<PAGE>
--------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-30634.
------------------------
TRAVELOCITY.COM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2855109
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15100 TRINITY BOULEVARD 76155
FORT WORTH, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
(817) 785-8000
Registrant's telephone number, including area code
4200 BUCKINGHAM MD 1400 FORT WORTH, TEXAS 76155
(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 periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value -- 16,349,377 as of November 8, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
INDEX
TRAVELOCITY.COM INC.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets--September 30, 2000 and
December 31, 1999...................................... 3
Consolidated Statements of Operations--Three and nine
months ended September 30, 2000 and 1999............... 4
Consolidated Statement of Stockholders' Equity--Nine
months ended September 30, 2000........................ 5
Consolidated Statements of Cash Flows--Nine months ended
September 30, 2000 and 1999............................ 6
Notes to Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 26
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................... 27
SIGNATURE................................................... 28
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRAVELOCITY.COM INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 402 $ --
Marketable securities..................................... 26,559 --
Accounts receivable, net of allowance for doubtful
accounts of $458 at September 30, 2000.................. 18,310 3,259
Receivable from affiliates, net........................... 369 --
Prepaid expenses and other current assets................. 27,210 195
--------- --------
Total current assets.................................... 72,850 3,454
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements...................... 2,545 726
Furniture, fixtures and equipment......................... 2,678 995
Computer equipment........................................ 22,281 1,342
--------- --------
27,504 3,063
Less accumulated depreciation and amortization............ (10,011) (1,118)
--------- --------
Total property and equipment............................ 17,493 1,945
Intangible assets, net of accumulated amortization of
$52,956 and $4,810 at September 30, 2000 and December 31,
1999 respectively......................................... 219,244 4,190
Marketable securities....................................... 43,944 --
Other assets................................................ 3,335 50
--------- --------
TOTAL ASSETS............................................ $ 356,866 $ 9,639
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 12,309 $ 7,114
Accrued compensation and related benefits................. 2,673 676
Other accrued liabilities................................. 5,991 983
--------- --------
Total current liabilities............................... 20,973 8,773
Payable to affiliates....................................... -- 68,884
Other liabilities........................................... 4,594 544
Sabre's interest in partnership............................. 14,117 --
STOCKHOLDERS' EQUITY (DEFICIT)
Series A Preferred Stock, $.001 par value; 7,000 shares
authorized at September 30, 2000; no shares issued...... -- --
Class A Common Stock, $.001 par value; 33,000 and
3,000 shares authorized, issued and outstanding at
September 30, 2000 and December 31, 1999,
respectively............................................ 33 3
Common Stock, $.001 par value; 135,000 shares authorized;
16,180 shares issued and outstanding at September 30,
2000.................................................... 16 --
Class B Common Stock, $.001 par value; 75,000 and
1,500 shares authorized at September 30, 2000 and
December 31, 1999, respectively; no shares issued....... -- --
Contributions from affiliates............................. -- 7,841
Stock subscription receivable from affiliate.............. -- (3)
Additional paid-in capital................................ 424,376 --
Equity options outstanding................................ 3,593 --
Unrealized gains on investments........................... 337 --
Accumulated deficit....................................... (111,173) (76,403)
--------- --------
Total stockholders' equity (deficit).................... 317,182 (68,562)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $ 356,866 $ 9,639
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TRAVELOCITY.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Transaction......................................... $ 38,294 $15,155 $ 95,805 $ 35,361
Advertising......................................... 13,795 2,444 28,785 5,785
Other............................................... 1,272 (26) 2,592 258
-------- ------- -------- --------
Total revenues.................................... 53,361 17,573 127,182 41,404
Cost of revenues.................................... 20,200 9,370 51,452 27,235
-------- ------- -------- --------
Gross profit........................................ 33,161 8,203 75,730 14,169
OPERATING EXPENSES
Selling and marketing............................... 33,741 7,522 80,758 18,574
Technology and development.......................... 4,596 2,724 13,770 7,337
General and administrative.......................... 4,395 1,264 12,386 3,315
Expenses related to integration of Preview Travel... -- -- 1,537 --
Stock compensation.................................. 1,096 -- 3,331 --
Amortization of intangible assets and goodwill from
the Merger........................................ 22,424 -- 50,278 --
-------- ------- -------- --------
Total operating expenses.......................... 66,252 11,510 162,060 29,226
-------- ------- -------- --------
OPERATING LOSS........................................ (33,091) (3,307) (86,330) (15,057)
OTHER INCOME (EXPENSE)
Interest income, net................................ 1,047 -- 2,464 --
Other income and expense............................ 758 -- 1,127 --
-------- ------- -------- --------
Loss before Sabre's interest in partnership......... (31,286) (3,307) (82,739) (15,057)
Sabre's interest in partnership....................... 19,095 -- 47,969 --
-------- ------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS.......... $(12,191) $(3,307) $(34,770) $(15,057)
======== ======= ======== ========
Loss per common share, basic and diluted.............. $ (.64) $ (1.55)
======== ========
Weighted average common shares used in loss per common
share computation:
Basic and diluted............................... 19,173 22,463
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TRAVELOCITY.COM INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CLASS A CLASS B CONTRIBUTIONS STOCK ADDITIONAL
PREFERRED COMMON COMMON COMMON FROM SUBSCRIPTION PAID-IN
STOCK STOCK STOCK STOCK AFFILIATES RECEIVABLE CAPITAL
--------- -------- -------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999....... $ -- $ 3 $-- $ -- $ 7,841 $ (3) $ --
Net loss........................... -- -- -- -- -- -- --
Contribution of the assets and
liabilities of the Travelocity
Division by Sabre................ -- -- -- -- (7,841) 3 80,721
Conversion by Sabre of 3,000 Class
A common shares to 33,000 Series
A preferred shares............... 33 (3) -- -- -- -- 8,619
Conversion of 33,000 Series A
preferred shares to 33,000 Class
A common shares.................. (33) 33 -- -- -- -- --
Issuance of 14,378 common shares in
connection with the merger with
Preview Travel................... -- -- 14 -- -- -- 276,749
Issuance of 1,350 common shares for
cash............................. -- -- 1 -- -- -- 53,999
Issuance of 452 common shares
pursuant to stock option,
restricted stock incentive and
stock purchase plans............. -- -- 1 -- -- -- 4,168
Stock based compensation for
consultants and employees of the
Company and Travelocity
Holdings......................... -- -- -- -- -- -- 120
Unrealized gains on investments.... -- -- -- -- -- -- --
---- ---- --- --------- ------- ---------- --------
Balance at September 30, 2000...... $ -- $ 33 $16 $ -- $ -- $ -- $424,376
==== ==== === ========= ======= ========== ========
<CAPTION>
EQUITY UNREALIZED
OPTIONS GAIN ON ACCUMULATED
OUTSTANDING INVESTMENTS DEFICIT TOTAL
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1999....... $ -- $ -- $ (76,403) $(68,562)
Net loss........................... -- -- (34,770) (34,770)
Contribution of the assets and
liabilities of the Travelocity
Division by Sabre................ -- -- -- 72,883
Conversion by Sabre of 3,000 Class
A common shares to 33,000 Series
A preferred shares............... -- -- -- 8,649
Conversion of 33,000 Series A
preferred shares to 33,000 Class
A common shares.................. -- -- -- --
Issuance of 14,378 common shares in
connection with the merger with
Preview Travel................... -- -- -- 276,763
Issuance of 1,350 common shares for
cash............................. -- -- -- 54,000
Issuance of 452 common shares
pursuant to stock option,
restricted stock incentive and
stock purchase plans............. -- -- -- 4,169
Stock based compensation for
consultants and employees of the
Company and Travelocity
Holdings......................... 3,593 -- -- 3,713
Unrealized gains on investments.... -- 337 -- 337
------ ---- --------- --------
Balance at September 30, 2000...... $3,593 $337 $(111,173) $317,182
====== ==== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
TRAVELOCITY.COM INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CLASS A CLASS B CONTRIBUTIONS STOCK ADDITIONAL
PREFERRED COMMON COMMON COMMON FROM SUBSCRIPTION PAID-IN
STOCK STOCK STOCK STOCK AFFILIATES RECEIVABLE CAPITAL
--------- -------- -------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999....... $ -- $ 3 $-- $ -- $ 7,841 $ (3) $ --
Net loss........................... -- -- -- -- -- -- --
Contribution of the assets and
liabilities of the Travelocity
Division by Sabre................ -- -- -- -- (7,841) 3 80,721
Conversion by Sabre of 3,000 Class
A common shares to 33,000 Series
A preferred shares............... 33 (3) -- -- -- -- 8,619
Conversion of 33,000 Series A
preferred shares to 33,000 Class
A common shares.................. (33) 33 -- -- -- -- --
Issuance of 14,378 common shares in
connection with the merger with
Preview Travel................... -- -- 14 -- -- -- 276,749
Issuance of 1,350 common shares for
cash............................. -- -- 1 -- -- -- 53,999
Issuance of 452 common shares
pursuant to stock option,
restricted stock incentive and
stock purchase plans............. -- -- 1 -- -- -- 4,168
Stock based compensation for
consultants and employees of the
Company and Travelocity
Holdings......................... -- -- -- -- -- -- 120
Unrealized gains on investments.... -- -- -- -- -- -- --
---- ---- --- --------- ------- ---------- --------
Balance at September 30, 2000...... $ -- $ 33 $16 $ -- $ -- $ -- $424,376
==== ==== === ========= ======= ========== ========
<CAPTION>
EQUITY UNREALIZED
OPTIONS GAIN ON ACCUMULATED
OUTSTANDING INVESTMENTS DEFICIT TOTAL
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1999....... $ -- $ -- $ (76,403) $(68,562)
Net loss........................... -- -- (34,770) (34,770)
Contribution of the assets and
liabilities of the Travelocity
Division by Sabre................ -- -- -- 72,883
Conversion by Sabre of 3,000 Class
A common shares to 33,000 Series
A preferred shares............... -- -- -- 8,649
Conversion of 33,000 Series A
preferred shares to 33,000 Class
A common shares.................. -- -- -- --
Issuance of 14,378 common shares in
connection with the merger with
Preview Travel................... -- -- -- 276,763
Issuance of 1,350 common shares for
cash............................. -- -- -- 54,000
Issuance of 452 common shares
pursuant to stock option,
restricted stock incentive and
stock purchase plans............. -- -- -- 4,169
Stock based compensation for
consultants and employees of the
Company and Travelocity
Holdings......................... 3,593 -- -- 3,713
Unrealized gains on investments.... -- 337 -- 337
------ ---- --------- --------
Balance at September 30, 2000...... $3,593 $337 $(111,173) $317,182
====== ==== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
TRAVELOCITY.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(34,770) $(15,057)
Adjustments to reconcile net loss to cash used for operating
activities
Depreciation and amortization............................. 71,953 2,119
Stock compensation........................................ 3,428 --
Sabre's interest in partnership........................... (47,969) --
Gain on sale of investments............................... (1,127) --
Changes in operating assets and liabilities:
Accounts receivable and other assets.................... (9,873) (2,387)
Accounts payable, accrued and other liabilities......... 2,542 4,154
Prepayment to strategic distribution partner............ (40,000) --
Receivable from affiliates.............................. (467) (1,403)
-------- --------
Cash used for operating activities........................ (56,283) (12,574)
INVESTING ACTIVITIES
Cash acquired from Preview Travel, net of direct acquisition
costs..................................................... 743 --
Additions to property and equipment......................... (8,959) (385)
Net increase in marketable securities....................... (50,490) --
Other investing activities, net............................. (909) --
-------- --------
Cash used for investing activities........................ (59,615) (385)
FINANCING ACTIVITIES
Cash advances from Sabre affiliates......................... 6,818 12,959
Contribution of cash by Sabre in connection with the
Merger.................................................... 52,680 --
Proceeds from issuance of common stock...................... 54,000 --
Proceeds from exercise of stock options..................... 3,313 --
Other....................................................... (511) --
-------- --------
Cash provided by financing activities..................... 116,300 12,959
-------- --------
Increase in cash and cash equivalents....................... 402 --
Cash at beginning of the period............................. -- --
-------- --------
Cash at end of the period................................... $ 402 $ --
======== ========
Supplemental cash flow information:
Cash payments for interest................................ $ 64 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL INFORMATION
Travelocity.com(SM) Inc. ("Travelocity.com" or the "Company"), is a leading
provider of online leisure and business travel services. Incorporated in
Delaware on September 30, 1999 as a wholly-owned subsidiary of
Sabre-Registered Trademark- Holdings Corporation ("Sabre"), the Company is a
holding company whose sole assets are units of Travelocity.com LP (the
"Partnership"), a limited partnership, formed on September 30, 1999. Effective
upon the consummation of a merger (the "Merger") with Preview Travel, Inc.
("Preview Travel") on March 7, 2000, the Partnership became the owner and
operator of the combined assets and liabilities of the former
Travelocity-Registered Trademark- business unit of Sabre (the "Travelocity
Division") and Preview Travel.
The Company, through the Partnership, is engaged in consumer-direct travel
distribution over the Internet. Through its Travelocity.com online travel Web
site, which is accessible free of charge through the Internet and online
services, leisure and business travelers can compare prices, make travel
reservations and obtain destination information. The Company features booking
and purchase capability for airlines, car rental and hotel companies, cruises
and vacation packages, and offers access to a database of information regarding
specific destinations and other information of interest to travelers. The
Internet address for the Company's main Web site is WWW.TRAVELOCITY.COM.
The Company and Sabre, directly and indirectly through wholly-owned
subsidiaries, are the partners in the Partnership. The Company currently holds
an approximate 39% equity interest in the Partnership, with the remaining
approximate 61% equity interest held by Sabre. Sabre, through ownership of
shares of the Company's Common Stock and Class A Common Stock, also holds an
approximate 22% equity interest in the Company. Sabre currently beneficially
holds an approximate 70% economic interest in the Partnership--that is:
- an approximate 61% equity interest held directly, plus
- an approximate 9% equity interest held through the Company--that is, 22%
(Sabre's equity interest in the Company) of 39% (the Company's equity
interest in the Partnership).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The accompanying consolidated financial statements
include the accounts of the Company after elimination of all significant
intercompany balances and transactions. The financial statements have been
prepared using Sabre's historical basis in the assets and liabilities of the
Travelocity Division. The results of operations of Preview Travel have been
included in the accompanying financial statements beginning with the date of the
Merger. The financial statements include the results of operations, financial
condition and cash flows of the Company as a component of Sabre for periods
prior to the Merger.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
contain all adjustments, consisting of normal recurring accruals, necessary to
present fairly the financial position, results of operations and cash flows for
the periods indicated. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts
7
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported in the financial statements and accompanying notes. Actual results may
differ from these estimates. The Company's quarterly financial data should be
read in conjunction with the consolidated financial statements and notes of the
Company for the year ended December 31, 1999 included in the Company's Annual
Report on Form 10-K.
Sabre has a majority equity interest in the Partnership and the general
presumption would be for Sabre to consolidate the Partnership into its financial
statements. Although the Company does not have a majority equity interest in the
Partnership, it controls the Partnership through the Partnership's board of
directors since it has the right to appoint a majority of the directors.
Furthermore, although Travelocity Holdings, Inc. ("Travelocity Holdings"), a
wholly-owned subsidiary of Sabre, manages the day to day operations of the
Partnership pursuant to a management services agreement, it is subject to the
direction and oversight of the Partnership's board of directors. As such, the
Partnership's board of directors has the unilateral ability to control the
management of the Partnership, thereby enabling the Company to consolidate the
Partnership in its separate financial statements.
The Company's consolidated financial statements include the financial
statements of the Company and the Partnership, with Sabre's approximate 61%
interest in the Partnership's results of operations presented as a single line
item, "Sabre's interest in partnership," in the Company's statement of
operations. The Company's consolidated results of operations and financial
position consist of the total of approximately 39% of the Partnership's results
and 100% of the Company's results.
CASH AND CASH EQUIVALENTS--Effective with the Merger, the Company began to
maintain its own cash and cash equivalents. Short-term investments, without
regard to remaining maturity at acquisition, are not considered cash equivalents
for purposes of the statement of cash flows.
Prior to the Merger, the Company did not maintain cash or cash equivalents.
Sabre maintained all cash balances, charging or crediting the Company through
intercompany accounts upon the recording of certain transactions, including the
collection of accounts receivable and the purchases of goods and services.
INVESTMENTS--Effective with the Merger, the Company began to administer its
own investment portfolio. The Company maintains an investment policy intended to
ensure the safety and preservation of invested funds by limiting default risk,
market risk and reinvestment risk. The Company does not currently use derivative
financial instruments to manage or reduce market risk. The Company's investment
policy is to invest in high credit quality securities such as debt instruments
of the United States government and its agencies and high quality corporate
issuers, as well as money market funds. Investments include only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
All investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. Marketable securities are classified as available-for-sale
securities and are carried at fair value, based on quoted market prices, with
the unrealized gains or losses, net of tax, reported in stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity, both of which are included in interest
income.
8
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All investments with current maturities less than twelve months from the
balance sheet date are classified as current assets. Investments with maturities
of twelve months or more from the balance sheet date are classified as
marketable securities--long term.
RECENT ACCOUNTING PRONOUNCEMENTS--In July, 1999 the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL
OF THE EFFECTIVE DATE OF FASB NO. 133, which defers for one year the effective
date of FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES ("FAS 133"). FAS 133 will apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company expects to adopt the new
Statement effective January 1, 2001. FAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. FAS 133 would apply to warrants received from Hotel
Reservations Network, Inc. in connection with an affiliation agreement. At
September 30, 2000 the Company currently estimates that upon adoption it will
report a gain of approximately $11.0 to $12.0 million from these warrants. The
estimated gain is based on the Black-Scholes value of the warrants at
September 30, 2000 and any actual gains or losses realized by the Company will
be dependent upon the stock price at the time the warrants are either exercised
or upon final disposal of the stock.
3. MERGER WITH PREVIEW TRAVEL AND RELATED TRANSACTIONS
On March 7, 2000 the Company merged with Preview Travel. The cost of the
acquisition of Preview Travel was approximately $287.1 million, measured as the
fair market value of Preview Travel's outstanding common stock on October 1,
1999, the last trading day before the Merger agreement was announced, plus the
value of the vested options of Preview Travel assumed by the Company in the
Merger, and other costs directly related to the Merger as follows (in
thousands):
<TABLE>
<S> <C>
Fair market value of Preview Travel's common stock.......... $253,395
Fair market value of vested Preview Travel stock options.... 23,655
Investment advisor, legal, accounting and other professional
fees and expenses......................................... 9,562
Other costs directly related to the Merger.................. 493
--------
Total....................................................... $287,105
========
</TABLE>
9
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. MERGER WITH PREVIEW TRAVEL AND RELATED TRANSACTIONS (CONTINUED)
The costs of the acquisition have been allocated to the respective assets
and liabilities acquired, with the remainder recorded as goodwill, based on
estimates of fair values as follows (in thousands):
<TABLE>
<S> <C>
Working capital............................................. $ 4,212
Property and equipment...................................... 4,055
Marketable securities--long term............................ 12,262
Noncurrent liabilities...................................... (624)
Intangible assets and goodwill.............................. 267,200
--------
Total....................................................... $287,105
========
</TABLE>
The estimates of fair value were determined by the Company's management
based on information furnished by management of Preview Travel and preliminary
independent valuations of the net assets acquired, including intangible assets.
The goodwill recorded in the Merger is being amortized over a three-year
period.
PRO FORMA STATEMENT OF OPERATIONS DATA--The unaudited pro forma statement of
operations data in the table below presents the effects of the Merger, the
contribution agreements and certain other agreements entered into at the
effective time of the Merger by the Partnership and Sabre on the operations of
the Company as if these transactions occurred on January 1, 1999. These
agreements are an access agreement, a technology services agreement, an
intellectual property agreement, a facilities agreement and an administrative
services agreement. Amounts shown below are in thousands, except per share
amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues........................... $ 53,361 $ 25,410 $135,854 $ 60,723
Net loss before Sabre's interest......... (31,286) (34,354) (106,750) (99,692)
Sabre's interest in partnership.......... 19,095 21,299 65,567 61,809
-------- -------- -------- --------
Loss attributable to common
shareholders........................... $(12,191) $(13,055) $(41,183) $(37,883)
======== ======== ======== ========
Basic and diluted loss per share......... $ (.64) $ (.77) $ (2.22) $ (2.25)
======== ======== ======== ========
Weighted average shares outstanding...... 19,173 16,857 18,590 16,806
======== ======== ======== ========
</TABLE>
4. CAPITAL STRUCTURE
On August 28, 2000, the Company amended and restated its certificate of
incorporation to redesignate its Series A Preferred Stock, par value $0.001 per
share, as Class A Common Stock, par value $0.001 per share. No other changes to
the terms of the Series A Preferred Stock were made. The Class A Common Stock
has powers, preferences, rights, qualifications, limitations and restrictions
identical to the Series A Preferred Stock, and participates in dividends and any
liquidation as if it has been converted into 3.0 million shares of the Company's
Common Stock. Sabre and its affiliates hold 33.0 million shares of the Company's
Class A Common Stock, which together with 30.0 million units of
10
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CAPITAL STRUCTURE (CONTINUED)
the Partnership, held directly by Sabre and its affiliates, are convertible into
33.0 million shares of the Company's Common Stock. The redesignation of these
shares has been afforded retroactive treatment in the Company's earnings per
share calculation as if all outstanding shares of Class A Common Stock had been
converted into 3.0 million shares of the Company's Common Stock.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Comprehensive loss for the three and nine months ended September 30,
2000 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
Net loss...................................... $(12,191) $(34,770)
Other comprehensive income (loss):
Unrealized gains (loss) on marketable
securities................................ (206) 1,494
Less reclassification adjustment for gains
included in net loss...................... (755) (1,157)
-------- --------
Comprehensive loss............................ $(13,152) $(34,433)
======== ========
</TABLE>
6. LOSS PER COMMON SHARE
Net loss per common share is accounted for in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("FAS 128"). FAS 128
requires companies to present basic earnings per share which is calculated based
on the weighted average number of common shares outstanding during the period,
and if applicable, diluted earnings per share which is calculated based on the
weighted average common shares outstanding during the period plus any dilutive
common equivalent shares outstanding.
The weighted average shares used in the calculation of basic earnings per
share for the nine months ended September 30, 2000 have been calculated as if
the 33.0 million shares of preferred shares held by Sabre were outstanding as
common shares from January 1, 2000 through the Merger with Preview Travel on
March 7, 2000. Subsequent to the Merger, basic earnings per share has been
computed as if Sabre's 33.0 million shares of Class A Common Stock, formerly
held as Series A Preferred Stock, had been converted into 3.0 million shares of
Common Stock. The common shares issued to stockholders in connection with the
Merger are also included in the weighted average share calculation from the date
of issuance through September 30, 2000.
During the third quarter of 2000, employee stock options to purchase
approximately 4.8 million shares of the Company's Common Stock were excluded
from the computation of diluted earnings per share as their effect would have
been antidilutive.
11
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SIGNIFICANT TRANSACTIONS AND RELATIONSHIPS
AMERICA ONLINE--On October 2, 1999, Travelocity Holdings entered into an
Interactive Services and Exclusive Channel Agreement (the "AOL Agreement") with
America Online, Inc. ("AOL"), which agreement became effective upon consummation
of the Merger with Preview Travel and was assigned to the Partnership. The AOL
Agreement provides, among other things, that the Travelocity.com site will be
the exclusive reservations engine for AOL's Internet properties and that
payments of up to $200 million will be made to AOL and advertising revenue and
commissions will be shared over the five-year term of the agreement.
8. STOCK OPTIONS AND AWARDS
Sabre employees who became employees of the Partnership or Travelocity
Holdings upon closing of the Merger were given the option to convert unvested
Sabre options into options to acquire shares of the Company's Common Stock. The
conversion of the Sabre options into options to acquire the Company's Common
Stock resulted in a new measurement date for the options, requiring the
recognition of stock compensation expense.
Approximately 1.7 million vested and 1.1 million unvested options to
purchase shares of Preview Travel common stock held by Preview Travel employees,
directors or consultants were converted into options to acquire the Company's
Common Stock in connection with the Merger. Because the share exchange ratio in
the Merger was one to one, the number of options and the exercise prices per
share remained unchanged. All unvested options held by directors and 50% of all
unvested options held by officers and employees of Preview Travel vested as a
result of the Merger. On March 7, 2000, approximately 809,000 unvested options
held by former officers of Preview Travel were scheduled to vest one-twelfth
during each successive month during the twelve month period following the
Merger, subject to specified exceptions. After taking into consideration vesting
and cancellations, approximately 123,000 of these stock options were unvested at
September 30, 2000. The remaining unvested options held by each non-officer
employee vest according to the terms of the initial grant of the options.
During the nine month period ended September 30, 2000, employees of
Travelocity Holdings and the Partnership were granted additional options to
acquire shares of the Company's Common Stock. The options vest 25% on the first
anniversary of the date of grant and monthly thereafter until fully vested on
the fourth anniversary of the grant. The options expire ten years after the date
of grant.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION ("FIN 44"), an interpretation of
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). FIN 44, which has been adopted prospectively by the
Company as of July 1, 2000, requires significant changes to previous practice
regarding the accounting for certain stock compensation arrangements. FIN 44
does not change APB 25's intrinsic value method, under which compensation
expense is generally not recognized for grants of stock options to employees
with an exercise price equal to the market price of the stock at the date of
grant, but it has narrowed its application.
FIN 44 contains provisions whereby employees are defined as they are under
common law for purposes of applying APB 25. As a result, APB 25 does not apply
in the separate financial statements of a subsidiary for equity awards made by
the subsidiary to employees of the parent company, as these employees are not
considered to be employees of the grantor. Grants of equity awards made to such
12
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. STOCK OPTIONS AND AWARDS (CONTINUED)
employees are required to be recorded at fair value and recognized as expense
over the vesting period in the separate financial statements of the subsidiary.
Such grants are required to be revalued to fair value at each periodic reporting
date until vesting is complete, with a cumulative catch up adjustment recognized
for any changes in fair value.
The adoption of FIN 44 required that the Company recognize expense at fair
value for grants of equity awards made subsequent to December 15, 1998 to
employees of Travelocity Holdings performing services for the Partnership under
a management services agreement. The options are recorded at fair value at each
periodic reporting date until vesting is complete, with a cumulative catch-up
adjustment recognized for any changes in fair value. At September 30, 2000,
unrecognized stock compensation expense relating to these options totaled
approximately $9.5 million.
Additionally, certain stock compensation is recognized by the Company, based
on the intrinsic value of the awards, for options held by employees of the
Partnership relating to options which were converted at the date of the Merger
from existing unvested Sabre options into options to purchase shares of the
Company's Common Stock, and for options held by former officers of Preview
Travel which vest over the twelve month period following the Merger. The amount
of unrecognized stock compensation expense related to these options is not
material.
Total stock compensation expense, including the effect of adopting FIN 44,
for the quarter ended September 30, 2000 was approximately $1.1 million.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The information provided in this Management Discussion and Analysis of
Financial Condition and Results of Operations includes the results of the
Company from the date of the merger ("Merger") with Preview Travel, Inc.
("Preview Travel") on March 7, 2000 through September 30, 2000 and the
historical results of the former Travelocity business unit (the "Travelocity
Division") of Sabre Holdings Corporation ("Sabre"), as an operating unit of
Sabre for all periods prior to the Merger. Results for the nine months ended
September 30, 2000 include the impacts of the contribution agreements and the
intercompany agreements entered into between the Partnership and Sabre for the
period prior to the Merger. Results prior to the Merger do not include financial
effects of the Merger with Preview Travel. Historical results prior to the
Merger are not indicative of what our future financial position or results of
operations subsequent to the Merger will be. Pro forma results for the three and
nine months ended September 30, 2000 and 1999 are also included herein to
illustrate the effect of these agreements and the Merger transaction on our
historical operations and financial position.
We receive transaction revenue including, for 2000, access fees under our
access agreement with Sabre and, for 1999, booking fees collected by Sabre and
transferred to us. For both 2000 and 1999, transaction revenue also includes
commissions from travel suppliers for online purchases of their products and
services by customers. Our online travel services have grown substantially since
the launch of our Web site in March 1996.
Gross bookings of travel services online increased from $226.1 million in
the third quarter of 1999 to $649.5 million in the third quarter of 2000, which
resulted in an increase in transaction revenues from $15.2 million to
$38.3 million for the corresponding periods. For the nine months ended
September 30, 1999 and 2000, gross bookings increased from $527.7 million to
$1.7 billion, which resulted in an increase in transaction revenues from
$35.4 million to $95.8 million for the corresponding periods. Gross bookings
represent the total purchase price of all travel services booked through our Web
site. Gross bookings are not a financial measurement in accordance with
generally accepted accounting principles ("GAAP") and should not be considered
in isolation or as a substitute for other information prepared in accordance
with GAAP. Period-to-period comparisons of gross bookings are not necessarily
meaningful as a measure of our revenues due to, among other things, changes in
commission rates. As with operating results, they should not be relied upon as
an indication of future performance.
Prior to the Merger, advertising revenue was generated primarily through an
agreement with DoubleClick Inc. ("DoubleClick") for the placement of advertising
on our Web site and through the direct selling of advertisements on our site.
Under the agreement, DoubleClick obtained advertisers for our site, collected
the revenue paid by the advertisers, and paid us an amount that was net of fees
due to DoubleClick for its service. We recorded advertising revenue generated
through the agreement with DoubleClick on a net of fee basis in the period the
advertisements were delivered. Effective with the Merger, the majority of our
advertising revenue is generated through sales by our direct sales force.
Beginning in the second quarter of 2000, advertising revenue includes our share
of travel related advertising revenue on the AOL sites under the terms of our
revenue sharing agreement with AOL.
Costs of revenues include costs of operating our customer service centers,
data processing charges and costs associated with operating our Internet
infrastructure.
GROSS MARGINS
Our gross margins for the three months ended September 30, 2000 and 1999
were 62.1% and 46.7%, respectively. This increase was due primarily to the mix
of transaction revenues and advertising revenues, the mix of travel services
sold, the level of commissions on travel products, and more
14
<PAGE>
favorable terms under our access agreement with Sabre. We expect higher gross
margins on advertising revenues than transaction revenues, higher commission
rates on vacation packages than hotel rooms and car rentals and higher
commission rates on hotel rooms and car rentals than airline tickets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
TRANSACTION REVENUES. Transaction revenues increased from $15.2 million to
$38.3 million for the three months ended September 30, 1999 compared to the
three months ended September 30, 2000, an increase of $23.1 million, 153%. This
increase was primarily attributable to an increase in gross bookings through our
Web site and added sales resulting from the Merger. Gross bookings increased
from $226.1 million for the three months ended September 30, 1999 to
$649.5 million for the three months ended September 30, 2000.
ADVERTISING REVENUES. Advertising revenues increased from $2.4 million (net
of fees paid to DoubleClick of $565,000) to $13.8 million for the three months
ended September 30, 1999 compared to the three months ended September 30, 2000,
an increase of $11.4 million, 464%. This increase was primarily due to a
significant increase in net revenue from our advertising revenue sharing
agreement with AOL and increased advertising impressions from the direct sale of
advertising by our internal sales force. The move from using DoubleClick for
advertising sales to a direct sales force reduced fees paid for advertising
services.
OTHER REVENUES. Other revenues increased from ($26,000) to $1.3 million for
the three months ended September 30, 1999 compared to the three months ended
September 30, 2000, an increase of $1.3 million, due primarily to the Company's
receipt of service charges for the handling and express delivery of certain
paper tickets and the recognition of revenue related to certain warrants
received from Hotel Reservations Network, Inc. ("HRN") in the first quarter of
2000 in connection with an affiliation agreement.
COSTS OF REVENUES
Costs of revenues increased from $9.4 million to $20.2 million for the three
months ended September 30, 1999 compared to the three months ended
September 30, 2000, an increase of $10.8 million, 116%. This increase was due to
increases in costs associated with the customer service center including the
addition of personnel and other costs associated with a new customer service
center effective with the Merger. Costs of revenues declined as a percentage of
total revenue from 53.3% for the three months ended September 30, 1999 to 37.9%
for the three months ended September 30, 2000, primarily due to increased
efficiencies in the customer service centers and to more favorable terms under
the access agreement with Sabre.
OPERATING EXPENSES
SELLING AND MARKETING. Selling and marketing expenses consist of
advertising costs to promote the Company's Web site, the amortization of
payments made to strategic distribution partnerships with companies such as AOL,
Yahoo! Inc. ("Yahoo!"), Excite, Inc. ("Excite"), Lycos, Inc. ("Lycos"), and At
Home Corporation, amortization of trademarks and salaries and benefits. Selling
and marketing expenses increased from $7.5 million to $33.7 million for the
three months ended September 30, 1999 compared to the three months ended
September 30, 2000, an increase of $26.2 million, 349%. This increase was
primarily due to increased costs relating to the amortization of payments made
to strategic distribution partners and new agreements with AOL, Excite and Lycos
effective with the Merger and an increase in advertising spending. The increase
was also due to an increase in salaries and other
15
<PAGE>
employee related costs to support additional direct selling efforts and the
addition of Preview Travel's direct sales force effective with the Merger.
TECHNOLOGY AND DEVELOPMENT. Technology and development expense consists of
salaries and related costs and charges from Sabre for development and
maintenance of our Web site, including enhancements to and maintenance of our
Web site. Technology and development expenses increased from $2.7 million to
$4.6 million for the three months ended September 30, 1999 compared to the three
months ended September 30, 2000, an increase of $1.9 million, 69%. This increase
was primarily due to an increase in salaries and benefits associated with the
transfer of development labor headcount to the Partnership from Sabre in 2000,
additional headcount from the Merger with Preview Travel and additional costs
incurred to enhance and maintain our Web site. This increase was partially
offset by a decrease in development labor charges from Sabre due to the transfer
of development labor headcount to the Partnership.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists of
fees paid to Travelocity Holdings and Sabre for salaries and benefits for
Travelocity Holdings management devoted to the Company, corporate facility
services, legal services, accounting and other services. General and
administrative expense also includes salaries and benefits of management and
administrative costs of the Company. General and administrative expenses
increased from $1.3 million to $4.4 million for the three months ended
September 30, 1999 compared to the three months ended September 30, 2000, an
increase of $3.1 million, 248%. This increase was primarily due to salaries and
employee related costs and fees paid to Travelocity Holdings and Sabre. These
costs increased as a result of additional administrative requirements needed to
support our growth and the Merger.
STOCK COMPENSATION. Stock compensation represents the expense associated
with the adoption of Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION ("FIN 44") that was issued by the Financial
Accounting Standards Board in March 2000. FIN 44 requires that the Company
recognize stock compensation expense at fair value for options held by employees
of Travelocity Holdings. In addition, stock compensation includes expense
associated with the acceleration of vesting on stock options held by certain key
former employees of Preview Travel; this expense is being recognized over the
shorter of the estimated remaining service period or the twelve-month period
following the close of the Merger. Stock compensation also includes expense for
unvested stock options held by former employees of Sabre which were converted
into the Company's stock options on the date of the Merger and expense for
options granted to a consultant by Preview Travel which were assumed in the
Merger. Stock compensation expense for the three months ended September 30, 2000
was $1.1 million. No stock compensation was recorded for the three months ended
September 30, 1999.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Amortization of intangible
assets and goodwill represents the amortization of intangible assets and
goodwill totaling $267.2 million recorded in conjunction with the Merger. Total
amortization expense for the three months ended September 30, 2000 was
$22.4 million. The goodwill is being amortized over a three-year period.
INTEREST INCOME, NET. Interest income represents interest income on
marketable securities held by the Company. Interest income for the three months
ended September 30, 2000, net of interest expense related to capital lease
obligations acquired effective with the Merger, was $1.0 million. Prior to the
Merger, the Company did not maintain cash balances or investments.
OTHER INCOME. Other income represents gains and losses on the sale of
Company investments and assets. A net gain in the amount of $758,000 was
recorded for the three months ended September 30, 2000 for the sale of certain
marketable securities.
SABRE'S INTEREST IN PARTNERSHIP. Sabre's interest in the Partnership
represents Sabre's approximate 61% share of the Partnership's net loss.
16
<PAGE>
NET LOSS. Net loss increased $8.9 million, 269%, from $3.3 million to
$12.2 million, primarily due to the increase in operating expenses offset by the
increase in gross profit, net of Sabre's interest in the results of operations
of the Partnership.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
TRANSACTION REVENUES. Transaction revenues increased from $35.4 million to
$95.8 million for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 2000, an increase of $60.4 million, 171%. This
increase was primarily attributable to an increase in gross bookings through our
Web site and added sales resulting from the Merger. Gross bookings increased
from $527.7 million for the nine months ended September 30, 1999 to
$1.7 billion for the nine months ended September 30, 2000.
ADVERTISING REVENUES. Advertising revenues increased from $5.8 million (net
of fees paid to DoubleClick of $1.4 million) to $28.8 million (net of fees of
$884,000) for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 2000, an increase of $23.0 million, 398%. This
increase was primarily due to a significant increase in net revenue from our
advertising revenue sharing agreement with AOL and increased advertising
impressions from the direct sale of advertising by our internal sales force. The
move from using DoubleClick for advertising sales to a direct sales force
reduced fees paid for advertising services.
OTHER REVENUES. Other revenues increased from $258,000 to $2.6 million for
the nine months ended September 30, 1999 compared to the nine months ended
September 30, 2000, an increase of $2.3 million, due primarily to the Company's
receipt of service charges for the handling and express delivery of certain
paper tickets and revenue related to certain warrants received from HRN in
connection with an affiliation agreement.
COSTS OF REVENUES
Costs of revenues increased from $27.2 million to $51.4 million for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
2000, an increase of $24.2 million, 89%. This increase was due to increases in
costs associated with the customer service center including the addition of
costs and headcount associated with a new customer service center effective with
the Merger. Costs of revenues declined as a percentage of total revenue from
65.8% for the nine months ended September 30, 1999 to 40.5% for the nine months
ended September 30, 2000 primarily due to increased efficiencies in the customer
service centers and to more favorable terms under the access agreement with
Sabre.
OPERATING EXPENSES
SELLING AND MARKETING. Selling and marketing expenses increased from
$18.6 million to $80.8 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000, an increase of
$62.2 million, 335%. This increase was due primarily to increased costs relating
to the amortization of payments made to strategic distribution partners and new
agreements with AOL, Excite and Lycos effective with the Merger and an increase
in advertising spending. Part of the increase was also due to an increase in
salaries and other employee related costs to support additional direct selling
efforts and the addition of Preview Travel's direct sales force effective with
the Merger.
TECHNOLOGY AND DEVELOPMENT. Technology and development expenses increased
from $7.3 million to $13.8 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000, an increase of
$6.5 million, 88%. This increase was primarily due to an increase in
17
<PAGE>
salaries and benefits associated with the transfer of development labor
headcount to the Partnership from Sabre in 2000, additional headcount from the
Merger with Preview Travel and additional costs incurred to enhance and maintain
our Web site. This increase was partially offset by a decrease in development
labor charges from Sabre due to the transfer of development labor headcount to
the Partnership.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $3.3 million to $12.4 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000, an increase of
$9.1 million, 274%. This increase was primarily due to an increase in salaries
and employee related costs and fees paid to Travelocity Holdings and Sabre.
These costs increased as a result of additional administrative requirements
needed to support our growth and the Merger. Also, certain administrative costs
incurred during the nine months ended September 30, 2000 were duplicative due to
the integration of the administrative services of Preview Travel with the
Company.
INTEGRATION RELATED EXPENSES. Integration related expenses represent costs
specifically associated with the integration of the Company and Preview Travel.
Integration related expenses were $1.5 million for the nine months ended
September 30, 2000. No comparable amounts were recorded for the nine months
ended September 30, 1999.
STOCK COMPENSATION. Stock compensation expense for the nine months ended
September 30, 2000 was $3.3 million. Stock compensation expense was primarily
due to the Merger. This includes expense associated with the acceleration of
vesting on stock options held by certain key former employees of Preview Travel,
expense for unvested stock options held by former employees of Sabre which were
converted into the Company's stock options and expense for options granted to a
consultant by Preview Travel. Also affecting stock compensation expense was the
Company's prospective adoption of FIN 44 on July 1, 2000, which required the
Company to recognize stock compensation expense at fair value for options held
by employees of Travelocity Holdings. No stock compensation was recorded for the
nine months ended September 30, 1999.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Total amortization expense
of intangible assets and goodwill, recorded in conjunction with the Merger for
the nine months ended September 30, 2000 was $50.3 million. The goodwill is
being amortized over a three-year period.
INTEREST INCOME, NET. Interest income, net of interest expense related to
capital lease obligations, for the nine months ended September 30, 2000 was
$2.5 million.
OTHER INCOME. A net gain in the amount of $1.1 million was recorded for the
nine months ended September 30, 2000 for the sale of certain marketable
securities.
SABRE'S INTEREST IN PARTNERSHIP. Sabre's interest in the Partnership
represents Sabre's approximate 61% share of the Partnership's net loss.
NET LOSS. Net loss increased $19.7 million, 131% from $15.1 million to
$34.8 million, primarily due to the increase in operating expenses offset by the
increase in gross profit, net of Sabre's interest in the results of operations
of the Partnership.
PRO FORMA STATEMENT OF OPERATIONS DATA
The unaudited pro forma statement of operations data in the table below
presents the effects of the Merger, the contribution agreements and certain
other agreements entered into at the effective time of the Merger by the
Partnership and Sabre as if these transactions occurred on January 1, 1999.
These agreements are an access agreement, a technology services agreement, an
intellectual property agreement, a facilities agreement, and an administrative
services agreement.
18
<PAGE>
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred if such transactions had been consummated on January 1, 1999, nor is it
necessarily indicative of future results of operations.
The unaudited pro forma statement of operations data should be read in
conjunction with the Financial Statements and related notes thereto included
elsewhere herein. Pro forma adjustments include the impact of intercompany
agreements, the amortization of goodwill and other intangibles recorded as a
result of the Merger as well as other adjustments associated with the Merger.
Amounts shown below are in thousands, except per share amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues
Transaction....................................... $ 38,294 $ 19,376 $ 102,655 $ 46,885
Advertising....................................... 13,795 6,034 30,607 13,580
Other............................................. 1,272 -- 2,592 258
-------- -------- --------- --------
Total revenues................................ 53,361 25,410 135,854 60,723
Cost of revenues.................................... 20,200 9,228 55,203 27,095
-------- -------- --------- --------
Gross profit........................................ 33,161 16,182 80,651 33,628
Operating expenses
Selling and marketing............................. 33,741 20,823 88,441 47,983
Technology and development........................ 4,596 3,042 14,989 8,905
General and administrative........................ 4,395 3,658 14,292 9,231
Expenses related to integration of Preview
Travel.......................................... -- 476 2,610 476
Stock compensation................................ 1,096 640 4,160 1,853
Amortization of intangible assets and goodwill
from the Merger................................. 22,424 22,424 66,698 66,698
-------- -------- --------- --------
Total operating expenses...................... 66,252 51,063 191,190 135,146
-------- -------- --------- --------
Operating loss...................................... (33,091) (34,881) (110,539) (101,518)
Interest income, net................................ 1,047 550 2,673 1,897
Other income........................................ 758 -- 1,127 --
Provision for income taxes.......................... -- (23) (11) (71)
-------- -------- --------- --------
Loss before Sabre's interest in partnership... (31,286) (34,354) (106,750) (99,692)
Sabre's interest in partnership..................... 19,095 21,299 65,567 61,809
-------- -------- --------- --------
Net loss attributable to common shareholders........ $(12,191) $(13,055) $ (41,183) $(37,883)
======== ======== ========= ========
Basic and diluted loss per share.................... $ (.64) $ (.77) $ (2.22) $ (2.25)
======== ======== ========= ========
Weighted average shares outstanding................. 19,173 16,857 18,590 16,806
======== ======== ========= ========
</TABLE>
GROSS MARGINS
Pro forma gross margins for the three months ended September 30, 2000 and
1999 were 62.1% and 63.7%, respectively.
19
<PAGE>
RESULTS OF OPERATIONS
PRO FORMA THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO PRO FORMA THREE
MONTHS ENDED SEPTEMBER 30, 1999
REVENUES
TRANSACTION REVENUES. Pro forma transaction revenues increased from
$19.4 million to $38.3 million for the three months ended September 30, 1999
compared to the three months ended September 30, 2000, an increase of
$18.9 million, 98%. This increase was primarily attributable to increased air
and non-air revenues which increased 92% and 120%, respectively, compared to the
same quarter last year. Pro forma gross bookings increased from $332.7 million
for the three months ended September 30, 1999 to $649.5 million for the three
months ended September 30, 2000.
ADVERTISING REVENUES. Pro forma advertising revenue increased from
$6.0 million (net of fees paid to DoubleClick of $565,000) to $13.8 million for
the three months ended September 30, 1999 compared to the three months ended
September 30, 2000, an increase of $7.8 million, 129%. This increase was
primarily due to a significant increase in net revenue from our advertising
revenue sharing agreement with AOL and increased advertising impressions from
the direct sale of advertising by our internal sales force. The move from using
DoubleClick for advertising sales to a direct sales force reduced fees paid for
advertising services.
OTHER REVENUES. Pro forma other revenues were $1.3 million for the three
months ended September 30, 2000. None were reported for the three months ended
September 30, 1999. The increase was due primarily to the Company's receipt of
service charges for the handling and express delivery of certain paper tickets
and revenue related to certain warrants received from HRN in connection with an
affiliation agreement.
COSTS OF REVENUES
Pro forma costs of revenues increased from $9.2 million to $20.2 million for
the three months ended September 30, 1999 compared to the three months ended
September 30, 2000, an increase of $11.0 million, 119%. This increase was due to
increases in costs associated with the customer service center and salaries and
employee related costs primarily due to the increase in transactions on our Web
site. Additionally, Preview Travel expanded its call center operations in
August 1999 which further increased costs for 2000.
Costs of revenues are expected to increase from current pro forma levels as
the number of transactions processed on our Web site increases. However, we
anticipate that, in the long-term, costs of revenues as a percentage of revenues
will decrease due to efficiencies gained in infrastructure costs and the ticket
fulfillment process due to economies of scale.
OPERATING EXPENSES
SELLING AND MARKETING. Pro forma selling and marketing expenses increased
from $20.8 million to $33.7 million for the three months ended September 30,
1999 compared to the three months ended September 30, 2000, an increase of
$12.9 million, 62%. This increase was due to increased costs relating to the
amortization of payments made to strategic distribution partners and additional
advertising spending. Part of the increase was also due to an increase in
salaries and other employee related costs to support additional direct selling
efforts.
TECHNOLOGY AND DEVELOPMENT. Pro forma technology and development expenses
increased from $3.0 million to $4.6 million for the three months ended
September 30, 1999 compared to the three months ended September 30, 2000, an
increase of $1.6 million, 51%. This increase was primarily due to
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costs to enhance and maintain our transaction processing systems. These costs
consist primarily of salaries and related costs, depreciation, repairs and
maintenance and software licensing.
GENERAL AND ADMINISTRATIVE. Pro forma general and administrative expenses
increased from $3.7 million to $4.4 million for the three months ended
September 30, 1999 compared to the three months ended September 30, 2000, an
increase of $737,000, 20%. This was primarily due to an increase in salaries and
employee related costs that increased as a result of additional administrative
requirements needed to support our growth and the Merger.
INTEGRATION RELATED EXPENSES. Pro forma integration related expenses
include costs specifically associated with the integration of the Company and
Preview Travel and Merger related expenses for Preview Travel of $476,000 which
was recorded for the three months ended September 30, 1999 and no amounts were
recorded for the three months ended September 30, 2000.
STOCK COMPENSATION. Pro forma stock compensation expense increased from
$640,000 to $1.1 million for the three months ended September 30, 1999 compared
to the three months ended September 30, 2000, an increase of $456,000, 71%. This
increase was primarily due to the expense associated with the Company's adoption
of FIN 44 on July 1, 2000 which required the Company to recognize stock
compensation expense at fair value for options held by employees of Travelocity
Holdings. The increase was also due to the timing of stock compensation expense
associated with the acceleration of vesting on stock options held by certain key
former employees of Preview Travel, expense for unvested stock options held by
former employees of Sabre which were converted into the Company's stock options
on the date of the Merger and expense for options granted to a consultant by
Preview Travel which were assumed in the Merger.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Pro forma amortization of
intangible assets and goodwill remained unchanged from the three months ended
September 30, 1999 compared to the three months ended September 30, 2000.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO PRO FORMA NINE MONTHS
ENDED SEPTEMBER 30, 1999
REVENUES
TRANSACTION REVENUES. Pro forma transaction revenues increased from
$46.9 million to $102.7 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000, an increase of
$55.8 million, 119%. This increase was primarily attributable to increased sales
through our Web site and our co-branded Web sites. Pro forma gross bookings
increased from $801.0 million for the nine months ended September 30, 1999 to
$1.8 billion for the nine months ended September 30, 2000. Transaction revenues
are expected to continue to be impacted by factors such as transaction growth
and variability in commission rates.
ADVERTISING REVENUES. Pro forma advertising revenue increased from
$13.6 million (net of fees paid to DoubleClick of $1.4 million) to
$30.6 million (net of fees of $884,000) for the nine months ended September 30,
1999 compared to the nine months ended September 30, 2000, an increase of
$17.0 million, 125%. This increase was primarily due to a significant increase
in net revenue from our advertising revenue sharing agreement with AOL and
increased advertising impressions from the direct sale of advertising by our
internal sales force. The move from using DoubleClick for advertising sales to a
direct sales force reduced fees paid for advertising services.
OTHER REVENUES. Pro forma other revenues increased from $258,000 to
$2.6 million for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 2000, an increase of $2.3 million, due primarily to
the Company's receipt of service charges for the handling and
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express delivery of certain paper tickets and revenue related to certain
warrants received from HRN in connection with an affiliation agreement.
COSTS OF REVENUES
Pro forma costs of revenues increased from $27.1 million to $55.2 million
for the nine months ended September 30, 1999 compared to the nine months ended
September 30, 2000, an increase of $28.1 million, 104%. This increase was due to
increases in costs associated with the customer service center and salaries and
employee related costs primarily due to the increase in transactions on our Web
site. Additionally, Preview Travel expanded its call center operations in
August 1999 which further increased costs for 2000.
Costs of revenues are expected to increase from current pro forma levels as
the number of transactions processed on the site increases. However, we
anticipate that, in the long-term, costs of revenues as a percentage of revenues
will decrease due to efficiencies gained in infrastructure costs and the ticket
fulfillment process due to economies of scale.
OPERATING EXPENSES
SELLING AND MARKETING. Pro forma selling and marketing expenses increased
from $48.0 million to $88.4 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000, an increase of
$40.4 million, 84%. This increase was due to increased costs relating to the
amortization of payments made to strategic distribution partners and additional
advertising spending. Part of the increase was also due to an increase in
salaries and other employee related costs to support additional direct selling
efforts. We will continue to invest a significant amount in advertising programs
to build our brand. Additionally, guaranteed payments under the AOL Agreement
will continue to result in significant distribution costs. We expect a
significant portion of these costs will be offset by increased revenue under our
advertising revenue sharing agreement with AOL.
TECHNOLOGY AND DEVELOPMENT. Pro forma technology and development expenses
increased from $8.9 million to $15.0 million for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 2000, an
increase of $6.1 million, 68%. This increase was primarily due to costs to
enhance and maintain our transaction processing systems. These costs consist
primarily of salaries and related costs, depreciation, repairs and maintenance
and software licensing.
GENERAL AND ADMINISTRATIVE. Pro forma general and administrative expenses
increased from $9.2 million to $14.3 million for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 2000, an
increase of $5.1 million, 55%. This increase was primarily due to an increase in
salaries and employee related costs that increased as a result of additional
administrative requirements needed to support our growth and the Merger. Also,
certain administrative costs were duplicative due to the integration of the
administrative services of Preview Travel with the Company. We expect cost
savings from the combined operations to lower general and administrative costs
as a percentage of revenue.
INTEGRATION RELATED EXPENSES. Pro forma integration related expenses
include costs specifically associated with the integration of the Company and
Preview Travel and Merger related expenses for Preview Travel. Pro forma
integration expenses increased from $476,000 to $2.6 million for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 2000,
an increase of $2.1 million, 448%.
STOCK COMPENSATION. Pro forma stock compensation expense increased from
$1.9 million to $4.2 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 2000, an increase of
$2.3 million, 125%. The increase in stock compensation expense
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was primarily due to the Merger and the effect of FIN 44. This includes expense
associated with the acceleration of vesting on stock options held by certain key
former employees of Preview Travel, expense for unvested stock options held by
former employees of Sabre which were converted into the Company's stock options
and expense for options granted to a consultant by Preview Travel. The Company's
prospective adoption of FIN 44 on July 1, 2000 required the Company to recognize
stock compensation expense at fair value for options held by employees of
Travelocity Holdings.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Pro forma amortization of
intangible assets and goodwill remained unchanged from the nine months ended
September 30, 1999 compared to the nine months ended September 30, 2000.
ANTICIPATED LOSSES
The Travelocity Division incurred significant operating losses since its
inception. For the future, our success will depend to a large part on our
ability to greatly increase sales volume to realize economies of scale, higher
returns on sales and increased revenue from advertising and non-air products. As
we increase spending for product development, advertising, customer service,
facilities and international expansion, we expect to continue to incur
significant, but declining, operating losses on a quarterly and annual basis for
the future.
VARIABILITY OF RESULTS
We expect to experience seasonality in our business, reflecting seasonal
fluctuations in the travel industry, Internet and commercial online service
usage and advertising expenditures. Travel bookings typically increase during
the first and second quarter in anticipation of summer travel and typically slow
in the third and fourth quarter. Due to the significant quarterly growth of the
business, this effect has not been historically evident in our operations but
may become so in the future. Internet and commercial online service usage and
the rate of growth of such usage are expected to decline during the summer.
Depending on the extent to which the Internet and commercial online services are
accepted as an advertising medium, seasonality in the level of advertising
expenditures could become more pronounced for Internet-based advertising.
Seasonality in the travel industry, Internet and commercial online service usage
and advertising expenditures is likely to cause fluctuations in our operating
results and could have a material adverse effect on our business.
Other factors that may adversely affect our quarterly operating results
include:
- our ability to retain existing customers, attract new customers and
encourage repeat purchases;
- our ability to adequately maintain and upgrade our Web sites and technical
infrastructure;
- our ability to obtain travel inventory from travel suppliers on
satisfactory terms;
- fluctuating gross margins due to a changing mix of revenues;
- the amount and timing of operating costs related to expanding our
operations;
- general economic conditions or economic conditions specific to the
Internet, online commerce and the travel industry;
- the seasonal nature of the travel industry, Internet and commercial online
service usage and advertising expenditures;
- our ability to attract and retain advertisers on our sites; and
- advertising revenues from our agreement with AOL may fluctuate due to the
effects of seasonality.
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Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and period-to-period comparisons of operating results
will not necessarily be meaningful and should not be relied upon as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used for operating activities for the nine months ended
September 30, 2000 were $56.3 million which was primarily attributed to the
payment to AOL of $40.0 million and the net loss before non-cash charges and
Sabre's interest in the Partnership. Also impacting cash used for operating
activities was an increase in accounts receivable and other assets caused by
amounts due from our advertising revenue sharing agreements. Cash flows used for
operating activities for the nine months ended September 30, 1999 were
$12.6 million which was primarily attributed to the net loss before non-cash
charges offset by increases in accounts payable, accrued expenses, and other
liabilities.
Investing activities for the nine months ended September 30, 2000 and 1999
were $59.6 million and $385,000, respectively. For the nine months ended
September 30, 2000, investing activities include the purchase of marketable
securities with funds received from Sabre in the Merger and capital expenditures
for furniture and fixtures, leasehold improvements and computer equipment to
support our growth during the year. For the nine months ended September 30,
1999, investing activities include capital expenditures for furniture and
fixtures and computer equipment.
Effective with the Merger, we began maintaining our own cash balances. Prior
to the Merger with Preview Travel, we did not maintain cash or cash equivalents,
but depended upon Sabre for the funding of our cash requirements. Sabre
maintained all cash balances, charging or crediting us through intercompany
accounts upon the recording of certain transactions, including the collection of
accounts receivable and purchase of goods and services. We incurred losses since
inception, which were funded by Sabre, as we were an operating unit of Sabre.
All cash advances from Sabre were contributed to paid-in-capital effective with
the Merger and are no longer due to Sabre.
Immediately prior to the Merger, Sabre contributed $52.7 million in cash to
the Partnership and received partnership units in exchange. Additionally, the
Company exercised its option to cause Sabre to invest an additional
$50.0 million in the Company in exchange for 1.2 million shares of common stock
of the Company. The Company contributed these funds to the Partnership. Sabre is
under no further obligation to fund the Partnership's capital requirements.
As a result of our separation from Sabre, the Partnership will directly
incur capital expenditures that Sabre previously incurred and charged to us. We
expect this change to increase capital expenditures in 2000 by approximately
$15.0 to $18.0 million.
We anticipate that our existing funds, which totaled approximately
$70.9 million at September 30, 2000, will be sufficient to meet anticipated cash
requirements through the end of year 2001 at which time the Company expects to
report positive cash earnings (before intangibles and stock compensation).
Thereafter, we anticipate cash requirements will be funded by cash flows from
operating activities. However, we cannot assure you that cash flows from
operations of the Partnership will be sufficient to meet our cash requirements,
including contractual commitments to our strategic distribution partners,
including AOL, or to make capital expenditures necessary to support the
anticipated growth of the business. In such event, we would be required to
obtain financing from the sale of equity securities or debt financing. We cannot
assure you that any such financing will be available or on terms acceptable to
us.
We will continue to use funds to enhance brand awareness and supplier
relationships, perform product development and for working capital. Payments due
under our agreements with strategic distribution partners could also impact
liquidity. Revenues under the AOL Agreement are based on performance and are
difficult to predict. Accordingly, they may not occur in the same time periods
as
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payments we must make to AOL. Additionally, agreements with Yahoo!, Excite,
Lycos and other distribution partners include guaranteed payments.
CAUTIONARY STATEMENT
Statements in this report which are not purely historical facts, including
statements regarding the Company's anticipations, beliefs, expectations, hopes,
intentions or strategies for the future, may be forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All forward looking statements in this report are based upon
information available to the Company on the date of this report. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
Any forward looking statements involve risks and uncertainties that could cause
actual events or results to differ materially from the events or results
described in the forward looking statements. Readers are cautioned not to place
undue reliance on these forward looking statements.
Risks associated with the Company's forward looking statements both in this
report and in any and all written and oral statements include, but are not
limited to: risks related to the relationships of the Company with Sabre and its
affiliates, including risks that they may terminate any of the agreements with
the Company, or fail or otherwise become unable to fulfill their principal
obligations thereunder, or determine not to renew certain of the agreements;
risks associated with competition, and technological innovation by competitors,
which could require the Company to reduce prices, to change billing practices,
to increase spending or marketing or product development or otherwise to take
actions that might adversely affect its operations or earnings; risks related to
the Company's technology; risks associated with online commerce and doing
business through an Internet web site, such as security issues, liability for
site content, and uncertain protection of intellectual property; risks relating
to the Company's investment in technology, including the ability of the Company
to timely develop and achieve market acceptance of new products; risks
associated with industry consolidation, including strategic alliances, in the
travel industry; risks related to seasonality of the travel industry and booking
revenues; risks of the Company's sensitivity to general economic conditions and
events that affect airline travel and the airlines, hotel operators and car
rental companies, including the increased price of fuel; risks of a natural
disaster, computer terrorism or other calamity that may cause significant damage
to the data center facilities and enterprise information systems upon which the
Company relies; risks of interruption or deterioration of third party services
on which the Company relies to provide its services; risks of deterioration or
obsolescence of the Company's current systems and infrastructures; risks
associated with the Company's international operations, such as currency
fluctuations, governmental approvals, tariffs and trade barriers, and political
instability; risks of new or different legal and regulatory requirements; the
risk that we may not be able to successfully complete the integration of the
business of the Travelocity Division and Preview Travel; risks associated with
the growth strategy of the Company, including investments in emerging markets
and the ability to successfully conclude alliances; the risk that evaluation of
the business and properties of the Company is difficult because the Company has
a short operating history; the risks associated with our expectation of
continued net losses for the foreseeable future, and our inability to predict
when we will operate profitably; risks that a decline in commission rates or the
elimination of commissions by travel suppliers would reduce our revenues; the
risk that our revenues derived from our relationships with Yahoo!, AOL and
Excite may not be sufficient to offset our significant financial commitments to
them; the risk that our financial performance could deteriorate if we lose
market share to our competitors; the risk that if we fail to increase our brand
recognition among consumers, we may not be able to expand our online traffic;
the risk that rapid technological changes may render our technology obsolete or
decrease the attractiveness of our services to consumers; the risk that security
breaches in our systems could damage our reputation and cause us to lose
customers; the risk that our computer systems may suffer system failures,
capacity constraints and business interruptions which could increase our
operating costs and cause us to lose customers; the risk that our ability to
increase our revenues depends on the
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continued use and growth of the Internet and electronic commerce since that is
the commercial medium through which we provide our service; the risk that our
stock price could fluctuate significantly; the risk that evolving government
regulation could impose taxes or other burdens on our business which could
increase our costs or decrease demand for our products; the risk that the loss
of our Chief Executive Officer could harm our business, and that if we do not
continue to attract and retain qualified personnel, we will not be able to
expand our operations; the risk that if financing is not available to us when we
need it on favorable terms, we may not be able to compete and expand; the risk
that conflicts of interest between Sabre and the Company and the Partnership
could impede our business strategy and hurt our business; and the risk that our
ability to promote our services in Southeast Asia, Australia, New Zealand,
Japan, India and other regions is restricted by an existing agreement between
Sabre and another operator of a global distribution system.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, the Company did not have any cash balances or
investments. The Company depended upon Sabre for the funding of cash
requirements until the Merger occurred on March 7, 2000.
Effective with the Merger, the Company began maintaining its own cash
balances. The exposure to market risk for changes in interest rates will relate
primarily to the Company's investment portfolio. The Company maintains an
investment policy intended to ensure the safety and preservation of all invested
funds by limiting default risk, market risk and reinvestment risk. The Company
does not currently plan to use derivative financial instruments to manage or
reduce market risk. The Company mitigates default risk by investing in high
credit quality securities such as debt instruments of the United States
government and its agencies and high quality corporate issuers, as well as money
market funds. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification.
The Company does not currently transact any significant portion of its
business in functional currencies other than the United States dollar. To the
extent that the Company continues to transact business using the United States
dollar as the functional currency, the Company does not believe that
fluctuations in foreign currency exchange rates will have a material adverse
effect on results of operations.
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule as of September 30, 2000.
</TABLE>
(b) Reports on Form 8-K
On August 31, 2000 the Company filed a current report on Form 8-K to report
the filing of its amended and restated certificate of incorporation
redesignating the Company's Series A Preferred Stock, par value $0.001 per
share, as Class A Common Stock, par value $0.001 per share. No other changes to
the terms of the Series A Preferred Stock were made.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
TRAVELOCITY.COM INC.
Date: November 14, 2000 BY: /s/ TERRELL B. JONES
-----------------------------------------
Terrell B. Jones
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
/s/ RAMESH K. PUNWANI
-----------------------------------------
Ramesh K. Punwani
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
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