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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999 or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File No.: 000-25279
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CHEAP TICKETS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 99-0338363
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
1440 Kapiolani Boulevard
Honolulu, Hawaii 96814
(Address of principal executive offices)
(808) 945-7439
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
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(Title of each class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 13, 2000 was approximately $107,865,560 based upon the
closing sale price of the Registrant's Common Stock on such date, as reported
on the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and each person owning more than 5% of the outstanding
Common Stock of the Registrant have been excluded in that such persons may be
deemed to be affiliates of the Registrant. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 13, 2000, the Registrant had 24,158,316 shares of Common Stock,
$.001 par value per share, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders scheduled to be held on May 9, 2000 are incorporated
by reference into Part III of this Form 10-K.
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From time to time, Cheap Tickets may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate," "believe,"
"expect," "estimate," "project," and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be
made by management orally or in writing, including, but not limited to, in
press releases, as part of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Annual Report on Form
10-K, and in Cheap Tickets' other filings with the SEC. Although Cheap Tickets
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions, including, without limitation those
identified under "Additional Factors That Could Affect Operating Results."
Should one or more of these risks or uncertainties materialize, or should any
of the underlying assumptions prove incorrect, actual results of current or
future operations may vary materially from those anticipated, estimated, or
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of their dates.
PART I
Item 1. Business.
Cheap Tickets is one of the leading retail sellers of discount tickets for
domestic leisure air travel. Offering more than 425,000 non-published airfares
on more than 35 major airlines, Cheap Tickets sells directly to consumers
through its Internet site, located at "www.cheaptickets.com;" through its
toll-free number, 1-800-OKCHEAP; and at its 12 retail stores. For the year
ended December 31, 1999, Cheap Tickets sold more than 1,825,000 airline
tickets, primarily through its call centers and its Internet site.
Products and Services
Leisure Airline Tickets. Cheap Tickets has the right to acquire non-
published fares under contracts from carriers. Cheap Tickets then resells
these tickets at profit margins which exceed the typical commissions payable
for the sale of tickets on an agented basis. The prices Cheap Tickets offers
to customers are generally at a substantial discount to published fares. Cheap
Tickets purchases these fares only when it resells them to customers, so that
it does not have inventory carrying costs. Cheap Tickets' non-published fares
are not available to consumers directly from the airlines and are not
published, except as advertised by Cheap Tickets. Availability of non-
published fares varies from route to route based on availability from the
airline carriers. Cheap Tickets currently offers approximately 425,000 non-
published fares at any given time, covering most major domestic and
international routes. Cheap Tickets sells these tickets with limitations and
restrictions that make them unattractive for full fare travelers, who seek the
convenience of tickets that can be exchanged or canceled and do not have
advance purchase or minimum stay requirements.
For the years ended December 31, 1998 and 1999, approximately 59% and 64%,
respectively, of Cheap Tickets' airline gross bookings were from non-published
fares. For customers who are unable to find a non-published fare for a
particular itinerary, Cheap Tickets also offers a full menu of regularly
published fares. In 1994, Cheap Tickets became the first non-airline to file
its non-published fares through the Airline Tariff Publishing Corporation.
This allows Cheap Tickets to integrate its non-published fares with published
fares in a special area of the SABRE reservations system to which only Cheap
Tickets has access. This system automatically sorts through millions of fares,
including Cheap Tickets' 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 5% 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. Cheap Tickets receives commissions
at least as
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favorable as those received by travel agents, and with many carriers Cheap
Tickets has negotiated more favorable commission rates. In addition, Cheap
Tickets frequently benefits from performance-based override commissions.
Other Travel Products and Services. Cheap Tickets has contractual
relationships to sell cruises on Carnival Cruises and Princess Cruises and
also has contractual relationships with major auto rental companies to provide
reservations. Cheap Tickets has recently entered into a number of contracts to
sell hotel room reservations. Such alternative products represented 1% of
Cheap Tickets' gross bookings for the year ended December 31, 1999. Cheap
Tickets sees these other travel products and services as potential areas of
future growth.
Call Center Operations. At December 31, 1999, Cheap Tickets had
approximately 605 reservation agents and other call center employees at its
four call centers. Facilities are located in Honolulu, Colorado Springs, Los
Angeles and Lakeport, California. Reservation agents at these call centers
receive all in-bound calls to Cheap Tickets' toll free number "1-800-OK-
CHEAP." On average, the call centers receive approximately 57,000 calls per
day. Reservation agents currently conduct fare searches for requested
itineraries, sell airline tickets, explain rules and restrictions applicable
to fares and ticket delivery details, identify retail ticket locations, and
provide other assistance. The call centers also provide customer service for
both call center customers and Internet users.
Cheap Tickets implemented an intelligent call routing and interactive voice
response technology that enables callers to receive fare quotes and get
answers to common information requests in an automated phone-based
environment. By automating caller activities and compensating agents on an
incentive basis, Cheap Tickets seeks to maximize agent productivity. Call
centers are segmented into teams, who are rewarded for the highest
productivity and operating effectiveness.
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 requires users to
complete a profile before searching for fares. 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 maintains a relational database containing information
compiled from customer profiles, shopping patterns and sales data. Cheap
Tickets analyzes information in this database to develop targeted marketing
programs and provide personalized and enhanced customer service. Its database
is scaleable to permit large transaction volumes with no significant software
changes. Cheap Tickets' systems support automated e-mail communications with
customers to facilitate confirmations of orders, provide customer support,
obtain customer feedback and engage in targeted marketing programs.
Cheap Tickets uses a combination of proprietary and industry-standard
encryption and authentication measures designed to protect a customer's
information. Cheap Tickets maintains an Internet firewall to protect its
internal systems and all credit card and other customer information.
Strategic Relationships
Airline Relationships. Cheap Tickets currently has contracts with more than
35 airlines. For the year ended December 31, 1999, approximately 49% of sales
of non-published fares came from tickets acquired from three airlines:
Continental represented approximately 20%; TWA represented approximately 20%,
and America West
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represented approximately 9%. Cheap Tickets sells non-published fares
purchased under these contracts, with minimum stay and advance purchase
requirements, as non-refundable, non-endorsable and non-changeable tickets and
without frequent flyer mileage or upgrades. Generally, the airline contracts
range from one to one and a half years in length and can be cancelled on short
notice. None of these carriers has any obligation to renew the contracts at
their expiration, but Cheap Tickets has consistently been successful in
obtaining renewals. Management believes that Cheap Tickets' track record of
selling excess capacity without compromising the airlines' fare structures
provides a strong incentive for the airlines to continue to use Cheap Tickets
for the sale of domestic non-published fares. Management believes that Cheap
Tickets' success in matching excess capacity to consumer demand for low ticket
prices comes from its strategy of directing its marketing efforts to leisure
travelers and selling restricted tickets directly to the public in high
volumes through call centers and over the Internet. Although Cheap Tickets has
a consistent history of renewing its contracts, there are no assurances that
any one or several of them will be renewed.
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 440 airlines, 50
auto rental companies, 45,000 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 millions of
published airfares, including those of all major domestic and international
commercial airlines. In addition, SABRE's electronic booking system and
database hosts Cheap Tickets' non-published fare information through a unique
arrangement that permits Cheap Tickets to integrate its non-published fares
with published fares on a special area of the SABRE reservations system to
which only Cheap Tickets has access. This system automatically sorts through
millions of fares, including Cheap Tickets' own non-published fares, to
identify the lowest fares available for the desired itinerary. These choices
are then posted in ascending price order for use by Cheap Tickets' reservation
agents and Internet customers.
Marketing and Brand Awareness
Cheap Tickets intends to aggressively build its brand name to enhance
consumer awareness and add new customers. As part of this program Cheap
Tickets plans to significantly increase its marketing and advertising
expenditures. Traditionally Cheap Tickets has depended primarily on print and,
more recently, Internet-based advertising. Cheap Tickets recently announced
the launch of a national campaign using television, print, radio promotions
and the Internet. Finally, Cheap Tickets plans to continue to pursue a highly
targeted Internet-based advertising campaign. Its Internet advertising efforts
will be targeted using keyword search and banner ads on Internet sites
frequented by its target consumer base. Through such targeted efforts, Cheap
Tickets seeks to obtain the highest return for its advertising expenditures.
It is a featured advertiser on the Travelocity website. Cheap Tickets also
advertises on Yahoo!, Excite, Lycos, HotBot, Snap.com and OnSale. Through its
banner advertisements, Cheap Tickets has achieved "click-through" rates to its
website as high as 8 percent.
Competition
Competition for Non-Published Fares.
Sellers of Non-Published Fares. Cheap Tickets' existing direct competition
for non-published fares comes largely from online companies and companies that
specialize in the distribution of discounted fares in the form of regularly
scheduled and chartered flights. Online competition has developed rapidly in
the last year from a small number of sellers to a large number of sellers.
Aside from these competitors, 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, aside from two online companies, 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.
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Online Travel Companies. Online travel companies have established a strong
market presence primarily based on the sale of published fares. Some are now
also selling non-published fares. The leading online competitor is
Priceline.com, Inc. which has induced a number of major domestic airlines to
supply non-published fares by offering warrants and other forms of equity
compensation in the company. Priceline.com sells tickets in an auction-based
process where the customer offers a price and Priceline.com then seeks to find
a ticket to match the customer's offer. By contrast, the Cheap Tickets
customer immediately can buy a fare posted on the Cheap Tickets website or
available through a call center, and unlike a Priceline.com customer, can
choose a specific airline for the desired rate. Notwithstanding the difference
in purchase procedures, Priceline.com has emerged as a vigorous competitor.
Other start-up online companies are also attempting to enter the market by
acquiring non-published fares by offering online equity participation in their
companies. A number of online companies possess larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than Cheap Tickets.
Airlines and Travel Agents. Airlines do not generally offer non-published
fares directly or indirectly through affiliates or travel agents for regularly
scheduled travel, presumably to prevent the erosion of their published fare
structure. Some airlines do offer limited special discounted fares through
their Internet sites that are not generally made available to travel agents.
These fares are typically offered only on a last-minute, "special sale" basis.
In addition, some airlines offer special promotional fares, combining low base
prices and the use of frequent flyer awards. Airlines may expand their
offering of special promotional fares, enter the non-published fare market or
sell non-published tickets through travel agents.
Certain Competitive Factors Affecting Non-Published Fares.
Published fares also compete with Cheap Tickets' non-published fares. They
effectively establish price ceilings for Cheap Tickets' non-published fares.
From time to time, airlines also offer special fares, which may compete
directly with Cheap Tickets' discounted non-published fares. Direct
competition also comes from the airlines when fare wars break out.
Competition for Published Fares.
In the sale of published fares, Cheap Tickets currently competes with
airlines, traditional travel agents, online travel services and travel
industry reservation databases. The online travel services market is new,
rapidly evolving and intensely competitive, and Cheap Tickets expects such
competition to intensify in the future. In the online travel services market,
Cheap Tickets competes for published fares with similar commercial websites of
other companies, such as Expedia, which is operated by Microsoft Corporation,
Travelocity.com and Preview Travel Inc., which are majority owned by Sabre
Holdings Corporation, Cendant Corporation, TravelWeb, which is operated by
Pegasus, Internet Travel Network, Biztravel.com and TheTrip.com, among others.
Several traditional travel agencies, including larger travel agencies such as
American Express Travel Related Services Co. Inc., Uniglobe Travel and Carlson
Wagonlit Travel, have established, or may establish in the future, commercial
websites offering online travel services. Several airlines also have
established commercial websites to sell their tickets and offer other online
travel services.
Employees
As of December 31, 1999, Cheap Tickets had 953 employees including 605
reservation agents and other call center employees, 55 retail store employees,
6 cruise employees, 13 Internet employees, 184 operations support employees
and 90 corporate and administrative employees. Cheap Tickets' ability to
attract and retain highly qualified employees will be the principal
determinant of its success. Cheap Tickets has a policy of using performance-
based and equity-based compensation programs to reward and motivate
significant contributors among its employees. Competition for qualified
personnel in the industry is intense. There can be no assurance that Cheap
Tickets' current and planned staffing will be adequate to support its future
operations or that management will be able to hire, train, retain, motivate
and manage required personnel. Although none of Cheap
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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.
Operating Segments
See "Operating Segments" in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 13 to the financial
statements for a detailed discussion on operating segments.
Item 2. Properties.
Cheap Tickets is headquartered in Honolulu, Hawaii, where it leases an
aggregate of approximately 27,194 square feet of space housing its corporate
offices and a call center. The leases for such space expire in November 2000
and December 2003, with an option to renew such leases covering approximately
13,300 square feet for an additional five years. Cheap Tickets also leases an
aggregate of approximately 5,400 square feet of retail or storage space in six
other locations in Hawaii. In July 1994, Cheap Tickets entered into a lease
expiring in September 2004 for approximately 9,600 square feet in Los Angeles,
California, to serve as one call center. In June 1999, Cheap Tickets entered
into a lease expiring in June 2009 for approximately 25,000 square feet to
house its Colorado Springs, Colorado call center. 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.
Item 3. Legal Proceedings.
On June 29, 1999, a former employee filed an action against Cheap Tickets
and two of its corporate officers in the Superior Court in Los Angeles,
California alleging, among other causes of action, that he was fraudulently
induced to become and stay as an employee, that he was improperly excluded
from participating in management incentive plans, that he was improperly cut
back on the allocation of shares in Cheap Tickets' initial public offering,
and that Cheap Tickets was unjustly enriched by his management of its cruise
division. The initial complaint has been amended twice so that the Second
Amended Complaint now seeks damages of $1,000,000 for the difference the
employee received for the sale of a separate business and what this separate
business would have been worth had he continued it; $250,000 for the
difference between the compensation the employee received from Cheap Tickets
and what he would have received if he accepted a competing position with
another company; $2,000,000 for improperly excluding the employee from
participating in management incentive plans; $20,000,000 for the amount the
employee enhanced the value of the Cheap Tickets' public offering; $1,000,000
for the estimated profit from the Cruise Division during the employee's
tenure; and unspecified punitive damages.
The defense and indemnification on the complaint has been tendered to Cheap
Tickets' insurance carrier. Cheap Tickets' insurance carrier has appointed
counsel to provide a defense for Cheap Tickets and its two corporate officers.
Management believes that this lawsuit is without merit and intends to
vigorously contest this lawsuit. The lawsuit is in an early stage of
litigation, and it is too early to determine what, if any, liability Cheap
Tickets will have with respect to the claims made in this lawsuit. At this
time, the depositions of the former employee and one of the corporate officers
have been completed. The insurance defense counsel prepared a motion to strike
various claims of the Second Amended Complaint. The court struck all claims
except the claim for excluding the employee from participating in management
incentive plans and unspecified punitive damages.
The defense of such litigation could entail considerable cost and the
diversion of efforts of management, either of which could hurt Cheap Tickets'
results of operations. While an unfavorable outcome in these matters is
possible, management does not believe that the outcome of this lawsuit will
have a material adverse effect on our business, financial condition, results
of operations or liquidity.
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In addition, Cheap Tickets may from time to time become a party to various
legal proceedings arising in the ordinary course of its business. Any such
proceeding against Cheap Tickets, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the fourth
quarter of 1999.
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PART II
Item 5. Market for Cheap Tickets Common Equity and Related Stockholder
Matters.
Nasdaq National Market Listing
Our common stock trades on the Nasdaq National Market under the symbol
"CTIX." The following table sets forth the range of high and low closing sales
prices of our common stock, as reported by the Nasdaq National Market, for the
periods indicated. As of March 13, 2000, there were approximately 7,889
holders of record of our common stock.
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High Low
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Quarter ended March 31, 1999 (from March 19, 1999)............ $33.63 $25.88
Quarter ended June 30, 1999................................... $45.00 $27.31
Quarter ended September 30, 1999.............................. $66.63 $31.06
Quarter ended December 31, 1999............................... $32.63 $12.25
</TABLE>
Dividends
Cheap Tickets has never declared or paid dividends on its common stock and
anticipate 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. The Delaware General Corporation Law
also restricts our ability to pay dividends. The Delaware General Corporation
Law provides that a Delaware Corporation may pay dividends either (1) out of
the corporation's surplus (as defined by Delaware law), or (2) if there is no
surplus, out of the corporation's net profit for the fiscal year in which the
dividend is declared or the preceding fiscal year. Any determination in the
future to pay dividends will depend on our financial condition, capital
requirements, results of operations, contractual limitations, legal
restrictions and any other factors our Board of Directors deems relevant.
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Item 6. Selected Financial Data.
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Years Ended December 31,
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1995 1996 1997 1998 1999
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(In thousands, except per share data)
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Results of Operations:
Non-published fares ........... $66,340 $ 58,982 $ 96,379 $159,846 $ 317,260
Commissions.................... 2,738 5,614 6,470 11,268 22,349
------- -------- -------- -------- ---------
Net Revenues(1).............. 69,078 64,596 102,849 171,114 339,609
Cost of sales(1)............... 56,424 49,168 81,370 136,067 271,561
------- -------- -------- -------- ---------
Gross Profit................... 12,654 15,428 21,479 35,047 68,048
Selling, general and
administrative expenses....... 11,921 14,352 23,091 33,411 59,277
------- -------- -------- -------- ---------
Net operating income (loss).... 733 1,076 (1,612) 1,636 8,771
Other income (deductions)...... (709) 37 (3) 169 4,088
------- -------- -------- -------- ---------
Earnings (loss) before income
taxes......................... 24 1,113 (1,615) 1,805 12,859
Income taxes................... 7 439 (606) 740 5,272
------- -------- -------- -------- ---------
Net earnings (loss)............ $ 17 $ 674 $ (1,009) $ 1,065 $ 7,587
======= ======== ======== ======== =========
Basic earnings (loss) per
share......................... $ 0.00 $ 0.05 $ (0.09) $ 0.04 $ 0.33
Shares used in computing basic
earnings (loss) per share..... 14,100 14,249 14,847 14,567 20,731
Diluted earnings (loss) per
share......................... $ 0.00 $ 0.05 $ (0.09) $ 0.03 $ 0.31
Shares used in computing
diluted earnings (loss) per
share......................... 14,100 14,249 14,847 17,921 22,060
Balance Sheet Data
Net working capital............ $ 182 $ 466 $ 2,356 $ 3,473 $ 134,142
Total assets................... 3,740 5,999 11,204 13,226 155,610
Long-term debt................. 537 1,715 948 1,238 3,893
Mandatorily redeemable
preferred stock(2)............ -- -- 3,622 4,136 --
Stockholders' equity........... 866 1,544 812 1,385 138,613
Gross bookings(3)
Non-published fares.......... $66,340 $ 58,982 $ 96,379 $159,846 $ 317,260
Published-fares.............. 25,654 46,962 57,295 110,287 178,065
------- -------- -------- -------- ---------
Total gross bookings....... $91,994 $105,944 $153,674 $270,133 $ 495,325
======= ======== ======== ======== =========
Airline tickets sold........... 313,863 357,551 554,403 960,879 1,828,186
Call centers................. 313,863 357,551 551,973 865,015 1,276,007
Internet..................... -- -- 2,430 95,864 552,179
Registered Internet users, as
of............................ -- -- 18,891 420,023 2,593,574
</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) The mandatorily redeemable preferred stock was redeemed on March 24, 1999.
The redemption price was approximately $4.8 million, including accrued
dividends.
(3) 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
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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.
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Item 7. 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. Some of the statements under this caption
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 "Additional Factors
that Could Affect Operating Results" and elsewhere in this Annual Report. 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 Annual Report.
Overview
Cheap Tickets is principally engaged in the sale of discount tickets for
domestic leisure air travel. A majority of its gross bookings have
historically come from the sale of non-published fares, which Cheap Tickets
acquires from airlines and resells to the public at a profit. Cheap Tickets
purchases non-published fares only when it resells them to customers, so that
it has no inventory carrying costs. On these fares, Cheap Tickets sets its
resale prices to meet the demands of leisure travelers who are looking for the
lowest price. Cheap Tickets also sells published fares for which it receives
commissions from the airlines. Sales of non-published fares generally carry
higher margins as a percentage of gross bookings than commissions on published
fare bookings.
Cheap Tickets' revenues historically had been generated by ticket sales
through Cheap Tickets' four call centers and, to a lesser extent, through 12
walk-in retail stores. In October 1997, Cheap Tickets broadened its ticket
distribution by offering online booking at "www.cheaptickets.com." Internet
bookings accounted for approximately 9% of total gross bookings in 1998, and
approximately 29% during year ended December 31, 1999. At December 31, 1999,
Cheap Tickets had over 2.6 million registered online users. Cheap Tickets
expects online gross bookings and online net revenues to represent an
increasing portion of gross bookings and net revenues in future periods.
Gross bookings represent the aggregate retail value of tickets sold under
non-published fares and published fares. The difference between gross bookings
and revenues as reported in Cheap Tickets' statement of operations derives
solely from the difference in revenue treatment accorded to sales of published
fares. With respect to published fares, Cheap Tickets records as revenue in
its statement of operations only the commissions earned by Cheap Tickets on
the sale of such fares. Gross bookings represent the retail value of the sales
of published fares. With respect to non-published fares, revenues as reported
in Cheap Tickets' statement of operations are equivalent to gross bookings,
which are 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.
11
<PAGE>
Gross profits include (1) the gross profit on non-published sales where
Cheap Tickets establishes the markup and retail price, and (2) commissions
earned on the sale of published fares sold. There is no cost of sale component
for published fare sales, whereas there is a cost of sale component for non-
published fare sales. Cheap Tickets earns higher profits on the sale of non-
published fares than on the sale of published fares.
Substantially all of Cheap Tickets' gross bookings represent sales of
airline tickets. For the years ended December 31, 1998 and 1999, approximately
98% and 99% respectively, of gross bookings arose from airline ticket sales.
The remaining gross bookings arose from sales of cruise tickets, auto rentals,
hotel reservations and other travel related products. Cheap Tickets expects
gross bookings from sources other than airline ticket sales to increase in
future periods.
Cheap Tickets' selling, general and administrative expenses include all
operating and corporate overhead. Major expense categories include
compensation, advertising, communications, credit card bank fees, occupancy
and delivery costs.
Results of Operations
The following table sets forth, for the years ended December 31, 1997, 1998
and 1999, information derived from the statement of operations of Cheap
Tickets expressed as a percentage of net revenues, and the percentage change
in such items and in gross bookings for the years ended December 31, 1997,
1998, and 1999, compared with the prior period. Any trends illustrated in the
following table are not necessarily indicative of future results.
<TABLE>
<CAPTION>
As a Percentage of Percentage Increase (Decrease)
Net Revenues Over Prior Periods
------------------------- -----------------------------
Year Ended December 31, Year Ended December 31,
------------------------- -----------------------------
1997 1998 1999 1997 to 1998 1998 to 1999
------- ------- ------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Non-published fares .... 93.7% 93.4% 93.4% 65.9% 98.5%
Commissions ............ 6.3 6.6 6.6 74.2 98.3
------- ------- -------
Net revenues ......... 100.0 100.0 100.0 66.4 98.5
Gross profit ........... 20.9 20.5 20.0 63.2 94.2
Selling, general and
administrative
expenses............... 22.5 19.5 17.4 44.7 77.4
------- ------- -------
Earnings (loss) from
operations .......... (1.6) 1.0 2.6 201.5 436.1
Net earnings (loss) .... (1.0) 0.6 2.2 205.6 612.4
Operating Data
(unaudited):
Gross bookings.......... -- -- -- 75.8% 83.4%
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Revenues. Net revenues for the year ended December 31, 1999 increased
$168.5 million, or 98.5%, to $339.6 million. Non-published fare sales
increased $157.4 million, or 98.5%, to $317.3 million. The increase in non-
published fare sales reflected a significant increase in the number of non-
published tickets sold. Commissions increased $11.1 million, or 98.3%, to
$22.3 million. The $11.1 million increase in commissions reflected an increase
in the number of published fares sold and an improvement in bonus overrides as
a percentage of net revenues. Gross bookings of published fares decreased from
40.8% to 35.9% of total gross bookings.
Strong growth in the leisure travel market and particularly in air travel,
improving recognition of the Cheap Tickets brand from both increased exposure
coincident with becoming a public company and significantly higher advertising
expenditures in 1999 compared with 1998, and increasing acceptance of Internet
commerce in 1999 all contributed to this growth in net revenues.
12
<PAGE>
Net revenues through call centers and retail operations (including allocated
incentive bonuses) increased $91.5 million, or 57.5% to $250.5 million. Of
this $91.5 million increase, $42.0 million reflected the effect of operations
in 1999 of a new call center that opened in late May 1998. Increased
productivity and staffing in the remainder of the call centers largely
accounted for the rest of the increase.
Net revenues through the Internet, including allocated incentive bonuses,
increased $77.0 million, to $89.1 million. Net revenues through the Internet
represented 26.2% of net revenues for the year ended December 31, 1999
compared with 7.0% for the year ended December 31, 1998. The largest component
in net revenues is the non-published fare retail value. In 1999, this
component in the Internet sales mix increased from 44% to 57% of total
Internet bookings.
Gross Profit. Gross profit increased $33.0 million, or 94.2% to $68.0
million. As a percentage of net revenues, gross profit decreased from 20.5% to
20.0%. Commissions in net revenue have no associated cost of goods sold and
are included 100% in gross profit. In 1999, a lower percentage of published
fares and lower margins on non-published fares reduced the gross profit
percent of net revenues. This was offset somewhat by higher performance-based
commission income earned in 1999. An industry-wide reduction in published fare
commissions from 8% to 5% in the fourth quarter of 1999 had a minor impact on
the year's results and may reduce future gross profit.
Selling, General and Administrative Expenses. For the year ended December
31, 1999, selling, general and administrative expenses increased $25.9
million, or 77.4%, to $59.3 million, and decreased as a percentage of net
revenues from 19.5% to 17.4%. The decrease in selling, general, and
administrative expenses as a percentage of net revenue was primarily
attributable to decreases in compensation, telephone and rent expense and most
other expenses as a percentage of net revenues. These decreases were partially
offset by increases, as a percentage of net revenues, in credit card charges
and advertising expenses. Advertising expenses increased by $7.3 million,
representing an increase from 2.2% to 3.3% of net revenues. Advertising
expenses targeted to increase Internet sales were $4.9 million higher for the
year ended December 31, 1999, and overall brand advertising, primarily through
print media, increased by $2.4 million.
Net Earnings. For the year ended December 31, 1999, Cheap Tickets' net
earnings increased $6.5 million, or 612.4% to $7.6 million. This increase
reflected higher net revenues, increased gross profit from these higher
volumes, and lower selling, general and administrative expenses as a
percentage of net revenues as a result of proportionately lower operating
leverage.
Years Ended December 31, 1998 and December 31, 1997
Net Revenues. Net revenues for the year ended December 31, 1998 increased
$68.3 million, or 66.4%, to $171.1 million. By category of net revenue, non-
published fare sales increased $63.5 million, or 65.9%, to $159.8 million, and
commissions 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 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.
13
<PAGE>
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. Credit card fees increased as a result of volume and rate increases
charged by Cheap Tickets' charge card associations. The decrease in selling,
general and administrative expenses as a percentage of net revenues was
primarily attributable to the leverage from increased sales.
In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price of
$1.57 per share. Total compensation associated with these options amounted to
$722,600, of which $26,325 has been charged to operations for the year ended
December 31, 1998. The remainder will be charged over the remaining five-year
vesting period of the options, with the exception of $1,062, which was charged
at the closing of Cheap Tickets' initial public offering in March 1999, at
which time 140,000 options vested by their terms.
Net Earnings (Loss). Cheap Tickets had net earnings of $1.1 million for the
year ended December 31, 1998, compared with the prior year's loss of $1.0
million. This increase was attributable to increased net revenues, with a
proportionately lower increase in selling, general and administrative
expenses, partially offset by lower gross profit percentages.
Operating Segments
Net Revenues by Segment
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Percent Percent
In of In of
Segments Thousands Total Thousands Total
-------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Internet................................. $ 89,077 26% $ 12,047 7%
Call Center.............................. 250,532 74% 159,067 93%
-------- --- -------- ---
Net revenues........................... $339,609 100% $171,114 100%
======== === ======== ===
</TABLE>
Gross Profit by Segment
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Percent Percent
In of In of
Segments Thousands Total Thousands Total
-------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Internet................................. $19,724 29% $ 3,187 9%
Call Center.............................. 48,324 71% 31,860 91%
------- --- ------- ---
Gross Profit........................... $68,048 100% $35,047 100%
======= === ======= ===
</TABLE>
14
<PAGE>
Years Ended December 31, 1999 and December 31, 1998 by Segment
Net Revenues. Net revenues through the Internet, including allocated
incentive bonuses, increased $77.0 million, or 639.4% to $89.1 million. The
retail value of non-published fares is the largest component of net revenues.
The non-published fare component in the Internet sales mix increased from 44%
in 1998 to 57% of total Internet bookings in 1999, contributing to the net
revenue growth. Sales volumes increased as a result of additional advertising,
growing acceptance of Internet commerce, and a significant increase in
registered users to our website.
Net revenues through call centers, including allocated incentive bonuses,
increased $91.5 million, or 57.5% to $250.5 million. The increase reflected
the effect of operations in 1999 of a new call center that opened in late May
1998 and increased productivity and staffing in the remainder of the call
centers.
Gross Profit. Gross profit from Internet sales increased $16.5 million, or
518.9% to $19.7 million. As a percentage of net revenues, Internet gross
profit decreased from 26.5% for the year ended December 31, 1998 to 22.1% for
the year ended December 31, 1999. A higher percentage of non-published fares
sold via the Internet decreased gross profit as a percentage of net revenues.
This was offset somewhat by higher performance-based commission income earned
in 1999.
Call center gross profit increased $16.5 million, or 51.7% to $48.3 million.
As a percentage of net revenues, gross profit from call centers decreased from
20.0% in 1998 to 19.3% in 1999. An increase in the sale of non-published fares
contributed to the decrease in gross profit as a percentage of net revenues.
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.
15
<PAGE>
The following table sets forth selected unaudited quarterly financial
information for each of the eight quarters in the period ended December 31,
1999, as well as such data expressed as a percentage of Cheap Tickets' net
revenues for the periods presented. This information has been derived from
unaudited statements of operations data that, in the opinion of management,
are stated on a basis consistent with the audited financial statements and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information in accordance with GAAP.
Cheap Tickets' results of operations for any quarter are not necessarily
indicative of the results to be expected in any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
1998 1999
-------------------------------- ----------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Non-published fares..... $30,449 $45,722 $46,823 $36,852 $55,962 $ 97,416 $103,764 $ 60,117
Commissions............. 1,949 2,491 3,614 3,215 4,567 5,154 6,391 6,238
------- ------- ------- ------- ------- -------- -------- --------
Net revenues............ 32,398 48,213 50,437 40,067 60,529 102,570 110,155 66,355
Cost of sales........... 25,959 39,016 39,572 31,520 47,852 83,028 88,628 52,053
------- ------- ------- ------- ------- -------- -------- --------
Gross profit............ 6,439 9,197 10,865 8,547 12,677 19,542 21,527 14,302
Selling, general and
administrative
expenses............... 6,430 8,128 9,535 9,319 11,157 14,739 18,393 14,988
------- ------- ------- ------- ------- -------- -------- --------
Net operating income.... 9 1,069 1,330 (772) 1,520 4,803 3,134 (686)
Other income............ 35 22 32 80 124 687 1,222 2,054
------- ------- ------- ------- ------- -------- -------- --------
Earnings (loss) before
income taxes........... 44 1,091 1,362 (692) 1,644 5,490 4,356 1,368
Income taxes............ 18 447 559 (283) 674 2,251 1,786 561
------- ------- ------- ------- ------- -------- -------- --------
Net earnings (loss)..... $ 26 $ 644 $ 803 $ (409) $ 970 $ 3,239 $ 2,570 $ 807
======= ======= ======= ======= ======= ======== ======== ========
Basic earnings (loss)
per share.............. $ (0.01) $ 0.04 $ 0.05 $ (0.04) $ 0.02 $ 0.15 $ 0.11 $ 0.03
Diluted earnings (loss)
per share.............. $ (0.01) $ 0.03 $ 0.04 $ (0.03) $ 0.01 $ 0.15 $ 0.11 $ 0.03
Operating Data:
Gross bookings.......... $52,754 $70,431 $75,930 $71,018 $89,740 $135,296 $149,646 $120,643
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As a Percentage of Net Revenues Quarter Ended
------------------------------------------------------------------
1998 1999
-------------------------------- --------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-published fares..... 94.0% 94.8% 92.8% 92.0% 92.5% 95.0% 94.2% 90.6%
Commissions............. 6.0 5.2 7.2 8.0 7.5 5.0 5.8 9.4
----- ----- ----- ----- ----- ----- ----- -----
Net revenues............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 80.1 80.9 78.5 78.7 79.1 80.9 80.5 78.4
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 19.9 19.1 21.5 21.3 20.9 19.1 19.5 21.6
Selling, general and
administrative
expenses............... 19.9 16.9 18.9 23.2 18.4 14.4 16.7 22.6
----- ----- ----- ----- ----- ----- ----- -----
Net operating income.... 0.0 2.2 2.6 (1.9) 2.5 4.7 2.8 (1.0)
Other income............ 0.1 0.1 0.1 0.2 0.2 0.7 1.1 3.1
----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) before
income taxes........... 0.1 2.3 2.7 (1.7) 2.7 5.4 3.9 2.1
Income taxes............ 0.0 1.0 1.1 (0.7) 1.1 2.2 1.6 0.9
----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss)..... 0.1% 1.3% 1.6% (1.0)% 1.6% 3.2% 2.3% 1.2%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
16
<PAGE>
Liquidity and Capital Resources
For the year ended December 31, 1999, Cheap Tickets generated cash from
operating activities of $10.5 million, compared with $2.0 million for the year
ended December 31, 1998. For the year ended December 31, 1999, cash generated
from operating activities was comprised principally of net earnings plus
depreciation totalling $9.2 million and an increase in accounts payable of
$2.5 million. 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. The primary account payable is the weekly settlement to the Airline
Reporting Corporation for airline tickets purchased less commissions earned.
This is generally a significant balance, and the timing of the current payment
relative to month-end can cause fluctuations in month-end balances.
For the year ended December 31, 1999, Cheap Tickets used cash in investing
activities of $96.8 million, while in the prior period it used cash in
investing activities of $4.8 million. Cash used in investing activities for
the year ended December 31, 1999 included net purchases of short term
marketable securities of $93.6 million and capital expenditures of $3.2
million. For the year ended December 31 1998 capital expenditures were
$485,000. In 1999, Cheap Tickets received net proceeds from an initial public
offering and the follow-on offering of $144.6 million, after deduction of
underwriters' fees and other costs of issuance less $4.8 million to redeem
mandatorily redeemable preferred stock and accumulated dividends. 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.
At December 31, 1999, Cheap Tickets maintained on hand cash and cash
equivalents of $40.7 million and short term marketable securities of $98.6
million. Cheap Tickets' net working capital was $134.1 million. Cheap Tickets
had available a $3 million credit facility with a bank which expired on
December 5, 1999. Cheap Tickets had outstanding long-term debt net of current
installments of $516,000 and capital lease obligations of $3,376,000.
In January 2000, Cheap Tickets completed its stock repurchase program. Cheap
Tickets repurchased 1,037,288 shares of its outstanding common stock for an
aggregate price of $14.7 million through periodic open market transactions.
All funds required for the repurchase of common stock were obtained from
available cash resources and marketable securities.
Cheap Tickets believes that its current cash and cash equivalents, short
term marketable securities and anticipated cash flow from operations will be
sufficient to meet its anticipated cash needs for working capital, debt
service and capital expenditures, at least for the foreseeable future. Cheap
Tickets spent approximately $7.9 million for capital expenditures in 1999,
nearly all of which was used for technological improvements and upgrades. If
cash generated from internal operations is not sufficient to satisfy Cheap
Tickets' liquidity requirements, Cheap Tickets may seek to acquire 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'
stockholders. There is no assurance that financing will be available in
amounts or on terms acceptable to Cheap Tickets, if at all.
Recently Issued Accounting Standards
In 1998, Cheap Tickets adopted SFAS No. 130, "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," and SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits."
SFAS No. 130 states that all items that are required to be recognized under
generally accepted accounting principles 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.
17
<PAGE>
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. Cheap Tickets manages its business as two operating
segments established for Internet and Call Center operations.
SFAS No. 132 standardized the disclosure requirements for pension and other
postretirement benefits. The adoption of SFAS No. 132 (which does not change
existing measurement or recognition standards for Cheap Tickets' defined
contribution plan) did not have a material effect on Cheap Tickets' financial
statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires the recognition of all derivative instruments as either
assets or liabilities in the statement of financial position and measurement
of those derivative instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133." The original
effective date for SFAS No. 133 was for all fiscal quarters of fiscal years
beginning after June 15, 1999. As a result of the issuance of SFAS No. 137,
the effective date for SFAS No. 133 is for all fiscal quarters of fiscal years
beginning after June 15, 2000. Currently, Cheap Tickets does not hold
derivative instruments or engage in hedging activities. The adoption of SFAS
No. 133, as amended by SFAS No. 137, is not expected to have a material effect
on Cheap Tickets' financial statements.
The FASB issued SFAS No. 134 in October 1998 and SFAS No. 136 in June 1999
which do not apply to Cheap Tickets. In February 1999, the FASB issued SFAS
No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections,"
which was effective shortly after issuance and did not have a material effect
on Cheap Tickets' financial statements.
In January 1999, Cheap Tickets adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up Activities"
issued by the Accounting Standards Executive Committee (AcSEC) of the American
Institute of Certified Public Accountants (AICPA). The implementation of these
pronouncements did not have a material effect on Cheap Tickets' financial
statements.
Year 2000 Compliance
Cheap Tickets has taken steps to address potential Year 2000 problems. Cheap
Tickets has formed a project team from its systems and technology, finance,
telecom and operations departments. The project team was 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 to date the impact of Year
2000 issues has not been material to its systems, Cheap Tickets could
experience residual Year 2000 issues that could have a material and adverse
effect on Cheap Tickets' business, results of operations or financial
condition if not properly addressed.
Cheap Tickets currently has three types of computer systems or programs
which may be affected by residual Year 2000 issues. They include: (1)
reservations database systems, (2) PC/LAN systems and (3) non-informational
technology systems. The reservations database systems involve the computer
programs and products responsible for airline, cruise, car and hotel
reservations and other transactional systems. PC/LAN systems include Cheap
Tickets' personal computer network systems. Non-informational technology
systems include systems or hardware containing embedded technology such as
micro controllers.
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.
18
<PAGE>
Further, SABRE has advised Cheap Tickets that it has resolved Year 2000 issues
for its main computer system--the airlines reservations system. In turn, Cheap
Tickets has implemented all changes required by SABRE for Cheap Tickets to be
Year 2000 compliant. There can be no assurances that SABRE will be compliant
with residual Year 2000 issues and that the impact of SABRE's non-compliance,
if any, would not be material.
PC/LAN Systems. Cheap Tickets has completed the replacement of all of its
PC/LAN computing systems. All the new PC/LAN systems being installed,
including hardware, software, applications and operating systems, have been
represented by their vendors to be Year 2000 compliant. Cheap Tickets believes
that any systems that it has not yet replaced do not present any Year 2000
concerns because, to Cheap Tickets' knowledge, these systems already are Year
2000 compliant. In addition, Cheap Tickets is currently requiring that any new
systems it purchases meet Year 2000 compliance requirements. There can be no
assurances that such PC/LAN computing systems will be compliant with residual
Year 2000 issues and that the impact of such non-compliance, if any, would not
be material.
Non-Informational Technology Systems. Cheap Tickets has evaluated its non-
informational technology systems. Each of its operational centers has achieved
Year 2000 compliance for these systems. Cheap Tickets has not developed a
contingency plan in the event that any of its critical computer systems are
not compliant with residual Year 2000 issues.
Management believes that the expenses for ensuring Year 2000 compliance of
its computer products and systems has not had a material adverse effect on
operations or earnings, and can be financed out of cash flow from operations.
Despite 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 residual
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 compliance with residual Year 2000 issues and does
not intend to do so.
Federal Aviation Administration Readiness. On July 21, 1999, the FAA
announced that all of its computer systems were fully Year 2000 compliant.
According to the FAA's announcement, compliance had been verified by an
independent contractor. The FAA's state of Year 2000 readiness could have a
significant impact on air travel for an uncertain period of time after January
1, 2000. Air travel may be affected both by travelers' safety fears and by
actual disruption caused by residual Year 2000 issues.
Possible Air Traffic Disruption. 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 residual Year 2000 effect will be experienced and, if so, how
it will affect Cheap Tickets. In addition, Cheap Tickets has not developed a
contingency plan to address this situation and does not intend to do so.
Effect on Other Entities. Finally, Year 2000 issues may impact other
entities with which Cheap Tickets does business, including, for example,
airlines and those responsible for maintaining telephone and Internet
communications. Accordingly, Cheap Tickets cannot predict the effect of Year
2000 problems on such entities. If these other entities fail to take
preventive/or corrective actions in a timely manner, Year 2000 issues could
have a material and adverse effect on Cheap Tickets' business, results of
operations and financial condition. Cheap
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Tickets has not yet developed a contingency plan to address the possibility
that other entities with which it does business are unable to achieve
compliance with Year 2000 issues and does not intend to do so.
Additional Factors That Could Affect Operating Results
In addition to the other information we provide in this Annual Report on
Form 10-K, you should carefully consider the following risks 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 forward-looking statements contained
herein. 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.
For access to non-published fares, we depend on travel suppliers with which we
have no long-term or exclusive contracts.
For the year ended December 31, 1999, approximately 99% of our gross
bookings came from the sale of airline tickets. Non-published fares
represented about 64% 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 35
airlines that permit us to acquire non-published fares on routes designated in
the contracts at specified prices. These contracts do not require airlines to
provide a specific quantity of tickets or to deal with us exclusively.
Although the terms vary, the typical contract is for a period from one to one
and a half years, and many are cancelable on 30 days' notice or less. We have
a consistent record of renewing these contracts, but airlines may decide not
to do business with us or to dispose of excess capacity themselves or through
others. At times in the past, airlines have renewed contracts with us on less
favorable terms and this may continue to occur in the future. In addition,
there may be times when they have less excess capacity to sell.
A large percentage of our sales of non-published fares currently comes from a
limited number of suppliers.
For the year ended December 31, 1999, approximately 49% of our sales of non-
published fares came from tickets we bought from three airlines: Continental
represented approximately 20%, TWA represented approximately 20%, and America
West represented approximately 9%. In 1998, these same three airlines
represented 49% of our sales of non-published fares. If one or more of these
carriers were to discontinue to supply non-published fares to us, our business
could be hurt.
The percentages of non-published fare sales represented by our leading
carriers are likely to change from year to year depending upon a variety of
factors, including the availability of excess capacity from each carrier and
the breadth of routes on which non-published fares are available. We typically
engage in ongoing discussions with existing carriers about increasing the
routes available for sale of non-published fares. From time to time, we also
discuss potential new relationships for the supply of non-published fares with
carriers with whom we currently do not have contracts.
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Our travel suppliers may be acquired and then not continue to deal with us.
We believe that our continued ability to obtain non-published fares is key
to our success. Because many of our contracts are short-term and can be
cancelled on short notice, we depend on our relationships with our suppliers
for a continued supply of non-published fares. We also depend on continuation
of our suppliers' policy of selling excess capacity through non-published
fares. The acquisition of one of our suppliers could hurt our relationship
with that supplier and/or could change that supplier's policy of dealing with
excess capacity.
In 1999, Reno Air was acquired by American Airlines. For the year ended
December 31, 1999, Reno Air accounted for approximately 5% of our sales of
non-published fares. American Airlines has made most of the former Reno Air
routes available to us for the sale of non-published fares.
A decline in airline commission rates or the elimination of commissions could
hurt our business.
We earned approximately 33% of our gross profit for the year ended December
31, 1999 from commissions, including incentive overrides, paid by airlines.
However, the airlines are not required to pay any particular commission rates
or any commissions at all. If air carriers reduce, restrict or eliminate
altogether commissions or impose surcharges for tickets not sold by them at
any time, it could hurt our business. In recent years, airlines have reduced
rates and capped per-ticket commissions. In addition, they have further
reduced rates and capped commissions for online reservations.
Potential fluctuations in our financial results makes financial forecasting
difficult.
Our annual or quarterly results of operations may be below the expectations
of public market analysts and investors. This could result in a decline in the
value of our common stock.
Our business is seasonal due to customers' leisure travel patterns and
changes in the availability of non-published fares. We typically have higher
sales and gross profit in the second and third quarters and lower sales and
gross profit in the fourth quarter, and historically we have experienced
losses in net income in the fourth quarter. During periods of high-volume air
travel, such as occur in the fourth quarter of each year, we historically have
had access to fewer non-published fares, and such fares on certain major
routes may be unavailable. Online gross bookings may also tend to be seasonal
and may decline or grow less rapidly in the summer months. The seasonal sales
cycle is fairly predictable, but the cycle may shift year-to-year,
corresponding to changes in the economy or other factors affecting the market
such as price wars which recently occurred in the fourth quarter of 1999. This
could lead to unusual volatility in revenues and earnings.
Gross profit may be impacted by a number of different factors, including:
. the number of fares sold;
. the percentage of gross bookings represented by non-published fare
sales;
. the gross margin percentages on non-published fare sales. These
percentages in turn can be impacted by the sales mix of airlines, whose
net fare prices to us vary, and by competitive factors on various routes
and the possible elimination of profitable routes;
. rates of commissions on published fare sales; and
. the amount of volume bonuses.
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.
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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.
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
select 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. Some of our competitors
have agreements to buy non-published fares from our major suppliers. For
example, Priceline.com, Inc. signed an agreement to purchase non-published
tickets from Continental, United, American Airlines and others, and has
granted warrants to purchase Priceline.com common stock to certain carriers.
Our competitors may be able to induce one or more of our suppliers of non-
published fares, through pricing, equity or other incentives, to cease doing
business with us, or to do business with us on less favorable terms. They
might also be able to build strong brand recognition in the leisure travel
market, through widespread advertising and other marketing efforts. Certain of
our competitors may be able to devote greater resources to marketing and
promotional campaigns on the Internet. Competitors may also devote
substantially more resources to website and systems development than we do.
Any or all of these developments could bring heavy competitive pressures to
bear on us.
We also face the prospect of competition from potential competitors not yet
in the leisure travel market. We believe that potential competitors are likely
to be large, well-financed companies with existing brand name recognition and
proven retail distribution ability. For a more complete description of the
competitive environment in which we operate, please refer to "Item 1.
Business--Competition."
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The success of our business will depend on continued growth of online commerce
and Internet infrastructure.
Our future revenues and profits depend, to a certain degree, upon the
widespread acceptance and use of the Internet and online services as a medium
for commerce by customers and sellers. If acceptance and growth of Internet
use does not continue, it will hurt our business.
Rapid growth in the use of the Internet and online services is a recent
phenomenon. This growth may not continue. A sufficiently broad base of
customers may not accept, or continue to use, the Internet as a medium of
commerce. Demand for and market acceptance of recently introduced products and
services over the Internet are subject to a high level of uncertainty. There
are few proven products and services. For us to achieve significant growth,
customers who have historically used traditional means of commerce will
instead need to elect to purchase products and services online, and sellers of
products and services will need to accept or expand use of the Internet as a
channel of distribution. Our revenues and profits depend on customers visiting
our website and actually purchasing tickets. Customers could potentially use
the site for route information and choose to purchase tickets directly from
the airlines or elsewhere.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and
security, and the timely development of complementary products, such as high-
speed modems, for providing reliable Internet access and services.
Major online service providers and the Internet itself have experienced
outages and other delays as a result of software and hardware failures and
could face such outages and delays in the future. Outages and delays are
likely to affect the level of Internet usage and the processing of
transactions on the Cheap Tickets website. It is unlikely that we could make
up for the level of orders lost in those circumstances by increased phone
orders. In addition, the Internet could lose its viability by reason of delays
in the development or adoption of new standards to handle increased levels of
activity or of increased government regulation. The adoption of new standards
or government regulation may require us to incur substantial compliance costs.
Our brand may not achieve the broad recognition necessary to succeed.
We believe that we must maintain and enhance the Cheap Tickets brand to
continue to attract and expand business. Failure to maintain and enhance our
brand could hurt our business.
The success of the Cheap Tickets brand will depend to a certain extent on
our ability to enhance our advertising programs. The number of Internet sites
that offer competing services increases the importance of establishing and
maintaining our brand name recognition. Many online sites already have well-
established brands in online services or the travel industry generally. We
intend to expand significantly our advertising expense, including national
television and radio promotions, but these expenditures may not result in
increased business activity or the desired enhancement of brand recognition.
This could adversely affect our results of operations.
We may be unable to manage our rapid growth effectively.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion. Our inability to manage growth effectively
could hurt our business.
We have recently added a number of key managerial and technical employees,
and we expect to add additional key personnel in the future. This expansion
has placed, and we expect it will continue to place, a significant strain on
our management, operational and financial resources. To manage the expected
growth of our operations and personnel, we plan to:
. improve and upgrade transaction-processing, operational, customer
service and financial systems, procedures and controls;
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. maintain and expand our relationships with various travel service
suppliers, Internet portals and other travel-related website companies
and other third parties necessary to our business;
. expand our finance, administrative and operations staff;
. continue to attract, train and manage our employee base; and
. implement a disaster recovery program.
Our current and planned personnel, systems, procedures and controls may be
inadequate to support our planned growth, and our management may not be able
to identify, manage and exploit existing and potential market opportunities
successfully.
We may not be able to keep up with the industry's rapid technological and
other changes.
The industry in which we compete is characterized by:
. rapid technological change;
. changes in user and customer requirements and preferences;
. frequent new product and service introductions embodying new
technologies;
. the emergence of new industry standards and practices; and
. the emerging importance of the Internet and the proliferation of
companies offering Internet-based products and services.
These developments could render our existing online sites and proprietary
technology and systems quickly obsolete. Our inability to modify or adapt our
infrastructure in a timely manner or the expenses incurred in making such
adaptations 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 occurrence of interruptions, delays, loss of data or the inability to
accept and confirm customer reservations could hurt our business.
Our online servers are located in Sunnyvale, California and Herndon,
Virginia; The SABRE Group's computers are located in Tulsa, Oklahoma; our
communication systems are located at four call centers; and our accounting
systems' computers are located in Hawaii. These systems and operations are
vulnerable to damage or interruption from power loss, telecommunications
failure, break-ins, natural disasters and similar events. Recently, the
operations of several major online companies were disrupted by "data floods"
from hackers, and we may be vulnerable to similar acts of sabotage.
We currently do not carry adequate business interruption insurance. Although
we have adopted network security measures, our servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions.
These kinds of events could lead to interruptions, delays, loss of data or the
inability to accept and confirm customer reservations. The occurrence of any
of the foregoing risks could hurt our business.
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Interruptions in service from third parties could hurt our business.
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the
airline and hotel industries to make airline ticket and hotel room
reservations. Any interruption in these third-party services or a
deterioration in their performance could hurt our business. If our arrangement
with any of these third parties is terminated, we may not find an alternative
source of systems support on a timely basis or on commercially reasonable
terms.
We rely on third parties to print our airline tickets and arrange for their
delivery. We rely on third parties to host our online system's infrastructure,
web and database servers.
We currently rely on SABRE for our general reservations system, including
customer profiling, making reservations and credit card verification and
confirmations. Currently, over 90% of our computing transactions are processed
through the SABRE systems. Our technology relationship with SABRE for Internet
operations will further increase our dependency. If we or SABRE ever elect to
terminate the existing relationship, we would be forced to convert to another
provider. This conversion could require a substantial commitment of time and
resources and hurt our business.
Our current reservation systems may not be able to handle all calls
adequately.
Our call centers have not been able to answer all calls or service all
inquiries adequately. Our systems' lack of capacity to handle the demands of
our customers can cause unanticipated system disruptions, slower response
times, poor customer service, impaired quality and speed of reservations and
confirmations and delays in reporting accurate financial information. These
problems could hurt our business.
If we experience a substantial increase in our web traffic or in
reservations beyond expected levels, we may need to expand and upgrade our
technology, transaction-processing systems and network infrastructure beyond
planned levels of improvement. If we fail to expand and upgrade in a timely
manner, our business could be hurt. In addition, we may not be able to:
. project accurately the rate or timing of increases in demand;
. upgrade our systems and infrastructure to accommodate future traffic
levels;
. integrate successfully any newly developed or purchased technology with
our existing systems; or
. upgrade and expand our systems in a timely or efficient manner.
Online security breaches could hurt our business.
In our business, secured transmission of confidential information over
public networks is essential to maintain consumer and supplier confidence. If
any compromise of our security were to occur, it could hurt our business.
Concerns over the security of transactions conducted on the Internet and the
potential compromise of customer privacy may inhibit the growth of commercial
online services as a means of conducting commercial transactions. We have
expended significant resources to protect against security breaches and to
alleviate problems caused by such breaches, and we may need to make further
expenditures for this purpose in the future. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to transmit securely confidential information,
such as customer credit card numbers. In addition, we maintain an extensive
confidential database of customer profiles and transaction information. Our
current security measures may not be adequate and advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the methods we use to
protect customer transaction and personal data. A party who can circumvent our
security might be able to misappropriate proprietary information or cause
interruptions in our operations. Security breaches could also expose us to a
risk of loss or litigation and possible liability for failing to secure
confidential customer information.
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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
and Chief Executive Officer, Sam Galeotos, President and Chief Operating
Officer, 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 have employment agreements with only certain of our key personnel. In
addition, most members of our senior management group have been recruited and
hired over the past 24 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 be able
to attract, assimilate or retain sufficiently qualified personnel. In
particular, we may encounter difficulties in attracting a sufficient number of
qualified software developers for our online services and transaction-
processing systems. The failure to retain and attract necessary technical,
managerial, marketing and customer service personnel could hurt our business
and impair our growth strategy.
Although none of our employees is represented by a labor union, our
employees may join or form a labor union.
Our business could be hurt if we do not offer new services successfully.
We plan to introduce new and expanded services. Our inability to generate
revenues from such expanded services or products sufficient to offset their
development or offering cost could hurt our business. Our alternative
products, including cruises, auto rentals and hotel room reservations,
represented less than 1% of our gross bookings for the year ended December 31,
1999. Our business strategy is to increase the percentage of such alternate
travel offerings as a percentage of our revenues. We may not be able to offer
such services in a cost-effective or timely manner and our efforts may not be
successful. Further, any new service that is not favorably received by
customers could damage our reputation or brand name. Expansion of our services
could also require significant additional expenses and may strain our
management, financial and operational resources. If we cannot obtain alternate
travel offerings in the future, we may not be able to benefit fully from our
growth strategy.
Our business could be hurt if we make acquisitions that are not successful.
We may in the future broaden the scope and content of our business through
the acquisition of existing complementary businesses. We may not be successful
in overcoming problems encountered in connection with such acquisitions, and
our inability to do so could hurt our business.
We may consider the acquisition of companies providing similar services in
international markets or in other sectors of the travel industry in the
future. Future acquisitions would expose us to increased risks. These include
risks associated with:
. the assimilation of new operations, sites and personnel;
. the diversion of resources from our existing businesses, sites and
technologies;
. the inability to generate revenues from new sites or content sufficient
to offset associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and policies;
and
. the impairment of relationships with employees and customers as a result
of integration of new businesses.
Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses.
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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. Alternatively, 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 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."
Our success depends on our ability to protect our intellectual property.
Trademarks, copyrights and trade secrets
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success. Claims, infringement
or misappropriation by third parties may hurt our business. We rely on a
combination of laws and contractual restrictions, including trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to establish and
protect our proprietary rights. However, laws and contractual restrictions may
not be sufficient to prevent misappropriation of our technology or deter
others from developing similar technologies. We pursue the registration of
certain of our key trademarks and service marks in the United States.
Effective trademark, service mark, copyright and trade secret protection may
not be available in every country in which our products and services are made
available. The steps we have taken to protect our proprietary rights may not
be adequate, third parties may infringe or misappropriate our copyrights,
trademarks, trade dress and similar proprietary rights, and we may be required
to incur significant expenses preserving our rights. In addition, other
parties may assert infringement claims against us. We may be subject to legal
proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by us. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
Domain names
We currently hold the Internet domain name "www.cheaptickets.com," as well
as various other related names. Third parties may acquire domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights which may hurt our business. Domain names generally are
regulated by Internet
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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 legislation could allow state and local
government to impose taxes on Internet-based sales, and such taxes could hurt
our business.
Our stock price is likely to be volatile.
The market price of the common stock is likely to be volatile and could be
subject to significant fluctuations in response to factors such as the
following, some of which are beyond our control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities analysts
and investors;
28
<PAGE>
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in market valuations of other travel, Internet or online service
companies;
. announcements of technological innovations or new services by us or our
competitors;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of one or more major travel suppliers;
. additions or departures of key personnel;
. future sales of our common stock; and
. stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price and
volume fluctuations. These fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, may adversely affect the market price of our common stock. The
market prices for stocks of Internet-related and technology companies
frequently reach levels that bear no relationship to the operating performance
of these companies. These market prices often are not sustainable and are
subject to wide variations. In the past, securities class action litigation
has often been brought against a company following periods of volatility in
the market price of its securities. We may in the future be the target of
similar litigation. Securities litigation could result in substantial costs
and divert management's attention and resources.
The market price of our stock could be adversely affected because a
significant portion of our stock is closely controlled.
At March 13, 2000, 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, beneficially owned approximately
49.0% of our outstanding common stock, subject to certain adjustments. Such
ownership could discourage others from initiating potential merger, takeover
or other change of control transactions. As a result, the market price of our
common stock could be adversely affected. If they act together, they will
effectively have the ability to control the outcome on all matters requiring
stockholder approval, including the election and removal of directors and any
merger, consolidation or sale of all or substantially all of our assets, and
to control our management and affairs.
Anti-takeover provisions affecting us could prevent or delay a change of
control.
Our Board of Directors has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. This could have an adverse impact on the
market price of our common stock. We have no present plans to issue any shares
of preferred stock, but we may do so. The rights of the holders of common
stock may be subject to, and adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. Moreover, the
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change of control of Cheap Tickets without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of common stock. Further, certain provisions of our charter documents,
including provisions permitting stockholders to take action by written consent
with a two-thirds vote and limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have
the effect of delaying or preventing changes in control or management of Cheap
Tickets. These governance provisions also could hurt the market price of our
common stock.
29
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Cheap Tickets does not use derivative financial instruments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. Government obligations and corporate obligations with
contractual maturities of less than one year. We do not expect any material
loss from our marketable security investments and therefore believe that our
potential interest rate exposure is not material.
Item 8. Financial Statements and Supplementary Data.
See pages F-1 through F-21 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Annual Report. We incorporate by reference in
Items 10 to 13 below certain sections of our definitive proxy statement, to be
filed pursuant to Regulation 14A with the SEC within 120 days after December
31, 1999.
Item 10. Directors and Executive Officers.
Information required by this Item 10 is incorporated by reference in this
Annual Report from our definitive proxy statement to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 1999.
Item 11. Executive Compensation.
Information required by this Item 11 is incorporated by reference in this
Annual Report from our definitive proxy statement to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this Item 12 is incorporated by reference in this
Annual Report from our definitive proxy statement to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 1999.
Item 13. Certain Relationships and Related Transactions.
Information required by this Item 13 is incorporated by reference in this
Annual Report from our definitive proxy statement to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 1999.
30
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
Our financial statements and the report of independent accountants are set
forth on pages F-1 through F-21 (See index on page F-1).
(a)(2) Financial Statement Schedules
All schedules to our financial statements are omitted because of the absence
of the conditions under which they are required.
(a)(3) List of Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
(c) Exhibits
Reference is made to the Exhibits index and exhibits filed as a part of this
Annual Report.
(d) Additional Financial Statements
Not applicable.
Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Note No.
------- ----------- --------
<C> <S> <C>
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.
10.1*# 1997 Stock Option Plan.
10.2*# 1999 Stock Incentive Plan.
10.3*# Form of Severance Agreement for Michael J. Hartley and
Sandra T. Hartley.
10.4*# Form of Indemnification Agreement.
10.5** The Commerce Tower Office Lease dated July 2, 1995 between
Tosei Shoji Co. and Cheap Tickets, Inc., as amended by the
1st Amendment to the Commerce Tower Office Lease dated
June 14, 1996, the 2nd Amendment to the Commerce Tower
Office Lease dated October 9, 1997, the 3rd Amendment of
Commerce Tower Office Lease dated December 2, 1998, the
Amendment of Commerce Tower Office Lease for Additional
Premises, Suite 901 dated July 14, 1999, and the Amendment
of Commerce Tower Office Lease for Additional Premises,
Suite 915 dated July 14, 1999.
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.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Note No.
------- ----------- --------
<C> <S> <C>
10.8** Commercial Lease Agreement dated December 22, 1998
between Connell Development Co. and Cheap Tickets, Inc.,
as amended by the 1st Amendment to the Commercial Lease
Agreement dated May 17, 1999.
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.
10.16+*** 2000 Net Consolidator Program Agreement dated June
23,1999 between Trans World Airlines, Inc. and Cheap
Tickets, Inc.
10.17# Employment Agreement dated as of October 25, 1999 between
Sam E. Galeotos and Cheap Tickets, Inc.
10.18# Promissory Note dated October 31, 1999 by Sam E. Galeolos
to Cheap Tickets, Inc.
10.19+ Consolidator Agreement dated February 4, 2000 between
America West Airlines, Inc. and Cheap Tickets, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference from Registration Statement No. 333-70841, as
amended, originally filed with Securities and Exchange Commission on
January 20, 1999.
** Incorporated by reference from Registration Statement No. 333-84323, as
amended, originally filed with Securities and Exchange Commission on
August 3, 1999.
*** Incorporated by reference from Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 15, 1999.
# Management contract or compensatory plan or arrangement.
+ Portions have been omitted pursuant to a confidential treatment request.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on March 29, 2000.
CHEAP TICKETS, INC.
/s/ Michael J. Hartley
By __________________________________
Name: Michael J. Hartley
Title: Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Michael J. Hartley March 29, 2000
___________________________________________
Michael J. Hartley
Chief Executive Officer and Chairman of the
Board
/s/ Sam E. Galeotos March 29, 2000
___________________________________________
Sam E. Galeotos
President and Chief Operating Officer and
Director
/s/ Dale K. Jorgenson March 29, 2000
___________________________________________
Dale K. Jorgenson
Vice President of Finance and Chief Financial Officer
/s/ Sandra T. Hartley March 29, 2000
___________________________________________
Sandra T. Hartley
Director
/s/ Cece Smith March 29, 2000
___________________________________________
Cece Smith
Director
/s/ George R. Mrkonic March 29, 2000
___________________________________________
George R. Mrkonic
Director
/s/ Giles H. Bateman March 29, 2000
___________________________________________
Giles H. Bateman
Director
/s/ A. Maurice Myers March 29, 2000
___________________________________________
A. Maurice Myers
Director
</TABLE>
33
<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 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, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Cheap Tickets, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's 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
auditing standards generally accepted in the United States 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 7, 2000
F-2
<PAGE>
CHEAP TICKETS, INC.
BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
ASSETS (Note 4)
---------------
Current Assets:
Cash and cash equivalents........................ $ 2,973,988 $ 40,717,517
Marketable securities............................ 4,935,229 98,579,668
Trade accounts and other receivables............. 924,348 4,519,775
Refundable income taxes.......................... -- 355,568
Ticket inventories............................... 286,331 348,263
Other current assets............................. 725,692 1,370,158
----------- ------------
Total current assets............................ 9,845,588 145,890,949
Property and equipment, net (Note 3)............... 2,999,418 9,263,101
Other assets....................................... 380,846 456,665
----------- ------------
$13,225,852 $155,610,715
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable................................. $ 4,681,055 $ 7,131,497
Accrued salaries................................. 399,167 1,763,380
Accrued vacation................................. 421,288 540,000
Accrued expenses and other liabilities........... 222,321 376,592
Current installments of long-term debt (Note 4).. 221,469 132,806
Current installments of capital lease obligations
(Note 9)........................................ 287,809 1,405,080
Deferred revenue, current........................ -- 400,000
Income taxes payable............................. 139,640 --
----------- ------------
Total current liabilities....................... 6,372,749 11,749,355
Long-term debt, excluding current installments
(Note 4).......................................... 585,556 516,503
Capital lease obligations, excluding current
installments (Note 9)............................. 652,359 3,376,119
Deferred revenue, non-current...................... -- 1,200,000
Other noncurrent liabilities....................... 93,961 155,879
----------- ------------
Total liabilities............................... 7,704,625 16,997,856
----------- ------------
Commitments and contingencies (Notes 8, 9, 11 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
in 1998 and none in 1999 (Note 5)................ 4,136,028 --
----------- ------------
Stockholders' Equity (Notes 5, 6, 10 and 11):
Preferred stock, $1 par value in 1998 and $0.01
par value in 1999
Authorized--5,000,000 shares in 1998 and
10,000,000 shares in 1999
Issued--none in 1998 and 1999 (except for 425,000
shares of mandatorily
redeemable cumulative preferred stock shown
above).......................................... -- --
Common stock, $0.01 par value in 1998 and $0.001
par value in 1999
Authorized--70,000,000 shares
Issued--14,473,676 shares in 1998 and 24,025,413
shares in 1999.................................. 10,338 24,025
Additional paid-in capital....................... 1,246,937 146,002,475
Unearned compensation............................ (696,275) (382,094)
Retained earnings................................ 824,199 7,708,455
Treasury stock, at cost--1,037,288 common shares
in 1999......................................... -- (14,740,002)
----------- ------------
Total stockholders' equity...................... 1,385,199 138,612,859
----------- ------------
$13,225,852 $155,610,715
=========== ============
</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, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Non-published fares................. $ 96,379,304 $159,845,855 $317,259,900
Published fare commissions and
bonuses............................ 6,470,082 11,268,472 22,349,477
------------ ------------ ------------
Net revenues.................... 102,849,386 171,114,327 339,609,377
Cost of sales....................... 81,370,511 136,067,182 271,561,665
------------ ------------ ------------
Gross profit........................ 21,478,875 35,047,145 68,047,712
Selling, general and administrative
expenses........................... 23,091,193 33,411,112 59,276,624
------------ ------------ ------------
Net operating income (loss)......... (1,612,318) 1,636,033 8,771,088
Other income (deductions):
Interest income................... 183,723 374,269 4,310,746
Interest expense.................. (185,428) (148,253) (261,256)
Loss on sale or disposal of
property and equipment........... (2,164) (48,786) (19,839)
Loss on sale of marketable
securities....................... -- -- (18,512)
Other, net........................ 994 (7,731) 76,994
------------ ------------ ------------
(2,875) 169,499 4,088,133
------------ ------------ ------------
Earnings (loss) before income
taxes.............................. (1,615,193) 1,805,532 12,859,221
Income taxes (Note 7)............... (606,633) 740,268 5,272,281
------------ ------------ ------------
Net earnings (loss)................. (1,008,560) 1,065,264 7,586,940
Preferred dividends................. (170,000) (340,000) (78,712)
Accretion of mandatorily redeemable
cumulative preferred stock
discount........................... (87,066) (174,132) (36,657)
Redemption of mandatorily redeemable
cumulative preferred stock......... -- -- (587,315)
------------ ------------ ------------
Income (loss) available to common
shares............................. $ (1,265,626) $ 551,132 $ 6,884,256
============ ============ ============
Basic earnings (loss) per common
share.............................. $ (0.09) $ 0.04 $ 0.33
============ ============ ============
Average common shares outstanding... 14,847,322 14,567,084 20,731,375
============ ============ ============
Diluted earnings (loss) per common
share.............................. $ (0.09) $ 0.03 $ 0.31
============ ============ ============
Average diluted common shares
outstanding........................ 14,847,322 17,920,868 22,060,051
============ ============ ============
</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, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-in Unearned Retained Treasury Stockholders'
Shares Amount Capital Compensation Earnings Stock Equity
---------- ------- ------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 1,053 $ 1,053 $ 45,842 $ (42,071) $ 1,538,768 $ -- $ 1,543,592
Net loss................ -- -- -- (1,008,560) -- (1,008,560)
Issuance of common stock
(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)......... 1,051,947 9,477 (9,477) -- -- -- --
Stock dividend (Note
6)..................... 7,523 75 -- -- (75) -- --
Accrual of dividends on
mandatorily redeemable
cumulative preferred
stock (Note 5)......... -- -- -- (170,000) -- (170,000)
Amortization of unearned
compensation (Note
10).................... -- -- 22,944 -- -- 22,944
---------- ------- ------------ --------- ----------- ------------ ------------
Balance at December 31,
1997................... 1,060,523 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
cumulative preferred
stock (Note 5)......... -- -- -- (340,000) -- (340,000)
Reversal of amortization
of unearned
compensation (Note
10).................... -- -- (3,820) -- -- (3,820)
Forfeiture of common
stock (Note 10)........ (26,689) (267) (22,680) 22,947 -- -- --
Stock option
compensation (Note
11).................... -- 722,600 (722,600) -- -- --
Amortization of unearned
stock option
compensation (Note
11).................... -- -- 26,325 -- -- 26,325
---------- ------- ------------ --------- ----------- ------------ ------------
Balance at December 31,
1998................... 1,033,834 10,338 1,246,937 (696,275) 824,199 -- 1,385,199
Net earnings............ -- -- -- 7,586,940 -- 7,586,940
14-for-1 common stock
split.................. 13,439,842 4,136 (4,136) -- -- -- --
Accretion to mandatorily
redeemable cumulative
preferred stock
redemption price (Note
5)..................... -- -- -- (36,657) -- (36,657)
Accrual of dividends on
mandatorily redeemable
cumulative preferred
stock (Note 5)......... -- -- -- (78,712) -- (78,712)
Redemption of
mandatorily redeemable
cumulative preferred
stock (Note 5)......... -- -- -- (587,315) -- (587,315)
Exercise of common stock
warrants (Note 5)...... 2,969,375 2,969 (848) -- -- -- 2,121
Sale of common stock
under public offerings,
net of expenses (Note
6)..................... 6,525,000 6,525 144,603,522 -- -- -- 144,610,047
Exercise of stock
options................ 56,560 56 13,565 -- -- -- 13,621
Other issuance of common
stock.................. 802 1 12,982 -- -- -- 12,983
Purchase of 1,037,288
treasury shares........ -- -- -- -- (14,740,002) (14,740,002)
Income tax benefit for
stock option
compensation .......... -- 350,674 -- -- -- 350,674
Amortization and
forfeiture of unearned
stock option
compensation (Note
11).................... -- (220,221) 314,181 -- -- 93,960
---------- ------- ------------ --------- ----------- ------------ ------------
Balance at December 31,
1999................... 24,025,413 $24,025 $146,002,475 $(382,094) $ 7,708,455 $(14,740,002) $138,612,859
========== ======= ============ ========= =========== ============ ============
</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, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................. $(1,008,560) $ 1,065,264 $ 7,586,940
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities--
Deferred income taxes.............. (19,053) (102,049) (151,875)
Depreciation and amortization...... 370,237 563,514 1,630,599
Stock option compensation.......... -- 26,325 93,960
Stock compensation expense
(benefit)......................... 22,944 (3,820) --
Amortization of discount on
marketable securities............. -- (51,029) (38,703)
Loss on sale or disposal of
property and equipment............ 2,164 48,786 19,839
Loss on sale of marketable
securities........................ -- -- 18,512
Changes in:
Trade accounts and other
receivables..................... 152,199 (269,202) (3,595,427)
Refundable income taxes.......... (663,209) 663,209 (4,894)
Ticket inventories............... 142,998 (166,560) (61,932)
Other current assets............. (105,790) (289,087) (422,787)
Other noncurrent assets.......... (26,267) (242,743) (79,900)
Accounts payable................. 2,516,670 295,276 2,450,443
Accrued salaries................. 92,702 61,712 1,364,213
Accrued vacation................. 31,460 342,120 118,712
Income taxes payable............. (200,336) 139,640 (139,640)
Accrued expenses and other
liabilities..................... 89,606 81,416 154,271
Deferred revenue................. -- -- 1,600,000
Other noncurrent liabilities..... 64,952 (155,284) (7,886)
----------- ----------- -------------
Net cash provided by operating
activities.................... 1,462,717 2,007,488 10,534,445
----------- ----------- -------------
Cash flows from investing activities:
Capital expenditures................ (496,406) (484,817) (3,159,988)
Proceeds from sale of property and
equipment.......................... 10,075 551,214 10,900
Purchases of marketable securities.. -- (4,884,200) (119,209,534)
Proceeds from sale of marketable
securities......................... -- -- 25,585,286
----------- ----------- -------------
Net cash used in investing
activities.................... (486,331) (4,817,803) (96,773,336)
----------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of
mandatorily redeemable cumulative
preferred stock and common stock
warrants, net...................... 3,875,482 -- --
Redemption of mandatorily redeemable
cumulative preferred stock......... -- -- (4,838,712)
Proceeds from issuance of common
stock, net of expense paid......... -- -- 144,638,771
Purchases of treasury stock......... -- -- (14,740,002)
Proceeds from issuance of long-term
debt............................... -- 307,200 235,875
Principal payments on long-term
debt............................... (56,960) (627,138) (393,591)
Proceeds from issuance of other
debt............................... 500,000 -- --
Principal payments on other debt.... (500,000) -- --
Principal payments on capital lease
obligations........................ (123,786) (150,165) (919,921)
----------- ----------- -------------
Net cash provided by (used in)
financing activities.......... 3,694,736 (470,103) 123,982,420
----------- ----------- -------------
Net increase (decrease) in cash
and cash equivalents.......... 4,671,122 (3,280,418) 37,743,529
Cash and cash equivalents at beginning
of period............................ 1,583,284 6,254,406 2,973,988
----------- ----------- -------------
Cash and cash equivalents at end of
period............................... $ 6,254,406 $ 2,973,988 $ 40,717,517
=========== =========== =============
</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, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest...................................... $185,428 $145,447 $ 264,062
Income taxes, net of refunds received......... 275,965 39,467 5,538,910
Noncash investing and financing activities:
Unearned compensation for stock options
granted...................................... -- 722,600 --
Acquisitions of new equipment through capital
leases....................................... 150,744 608,069 4,760,952
Accrued and unpaid dividends on mandatorily
redeemable preferred stock................... 170,000 340,000 --
</TABLE>
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. The
Company operates in Hawaii, California, Colorado, New York and Washington.
Cheap Tickets deals with over 100 airline carriers. Revenues from non-
published fares through three of these airline carriers accounted for
approximately 60%, 49% and 49% of total non-published fares for 1997, 1998 and
1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the useful lives of property and
equipment, the valuation allowance for deferred tax assets and the allowance
for doubtful receivables. Management believes that such estimates 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 amortized cost, which
approximates fair value.
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, 1998 and 1999.
Property and Equipment
Property and equipment are carried at cost. Equipment held under capital
leases is stated at the lower of the present value of minimum lease payments
or estimated fair value of the equipment at the inception of the lease.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives
F-8
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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. When fixed
assets are sold or retired, cost and accumulated depreciation are eliminated
from the accounts, and gains or losses are recorded in income.
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>
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,
whereby Cheap Tickets is the credit card merchant of record. Non-published
fares are generally sold at a significant discount off published fares. Cheap
Tickets also sells travel services at regular published fares, where the
Company is not the credit card merchant of record, 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.
Bonuses received in connection with contract acceptances or extensions are
deferred and recognized as income over the life of the contract.
Advertising
Advertising costs are expensed as incurred. Advertising expenses amounted to
$2,495,325, $3,823,150 and $11,132,308 for 1997, 1998 and 1999, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and for operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
F-9
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Cheap Tickets adheres to the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
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.
Fair Value of Financial Instruments
The fair values of Cheap Tickets' long-term debt approximate 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 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>
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 income and assumed
conversions............ $ 551,132 17,920,868 $ 0.03
=========== ========== ======
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1999:
Basic
Income available to
common shares.......... $ 6,884,256 20,731,375 $ 0.33
======
Effect of dilutive
securities
Common stock warrants... -- 658,975
Stock options........... -- 625,112
Option--IPO
overallotment.......... -- 44,589
Diluted
----------- ----------
Net income and assumed
conversions............ $ 6,884,256 22,060,051 $ 0.31
=========== ========== ======
</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 1997 since it
would have had an antidilutive effect.
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 principles
as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
F-11
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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. Cheap Tickets manages its business as two operating
segments established for Internet and Call Center operations. See Note 13.
SFAS No. 132 standardized the disclosure requirements for pension and other
postretirement benefits. The adoption of SFAS No. 132 (which does not change
existing measurement or recognition standards for Cheap Tickets' defined
contribution plan) did not have a material effect on Cheap Tickets' financial
statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires the recognition of all derivative instruments as either
assets or liabilities in the statement of financial position and measurement
of those derivative instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133." The original
effective date for SFAS No. 133 was for all fiscal quarters of fiscal years
beginning after June 15, 1999. As a result of the issuance of SFAS No. 137,
the effective date for SFAS No. 133 is for all fiscal quarters of fiscal years
beginning after June 15, 2000. Currently, Cheap Tickets does not hold
derivative instruments or engage in hedging activities. The adoption of SFAS
No. 133, as amended by SFAS No. 137, is not expected to have a material effect
on Cheap Tickets' financial statements.
The FASB issued SFAS No. 134 in October 1998 and SFAS No. 136 in June 1999
which do not apply to Cheap Tickets. In February 1999, the FASB issued SFAS
No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections,"
which was effective shortly after issuance and did not have a material effect
on Cheap Tickets' financial statements.
In January 1999, Cheap Tickets adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up Activities"
issued by the Accounting Standards Executive Committee (AcSEC) of the American
Institute of Certified Public Accountants (AICPA). The implementation of these
pronouncements did not have a material effect on Cheap Tickets' financial
statements.
Reclassifications
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform with the 1999 presentation. These reclassifications
had no effect on net income (loss) as previously reported.
F-12
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
2. Marketable Securities
A summary of marketable securities at December 31 follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Fixed maturities:
Corporate notes and obligations................... $ -- $70,161,197
U.S. government obligations....................... 4,935,229 8,752,838
State and municipal obligations................... -- 7,200,000
Commercial paper.................................. -- 7,065,633
----------- -----------
Equity securities:
Preferred stocks.................................. -- 5,400,000
----------- -----------
$ 4,935,229 $98,579,668
=========== ===========
</TABLE>
All debt securities at December 31, 1999 have contractual maturities of less
than one year.
The cost of securities sold is based on the specific identification method.
There were no sales of securities in 1997 and 1998. Sales of securities for
1999 are summarized below:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Fixed maturities:
Cash proceeds.................................................. $14,586,286
Gross realized gains........................................... --
Gross realized losses.......................................... 18,214
Equity securities:
Cash proceeds.................................................. $11,000,000
Gross realized gains........................................... --
Gross realized losses.......................................... 298
</TABLE>
3. Property and Equipment
A summary of property and equipment at December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Land................................................. $ 158,239 $ 158,239
Building improvements................................ 741,761 767,601
Leasehold improvements............................... 358,737 723,630
Furniture, fixtures and equipment (Note 9)........... 3,088,240 10,493,752
Vehicles............................................. 122,916 197,620
---------- -----------
4,469,893 12,340,842
Less accumulated depreciation and amortization....... 1,470,475 3,077,741
---------- -----------
$2,999,418 $ 9,263,101
========== ===========
</TABLE>
Depreciation and amortization expense amounted to $370,237, $563,514 and
$1,630,599 for 1997, 1998 and 1999, respectively.
F-13
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
4. Debt
Long-term debt at December 31, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Bank Debt--
3.125% above an indexed rate (total rate of 9.25% at
December 31, 1999) note payable in monthly installments
of $5,773, including interest, due May 1, 2012,
collateralized by a first mortgage on land and
building................................................ $564,890 $540,904
10% note payable in monthly installments of $1,413
including interest, balance due January 26, 2001,
collateralized by a vehicle............................. 31,785 --
6.80% note payable in monthly installments of $16,448
including interest, due May 28, 2000.................... -- 80,859
Other--
8.25% note payable in monthly installments of $13,930
including interest, due February 28, 2000............... 210,350 27,546
-------- --------
Total long-term debt..................................... 807,025 649,309
Less current installments of long-term debt.............. 221,469 132,806
-------- --------
Long-term debt, excluding current installments........... $585,556 $516,503
======== ========
</TABLE>
The aggregate maturities of long-term debt subsequent to December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Year ending December 31
-----------------------
<S> <C>
2000............................................................ $132,806
2001............................................................ 26,755
2002............................................................ 29,338
2003............................................................ 32,170
2004............................................................ 35,275
Later years..................................................... 392,965
--------
$649,309
========
</TABLE>
5. Mandatorily Redeemable Cumulative Preferred Stock
In July 1997, Cheap Tickets issued and sold 425,000 shares of mandatorily
redeemable cumulative preferred stock with detachable warrants to purchase an
aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate
exercise price of $2,121 in exchange for cash consideration of $4,250,000 (the
"Equity Transaction").
The net proceeds of $3,875,482, after reflecting transaction costs of
$374,518, were allocated between the warrants and preferred stock based on
their relative fair values, resulting in an allocation of $510,652 and
$3,364,830 to the warrants and preferred stock, respectively. The value
attributable to the warrants was recorded as additional paid-in capital. The
excess of the redemption value of the preferred stock of $4,250,000 over the
initial carrying value of $3,364,830 was being accreted by periodic charges to
retained earnings. The accretion amounted to $87,066, $174,132 and $36,657 for
1997, 1998 and 1999, respectively.
The preferred stock had a par value of $1 per share, was nonvoting and
accrued cumulative annual dividends of $.80 per share. Accrued dividends
amounted to $170,000, $340,000 and $78,712 for 1997, 1998 and 1999,
respectively. Undeclared cumulative dividends amounted to $510,000 at December
31, 1998 and were accrued as an addition to preferred stock in the
accompanying balance sheets.
F-14
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
By its terms, the preferred stock was required to be redeemed at the time of
an initial public offering of Cheap Tickets' common stock. The initial public
offering of Cheap Tickets' common stock occurred on March 19, 1999. The
redemption price was equal to its price of issuance, $4,250,000, plus accrued
dividends of $589,000 at March 24, 1999, the date of redemption. Unamortized
accretion of $587,315 on March 24, 1999 was charged against retained earnings.
Coincident with the redemption of the preferred stock, the warrants were
exercised and 2,969,375 shares were issued in a cashless exercise.
6. Stockholders' Equity
Common Stock
On June 24, 1997, Cheap Tickets' board of directors approved an amendment to
Cheap Tickets' articles of incorporation wherein the authorized common stock
of Cheap Tickets was increased from 5,000 shares at $1 par value to 5,000,000
shares at $0.01 par value, and to effect a 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 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
described in Note 5, 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 11).
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 10, 373,646 shares were forfeited by an officer upon
his resignation in March 1998.
Public Offerings
On March 19, 1999 Cheap Tickets completed an initial public offering of its
common stock in which 3,500,000 shares were issued at an offering price of $15
per share. The offering raised $47.7 million after underwriting discounts and
other related costs of issuance. Concurrently with the issuance of 3,500,000
shares in the offering, warrants for 2,969,375 shares were exercised. In
connection with the initial public offering, the underwriters had the option
to purchase an additional 525,000 shares of common stock. They exercised this
option on April 19, 1999. Net proceeds to Cheap Tickets were $7.3 million
after underwriting discounts and other costs of issuance.
On August 20, 1999 Cheap Tickets completed a secondary public offering of
its common stock, whereby 5,750,000 shares were sold at an offering price of
$38.00 per share. Of the total shares sold, 2,500,000 were offered by Cheap
Tickets and 3,250,000 were offered by certain existing stockholders. Net
proceeds to Cheap Tickets were $89.6 million after underwriting discounts and
other related costs of issuance.
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,
priviledges and restrictions, thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, and liquidation preferences.
F-15
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Restriction on Declaration and Payment of Dividends
In connection with the Equity Transaction described in Note 5, written
approval from a majority of the holders of preferred stock, common stock
warrants, and common stock issued upon exercise of warrants, was required for
the declaration or payment of dividends to common stockholders. However, this
restriction was removed upon redemption of the mandatorily redeemable
cumulative preferred stock on March 24, 1999.
7. Income Taxes
Income tax expense (benefit) for the years ended December 31, 1997, 1998 and
1999 was as follows:
<TABLE>
<CAPTION>
Years ended December 31 Federal State Total
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
1999:
Current................................. $4,431,488 $ 992,668 $5,424,156
Deferred................................ (186,816) 34,941 (151,875)
---------- ---------- ----------
$4,244,672 $1,027,609 $5,272,281
========== ========== ==========
</TABLE>
A tax benefit of $350,674 was credited directly to additional paid-in
capital for stock option compensation.
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 1997, 1998 and 1999 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>
1997 1998 1999
--------- -------- ----------
<S> <C> <C> <C>
Federal "expected" income tax expense
(benefit).................................. $(549,166) $613,881 $4,372,135
Additional federal income tax expense at
35%........................................ -- -- 28,592
State franchise and income taxes, net of
federal income tax effect.................. (81,201) 93,888 844,021
Other....................................... 23,734 32,499 27,533
--------- -------- ----------
$(606,633) $740,268 $5,272,281
========= ======== ==========
</TABLE>
F-16
<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, 1998 and 1999 are
presented below:
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued rent not deductible for tax purposes......... $ 21,201 $ 15,323
Accrued vacation not deductible for tax purposes..... 112,319 147,600
State tax credit carryforward........................ 34,129 --
Unearned compensation not deductible for tax
purposes............................................ 10,319 49,317
State franchise tax.................................. 23,046 243,573
-------- ---------
Total gross deferred tax assets.................... 201,014 455,813
-------- ---------
Deferred tax liabilities:
Property and equipment, principally due to
differences between accounting and tax depreciation
and amortization.................................... (63,166) (166,090)
-------- ---------
Total gross deferred tax liabilities............... (63,166) (166,090)
-------- ---------
Net deferred tax asset............................. $137,848 $ 289,723
======== =========
Deferred tax assets and liabilities are presented in
the accompanying balance sheets as follows:
Other current assets................................. $169,494 $ 391,173
Other noncurrent liabilities......................... (31,646) (101,450)
-------- ---------
$137,848 $ 289,723
======== =========
</TABLE>
There was no valuation allowance provided for deferred tax assets as of
December 31, 1997, 1998 and 1999. 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 qualified 401(k) defined contribution plan covering
all employees who attained the age of 20 and completed one year of service.
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. Cheap Tickets contributed
$415,000 in 1999.
F-17
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
9. Lease Commitments
Cheap Tickets is obligated under capital leases for equipment that expire at
various dates through 2004. At December 31, 1998 and 1999, the gross amounts
of equipment and related accumulated amortization recorded under capital
leases are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Equipment............................................. $1,260,237 $6,021,188
Less accumulated amortization (amortization expense
charged to depreciation and amortization expense).... 384,869 1,274,484
---------- ----------
$ 875,368 $4,746,704
========== ==========
</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 $851,709, $1,175,289 and
$1,430,902 for 1997, 1998 and 1999, respectively.
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31 Leases Leases
----------------------- ---------- ----------
<S> <C> <C>
2000................................................ $1,727,412 $1,086,081
2001................................................ 1,660,920 951,409
2002................................................ 998,908 865,573
2003................................................ 670,616 866,754
2004................................................ 440,611 530,216
Later years......................................... -- 1,519,243
----------
Total minimum lease payments..................... 5,498,467 $5,819,276
==========
Less amounts representing interest (at rates ranging
from 7.75% to 14.05%).............................. 717,268
----------
Present value of minimum capital lease payments.... 4,781,199
Less current installments of capital lease
obligations........................................ 1,405,080
----------
Capital lease obligations, excluding current
installments...................................... $3,376,119
==========
</TABLE>
10. 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.
F-18
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
11. Stock Option Plans
Cheap Tickets' 1997 Stock Option plan provided for the issuance of up to
1,979,642 shares of common stock.
In 1998, Cheap Tickets granted options 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 and $93,960 for 1998 and
1999, respectively. The remaining unamortized compensation cost of $696,275
and $382,094 (net of forfeitures) at December 31, 1998 and 1999, respectively
will be amortized over the future vesting periods of the options. The granted
options have a five-year vesting period and a ten-year exercise period from
the date of the grant. However, options to purchase up to 140,000 shares fully
vested upon Cheap Tickets' initial public offering of its stock.
Cheap Tickets' 1999 Stock Incentive Plan was adopted by the Board of
Directors in February 1999 and approved by the stockholders prior to the
initial public offering. All grants subsequent to the initial public offering
were and will be made under the 1999 Stock Incentive Plan. Under the 1999
Stock Incentive Plan, 1,260,000 shares plus an annual increase to be added on
the first day of Cheap Tickets' fiscal year beginning 2000 equal to two
percent of the number of shares outstanding as of such date or a lesser number
of shares determined by the plan administrator of the 1999 Stock Incentive
Plan were reserved for issuance. The Plan requires that the exercise price be
at least equal to the fair market value of the common stock on the date of the
grant, and the term of the option not exceed ten years. For all optionees
holding less than 10% of the voting power of all classes of Cheap Tickets'
oustanding capital stock, an exercise price equal to market value at date of
grant will not create any requirement for excess compensation charges.
Pursuant to the 1999 Stock Incentive Plan, the Board of Directors adopted the
1999 non-employee Director Option Program. Under this program, each non-
employee director appointed to the Board received an option to acquire 1,500
shares of common stock at an exercise price equal to the then fair market
value of the common stock at the date of grant.
The following table summarizes activity under the stock option plans:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Grant-Date
Shares Price Fair Value
--------- -------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997................ -- $ --
Granted--exercise price less than fair
value...................................... 728,000 0.31 $ 1.30
---------
Balance at December 31, 1998................ 728,000 0.31
Granted--exercise price equals fair value... 764,500 16.58 16.58
Exercised................................... (56,560) 0.24
Forfeited................................... (82,500) 2.35
---------
Balance at December 31, 1999................ 1,353,440 9.37
=========
Options exercisable at:
December 31, 1998......................... 28,000 $ 0.18
December 31, 1999......................... 190,120 $ 0.23
</TABLE>
F-19
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Options outstanding and exercisable at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
at December 31, 1999 at December 31, 1999
-------------------------------- -----------------------
Average
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life in Years Shares Price
--------------- --------- -------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.18-$ 1.57....... 594,440 $ 0.28 8.34 190,120 $ 0.23
11.93- 16.19....... 720,500 15.76 5.85 -- --
27.31- 37.50....... 38,500 30.19 9.20 -- --
--------- -----------
1,353,440 $ 9.37 7.04 190,120 $ 0.23
========= ===========
</TABLE>
Under SFAS No. 123, the fair value of each grant was estimated on the grant
date using the minimum value method in 1998 and the Black-Scholes valuation
model in 1999 based on the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Expected dividend yield........................................ 0.00% 0.00%
Average risk-free interest rate................................ 5.73% 6.01%
Expected volatility............................................ 0.00% 67.00%
Expected life of the options, in years......................... 10.00 6.18
</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 years ended December 31, 1998 and 1999 had Cheap Tickets elected to
adopt the fair-value based method of accounting prescribed by SFAS No. 123 is
presented below:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Net income:
As reported......................................... $1,065,264 $7,586,940
Pro forma........................................... $1,061,513 $6,528,713
Basic earnings per share:
As reported......................................... $ 0.04 $ 0.33
Pro forma........................................... $ 0.04 $ 0.28
Diluted earnings per share:
As reported......................................... $ 0.03 $ 0.31
Pro forma........................................... $ 0.03 $ 0.26
</TABLE>
12. Contingencies
Litigation
Various legal proceedings are pending against Cheap Tickets. The ultimate
liability of Cheap Tickets, if any, cannot be determined at this time. Based
upon consultation with counsel, management does not expect that the aggregate
liability, if any, resulting from these proceedings would have a material
effect on Cheap Tickets' financial position, results of operations or
liquidity.
F-20
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
13. Segment Information
In the fourth quarter of 1999, management began managing its business as two
reportable operating segments based on revenue distribution channels which
include the Internet and Call Centers (including retail stores). Net revenues,
including non-published fares, published fare commissions and bonuses and cost
of sales and operating expenses, including all general and administrative
expenses, are disaggregated by operating segment. In accordance with SFAS No.
131, segment information has been provided for all periods presented, except
for 1997 due to the insignificance of the Internet segment in that year. The
Company does not allocate assets by operating segment nor are the segments
evaluated by this criteria.
The reporting segments follow the same accounting policies used for the
Company's financial statements as described in the summary of significant
accounting policies. Management evaluates a segment's performance based upon
operating income. There were no intersegment sales or transfers.
Information on the reporting segments for 1998 and 1999 follows:
<TABLE>
<CAPTION>
1998 1999
------------------------------------- -------------------------------------
Internet Call Centers Total Internet Call Centers Total
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $12,047,000 $159,067,000 $171,114,000 $89,077,000 $250,532,000 $339,609,000
Cost of sales........... 8,860,000 127,207,000 136,067,000 69,353,000 202,208,000 271,561,000
----------- ------------ ------------ ----------- ------------ ------------
Gross profit............ 3,187,000 31,860,000 35,047,000 19,724,000 48,324,000 68,048,000
Operating expenses...... 2,784,000 30,627,000 33,411,000 13,626,000 45,651,000 59,277,000
----------- ------------ ------------ ----------- ------------ ------------
Operating income........ $ 403,000 $ 1,233,000 $ 1,636,000 $ 6,098,000 $ 2,673,000 $ 8,771,000
=========== ============ ============ =========== ============ ============
Other:
Depreciation expense
(included in operating
expenses)............. $ 95,000 $ 469,000 $ 564,000 $ 309,000 $ 1,321,000 $ 1,631,000
</TABLE>
Substantially all of the Company's net revenues are derived from sales of
airline tickets in the United States.
F-21
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
---------------------
THIS EMPLOYMENT AGREEMENT, dated as of October 25, 1999, is entered into by
and between CHEAP TICKETS, INC., a Delaware corporation (the "Company"), and SAM
E. GALEOTOS ("Executive").
RECITAL
-------
The Company desires to employ Executive, and Executive desires to be
employed by the Company, as a senior executive of the Company, in accordance
with and subject to the terms and conditions set forth herein.
AGREEMENT
---------
Accordingly, the parties hereby agree as follows:
1. Employment Term.
---------------
1.1. Initial Term and Additional Term. Subject to Section 4, the
-------------------------------- ---------
Company hereby employs Executive, and Executive hereby accepts employment by the
Company, to render services on behalf of the Company and all existing and future
Affiliated Companies (as defined in Section 2.1) in the position and with the
-----------
duties and responsibilities described in Section 2 for the period commencing on
---------
the date of this Agreement and ending upon the fifth anniversary hereof (the
"Initial Term"). Unless either party notifies the other party of its intention
to terminate this Agreement, at its sole and absolute discretion, within thirty
(30) days prior to the expiration of the Initial Term, this Agreement shall
continue indefinitely on a yearly basis (each extended yearly term referred to
as an "Additional Term"), subject to termination by either party, at its sole
and absolute discretion, upon thirty (30) days' notice prior to the expiration
of any such Additional Term. The Initial Term and all Additional Terms as set
forth above shall be referred to as the "Employment Term." In the event that the
Employment Term expires at the end of the Initial Term or any Additional Term by
reason of a notice provided by the Company or by the Executive pursuant to this
Section 1, the Company shall (i) pay Executive the compensation to which
- ---------
Executive is entitled under Section 3.1(a), including any accrued vacation,
--------------
through the end of the Employment Term; and (ii) reimburse Executive for any
business expenses properly incurred by Executive pursuant to Section 3.3 through
-----------
the end of the Employment Term. In the event that the Employment Term expires at
the end of the Initial Term or any Additional Term by reason of a notice
provided by the Company pursuant to this Section 1, the Company shall also pay
---------
Executive the severance payment as set forth in Section 5. Thereafter, the
---------
Company's obligations hereunder shall terminate. Nothing in this Section 1 shall
---------
affect Executive's rights to any benefits vested as of the date of the
expiration of the Initial Term or Additional Term, as the case may be
(including, without limitation, stock options that have vested). Executive
hereby agrees that the Company may cause the Employment Term to expire pursuant
to this Section 1 without regard (i) to any general or specific policies
---------
(whether written or oral) of the Company relating to the employment or
termination of its employees, or (ii) to any
1
<PAGE>
statements made to Executive, whether made orally or contained in any document,
pertaining to Executive's relationship with the Company.
1.2. Termination of the Employment Term Pursuant to Section 4. Each
--------------------------------------------------------
party shall have the right to terminate the Employment Term pursuant to Section
-------
4 with or without Cause (as defined therein), subject to the consequences set
- -
forth therein.
2. Position, Duties, Responsibilities.
----------------------------------
2.1. Position. Executive shall be employed by the Company as the
--------
President and Chief Operating Officer (or in such other position(s) as the Board
of Directors of the Company (the "Board") shall designate, provided that such
position shall have authority commensurate with the position of a senior
executive officer of the Company, with direct reporting authority to the Chief
Executive Officer of the Company or to the Board). Executive shall devote
Executive's best efforts and Executive's full time and attention to the
performance of the services customarily incident to such office, including,
without limitation, to the Company's and any Affiliated Company's operations,
strategic planning and to such other services as may be reasonably requested by
the Board (collectively, the "Services"). (The term "Affiliated Company" as used
in this Agreement means any corporation or other business entity that, now or
hereafter, directly or indirectly, controls, is controlled by or is under common
control with the Company.) Executive shall report directly to the Chief
Executive Officer of the Company. The Company shall retain full direction and
control of the means and methods by which Executive performs the Services.
Executive shall be based in Honolulu, Hawaii or such other place(s) as mutually
agreed between the Company and Executive.
2.2. Other Activities. Executive, during the Employment Term, shall
----------------
not (i) accept any other employment, or (ii) engage, directly or indirectly, in
any other business activity (whether or not pursued for pecuniary advantage)
that is or may be competitive with, or that might place Executive in a competing
position to that of the Company or any Affiliated Company. Executive's position
as a member of the Board of Directors of HealthInside.com and Etrieva.com shall
not be deemed to violate this Section 2.2.
-----------
3. Compensation, Benefits, Expenses.
--------------------------------
3.1. Compensation. In consideration of the Services to be rendered
------------
hereunder, including, without limitation, Services to any Affiliated Company,
Executive shall receive:
(a) Salary. An annual salary in the amount of Four Hundred
------
Fifty Thousand Dollars ($450,000), payable in twenty-four (24) equal
installments at the time and pursuant to the procedures regularly established,
and as they may be amended, by the Company during the course of this Agreement.
The Board shall review Executive's salary annually and in light of such review
may, in its sole and absolute discretion, increase such salary taking into
account any change in Executive's then responsibilities, increases in the cost
of living, performance by Executive, performance of the Company and other
pertinent factors.
2
<PAGE>
(b) Bonus. Upon attainment by the Company and Executive of
-----
financial and operational goals determined annually in advance by the Board in
consultation with Executive, an annual bonus in the amount of fifty percent
(50%) of the annual salary, payable at the time and pursuant to the procedures
regularly established, and as they may be amended, by the Company during the
course of this Agreement. If the Company and Executive exceed such financial and
operational goals, the bonus shall be at an increased percentage of the annual
salary, not to exceed seventy-five percent (75%) thereof, on a graduated scale,
as determined annually in advance by the Board in consultation with Executive.
(c) Stock Options. A grant of stock options representing six
-------------
hundred thousand (600,000) shares of common stock of the Company (the "Option
Shares"), in accordance with and subject to the terms and conditions of that
certain Stock Option Award Agreement of even date herewith between the Company
and Executive (the "Stock Option Award Agreement"), a copy of which is attached
hereto as Exhibit A and is incorporated by reference herein. Notwithstanding any
provision therein to the contrary, (i) if, during the first three (3) years of
the Employment Term, Executive's employment with the Company is terminated by
the Company without Cause or by Executive for Good Reason, the difference
between (X) sixty percent (60%) of the Option Shares and (Y) the Option Shares
which have already vested, shall immediately vest; and (ii) if, at any time
during the Employment Term, there occurs a Change of Control (as defined in
subparagraph (b) of Section 4.4), all Option Shares which have not already
-----------
vested shall immediately vest.
(d) Loan. A loan, bearing no stated interest until maturity,
----
in the amount of Four Hundred Thousand Dollars ($400,000), to be evidenced by a
Promissory Note made by Executive in favor of the Company (the "Note"), a form
of which is attached hereto as Exhibit B. At each of the first three (3)
anniversaries of the Note, one-third (1/3) of the principal amount payable by
Executive under the Note shall be forgiven by the Company, provided that
Executive is employed with the Company on such anniversary. Notwithstanding the
foregoing, Executive shall be entitled to forgiveness of one-third (1/3) of the
principal amount payable by Executive under the Note on any of the three (3)
anniversaries if:
(i) in the year preceding such anniversary, Executive
was employed with the Company for at least six (6) months, and
(ii) either (A) Executive terminated his employment with
the Company for Good Reason pursuant to Section 4.4(b), or (B) the Company
--------------
terminated Executive without Cause (as defined Section 4.3).
-----------
Executive and the Company agree that the forgiveness of any portion of the
Note hereunder shall be treated as if the Company paid to Executive an amount
equal to the amount forgiven (the "Forgiveness Payment") and Executive paid the
Forgiveness Payment to the Company to reduce the principal amount outstanding on
the Note, and any Forgiveness Payment shall be reportable to Executive as
compensation income for income tax purposes.
(e) Gross-Up. The Company shall pay to Executive, on or before the
--------
last day of the calendar year with respect to which any Forgiveness Payment or
Gross-Up
3
<PAGE>
Amounts (as defined in Section 3.3(d) below) are reportable, an amount (the
--------------
"Gross-Up Payment") such that, after the payment of federal, state and local
income and employment taxes on such amount, Executive shall have received
amounts free and clear of such taxes equal to the Forgiveness Payment and Gross-
Up Amounts; provided that the Company may withhold from any Gross-Up Payment any
federal, state, local income and employment taxes required to be withheld from
the Gross-Up Payment, the Forgiveness Payment and the Gross-Up Amounts (in
aggregate) and paid over to governmental authorities.
For purposes of determining the amount of any Gross-Up Payment, Executive
shall be deemed (i) to pay federal income taxes at the highest marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made, and (ii) to pay any applicable state and local income taxes at the
highest marginal rate of taxation for the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes if paid in
such year. The Company and Executive shall cooperate in good faith to determine
the amount of any Gross-Up Payment payable hereunder. If the Company and
Executive cannot agree on the amount of any Gross-Up Payment so payable, the
Company and Executive shall mutually select an independent accounting firm to
make the determination.
Notwithstanding anything herein to the contrary, the maximum Gross-Up
Payment payable by the Company to Executive shall not exceed one hundred percent
(100%) of the amount forgiven.
3.2. Benefits. The Company shall provide Executive with the right to
--------
participate in and to receive benefits from all present and future life,
accident, disability, medical, pension, stock and savings plans and all similar
benefits made available generally to senior executive officers of the Company.
Executive shall be entitled to the amount of annual vacation available to senior
executive officers of the Company (other than Michael J. Hartley) pursuant to
the Company's employment policies, and he shall not be subject to any waiting
period before he is first entitled to take vacation. As of the date hereof,
senior executive officers of the Company are entitled to three (3) weeks of
annual vacation. The amount and extent of benefits to which Executive is
entitled shall be governed by a specific benefit plan, as it may be amended from
time to time.
3.3. Expenses. The Company shall reimburse Executive for reasonable
--------
travel and other business expenses incurred by Executive in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the course of this Agreement. In
addition, the Company shall reimburse (or pay on behalf of Executive) for the
following expenses:
(a) Moving Expenses. Reimbursement of up to Forty Thousand
---------------
Dollars ($40,000) incurred by Executive in relocating himself and his family
from Atlanta, Georgia to Honolulu, Hawaii. Executive agrees to provide
appropriate documentation to the Company evidencing such relocation expenses.
4
<PAGE>
(b) Temporary Lodging Expenses. Prior to Executive's relocation
--------------------------
from Atlanta, Georgia to Honolulu, Hawaii, reimbursement of up to Four Thousand
Five Hundred Dollars ($4,500) per month for Executive's temporary lodging
expenses in Honolulu, Hawaii (e.g., hotels or other suitable housing selected by
Executive) for a period not to exceed six (6) months from the date hereof.
Executive agrees to provide documentation to the Company evidencing such
temporary lodging expenses.
(c) Automobile Allowance. Provision of a company automobile of
--------------------
luxury standard acceptable to Executive, including reasonable costs for
maintenance and insurance.
(d) Gross-Up Amounts. To the extent that (i) amounts payable to
----------------
Executive pursuant to Sections 3.3(a) and (b) hereunder are reported to him by
----------------------
the Company as compensation income and not otherwise deductible by him as
"moving expenses," within the meaning of Section 217(b) of the Internal Revenue
Code ("Qualified Moving Expenses"), for federal income tax purposes, and (ii)
interest imputed on the Note gives rise to deemed compensation income to the
Executive pursuant Section 7872 of the Code, such income shall be treated as
"Gross-Up Amounts." The Company and Executive shall cooperate in good faith to
determine the amounts payable to Executive pursuant to Sections 3.3(a) and (b)
----------------------
which are deductible by him as Qualified Moving Expenses. If the Company and
Executive cannot agree on the amounts, the Company and Executive shall mutually
select an independent accounting firm to make the determination.
3.4. Indemnification. The Company shall indemnify Executive pursuant
---------------
to Article IX of the Company's Bylaws, which Article is attached hereto as
Exhibit C.
4. Termination of Employment.
-------------------------
4.1. By Death. The Employment Term shall terminate automatically upon
--------
the death of Executive. The Company shall pay to Executive's beneficiaries or
estate, as appropriate, the compensation to which Executive is entitled pursuant
to Section 3.1(a) (including any accrued vacation), and reimburse Executive for
--------------
any expenses properly incurred by Executive pursuant to Section 3.3, in each
-----------
case through the end of the month in which death occurs. Thereafter, the
Company's obligations hereunder shall terminate. Nothing in this Section 4.1
-----------
shall affect any entitlement of Executive's heirs to any vested benefits
(including, without limitation, stock options that have vested) of Executive or
to the benefits of any life insurance plan.
4.2. By Disability. If, in the sole and reasonable opinion of the
-------------
Board, Executive shall be prevented from properly performing his duties
hereunder by reason of any physical or mental incapacity for a period of more
than one-hundred thirty-five (135) days in the aggregate in any twelve-month
(12-month) period, then, to the extent permitted by law, the Employment Term
shall terminate on, and the Company shall pay to Executive the compensation to
which Executive is entitled pursuant to Section 3.1(a) (including any accrued
--------------
vacation), and reimburse Executive for any expenses properly incurred by
Executive pursuant to Section 3.3, in each case through the last day of the
-----------
month in which the 135th day of incapacity occurs, and
5
<PAGE>
thereafter the Company's obligations hereunder shall terminate. Nothing in this
Section 4.2 shall affect Executive's rights to any vested benefits (including,
- -----------
without limitation, stock options that have vested) of Executive or under any
disability plan in which he is a participant.
4.3. By the Company with Cause. The Company may terminate, without
-------------------------
liability, the Employment Term with Cause (as defined below) solely pursuant to
this Section 4.3. In the event the Company intends to terminate Executive with
-----------
Cause, the Company shall give Executive notice thereof, such notice to state in
reasonable detail the particular act(s) or failure(s) that constitute the
grounds on which the proposed termination with Cause is based. Executive shall
have twenty (20) days after the date that such notice has been given to
Executive to cure such act(s) or failure(s), to the extent such act(s) or
failure(s) are capable of being cured. If Executive fails to cure such act(s)
or failure(s), or such cure is not possible, the Company may thereupon terminate
Executive's employment with Cause immediately upon notice to Executive. In such
event, the Company shall (i) pay Executive the compensation to which Executive
is entitled pursuant to Section 3.1(a) (including any accrued vacation); and
--------------
(ii) reimburse Executive for any expenses properly incurred by Executive
pursuant to Section 3.3, in each case through the end of the day on which the
-----------
Company terminates Executive. Thereafter the Company's obligations hereunder
shall terminate. Nothing in this Section 4.3 shall affect Executive's rights to
-----------
any benefits vested as of the date of termination (including, without
limitation, stock options that have vested).
Termination shall be with "Cause" if:
(a) Executive is convicted of, pleads guilty to or confesses
to any felony, any act of fraud, misappropriation or embezzlement, or similar
criminal acts, or any other crime involving moral turpitude;
(b) Executive refuses or fails to act in accordance with any
lawful direction or order of the Board except any such direction or order that
constitutes or results in a breach of this Agreement by the Company;
(c) Executive engages in conduct or activities that are
dishonest, unethical, unlawful, in bad faith or involving moral turpitude and
damaging or prejudicial to the property, business or reputation of the Company
or any Affiliated Company; or
(d) Executive materially breaches any term of this Agreement.
4.4. By Executive For Good Reason. Executive may terminate, without
----------------------------
liability, the Employment Term for Good Reason (as defined below) solely
pursuant to this Section 4.4. In the event Executive intends to terminate
-----------
Executive's employment for Good Reason, Executive shall give the Company notice
thereof, such notice to state in reasonable detail the particular act(s) or
failure(s) that constitute the grounds on which the proposed termination for
Good Reason is based. The Company shall have ten (10) days after the date that
such notice has been given to the Company to cure such act(s) or failure(s), to
the extent such act(s) or failure(s) are capable of being cured. If the Company
fails to cure such act(s) or failure(s), or such cure is not possible, Executive
may thereupon terminate Executive's
6
<PAGE>
employment for Good Reason immediately upon notice to the Company. In such
event, the Company shall: (i) pay Executive the compensation to which Executive
is entitled pursuant to Section 3.1(a) through the end of the day on which
-------------
Executive terminates Executive's employment; (ii) reimburse Executive for any
expenses properly incurred by Executive pursuant to Section 3.3 through the end
-----------
of the day on which Executive terminates Executive's employment; and (iii) pay
Executive the severance payment as set forth in Section 5. Thereafter the
---------
Company's obligations hereunder shall terminate. Nothing in this Section 4.4
-----------
shall affect Executive's rights to any benefits vested as of the date of
termination (including, without limitation, stock options that have vested).
Good Reason shall exist under any of the following events:
(a) At the first Board meeting that is held after six (6)
months from the date hereof, Executive is not appointed or elected to serve as a
director on the Board.
(b) There is a Change of Control in the Company. A "Change of
Control" occurs when, within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended, (i) any person beneficially owns a greater
amount of shares of voting common stock of the Company than the collective
amount of shares of voting common stock of the Company beneficially owned by
Michael J. Hartley, Sandra T. Hartley (together with Michael J. Hartley, the
"Hartleys") and Tammy A. Ishibashi ("Ishibashi") and by any trusts, family
partnerships or other entities controlled by the Hartleys or Ishibashi
(collectively, the "Hartley Entities"), or (ii) the Hartley Entities
beneficially own less than twenty-five percent (25%) of the total outstanding
voting common stock of the Company.
(c) There is an assignment to Executive of any duties
materially inconsistent with or which constitute a material change in
Executive's position, duties, responsibilities, or status with the Company, or a
material change in Executive's reporting responsibilities, title, or offices, or
removal of Executive from or failure to re-elect Executive to any of such
positions, except in connection with the termination of the Employment Term with
Cause, or due to disability, early or normal retirement as defined by the
Company's pension plan, death, or termination of the Employment Term by
Executive other than for Good Reason.
(d) The Company materially breaches the terms of this
Agreement.
4.5. At Will. At any time, either the Company or Executive may
-------
terminate, without liability, the Employment Term for any reason, with or
without Cause, by giving fifteen (15) days' advance written notice to the other
party. If Executive terminates Executive's employment pursuant to this Section
-------
4.5, the Company shall have the option, in its sole discretion, to terminate
- ---
Executive immediately without the running of the notice period. In the event
that Executive's employment is terminated by either party pursuant to this
Section 4.5, the Company shall: (i) pay Executive the compensation to which
- -----------
Executive is entitled pursuant to Section 3.1(a) (including any accrued
-------------
vacation) through the end of the day on which Executive's employment is
terminated; and (ii) reimburse Executive for any expenses properly incurred by
Executive pursuant to Section 3.3 through the end of the day on which
-----------
Executive's employment is terminated. In the event that Executive's employment
is terminated by the Company pursuant
7
<PAGE>
to this Section 4.5, the Company shall also pay Executive the severance payment
-----------
as set forth in Section 5. Thereafter the Company's obligations hereunder shall
---------
terminate. Nothing in this Section shall affect Executive's rights to any
benefits vested as of the date of termination (including, without limitation,
stock options that have vested). Executive hereby agrees that the Company may
dismiss Executive under this Section 4.5 without regard (i) to any general or
-----------
specific policies (whether written or oral) of the Company relating to the
employment or termination of its employees, or (ii) to any statements made to
Executive, whether made orally or contained in any document, pertaining to
Executive's relationship with the Company.
4.6. Termination of Obligations.
--------------------------
(a) Executive hereby acknowledges and agrees that all personal
property, including, without limitation, all books, manuals, records, reports,
notes, contracts, lists, blueprints, and other documents, or materials, or
copies thereof, Proprietary Information (as defined in Section 7.1), and
-----------
equipment furnished to or prepared by Executive in the course of or incident to
his employment, belong to the Company and shall be promptly returned to the
Company upon termination of the Employment Term. Following termination,
Executive will not retain any written or other tangible material containing any
Proprietary Information.
(b) Upon termination of the Employment Term, Executive shall
be deemed to have resigned from all offices and directorships, if any, then held
with the Company or any Affiliated Company.
(c) Executive's obligations under Sections 4.6 and 7 shall
------------------
survive termination of the Employment Term and the expiration of this Agreement.
5. Severance. In the event Executive's employment with the Company is
---------
terminated either by the Company without Cause or by Executive for Good Reason,
the Company shall pay and provide to Executive a severance in an amount equal to
two and one-half times the annual salary set forth in Section 3.1(a), as
--------------
applicable at the time of termination, payable over a period of twenty-four (24)
months from the effective date of termination, in forty-eight (48) equal semi-
monthly installments.
6. Existing Obligations of Executive.
---------------------------------
6.1. Existing Non-Compete Obligations. Executive represents and
--------------------------------
warrants that Executive has entered into that certain Retention Agreement dated
as of June 21, 1999 and that certain Severance Agreement dated as of October 20,
1999 (collectively, the "Non-Competition Agreements") with WORLDSPAN, L.P.
("WORLDSPAN"), which Non-Competition Agreements impose certain restrictions upon
the Executive's ability to provide services to business enterprises other than
WORLDSPAN. A true and complete copy of the provision or provisions containing
such restrictions is attached hereto as Exhibit D. Except for the Non-
Competition Agreements, Executive has not entered into any agreement
prohibiting, restricting or otherwise limiting Executive's employment. Executive
is no longer employed by WORLDSPAN.
8
<PAGE>
6.2. Indemnification. The Company shall indemnify and hold harmless
---------------
Executive from and against any and all claims, losses, liabilities, damages,
penalties, demands, judgments, costs and expenses, including reasonable
attorneys' fees ("Losses") suffered or incurred by Executive as a result of any
violation, or alleged violation, of the Non-Competition Agreements arising out
of a Change in Control of the Company. The Company shall have thirty (30) days
after receipt of any notification of a claim for indemnification under the
preceding sentence ("Indemnifiable Claim") to undertake, conduct and control,
through counsel of its own choosing, and at its own expense, the settlement or
defense thereof, and Executive shall cooperate with the Company in connection
therewith if such cooperation is reasonably requested. If the Company assumes
responsibility for the settlement or defense of any Indemnifiable Claim, (i) the
Company shall permit Executive to participate in such settlement or defense
through counsel chosen by him (subject to the Company's consent, which shall not
be unreasonably withheld); provided that, except in the event of a conflict of
interest requiring Executive's retention of separate counsel, the fees and
expenses of such counsel shall not be borne by the Company, and (ii) the Company
shall not settle any Indemnifiable Claim without Executive's consent, which
consent shall not be unreasonably withheld or delayed for any reason if the
settlement involves only payment of money, and which consent may be withheld for
any reason if the settlement involves more than the payment of money. So long as
the Company is vigorously contesting any such Indemnifiable Claim in good faith,
Executive shall not pay or settle such claim without the Company's consent,
which consent shall not be unreasonably withheld. If the Company does not notify
Executive within thirty (30) days after receipt of notice of the Indemnifiable
Claim, Executive shall have the right, upon notice to the Company, to contest,
settle or compromise the Indemnifiable Claim in the exercise of its reasonable
discretion; provided that Executive shall notify the Company of any compromise
or settlement.
7. Proprietary Information; Interference with Business; Competitive
----------------------------------------------------------------
Activities.
- ----------
7.1. Defined. "Proprietary Information" is any confidential or
-------
proprietary information about the Company or any Affiliated Company that
Executive acquired or may have acquired during the Employment Term except for
confidential or proprietary information that (i) is or becomes publicly known
through means not involving a breach of this Agreement or any other
confidentiality agreement to which the Company or any Affiliated Company is a
party or not otherwise unlawful; (ii) was rightfully in Executive's possession
or part of his general knowledge prior to his employment by the Company; or
(iii) s disclosed to Executive without confidential or proprietary restriction
by a third party who rightfully possesses the information (without confidential
or proprietary restriction) and did not learn of it, directly or indirectly,
from the Company.
7.2. General Restrictions on Use. Executive agrees to hold all
---------------------------
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize, or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Employment Term to the extent necessary to carry out Executive's
responsibilities under this Agreement and (ii) after the termination of the
Employment Term as specifically authorized in writing by a senior executive
officer of the Company. These rights of
9
<PAGE>
the Company are in addition to all rights the Company has under the common
law or any other applicable federal or state law for protection of trade
secrets.
7.3. Interference with Business; Competitive Activities. Executive
--------------------------------------------------
acknowledges that the pursuit of the activities forbidden by this Section 7.3
-----------
would necessarily involve the use or disclosure of Proprietary Information in
breach of Section 7.2, but that proof of such breach would be extremely
-----------
difficult. To forestall such disclosure, use, and breach, and in consideration
of the employment under this Agreement, Executive agrees that during his
employment and for a period of one (1) year thereafter, Executive shall not, for
Executive or any third party, directly or indirectly
(a) interfere with the relationship between the Company or an
Affiliated Company (together, the "Corporation") and any employee, agent or
representative of the Corporation who is (i) engaged in management, relations
with suppliers, technical operations or sales and (ii) was employed with or
retained by the Corporation during the Employment Term;
(b) divert or attempt to divert from the Corporation any
business related to the sale of discount airline tickets to domestic or
international customers, or interfere with the relationships of the Corporation
with customers, dealers, distributors, or sources of supply (provided, however,
that any activity of Executive that does not violate subparagraph (c) below
shall be deemed not to violate this subparagraph (b)); or
(c) own, manage, operate, control, be employed by, participate
in, serve as a director of or consultant for, or be connected in any manner with
the ownership, management, operation or control of, any business or enterprise
other than the Corporation which is primarily engaged in, or has specific plans
to be primarily engaged in, the business of discount airline ticket sales;
provided, however, that Executive may own five percent (5%) or less of a public
company so engaged as long as such ownership is otherwise passive in nature.
8. Assignment; Successors and Assigns. Each party agrees that such party
----------------------------------
will not assign, sell, transfer, delegate or otherwise dispose of, whether
voluntarily or involuntarily, or by operation of law, any rights or obligations
under this Agreement, nor shall such party's rights be subject to encumbrance or
the claims of creditors. Any purported assignment, transfer, or delegation
thereof shall be null and void. Nothing in this Agreement shall prevent the
consolidation of the Company with, or its merger into, any other corporation, or
the sale by the Company of all or substantially all of its properties or assets,
or the assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
10
<PAGE>
9. Notices. Unless otherwise agreed to, all notices, requests,
-------
instructions or other documents to be given hereunder shall be in writing or by
written telecommunication, and shall be deemed to have been duly given if
(a) delivered personally (effective upon delivery);
(b) mailed by certified mail, return receipt requested, postage
prepaid (effective five (5) business days after dispatch);
(c) sent by a reputable, established courier service that
guarantees next business day delivery (effective the next business day); or
(d) sent by telecopier followed within twenty-four (24) hours
by confirmation by one of the foregoing methods (effective upon receipt of the
telecopy in complete, readable form), addressed to the party to be notified at
the address indicated for such party on the signature page hereof, or at such
other address as such party may designate by ten (10) days' advance notice to
the other parties.
All notices and other documents hereunder shall be given to the Company at:
Cheap Tickets, Inc.
1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
Attn: Mr. Michael J. Hartley
Fax: (808) 946-3844
with a copy to:
Morrison & Foerster LLP
555 West Fifth Street, Suite 3500
Los Angeles, California 90013-1024
Attn: Henry M. Fields, Esq.
Fax: (213) 892-5454
and to Executive at:
Sam E. Galeotos
1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
Fax: (808) 946-3844
with a copy to:
Wasson, Sours & Harris
300 Galleria Parkway, N.W., Suite 1000
Atlanta, Georgia 30339-5917
Attn: John R. Crenshaw, Esq.
Fax: (770) 956-1086
11
<PAGE>
Notice of change of address shall be effective only when done in accordance with
this Section 9.
---------
10. Governing Law; Conciliation and Arbitration.
-------------------------------------------
10.1. Governing Law. The validity, interpretation, enforceability, and
-------------
performance of this Agreement, the Stock Option Award Agreement and the Note
shall be governed by and construed in accordance with the law of the State of
Hawaii, without giving effect to its conflict of laws rules.
10.2. Conciliation and Arbitration.
----------------------------
(a) In the event of any dispute, controversy or claim arising
out of or relating in any manner to the employment or termination of Executive,
or any provision of this Agreement, the Stock Option Award Agreement or the
Note, or the interpretation, enforceability, performance, breach, termination or
validity hereof or thereof, including, without limitation, this Section 10.2 (a
------------
"Dispute"), the parties shall attempt, in good faith, to amicably resolve the
Dispute. Either party may give the other party written notice of any Dispute not
resolved in the normal course of business. Within five (5) business days after
receipt of said notice, the Chief Executive Officer of the Company (or a
reasonable substitute therefor) and Executive shall negotiate in good faith to
resolve the Dispute for a period of thirty (30) days.
(b) Except as specifically stated in Sections 10.2(a) and
--------------------
10.2(f), all Disputes shall be resolved by arbitration. Disputes shall include,
- ------
but are not limited to, contract (express or implied) and tort claims of all
kinds, as well as all claims based on any federal, state, or local law, statute,
or regulation, excepting only claims under applicable workers' compensation law
and unemployment insurance claims. By way of example and not in limitation of
the foregoing, Disputes shall include any claims arising under Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, and the California Fair Employment and Housing
Act, as well as any claims asserting wrongful termination, breach of contract,
breach of the covenant of good faith and fair dealing, negligent or intentional
infliction of emotional distress, negligent or intentional misrepresentation,
negligent or intentional interference with contract or prospective economic
advantage, defamation, invasion of privacy, and claims related to disability.
Arbitration shall be final and binding upon the parties and shall be the
exclusive remedy for all Disputes. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY
HAVE TO TRIAL BY JURY IN REGARD TO ANY DISPUTE.
(c) Arbitration of Disputes shall be in accordance with the
Employment Dispute Resolution Rules of the American Arbitration Association
("AAA Employment Rules"), except as provided otherwise in this Agreement.
Arbitration shall be initiated by providing written notice to the other party
with a statement of the claim(s) asserted, the facts upon which the claim(s) are
based, and the remedy sought. The burden of proof in any arbitration shall be
allocated as provided by applicable law, unless otherwise specified in this
Agreement. Either party may bring an action in court to compel arbitration under
this Agreement, the Stock Option Award Agreement or the Note and to enforce an
arbitration award. Otherwise, neither party shall initiate or prosecute any
lawsuit or administrative action in any
12
<PAGE>
way related to any Dispute. All arbitration hearings under this Agreement, the
Stock Option Award Agreement or the Note shall be conducted in Honolulu, Hawaii.
The Federal Arbitration Act shall govern the interpretation and enforcement of
this Section 10.2, if applicable; otherwise, this Section 10.2 shall be
------------ ------------
governed, interpreted and enforced under Chapter 658 of the Hawaii Revised
Statutes.
(d) All Disputes shall be decided by a single arbitrator. The
arbitrator shall be selected by mutual agreement of the parties within thirty
(30) days of the effective date of the notice initiating the arbitration. If the
parties cannot agree on an arbitrator, then the complaining party shall notify
the AAA and request selection of an arbitrator in accordance with the AAA
Employment Rules. The arbitrator shall have only such authority to award
equitable relief, damages, costs, and fees as a court would have for the
particular claim(s) asserted. The fees and expenses of any arbitration
(including the fees and expenses of the arbitrator, attorneys and expert
witnesses) shall be paid by the losing party, as identified by the arbitrator.
The arbitrator shall have exclusive authority to resolve all Disputes,
including, but not limited to, any claim or allegation that all or any part of
this Agreement, the Stock Option Award Agreement or the Note is void or
unenforceable.
(e) All proceedings and all documents prepared in connection
with any Dispute shall be confidential and, unless otherwise required by law,
the subject matter thereof shall not be disclosed to any person other than the
parties to the proceedings, their counsel, witnesses and experts, the
arbitrator, and, if involved, the court and court staff. All documents filed
with the arbitrator or with a court shall be filed under seal. The parties shall
stipulate to all arbitration and court orders necessary to effectuate fully the
provisions of this subsection concerning confidentiality.
(f) If Executive breaches Section 2.2 or 7, the parties
----------------
acknowledge that the damage or imminent damage to the Company's business or its
goodwill would be irreparable and extremely difficult to estimate, making any
remedy at law or in damages inadequate. Accordingly, notwithstanding any other
provision in this Agreement, the Company shall have the right to pursue a claim
for injunctive relief, damages and attorneys' fees in a court of competent
jurisdiction for Executive's breach of Executive's obligations pursuant to
Section 2.2 or 7 of this Agreement, in addition to any other relief available to
- ----------------
the Company under this Agreement or under law. If Executive prevails in any such
litigation, Executive shall be entitled to the fees and expenses incurred in
connection with Executive's defense thereunder, including expert witness costs
and attorneys' fees.
11. Entire Agreement. The terms of this Agreement are intended by the
----------------
parties to be the final expression of their agreement with respect to the
employment of Executive by the Company and may not be contradicted by evidence
of any prior or contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative, or other legal proceeding involving this Agreement.
13
<PAGE>
12. Amendments; Waivers. This Agreement may not be modified, amended, or
-------------------
terminated except by an instrument in writing, signed by Executive and by a duly
authorized representative of the Company other than Executive. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this Agreement that such other party was or is
obligated to comply with or perform; provided, however, that such waiver shall
not operate as a waiver of, or estoppel with respect to, any other or subsequent
failure. No failure to exercise and no delay in exercising any right, remedy,
or power hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, or power hereunder preclude any other or
further exercise thereof or the exercise of any other right, remedy, or power
provided herein or by law or in equity.
13. Severability; Enforcement. If any provision of this Agreement, or the
-------------------------
application thereof to any person, place, or circumstance, shall be held by a
court of competent jurisdiction or by arbitrator(s) to be invalid,
unenforceable, or void, the remainder of this Agreement and such provisions as
applied to other persons, places, and circumstances shall remain in full force
and effect. It is the intention of the parties that the covenants contained in
Section 7 shall be enforced to the greatest extent (but to no greater extent) in
- ---------
time, area, and degree of participation as is permitted by the law of that
jurisdiction whose law is found to be applicable to any acts allegedly in breach
of these covenants. It being the purpose of Section 7 of this Agreement to
---------
govern competition by Executive anywhere throughout the world, the covenants
therein contained shall be governed by and construed according to that law (from
among those jurisdictions arguably applicable to this Agreement and those in
which a breach of this Agreement is alleged to have occurred or to be
threatened) which best gives them effect.
14. Executive Acknowledgment. Executive acknowledges (i) that Executive
------------------------
has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) that Executive has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on Executive's own judgment.
15. Counterparts. This Agreement may be signed in multiple counterparts,
------------
each of which shall be deemed an original but all of which together shall be
deemed one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
In witness whereof, the parties hereto have duly executed this Employment
Agreement as of the date first written above.
CHEAP TICKETS, INC.,
a Delaware corporation
By: /s/ MIKE HARTLEY
------------------------------
Name: MIKE HARTLEY
----------------------------
Title: CEO
---------------------------
/s/ SAM E. GALEOTOS
---------------------------------
SAM E. GALEOTOS
[SIGNATURE PAGE]
<PAGE>
Exhibit A
---------
Stock Option Award Agreement
<PAGE>
Exhibit B
---------
Form of Promissory Note (la-333704)
PROMISSORY NOTE
$400,000.00 October 31, 1999
- --------------------------------------------------------------------------------
1. FOR VALUE RECEIVED, the undersigned, Sam E. Galeotos, an individual
(the "Borrower"), hereby promises to pay to the order of Cheap Tickets, Inc., a
Delaware corporation (the "Lender"), at the Lender's address of 1440 Kapiolani
Boulevard, Suite 800, Honolulu, Hawaii 96814, or at such other place as the
Lender from time to time may designate, in lawful money of the United States and
in immediately available funds, the principal amount of FOUR-HUNDRED THOUSAND
AND NO/100 DOLLARS ($400,000.00) with no interest thereon from the date the
proceeds of the loan evidenced by this Promissory Note (this "Note") are
disbursed until maturity (whether such maturity is scheduled or accelerated).
2. The entire unpaid principal balance and any other sums outstanding
under this Note shall be due and payable upon October 31, 2002.
3. Principal, any interest, and all other sums owed to the Lender under
this Note shall be evidenced by entries in records maintained by the Lender for
such purpose.
4. Any interest and fees shall be calculated for actual days elapsed on
the basis of a 365-day year. In no event shall the Borrower be obliged to pay
interest at a rate in excess of the highest rate permitted by applicable law
from time to time in effect.
5. The Borrower may prepay some or all of the principal under this Note
without penalty or premium.
6. From and after maturity of this Note, whether scheduled or accelerated,
all sums then due and payable under this Note, including all principal and all
accrued interest, shall bear interest at a rate of Ten Percent (10%) per annum
until paid in full.
7. This Note is issued pursuant to and governed by Section 3.1(d) of that
--------------
certain Employment Agreement dated as of October 25, 1999, by and between the
Lender and the Borrower (the "Employment Agreement").
8. If the Lender delays in exercising or fails to exercise any of its
rights under this Note, that delay or failure shall not constitute a waiver of
any of the Lender's rights, or of any breach, default or failure of condition of
or under this Note. All of the Lender's remedies in connection with this Note or
under applicable law shall be cumulative, and the Lender's exercise of any one
or more of those remedies shall not constitute an election of remedies. The
illegality or unenforceability of any provision of this Note or any related
document shall not in any way
<PAGE>
affect or impair the legality or enforceability of the remaining provisions of
this Note or any related document.
9. This Note inures to and binds the heirs, legal representatives,
successors and assigns of the Borrower and the Lender; provided, however, that
the Borrower may not assign this Note, or assign or delegate any of its rights
or obligations, without the prior written consent of the Lender in each
instance. The Lender in its sole discretion may transfer this Note without
notice to or the consent of the Borrower.
10. This Note is governed by the laws of the State of Hawaii, without
regard to the choice of law rules of that State.
11. Any dispute, controversy or claim arising out of or relating in any
manner to this Note or the loan shall be resolved pursuant to Section 10 of the
----------
Employment Agreement.
By:
------------------------------------------
Name: Sam E. Galeotos
Address: 1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
NOTEHOLDER:
CHEAP TICKETS, INC.,
a Delaware corporation
By:
-------------------------
Name:
-----------------------
Title:
----------------------
MAILING ADDRESS:
Cheap Tickets, Inc.
1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
Attn:
------------------------------
<PAGE>
Exhibit C
---------
Article IX of the Bylaws of Cheap Tickets, Inc.
ARTICLE IX
Indemnification of Officers, Directors, Employees and Agents
Section 9.1 Right to Indemnification.
To the fullest extent authorized by the Delaware General Corporation Law,
as the same exists or may hereafter be amended or interpreted (but, in the case
of any such amendment or interpretation, only to the extent that such amendment
or interpretation permits the corporation to provide broader indemnification
rights than were permitted prior thereto), the corporation shall indemnify and
hold harmless each director or officer who was or is a party or is threatened to
be made a party to or is involved (as a party, witness, or otherwise), in any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (hereinafter a "Proceeding"), by
reason of the fact that he, or a person of whom he is the legal representative,
is or was a director or officer of the corporation or is or was serving at the
request of the corporation as a director or officer of another corporation or of
a partnership, joint venture, trust, or other enterprise, including service with
respect to employee benefit plans, whether the basis of the Proceeding is
alleged action in an official capacity as a director or officer, or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the corporation against all expenses, liability, and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts
paid or to be paid in settlement, and any interest, assessments, or other
charges imposed thereon, and any federal, state, local, or foreign taxes imposed
on any director as a result of the actual or deemed receipt of any payments
under this Article) reasonably incurred or suffered by such person in connection
with investigating, defending, being a witness in, or participating in
(including on appeal), or preparing for any of the foregoing in, any Proceeding
(hereinafter "Expenses"); provided, however, that except as to actions to
enforce indemnification rights pursuant to Section 9.3 of this Article, the
-----------
corporation shall indemnify any director or officer seeking indemnification in
connection with a Proceeding (or part thereof) initiated by such person only if
the Proceeding (or part thereof) was authorized by the Board of Directors of the
corporation. The right to indemnification conferred in this Article shall be a
contract right.
The Corporation shall have the authority by contract or by resolution of
the Board of Directors to indemnify and hold harmless to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended or interpreted (but, in the case of any such amendment or
interpretation, only to the extent that such amendment or interpretation permits
the corporation to provide broader indemnification rights than were permitted
prior thereto), each agent or employee who was or is a party or is threatened to
be made a party to or is involved (as a party, witness, or otherwise), in any
threatened, pending, or completed Proceeding, by reason of the fact that he, or
a person of whom he is the legal
<PAGE>
representative, is or was an agent or employee of the corporation or is or was
serving at the request of the corporation as an agent or employee of another
corporation or of a partnership, joint venture, trust, or other enterprise,
including service with respect to employee benefit plans, whether the basis of
the Proceeding is alleged action in an official capacity as an agent or
employee, or in any other capacity while serving as an agent or employee, may be
indemnified and held harmless by the corporation against all Expenses; provided,
however, that except as to actions to enforce indemnification rights pursuant to
Section 9.3 of this Article, the corporation shall indemnify any agent or
- -----------
employee seeking indemnification in connection with a Proceeding (or part
thereof) initiated by such person only if the Proceeding (or part thereof) was
authorized by the Board of Directors of the corporation. The right to
indemnification conferred in this Article shall be a contract right.
Section 9.2 Authority to Advance Expenses.
Expenses incurred by an officer or director (acting in his capacity as
such) in defending a Proceeding shall be paid by the corporation in advance of
the final disposition of such Proceeding, provided, however, that if required by
the Delaware General Corporation Law, as amended, such Expenses shall be
advanced only upon delivery to the corporation of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Article or otherwise. Expenses incurred by other Agents of
the corporation (or by the directors or officers not acting in their capacity as
such, including service with respect to employee benefit plans) may be advanced
upon such terms and conditions as the Board of Directors deems appropriate. Any
obligation to reimburse the corporation for Expense advances shall be unsecured
and no interest shall be charged thereon.
Section 9.3 Right of Claimant to Bring Suit.
If a claim under Section 9.1 or 9.2 of this Article is not paid in full by
------------------
the corporation within 90 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense
(including attorneys' fees) of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending a Proceeding in advance of its final disposition where the
required undertaking has been tendered to the corporation) that the claimant has
not met the standards of conduct that make it permissible under the Delaware
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed. The burden of proving such a defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper under the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant had not met
such applicable standard of conduct, shall be a
<PAGE>
defense to the action or create a presumption that claimant has not met the
applicable standard of conduct.
Section 9.4 Provisions Nonexclusive.
The rights conferred on any person by this Article shall not be exclusive
of any other rights that such person may have or hereafter acquire under any
statute, provision of the Certificate of Incorporation, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office. To the extent that any provision of the Certificate, agreement, or vote
of the stockholders or disinterested directors is inconsistent with these
Bylaws, the provision, agreement, or vote shall take precedence.
Section 9.5 Authority to Insure.
The corporation may purchase and maintain insurance to protect itself and
any Agent against any Expense, whether or not the corporation would have the
power to indemnify the Agent against such Expense under applicable law or the
provisions of this Article.
Section 9.6 Survival of Rights.
The rights provided by this Article shall continue as to a person who has
ceased to be an Agent and shall inure to the benefit of the heirs, executors,
and administrators of such a person.
Section 9.7 Settlement of Claims.
The corporation shall not be liable to indemnify any Agent under this
Article (a) for any amounts paid in settlement of any action or claim effected
without the corporation's written consent, which consent shall not be
unreasonably withheld; or (b) for any judicial award if the corporation was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.
Section 9.8 Effect of Amendment.
Any amendment, repeal, or modification of this Article shall not adversely
affect any right or protection of any Agent existing at the time of such
amendment, repeal, or modification.
Section 9.9 Subrogation.
In the event of payment under this Article, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Agent, who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the corporation effectively to bring suit to enforce such
rights.
<PAGE>
Section 9.10 No Duplication of Payments.
The corporation shall not be liable under this Article to make any payment
in connection with any claim made against the Agent to the extent the Agent has
otherwise actually received payment (under any insurance policy, agreement,
vote, or otherwise) of the amounts otherwise indemnifiable hereunder.
<PAGE>
Exhibit D
---------
Non-Competition Agreements
<PAGE>
EXHIBIT 10.18
PROMISSORY NOTE
$400,000.00 October 31, 1999
- --------------------------------------------------------------------------------
1. FOR VALUE RECEIVED, the undersigned, Sam E. Galeotos, an individual
(the "Borrower"), hereby promises to pay to the order of Cheap Tickets, Inc., a
Delaware corporation (the "Lender"), at the Lender's address of 1440 Kapiolani
Boulevard, Suite 800, Honolulu, Hawaii 96814, or at such other place as the
Lender from time to time may designate, in lawful money of the United States and
in immediately available funds, the principal amount of FOUR-HUNDRED THOUSAND
AND NO/100 DOLLARS ($400,000.00) with no interest thereon from the date the
proceeds of the loan evidenced by this Promissory Note (this "Note") are
disbursed until maturity (whether such maturity is scheduled or accelerated).
2. The entire unpaid principal balance and any other sums outstanding
under this Note shall be due and payable upon October 31, 2002.
3. Principal, any interest, and all other sums owed to the Lender under
this Note shall be evidenced by entries in records maintained by the Lender for
such purpose.
4. Any interest and fees shall be calculated for actual days elapsed on
the basis of a 365-day year. In no event shall the Borrower be obliged to pay
interest at a rate in excess of the highest rate permitted by applicable law
from time to time in effect.
5. The Borrower may prepay some or all of the principal under this Note
without penalty or premium.
6. From and after maturity of this Note, whether scheduled or
accelerated, all sums then due and payable under this Note, including all
principal and all accrued interest, shall bear interest at a rate of Ten Percent
(10%) per annum until paid in full.
7. This Note is issued pursuant to and governed by Section 3.1(d) of that
--------------
certain Employment Agreement dated as of October 25, 1999, by and between the
Lender and the Borrower (the "Employment Agreement").
8. If the Lender delays in exercising or fails to exercise any of its
rights under this Note, that delay or failure shall not constitute a waiver of
any of the Lender's rights, or of any breach, default or failure of condition of
or under this Note. All of the Lender's remedies in connection with this Note or
under applicable law shall be cumulative, and the Lender's exercise of any one
or more of those remedies shall not constitute an election of remedies. The
illegality or unenforceability of any provision of this Note or any related
document shall not in any way affect or impair the legality or enforceability of
the remaining provisions of this Note or any related document.
9. This Note inures to and binds the heirs, legal representatives,
successors and assigns of the Borrower and the Lender; provided, however, that
the Borrower may not assign this Note, or assign or delegate any of its rights
or obligations, without the prior written consent
1
<PAGE>
of the Lender in each instance. The Lender in its sole discretion may transfer
this Note without notice to or the consent of the Borrower.
10. This Note is governed by the laws of the State of Hawaii, without
regard to the choice of law rules of that State.
11. Any dispute, controversy or claim arising out of or relating in any
manner to this Note or the loan shall be resolved pursuant to Section 10 of the
Employment Agreement.
By: /s/ Sam E. Galeotos
--------------------
Name: Sam E. Galeotos
Address: 1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
NOTEHOLDER:
CHEAP TICKETS, INC.,
a Delaware corporation
By: /s/ Mike Hartley
--------------------
Name: Mike Hartley
------------------
Title: CEO
-----------------
MAILING ADDRESS:
Cheap Tickets, Inc.
1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
Attn:
------------------------------
2
<PAGE>
EXHIBIT 10.19
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.
[LOGO] AMERICA WEST AIRLINES
CONSOLIDATOR AGREEMENT
This Agreement is made February 4, 2000, 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 Boulevard, Suite 800, Honolulu, Hawaii 96814, (herein "Customer").
The parties agree to the following mutual covenants:
1. FARES:
a) This Agreement is valid for use by Cheap Tickets Inc.
b) 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.
c) The net fares offered in conjunction with this Agreement shall be
applicable for travel wholly over the services of America West and
America West Express as specified in Attachment A; all other codeshare
flights are not applicable. Net fares are provided in Consolidator
Fare schedules per previous and/or future fare distributions.
d) 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 electronically filed
fares. Customer agrees that all tickets issued as of the effective
date of any net-fare change shall reflect the applicable fares of such
fare change. Customer agrees to sign and return the confirmation page
of all Bulk Fare Advisories, thereby signifying acceptance of all
terms, conditions and fares contained in said advisory. Failure to
sign and return confirmation does not release Customer from adherence
to any revisions made on such advisories.
e) Fares do not include the following: U.S. 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 purpose.
3. ADVERTISING:
Customer agrees not to use the America West trade name, service marks,
logos, emblems, symbols or other brand identifiers in any advertising
promotional material, brochures, facsimiles, printed matter, signs or
Internet sites without the prior review and written approval of such
material by America West.
4. INTERNET
If Customer utilizes an Internet site to facilitate the sale of America
West seats, Customer agrees to the following:
a) A complete list of all Internet addresses connected to the sale of
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. Communication must be made via electronic mail to
[email protected].
b) Customer agrees to provide monthly reports listing the number of
America West tickets sold via the Internet and the grand total of
America West ticket sales (Internet sales plus all other sales).
Reports must be received by America West by the 10th business day of
each month, with totals representing the previous month's ticket
sales. The report must be sent via electronic mail to
[email protected].
c) If an Internet site contains restricted pages that are used to
facilitate business, Customer agrees to provide America West with
passwords necessary to gain access to restricted pages.
5. CONTRACT NONCOMPLIANCE:
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 or
released in accordance with this Agreement, including Attachments A
and B.
b) Compensation due America West will be invoiced to Customer due and
payable fifteen (15) business days after notification.
c) Noncompliance with booking and/or ticketing procedures set forth in
this Agreement and its Attachments will result in a debit memo to
Customer. Noncompliance includes but is not limited to reservations
booked and/or ticketed in the wrong class of service, wrong fare,
individual bookings that qualify as a group, and/or booking published
fares without ticketing in accordance with tariff rules. Customer
will be responsible for noncompliance. America West will issue debit
memos to recover CRS fees and full-ticket value of noncompliant
bookings/tickets.
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) business 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 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.
<PAGE>
AMERICA WEST AIRLINES
CONSOLIDATOR AGREEMENT (continued)
7. TERMS AND TERMINATION:
a) The term of this Agreement is from February 15, 2000, through December
31, 2000, with all travel completed forty-five (45) days after the
Agreement expires. Either party may terminate this Agreement without
cause by giving not less than thirty (30) days prior written notice of
the intention to do so. Such termination shall not relieve either
party from payment of amounts currently due and owing.
b) Should Customer fail to perform its duties as outlined in this
Agreement, and such default continues after thirty (30) days written
notice to correct such default, then America West may terminate this
Agreement without further notice.
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 minus the applicable fee, 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. COMMISSION
Attachment B herein represents the only commission program for which
Customer is eligible. Customer shall be entitled to a commission on
applicable published fares in specified markets for individual travel per
---------
Attachment B. All published-fare commissions must be taken at point of
sale. Net fares offered under this agreement are not eligible for
commission. ARC ticketing locations included under this agreement shall
not be eligible for further override commission or soft dollar incentives.
10. CONFIDENTIALITY:
All terms and conditions of this Agreement are strictly confidential. Any
breach of confidentiality; duplication of the Agreement, its Attachments,
Bulk Fare Advisories and/or Consolidator Fare schedules; 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.
11. 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.
12. 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.
13. ATTORNEY FEES:
In the event action is necessary to enforce the terms of this Agreement,
the prevailing party in such action shall be entitled to recover its
reasonable attorney fees and costs.
14. APPLICABLE LAW:
The laws of the State of Arizona shall govern this Agreement.
15. AUTHORIZED TICKETING LOCATIONS
Tickets issued under this Agreement may be issued only through designated
ticketing locations as shown on Attachment C. Customer agrees to provide
written notice of any changes, additions or deletions to designated
ticketing locations upon not less than ten (10) days prior written notice
to America West via electronic mail to sp&a@americawestcom. If e-mail is
not available, changes should be sent to the following postal address:
America West Airlines
Off-Tariff Contracts, Mail Code CH-SPA
4000 East Sky Harbor Boulevard
Phoenix, Arizona 85034
All ARC lists, changes and additions submitted must include the following
information: The complete eight-digit ARC number, agency name, address and
phone number. If the number of ARC locations exceeds ten (10), Customer
agrees to provide ARC numbers via electronic mail or floppy diskette (IBM
compatible) in MS Excel format.
<TABLE>
<CAPTION>
CHEAP TICKETS, INC. AMERICA WEST AIRLINES, INC.
<S> <C>
By: /s/ Michael Hartley By: /s/ Ron Cole
------------------------------------- -------------------------------------
Michael Hartley Ron L. Cole
President & Chief Executive Officer Vice President, Sales
Date: 2-11-00 Date: 03-03-00
------------------------------------- -------------------------------------
Initials: /s/ M.L. /s/ J.S.
----------- ----------
M. Loew J. Schmidt
</TABLE>
<PAGE>
ATTACHMENT A - NET FARE PROGRAM
-------------------------------
<TABLE>
<CAPTION>
PROGRAM TITLE: Cheap Tickets Inc.
- --------------
<S> <C>
Address: 1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
ARC Number(s): See Attachment C
Automation System(s): Sabre
Contact: Michael Hartley
Phone: (808) 945-7439
Fax: (808) 945-0610
E-mail: [email protected]
Internet site: www.cheaptickets.com
RESERVATIONS: Booked by Customer only, through automation. Bookings made [*] are
- ------------ permitted with [*].
Booking Class: Day: V class / Night: KN class
Groups: Not Permitted.
OSI Entries: 3 OSI HP CTCT (808) 945-7439 CHEAP TICKETS
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: [*] non-commissionable fee per ticket. Ticket reissuance by Customer 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 Fare list. All net fares are subject to change with five (5) business
days notice or two (2) days for electronically filed fares.
Fares are net, non-commissionable.
Fares do not include taxes or surcharges.
---
Net fares are subject to change until ticketed.
When LAX-CMH nonstop night service is used for LAX to East Coast, the night fare may be used
when the connecting flight out of CMH departs at or before 9:10 a.m. Applicable East Coast
cities are BDL, BOS, BWI, DCA, EWR, LGA, MDW, PHL.
Fare Basis Codes:
FARE BASIS CODES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fee Type Day Off Peak Day Peak Night Off Peak Night Peak
-------------------------------------------------------------------------------
HIGH Season One-Way VHO3CNO VHP3CNO KNHO2CNO KNHP2CNO
-------------------------------------------------------------------------------
HIGH Season Roundtrip VHO3CN VHP3CN KNHO2CN KNHP2CN
-------------------------------------------------------------------------------
LOW Season One-Way VO3CNO VP3CNO KNO2CNO KNP2CNO
-------------------------------------------------------------------------------
LOW Season Roundtrip VO3CN VP3CN KNO2CN KNP2CN
-------------------------------------------------------------------------------
IT Code: ITLPCTI (must appear in tour code box)
Restrictions: Tickets are nontransferable and nonrefundable, with the exception of death of the passenger
(properly documented).
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. Not valid before date of travel.
4. Not valid after thirty (30) days from original travel date.
PROGRAM SPECIFICS
- -----------------
Days/Travel: Off-Peak [*] (both directions).
Peak [*] (both directions).
Flight Fund: Not permitted on net fares; permitted on published fares only.
Markets: Systemwide
[*] [*]
[*] [*]
Open Jaw: Permitted
Open Returns: Not Permitted
PTA/TBM: Not Permitted
Routing: Published America West and America West Express routings only. All other codeshare flights are
not applicable.
Rule 240: Permitted
[*] [*]
Stopover: Not Permitted
Waitlists: Not Permitted
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
<TABLE>
<CAPTION>
ATTACHMENT B - COMMISSION ON PUBLISHED FARES (Individual Travel)
----------------------------------------------------------------
RESERVATIONS:
- ------------
<S> <C>
Booking Class: Applicable published fare type
Groups: Not permitted
Reservations: Booked by Customer 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 "Restrictions"
below.
Disclaimer: Certain short-term, introductory or other
----------
published promotional fares specifically prohibiting
additional discounts do not apply.
Restrictions:
-------------
1. Companion fares do not apply
2. Promotional fares specifically prohibiting additional
discounts do not apply
3. Other discounts do not apply (senior discounts,
vouchers, etc.)
4. F-class excursion fares do not apply (FE14, etc.)
[*]
[*]
Fare Basis Code: Applicable to the published fare used.
IT Code: ITLPCTIPBA (must appear in tour code box)
---
Ticketing Agency: Cheap Tickets Inc.
ARC Number(s): See Attachment C
Ticket Entries: All published fare ticket entries are required, with the
exception of the following:
The discounted published fare should be omitted from the
base, tax and total box of the passenger coupon if Customer
uses all of or a portion of commission to discount the
published fare. The discounted published fare and
applicable base, tax, total and commission amounts must be
shown on all auditor's coupons.
PROGRAM SPECIFICS:
- ------------------
Published America West and America West Express routings only.
Markets: Codeshare flights are not applicable.
Restrictions: All published rules apply, unless otherwise stated above.
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treat request.
<PAGE>
ATTACHMENT C - AUTHORIZED TICKETING LOCATIONS
---------------------------------------------
PROGRAM TITLE: Cheap Tickets, Inc.
- ------------- 1440 Kapiolani Boulevard, Suite 800
Honolulu, Hawaii 96814
ARC NUMBERS OF AUTHORIZED TICKETING LOCATIONS UNDER THIS AGREEMENT:
- ------------------------------------------------------------------
05508274
05513266
05521714
05644236
05685713
05709745
06644444
12505964
12518483
12530954
12601676
12916120
33514526
33965750
36975820
50523911
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-78465) of Cheap Tickets, Inc. of our report
dated February 7, 2000 relating to the financial statements, which appears in
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Honolulu, Hawaii
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AT DECEMBER 31, 1998 AND 1999 AND STATEMENTS OF OPERATIONS FOR THE YEARS
THEN ENDED AND IS QUALIFIED ON ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 2,973,988 40,717,517
<SECURITIES> 4,935,229 98,579,668
<RECEIVABLES> 924,348 4,519,775
<ALLOWANCES> 0 0
<INVENTORY> 286,331 348,263
<CURRENT-ASSETS> 9,845,588 145,890,949
<PP&E> 4,469,893 12,340,842
<DEPRECIATION> 1,470,475 3,077,741
<TOTAL-ASSETS> 13,225,852 155,610,715
<CURRENT-LIABILITIES> 6,372,749 11,749,355
<BONDS> 1,237,915 3,892,622
4,136,028 0
0 0
<COMMON> 10,338 24,025
<OTHER-SE> 1,374,861 138,588,834
<TOTAL-LIABILITY-AND-EQUITY> 13,225,852 155,610,715
<SALES> 159,845,855 317,259,900
<TOTAL-REVENUES> 171,114,327 339,609,377
<CGS> 136,067,182 271,561,665
<TOTAL-COSTS> 33,411,112 59,276,624
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 148,253 261,256
<INCOME-PRETAX> 1,805,532 12,859,221
<INCOME-TAX> 740,268 5,272,281
<INCOME-CONTINUING> 1,065,264 7,586,940
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,065,264 7,586,940
<EPS-BASIC> .04 .33
<EPS-DILUTED> .03 .31
</TABLE>
