<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 JUNE 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
4200 BUCKINGHAM MD 1400 76155
FORT WORTH, TEXAS (Zip Code)
(Address of principal executive
offices)
</TABLE>
Registrant's telephone number, including area code (817) 963-2923
NOT APPLICABLE
(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--16,346,377 as of August 9, 2000
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<PAGE>
INDEX
TRAVELOCITY.COM INC.
<TABLE>
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)............................
Consolidated Balance Sheets--June 30, 2000 and December 31,
1999........................................................
Consolidated Statements of Operations--Three and six months
ended June 30, 2000 and 1999................................
Consolidated Statement of Stockholders' Equity--Six months
ended June 30, 2000.........................................
Consolidated Statements of Cash Flows--Six months ended
June 30, 2000 and 1999......................................
Notes to Consolidated Financial Statements..................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................
SIGNATURE...........................................................................
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRAVELOCITY.COM INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 403 $ --
Marketable securities..................................... 26,756 --
Accounts receivable, net of allowance for doubtful
accounts of $319 at June 30, 2000....................... 17,121 3,259
Receivable from affiliates, net........................... 4,028 --
Prepaid expenses and other current assets................. 34,509 195
-------- --------
Total current assets.................................... 82,817 3,454
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements...................... 1,909 726
Furniture, fixtures and equipment......................... 2,111 995
Computer equipment........................................ 19,975 1,342
-------- --------
23,995 3,063
Less accumulated depreciation and amortization............ (8,070) (1,118)
-------- --------
Total property and equipment............................ 15,925 1,945
Intangible assets, net of accumulated amortization of
$33,354 and $4,810 at June 30, 2000 and December 31, 1999
respectively.............................................. 240,533 4,190
Marketable securities....................................... 41,983 --
Other assets................................................ 5,492 50
-------- --------
TOTAL ASSETS.............................................. $386,750 $ 9,639
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 10,789 $ 7,114
Accrued compensation and related benefits................. 3,270 676
Other accrued liabilities................................. 8,718 983
-------- --------
Total current liabilities............................... 22,777 8,773
Payable to affiliates....................................... -- 68,884
Other liabilities........................................... 2,010 544
Sabre's interest in partnership............................. 33,078 --
Stockholders' equity (deficit)
Series A Preferred Stock, $.001 par value; 40,000 shares
authorized; 33,000 shares issued and outstanding at
June 30, 2000........................................... 33 --
Class A Common Stock, $.001 par value; 3,000 shares
authorized, issued and outstanding at December 31,
1999.................................................... -- 3
Common Stock, $.001 par value; 135,000 shares authorized;
16,146 shares issued and outstanding at June 30, 2000... 16 --
Class B Common Stock, $.001 par value; 75,000 and 1,500
shares authorized at June 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................................ 424,087 --
Equity options outstanding................................ 2,433 --
Unrealized gains on investments........................... 1,298 --
Accumulated deficit....................................... (98,982) (76,403)
-------- --------
Total stockholders' equity (deficit).................... 328,885 (68,562)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $386,750 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Transaction........................................ $ 34,587 $11,025 $ 57,511 $ 20,206
Advertising........................................ 11,587 1,871 14,990 3,341
Other.............................................. 624 207 1,320 284
-------- ------- -------- --------
Total revenues................................... 46,798 13,103 73,821 23,831
Cost of revenues................................... 19,108 9,500 31,252 17,865
-------- ------- -------- --------
Gross profit....................................... 27,690 3,603 42,569 5,966
OPERATING EXPENSES
Selling and marketing.............................. 30,343 5,894 47,017 11,052
Technology and development......................... 5,186 2,328 9,174 4,613
General and administrative......................... 4,497 1,011 7,991 2,051
Expenses related to integration of Preview
Travel........................................... 1,011 -- 1,537 --
Stock compensation................................. 689 -- 2,235 --
Amortization of intangible assets and goodwill from
the Merger....................................... 22,140 -- 27,854 --
-------- ------- -------- --------
Total operating expenses......................... 63,866 9,233 95,808 17,716
-------- ------- -------- --------
OPERATING LOSS....................................... (36,176) (5,630) (53,239) (11,750)
OTHER INCOME (EXPENSE)
Interest income, net............................... 1,083 -- 1,417 --
Other income and expense........................... 375 -- 369 --
-------- ------- -------- --------
Loss before Sabre's interest in partnership........ (34,718) (5,630) (51,453) (11,750)
Sabre's interest in partnership...................... 21,210 -- 28,874 --
-------- ------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS......... $(13,508) $(5,630) $(22,579) $(11,750)
======== ======= ======== ========
Loss per common share, basic and diluted............. $ (.84) $ (1.02)
======== ========
Weighted average common shares used in loss per
common share computation:
Basic.............................................. 16,008 22,230
======== ========
Diluted............................................ 16,008 22,230
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TRAVELOCITY.COM INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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
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 417 common shares pursuant
to stock option, restricted stock
incentive and stock purchase
plans............................... -- -- 1 -- -- -- 3,812
Options issued to consultants by
Preview Travel and assumed in the
Merger.............................. -- -- -- -- -- -- 187
Unrealized gains on investments....... -- -- -- -- -- -- --
---- ---- ---- --- ------- ---- --------
Balance at June 30, 2000.............. $ 33 $ -- $ 16 $-- $ -- $ -- $424,087
==== ==== ==== === ======= ==== ========
<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.............................. -- -- (22,579) (22,579)
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
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 417 common shares pursuant
to stock option, restricted stock
incentive and stock purchase
plans............................... -- -- -- 3,813
Options issued to consultants by
Preview Travel and assumed in the
Merger.............................. 2,433 -- -- 2,620
Unrealized gains on investments....... -- 1,298 -- 1,298
------ ------ -------- --------
Balance at June 30, 2000.............. $2,433 $1,298 $(98,982) $328,885
====== ====== ======== ========
</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>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(22,579) $(11,750)
Adjustments to reconcile net loss to cash used for operating
activities
Depreciation and amortization............................. 39,622 1,397
Stock compensation........................................ 2,334 --
Sabre's interest in Partnership........................... (28,874) --
Gain on sale of investments............................... (369) --
Changes in operating assets and liabilities:
Accounts receivable and other assets.................... (8,036) (1,349)
Accounts payable, accrued and other liabilities......... 1,306 6,226
Prepayment to strategic distribution partner............ (40,000) --
Receivable from affiliates.............................. (4,028) (1,408)
-------- --------
Cash used for operating activities........................ (60,624) (6,884)
INVESTING ACTIVITIES
Cash acquired from Preview Travel, net of direct acquisition
costs..................................................... 866 --
Additions to property and equipment......................... (5,584) (252)
Net increase in marketable securities....................... (48,700) --
Other investing activities, net............................. (1,648) --
-------- --------
Cash used for investing activities........................ (55,066) (252)
FINANCING ACTIVITIES
Cash advances from Sabre affiliates......................... 6,818 7,136
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..................... 2,863 --
Other....................................................... (268) --
-------- --------
Cash provided by financing activities..................... 116,093 7,136
-------- --------
Increase in cash and cash equivalents....................... 403 --
Cash at beginning of the period............................. -- --
-------- --------
Cash at end of the period................................... $ 403 $ --
======== ========
Supplemental cash flow information:
Cash payments for interest................................ $ 35 $ --
======== ========
</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 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 61%
equity interest held by Sabre. Sabre, through ownership of shares of the
Company's Common Stock and Series A Preferred 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:
- a 61% equity interest held directly, plus
- a 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 which is
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 original maturities greater than 90 days and 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--The Financial Accounting Standards Board
(FASB) has recently 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 will result in significant changes to current
practice regarding the accounting for stock compensation arrangements. It will
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 will narrow 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 would 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 would not
be considered to be employees of the grantor. Grants of equity awards made to
such employees will be 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 may be 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.
For periods beginning after July 1, 2000, FIN 44 will require 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. As a result,
stock compensation expense will be recorded for certain grants of options.
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 $286.9 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......................................... 9,342
Other costs directly related to the Merger.................. 493
--------
Total....................................................... $286,885
========
</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
preliminary estimates of fair values as follows (in thousands):
<TABLE>
<S> <C>
Working capital............................................. $ 4,212
Property and equipment...................................... 5,148
Marketable securities-long term............................. 12,262
Noncurrent liabilities...................................... (624)
Intangible assets and goodwill.............................. 265,887
--------
Total....................................................... $286,885
========
</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 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................... $ 46,798 $ 19,200 $ 82,493 $ 35,313
Net loss before Sabre's interest............. (34,718) (33,644) (75,463) (65,338)
Sabre's interest in partnership.............. 21,210 20,859 46,472 40,510
-------- -------- -------- --------
Loss attributable to common Shareholders..... $(13,508) $(12,785) $(28,991) $(24,828)
======== ======== ======== ========
Basic and diluted loss per share............. $ (.84) $ (.93) $ (1.90) $ (1.80)
======== ======== ======== ========
Weighted average shares outstanding.......... 16,008 13,818 15,295 13,780
======== ======== ======== ========
</TABLE>
4. 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. During the three and six months ended June 30, 2000, the only component
of comprehensive loss other than the net loss was the unrealized gains on
marketable securities of approximately $1,064,000 and $1,298,000, respectively.
10
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. EARNINGS PER SHARE
Net loss per common share is accounted for in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, which 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. During the second quarter of 2000, employee stock
options to purchase approximately 4.2 million shares of the Company's common
stock and the effect of conversion of the 33.0 million Series A preferred shares
held by Sabre were excluded from the computation of diluted earnings per share
as their effect would have been antidilutive.
The weighted average shares used in the calculation of basic earnings per
share for the six months ended June 30, 2000 have been calculated as if the 33.0
million shares of preferred stock 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, these shares are excluded from the weighted
average shares calculation. The common shares issued to former stockholders of
Preview Travel in connection with the Merger are included in the weighted
average share calculation from the date of issuance through June 30, 2000.
6. 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 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. In
connection with this agreement, the Company paid $40.0 million to AOL upon the
closing of the Merger with Preview Travel on March 7, 2000.
7. 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 to options to acquire shares of the Company's common stock. The
conversion of the Sabre options to options to acquire the Company's 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. The 809,000 unvested options held by former officers of
Preview Travel vest one-twelfth during each successive month during the year
following the Merger, subject to specified exceptions. The remaining unvested
options held by each non-officer employee vest according to the terms of the
initial grant of the options.
11
<PAGE>
TRAVELOCITY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. STOCK OPTIONS AND AWARDS (CONTINUED)
Upon completion of the Merger, 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 are not exercisable more than ten years after the date of
grant.
Effective July 1, 2000, FIN 44 will require that the Company recognize stock
compensation expense at fair value for options held by employees of Travelocity
Holdings. At June 30, 2000 the fair value of unvested options held by employees
of Travelocity Holdings totaled approximately $12.0 million, which will be
amortized to expense over the vesting period of the options. The options will 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.
Additionally, stock compensation will be 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 to options to purchase shares of the
Company's common stock, and for options held by former officers of Preview
Travel which vest over the year following the Merger. The amount of unrecognized
stock compensation expense related to these options is not material.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The information provided in this Management Discussion and Analysis includes
the results of the Company from the date of the merger ("Merger") with Preview
Travel, Inc. ("Preview Travel") on March 7, 2000 through June 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 six months ended
June 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
impacts 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
six months ended June 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 the
new 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 experienced substantial
growth since the launch of our Web site in March 1996.
Gross bookings of travel services online increased from approximately $173.0
million in the second quarter of 1999 to $610.2 million in the second quarter of
2000, which resulted in an increase in transaction revenues from $11.0 million
to $34.6 million for the corresponding periods. For the six months ended
June 30, 1999 and 2000, gross bookings increased from approximately $301.6
million to $1.0 billion, which resulted in an increase in transaction revenues
from $20.2 million to $57.5 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 principals (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 the 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 are delivered. Effective with the Merger, the majority of our
advertising revenue is generated through sales by our direct sales force and our
revenue sharing agreement with America Online, Inc. ("AOL"). Advertising revenue
in the second quarter and beyond will include our share of travel related
advertising revenue on the AOL sites.
Costs of revenues includes 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 June 30, 2000 and 1999 were
59.2% and 27.5%, respectively. This increase was due primarily to the mix of
transaction revenues versus online advertising revenues, the mix of travel
services sold, the level of commissions on travel products, and
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more favorable terms under the 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 JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
REVENUES
TRANSACTION REVENUES. Transaction revenues increased from $11.0 million to
$34.6 million for the three months ended June 30, 1999 compared to the three
months ended June 30, 2000, an increase of approximately $23.6 million, 214%.
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 $173.0 million for the three months ended June 30, 1999 to $610.2
million for the three months ended June 30, 2000.
ADVERTISING REVENUES. Advertising revenues increased from $1.9 million (net
of fees paid to DoubleClick of $517,000) to $11.6 million (net of fees of
$193,000) for the three months ended June 30, 1999 compared to the three months
ended June 30, 2000, an increase of $9.7 million, 519%. 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 $207,000 to $624,000 for the
three months ended June 30, 1999 compared to the three months ended June 30,
2000, an increase of $417,000, 201%, due to new licensing agreements and the
recognition of revenue related to certain warrants received from Hotel
Reservations Network ("HRN") in the first quarter of 2000 in connection with an
affiliation agreement.
COSTS OF REVENUES
Costs of revenues increased from $9.5 million to $19.1 million for the three
months ended June 30, 1999 compared to the three months ended June 30, 2000, an
increase of approximately $9.6 million, 101%. This increase was due to increases
in data processing charges and costs associated with the customer service center
including the addition of costs and headcount associated with two new customer
service centers effective with the Merger. Costs of revenues declined as a
percentage of total revenue from 72.5% for the three months ended June 30, 1999
to 40.8% for the three months ended June 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, costs relating 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 $5.9 million to $30.3 million for the three months ended
June 30, 1999 compared to the three months ended June 30, 2000, an increase of
approximately $24.4 million, 415%. 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 additional advertising spending by us to gain market share. Part of the
increase was also due to an increase in salaries and
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other employee related costs to support the 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 the
site. Technology and development expenses increased from $2.3 million to $5.2
million for the three months ended June 30, 1999 compared to the three months
ended June 30, 2000, an increase of approximately $2.9 million, 123%. 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 is 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 our management and
administrative costs of the Company. General and administrative expenses
increased from $1.0 million to $4.5 million for the three months ended June 30,
1999 compared to the three months ended June 30, 2000, an increase of
approximately $3.5 million, 345%. 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 increased administrative
requirements to support our growth and the Merger. Additionally, certain
administrative costs 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
and were $1.0 million for the three months ended June 30, 2000. No comparable
amounts were recorded for the three months ended June 30, 1999.
STOCK COMPENSATION. Stock compensation expense represents expense associated
with the acceleration of vesting on stock options held by certain key former
employees of Preview Travel over the shorter of the estimated remaining service
period or the twelve month period following the close of the Merger, expense for
unvested stock options held by former employees of Sabre which were converted to
the Company's 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 June 30, 2000 was $689,000. No
stock compensation was recorded for the three months ended June 30, 1999.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Amortization of intangible
assets and goodwill represents the amortization of intangible assets and
goodwill recorded in conjunction with the Merger. Goodwill and certain other
intangible assets totaling approximately $265.9 million were recorded in
connection with the Merger. Total amortization expense for the three months
ended June 30, 2000 was $22.1 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 June 30, 2000, net of interest expense related to capital lease
obligations acquired effective with the Merger, was $1.1 million. Prior to the
Merger, the Company did not maintain cash balances or investments.
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OTHER INCOME. Other income represents gains and losses on the sale of
Company investments and assets. A net gain in the amount of $369,000 was
recorded for the three months ended June 30, 2000 for the sale of certain
marketable securities.
SABRE'S INTEREST IN PARTNERSHIP. Sabre's interest in partnership represents
Sabre's approximate 61% share of the Partnership's net loss.
NET LOSS. Net loss increased $7.9 million, 140%, from $5.6 million to
$13.5 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
REVENUES
TRANSACTION REVENUES. Transaction revenues increased from $20.2 million to
$57.5 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 2000, an increase of approximately $37.3 million, 185%. 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 $301.6 million for the six months ended June 30, 1999 to $1.0 billion for
the six months ended June 30, 2000.
ADVERTISING REVENUES. Advertising revenues increased from $3.3 million (net
of fees paid to DoubleClick of $884,000) to $15.0 million (net of fees of
$884,000) for the six months ended June 30, 1999 compared to the six months
ended June 30, 2000, an increase of $11.7 million, 349%. 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.
OTHER REVENUES. Other revenues increased from $284,000 to $1.3 million for
the six months ended June 30, 1999 compared to the six months ended June 30,
2000, an increase of $1.0 million, 365%, due to new licensing agreements and
revenue related to certain warrants received from HRN in connection with an
affiliation agreement.
COSTS OF REVENUES
Costs of revenues increased from $17.9 million to $31.3 million for the six
months ended June 30, 1999 compared to the six months ended June 30, 2000, an
increase of approximately $13.4 million, 75%. This increase was due to increases
in data processing charges and costs associated with the customer service center
including the addition of costs and headcount associated with two new customer
service centers effective with the Merger. Costs of revenues declined as a
percentage of total revenue from 75.0% for the six months ended June 30, 1999 to
42.3% for the six months ended June 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
$11.0 million to $47.0 million for the six months ended June 30, 1999 compared
to the six months ended June 30, 2000, an increase of approximately
$36.0 million, 325%. 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 additional
advertising spending by us to gain market share. Part of the increase was also
due to an increase in salaries and other employee related
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costs to support the 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 $4.6 million to $9.2 million for the six months ended June 30, 1999
compared to the six months ended June 30, 2000, an increase of approximately
$4.6 million, 99%. 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 is 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 $2.1 million to $8.0 million for the six months ended June 30, 1999
compared to the six months ended June 30, 2000, an increase of approximately
$5.9 million, 290%. 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 increased administrative requirements to
support our growth and the Merger. Additionally, certain administrative costs
incurred during the six months ended June 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 six months ended
June 30, 2000. No comparable amounts were recorded for the six months ended
June 30, 1999.
STOCK COMPENSATION. Stock compensation expense represents expense
associated with the acceleration of vesting on stock options held by certain key
former employees of Preview Travel over the shorter of the estimated remaining
service period or the twelve month period following the close of the Merger,
expense for unvested stock options held by former employees of Sabre which were
converted to the Company's 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 six months ended June 30, 2000 was
$2.2 million. No stock compensation was recorded for the six months ended
June 30, 1999.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Total amortization expense
of intangible assets and goodwill, recorded in conjunction with the Merger for
the six months ended June 30, 2000 was $27.9 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 six months ended June 30, 2000 was
$1.4 million.
OTHER INCOME. A net gain in the amount of $369,000 was recorded for the six
months ended June 30, 2000 for the sale of certain marketable securities.
SABRE'S INTEREST IN PARTNERSHIP. Sabre's interest in partnership represents
Sabre's approximate 61% share of the Partnership's net loss.
NET LOSS. Net loss increased $10.8 million, 92% from $11.8 million to $22.6
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
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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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Transaction........................................ $ 34,587 $ 14,714 $ 64,361 $ 27,509
Advertising........................................ 11,587 4,305 16,812 7,546
Other.............................................. 624 181 1,320 258
-------- -------- -------- --------
Total revenues................................... 46,798 19,200 82,493 35,313
Cost of revenues................................... 19,108 9,534 35,003 17,867
-------- -------- -------- --------
Gross profit......................................... 27,690 9,666 47,490 17,446
Operating expenses
Selling and marketing.............................. 30,343 15,125 54,700 27,160
Technology and development......................... 5,186 2,934 10,393 5,863
General and administrative......................... 4,497 2,972 9,897 5,573
Expenses related to integration of Preview
Travel........................................... 1,011 -- 2,610 --
Stock compensation................................. 689 762 3,064 1,213
Amortization of intangible assets and Goodwill from
the Merger....................................... 22,140 22,140 44,274 44,274
-------- -------- -------- --------
Total operating expenses......................... 63,866 43,933 124,938 84,083
-------- -------- -------- --------
Operating loss....................................... (36,176) (34,267) (77,448) (66,637)
Interest income, net................................. 1,083 639 1,627 1,347
Other income......................................... 369 -- 369 --
Benefit (provision) for income taxes................. 6 (16) (11) (48)
-------- -------- -------- --------
Loss before Sabre's interest in Partnership...... (34,718) (33,644) (75,463) (65,338)
Sabre's interest in partnership...................... 21,210 20,859 46,472 40,510
Net loss attributable to common Shareholders......... $(13,508) $(12,785) $(28,991) $(24,828)
======== ======== ======== ========
Basic and diluted loss per share..................... $ (.84) $ (.93) $ (1.90) $ (1.80)
======== ======== ======== ========
Weighted average shares outstanding.................. 16,008 13,818 15,295 13,780
======== ======== ======== ========
</TABLE>
GROSS MARGINS
Pro forma gross margins for the three months ended June 30, 2000 and 1999
were 59.2% and 50.3%, respectively. Our future gross margins may differ from pro
forma gross margins due to a higher mix of advertising revenue, which has a
higher gross margin, resulting from the AOL Agreement. As revenues under the AOL
Agreement are dependent upon performance, the timing of the revenues from the
agreement are uncertain and may be sporadic, resulting in a fluctuating gross
margin.
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RESULTS OF OPERATIONS
PRO FORMA THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO PRO FORMA THREE MONTHS
ENDED JUNE 30, 1999
REVENUES
TRANSACTION REVENUES. Pro forma transaction revenues increased from
$14.7 million to $34.6 million for the three months ended June 30, 1999 compared
to the three months ended June 30, 2000, an increase of approximately
$19.9 million, 135%. This increase was primarily attributable to increased air
and non-air revenues which increased 135% and 134%, respectively, compared to
the same quarter last year. Gross bookings increased from $263.0 million for the
three months ended June 30, 1999 to $610.2 million for the three months ended
June 30, 2000.
ADVERTISING REVENUES. Pro forma advertising revenue increased from
$4.3 million (net of fees paid to DoubleClick of $517,000) to $11.6 million (net
of fees of $193,000) for the three months ended June 30, 1999 compared to the
three months ended June 30, 2000, an increase of $7.3 million, 169%. 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 $181,000 to
$624,000 for the three months ended June 30, 1999 compared to the three months
ended June 30, 2000, an increase of $443,000, 245%, due to new licensing
agreements 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 $9.5 million to $19.1 million for
the three months ended June 30, 1999 compared to the three months ended
June 30, 2000, an increase of approximately $9.6 million, 100%. This increase
was due to increases in data processing charges, 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
opened a second call center 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 $15.1 million to $30.3 million for the three months ended June 30, 1999
compared to the three months ended June 30, 2000, an increase of approximately
$15.2 million, 101%. This increase was due to additional advertising spending by
us to gain market share, and increased costs relating to the amortization of
payments made to strategic distribution partners. Part of the increase was also
due to an increase in salaries and other employee related costs to support the
additional direct selling efforts.
TECHNOLOGY AND DEVELOPMENT. Pro forma technology and development expenses
increased from $2.9 million to $5.2 million for the three months ended June 30,
1999 compared to the three months ended June 30, 2000, an increase of
approximately $2.3 million, 77%. This increase was primarily due to costs to
enhance and maintain our combined transaction processing systems. These costs
consist primarily of salaries and related costs, depreciation, repairs and
maintenance and software licensing.
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GENERAL AND ADMINISTRATIVE. Pro forma general and administrative expenses
increased from $3.0 million to $4.5 million for the three months ended June 30,
1999 compared to the three months ended June 30, 2000, an increase of
approximately $1.5 million, 51%. 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 increased administrative
requirements to support our growth and the Merger. Additionally, certain
administrative costs were duplicative due to the integration of the
administrative services of Preview Travel with the Company.
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, and were
$1.0 million for the three months ended June 30, 2000. No amounts were recorded
for the three months ended June 30, 1999.
STOCK COMPENSATION. Pro forma stock compensation expense decreased from
$762,000 to $689,000 for the three months ended June 30, 1999 compared to the
three months ended June 30, 2000, a decrease of approximately $73,000, 10%. This
decrease was due to the timing of stock compensation expense associated with the
acceleration of vesting on stock options held by certain former Preview Travel
key employees over the shorter of the estimated remaining service period or the
twelve month period following the close of the Merger, expense for unvested
stock options held by former employees of Sabre and converted to the Company's
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
June 30, 1999 compared to the three months ended June 30, 2000.
PRO FORMA SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO PRO FORMA SIX MONTHS ENDED
JUNE 30, 1999
REVENUES
TRANSACTION REVENUES. Pro forma transaction revenues increased from
$27.5 million to $64.4 million for the six months ended June 30, 1999 compared
to the six months ended June 30, 2000, an increase of approximately
$36.9 million, 134%. This increase was primarily attributable to increased sales
through our Web site and our co-branded Web sites. Gross bookings increased from
$468.3 million for the six months ended June 30, 1999 to $1.1 billion for the
six months ended June 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
$7.5 million (net of fees paid to DoubleClick of $884,000) to $16.8 million (net
of fees of $884,000) for the six months ended June 30, 1999 compared to the six
months ended June 30, 2000, an increase of $9.3 million, 123%. 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.
OTHER REVENUES. Pro forma other revenues increased from $258,000 to
$1.3 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 2000, an increase of $1.1 million, 412%, due to new licensing
agreements 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 $17.9 million to $35.0 million
for the six months ended June 30, 1999 compared to the six months ended
June 30, 2000, an increase of approximately
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$17.1 million, 96%. This increase was due to increases in data processing
charges, 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 opened a second call center 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 $27.2 million to $54.7 million for the six months ended June 30, 1999
compared to the six months ended June 30, 2000, an increase of approximately
$27.5 million, 101%. This increase was due to additional advertising spending by
us to gain market share, and increased costs relating to the amortization of
payments made to strategic distribution partners. Part of the increase was also
due to an increase in salaries and other employee related costs to support the
additional direct selling efforts. Selling and marketing expenses in the future
will be higher than pro forma results. We will be investing a significant amount
in advertising programs to build our brand. Additionally, guaranteed payments
under the new AOL Agreement will result in significantly higher distribution
costs on a year-to-date basis for the Company than reported in the pro forma
statement of operations data. We expect a significant portion of these increased
costs will be offset by increased revenue under our new advertising revenue
share agreement with AOL.
TECHNOLOGY AND DEVELOPMENT. Pro forma technology and development expenses
increased from $5.9 million to $10.4 million for the six months ended June 30,
1999 compared to the six months ended June 30, 2000, an increase of
approximately $4.5 million, 77%. This increase was primarily due to costs to
enhance and maintain our combined 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 $5.6 million to $9.9 million for the six months ended June 30,
1999 compared to the six months ended June 30, 2000, an increase of
approximately $4.3 million, 78%. 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 increased administrative
requirements to support our growth and the Merger. Additionally, 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, and were
$2.6 million for the six months ended June 30, 2000. No amounts were recorded
for the six months ended June 30, 1999.
STOCK COMPENSATION. Pro forma stock compensation expense increased from
$1.2 million to $3.1 million for the six months ended June 30, 1999 compared to
the six months ended June 30, 2000, an increase of approximately $1.9 million,
153%. This increase was due to stock compensation expense associated with the
acceleration of vesting on stock options held by certain former Preview Travel
key employees over the shorter of the estimated remaining service period or the
twelve month period following the close of the Merger, expense for unvested
stock options held by former employees of Sabre and converted to the Company's
options on the date of the Merger and expense for options granted to a
consultant by Preview Travel which were assumed in the Merger.
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<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL. Pro forma amortization of
intangible assets and goodwill remained unchanged from the six months ended
June 30, 1999 compared to the six months ended June 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 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. Our
operating losses may be significantly different than the pro forma losses
presented due to the uncertain impact of the new AOL Agreement, the integration
of the two businesses (including cost synergies and recognition of non-recurring
items), and the cost and uncertain success of branding initiatives.
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
decline during the 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.
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.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used for operating activities for the six months ended June 30,
2000 were $60.6 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
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 and accrued investment income. Cash flows
used for operating activities for the six months ended June 30, 1999 were
$6.9 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 six months ended June 30, 2000 and 1999 were
$55.1 million and $252,000, respectively. For the six months ended June 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 and computer equipment to support our growth during the year. For
the six months ended June 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 approximately 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 $10.0 to
$12.0 million.
We anticipate that Sabre's $52.7 million contribution and the additional
$50.0 million invested immediately prior to the Merger, together with our
existing funds, will be sufficient to meet anticipated cash requirements through
the end of year 2001. 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, such as 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.
Over the next two years, we will 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 payments we must make to AOL. Additionally, agreements with Yahoo!,
Excite, Lycos and other distribution partners include guaranteed payments.
23
<PAGE>
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 integrate 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 Preview Travel and
the Travelocity Division have short operating histories; 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 inability
to increase our revenues depends on the 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
24
<PAGE>
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.
YEAR 2000 COMPLIANCE
We depended upon Sabre to ensure proper operation of our information
technology systems after the Year 2000 date change. In late 1999, Sabre and the
Company completed remediation and testing of hardware and software systems. As a
result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and we believe those systems successfully
responded to the Year 2000 date change. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems, or the products and services of third parties. We will continue to
monitor mission critical computer applications and those of our suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
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 will maintain an
investment policy which is 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 will mitigate 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 will include only marketable
securities with active secondary or resale markets to ensure portfolio liquidity
and will maintain 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.
25
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
10.28 Amended and Restated Information Technology Services
Agreement dated as of March 7, 2000, by and between
Travelocity.com LP and Sabre Inc. +
10.29 Amended and Restated Intellectual Property Agreement dated
as of March 7, 2000, by and between Travelocity.com LP and
Sabre Inc. +
10.30 Amended and Restated Administrative Services Agreement dated
as of March 7, 2000, by and between Travelocity.com LP and
Sabre Inc. +
10.31 Amended and Restated Sabre Access Agreement dated as of
March 7, 2000, by and between Travelocity.com LP and Sabre
Inc. +
27.1 Financial Data Schedule as of June 30, 2000.
</TABLE>
------------------------
+ Portions of this exhibit have been redacted and are subject to a request for
confidential treatment that has been filed with the Securities and Exchange
Commission.
(b) Reports on Form 8-K
None
26
<PAGE>
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: AUGUST 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>
27
