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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 000-25279
CHEAP TICKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 99-0338363
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1440 Kapiolani Blvd., Honolulu, Hawaii 96814
(Address of principal executive offices) (Zip Code)
(808) 945-7439
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of August 10, 2000, the Registrant had 24,238,278 shares of Common
Stock, $.001 par value per share, outstanding.
1
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INDEX
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Page
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PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (unaudited)................................... 3
- Balance sheets at December 31, 1999 and June 30, 2000............ 3
- Statements of operations for the three and six months ended
June 30, 1999 and 2000........................................... 4
- Statement of stockholders' equity for the three and six months
ended June 30, 1999 and 2000..................................... 5
- Condensed statements of cash flows for the six months ended
June 30, 1999 and 2000........................................... 6
- Notes to financial statements.................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 10
Item 3. Quantitative and Qualitative
Disclosure about Market Risk....................................... 14
PART II OTHER INFORMATION.................................................. 15
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes in Securities and Use of Proceeds.......................... 15
Item 3. Defaults Upon Senior Securities.................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 16
Item 6. Exhibits and Reports on Form 8-K................................... 17
SIGNATURES......................................................... 17
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2
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PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CHEAP TICKETS, INC.
BALANCE SHEETS
(In thousands, except per share data)
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<CAPTION>
December 31, June 30,
1999 2000
----------- -------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 40,718 $ 62,762
Marketable securities 98,580 93,858
Trade accounts and other receivables 4,520 6,526
Refundable income taxes 355 -
Ticket inventories 348 430
Other current assets 1,370 1,368
-------- --------
Total current assets 145,891 164,944
Property and equipment, net 9,263 8,577
Other assets 456 594
-------- --------
$155,610 $174,115
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,131 $ 18,549
Accrued salaries 1,763 1,140
Accrued vacation 540 620
Accrued expenses and other liabilities 377 581
Current installments of long-term debt 133 25
Current installments of capital lease obligations 1,405 1,394
Deferred revenue, current 400 400
Income taxes payable - 1,162
-------- --------
Total current liabilities 11,749 23,871
Long-term debt, excluding current installments 517 504
Capital lease obligations, excluding current installments 3,376 2,675
Deferred revenue, noncurrent 1,200 1,000
Other noncurrent liabilities 156 141
-------- --------
Total liabilities 16,998 28,191
Stockholders' Equity:
Preferred stock, $0.01 par value as of December 31, 1999 and
June 30, 2000. Authorized 10,000,000 shares; Issued and
Outstanding none at December 31, 1999 and June 30, 2000
(Note 4). - -
Common stock, $.001 par value. Authorized 70,000 shares;
Issued and outstanding 24,025 shares at December 31, 1999 and
24,233 shares at June 30, 2000 (Note 4). 24 24
Additional paid-in capital 146,002 145,907
Unearned compensation (382) (187)
Retained earnings 7,708 14,920
Treasury stock, at cost--1,037 common shares at December 31,
1999 and June 30, 2000 (14,740) (14,740)
-------- --------
Total stockholders' equity 138,612 145,924
-------- --------
$155,610 $174,115
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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<TABLE>
<CAPTION>
CHEAP TICKETS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Non-published fares $ 97,416 $ 119,911 $ 153,379 $ 213,727
Published fare commissions and bonuses 5,154 8,763 9,720 15,024
-------------- ------------ -------------- --------------
Net revenues 102,570 128,674 163,099 228,751
Cost of sales 83,028 102,678 130,880 183,581
--------------- ------------- -------------- --------------
Gross Profit 19,542 25,998 32,219 45,170
Selling, general and administrative expenses 14,739 20,069 25,896 37,303
--------------- -------------- -------------- --------------
Net operating income 4,803 5,927 6,323 7,867
Other income (deductions):
Interest income 738 2,270 884 4,333
Interest expense (58) (97) (94) (202)
Other, net 7 (132) 21 (175)
--------------- -------------- -------------- --------------
Earnings before income taxes 5,490 7,968 7,134 11,823
Income taxes 2,251 3,069 2,925 4,611
--------------- -------------- -------------- ------------
Net earnings 3,239 4,899 4,209 7,212
Preferred stock dividends - - (79) -
Accretion of mandatorily redeemable
cumulative preferred stock discount - - (37) -
Redemption of mandatorily redeemable
cumulative preferred stock - - (586) -
-------------- -------------- -------------- --------------
Income available to common shares $ 3,239 $ 4,899 $ 3,507 $ 7,212
============= ============= ============== ==============
Basic earnings per common share $ 0.15 $ 0.21 $ 0.19 $ 0.31
============= ============= ============== ==============
Average common shares outstanding 21,367 23,171 18,217 23,137
============= ============= ============== ==============
Diluted earnings per common share $ 0.15 $ 0.21 $ 0.17 $ 0.31
============= ============= ============== ==============
Average diluted common shares outstanding 22,141 23,542 20,294 23,561
============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<TABLE>
<CAPTION>
CHEAP TICKETS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Additional Total
Common Paid-In Unearned Retained Treasury Stockholders'
Stock Capital Compensation Earnings Stock Equity
--------------- ---------- ------------ -------- -------- -------------
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 24,023 $ 24 $146,002 $ (382) $ 7,708 $ (14,740) $ 138,612
Net earnings - - - - 7,212 - 7,212
Exercise of stock options 204 - 32 - - - 32
Other issuance of common stock 4 - 47 - - - 47
Amortization and forfeiture of stock
option compensation - - (174) 195 - - 21
----------------- ---------- -------- -------- --------- ------------
Balance, June 30, 2000 24,233 $ 24 $145,907 $ (187) $ 14,920 $ (14,740) $ 145,924
================= ========== ======== ======== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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CHEAP TICKETS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six months ended
June 30,
----------------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,209 $ 7,212
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 585 1,226
Stock option compensation 44 21
Amortization of discount/premium on marketable securities (58) (151)
Loss on sale or disposal of property and equipment - 134
Loss on sale of marketable securities 5 68
Changes in operating assets and liabilities 10,997 10,157
------ ------
- -
Net cash provided by operating activities 15,782 18,667
Cash flows from investing activities:
Capital expenditures (2,167) (779)
Proceeds from sale of property and equipment - 105
Purchase of marketable securities (28,666) (75,449)
Proceeds from sale of marketable securities 10,255 80,254
------ ------
- -
Net cash provided by (used in) investing activities (20,578) 4,131
Cash flows from financing activities:
Redemption of mandatorily redeemable cumulative preferred stock (4,839) -
Proceeds from issuance of common stock, net of expenses paid 54,953 79
Proceeds from issuance of long-term debt 236 -
Principal payments on long-term debt (194) (121)
Principal payments on capital lease obligations (298) (712)
------ ------
- -
Net cash provided by (used in) financing activities 49,858 (754)
Net increase in cash 45,062 22,044
Cash and cash equivalents at beginning of period 2,974 40,718
------ ------
- -
Cash and cash equivalents at end of period $ 48,036 $ 62,762
======== ========
Supplemental cash flow information:
Cash paid for:
Interest $ 96 $ 202
Income taxes 1,365 3,093
Noncash investing and financing activities:
Acquisitions of new equipment through capital leases 2,033 -
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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CHEAP TICKETS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements of Cheap Tickets, Inc.
("Cheap Tickets") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation for the periods reported. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules or regulations, although management believes that the disclosures
made are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements for the year ended December 31, 1999 and the notes thereto included
in Cheap Tickets' Annual Report on Form 10-K for the year ended December 31,
1999 filed with the Securities and Exchange Commission. The results of
operations for the three and six months ended June 30, 2000 are not necessarily
indicative of results expected for the full fiscal year or for any future
period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the useful lives of property and
equipment, the valuation allowance for deferred tax assets and the allowance for
doubtful receivables. Management believes that such allowances have been
appropriately determined in accordance with generally accepted accounting
principles.
Revenue Recognition
Revenues consist of non-published fares, commissions and overrides on
published fares, and volume bonuses from a travel service network. Non-published
fares are fares that are bought by Cheap Tickets under negotiated net fare
contracts from various airline carriers and other travel service providers and
resold to consumers at fares determined by Cheap Tickets generally sold at a
significant discount off published fares. In such transactions, Cheap Tickets
is the credit card merchant of record. Cheap Tickets also sells travel services
at regular published fares and earns a commission on such sales. In published
fare sales, the fares are set by the airlines and Cheap Tickets is not the
credit card merchant of record.
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 incentive payments 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.
New Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. In
June 2000, the Securities and Exchange Commission issued SAB No. 101B to defer
the effective date of implementation of SAB No. 101 until the fourth quarter of
fiscal 2000. Cheap Tickets will adopt this accounting pronouncement as required
in the fourth quarter of fiscal 2000. In July 2000, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board reached a consensus on
EITF Issue 99-19, "Recording Revenue Gross As a Principal versus Net As an
Agent." This issue is intended to develop an accounting model that is consistent
with the requirements of SAB No. 101 and provides guidance on reporting revenue
based on the gross amount billed to a customer or on the net amount retained
(amount billed to the customer less the amount paid to a supplier).
7
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Cheap Tickets is still evaluating EITF Issue 99-19 and the effect that its
adoption may have on its financial statements. Should Cheap Tickets be required
to report non-published fare revenue on a net basis, such reporting would be
similar to commission income and accordingly may have a material effect on
reported net revenues. The implementation of this new accounting pronouncement
will not affect Cheap Tickets' net income.
In July 2000, the EITF reached a consensus on EITF Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." This consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue. The
EITF did not reach a consensus with respect to the classification of costs
related to shipping and handling incurred by the seller and withdrew its
previous tentative conclusion that costs incurred by the seller for shipping and
handling be classified as costs of goods sold. However, the Securities and
Exchange Commission is expected to issue a staff announcement that would require
shipping and handling costs to be included in costs of goods sold. The
implementation of this new pronouncement will change the way Cheap Tickets
presently presents these income and expense items in its financial statements.
Presently, Cheap Tickets offsets amounts collected from customers for shipping
and handling costs against the related expenses. Cheap Tickets does not expect
the adoption of this consensus and any change to the classification of shipping
and handling costs to have a material effect on its financial statements.
2. Net Income Per Share
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows (in thousands,
except per share data).
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<CAPTION>
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
------- -------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Income available to common shares .......... $ 3,239 $ 4,899 $ 3,507 $ 7,212
------- ------- ------- -------
Denominator:
Shares - basic............................... 21,367 23,171 18,217 23,137
Effect of Dilutive Securities:
Common stock warrants ................... -- -- 1,322 --
Stock options ........................... 774 371 755 424
Shares - diluted........................... 22,141 23,542 20,294 23,561
Basic earnings per share: .................... $ 0.15 $ 0.21 $ 0.19 $ 0.31
======= ======= ======= =======
Diluted earnings per share: .................. $ 0.15 $ 0.21 $ 0.17 $ 0.31
======= ======= ======= =======
</TABLE>
Net income per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period.
Options to purchase 975,650 shares of common stock at a range of $15.00 to
$37.50 were outstanding during the three months ended June 30, 2000 but were not
included in the computation of the diluted EPS because the options' exercise
price was greater than the average market price of the common stock.
3. Mandatorily Redeemable Cumulative Preferred Stock
In July 1997, Cheap Tickets issued and sold 425,000 shares of mandatorily
redeemable cumulative preferred stock with detachable warrants to purchase an
aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate
exercise price of $2,121, in exchange for cash consideration of $4,250,000.
8
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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 $36,657 for the six months ended June 30, 1999 and
none for six months ended June 30, 2000.
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 $78,712 for the year ended December 31, 1999 and the three months
ended March 31, 1999, which were subsequently paid at the preferred stock
redemption on March 24, 1999.
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 approximately $587,000 on March 24, 1999 was charged against
retained earnings. Coincident with the redemption of the preferred stock, the
warrants were exercised and 2,969,375 shares were issued in a cashless exercise.
4. Stockholders' Equity
Common Stock
In February 1999, Cheap Tickets increased its authorized common stock from
5,000,000 shares at $.01 par value to 70,000,000 shares at $.001 par value.
Cheap Tickets also effected a 14-for-one stock split. In these statements, all
per share accounts have been restated to reflect the stock splits.
Public Offerings
On March 19, 1999 Cheap Tickets completed an initial public offering of its
common stock in which 3,500,000 shares were issued at an offering price of $15
per share. The offering raised $47.7 million after underwriting discounts and
other related costs of issuance. Concurrently with the issuance of 3,500,000
shares in the offering, warrants for 2,969,375 shares were exercised. In
connection with the initial public offering, the underwriters had the option to
purchase an additional 525,000 shares of common stock. They exercised this
option on April 19, 1999. Net proceeds to Cheap Tickets were $7.3 million after
underwriting discounts and other costs of issuance.
On August 20, 1999 Cheap Tickets completed a secondary public offering of
its common stock, whereby 5,750,000 shares were sold at an offering price of
$38.00 per share. Of the total shares sold, 2,500,000 were offered by Cheap
Tickets and 3,250,000 were offered by certain existing stockholders. Net
proceeds to Cheap Tickets were $89.6 million after underwriting discounts and
other related costs of issuance.
The total number of shares of common stock outstanding at June 30, 2000 was
24,232,958.
Preferred Stock
In February 1999, the authorized preferred stock of Cheap Tickets, Inc. was
increased from 5,000,000 shares at $1 par value to 10,000,000 shares at $.01 par
value. The board of directors has the authority to issue shares of preferred
stock in one or more series and to fix the rights, preferences, privileges, and
restrictions thereof, including dividend rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, and liquidation preferences.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere herein.
Overview
Cheap Tickets is principally engaged in the sale of discount tickets for
domestic leisure air travel. A majority of its gross bookings have historically
come from the sale of non-published fares, which Cheap Tickets acquires from
airlines and resells to the public at a profit. Cheap Tickets purchases non-
published fares only when it resells them to customers, so that it has no
inventory carrying costs. On these fares, Cheap Tickets sets its resale prices
to meet the demands of leisure travelers who are looking for the lowest price.
Cheap Tickets also sells published fares for which it receives commissions from
the airlines. Sales of non-published fares generally carry higher margins as a
percentage of gross bookings than commissions on published fare bookings.
Cheap Tickets' revenues 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 29% of total gross bookings in 1999 and
approximately 39% during the three months ended June 30, 2000. In the second
quarter of 2000 Cheap Tickets added approximately 1.7 million registered online
users. At June 30, 2000, total registered online users were approximately 5.9
million. 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
is the retail value of such fares. Gross bookings are not required by generally
accepted accounting principles and should not be considered in isolation or as a
substitute for other information prepared in accordance with GAAP. Management
uses gross bookings as a key indicator of general business activity, success of
promotional efforts, capacity to handle customer demand and efficiency of
reservation agents. In addition, management believes that gross bookings
provide a useful comparison between historical periods, and year-to-year changes
in such information provide a useful measure of market acceptance of Cheap
Tickets' products.
Net revenues consist of sales of non-published fares and commissions. Net
revenues from sales of non-published fares represent revenues from the sale of
tickets purchased from the airlines. Cheap Tickets' cost of sales consists of
the net fare cost paid to carriers to purchase non-published fares. Commissions,
including incentive payments, are earned primarily on published air fares sold
and include certain other payments based on the volume of transactions. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements."
SAB No. 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. In June 2000,
the Securities and Exchange Commission issued SAB No. 101B to defer the
effective date of implementation of SAB No. 101 until the fourth quarter of
fiscal 2000. Cheap Tickets will adopt this accounting pronouncement as required
in the fourth quarter of fiscal 2000. In July 2000, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board reached a consensus on
EITF Issue 99-19, "Recording Revenue Gross As a Principal versus Net As an
Agent." This issue is intended to develop an accounting model that is consistent
with the requirements of SAB No. 101 and provides guidance on reporting revenue
based on the gross amount billed to a customer or on the net amount retained
(amount billed to the customer less the amount paid to a supplier). Cheap
Tickets is still evaluating EITF Issue 99-19 and the effect that its adoption
may have on its financial statements. Should Cheap Tickets be required to report
non-published fare revenue on a net basis, such reporting would be similar to
commission income and accordingly may have a material effect on reported net
revenues. The implementation of this new accounting pronouncement will not
affect Cheap Tickets' net income.
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 three months ended June 30, 1999 and 2000,
approximately 98% of gross bookings arose from airline ticket sales. The
remaining gross bookings arose from
10
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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. In July 2000, the EITF reached a consensus on EITF Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." This consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue. The
EITF did not reach a consensus with respect to the classification of costs
related to shipping and handling incurred by the seller and withdrew its
previous tentative conclusion that costs incurred by the seller for shipping and
handling be classified as costs of goods sold. However, the Securities and
Exchange Commission is expected to issue a staff announcement that would require
shipping and handling costs to be included in costs of goods sold. The
implementation of this new pronouncement will change the way Cheap Tickets
presently presents these income and expense items in its financial statements.
Presently, Cheap Tickets offsets amounts collected from customers for shipping
and handling costs against the related expenses. Cheap Tickets does not expect
the adoption of this consensus and any change to the classification of shipping
and handling costs to have a material effect on its financial statements.
Results of Operations
Three months ended June 30, 2000 and June 30, 1999
Net revenues. Net revenues for the second quarter of 2000 increased $26.1
million, or 25.4%, to $128.7 million. Non-published fare sales increased $22.5
million, or 23.1%, to $119.9 million, reflecting a significant increase in the
number of non-published fare tickets sold. Commissions increased $3.6 million,
or 70.0%, to $8.8 million. The $3.6 million increase in commissions primarily
reflected two factors: first, a $1 million increase in commissions on increased
sales of published fares; and second, an improvement in incentive payments
earned, offset by decreased rates. Non-published fare sales as a percentage of
net revenues decreased from 95.0% to 93.2%.
The increase in net revenues benefitted from accelerating usage of Internet
commerce in the leisure travel market and improving recognition of the Cheap
Tickets brand name, particularly through Internet and overall advertising to
targeted markets.
Net revenues through call centers and retail operations increased $6.9
million, or 9.2%, to $81.2 million. The increase of $6.9 million mainly
reflected a higher percentage of calls answered due to increased staffing and an
increase in the average ticket price.
Net revenues from Internet sales increased $19.2 million, to $47.0 million.
Net revenues through the Internet increased to 36.5% of total net revenues in
the second quarter of 2000, compared with 27.1% in the second quarter of 1999.
Gross Profit. Gross profit for the second quarter of 2000 increased $6.5
million, or 33.0%, to $26.0 million. As a percentage of net revenues, gross
profit increased from 19.0% to 20.2% of net revenues. This increase can be
attributed to a higher percentage of published fares sold and a $2.6 million
increase in incentive payments earned.
Selling, General and Administrative Expenses. For the three months ended
June 30, 2000, selling, general and administrative expenses increased $5.3
million, or 36.2%, to $20.1 million, and increased as a percentage of net
revenues from 14.4% to 15.6%. The increase in selling, general and
administrative expenses as a percentage of net revenues was primarily due to an
increase in advertising to $6.4 million. As a percentage of net revenues,
advertising increased from 2.3% to 5.0%. Advertising expenses targeted to
increase Internet sales were $2.0 million higher for the three months ended June
30, 2000 than in the same period in 1999.
Net Earnings. Net earnings for the three months ended June 30, 2000
increased $1.7 million, or 51.2% to $4.9 million. The increase reflected higher
net revenues and interest income from marketable securities.
Six months ended June 30, 2000 and June 30, 1999
Net revenues. Net revenues for the first six months ended June 30, 2000
increased $65.6 million, or 40.2%, to $228.7 million. Non-published fare sales
increased $60.3 million, or 39.3%, to $213.7 million, reflecting a significant
increase in the number of non-published fare tickets sold. Commissions increased
$5.3 million, or 54.6%, to $15.0 million. The $5.3 million increase in
commissions primarily reflected two factors: first, an increase in commissions
on increased sales of published fares; and second, a $3.3 million increase in
incentive payments. Published fare sales as a percentage of net revenues
increased from 6.0% to 6.6%.
11
<PAGE>
The increase in net revenues benefitted from accelerating usage of Internet
commerce in the leisure travel market and improving recognition of the Cheap
Tickets brand name, particularly through Internet and overall advertising to
targeted markets.
Net revenues through call centers and retail operations increased $23.5
million, or 19.1%, to $146.7 million. Of this $23.5 million increase, $15.8
million reflected the improving call center sales from improved productivity,
higher staffing levels and increased average ticket price.
Net revenues from Internet sales increased $42.1 million, to $82.1 million.
Net revenues through the Internet represented 35.9% of net revenues in the
first six months ended June 30, 2000, compared with 24.5% in the first six
months ended June 30, 1999.
Gross Profit. Gross profit for the first six months ended June 30, 2000
increased $12.9 million, or 40.2%, to $45.2 million, reflecting a comparable
percentage increase in net revenues. As a percentage of net revenues, gross
profit remained the same at 19.7% of net revenues. This can be attributed to
modestly lower non-published gross margins from a shift in sales mix to lower
margin carriers and lower average published fare commissions from an industry
wide reduction in the fourth quarter of 1999, offset by an increase in volume
incentive payments earned.
Selling, General and Administrative Expenses. For the six months ended
June 30, 2000, selling, general and administrative expenses increased $11.4
million, or 44.0%, to $37.3 million, and increased as a percentage of net
revenues from 15.9% to 16.3%. The increase as a percentage of net revenues was
primarily the result of increases in advertising expenses of $5.5 million, which
was 4.2% of net revenues this year compared with 2.5% in 1999. Advertising
expenses targeted to increase internet sales were $3.2 million higher for the
six months ended June 30, 2000, including a campaign encompassing print, radio,
television, e-mail and special airfare promotions. Other expenses such as
compensation, credit card fees and telephone expenses were higher than the same
period in 1999 as a result of higher sales volumes. In the aggregate, all other
selling, general and administrative expenses, other than advertising, were 13.3%
and 12.1% of net revenues for the six months ended June 30, 1999 and 2000,
respectively.
Net Earnings. Net earnings for the six months ended June 30, 2000
increased $3.0 million, or 71.3% to $7.2 million. The increase reflected higher
net revenues and interest income from marketable securities of $4.3 million.
Operating Segments
<TABLE>
<CAPTION>
Net Revenues By Segment
-----------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------- ----------------------------------------------
1999 2000 1999 2000
---------------------------------------------- ----------------------------------------------
Percent Percent Percent Percent
In Thousands of Total In Thousands of Total In Thousands of Total In Thousands of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Segments
--------
Internet $ 27,760 27% $ 46,998 37% $ 39,944 24% $ 82,081 36%
Call Center 74,810 73% 81,676 63% 123,155 76% 146,670 64%
--------- ----- --------- ----- --------- ----- --------- -----
Net Revenues $ 102,570 100% $ 128,674 100% $ 163,099 100% $ 228,751 100%
========= ===== ========= ===== ========= ===== ========= =====
Gross Profit By Segment
-----------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------- ----------------------------------------------
1999 2000 1999 2000
---------------------------------------------- ----------------------------------------------
Percent Percent Percent Percent
In Thousands of Total In Thousands of Total In Thousands of Total In Thousands of Total
Segments
--------
Internet $ 5,578 29% $ 9,956 38% $ 8,473 26% $ 17,036 38%
Call Center 13,964 71% 16,040 62% 23,746 74% 28,134 62%
--------- ----- --------- ----- --------- ----- --------- -----
Gross Profit $ 19,542 100% $ 25,996 100% $ 32,219 100% $ 45,170 100%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Three Months Ended June 30, 2000 and June 30, 1999 by Segment
Net Revenues. Net revenues through the Internet increased $19.2 million,
or 69.3% to $47.0 million. The retail value of non-published fares is the
largest component of net revenues. Sales volumes increased as a result of a
targeted advertising campaign, growing acceptance of Internet commerce, and a
significant increase in registered users to our website. The non-published fare
component in the Internet sales mix was 68% and 58%, respectively, of total
Internet bookings for the three months ended June 30, 1999 and 2000.
12
<PAGE>
Net revenues through call centers increased $6.9 million, or 9.2% to $81.2
million. This increase reflected higher staffing levels and the benefits of
increased advertising.
Gross Profit. Gross profit from Internet sales increased $4.4 million, or
78.5% to $10.0 million. As a percentage of net revenues, Internet gross profit
increased from 20.1% to 21.2%. The increase in published fare commissions
combined with a decrease in non-published fare margins from changes in carrier
sales mix resulted in the increase in gross profit as a percentage of net
revenues. A higher component of commissions paid on published fare sales
combined with lower non-published fare margins primarily from changes in carrier
sales mix resulted in a higher gross profit as a percentage of net revenues. As
published fare commissions have no accompanying cost of sales, an increase in
the published fare component of sales will result in an increase in gross profit
as a percentage of net revenues.
Call center gross profit increased $2.1 million, or 14.9% to $16.0 million.
As a percentage of net revenues, gross profit from call centers increased from
18.7% to 19.6% for the three months ended June 30, 1999 and 2000, respectively.
Six Months Ended June 30, 2000 and June 30, 1999 by Segment
Net Revenues. Net revenues through the Internet increased $42.1 million,
or 105.5% to $82.1 million. The non-published fare component in the Internet
sales mix was 64% and 56% of total Internet bookings for the six months ended
June 30, 1999 and 2000, respectively. Sales volumes increased as a result of a
targeted advertising campaign, growing acceptance of Internet commerce, and a
significant increase in registered users to our website.
Net revenues through call centers increased $23.5 million, or 19.1% to
$146.7 million. The increase reflected the overall industry demand, the results
of the Cheap Tickets' branding campaign, increased productivity and higher
staffing levels in the call centers.
Gross Profit. Gross profit from Internet sales increased $8.6 million, or
101.1% to $17.0 million. As a percentage of net revenues, Internet gross profit
decreased from 21.2% to 20.7%. The reduction was primarily due to the impact of
a decrease in non-published fare margins from changes in the carrier sales mix
and the impact of fuel surcharges.
Call center gross profit increased $4.4 million, or 18.5% to $28.1 million.
As a percentage of net revenues, gross profit from call centers decreased
slightly from 19.3% to 19.2% for the six months ended June 30, 1999 and 2000,
respectively, also primarily due to the same reasons as stated above.
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.
Liquidity and Capital Resources
For the six months ended June 30, 2000, Cheap Tickets generated cash from
operating activities of $18.7 million, compared with $15.8 million for the six
months ended June 30, 1999. For the six months ended June 30, 2000, cash
generated from operating activities was comprised principally of net earnings of
$7.2 million plus depreciation of $1.2 million and an increase in accounts
payable of $11.4 million. For the six months ended June 30, 1999, cash
generated from operating activities was comprised principally of net earnings of
$4.2 million plus depreciation of $585,000 and an increase in accounts payable
of $8.9 million. The primary account payable is the weekly settlement to the
Airline Reporting Corporation for airline tickets purchased less commissions
earned. This is generally a significant balance, and the timing of the current
payment relative to month-end can cause fluctuations in month-end balances.
13
<PAGE>
For the six months ended June 30, 2000, Cheap Tickets received cash from
investing activities of $4.1 million, while in the prior period it used cash in
investing activities of $20.6 million. Cash provided by investing activities
for the six months ended June 30, 2000 included net proceeds from the sale of
short term marketable securities of $4.8 million and capital expenditures of
$779,000. For the six months ended June 30, 1999 net purchases of short term
marketable securities were $18.4 million and capital expenditures were $2.2
million. For the six months ended June 30, 1999, Cheap Tickets received net
proceeds from an initial public offering of $55.0 million, after deduction of
underwriters' fees and other costs of issuance less $4.8 million to redeem
mandatorily redeemable preferred stock and accumulated dividends.
At June 30, 2000, Cheap Tickets maintained on hand cash and cash
equivalents of $62.8 million and short term marketable securities of $93.8
million. Cheap Tickets' net working capital was $141.1 million. Last year,
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 $504,000 and capital lease obligations of $2,675,000.
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. If cash
generated from internal operations is not sufficient to satisfy Cheap Tickets'
liquidity requirements, Cheap Tickets may seek to acquire bank credit 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.
Risks Associated with Forward-Looking Statements
From time to time, Cheap Tickets may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be made
by management orally or in writing, including, but not limited to, in press
releases, as part of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Report, and in Cheap
Tickets' other filings with the Securities Exchange Commission. Although Cheap
Tickets believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including, without limitation
those identified below. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current or future operations may vary materially from those
anticipated, estimated, or projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates.
General
There are several risks and uncertainties that may affect the future
operating results, business and financial condition of Cheap Tickets, including,
without limitation: (1) the risk of reduction in consumer demand for Cheap
Tickets' products; (2) the risk of loss of one or more of the major airline
carriers with whom Cheap Tickets does business; (3) the risk that Cheap Tickets
may not be able to continue to provide its products at prices which are
competitive or that it can continue to market its products in a manner that
appeals to consumers even if price-competitive; (4) the risk that Cheap Tickets
may not be able to obtain its products on substantially similar terms, including
cost, in order to sustain its operating margins; (5) the risks associated with
the exercise of management's discretion in the use of proceeds from the initial
and secondary public offerings; and (6) the risks inherent in legal
proceedings. Readers are encouraged to refer to Cheap Tickets' Annual Report on
Form 10-K for the year ended December 31, 1999 for a further discussion of Cheap
Tickets' business and the risks and opportunities attendant thereto.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
14
<PAGE>
PART II--OTHER INFORMATION
Item 1. 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.
After amending the initial complaint twice, the amended complaint sought 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 was tendered to Cheap
Tickets' insurance carrier. Defense counsel was provided by the insurance
carrier. The defense was vigorous as it was felt the lawsuit had no merit.
Defense counsel filed a motion to strike certain claims except the claim for
excluding the employee from participating in the management incentive plans.
Mediation was held on May 6,2000. During mediation, the insurance
carrier decided to settle the claims of the former employee for $75,000, which
represents the costs of the defense. This settlement will be paid by the
insurance carrier for Cheap Tickets.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Please refer to the discussion in notes 3 and 4 of the Financial
Statements set forth in Part I, Item 1 and in the Section entitled "Liquidity
and Capital Resources" in Part I, Item 2.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of Stockholders (the "Annual Meeting") of Cheap
Tickets was held on May 9, 2000. At the Annual Meeting, three items were put to
a vote of the stockholders:
The election of the following seven directors of the Company to serve
until the 2001 Annual Meeting of Stockholders, and until their successors are
elected and qualified: Giles H. Bateman, George R. Mrkonic, A. Maurice Myers,
Cece Smith, Sam E. Galeotos, Michael J. Hartley and Sandra T. Hartley.
The approval and ratification of the Amended and Restated 1999 Stock
Incentive Plan.
The appointment of PricewaterhouseCoopers LLP as the independent
auditors for the Company for the fiscal year ending December 31, 2000.
15
<PAGE>
<TABLE>
<CAPTION>
The voting results were:
Item For Against Abstained
---- ---------- --------- ----------
<S> <C> <C> <C>
1. Directors
Giles H. Bateman 18,648,519 0 14,717
George R. Mrkonic 18,648,519 0 14,717
A. Maurice Myers 18,648,519 0 14,717
Cece Smith 18,648,519 0 14,717
Sam E. Galeotos 18,648,519 0 14,717
Michael J. Hartley 18,648,519 0 14,717
Sandra T. Hartley 18,648,519 0 14,717
2. Approval and ratification of 18,509,672 125,437 28,127
Amended and Restated
1999 Stock Incentive Plan
3. Appointment of auditors 18,654,188 7,922 1,126
</TABLE>
Item 5. OTHER INFORMATION
Not applicable.
16
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the three months
covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEAP TICKETS, INC.
(Registrant)
Date: August 14, 2000 /s/ Michael J. Hartley
---------------------------------------
Michael J. Hartley
Chairman of the Board, Chief Executive
Officer
Date: August 14, 2000 /s/ Sam E. Galeotos
---------------------------------------
Sam E. Galeotos
President and Chief Operating Officer
Date: August 14, 2000
/s/ Dale K. Jorgenson
---------------------------------------
Dale K. Jorgenson
Chief Financial Officer and Vice
President (Principal Financial Officer
and Principal Accounting Officer)
17
