------------------- -----
<S> <C> <C>
[*] For SABRE Bookings between [*] [*] per SABRE Booking
[*] For SABRE Bookings above [*] [*] per SABRE Booking
</TABLE>
10. [*] (Incremental Bookings). TSG and Customer agree that if Customer
processes SABRE Bookings above the Volume Threshold described in the table below
at the end of [*], TSG shall establish a [*] in excess of the levels stated in
the table below. [*] Charges not covered by this Agreement. [*] upon completion
of each [*], provided however, Customer is current in its payments due to TSG.
In the event that Customer processes SABRE Bookings above the Volume Threshold
within the first three quarters of Agreement Years 2, 3, 4 or 5, TSG agrees to
allow Customer to convert to cash, for payment at the third quarter measurement
period, an amount equal to [(SABRE Bookings processed by Customer during the
first three quarters of that Agreement Year minus SABRE Booking Volume Threshold
for that Agreement Year) multiplied by $0.75], provided however, Customer is
current in its payments due TSG. Any unused portion of this [*] upon the
happening of an Event of Default under the terms of the Agreement.
<TABLE>
<CAPTION>
[*] SABRE Booking Volume Threshold [*]
----- -------------------------------- -----
<S> <C> <C>
[*] [*] SABRE Booking [*]
[*] [*] SABRE Booking [*]
[*] [*] SABRE Booking [*]
[*] [*] SABRE Booking [*]
[*] [*] SABRE Booking [*]
</TABLE>
11. SABREscan. TSG and Customer agree to a contractual SABREscan rate of [*]
Transactions per SABRE Booking. Transactions and SABRE Bookings include, but are
not limited to, those generated by Customer retail, call-center and on-line
("Internet") locations. Customer agrees that SABREscan will be measured monthly
using a twelve-month rolling average, and Customer agrees to pay TSG on a
quarterly basis an additional charge at the rate of [*] per Host Transaction for
Host Transactions which exceed the level of [*] Host Transactions per SABRE
Booking.
12. Fares Filing. TSG and Customer agree to retain in force the provisions of
the agreement termed "SABRE Agreement for Negotiated Fares Maintenance" dated
15 July 1994, throughout the term of the Agreement. Customer agrees to pay TSG
the monthly charge of [*] for these services. Should TSG's costs to provide
Customer's fares
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
filing decline substantially below [*] per month, TSG agrees to reduce
Customer's charges associated with this fares filing. TSG agrees to guarantee
fares filed by Customer as set forth in Appendix B.
13. SABRE Terminal Addresses (TAs). Customer agrees to pay TSG the sum of [*]
for every Terminal Address exceeding the [*] total number allowed by TSG
below.
<TABLE>
<CAPTION>
Year Total Number of TAs Allowed
------ ---------------------------
<S> <C>
Year 1 [*]
Year 2 [*]
Year 3 [*]
Year 4 [*]
Year 5 [*]
</TABLE>
14. Internet On-line Bookings. Customer agrees to pay TSG the sum of [*] for
every ticketed Passenger Name Record ("PNR") created which utilizes Customer's
Internet website for all or part of the booking process.
15. Credit Card Address Verification ("AVS"). Customer agrees to pay TSG the sum
of [*] for every automated credit card address verification ("AVS") query
Customer processes through SABRE. [*].
16. Turbo SABRE License Fees. Customer agrees to pay TSG the sum of [*] for each
additional Turbo SABRE license utilized by Customer during the term of this
Agreement. TSG agrees [*] by Customer on or after the Effective Date of this
Agreement [*] of its purchase date.
17. TSG Technical Support. Customer agrees to pay TSG the sum of [*] per hour
for any TSG in-house technical support provided to Customer by TSG during the
term of this Agreement. Customer agrees that TSG is under no obligation to
provide technical support to Customer, and agrees to pay TSG for the services of
any outside parties (including but not limited to consultants and
subcontractors), which may be passed through to Customer at rates which may
exceed [*] per hour. Customer also agrees to pay TSG's reasonable administrative
costs and travel and incidentals expenses associated with any Customer technical
support provided by or on behalf of TSG.
18. Reduction in Number of Data Lines. Provided that Customer reduces its
usage of SABRE data lines, TSG shall provide Customer additional amounts in
Customer's paragraph 3 Line of Credit. These additional amounts shall be
calculated monthly as [(41 minus Customer's number of Equivalent Data Lines in
that month) multiplied by $250 per month].
<TABLE>
<CAPTION>
Number of Equivalent Number of Equivalent
Data Line Data Lines Data Line Data Lines
<S> <C> <C> <C>
96 KB X .25 1 384 KB Frame Relay 6
56 KB Frame Relay 2 512 KB Frame Relay 7
ISDN 2 768 KB Frame Relay 8
128 KB Frame Relay 3 1024 KB Frame Relay 10
256 KB Frame Relay 5 1536 KB Frame Relay 11
</TABLE>
19. Reports. Reports showing the number of SABRE Bookings shall be provided by
TSG on a monthly basis. Invoicing, if necessary, will be made at the end of each
month and Customer agrees to pay all amounts due to TSG, including applicable
taxes, within thirty (30) days of the invoice date.
20. Monthly Reconciliation. The reports will be reconciled by TSG and Customer
each month. The semi-annual measurement will be calculated using the reconciled
information.
21. Yearly Reconciliation. Upon each anniversary of the Effective Date, there
shall be a reconciliation of payments/credits made throughout the year. Such
reconciliation shall consist of the following: the total SABRE Bookings over the
year shall be compared to the Booking Threshold as defined in paragraph 7 and
the differentiation shall be applied to the formula herein regarding SABRE
Bookings above or below the Booking Threshold as applicable ("The Reconciled
Amount"). The Reconciled Amount, and all [*] Volume Threshold incentives under
paragraph 10 shall be compared to the actual amount of payments/credits provided
during the same year and TSG shall invoice or credit Customer for the difference
between The Reconciled Amount and the actual amount paid/credited during the
year.
22. Acquisitions. If at any time during the term of the Agreement, Customer
purchases or otherwise acquires all of the assets of any travel agency which
utilizes SABRE, then such travel agencies shall be bound by the terms and
conditions as set forth in the Agreement and this Amendment. Notwithstanding the
foregoing, all outstanding receivables at the time of acquisition by Customer
must be paid to TSG prior to inclusion of the acquired locations and/or
equipment under the terms of the Agreement, unless otherwise agreed to by both
parties. Customer and travel agency acquired must both notify TSG in
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
writing of the acquisition and must provide at a minimum (i) the pseudo city
code of acquired location(s), (ii) total number of productive devices being
acquired, and (iii) the effective date of the acquisition.
23. Communications Costs. Commencing on the first anniversary of the Effective
Date but not more than once every contract year, TSG shall have the right to
decrease the Yearly Volume Threshold Incentives to recover any actual increases
in communication costs during the upcoming year. TSG shall provide to Customer
satisfactory evidence of such increased communication costs.
24. SABRE System Reliability. In the event Customer is unable to generate SABRE
Bookings through the System or the SABRE System for a period of four or more
consecutive hours, or 32 (thirty-two) hours within any calendar month, due to
the negligence of TSG, TSG and Customer agree to negotiate an appropriate
financial remedy for Customer.
25. Wholly Owned Offices/Outlets. The terms and conditions of the Agreement and
this Amendment are only applicable to wholly owned offices/outlets of Customer
and shall not apply to any franchise or associate operation.
26. Confidentiality. It is expressly understood and agreed that this Amendment
and the Agreement, and each and every provision hereof, shall be held and
treated as confidential and shall not be disclosed by Customer to any other
person, firm, organization, association, or entity, of any and every kind,
whether public, private or governmental, for any reason, or at any time, without
the prior written consent of TSG (except that Customer may disclose the
provisions of the Agreement and this Amendment to its attorney and/or
accountant), unless such disclosure is required by law or legal process. In the
event of such disclosure, this Amendment and the Agreement may be terminated
immediately by TSG, without notice to Customer, and TSG shall have the right to
pursue any remedies available to it in law or in equity.
27. Defined Terms. The defined terms used in this Amendment shall have the
meaning assigned to such terms in the Agreement.
28. Agreement. Except as otherwise provide herein, all other terms of the
Agreement remain in full force and effect. In the event of any conflict between
the terms of the Agreement and this Amendment, the Amendment shall control.
29. Termination of Prior Agreements. All oral or written agreements entered into
by the parties prior to the effective date of the Agreement and this Amendment
which relate to the maintenance or use of the SABRE System or any portion
thereof shall be deemed terminated upon execution of the Agreement and this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year written below.
<TABLE>
<CAPTION>
CUSTOMER THE SABRE GROUP, INC.
<S> <C>
By: /s/ Mike Hartley By: /s/ Darla K. Couture
----------------------------- ---------------------------------
(Signature) (Signature)
Name: Mike Hartley Name: D.K. Couture 3/11/99
--------------------------- -------------------------------
(Print Name) (Print Name)
Title: President Title:
-------------------------- ------------------------------
Date: 2/25/99 Date:
--------------------------- -------------------------------
PCC: 2DF0
----------------------------
</TABLE>
<PAGE>
Appendix A
Cheap Tickets, Inc.-TSG TravelBase Operating Conditions
TravelBase system performance, and TravelBase's resultant ability to process the
transactions associated with a given number of SABRE Bookings, is dependent upon
a broad range of factors. Many of these factors rest solely within the control
of Customer. Customer agrees to operate TravelBase in an efficient manner, in a
manner for which it was designed, and in a manner in keeping with Customer's
Past Practices.
Customer agrees to consult with TSG prior to any use of TravelBase outside of
Customer's Past Practices. Such use would include, but is not limited to,
substantially greater report size or frequency, highly automated interactive
reporting or other database interaction for which TravelBase is not currently
used by Customer, substantial increase in record sizes, and any substantial
increase in the number of concurrent connections to TravelBase.
Customer and TSG agree to mutually confer to determine how to respond to any
Customer business need that might result in Customer's use of TravelBase outside
of Customer's Past Practices. Customer and TSG also agree to make good faith
efforts to negotiate, to mutual satisfaction, any financial impacts related to
providing such a solution to Customer. In the event that these good-faith
negotiations are unsuccessful Customer agrees that TSG is under no obligation to
provide or support that use of TravelBase outside of Customer's Past Practices.
If Customer proceeds with such usage of TravelBase outside of Customer's Past
Practices without TSG's written concurrence, Customer agrees to (i) pay TSG for
any additional cost incurred by TSG resulting from that usage and (ii) hold TSG
harmless, in the event that TravelBase is unable to adequately process
Customer's data.
Past Practices include, but are not limited to, Customer's current
. Number of concurrent users
. Number of concurrent connections per user
. Number of transactions per SABRE Booking
. Average size of transaction record
. Peak size of transaction record
. Number of reporting links
. Report size
. Frequency and timing of reporting queries
Customer agrees to limit the total number of months of data stared on the
TravelBase system to 35 months.
<PAGE>
Appendix B
Cheap Tickets, Inc.--TSG Fare Filing Guarantee
TSG is committed to providing quality information and guarantees the fares that
are auto-priced and ticketed in our system. In order to provide accurate fares,
TSG must control the content and is therefore unable to guarantee fares that
have been changed or manipulated and those that do not adhere to the fare rules.
This document should clarify the types of fares and ticketing practices TSG will
and will not guarantee.
Criteria for Debit Memo Reimbursement
- -------------------------------------
Debit Memos for the following types of fares and ticketing practices will
generally be paid by TSG; however, such debit memo will be reimbursed only when
error is caused by the SABRE System's pricing functionality. For example, a
debit memo caused by an incorrect ticket designator would not be paid by TSG:
1. Phase 3.0 tickets: tickets auto-priced and ticketed through the SABRE System
(See exceptions listed below)
2. Phase 3.75 tickets: tickets showing ticket designator
TSG will NOT pay Debit Memos related to certain types of faring and/or ticketing
practices including, but not limited to, the following:
1. Fare quotes
2. Handwritten tickets
3. Phase 4.0 tickets
4. Phase 3.5 tickets
5. Phase 3.75 tickets which have an error not caused by the SABRE System's
pricing functionality, including tickets with incorrect ticket designators
6. Airline schedule changes Messages not received by the subscriber which
result in additional charges to the customer
7. Add-collects made to customers due to a change in itinerary from the
original ticket
8. Ghost tickets, printer problems and outages, refund penalties due to
refunding a round trip ticket when only a portion of the ticket is used, or
a non-refundable ticket
9. Failure to report a ticket during a sales reporting period
10. Credit Card charges made by the Airline for incorrect credit card
authorization codes, use of incorrect credit card, over-extending floor
limits, or use of black-listed or stolen cards
11. Phase 3.0 tickets that have been manipulated and subject to the overrides
listed below:
- Tax exemptions that are a result of in override of the SABRE System's tax
program (subscriber is responsible for showing proof of tax exemption
status to die airline and collect all appropriate taxes)
- Senior Citizen Discount override when fire rules states no Senior
Citizens Discount are allowed on specific fare basis
- Endorsement violations that are a result of a ticketing override
- Canceled and Re-booked itineraries for the purpose of extending the
ticketing limit. Ticketing requirements must be met and ticket must be
issued within the time frame of the initial booking of SABRE record.
- Passive Segment bookings and fees, i.e.: Debit Memos issued for incorrect
booking code when the itinerary has been passively booked in a class of
service not applicable to the fare used. Debit memos issued for segment
fees for usage of my passive status code such as GK or BK
- Commission over-collection by agency
- Plating fees by Airlines
- Point beyond ticketing when traveler has not completed the trip booked
- Back to back ticketing when multiple round trips are booked in one PNR
- Validation override
Terms and Conditions
- --------------------
TSG reserves the right to modify and/or cancel its Fare Guarantee Policy at any
time without notice.
Neither TSG nor its affiliates shall be liable to Customer, nor deemed to be in
default of this Agreement on account of any delays, errors, malfunctions, or
breakdown with respect to the equipment, data or services provided under this
Agreement, regardless of its negligence.
TSG and its affiliates disclaim and Customer hereby waives all warranties,
expressed or implied, including but not limited to, any warranty of
merchantability or fitness for intended use of any equipment, data or services
furnished under this Agreement, or any liability in negligence, tort or strict
liability with respect to the equipment data or services furnished hereunder.
Customer agrees that neither TSG nor any affiliate of TSG shall be liable to it
for consequential damages under any circumstances (including loss of revenues
related to the presentation and/or selling of travel-related products or
services).
The above terms and conditions relate directly to TSG's fare filing activities
on behalf of Customer. The terms and conditions as set forth in the Agreement
shall continue to apply, and in the event of any conflict between these terms
and conditions, die Agreement shall control.
Contacts & More Information
- ---------------------------
Submission of New Debit Memos:
-----------------------------
Via fax: (917) 963-4659
Via mail:
ATTN: Pricing Team
SABRE WorldFare Pricing Team
Mail Drop 1457
P.O. Box 619615
DFW Airport, TX 75261-9615
Inquiries about Previously Submitted Debit Memos:
------------------------------------------------
Queue: QP/IQAS or QP/IQAG
<PAGE>
Exhibit 10.14
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.
SABRE AGREEMENT
---------------
FOR
---
NEGOTIATED FARES MAINTENANCE
----------------------------
THIS AGREEMENT is made as of the 15th day of July, 1994, by and between
SABRE TRAVEL INFORMATION NETWORK ("STIN"), a division of AMERICAN AIRLINES, INC.
a Delaware corporation having its principal address at 4200 American Boulevard,
Fort Worth, Texas 76155 (American), and CTI CORPORATION, a corporation having
its principal place of business at 738 Kaheka Street, Honolulu, Hawaii
("Customer").
RECITALS
A. STIN provides computerized reservations services for travel agents with
related data processing activities through its SABRE Computerized Reservations
System which is a database of fares and pricing data.
B. Customer operates a travel agency and enters into contractual arrangements
for negotiated fares with carriers operating air transportation services.
C. The parties desire to enter into an agreement governing the SABRE display and
maintenance of the Customer's negotiated fares.
SECTION 1. DEFINITIONS. The following definitions shall apply to this
Agreement.
1.1 ATPCo is the Airline Tariff Publishing Company which is a vendor of fares
data to the airline industry.
1.2 Fare Base Management is a department of SABRE Computer Services. Fare Base
Management shall be responsible for updating and maintenance of the Negotiated
Fares, Fare Rules, Fare Routings and other related information.
1.3 Fare Rule is a set of provisions, limitations or conditions applicable to a
specific Negotiated Fare or set of Negotiated Fares as reflected in a single
rule number assigned by ATPCo. The same ATPCo rule number in two tariffs will
be construed to be two rules.
1.4 Fare Routing is the path of travel the traveler must follow to obtain the
Negotiated Fare from the appropriate carrier.
1.5 Implementation Date is August 2, 1994 but will be extended one day for each
day after July 21 that ATPCo fails to deliver the Customer's Negotiated Fares
through an acceptable transmission to Fare Base Management. If the revised
implementation Date falls on a weekend or legal holiday, the date will be
further extended until the following Tuesday.
1.5 Negotiated Fares are fares subject to various rules and restrictions which
are negotiated by Customer with various air transportation carriers and which
are evidenced by valid contracts with the applicable air carriers.
1.6 SABRE System Database is the database of fares, rules and restrictions
maintained in STIN's SABRE Computerized Reservations System.
<PAGE>
SECTION 2. RESPONSIBILITIES OF STIN
2.1. STIN agrees to process the Customer's Negotiated Fares, Fare Rules and
Fare Routings into the SABRE System Database and to maintain Customer's
Negotiated Fares and the Fare Rules and Fare Routings pertaining to such fares,
subject to the following terms and conditions:
a. STIN agrees to process and maintain Customer's Negotiated Fares, together
with the applicable Fare Rules and Fare Routings, to the extent that such
rules and routings are, at STIN's sole discretion, practical for inclusion in
the SABRE System. However, notwithstanding the above, STIN shall not, at any
time, be required to maintain more than [*] Customer Fare Rules within the
SABRE System Database.
b. STIN shall use its best efforts to provide SABRE access to Customer's
Negotiated Fares, Fare Rules and Fare Routings by the Implementation Date. In
the event that Customer does not have access to its Negotiated Fares, Fare
Rules and Fare Routings by the Implementation Date, it may terminate this
contract which shall be its exclusive remedy for STIN's failure to meet the
Implementation Date.
c. After the initial implementation of Customer's existing Negotiated Fares,
Fare Rules and Fare Routings in the SABRE System Database, STIN will make
changes or additions to the Customer's Negotiated Fares, Fare Rules and Fare
Routings upon Customer's written request to Fare Base Management. Such
changes or additions will be made within [*] days of receipt of Customer's
request whenever reasonably practical.
d. Should all or part of Customer's data be lost or destroyed Fare Base
Management shall use its best efforts to reconstruct the data within twenty
four (24) hours of such loss or destruction; in the event that such loss of
Customer's data is caused, in whole or in part, by force majeure or
Customer's negligence such reconstruction shall be at Customer's expense; and
in any other event, such reconstruction shall be at STIN's expense. To the
extent that reconstruction of the Customer's data requires data solely in
Customer's possession, STIN shall use its best efforts to reconstruct the
database within twenty four (24) hours of receiving such data from the
Customer.
e. STIN shall, under no circumstances, be responsible for calculating the
Negotiated Fares under the Customer's contracts with various air carriers.
Instead, the Customer's Negotiated Fares will be added to the SABRE System
Database solely through transmissions or magnetic tapes received from ATPCo.
STIN assumes no responsibility or liability for the accuracy of any
information received from ATPCo.
2.2. STIN shall bill the Customer on a monthly basis. Payment is due upon
receipt of each monthly invoice.
2.3. STIN shall use its best efforts to assure that data supplied by the
Customer is promptly and accurately incorporated into the SABRE Database;
however, STIN does not warrant the accuracy or completeness of the data so
incorporated, nor does it assume liability for consequential damages resulting
from any delay in, or error or omission made in the course of such
incorporation, whether or not solely attributable to STIN's negligence or other
conduct.
2.4. SABRE Downtime. Customer recognizes that from time to time, SABRE and/or
access to Customer's Negotiated Fares, Fare Rules and Fare Routings may be
unavailable due to unexpected failures and routine maintenance, upgrading or
repairs. STIN shall not be liable for any such downtime.
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
SECTION 3. RESPONSIBILITIES OF CTI CORPORATION
3.1 Customer Representations and Warranties. Customer makes the following
representations and warranties:
a. The Customer warrants that the Negotiated Fares, Fare Rules, Fare
Routings and any other data it supplies under this Agreement is based on
fully and validly executed contractual agreements between the Customer and
various carriers on whose behalf it is authorized to sell transportation.
b. Customer warrants the accuracy and reliability of all Negotiated Fares,
Fare Rules, Fare Routings and any other information it supplies to STIN under
this contract and assumes sole responsibility and liability (if any) for
providing this information to STIN on behalf of those carriers with whom
contracts for Negotiated Fares exist.
c. Customer warrants that in executing this agreement and in supplying the
Negotiated Fares, Fare Rules, Fare Routings and any other information
hereunder, it is not in breach of any existing contracts or in violation of
any Federal or State statutes, rules or regulations.
3.2 Information Supplied. In supplying data to be included in the SABRE System
Database, the Customer shall conform to the standards and procedures as
prescribed in attached Schedule 1 and as amended from time to time by mutual
consent.
3.3 Customer Payment. Customer shall pay STIN each of the following charges
for services provided pursuant to this Agreement.
a. A one time implementation fee of [*] for development, testing and for the
inputting of the Customer's existing Negotiated Fares, Fare Rules, Fare
Routings and other related information into the SABRE System Database, which
shall be due and payable within thirty (30) days of the Implementation Date.
b. A charge for each request change or addition to the SABRE System Database
as follows:
i. A filing fee of [*] to be charged each time Customer request STIN to
make one or more changes or additions to the existing SABRE System
Database.
ii. An additional processing fee of [*] per Fare Rule or Fare Routing for
each change or addition to the existing SABRE System Database. However,
nothwithstanding the above, STIN shall waive this [*] processing fee for
a given number of requested changes or additions as set forth in the
following chart.
Number of Customer Fare Number of Changes / Additions For
Rules in SABRE System Which No Processing Fee Will Be
Database Charged
1 - 75 [*]
76 - 100 [*]
100 - 125 [*]
126 - 200 [*]
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
c. A monthly maintenance and storage fee based on the number of Fare Rules
maintained in the SABRE System Database as shown in the following chart.
<TABLE>
<CAPTION>
Number of Customer Fare Monthly Maintenance
Rules in SABRE System and Storage
Database Fee
<S> <C>
1 - 75 [*]
76 - 100 [*]
100 - 125 [*]
125 - 200 [*]
</TABLE>
d. The filling fee of [*] and the processing fee of [*] shall be [*] made to
the Customer's Negotiated Fares, Fare Rules of Fare Routings during the first
[*] days after the actual Implementation Date.
SECTION 4. TERM, DEFAULT AND TERMINATION PROVISIONS
4.1. Term. This Agreement shall be effective for a period of one (1) year from
the date of this Agreement or until terminated pursuant to Sections 2.1(b),
4.4. or 4.5 of this Agreement. In the event that this Agreement has not been
terminated prior to the expiration of one (1) year, it shall continue in effect
thereafter until terminated by either party upon ninety (90) days written
notice.
4.2. Price Increases. At the end of the one (1) year initial term of this
agreement, STIN may increase the charges set forth in Section 3.3 of this
Agreement. STIN agrees to notify Customer in writing at least thirty (30) days
prior to any such price increase.
4.3 Default. The occurrence of any one (1) or more of the following events
shall constitute an event of default pursuant to this Agreement ("Event of
Default").
a. Customer fails to pay or cause to be paid any amounts due hereunder as it
becomes due in accordance with the terms of this Agreement and such failure
continues for a period of five (5) days after receipt of written notice from
STIN that Customer is in default under this Agreement.
b. Either party has materially breached or misrepresented any representation,
warranty, or covenant given by it in this Agreement.
c. Customer commences bankruptcy or insolvency proceedings or Customer ceases
to do business as a going concern, makes an assignment for the benefit of
creditors, admits in writing its inability to pay debts as they become due,
or acquiesces in the appointment of a trustee, receiver or liquidator for it
or any substantial part of its assets.
4.4 Termination. Upon occurrence of an Event of Default, the non-defaulting
party shall have the right to (i) terminate this Agreement, and if Customer is
the defaulting party. Customer's access to SABRE; and (ii) seek all legal and
equitable remedies to which it is entitled.
4.5 Right to Terminate if Claim is Made. In the event that any claim is made
or threatened to be made against STIN by one of the carriers with whom Customer
has Negotiated Fares, Fare Rules or Fare Routings and such claim arises out of
STIN's performance under this Agreement, STIN may, in its sole discretion,
terminate this Agreement without any further obligation or liability on the part
of STIN.
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
SECTION 5. LIMITATION ON LIABILITY
5.1 STIN shall not be liable to Customer for any loss, claim or damage caused
in whole or in part by STIN's negligence or by contingencies beyond STIN's
control in procuring, collecting, compiling, abstracting, Interpreting,
communicating, processing or delivering Negotiated Fares, Fare Rules or Fare
Routings through SABRE. However, if errors in data are due to circumstances
under STIN's direct control, STIN shall use its best efforts to correct such
errors within 72 hours after notification by the Customer of the error.
Although STIN shall use its best efforts to accurately maintain Customer's
Negotiated Fares, Fare Rules and Fare Routings in the SABRE System Database, the
foregoing limitation on liability includes, but is not limited to, any liability
in contract or tort, for the difference between the fare reflected in SABRE, or
on tickets autopriced and issued by SABRE, the Customer's actual Negotiated
Fares.
5.2 STIN DISCLAIMS AND CUSTOMER HEREBY WAIVES ANY WARRANTIES EXPRESS OR IMPLIED
INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
INTENDED USE OF SERVICES FURNISHED HEREUNDER OR ANY LIABILITY IN NEGLIGENCE
OR TORT WITH RESPECT TO THE SERVICES FURNISHED HEREUNDER. CUSTOMER AGREES
THAT STIN SHALL NOT BE LIABLE TO IT FOR CONSEQUENTIAL DAMAGES UNDER ANY
CIRCUMSTANCES.
SECTION 6. INDEMNITY
Customer hereby agrees to indemnify and hold STIN, its officers, directors,
agents and employees harmless from and against any and all liabilities, damages,
losses, expenses, claims, demands, suits, debit memos, fines or judgments
including, but not limited to, attorney's fees, costs and expenses incident
thereto, which may be suffered by, accrue against, be charged to or recoverable
from STIN, its officers, directors, agents, or employees, by reason of losses
(including lost profits), damages, injuries or deaths of persons arising out of
or in connection with, STIN's performance of the terms if this Agreement or any
negligent act, error, or omission of the Customer.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Force Majeur. STIN shall not be liable for delays in or failure of
performance hereunder caused by acts of God, strikes or other labor disputes,
fires, or for any other delay or failure resulting from a cause beyond its
reasonable control.
7.2 Assignment. Customer shall not transfer or assign this Agreement, or any
right or obligation under it by operation of law or otherwise, without the prior
written consent of STIN.
7.3 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF TEXAS AND THE UNITED STATES OF AMERICA. CUSTOMER HEREBY SUBMITS AND CONSENTS
TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF TEXAS AND THE COURTS OF THE STATE OF TEXAS IN ANY DISPUTE
ARISING OUT OF THIS AGREEMENT AND AGREES THAT SERVICE OF PROCESS SHALL BE
SUFFICIENT IF MADE ON THE SECRETARY OF STATE OF THE STATE OF TEXAS WITH A COPY
TO BE SENT, REGISTERED MAIL TO THE CUSTOMER AT THE ADDRESS SET FORTH BELOW OR
SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO STIN.
<PAGE>
BELOW OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO
STIN.
7.4 Notices. Notices given or required under this Agreement shall be deemed
delivered if sent by United States mail, postage prepaid, fax, or by telex, to
the respective address of SABRE Travel Information Network or Customer set forth
below:
STIN: Customer:
SABRE Travel Information Network C.T.I. Corporation
- ------------------------------------ ---------------------------------------
P.O. Box 819816 738 Kaheka Street #301
- ------------------------------------ ---------------------------------------
DFW Airport, TX 75261-9616 Honolulu, HI 86814
- ------------------------------------ ---------------------------------------
7.5 Waiver. A failure or delay of STIN to require strict performance or to
enforce a provision of this Agreement shall in no way be construed as a waiver
or continuing waiver of any provision of this Agreement.
7.6 Severability. Any provision of this Agreement which may be determined in a
court or other competent government authority to be prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition and unenforceability, without invalidating the
remaining provisions thereof, unless such prohibition or unenforceability
materially after the rights or obligations of either party.
7.7 Entire Agreement. This Agreement shall constitute the entire agreement of
the parties as to the matters set forth herein and shall supersede any previous
understandings, whether written or oral, between the parties relating to the
matters set forth herein. Any amendment to this Agreement must be in writing and
signed by the authorized representatives of both parties.
7.8 Effective Date. This Agreement shall not be effective until countersigned
by an authorized representative of STIN.
IN WITNESS WHEREOF, STIN and Customer have executed this Agreement as of
the date first above written.
CTI CORPORATION STIN
By: Customer /s/ Mike Hartley By: /s/
-------------------------- --------------------------
Name: Mike Hartley Name:
------------------------ -------------------------
Title: General Manager Title:
---------------------- ------------------------
<PAGE>
QCP Schedule for SABRE
<TABLE>
<S> <C> <C> <C> <C> <C>
Vendor WDM WDM QCP SABRE
Transmission Update Freetext Processing Load Times
Cutoff Cutoff Time
QCP 09:00 09:30 09:30 - 13:00 -
1 ATP Dom 13:00 14:00
QCP 11:30 11:30 - 11:45 12:00 - 18:30 -
2 ATP Int'l 10:00 12:00 18:30 20:30
ATP Dom 11:30
QCP 14:00 19:00 19:00 - 23:00 -
3 ATP Int'l 14:00 23:00 02:30
SITA 17:00
QCP 19:00 23:00 21:45 23:00 - 03:00 -
4 ATP Int'l 03:00 06:30
ATP Dom
QCP 04:30 05:00 05:00 - 07:30 -
5 ATP Int'l 07:30 10:00
Sat/ 16:00 18:00 14:30 18:00 - 20:30 -
Sun ATP Int'l 20:30 08:30
ATP Dom
</TABLE>
<PAGE>
Reference WorldFare Data Management
- --------------------------------------------------------------------------------
GFS, Commercial, and SABRE Categories/Tables
IMS Menu Screens (see chart for specific category screens):
Main Menu /FOR TQOAD
Fare Class Application /FOR TQOGU
Rule /FOR TQODH
Fares Update (Fare Record) /FOR PFQOAQ
Browse for Footnotes/Rules /FOR TQOKI or /FOR TQOKJ or /FOR TQOKK
QCP Table /FOR TQOKR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
QCP (IMS) Auto
SABRE RD GFS /FOR TQODG MRT Rules Freetext
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
01 Booking Code WAR 412
02 Penalty 16 402
03 Reservation/Ticketing 05 008 TQODF
04 Minimum Stay 06 001 TQOCE
05 Maximum Stay 07 002 TQOCD
06 Day/Time 02 005 TQOCC
07 Season 03 03
08 Blackouts 11 11
09 Effective/Expired 14-15 003 TQOCI
Sales/Travel 006 TQOCZ
10 Flight Application 04 014 TQOCO WAR*
11 Stopovers 08 009 TQONF WAR* 408
12 Ticket Issue 15 016 TQONW 420
13 Surcharges 12 015 TQOCN 936
14 Discounts 19-22 012 TQOCL 406
15 Reroute 16 404
16 Transfers 09 09
17 Combinability 10 10
18 Open Return 05 410
19 Refunds 16 416
20 Special Provision 13 011 TQOCG
21 Co-terminals WAR* 418
22 Int'l Construction 114/116
23 Group 26 414
24 Tour 27 422
25 Deposit 27 424
26 Misc. 23 426
Ticket Endorsements 18 108
</TABLE>
* Limited WAR applications
- --------------------------------------------------------------------------------
Version 2.3 Categories-1 10/27/97
<PAGE>
EXHIBIT 10.15
SABRE TRAVELBASE SYSTEM LEASE AGREEMENT
---------------------------------------
The SABRE TravelBase System Lease Agreement (the "Agreement") is entered
into by and between the SABRE Travel Information Network, a division of American
Airlines, Inc. ("American") and the undersigned ("Customer"), as of the date
executed by American below ("Effective Date") regarding the provision of
products and services set forth herein.
Article 1 - Term
- ----------------
1.1 The term of the SABRE TravelBase System shall commence on the completion
of data conversion (the "Effective Date") and shall continue in effect for the
number of months as stated on the Schedule ("Initial term") unless terminated as
provided herein. Any additional SABRE TravelBase System installed subsequent to
the date of execution of this Agreement by American shall be subject to the
terms and conditions of this Agreement and shall have a term as specified on the
Supplement ("Additional Term"), commencing on the date of installation. Upon
expiration of the applicable term, the Agreement for such SABRE TravelBase
System shall continue on a month-to-month basis until termination by either
party upon thirty days notice.
Article 2 - Definitions
- -----------------------
2.1 Agreement means this SABRE TravelBase System Lease Agreement, and all
Amendments, Schedules and Supplements made a part hereof.
2.2 Confidential Information means this Agreement, any and all applicable
rights to patents, copyrights, trademarks and trade secrets, proprietary and
confidential information of American or its affiliates, subsidiaries, successors
or assigns concerning their past, present or future research, development,
business activities or affairs, finances, properties, methods of operation,
processes and systems, agreements, related to the business of American.
2.3 Instructions means any and all manuals, operation procedures,
manufacturer's recommendations, rules and instructions delivered or made
available to Customer (either in hard copy, verbally or on-line) all of which
must be complied with by Customer. Such Instructions may be unilaterally
revised or amended by American at any time in its sole discretion.
2.4 SABRE TravelBase System means the Standard Equipment, SABRE TravelBase
System Components, Instructions and/or the SABRE TravelBase System Software as
identified on the Schedule and all Supplements.
2.5 SABRE TravelBase System Component means all memory, disk storage space,
ports, workstations, printers and any other element of the Standard Equipment.
2.6 SABRE TravelBase System Software means that Software delivered by
American to Customer as identified on the Schedule and all Supplements including
all upgrades, improvements, enhancements and modifications thereto.
2.7 Schedule means the document reflecting the Charges and term for the SABRE
TravelBase System.
2.8 Standard Equipment means the items of computer hardware leased to
Customer by American in accordance with this Agreement.
2.9 Supplement means the document reflecting any changes to the SABRE
TravelBase System, and/or charges or credits related thereto.
Article 3 - Charges and Payment
- -------------------------------
3.1 Prepayment. Upon execution, Customer shall pay to American the
prepayment as shown on the Schedule. When the SABRE TravelBase System is
installed, the prepayment shall be credited against the Customer's first
Charges.
3.2 Charges. All amounts payable to American ("Charges") shall be due and
payable within fifteen days of the date of American's invoice, without set off
or counterclaim.
<PAGE>
3.3 Additional Charges. Customer agrees to pay to American an additional
charge at American's then prevailing rate for services and materials including
without limitation the following: (a) the installation or removal of Standard
Equipment; (b) excess cable or teflon coated cable required for installation;
(c) Standard Equipment relocation within the site; (d) additional support and
expenses outside of the scope of this Agreement.
3.4 Increases. American shall have the right to increase the Charges as
shown on the Schedule and any Supplements for the remaining term of this
Agreement upon thirty days written notice to the Customer. The total amount of
such increase shall not exceed ten percent of the Charges in any consecutive
twelve-month period. Hardware maintenance payments may be increased; however,
such increase may not be more than a rounded-up percentage equal to the
percentage of increase charged to American by its maintenance vendors.
3.5 Interest. Charges not paid when due shall accrue interest at the rate of
eighteen percent per annum or the highest rate permitted by Texas law, whichever
is less.
3.6 Taxes. Customer shall pay any taxes, or assessments including any
interest or penalty thereon levied as a result of this Agreement, excluding
taxes measured by the net income of American. Customer shall indemnify and hold
harmless American from all costs, fines and expenses (including reasonable legal
costs) incurred by American resulting from Customer's failure to pay taxes as
provided in this Article.
Article 4 - Installation and Delivery
- -------------------------------------
4.1 Delivery. American shall arrange for delivery of the SABRE TravelBase
System F. O. B. to the site, as identified on the Schedule and all Supplements
thereto.
4.2 Installation. Subject to Article 4.3, American shall install, or cause
to be installed, the SABRE TravelBase System at the site.
4.3 Customer's Obligations Prior to Installation. Customer, at its expense,
shall be responsible for preparing the site for SABRE TravelBase System in
accordance with the Instructions. If installation of the SABRE TravelBase
System is prevented or delayed because of Customer's failure to prepare the
site, American shall use reasonable efforts to install the SABRE TravelBase
System upon Customer's with this Article and upon payment of all reasonable
expenses incurred by American resulting from Customer's failure to prepare the
site. In the event installation of the SABRE TravelBase System is delayed as a
result of Customer's actions or failure to take action, American shall begin
invoicing Customer under Article 3 and the term of the Agreement shall commence.
Customer shall commence payments notwithstanding the fact that the SABRE
TravelBase System has not been installed. In addition, American shall
discontinue the installation process of the SABRE TravelBase System until all
applicable SABRE TravelBase hardware components have been installed, even though
American has begun the billing process. Once Customer complies with the
installation requirements, American shall proceed with the installation process.
4.4 Relocation and Possession. Customer shall at all times keep the SABRE
TravelBase System in its sole possession and control at the site. Customer
shall not move any part of the SABRE TravelBase System from or within the site
without first obtaining the written consent of American.
4.5 Communications Access. Customer shall provide at its own expense such
communication lines in accordance with the Instructions for access by American
or its designated third-party to the SABRE TravelBase System.
4.6 Non-Standard System. Customer shall not connect or use any hardware, or
firmware not acquired from American with the SABRE TravelBase System without
American's prior written consent, which shall be granted provided that such
hardware, or firmware is approved by American for use with SABRE TravelBase
System and Customer executes the Non-Standard System Amendment.
4.7 Acceptance of SABRE TravelBase System. Upon installation of the SABRE
TravelBase System, Customer shall be deemed to have accepted the SABRE
TravelBase System. Any use of the SABRE TravelBase System, and/or SABRE
TravelBase System Components or SABRE TravelBase System Software further
constitutes acceptance of the Agreement and applicable Amendments and
Supplements by the Customer.
<PAGE>
Article 5 - Repairs and Maintenance
- -----------------------------------
5.1 Repairs and Maintenance. Upon prompt notification from Customer,
American or its designated agent, shall repair and maintain the Standard
Equipment and shall keep it in good working order provided that the Standard
Equipment has been subject to reasonable operation. Customer shall not make any
modifications nor attempt to perform repairs or maintenance of any kind without
previous written permission from American. American or its designated agent,
shall have free access to the Standard Equipment at reasonable times during
normal business hours (9:00 a.m. to 5:00 p.m. local time, Monday through Friday,
excluding legal holidays) to provide such service. Damage resulting from
negligence, transport, repairs not done by American or its agents, will not be
covered.
5.2 Changes to Coverage. If Customer has title to hardware he may elect, at
any time during the term of the Agreement, to discontinue or change hardware
maintenance upon giving American ninety days written notice.
5.3 Limitations. Items consumed in the normal course of business, including
but not limited to printer ribbons and software media are excluded from
coverage. When in the course of normal usage and due to normal wear and tear, a
piece of Standard Equipment may no longer be maintained or repaired, it will be
the responsibility of the Customer to replace the Standard Equipment.
5.4 Charges. Repair or maintenance services on Standard Equipment during
normal business hours (9:00 a.m. to 5:00 p.m. local time, Monday through Friday,
excluding legal holidays) are included in the Charges, provided that the
Customer has not been negligent and the Standard Equipment has been subject to
reasonable operation; otherwise, Customer will be charged a service fee in
accordance with American's or its designated third-party's then prevailing
rates.
Article 6 - Title and Ownership of SABRE TravelBase System
- ----------------------------------------------------------
6.1 Title and Ownership of SABRE TravelBase Standard Equipment. The SABRE
TravelBase System leased hardware hereunder shall remain the property of
American. Customer shall not in any other manner dispose of the SABRE
TravelBase System or any part thereof or suffer any lien or legal process to be
incurred or levied on the SABRE TravelBase System.
6.2 Risk of Loss. Risk of loss for and damage to the SABRE TravelBase System
shall pass to the Customer upon delivery of the SABRE TravelBase System to the
site.
Article 7 - Insurance
- ---------------------
7.1 General. Upon delivery of any part of the SABRE TravelBase System to the
site, Customer shall maintain Comprehensive General Liability (including bodily
injury, product liability, property damage and contractual liability) and All
Risk Property Insurance.
7.2 Comprehensive General Liability. The Comprehensive General Liability
coverage shall be in the amount not less than one million dollars combined
single limit. The coverage shall include the following special provisions:
(a) American, its officers, agents and employees, shall be named as additional
insureds; (b) The policy(ies) shall specifically insure the indemnification
provision included in this Agreement; (c) Such insurance shall be primary
without any right of contribution from any insurance maintained by the
additional insureds; and (d) Insurers will provide American with thirty days'
prior written notice of any cancellation or material change.
7.3 All Risk Property. The All Risk Property insurance shall be in an amount
to cover the replacement value of the Standard Equipment as set forth in the
Schedule and all Supplements. Such policy shall: (a) name American as
additional insured; (b) name American as the sole loss payee for loss of the
Standard Equipment; (c) be primary without right of contribution from any
insurance carried by American; and (e) provide that American will b e given
thirty days' prior written notice of any cancellation or material change of such
policy.
7.4 Certificates. Customer will provide to American, on or before delivery
of any part of the SABRE TravelBase System to the site, a Certificate issued by
its insurer(s), evidencing the insurance coverage required by this Article. If
American does not receive such Certificates of insurance prior to delivery of
the SABRE TravelBase System, American may obtain insurance and Customer shall
reimburse American for all amounts paid by American to obtain such insurance.
<PAGE>
Article 8 - Confidential Information
- ------------------------------------
8.1 The Confidential Information shall remain American's property.
8.2 Customer shall maintain in perpetuity the confidentiality of the
Confidential Information using the highest degree of care. Customer shall not
use, sell, sublicense, transfer, publish, disclose, display, or otherwise make
available to others, except as authorized in this Agreement, the Confidential
Information or any other material relating to the Confidential Information at
any time before or after the termination of this Agreement nor shall Customer
permit its officers, employees, agents, contractors or subcontractors to divulge
the Confidential Information without prior written consent of American.
Article 9 - SABRE TravelBase System Software License
- ----------------------------------------------------
9.1 Ownership of SABRE TravelBase System Software. Customer acknowledges
that American or the original manufacturer of the SABRE TravelBase System
Software, as applicable, owns or has licensed from the owner, copyrights in the
respective SABRE TravelBase System Software and that ownership and title are
retained by the manufacturer or its licensor. All applicable rights to patents,
copyrights, trademarks, and trade secrets inherent in the SABRE TravelBase
System Software and pertinent thereto are and shall remain American's or the
original manufacturer's sole and exclusive property. Any copy of such Software
must incorporate any copyright, trade secret, or trademark notices or legends
appearing in the original version delivered to Customer.
9.2 Grant of License. Subject to the provisions of this Agreement and for
the term specified on the Schedule, either American or the original manufacturer
grants to Customer a non-transferable, non-exclusive, limited license to use the
SABRE TravelBase System Software subject to the following restrictions: (a)
Customer shall use the SABRE TravelBase System Software only to process data
related to Customer's own travel agency business transactions, (b) Customer must
do business as a bona fide travel agency, (c) the SABRE TravelBase System
Software shall be used and installed solely at the site and solely used on the
Standard Equipment, or other equipment authorized by American, (d) the SABRE
TravelBase System Software shall be used solely for internal purposes and only
in the ordinary course of business; (e) Customer shall not reserve engineer,
compile, reverse compile, decompile, disassemble, or reverse assemble the SABRE
TravelBase System Software or any portion thereof, (f) the SABRE TravelBase
System Software shall not be copied or reprinted in whole or in part except (i)
a reasonable number of copies of each program may be made in machine readable
form for reasonable archival or backup purposes, or (ii) when American as
granted permission to do so, and (g) Customer shall not lease, sell, license,
sublicense or otherwise transfer the SABRE TravelBase System Software to any
other party. Nothing in this Agreement shall convey title to the SABRE
TravelBase System Software to Customer.
9.3 Modification Rights. Customer shall not modify the SABRE TravelBase
System Software or merge such software into other programs or create derivates
works based on such software.
9.4 Upgrades and Modifications. All tangible objects containing or relating
to the SABRE TravelBase System Software are the sole and exclusive property of
American or the manufacturer. In the event American, in its sole discretion,
modifies the SABRE TravelBase System Software, it may deliver such modified
SABRE TravelBase System Software to Customer at its then current charge, if any,
and Customer shall promptly return to American any and all tangible objects
relating to the SABRE TravelBase System Software as provided in Article 15.7.
Customer shall install all such modifications within ninety days of receipt of
the new revision of SABRE TravelBase System Software. Customer shall be solely
responsible for protecting all software not obtained from American hereunder and
the data related thereto in the event of a software upgrade. Customer, in order
to receive an upgraded or updated program, shall comply with any and all terms
and conditions and Instructions imposed by American.
9.5 Processing Units. The SABRE TravelBase System Software resided solely on
the processing units (the "Fileserver" and "Database server"). In the event a
Fileserver or Database server is upgraded, replaced or moved, Customer shall be
solely responsible for moving and protecting all software not obtained from
American and the data related thereto.
9.6 Operating Program.
9.6.1 Customer acknowledges that the SABRE TravelBase System Software
incorporates, in part, copyrighted materials pertinent to the Operating Program
as identified on the Schedule. Customer agrees that such copyrighted portions
shall be subject to the Operating Program copyright and license.
<PAGE>
9.6.2 Customer will look only to American and not to the manufacturer for any
support, maintenance, assistance and upgrades and the like with respect to the
Operating Program and the manufacturer shall have no liability to Customer in
relation to this program.
9.6.3 No action, regardless of form, arising out the license of the Operating
Program may be brought more than two years after the cause of action has arisen.
9.6.4 THE LICENSE OF THE OPERATING PROGRAM, IF MANUFACTURED BY IBM, SHALL BE
CONSTRUED AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND THE UNITED
STATES OF AMERICA NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS
AGREEMENT.
9.7 SABRE TravelBase System Software.
9.7.1 Customer acknowledges and agrees that Customer is not entitled to any
greater warranty with respect to the SABRE TravelBase System Software than the
warranty received by American from its supplier of the respective SABRE
TravelBase System Software.
9.7.2 EXCEPT AS SPECIFICALLY PROVIDED BELOW, THE SABRE TRAVELBASE SYSTEM
SOFTWARE IS PROVIDED TO CUSTOMER AS IS AND WITH ALL ITS FAULTS WITHOUT ANY
WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
THOSE IMPLIED WARRANTIES ARISING OUT OF COURSE OF PERFORMANCE, COURSE OF
DEALING, USAGE OF TRADE OR ANY OTHER WARRANTY. THE ENTIRE RISK AS TO THE
QUALITY AND PERFORMANCE OF THE SABRE TRAVELBASE SYSTEM SOFTWARE IS WITH THE
CUSTOMER. SHOULD THE SABRE TRAVELBASE SYSTEM SOFTWARE PROVE DEFECTIVE, CUSTOMER
SHALL ASSUME THE ENTIRE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION.
SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE
EXCLUSION MAY NOT APPLY TO CUSTOMER. THIS WARRANTY GIVES THE CUSTOMER SPECIFIC
LEGAL RIGHTS AND CUSTOMER MAY ALSO HAVE OTHER RIGHTS WHICH VARY FROM STATE TO
STATE. ADDITIONALLY, CUSTOMER ASSUMES RESPONSIBILITY FOR THE SELECTION OF THE
SABRE TRAVELBASE SYSTEM SOFTWARE TO ACHIEVE CUSTOMER'S INTENDED RESULTS, AND FOR
THE INSTALLATION AND USE OF THE RESULTS OBTAINED FROM THE SABRE TRAVELBASE
SYSTEM SOFTWARE.
9.7.3 Notwithstanding the above, the media on which the SABRE TravelBase
System Software is encoded is warranted to the Customer against defects in
material or workmanship for a period of three months from the receipt of
original purchase by Customer. If during such period, Customer discovers any
defect in the media, Customer may return the media to American and American
shall, as Customer's sole and exclusive remedy, repair, or replace the defective
media.
Article 10 - Documentation and Training
- ---------------------------------------
10.1 Documentation. For each SABRE TravelBase System purchased hereunder,
American will provide at the time of delivery of the SABRE TravelBase System,
one copy of all such manuals as may be relative to the installation and
operation of the SABRE TravelBase System and all such on-line documentation as
may be available to enable a Customer's personnel to use and understand the
operation thereof. Additional copies may be purchased at American's then
prevailing rate.
10.2 Training. For each SABRE TravelBase System purchased, American shall
provide to Customer prior to installation of the Standard Equipment, training
for a specific number of Customer employees an the basic use and operation of
the SABRE TravelBase System Software as described an the schedule. This
training must be completed prior to the installation of the SABRE TravelBase
System. Additional classes may be offered on more advanced modules of the
software as then may be available to the Customer. Some modules have a
mandatory training requirement prior to the implementation of those modules.
10.2.1 Training for additional employees will be offered subject to
availability and at American's then prevailing rate per person, per class. The
additional training charge will be assessed on Customer's monthly invoice. A
prepayment may be necessary to secure a place in the class.
10.2.2 The training described in Article 10.2 shall be performed at a
location designated by American.
<PAGE>
10.2.3 In addition to the charge for training, American reserves the right to
charge all costs incidental to such training, including transportation, meals,
and lodging.
10.2.4 Except as otherwise provided herein, Customer is responsible for all
training of all its employees in the proper use of SABRE TravelBase. American
has the right to require further training at the Customer's expense before
adding or changing levels of software support or adding additional software
options.
10.2.5 In addition to the training described in Article 10.2, American may
offer to Customer supplemental training programs at a local Level. Such
training may consist of, but not limited to, workshops, seminars, and individual
consultations. These will be made available at American's then prevailing rate.
10.2.6 Customer and its trainees agree to comply with all training procedures
and rules established by American, and American reserves the right to remove any
Customer trainee from the training program if such trainee fails to comply with
such procedures and rules.
10.2.7 American may at its discretion, monitor or test Customer's employee's
training levels. If American determines the training level to be insufficient,
the Customer will institute such additional training, at its own expense
(including, if necessary, additional training by American at American's then
prevailing rate) as may be necessary to bring Customer's employees to the level
of training required by American.
Article 11 - Software Support
- -----------------------------
11.1 Software Support. American agrees to provide software support to assist
the Customer's personnel of an understanding of the use of SABRE TravelBase.
Such support will be in the form of a Help Desk available at specified times and
hours via telephone. Support will be limited to the SABRE TravelBase System
Software provided by American and the formation of files by SABRE TravelBase
System Software prior to transfer or export. The hours of support offered will
be 7:00 a.m. to 9:00 p.m. Central time, Monday through Friday and 8.00 a.m. to
3:00 p.m. Central time on Saturdays excluding legal holidays which am subject to
change. Unless otherwise specified, support will be limited to the Customer
officer who signs this Agreement, or with whom Customer officer designates by
providing the Help Desk telephone number.
11.2 Support Levels. American will provide ninety days of unlimited support
from the Effective Date. Thereafter, the support level elected by the Customer
shall be provided at American's then prevailing rate. Customer may elect any
level as described in the Article 11.2.2 for the Initial Term. With thirty days
written notice, Customer may upgrade the service level at any time during the
contract term. With thirty days written notice, Customer may reduce the service
level at the end of each twelve month period.
11.2.1 Definition of Call Type
(i) Billable Calls. Customer will be charged for these calls. Calls
include, but are not limited to operator knowledge for which information is
available in a manual or accessible on-line, accounting knowledge relating to
the procedures and processing of tickets, and ARC/BSP documents, other
vendor/suppliers relating to questions that should be directed to CRS vendors,
forms or suppliers, hardware and software not sold or supported by American.
(ii) Non-Billable Calls. Customer will not be charged for these calls.
Calls include, but are not limited to Hardware Maintenance where a vendor is
dispatched.
11.2.2 Definition of Support Levels.
(i) Level I. Customer may call for support as desired and required.
Customer must pay for each Billable Call at the rate specified on the Schedule
and any Supplements. Such Charges will appear an the monthly invoice.
(ii) Level II. Customer may call for support as desired and required.
Customer will be allocated, at no charge, a limited number of Billable Calls per
month as specified on the Schedule and any Supplements. All Billable Calls over
that number will be charged at the rate specified on the Schedule and any
Supplements.
(iii) Level III. Customer may call for support as desired and required. There
will be no charge for the Billable Calls at this level. Customer shall be
billed a monthly flat rate for this support option.
<PAGE>
Article 12 - Warranty, and Limitation of Warranty, Liability and Remedy
- -----------------------------------------------------------------------
12.1 Standard Equipment. The Standard Equipment shall be delivered and
installed in good working order.
12.2 SABRE TravelBase System Software. The SABRE TravelBase System Software
provided will be in good working order when installed. SABRE TravelBase System
Software and any additions, changes, improvements, and enhancements provided the
Customer hereunder shall conform to any applicable requirements or rules of the
Airline Reporting Corporation ("ARC"), Bank Settlement Plan ("BSP") or the
International Air Transport Association ("IATA") as approved by the Department
of Transportation ("DOT")
12.3 Limitation of Warranty. THE LIMITED EXPRESSED WARRANTIES SPECIFIED
HEREIN ARE THE ONLY WARRANTIES MADE BY AMERICAN AND THE MANUFACTURER AND THERE
ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE OF
SABRE TRAVELBASE OR THE SABRE TRAVELBASE SYSTEM OR ANY LIMITATION STATEMENTS
REGARDING CAPACITY. SUITABILITY FOR USE, OR PERFORMANCE OF THE SABRE TRAVELBASE
SYSTEM OR ANY COMPONENTS THEREOF, WHETHER MADE BY AMERICAN OR OTHERWISE, WHICH
IS NOT CONTAINED IN THIS AGREEMENT, SHALL BE DEEMED TO BE A WARRANTY FOR ANY
PURPOSE OR GIVE RISE TO ANY LIABILITY OF AMERICAN OR THE MANUFACTURER.
12.4 Limitation of Remedies. In the event of a material malfunction or
defect in an unaltered component of the SABRE TravelBase System that can be
reproduced by American, American will provide reasonable services to correct
such malfunction or defect. Customer will supply American with such input files
and other materials as may be necessary to enable American to diagnose and
correct the malfunction or defect. THE FORGOING SHALL BE CUSTOMER'S SOLE AND
EXCLUSIVE PRIMARY REMEDY FOR ANY MALFUNCTION OR DEFECT IN THE SABRE TRAVELBASE
SYSTEM. IF SUCH MALFUNCTION OR DEFECT MATERIALLY IMPAIRS CUSTOMER'S USE OF THE
SABRE TRAVELBASE SYSTEM AND CANNOT BE CURED AS PROVIDED IN THIS PARAGRAPH, THEN
CUSTOMER'S ALTERNATE SOLE AND EXCLUSIVE REMEDY SHALL BE TO TERMINATE THIS
AGREEMENT WITHOUT FURTHER LIABILITY TO AMERICAN FOR DAMAGES HEREUNDER.
12.5 Limitation of Liability. CUSTOMER WAIVES ALL LIABILITY IN TORT, OF
AMERICAN AND THE RESPECTIVE MANUFACTURER INCLUDING WITHOUT LIMITATION ANY
LIABILITY ARISING FROM NEGLIGENCE. NOTWITHSTANDING THE FOREGOING, AMERICAN'S
LIABILITY TO CUSTOMER HEREUNDER SHALL BE LIMITED TO THE TOTAL AMOUNT OF CHARGES
ACTUALLY PAID BY CUSTOMER TO AMERICAN PURSUANT TO THIS AGREEMENT. NEITHER
AMERICAN NOR ANY MANUFACTURER SHALL BE LIABLE TO CUSTOMER FOR ANY INCIDENTAL, OR
CONSEQUENTIAL DAMAGES, UNDER ANY CIRCUMSTANCES, INCLUDING BUT NOT LIMITED TO
LOST PROFITS, REVENUE OR SAVINGS, OR THE LOSS OF USE OF ANY DATA, EVEN IF
AMERICAN OR THE MANUFACTURER HAS BEEN ADVISED OF, KNOWN, OR SHOULD HAVE KNOWN,
OF THE POSSIBILITY THEREOF.
Article 13 - Indemnification
- ----------------------------
Customer and American hereby agree to indemnify and hold each other, their
affiliates, subsidiaries, successors and assigns and their officers, directors,
agents, and employees ("Indemnitees") harmless from and against third-party
liabilities, including, but not limited to, attorney's fees, and other expenses
incident thereto, which may be threatened against, or recoverable from the
Indemnitees by reason of any injuries to or death of persons or loss of, damage
to, or destruction of property arising out of or in connection with any act, or
omission of Customer or American, including without limitation any act, or
omission constituting negligence.
Article 14 - Assignment
- -----------------------
14.1 Assignment Or Sublease By Customer. CUSTOMER SHALL NOT SUBLEASE,
TRANSFER OR ASSIGN THIS AGREEMENT OR ANY PORTION THEREOF, OR ANY RIGHT OR
OBLIGATION HEREUNDER, UNLESS CUSTOMER HAS OBTAINED THE PRIOR WRITTEN CONSENT OF
AMERICAN. ANY ATTEMPTED ASSIGNMENT IN VIOLATION OF THIS ARTICLE SHALL BE VOID.
<PAGE>
14.2 Assignment by American. American shall have the right to sell,
transfer, assign or delegate its interests, rights and/or obligations, without
the prior consent of Customer, and, provided that such transferee or assignee
assumes all of American's obligations, American shall be released of all
obligations after the effective date of such sale, transfer, delegation or
assignment.
Article 15 - Termination and Default
- ------------------------------------
15.1 Default by Customer. The occurrence of any one of the following events
shall constitute a non-exclusive event of default (the "Event of Default")
pursuant to the terms of this Agreement.
15.1.1 Customer fails to pay any amount when due;
15.1.2 Customer ceases to be a bona fide travel agency;
15.1.3 Any representation by Customer is discovered to be materially
misleading or inaccurate, or Customer fails to perform any material covenant,
agreement, obligation, term or condition contained herein;
15.1.4 Customer ceases to do business as a going concern, makes an assignment
for the benefit of creditors, admits in writing its inability to pay debts as
they become due, acquiesces in the appointment of a trustee, receiver or
liquidator for it or any substantial part of its assets or properties. Sells,
or executes an agreement to sell all or substantially all of its assets without
the consent of American.
15.1.5 Events of Default described in 15.1.1, 15.1.3 and 15.1.4 shall not be
cause for termination if Customer cures such failure within fifteen days after
date or written notice from American. If Customer cures its failure as provided
in this provision, said failure shall not be considered to be an Event of
Default for the purposes of Article 15.2.
15.2 American's Rights Upon Termination. Upon the occurrence of an Event of
Default and subject to Article 15.1.6, American shall have the right to any one
or more of the following remedies: (i) terminate this Agreement; (ii) seek all
legal and equitable remedies to which it is entitled and; (iii) retake immediate
possession of the SABRE TravelBase System. If Customer's Event of Default
results in termination Customer agrees to pay to American, in full settlement of
the damages American will suffer as a result of such Event of Default, an amount
calculated to estimate American's damages as liquidated damages as follows:
15.2.1 the applicable charge to disconnect the Standard Equipment; plus
15.2.2 the applicable costs, expenses and damages which American may sustain
by reason of the default, including, without limitation, reasonable legal fees
incurred by American; plus
15.2.3 the sum of the remaining monthly payments discounted to the then
present value at an eight percent per annum rate.
15.3 Termination by Customer. In the event that American breaches any
material term of this Agreement, which breach continues for a period of fifteen
days after date of written notice from Customer, then Customer may terminate
this Agreement immediately upon written notice to American. Except as limited
by this Agreement, upon termination, Customer may seek all legal and equitable
remedies to which it is entitled. Customer may not otherwise cancel, terminate,
modify, repudiate, excuse or substitute this Agreement without American's prior
written consent, which American may withhold in its absolute discretion.
Article 16 - Miscellaneous
- --------------------------
16.1 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF TEXAS AND THE UNITED STATES OF AMERICA. CUSTOMER HEREBY SUBMITS AND
CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS AND THE COURTS OF THE STATE OF TEXAS IN ANY
DISPUTE ARISING OUT OF THIS AGREEMENT AND AGREES THAT SERVICE OF PROCESS SHALL
BE SUFFICIENT IF MADE ON THE SECRETARY OF STATE OF THE STATE OF TEXAS WITH A
COPY TO BE SENT, REGISTERED MAIL TO THE CUSTOMER AT THE ADDRESS SET FORTH IN THE
SCHEDULE OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE
TO AMERICAN.
<PAGE>
16.2 Binding Effect. Except as otherwise provided, the Agreement shall inure
to the benefit of and bind the successors and assigns of the parties hereto.
16.3 Entire Agreement. This Agreement and the Instructions constitute the
entire agreement of the parties as to the matters set forth herein and shall
supersede any previous understandings, agreements, representations, statements,
negotiations and undertakings, whether written or oral, between the parties
relating to the matters set forth herein. Any Amendment to this Agreement must
be in writing and signed by the authorized representatives of both parties.
16.4 Force Majeure. American shall be relieved of its obligations hereunder
in the event and to the extent that performance is delayed or prevented by any
cause reasonably beyond its control, including, but not limited to acts of God,
public enemies, war, civil disorder, fire, flood, explosion, labor dispute or
strikes, or any acts or orders of any governmental authority, inability to
obtain supplies and materials (including and without limitation computer
hardware) or any delay of deficiency caused by the electrical or telephone line
suppliers or other third parties.
16.5 Notices. Unless otherwise stated, notices given or required under this
Agreement must be in writing and shall be deemed delivered (i) upon deposit
through the United States Mail, to American at P.O. Box 619616, MD _____,
Dallas Fort Worth Airport, Texas 75261-9616 (to be sent to the attention of
SABRE Travel Information Network, Financial Services) or to the Customer at the
address set forth in the Schedule, or (ii) upon dispatch, if sent by SABRE as
follows: If to American: QP/_____ and if to Customer: to the Pseudo City Code
as set forth in the Schedule or Supplement.
16.6 Return of SABRE TravelBase System. Upon the termination of this
Agreement for any reason, Customer, at its sole cost and expense, shall return
all Confidential Information as requested by American, in good condition, less
normal wear and tear.
16.7 Modifications. American retains the right to modify the SABRE
TravelBase System, at its discretion at any time during the term of this
Agreement. However, such modifications will not materially impair Customer's
ability to access and use SABRE TravelBase in the manner expressly permitted in
this Agreement. During the term hereof, American shall make additions, changes,
improvements or enhancements in the SABRE TravelBase System Software necessary
to enable Customer to comply with applicable requirements or rules of ARC, BSP
or IATA, as approved by DOT.
16.8 Severability. Any provision of this Agreement which may be determined
by a court or other competent governmental authority to be prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent such prohibition or unenforceability, without invalidating
the remaining provisions thereof, unless said prohibition or unenforceability
materially alters the rights or obligations of either party.
16.9 Surviving Sections. If the term of the Agreement expires or is
otherwise terminated for any reason before Customer has paid to American all
of the sums due, the Agreement, the Schedule, and all Supplements shall survive
such expiration or termination to the extent necessary to protect American's
rights until all sums owed to American have been paid. Notwithstanding anything
to the contrary referenced herein Articles 6, 8, 11 and 12 shall survive the
termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth below.
Customer American Airlines, Inc.
By: /s/ Michael J. Hartley By:
------------------------- -------------------------
(Signature) (Signature)
Name: Name:
------------------------- -----------------------
(Print Name) (Print Name)
Title: Title: Manager - Financial Services
------------------------- SABRE TravelBase Network
Date: Date:
------------------------- -------------------------
Agency Name: PCC
-------------------- -----
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File
No. 333-70841) of our report dated February 15, 1999 on our audits of the
financial statements of Cheap Tickets, Inc. We also consent to the references
to our firm under the captions "Experts" and "Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
March 15, 1999
