<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 November 7, 2000, the Registrant had 24,247,996 shares of Common
Stock, $.001 par value per share, outstanding.
1
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INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited).................... 3
- Consolidated balance sheets at December 31, 1999 and
September 30, 2000............................................. 3
- Consolidated statements of operations for the three and nine
months ended September 30, 1999 and 2000....................... 4
- Consolidated statement of stockholders' equity for the three
and nine months ended September 30, 1999 and 2000.............. 5
- Condensed consolidated statements of cash flows for the nine
months ended September 30, 1999 and 2000....................... 6
- Notes to consolidated financial statements..................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 9
Item 3. Quantitative and Qualitative
Disclosure about Market Risk..................................... 13
PART II OTHER INFORMATION................................................ 14
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities and Use of Proceeds........................ 14
Item 3. Defaults Upon Senior Securities.................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
Item 5. Other Information................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................. 15
SIGNATURES....................................................... 15
</TABLE>
2
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PART I
FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEAP TICKETS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 40,718 $ 57,856
Marketable securities 98,580 96,600
Trade accounts and other receivables 4,520 6,424
Refundable income taxes 355 106
Ticket inventories 348 354
Other current assets 1,370 1,437
-------- --------
Total current assets 145,891 162,777
Property and equipment, net 9,263 9,786
Other assets 456 721
-------- --------
$155,610 $173,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,131 $ 14,310
Accrued salaries 1,763 1,751
Accrued vacation 540 650
Accrued expenses and other liabilities 377 685
Current installments of long-term debt 133 25
Current installments of capital lease obligations 1,405 1,410
Deferred revenue, current 400 400
-------- --------
Total current liabilities 11,749 19,231
Long-term debt, excluding current installments 517 498
Capital lease obligations, excluding current installments 3,376 2,316
Deferred revenue, noncurrent 1,200 900
Other noncurrent liabilities 156 131
-------- --------
Total liabilities 16,998 23,076
Stockholders' Equity:
Preferred stock, $0.01 par value as of December 31, 1999 and
September 30, 2000. Authorized 10,000,000 shares; Issued
And Outstanding none at December 31, 1999 and September 30,
2000 (Note 4). - -
Common stock, $.001 par value. Authorized 70,000 shares;
Issued and outstanding 24,025 shares at December 31, 1999 and
24,243 shares at September 30, 2000 (Note 4). 24 24
Additional paid-in capital 146,002 145,911
Unearned compensation (382) (172)
Retained earnings 7,708 19,185
Treasury stock, at cost--1,037 common shares at December 31,
1999 and September 30, 2000 (14,740) (14,740)
-------- --------
Total stockholders' equity 138,612 150,208
-------- --------
$155,610 $173,284
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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CHEAP TICKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Non-published fares $103,764 $114,161 $257,143 $327,888
Published fare commissions and bonuses 6,391 7,238 16,112 22,263
-------- -------- -------- --------
Net revenues 110,155 121,399 273,255 350,151
Cost of sales 88,628 96,111 219,508 279,693
-------- -------- -------- --------
Gross Profit 21,527 25,288 53,747 70,458
Selling, general and administrative expenses 18,393 20,640 44,289 57,943
-------- -------- -------- --------
Net operating income 3,134 4,648 9,458 12,515
Other income (deductions):
Interest income 1,297 2,432 2,181 6,765
Interest expense (67) (90) (161) (292)
Other, net (8) 3 13 (173)
-------- -------- -------- --------
Earnings before income taxes 4,356 6,993 11,491 18,815
Income taxes 1,786 2,727 4,711 7,338
-------- -------- -------- --------
Net earnings 2,570 4,266 6,780 11,477
Preferred stock dividends --- --- (79) ---
Accretion of mandatorily redeemable
cumulative preferred stock discount --- --- (37) ---
Redemption of mandatorily redeemable
cumulative preferred stock --- --- (587) ---
-------- -------- -------- --------
Income available to common shares $ 2,570 $ 4,266 $ 6,077 $ 11,477
-------- -------- -------- --------
Basic earnings per common share $ 0.11 $ 0.18 $ 0.31 $ 0.50
======== ======== ======== ========
Average common shares outstanding 22,607 23,201 19,711 23,159
======== ======== ======== ========
Diluted earnings per common share $ 0.11 $ 0.18 $ 0.29 $ 0.49
======== ======== ======== ========
Average diluted common shares outstanding 23,256 23,534 21,310 23,554
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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CHEAP TICKETS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
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 24,025 $24 $146,002 $(382) $ 7,708 $(14,740) $138,612
Net earnings - - - - 11,477 - 11,477
Exercise of stock options 214 - 37 - - - 37
Other issuance of common stock 4 - 47 - - - 47
Amortization and forfeiture of stock option
compensation - - (175) 210 - - 35
--------------- --------- ------ ------- --------- --------
Balance, September 30, 2000 24,243 $24 $145,911 $(172) $19,185 $(14,740) $150,208
=============== ========= ====== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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CHEAP TICKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,780 $ 11,477
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 1,037 2,097
Stock option compensation 69 35
Amortization of discount on marketable securities (35) (381)
Loss on sale or disposal of property and equipment 20 124
Loss on sale of marketable securities 9 86
Changes in operating assets and liabilities 10,415 5,267
---------- ----------
Net cash provided by operating activities 18,295 18,705
Cash flows from investing activities:
Capital expenditures (2,913) (2,877)
Proceeds from sale of property and equipment 11 133
Purchase of marketable securities (103,806) (111,109)
Proceeds from sale of marketable securities 18,506 113,384
---------- ----------
Net cash used in investing activities (88,202) (469)
Cash flows from financing activities:
Redemption of mandatorily redeemable cumulative preferred stock (4,839) -
Proceeds from issuance of common stock, net of expenses paid 144,640 84
Proceeds from issuance of long-term debt 236 -
Principal payments on long-term debt (299) (127)
Principal payments on capital lease obligations (567) (1,055)
---------- ----------
Net cash provided by (used in) financing activities 139,171 (1,098)
Net increase in cash 69,264 17,138
Cash and cash equivalents at beginning of period 2,974 40,718
---------- ----------
Cash and cash equivalents at end of period $ 72,238 $ 57,856
========== ==========
Supplemental cash flow information:
Cash paid for:
Interest $ 164 $ 292
Income taxes 4,172 7,088
Noncash investing and financing activities:
Acquisitions of new equipment through capital leases 4,446 -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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CHEAP TICKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated 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 consolidated 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 consolidated 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 nine months ended September 30, 2000 are not
necessarily indicative of results expected for the full fiscal year or for any
future period.
Principles of Consolidation
The consolidated financial statements include the accounts of Cheap Tickets
and its wholly-owned subsidiary. All significant intercompany transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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 consolidated
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
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
7
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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 consolidated 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 consolidated 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 consolidated
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).
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
Numerator:
Income available to common shares........ $ 2,570 $ 4,266 $ 6,077 $11,477
------- ------- ------- -------
Denominator:
Shares - basic........................... 22,607 23,201 19,711 23,159
Effect of Dilutive Securities:
Common stock warrants................. -- -- 881 --
Stock options......................... 649 333 718 395
------- ------- ------- -------
Shares - diluted......................... 23,256 23,534 21,310 23,554
------- ------- ------- -------
Basic earnings per share:.................. $ 0.11 $ 0.18 $ 0.31 $ 0.50
======= ======= ======= =======
Diluted earnings per share:................ $ 0.11 $ 0.18 $ 0.29 $ 0.49
======= ======= ======= =======
</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 1,317,950 shares of common stock at a range of $11.44 to
$37.50 were outstanding during the three months ended September 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.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated 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 30% of total gross bookings in 1999 and
approximately 40% during the three months ended September 30, 2000. In the third
quarter of 2000, Cheap Tickets added approximately 1.6 million registered online
users. At September 30, 2000, total registered online users were approximately
7.5 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' consolidated 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' consolidated 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 generally accepted accounting principles. 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 consolidated 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,
9
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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 September 30, 1999 and 2000,
approximately 99% of gross bookings arose from airline ticket sales. The
remaining gross bookings arose from sales of cruise tickets, auto rentals, hotel
reservations and other travel related products. Cheap Tickets 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 consolidated 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 consolidated
financial statements.
Results of Operations
Three months ended September 30, 2000 and September 30, 1999
Net revenues. Net revenues for the third quarter of 2000 increased $11.2
million, or 10.2%, to $121.4 million. Non-published fare sales increased $10.4
million, or 10.0%, to $114.2 million, reflecting a significant increase in the
number of non-published fare tickets sold. Commissions increased $847,000, or
13.3%, to $7.2 million. The increase in net revenues reflected increased sales
volumes and higher commissions on published fares from more favorable supplier
agreements. Non-published fare sales as a percentage of net revenues remained
the same at 94%.
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 decreased $4.4
million, or 5.5%, to $76.0 million. The decrease can be attributed to some
pricing competition resulting from United Airlines' pricing actions and Cheap
Tickets' focus on optimizing margins.
Net revenues from Internet sales increased $15.7 million, to $45.4 million.
Net revenues through the Internet increased to 37.4% of total net revenues in
the third quarter of 2000, compared with 27.1% in the third quarter of 1999.
Gross Profit. Gross profit for the third quarter of 2000 increased $3.8
million, or 17.5%, to $25.3 million. As a percentage of net revenues, gross
profit increased from 19.5% to 20.8% of net revenues. This increase reflects a
higher percentage of published fares sold and higher margins from more effective
yield management of non-published fares.
Selling, General and Administrative Expenses. For the three months ended
September 30, 2000, selling, general and administrative expenses increased $2.2
million, or 12.2%, to $20.6 million, and increased as a percentage of net
revenues from 16.7% to 17.0%. The increase in selling, general and
administrative expenses as a percentage of net revenues was primarily due to
increases in compensation, telephone and credit card charges.
Net Earnings. Net earnings for the three months ended September 30, 2000
increased $1.7 million, or 66.0% to $4.3 million. The increase reflected higher
net revenues, operating margins, and interest income.
Nine months ended September 30, 2000 and September 30, 1999
Net revenues. Net revenues for the nine months ended September 30, 2000
increased $76.9 million, or 28.1%, to $350.1 million. Non-published fare sales
increased $70.7 million, or 27.5%, to $327.9 million, reflecting a significant
increase in the number of non-published fare tickets sold. Commissions increased
$6.2 million, or 38.2%, to $22.3 million. The $6.2 million increase in
commissions primarily reflected two factors: first, an increase in commissions
on increased sales of published fares;
10
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and second, a $4.2 million increase in incentive payments. Published fare
commissions as a percentage of net revenues increased from 5.9% to 6.4%.
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 $19.6
million, or 9.7%, to $222.7 million. The increase reflected higher staffing
levels and increased average ticket price.
Net revenues from Internet sales increased $57.2 million, to $127.4
million. Net revenues through the Internet represented 36.4% of net revenues in
the first nine months ended September 30, 2000, compared with 25.7% in the first
nine months ended June 30, 1999.
Gross Profit. Gross profit for the nine months ended September 30, 2000
increased $16.7 million, or 31.1%, to $70.5 million, driven by a 28.1% increase
in net revenues. As a percentage of net revenues, gross profit increased from
19.7% to 20.1%. This can be attributed to slightly higher non-published gross
margins from more effective non-published fare yield management and increased
volume incentive payments earned.
Selling, General and Administrative Expenses. For the nine months ended
September 30, 2000, selling, general and administrative expenses increased $13.7
million, or 30.8%, to $57.9 million, and increased slightly as a percentage of
net revenues from 16.2% to 16.5%. The increase as a percentage of net revenues
was primarily the result of increases in advertising expenses of $5.8 million,
which was 4.1% of net revenues this year compared with 3.1% in 1999. Advertising
expenses targeted to increase Internet sales were $3.2 million higher for the
nine months ended September 30, 2000, including campaigns 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 but lower as a percentage of
net revenues. In the aggregate, all other selling, general and administrative
expenses, other than advertising, were 13.1% and 12.4% of net revenues for the
nine months ended September 30, 1999 and 2000, respectively.
Net Earnings. Net earnings for the nine months ended September 30, 2000
increased $4.7 million, or 69.3% to $11.5 million. The increase reflected higher
net revenues, higher operating margins, and interest income from cash and
marketable securities of $6.7 million.
Operating Segments
<TABLE>
<CAPTION>
Net Revenues By Segment
-----------------------
Three Months Ended September 30, Nine Months Ended September 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 $ 29,707 27% $ 45,358 37% $ 70,189 26% $ 127,439 36%
Call Center 80,448 73% 76,041 63% 203,066 74% 222,712 64%
---------------------- ------------------------ ---------------------- ----------------------
Net Revenues $ 110,155 100% $ 121,399 100% $ 273,255 100% $ 350,151 100%
====================== ======================== ====================== ======================
</TABLE>
<TABLE>
<CAPTION>
Gross Profit By Segment
-----------------------
Three Months Ended September 30, Nine Months Ended September 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 $ 6,509 30% $ 9,561 38% $ 14,984 28% $ 26,598 38%
Call Center 15,018 70% 15,727 62% 38,763 72% 43,860 62%
---------------------- ------------------------ ---------------------- ----------------------
Gross Profit $ 21,527 100% $ 25,288 100% $ 53,747 100% $ 70,458 100%
====================== ======================== ====================== ======================
</TABLE>
Three Months Ended September 30, 2000 and September30, 1999 by Segment
Net Revenues. Net revenues through the Internet increased $15.7 million, or
52.7% to $45.4 million. The retail value of non-published fares is the largest
component of net revenues. Sales volumes increased as a result of targeted
advertising and email campaigns, growing acceptance of Internet commerce, and a
significant increase in registered users to our website.
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The non-published fare component in the Internet sales mix was 62% and 60%,
respectively, of total Internet bookings for the three months ended September
30, 1999 and 2000.
Net revenues through the call centers decreased $4.4 million, or 5.5% to
$76.0 million. This decrease can be attributed to some pricing competition
resulting from United Airlines' pricing actions and Cheap Tickets' focus on
optimizing margins.
Gross Profit. Gross profit from Internet sales increased $3.1 million, or
46.9% to $9.6 million. As a percentage of net revenues, Internet gross profit
decreased from 21.9% to 21.1%. The reduction was primarily due to a decrease in
margins on Internet non-published fare sales.
Call center gross profit increased $709,000, or 4.7% to $15.7 million. As a
percentage of net revenues, gross profit from call centers decreased from 20.7%
to 18.7% for the three months ended September 30, 1999 and 2000, respectively.
Nine Months Ended September 30, 2000 and September 30, 1999 by Segment
Net Revenues. Net revenues through the Internet increased $57.2 million, or
81.6% to $127.4 million. The non-published fare component in the Internet sales
mix was 63% and 57% of total Internet bookings for the nine months ended
September 30, 1999 and 2000, respectively. Sales volumes increased as a result
of targeted advertising and email campaigns, growing acceptance of Internet
commerce, and a significant increase in registered users to our website.
Net revenues through call centers increased $19.6 million, or 9.7% to
$222.7 million. The increase reflected the overall industry demand, the results
of the Cheap Tickets' branding campaign and higher staffing levels in the call
centers.
Gross Profit. Gross profit from Internet sales increased $11.6 million, or
77.5% to $26.6 million. As a percentage of net revenues, Internet gross profit
decreased from 21.3% to 20.9%. The reduction was primarily due to the impact of
a decrease in non-published fare margins from changes in the carrier sales mix.
Call center gross profit increased $5.1 million, or 13.1% to $43.9 million.
As a percentage of net revenues, gross profit from call centers increased
slightly from 19.1% to 19.7% for the nine months ended September 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 nine months ended September 30, 2000, Cheap Tickets generated cash
from operating activities of $18.7 million, compared with $18.3 million for the
nine months ended September 30, 1999. For the nine months ended September 30,
2000, cash generated from operating activities was comprised principally of net
earnings of $11.4 million plus depreciation of $2.1 million and an increase in
accounts payable of $7.1 million. For the nine months ended September 30, 1999,
cash generated from operating activities was comprised principally of net
earnings of $6.8 million plus depreciation of $1.0 million and an increase in
accounts payable of $10.6 million. The primary account payable is the weekly
settlement to the Airline Reporting Corporation for airline tickets purchased
less commissions earned. This is generally a significant balance, and the timing
of the current payment relative to month-end can cause fluctuations in month-end
balances.
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<PAGE>
For the nine months ended September 30, 2000, Cheap Tickets received cash
from investing activities of $468,000, while in the prior period it used cash in
investing activities of $88.2 million. Cash used in investing activities for the
nine months ended September 30, 2000 included net proceeds from the sale of
short term marketable securities of $2.3 million and capital expenditures of
$2.8 million. For the nine months ended September 30, 1999 net purchases of
short term marketable securities were $85.3 million and capital expenditures
were $2.9 million. For the nine months ended September 30, 1999, Cheap Tickets
received net proceeds from initial and secondary public offerings 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.
At September 30, 2000, Cheap Tickets maintained on hand cash and cash
equivalents of $57.8 million and short term marketable securities of $96.6
million. Cheap Tickets' net working capital was $143.5 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 $498,000 and capital lease obligations of $2,316,000.
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.
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<PAGE>
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 Consolidated
Financial Statements set forth in Part I, Item 1 and in the Section entitled
"Liquidity and Capital Resources" in Part I, Item 2.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
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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)
/s/ Michael J. Hartley
Date: November 13, 2000
Michael J. Hartley
Chairman of the Board, Chief Executive Officer
/s/ Sam E. Galeotos
Date: November 13, 2000
Sam E. Galeotos
President and Chief Operating Officer
/s/ Dale K. Jorgenson
Date: November 13, 2000
Dale K. Jorgenson
Chief Financial Officer and Vice President (Principal
Financial Officer and Principal Accounting Officer)
15
