-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfS3U/I88JcQ3AGTuq2RmCgubuWcyPRxbWiS0VugxxERa5ZyqezKmcEaYkhH4CBb NoylWOVZjOKdiVCIrqIGkw== 0000898430-99-000930.txt : 19990317 0000898430-99-000930.hdr.sgml : 19990317 ACCESSION NUMBER: 0000898430-99-000930 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEAP TICKETS INC CENTRAL INDEX KEY: 0001076411 STANDARD INDUSTRIAL CLASSIFICATION: TRANSPORTATION SERVICES [4700] IRS NUMBER: 990338363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70841 FILM NUMBER: 99565451 BUSINESS ADDRESS: STREET 1: 1440 KAPIOLANI BLVD STREET 2: STE 800 CITY: HONOLULU STATE: HI ZIP: 96814 BUSINESS PHONE: 8089457439 MAIL ADDRESS: STREET 1: 1440 KAPIOLANI BLVD STREET 2: STE 800 CITY: HONOLULU STATE: HI ZIP: 96814 S-1/A 1 FORM S-1 AMENDMENT NO. 2 As filed with the Securities and Exchange Commission on March 16, 1999 Registration No. 333-70841 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 -------------- CHEAP TICKETS, INC. (Exact Name of Registrant as Specified in Its Charter) -------------- Delaware 561599 99-0338363 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
1440 Kapiolani Boulevard, Honolulu, Hawaii 96814 (808) 945-7439 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------- Michael J. Hartley Chairman of the Board, Chief Executive Officer and President Cheap Tickets, Inc. 1440 Kapiolani Boulevard, Honolulu, Hawaii 96814 (808) 945-7439 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies of all communications to be sent to: Henry M. Fields, Esq. Arthur J. Simon, Esq. Victor H. Sim, Esq. Diane Bono, Esq. Mavis L. Yee, Esq. SONNENSCHEIN NATH & ROSENTHAL MORRISON & FOERSTER LLP 8000 Sears Tower, Chicago, Illinois 60606 555 West Fifth Street, Los Angeles, California (312) 876-8000 90013-1024 (213) 892-5200
-------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Proposed Proposed Amount maximum maximum Amount of Title of each class of to be offering price aggregate registration securities to be registered registered(1) per unit(1) offering price(2) fee(2) - ------------------------------------------------------------------------------------------------------ Common Stock, par value $.001........ 4,025,000 shares $13.00 $52,325,000 $14,546.35(3) - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
(1) Includes 525,000 shares which the underwriters have options to purchase to cover, if any, over-allotments. (2) Estimated solely for purpose of calculating the amount of the registration fee. This estimate is made in accordance with Rule 457 under the Securities Act of 1933, as amended. (3) A fee of $15,841 was previously paid with the initial filing on January 20, 1999. -------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +Information in this prospectus is not complete and may be changed. We may not + +sell these securities until the time the registration statement filed with + +the Securities and Exchange Commission becomes effective. This prospectus is + +not an offer to sell the securities and we are not soliciting an offer to buy + +these securities in any state where the offer or sale is not permitted or + +would be unlawful prior to registration or qualification under the securities + +laws of any such state. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PROSPECTUS 3,500,000 Shares [LOGO OF CHEAP TICKETS INC. APPEARS HERE] www.cheaptickets.com Common Stock Cheap Tickets, Inc. is offering 3,500,000 shares of its common stock. This is our initial public offering, and no market currently exists for our shares. We anticipate that the initial public offering price will be between $11.00 and $13.00 per share. The offering price may not reflect the market price of our shares after the offering. We will list the common stock on the Nasdaq National Market under the trading symbol "CTIX." This investment involves a high degree of risk. You should purchase shares only if you can afford a complete loss. See "Risk Factors" commencing on Page 7. ------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The Offering Per Share Total - ----------------------------------------------------------------------------------- Public Offering Price........................................ $ $ Underwriting Discounts....................................... $ $ Proceeds to Cheap Tickets, Inc. ............................. $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- We have granted the underwriters the right to purchase an additional 525,000 shares at the public offering price, less the underwriting discount within 30 days from the date of this prospectus to cover over-allotments. William Blair & Company Dain Rauscher Wessels a division of Dain Rauscher Incorporated The date of this prospectus is , 1999 [PICTURE OF CHEAP TICKETS' INTERNET HOME PAGE] Cheap Tickets' Home Page serves the discount travel needs of consumers for airfare, hotels and car rentals. The fully-functional Internet site sold nearly 100,000 tickets in 1998. [PICTURE OF CHEAP TICKETS' INTERNET REQUEST PAGE] In addition to calling any of the Company's over 300 sales agents at its four call centers, the customer can easily schedule domestic and international travel on the web site. [PICTURE OF CHEAP TICKETS' INTERNET FARES PAGE] The customer is presented with a broad array of fare possibilities, including proprietary "non-published" fares representing excess airline capacity. Cheap Tickets buys these fares from over 25 domestic and international airlines. Also, a full menu of regularly published fares through the SABRE reservations system is available. Certain persons participating in this offering may engage in transactions which stabilize, maintain or otherwise affect the price of common stock of the Company including stabilizing bids, syndicate covering transactions or the imposition of penalty bids. For a discussion of these activities, see "Underwriting." These transactions may be made on the Nasdaq National Market or otherwise. Stabilizing, if commenced, may be discontinued at any time. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Cheap Tickets' actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." CHEAP TICKETS, INC. We are a leading retail seller of discount tickets for domestic leisure air travel. In 1998, we sold approximately 963,000 airline tickets through call centers, retail stores and our Internet site at "www.cheaptickets.com." We believe we are the leading seller of non-published fares for regularly scheduled domestic routes. Non-published fares are tickets that we buy from airlines and resell to consumers at significant discounts off published fares. Sales of non-published fares accounted for approximately 59% of our airline gross bookings in 1998. We have rights to buy these fares under contracts from over 30 airline carriers, including America West, American, Continental, Northwest TWA and US Airways. Our airline contracts, which typically run for a term of 1 1/2 years or less and can be cancelled on short notice, do not require the airlines to deal with us exclusively or to provide a specific quantity of tickets. Under the contracts, we purchase tickets only when we resell to customers, so that we do not have inventory carrying costs. We also offer a full complement of regularly published fares, affording customers a breadth of choice in leisure travel tickets at attractive prices that we believe is unmatched in the industry. In addition, we sell cruise tickets, auto rentals and hotel reservations. We began selling tickets over the Internet in October 1997. In 1998, we sold 97,000 tickets through our website, generating $25 million in gross bookings. Internet sales represented approximately 9% of our gross bookings in 1998 and 15% in the fourth quarter of 1998, reflecting the rapid increase in Internet sales as a percentage of gross bookings. At February 22, 1999, we had over 575,000 registered online users, with 155,000 registering since December 1998. Since 1986, we have provided an efficient distribution channel for airlines to sell excess capacity without eroding their published fare structures. Domestic airlines had average excess system capacity of 32.5% from 1995 to 1997, and excess capacity is estimated to be 29.3% in 1998. We seek to match excess capacity with consumer demand for the lowest price available. Currently, we offer approximately 375,000 non-published fares at any given time, covering most major domestic and international routes. We set prices on these fares lower than those available on published fares to meet the demands of leisure travelers. These fares contain restrictions typically making them unattractive for full fare passengers, who seek the convenience of tickets that can be exchanged or cancelled and that do not have advance purchase or minimum stay requirements. We believe our track record of selling excess capacity without compromising the airlines' fare structures provides a strong incentive for the airlines to continue to use us for the sale of domestic non-published fares. We also offer to customers a full menu of regularly published fares in addition to non-published fares. In 1994, we became the first non-airline to file our non-published fares through the Airline Tariff Publishing Corporation. This allows us to integrate our non-published fares with published fares in a special area of the SABRE reservations system to which only we have access. This system 3 automatically sorts through millions of fares, including our non-published fares, to identify the lowest fares available for the desired itinerary. These fares are then posted in ascending price order for use by our reservation agents and Internet customers. The travel industry is large and growing. Consumers in the United States spent $126 billion on travel through travel agencies in 1997, up from $101 billion in 1995. Airline travel continues to be the largest segment of the industry with $70.5 billion, or 56%, of total travel booked through travel agencies in 1997. Increasingly, the Internet has become an attractive method to sell travel tickets directly to the public. Currently, travel represents the second largest online retail category sold over the Internet. Online airline travel bookings were $1.6 billion in 1998 and are expected to grow at a compounded annual growth rate of 46%, reaching $10.6 billion in 2003. Our growth strategy is to expand our customer base, significantly increase our brand awareness, expand our strategic relationships and increase call center productivity. First, we plan to capitalize on our position in selling non-published fares to rapidly grow our Internet ticket sales. We intend to broaden our online visibility with Internet content, commerce and service providers. Second, we plan to aggressively expand brand recognition nationally and internationally. To accomplish this goal, we intend to augment our successful print media marketing and increase advertising on leading websites and in other media. Third, we plan to expand existing and establish new strategic relationships with airlines to increase sales of their excess capacity. We also intend to seek new relationships with other travel suppliers, certain Internet portals and travel-related websites. Finally, we plan to expand our call center capacity through improved productivity. We intend to invest substantial resources in developing, acquiring and implementing technological enhancements to our call centers. Our executive offices are located at 1440 Kapiolani Boulevard, Honolulu, Hawaii 96814; our telephone number is (808) 945-7439 and our facsimile number is (808) 946-3844. We were incorporated in Hawaii in 1986 and reincorporated in Delaware on February 1, 1999. THE OFFERING Common stock offered by the Company.................... 3,500,000 shares Common stock to be outstanding after the offering...... 20,943,132 shares(1) Use of proceeds........................................ For advertising and brand development; for development of technological infrastructure; to redeem outstanding mandatorily redeemable preferred stock; and for general corporate purposes. For a more detailed discussion of the use of proceeds, please refer to "Use of Proceeds" on page 21.
- -------- (1) Based on the number of shares outstanding as of December 31, 1998. Excludes 1,979,642 shares reserved for issuance under the 1997 Stock Option Plan as of December 31, 1998. Includes 2,969,456 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 1998. It is anticipated that all the warrants will be exercised immediately prior to the closing of the offering. Excludes 1,260,000 shares reserved for issuance under the 1999 Stock Incentive Plan. For a more detailed discussion of our capital stock and stock option plans please refer to notes 6 and 12 to the financial statements on pages F-15 and F-20, "Management--Employee Stock Plans" on page 53, and "Description of Capital Stock" on page 59. ---------------- 4 SUMMARY FINANCIAL DATA (in thousands, except per share and operating data) Set forth below are summary financial data of Cheap Tickets for the periods indicated, which have been derived from Cheap Tickets' audited financial statements. The operating data were not audited. The summary financial data set forth below should be read in conjunction with Cheap Tickets' financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, -------------------------- 1996 1997 1998 ------- -------- -------- Results of Operations: Non-published fares................................ $58,982 $ 96,379 $159,846 Commissions........................................ 5,614 6,470 11,268 ------- -------- -------- Net revenues(1).................................. 64,596 102,849 171,114 Gross profit....................................... 15,428 21,479 35,047 Selling, general and administrative expenses(2).... 14,352 23,091 33,411 ------- -------- -------- Net operating income (loss)...................... 1,076 (1,612) 1,636 Net earnings (loss)................................ $ 674 $ (1,009) $ 1,065 Basic earnings (loss) per share(3)................. $ 0.05 $ (0.09) $ 0.04 Shares used in computing basic earnings (loss) per share(3).......................................... 14,249 14,847 14,567 Diluted earnings (loss) per share(3)............... $ 0.05 $ (0.09) $ 0.03 Shares used in computing diluted earnings (loss) per share(3)...................................... 14,249 14,847 17,921
December 31, 1998 ---------------------- Actual As Adjusted(4) ------- -------------- Balance Sheet Data: Net working capital ..................................... $ 3,473 $36,975 Total assets............................................. 13,226 46,728 Long-term debt........................................... 1,238 1,238 Mandatorily redeemable preferred stock(5)................ 4,136 -- Stockholders' equity(5).................................. 1,385 39,023
Year Ended December 31, -------------------------- 1996 1997 1998 -------- -------- -------- Operating Data (unaudited): Gross bookings (in thousands)(6) Non-published fares............................... $ 58,982 $ 96,379 $159,846 Published fares................................... 46,962 57,295 110,287 -------- -------- -------- Total gross bookings............................. $105,944 $153,674 $270,133 ======== ======== ======== Airline tickets sold:............................... 357,551 554,403 963,007 Call centers...................................... 357,551 552,383 865,661 Internet.......................................... -- 2,020 97,346 Registered Internet users........................... -- 18,891 420,023
- -------- (1) Net revenues consist of sales of non-published fares and commissions. Net revenues from sales of non-published fares represent revenues from the sale of tickets purchased from the airlines. Cost of sales consists of the net fare cost paid to carriers to purchase non-published fares. Commissions, including incentive overrides, are earned primarily on published fares sold and include certain other payments based on the volume of transactions. (2) In 1998, Cheap Tickets issued stock options to employees to acquire an aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800 have an exercise price of $0.18 per share and 67,200 have an exercise price of $1.57 per share. Total compensation associated with these options amounted to $722,600 of which $26,325 has been charged to operations in 1998. The remainder will be charged over 5 the remaining five-year vesting period of the options, with the exception of $1,062, which will be charged at the closing of the offering at which time 140,000 options vest by their terms. (3) Please refer to notes 1 and 6 to the financial statements for the calculation of earnings per share, including an explanation of the number of shares used in computing the amount of basic and diluted earnings per share. (4) As adjusted to reflect (1) the receipt of net proceeds of the offering; (2) the redemption of the mandatorily redeemable preferred stock (including a charge for the unaccreted discount); (3) the exercise of warrants to purchase up to 2,969,456 shares of common stock at an aggregate exercise price of $2,121 and (4) the immediate recognition of unearned compensation related to certain stock options that fully vest upon the completion of this offering. (5) The mandatorily redeemable preferred stock is required to be redeemed upon the closing of this offering. The redemption price upon the closing of this offering will be approximately $4.8 million. The preferred stock was issued at a discount of $885,170. Cheap Tickets is accreting the discount over a five year period. Upon redemption, the unaccreted discount will be charged directly to stockholders' equity and have a dilutive effect on the calculation of earnings per share. (6) Gross bookings represent the aggregate retail value of tickets sold under non-published fares and published fares. The difference between gross bookings and revenues as reported in Cheap Tickets' statement of operations derives solely from the difference in revenue treatment accorded to sales of published fares. With respect to published fares, Cheap Tickets records as revenue in its statement of operations only the commissions earned by Cheap Tickets on the sale of such fares. Gross bookings represents the retail value of the sales of published fares. With respect to non-published fares, revenues as reported in Cheap Tickets statement of operations is equivalent to gross bookings, which is the retail value of such fares. Management uses gross bookings as a key indicator of general business activity, success of promotional efforts, capacity to handle customer demand and efficiency of reservation agents. In addition, management believes that gross bookings provide a useful comparison between historical periods, and year-to-year changes in such information provide a useful measure of market acceptance of Cheap Tickets products. 6 RISK FACTORS In addition to the other information we provide in this prospectus, you should carefully consider the following risks before deciding whether to invest in our common stock. These are not the only risks we face. Some risks are not yet known to us and there are others we do not currently believe are material but could later turn out to be so. All of these could hurt our business. The trading price of our common stock could decline because of general market conditions or if any or all of these risks came to pass, and you could lose all or part of your investment. In evaluating the risks of investing in us, you should also evaluate the other information set forth in this prospectus, including our financial statements. For access to non-published fares, we depend on travel suppliers with which we have no long-term contracts. In 1998, approximately 98% of our gross bookings came from the sale of airline tickets. Non-published fares represented about 59% of our airline gross bookings and 93% of our net revenues, and we believe that our continuing ability to obtain non-published fares is key to our success. Our business could be hurt by: . Refusals by airlines to renew contracts for supply of non-published fares; . Lack of available excess capacity for an extended time period; . Renewals of the contracts on less favorable terms; or . Cancellation of contracts. Non-published fares are tickets we acquire from the airlines and resell to consumers at substantial discounts off published fares. The airlines sell us tickets at these non-published fares primarily to dispose of excess capacity without eroding published fare structures. We have contracts with more than 30 airlines that permit us to acquire non-published fares on routes designated in the contracts at specified prices. These contracts do not require airlines to provide a specific quantity of tickets or to deal with us exclusively. Although the terms vary, the typical contract is for a period from one to one and a half years, and many are cancelable on 30 days' notice or less. We have a consistent record of renewing these contracts, but airlines may decide not to do business with us or to dispose of excess capacity themselves or through others. At times in the past, airlines have renewed contracts with us on less favorable terms and this may continue to occur in the future. In addition, there may be times when they have less excess capacity to sell. A large percentage of our sales of non-published fares currently comes from three suppliers. In 1998, approximately 49% of our sales of non-published fares came from tickets we bought from three airlines: Continental represented approximately 25%, and America West and TWA represented approximately 12% each. If one or more of these carriers were to discontinue to supply non-published fares to us, our business could be hurt. The percentages of non-published fare sales represented by our leading carriers are likely to change from year to year depending upon a variety of factors, including the availability of excess capacity from each carrier and the breadth of routes on which non-published fares are available. We typically engage in ongoing discussions with existing carriers about increasing the routes available for sale of non-published fares. From time to time, we also discuss potential new relationships for the supply of non-published fares with carriers with whom we currently do not have contracts. Although these discussions are at times successful, we do not anticipate that the percentages for non-published fare sales among the leading carriers will change significantly in the foreseeable future. 7 Our travel suppliers may be acquired and then not continue to deal with us. We believe that our continued ability to obtain non-published fares is key to our success. The acquisition of a key supplier could, however, adversely change that supplier's relationship with us and hurt our business. Because many of our contracts are short-term and can be cancelled on short notice, we depend on our relationships with our suppliers for a continued supply of non-published fares. We also depend on continuation of our suppliers' policy of selling excess capacity through non-published fares. The acquisition of one of our suppliers could hurt our relationship with that supplier and/or could change that supplier's policy of dealing with excess capacity. A decline in airline commission rates or the elimination of commissions could hurt our business. We earned approximately 24% of our gross profit in 1998 from commissions paid by airlines. However, they are not required to pay any particular commission rates or any commissions at all. If air carriers reduce, restrict or eliminate altogether commissions or impose surcharges for tickets not sold by them at any time, it could hurt our business. In recent years, airlines have reduced rates and capped per-ticket commissions. In addition, they have further reduced rates and capped commissions for online reservations. Potential fluctuations in our financial results makes financial forecasting difficult. Our annual or quarterly results of operations may be below the expectations of public market analysts and investors. This could result in a decline in the value of our common stock. Our business is seasonal due to customers' leisure travel patterns and changes in the availability of non-published fares. We typically have higher sales and gross profit in the second and third quarters and lower sales and gross profit in the fourth quarter, and historically we have experienced losses in net income in the fourth quarter. During periods of high-volume air travel, such as occur in the fourth quarter of each year, we historically have had access to fewer non-published fares, and such fares on certain major routes may be unavailable. Online gross bookings may also tend to be seasonal and may decline or grow less rapidly in the summer months. The seasonal sales cycle is fairly predictable, but the cycle may shift year-to-year, corresponding to changes in the economy or other factors affecting the market such as price wars. This could lead to unusual volatility in revenues and earnings. Gross profit may be impacted by a number of different factors, including: . the amount of fares sold; . the percentage of gross bookings represented by non-published fare sales; . the gross margin percentages on non-published fare sales. These percentages in turn can be impacted by the sales mix of airlines, whose net fare prices to us vary, and by competitive factors on various routes and the possible elimination of profitable routes; .rates of commissions on published fare sales; and .the amount of volume bonuses. 8 Any change in these factors could materially affect our gross margins and operating results in future periods. Other events outside our control, including those set forth in other risk factors, may cause us to experience significant fluctuations in revenues and earnings. We intend to increase operating expenses in anticipation of future sales. If these increased sales do not occur or occur only in subsequent periods, we may experience downward fluctuations in our earnings. A decline in leisure travel or disruptions in travel generally could hurt our business. We earn almost all our revenues from the travel industry, particularly from leisure travel. Leisure travel is highly sensitive to personal discretionary spending levels and thus tends to decline during general economic downturns. In addition, other adverse trends or events that tend to reduce leisure travel are likely to hurt our business. These may include: .Political instability; .Regional hostilities; .Terrorism; .Fuel price escalation; .Travel-related accidents; .Bad weather; or .Airline or other travel related strikes. A number of airlines are currently in various stages of negotiation with unions representing their employees. If those negotiations fail and the unions elect to strike or effect a slowdown, our business could be harmed. We face actual and potential competition from many sources. We compete in ticket sales against travel wholesalers, consolidators, online travel companies, airlines and travel agents based on price and the quality of service to the customer. In the leisure travel market, we also compete against frequent flyer awards and charter flights. Increased competition may result in reduced operating margins, loss of market share and decreased brand recognition. Ultimately, we may not be able to compete successfully against current and future competitors. Among other factors, our success depends heavily on our access to non- published fares, on our brand recognition and on the ability of our systems to integrate our non-published fares with published fares to offer customers a broad choice. Some of our competitors, including the air carriers themselves, have longer histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. These competitors may be able to replicate the factors that make us successful. They may also enter into strategic or commercial relationships with larger, established and well-financed companies. They may be able to induce one or more of our suppliers of non-published fares to cease doing business with us, or to do business with us on less favorable terms. They might also be able to build strong brand recognition in the leisure travel market, through widespread advertising and other marketing efforts. Certain of our competitors may be able to devote greater resources to marketing and promotional campaigns on the 9 Internet. Competitors may also devote substantially more resources to website and systems development than we do. Any or all of these developments could bring heavy competitive pressures to bear on us. We also face the prospect of competition from potential competitors not yet in the leisure travel market. We believe that potential competitors are likely to be large, well-financed companies with existing brand name recognition and proven retail distribution ability. Potential competitors are also likely to need well developed Internet capabilities to compete effectively with us. Without these characteristics, or without significant amounts of capital to create them, we believe it would be relatively difficult, although not impossible, for potential competitors to enter our market. Potential competitors would have to convince air carriers to use them to distribute excess capacity effectively without eroding existing fare structures. We believe our suppliers have confidence in us in this regard based on our historical results, but these suppliers could be induced to change their method of distribution, if offered higher returns, broad distribution capability and protection against fare erosion by potential competitors. For a more complete description of the competitive environment in which we operate, please refer to "Business--Competition" on pages 45 and 46. The success of our business will depend on continued growth of online commerce and internet infrastructure. Our future revenues and profits depend, to a certain degree, upon the widespread acceptance and use of the Internet and online services as a medium for commerce by customers and sellers. If acceptance and growth of Internet use does not continue, it will hurt our business. Rapid growth in the use of the Internet and online services is a recent phenomenon. This growth may not continue. A sufficiently broad base of customers may not accept, or continue to use, the Internet as a medium of commerce. Demand for and market acceptance of recently introduced products and services over the Internet are subject to a high level of uncertainty. There are few proven products and services. For us to achieve significant growth, customers who have historically used traditional means of commerce will instead need to elect to purchase products and services online, and sellers of products and services will need to accept or expand use of the Internet as a channel of distribution. Our revenues and profits depend on customers visiting our website and actually purchasing tickets. Customers could potentially use the site for route information and choose to purchase tickets directly from the airlines or elsewhere. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. Our success will depend upon the development and maintenance of the Internet's infrastructure to cope with this increased traffic. This will require a reliable network backbone with the necessary speed, data capacity and security, and the timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. Major online service providers and the Internet itself have experienced outages and other delays as a result of software and hardware failures and could face such outages and delays in the future. Outages and delays are likely to affect the level of Internet usage and the processing of transactions on the Cheap Tickets website. It is unlikely that we could make up for the level of orders lost in those circumstances by increased phone orders. In addition, the Internet could lose its viability by 10 reason of delays in the development or adoption of new standards to handle increased levels of activity or of increased government regulation. The adoption of new standards or government regulation may require us to incur substantial compliance costs. Our brand may not achieve the broad recognition necessary to succeed. We believe that we must maintain and enhance the Cheap Tickets brand to continue to attract and expand business. Failure to maintain and enhance our brand could hurt our business. The success of the Cheap Tickets brand will depend to a certain extent on our ability to enhance our advertising programs. The number of Internet sites that offer competing services increases the importance of establishing and maintaining our brand name recognition. Many online sites already have well- established brands in online services or the travel industry generally. We may find it necessary to increase substantially our financial commitment to advertising and publicity. This could adversely affect our results of operations. We may be unable to manage our rapid growth effectively. We have rapidly and significantly expanded our operations and anticipate further significant expansion. Our inability to manage growth effectively could hurt our business. We have recently added a number of key managerial and technical employees, and we expect to add additional key personnel in the future. This expansion has placed, and we expect it will continue to place, a significant strain on our management, operational and financial resources. To manage the expected growth of our operations and personnel, we plan to: . improve and upgrade transaction-processing, operational, customer service and financial systems, procedures and controls; . maintain and expand our relationships with various travel service suppliers, Internet portals and other travel-related website companies and other third parties necessary to our business; . expand our finance, administrative and operations staff; . continue to attract, train and manage our employee base; and . implement a disaster recovery program. Our current and planned personnel, systems, procedures and controls may be inadequate to support our planned growth, and our management may not be able to identify, manage and exploit existing and potential market opportunities successfully. We may not be able to keep up with the industry's rapid technological and other changes. The industry in which we compete is characterized by: . rapid technological change; . changes in user and customer requirements and preferences; . frequent new product and service introductions embodying new technologies; . the emergence of new industry standards and practices; and . the emerging importance of the Internet and the proliferation of companies offering Internet-based products and services. 11 These developments could render our existing online sites and proprietary technology and systems quickly obsolete. Our inability to modify or adapt our infrastructure in a timely manner or the expenses incurred in making such adaptions could hurt our business. As a result, we will be required to continually improve the performance, features and reliability of our services, particularly in response to competitive offerings. Our success will depend, in part, on our ability to enhance our existing services and develop new services in a cost-effective and timely manner. The development of proprietary technology entails significant technical and business risks and requires substantial expenditures and lead time. We may not be able to adapt successfully to customer requirements or emerging industry standards. In addition, the widespread adoption of Internet, networking or telecommunications technologies or other technologies could require us to incur substantial expenditures to modify or adapt our services or infrastructure. Our computer and communications systems are vulnerable to business interruptions. Our ability to receive and fill orders through our call centers or online and provide high-quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications hardware systems. The occurence of interruptions, delays, loss of data or the inability to accept and confirm customer reservations could hurt our business. Our online servers are located in San Jose, California, SABRE's computers are located in Tulsa, Oklahoma, our communication systems are located at four call centers, and our accounting systems' computers are located in Hawaii. These systems and operations are vulnerable to damage or interruption from power loss, telecommunications failure, break-ins, natural disasters and similar events. We currently do not have back-up systems and do not carry adequate business interruption insurance. In addition, although we back up data on a regular basis, we do not have a formal disaster recovery plan. Although we have adopted network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. These kinds of events could lead to interruptions, delays, loss of data or the inability to accept and confirm customer reservations. The occurrence of any of the foregoing risks could hurt our business. Interruptions in service from third parties could hurt our business. We rely on certain third-party computer systems and third-party service providers, including the computerized central reservation systems of the airline and hotel industries to make airline ticket and hotel room reservations. Any interruption in these third-party services or a deterioration in their performance could hurt our business. If our arrangement with any of these third parties is terminated, we may not find an alternative source of systems support on a timely basis or on commercially reasonable terms. We rely on third parties to print our airline tickets and arrange for their delivery. We rely on iXL Holdings to host our online system's infrastructure, web and database servers. We use an internally developed system for our website and substantially all aspects of transaction processing. We currently rely on The SABRE Group for our general reservations system, including customer profiling, making reservations and credit card verification and confirmations. Currently, over 90% of our computing transactions are processed through the SABRE systems. Our technology relationship with SABRE for Internet operations will further increase our dependency. If 12 we or SABRE ever elect to terminate the existing relationship, we would be forced to convert to another provider. This conversion could require a substantial commitment of time and resources and hurt our business. Our current reservation systems may not be able to handle all calls adequately. During traffic peaks, our call centers have not been able to answer all calls or service all inquiries adequately. Our systems' lack of capacity to handle the demands of our customers can cause unanticipated system disruptions, slower response times, poor customer service, impaired quality and speed of reservations and confirmations and delays in reporting accurate financial information. These problems could hurt our business. We intend to use part of the proceeds of this offering to upgrade our systems and increase our processing capability, both online and through our call centers, to accommodate anticipated increases in customer ticket sales. However, if we experience a substantial increase in our web traffic or in reservations beyond expected levels, we may need to expand and upgrade our technology, transaction-processing systems and network infrastructure. If we fail to expand and upgrade in a timely manner, our business could be hurt. We believe that our contemplated systems enhancements will be sufficient to handle increases in expected demand, but we may not be able to: . project accurately the rate or timing of such increases; . upgrade our systems and infrastructure to accommodate future traffic levels; . integrate successfully any newly developed or purchased technology with our existing systems; or . upgrade and expand our systems in a timely or efficient manner. Online security breaches could hurt our business. In our business, secured transmission of confidential information over public networks is essential to maintain consumer and supplier confidence. If any compromise of our security were to occur, it could hurt our business. Concerns over the security of transactions conducted on the Internet and the potential compromise of customer privacy may inhibit the growth of commercial online services as a means of conducting commercial transactions. We have expended significant resources to protect against security breaches and to alleviate problems caused by such breaches, and we may need to make further expenditures for this purpose in the future. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to transmit securely confidential information, such as customer credit card numbers. In addition, we maintain an extensive confidential database of customer profiles and transaction information. Our current security measures may not be adequate and advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the methods we use to protect customer transaction and personal data. A party who can circumvent our security might be able to misappropriate proprietary information or cause interruptions in our operations. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. 13 If we lose our key personnel or cannot recruit additional personnel, our business may suffer. We depend substantially on the continued services and performance of our senior management, particularly Michael J. Hartley, the Chairman of the Board, Chief Executive Officer and President, and certain other key personnel. The loss of the services of any of these executive officers or other key employees could hurt our business. We do not have employment agreements with any of our key personnel. In addition, most members of our senior management group have been recruited and hired over the past 18 months. These individuals may not be able to fulfill their responsibilities adequately and may not remain with us. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, marketing and customer service personnel. Competition for such personnel is intense. The location of our headquarters in Hawaii may also make it more difficult to attract qualified personnel from the mainland. We may not able to attract, assimilate or retain sufficiently qualified personnel. In particular, we may encounter difficulties in attracting a sufficient number of qualified software developers for our online services and transaction-processing systems. The failure to retain and attract necessary technical, managerial, marketing and customer service personnel could hurt our business and impair our growth strategy. Although none of our employees is represented by a labor union, our employees may join or form a labor union. For a more detailed description of our management and key employees, please refer to "Management" on page 47. Our business could be hurt if we do not offer new services successfully. We plan to introduce new and expanded services. Our inability to generate revenues from such expanded services or products sufficient to offset their development or offering cost could hurt our business. In 1998, approximately 2% of our gross bookings came from the sale of cruise tickets, auto rentals and hotel reservations. Our business strategy is to increase the percentage of such alternate travel offerings as a percentage of our revenues. We may not be able to offer such services in a cost-effective or timely manner and our efforts may not be successful. Further, any new service that is not favorably received by customers could damage our reputation or brand name. Expansion of our services could also require significant additional expenses and may strain our management, financial and operational resources. If we cannot obtain alternate travel offerings in the future, we may not be able to benefit fully from our growth strategy. Our business could be hurt if we make acquisitions that are not successful. We may in the future broaden the scope and content of our business through the acquisition of existing complementary businesses. We may not be successful in overcoming problems encountered in connection with such acquisitions, and our inability to do so could hurt our business. Although we are not currently contemplating any acquisitions, we may consider the acquisition of companies providing similar services in international markets or in other sectors of the travel industry in the future. Future acquisitions would expose us to increased risks. These include risks associated with: . the assimilation of new operations, sites and personnel; . the diversion of resources from our existing businesses, sites and technologies; 14 . the inability to generate revenues from new sites or content sufficient to offset associated acquisition costs; . the maintenance of uniform standards, controls, procedures and policies; and . the impairment of relationships with employees and customers as a result of integration of new businesses. Acquisitions may also result in additional expenses associated with amortization of acquired intangible assets or potential businesses. Our business could be hurt if our international expansion is not successful. One component of our growth strategy is to expand internationally. International expansions will present us with special problems of adapting to foreign business customs and regulations and of managing staff effectively from a distance. If we do not address these problems adequately, our international expansion may not produce desired results. This could hurt our business. We may expend significant financial and management resources to establish local offices overseas, create localized user interfaces and comply with local customs and regulations. If the revenues generated by these international operations are insufficient to offset the expense of establishing and maintaining them, our business could be hurt. To date, we have no experience in developing localized versions of our online sites or offshore call centers and only limited experience in marketing and distributing our travel services internationally. We may not be able to expand our operations successfully in such markets. Conducting business on an international level also involves certain inherent risks, such as unexpected changes in regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political instability, currency rate fluctuations, seasonality in leisure travel in certain countries and potentially adverse tax consequences. We may be unable to meet our future capital requirements. We may not be able to fund our expansion, develop or enhance our products or services or respond to competitive pressures if we lack adequate funds. This could hurt our business. Based on our current operating plan, we anticipate that the net proceeds of this offering, together with our available funds and bank lines, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures and business expansion for the foreseeable future. After that time, we may need additional capital. Alternatively, we may need to raise additional funds sooner in order to fund more rapid expansion, to develop new or enhanced services, or to respond to competitive pressures. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our stockholders will be diluted. Further, any new securities could have rights, preferences and privileges senior to those of the common stock. We currently do not have any commitments for additional financing. We cannot be certain that additional financing will be available in the future to the extent required or that, if available, it will be on acceptable terms. For more information on how the proceeds from this offering are intended to be used, please refer to "Use of Proceeds" on page 21 and for more information on management's view of liquidity and capital resources, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" on page 32. 15 Year 2000 risks may harm our business. The risks posed by Year 2000 issues could hurt our business in a number of significant ways. Our information technology system could be substantially impaired or cease to operate due to Year 2000 problems. Additionally, we rely on information technology supplied by third parties, and our participating sellers are also heavily dependent on information technology systems and on their own third party vendors' systems. The main supplier of our reservations system is SABRE. Currently, over 90% of our transactions are processed through SABRE. Year 2000 problems experienced by us or any such third parties could hurt our business. Additionally, the Internet could face serious disruptions arising from the Year 2000 problem. We are evaluating our internal information technology systems and contacting our information technology suppliers and participating sellers to ascertain their Year 2000 status. However, our own systems may not be Year 2000 compliant in a timely manner, any of our participating sellers or other website vendors may not be Year 2000 compliant in a timely manner, and there may be significant interoperability problems among information technology systems. Consumers may not be able to visit our website without serious disruptions arising from the Year 2000 problem. Given the pervasive nature of the Year 2000 problem, disruptions in other industries and market segments may hurt our business. Moreover, the costs related to Year 2000 compliance could be significant. Finally, Year 2000 issues may impact other entities with which we do business, including, for example, those responsible for maintaining telephone and Internet communications. Accordingly, we cannot predict the effect of the Year 2000 problem on such entities. If these other entities fail to take preventive or corrective actions in a timely manner, the Year 2000 issue could hurt our business. For more information on management's view of the Year 2000 risks, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance" on page 33. Our success depends on our ability to protect our intellectual property. Trademarks, copyrights and trade secrets We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success. Claims, infringement or misappropriation by third parties may hurt our business. We rely on a combination of laws and contractual restrictions, including trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to establish and protect our proprietary rights. However, laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technologies. We pursue the registration of certain of our key trademarks and service marks in the United States. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available. The steps we have taken to protect our proprietary rights may not be adequate, third parties may infringe or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights, and we may be required to incur significant expenses preserving our rights. In addition, other parties may assert infringement claims against us. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. 16 Domain names We currently hold the Internet domain name "www.cheaptickets.com," as well as various other related names. Third parties may acquire domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights which may hurt our business. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. As a result, we may not acquire or maintain the "www.cheaptickets.com" domain name in all of the countries in which we conduct business. Regulatory and legal uncertainties could harm our business. Certain segments of the travel industry are heavily regulated by the United States and other governments. Accordingly, certain services offered by us are affected by such regulations. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and commercial online services could hurt our business. We are subject to federal regulations prohibiting unfair and deceptive practices. In addition, federal regulations concerning the display and presentation of information currently applicable to airline booking services could be extended to us in the future, as well as other laws and regulations aimed at protecting customers accessing online or other travel services. In California, Hawaii and certain other states, we are required to register as a seller of travel, comply with certain disclosure requirements and participate in the state's restitution fund. We are also subject to regulations applicable to businesses generally and laws or regulations applicable to online commerce. Currently, few laws and regulations directly apply to the Internet and commercial online services. However, it is possible that laws and regulations may be adopted with respect to the Internet or commercial online services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws. Such laws would likely impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or commercial online services. In turn, this could decrease the demand for our products and services and increase our cost of doing business, or otherwise hurt our business. Moreover, in many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. Federal legislation imposing certain limitations on the ability of states to impose taxes on Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as this legislation is known, imposes on electronic commerce a three-year moratorium on state and local taxes imposed after October 1, 1998 but only where such taxes are discriminatory on Internet access. It is possible that the legislation could not be renewed when it terminates in October 2001. Failure to renew the 17 legislation could allow state and local government to impose taxes on Internet- based sales, and such taxes could hurt our business. Our business could be hurt if management uses the proceeds of this offering inappropriately. The net proceeds of this offering are estimated to be approximately $38.3 million at an assumed initial public offering price of $12.00 per share and after deducting the estimated underwriting discount and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, the net proceeds are estimated to be approximately $44.1 million. Our management will retain broad discretion as to the allocation of approximately $15.5 million of the proceeds of this offering. For more information on our use of proceeds from this offering, please refer to "Use of Proceeds" on page 21. Our stock price is likely to be very volatile. Prior to this offering, you could not buy or sell our common stock publicly. An active market for our common stock may not develop or be sustained after this offering because stockholders may elect not to trade their shares. With the underwriters, we will determine the offering price for our common stock. That price may bear no relationship to the price at which the common stock will trade after completion of this offering. The market price of the common stock is likely to be volatile and could be subject to significant fluctuations in response to factors such as the following, some of which are beyond our control: . quarterly variations in our operating results; . operating results that vary from the expectations of securities analysts and investors; . changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; . changes in market valuations of other travel, Internet or online service companies; . announcements of technological innovations or new services by us or our competitors; . announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; . loss of one or more major travel suppliers; . additions or departures of key personnel; . future sales of our common stock; and . stock market price and volume fluctuations. Domestic and international stock markets often experience extreme price and volume fluctuations. These fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, may adversely affect the market price of our common stock. The market prices for stocks of Internet-related and technology companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are subject to wide variations. If our common stock trades to such levels following this offering, it likely will thereafter experience a material decline. 18 In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. The market price of our stock could be adversely affected because a significant portion of our stock is closely controlled. Upon consummation of this offering, Michael J. Hartley, Chairman of the Board, Chief Executive Officer and President of Cheap Tickets, and Sandra T. Hartley, Vice President, Employee Relations and Director and wife of Michael J. Hartley, together with their respective affiliates, will beneficially own approximately 64.0 percent of our outstanding common stock, subject to certain adjustments. If the underwriters' over-allotment option is exercised in full, Michael J. Hartley and Sandra T. Hartley will beneficially own approximately 62.4 percent of our outstanding common stock. Such ownership could discourage others from initiating potential merger, takeover or other change of control transactions. As a result, the market price of our common stock could be adversely affected. If they act together, they will have the ability to control the outcome on all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, and to control our management and affairs. For more information on beneficial ownership of stock, please refer to "Principal Stockholders" on page 57. Anti-takeover provisions affecting us could prevent or delay a change of control. Upon the closing of this offering our Board of Directors will have the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. This could have an adverse impact on the market price of our common stock. We have outstanding 425,000 shares of mandatorily redeemable preferred stock, all of which are required to be redeemed by us upon the closing of the offering. We have no present plans to issue any additional shares of preferred stock, but we may do so. The rights of the holders of common stock may be subject to, and adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Moreover, the issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Cheap Tickets without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our charter documents, including provisions permitting stockholders to take action by written consent with a two-thirds vote and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Cheap Tickets. These governance provisions also could hurt the market price of our common stock. For more information on our capital stock, please refer to "Description of Capital Stock" on page 59. Substantial sales of our common stock could adversely affect our stock price. Sales of substantial amounts of our common stock in the public market after this offering could adversely affect the prevailing market price of the common stock. Immediately upon the effectiveness of this offering, 3,500,000 shares will be freely tradable. Commencing 180 days following the date of this offering, an additional 17,443,132 shares will become freely tradable upon the expiration of agreements not to sell such shares, subject to compliance with Rule 144 19 promulgated under the Securities Act of 1933, as amended, assuming the exercise of warrants to purchase 2,969,456 shares of common stock. William Blair & Company, L.L.C. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these agreements. Immediately after this offering, we intend to register approximately 3,239,642 shares of our common stock reserved for issuance under our stock option plans. Sales of common stock by stockholders upon expiration of the lock-up agreements may adversely affect the market price of the common stock. For more information regarding the terms upon which our common stock will be underwritten, please refer to "Underwriting" on pages 63 and 64. As of the effective date of the registration statement, holders of 2,969,456 shares of common stock will be entitled to registration rights with respect to their shares. Holders of such shares can require us to register the shares at any time following 180 days after the effective date, subject to certain conditions. You will experience immediate and substantial dilution. The initial public offering price is expected to be substantially higher than book value per share of the outstanding common stock. Investors purchasing shares of common stock will incur immediate substantial dilution in the amount of $10.14 per share. In addition, investors purchasing shares in the offering will incur additional dilution to the extent outstanding options are exercised. For more information on the dilution of our common stock, please refer to "Dilution" on page 23. FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward- looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," " anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus. 20 USE OF PROCEEDS The net proceeds to Cheap Tickets from the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by Cheap Tickets, are estimated to be $38.3 million at an assumed initial public offering price of $12.00 per share. If the underwriters exercise their over-allotment option in full, the net proceeds are estimated to be $44.1 million. During 1999, Cheap Tickets intends to use approximately $9 million of such proceeds for advertising and brand development expenditures and approximately $9 million for development of Cheap Tickets' technological infrastructure in order to support growth. An additional use of proceeds will be the redemption of the existing mandatorily redeemable preferred stock for approximately $4.8 million, the substantial majority of which is held by Phillips-Smith Specialty Retail Group III, L.P. Two of Cheap Tickets' directors are principals of that group. The balance of the proceeds will be used for general corporate purposes, including working capital, and to fund additional advertising and brand development expenditures and technological infrastructure. Cheap Tickets may apply an undetermined amount of the proceeds toward the acquisition of complementary businesses. Cheap Tickets has no agreements or understandings with respect to any such acquisition. Pending application, the net proceeds will be invested in short-term, investment grade, interest-bearing obligations. DIVIDEND POLICY Cheap Tickets has never declared or paid dividends on its common stock and anticipates for the foreseeable future that all earnings will be retained for use in its business. The payment of any future dividends will be at the discretion of the Board of Directors. 21 CAPITALIZATION The following table sets forth the capitalization of Cheap Tickets as of December 31, 1998, and as adjusted to give effect to the sale of 3,500,000 shares of common stock offered by Cheap Tickets and the application of net proceeds therefrom, and the exercise of warrants for 2,969,456 shares of common stock. This assumes that the underwriters will not exercise their over- allotment option. The number of shares outstanding used throughout the prospectus reflect a 14-for-one stock split. For more information on our anticipated use of proceeds of this offering, please refer to "Use of Proceeds" on page 21. The table should be read in conjunction with the financial statements included elsewhere in this prospectus.
December 31, 1998 ---------------------- Actual As Adjusted(1) ------ -------------- (in thousands) Long-term debt, excluding current installments...... $ 586 $ 586 Capital lease obligations, excluding current installments....................................... 652 652 ------ ------- Total debt (2).................................... 1,238 1,238 ------ ------- Mandatorily redeemable preferred stock, $1 par value (aggregate involuntary liquidation preference of $4,250,000 plus unpaid cumulative dividends), 425,000 shares issued and outstanding (actual); none issued or outstanding (as adjusted)(3)........ 4,136 -- ------ ------- Stockholders' equity: Preferred stock, $.01 par value--authorized 5,000,000 shares (actual), 10,000,000 shares (as adjusted); none issued or outstanding (as adjusted)(4)..................................... -- -- Common stock, $.001 par value; 70,000,000 shares authorized, 14,473,676 shares issued and outstanding (actual); 20,943,132 shares issued and outstanding (as adjusted)(5)................. 10 75 Additional paid-in capital........................ 1,247 39,444 Unearned compensation............................. (696) (695) Retained earnings................................. 824 199 ------ ------- Total stockholders' equity........................ 1,385 39,023 ------ ------- Total capitalization............................ $6,759 $40,261 ====== =======
- -------- (1) As adjusted to reflect the receipt of the net proceeds of the offering of $38,260,000, the redemption of the preferred stock (which includes a charge to retained earnings of $623,972 unaccreted issuance costs and discount), the exercise of 2,969,456 warrants at an aggregate exercise price of $2,121 and the immediate recognition of unearned compensation of $1,062 related to certain stock options that fully vest upon the completion of this offering. (2) Total debt excludes Cheap Tickets' current installments of long-term debt of $221,469 and current installments of capital lease obligations of $287,809. (3) The mandatorily redeemable preferred stock amount is presented net of unaccreted issuance costs and discount aggregating $623,972, and includes unpaid cumulative dividends, which are required to be paid at redemption of $510,000. Total redemption value, including dividends of $595,000 upon the closing of this offering is expected to be $4,845,000. After redemption, Cheap Tickets will have 10,000,000 authorized shares of preferred stock, which may be issued with or without mandatory redemption features. (4) This reflects an increase in the authorized preferred stock and reduction in par value anticipated to occur before the offering. (5) This reflects a reduction in par value anticipated to occur before the offering in conjunction with the stock split. As of December 31, 1998, there were stock options outstanding to purchase an aggregate of 728,000 shares of common stock of which 660,800 have an exercise price of $0.18 per share and 67,200 have an exercise price of $1.57 per share and 1,251,642 shares were reserved for future issuance under Cheap Tickets' employee stock plan. In addition, there were warrants outstanding to purchase an aggregate of 2,969,456 shares of common stock at an aggregate exercise price of $2,121. 22 DILUTION As of December 31, 1998, Cheap Tickets had a historical and pro forma net tangible book value of approximately $1,385,000 or $0.10 per share of common stock, and approximately $763,000 or $0.04 per share of common stock, respectively. Pro forma net tangible book value represents total tangible assets less total liabilities, including the effect of the redemption of mandatorily redeemable preferred stock and the exercise of certain warrants, divided by the number of shares of common stock outstanding at that date including shares of common stock to be issued upon the exercise of warrants. Without taking into account any other changes in the pro forma net tangible book value after December 31, 1998, other than to give effect to the receipt by Cheap Tickets of the net proceeds from the sale of the 3,500,000 shares of common stock offered by Cheap Tickets hereby at the initial public offering price of $12 per share, the pro forma net tangible book value at December 31, 1998 would have been approximately $39,023,000 or $1.86 per share. This represents an immediate increase in net tangible book value of $1.82 per share to existing stockholders and an immediate dilution of $10.14 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this per share dilution: Initial public offering price per share...................... $12.00 Net tangible book value per common share as of December 31, 1998........................................................ .10 Effect of pro forma adjustments:............................. Redemption of mandatorily redeemable preferred stock....... (.04) Exercise of warrants....................................... (.02) ----- Pro forma net tangible book value per share.................. .04 Increase per share attributable to new investors............. 1.82 ----- Pro forma net tangible book value per share after the offering.................................................... 1.86 ------ Dilution per share to new investors.......................... $10.14 ======
The following table summarizes, on a pro forma basis, as of December 31, 1998, the differences between the number of shares of common stock purchased from Cheap Tickets, the aggregate consideration paid and the average price per share paid by existing stockholders and new investors purchasing shares of common stock in this offering:
Shares Purchased Total Considerations ---------------------- ---------------------- Average Number Amount Price (in thousands) Percent (in thousands) Percent Per Share -------------- ------- -------------- ------- --------- Existing stockholders(1)...... 17,443 83.3% $ 1,259 2.9% $ 0.07 New investors(1)...... 3,500 16.7 42,000 97.1 12.00 ------ ----- ------- ----- Total................ 20,943 100.0% $43,259 100.0% ====== ===== ======= =====
- -------- (1) The foregoing tables include an aggregate of 2,969,456 shares issuable upon exercise of warrants outstanding as of December 31, 1998 at an aggregate exercise price of $2,121, all of which are expected to be exercised immediately prior to the closing of this offering. Also includes the redemption of 425,000 shares of preferred stock outstanding as of December 31, 1998. Excludes (a) 728,000 shares issuable upon exercise of outstanding options at a weighted average exercise price of $0.31 per share as of December 31, 1998, and (b) an aggregate of 1,251,642 shares available for future issuance under the 1997 Stock Option Plan. 23 SELECTED FINANCIAL DATA (in thousands, except per share and operating data) The following selected financial data for the years ended December 31, 1996, 1997 and 1998 and as of December 31, 1997 and 1998 have been derived from Cheap Tickets' financial statements included elsewhere in this prospectus which have been audited by PricewaterhouseCoopers LLP, independent public accountants. The following selected financial data for the years ended December 31, 1994 and 1995 and as of December 31, 1994, 1995 and 1996 have been derived from the audited financial statements of Cheap Tickets not included in this prospectus. The operating data are derived from information compiled by Cheap Tickets and are unaudited. The following information is qualified by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements included elsewhere in the prospectus.
Year Ended December 31, ----------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- -------- -------- -------- Results of Operations: Non-published fares........... $ -- (2) $66,340 $ 58,982 $ 96,379 $159,846 Commissions................... -- (2) 2,738 5,614 6,470 11,268 ------- ------- -------- -------- -------- Net revenues(1)............. -- (2) 69,078 64,596 102,849 171,114 Cost of sales(1).............. -- (2) 56,424 49,168 81,370 136,067 ------- ------- -------- -------- -------- Gross profit.................. 8,128 12,654 15,428 21,479 35,047 Selling, general and administrative expenses(3)... 7,947 11,921 14,352 23,091 33,411 ------- ------- -------- -------- -------- Net operating income (loss)... 181 733 1,076 (1,612) 1,636 Other income (deductions)..... 31 (709) 37 (3) 169 ------- ------- -------- -------- -------- Earnings (loss) before income taxes........................ 212 24 1,113 (1,615) 1,805 Income taxes.................. 60 7 439 (606) 740 ------- ------- -------- -------- -------- Net earnings (loss)........... $ 152 $ 17 $ 674 $ (1,009) $ 1,065 ======= ======= ======== ======== ======== Basic earnings (loss) per share(4)..................... $ 0.01 $ 0.00 $ 0.05 $ (0.09) $ 0.04 Shares used in computing basic earnings (loss) per share(4)..................... 14,100 14,100 14,249 14,847 14,567 Diluted earnings (loss) per share(4)..................... $ 0.01 $ 0.00 $ 0.05 $ (0.09) $ 0.03 Shares used in computing diluted earnings (loss) per share(4)..................... 14,100 14,100 14,249 14,847 17,921 Balance Sheet Data: Net working capital........... $ 451 $ 182 $ 466 $ 2,356 $ 3,473 Total assets.................. 2,954 3,740 5,999 11,204 13,226 Long-term debt................ 653 537 1,715 948 1,238 Mandatorily redeemable preferred stock(5)........... -- -- -- 3,622 4,136 Stockholders' equity(5)....... 849 866 1,544 812 1,385 Operating Data (unaudited): Gross bookings (in thousands)(6) Non-published fares......... $ -- (2) $66,340 $ 58,982 $ 96,379 $159,846 Published fares............. -- (2) 25,654 46,962 57,295 110,287 ------- ------- -------- -------- -------- Total gross bookings...... $52,951(2) $91,994 $105,944 $153,674 $270,133 ======= ======= ======== ======== ======== Airline tickets sold:......... 180,656 313,863 357,551 554,403 963,007 Call centers................ 180,656 313,863 357,551 552,383 865,661 Internet.................... -- -- -- 2,020 97,346 Registered Internet users..... -- -- -- 18,891 420,023
24 - -------- (1) Net revenues consist of sales of non-published fares and commissions. Net revenues from sales of non-published fares represent revenues from the sale of tickets purchased from the airlines. Cost of sales consists of the net fare cost paid to carriers to purchase non-published fares. Commissions, including incentive overrides, are earned primarily on published fares sold and include certain other payments based on the volume of transactions. (2) Net revenues for 1994 were not separately identified from gross bookings and are not available. In addition, cost of sales for 1994 was previously accounted for on a gross bookings basis and is not available on a GAAP basis. (3) In 1998, Cheap Tickets issued stock options to employees to acquire an aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800 have an exercise price of $0.18 per share and 67,200 have an exercise price of $1.57 per share. Total compensation associated with these options amounted to $722,600 of which $26,325 has been charged to operations. The remainder will be charged over the remaining five-year vesting period of the options, with the exception of $1,062, which will be charged at the closing of the offering at which time 140,000 options vest by their terms. (4) Please refer to notes 1 and 6 to the financial statements for the calculation of earnings per share, including an explanation of the number of shares used in computing the amount of basic and diluted earnings per share. (5) The mandatorily redeemable preferred stock is required to be redeemed upon the closing of this offering. The redemption price upon the closing of this offering will be approximately $4.8 million. The preferred stock was issued at a discount of $885,170. Cheap Tickets is accreting the discount over a five-year period. At redemption, it is anticipated that the unaccreted discount will be $580,439. Upon redemption, the unaccreted discount will be charged directly to stockholders' equity, and have a dilutive effect on the calculation of earnings per share. (6) Gross bookings represent the aggregate retail value of tickets sold under non-published fares and published fares. The difference between gross bookings and revenues as reported in Cheap Tickets' statement of operations derives solely from the difference in revenue treatment accorded to sales of published fares. With respect to published fares, Cheap Tickets records as revenue in its statement of operations only the commissions earned by Cheap Tickets on the sale of such fares. Gross bookings represents the retail value of the sales of published fares. With respect to non-published fares, revenues as reported in Cheap Tickets statement of operations is equivalent to gross bookings, which is the retail value of such fares. Management uses gross bookings as a key indicator of general business activity, success of promotional efforts, capacity to handle customer demand and efficiency of reservation agents. In addition, management believes that gross bookings provide a useful comparison between historical periods, and year-to-year changes in such information provide a useful measure of market acceptance of Cheap Tickets products. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements of Cheap Tickets. In evaluating the risks of investing in Cheap Tickets, prospective investors should also evaluate the other information set forth in this prospectus, including the Risk Factors. Overview Cheap Tickets is principally engaged in the sale of discount tickets for domestic leisure air travel. A majority of its gross bookings have historically come from the sale of non-published fares, which Cheap Tickets acquires from airlines and resells to the public at a profit. Cheap Tickets purchases non- published fares only when it resells them to customers, so that it has no inventory carrying costs. On these fares, Cheap Tickets sets its resale prices to meet the demands of leisure travelers who are looking for the lowest price. Cheap Tickets also sells published fares for which it receives commissions from the airlines. Sales of non-published fares generally carry higher margins as a percentage of gross bookings than commissions on published fare bookings. Cheap Tickets' revenues have been generated by ticket sales through Cheap Tickets' four call centers and, to a lesser extent, through 12 walk-in retail stores. In October 1997, Cheap Tickets broadened its ticket distribution by offering online booking at "www.cheaptickets.com." Internet bookings have experienced significant month-to-month growth in 1998 and accounted for approximately 9% of total gross bookings in 1998 and approximately 15% in the last quarter of 1998. At December 31, 1998, Cheap Tickets had over 420,000 registered online users, with 180,000 registering in the fourth quarter of 1998. Cheap Tickets expects online gross bookings and net revenue to represent an increasing portion of gross bookings and net revenues in future periods. Gross bookings represent the aggregate retail value of tickets sold under non-published fares and published fares. The difference between gross bookings and revenues as reported in Cheap Tickets' statement of operations derives solely from the difference in revenue treatment accorded to sales of published fares. With respect to published fares, Cheap Tickets records as revenue in its statement of operations only the commissions earned by Cheap Tickets on the sale of such fares. Gross bookings represents the retail value of the sales of published fares. With respect to non-published fares, revenues as reported in Cheap Tickets statement of operations is equivalent to gross bookings, which is the retail value of such fares. Gross bookings are not required by generally accepted accounting principles and should not be considered in isolation or as a substitute for other information prepared in accordance with GAAP. Management uses gross bookings as a key indicator of general business activity, success of promotional efforts, capacity to handle customer demand and efficiency of reservation agents. In addition, management believes that gross bookings provide a useful comparison between historical periods, and year-to-year changes in such information provide a useful measure of market acceptance of Cheap Tickets products. Net revenues consist of sales of non-published fares and commissions. Net revenues from sales of non-published fares represent revenues from the sale of tickets purchased from the airlines. Cheap Tickets' cost of sales consists of the net fare cost paid to carriers to purchase non-published fares. Commissions, including incentive overrides, are earned primarily on published air fares sold and include certain other payments based on the volume of transactions. Substantially all of Cheap Tickets' gross bookings represent sales of airline tickets. For the year ended December 31, 1998, approximately 98% of gross bookings arose from airline ticket sales. The 26 remaining gross bookings arose from sales of cruise tickets, auto rentals, hotel reservations and other travel related products. Cheap Tickets expects gross bookings from sources other than airline ticket sales to increase in future periods. Cheap Tickets' selling, general and administrative expenses include all operating and corporate overhead. Major expense categories include compensation, advertising, communications, credit card bank fees, occupancy and delivery costs. Selling, general and administrative expenses also include compensation charges related to the issuance of stock options. Results of Operations The following table sets forth, for the years ended December 31, 1995, 1996, 1997 and 1998, information derived from the statement of operations of Cheap Tickets expressed as a percentage of net revenues, and the percentage change in such items and in gross bookings for the years ended December 31, 1996, 1997 and 1998 compared with the prior period. Any trends illustrated in the following table are not necessarily indicative of future results.
Percentage Increase As a Percentage (Decrease) Over of Net Revenues Prior Periods -------------------------- ------------------------- Year Ended December 31, Year Ended December 31, -------------------------- ------------------------- 1995 to 1996 to 1997 to 1995 1996 1997 1998 1996 1997 1998 ----- ----- ----- ----- ------- ------- ------- Results of Operations: Non-published fares..... 96.0% 91.3% 93.7% 93.4% (11.1)% 63.4% 65.9% Commissions............. 4.0 8.7 6.3 6.6 105.0 15.2 74.2 ----- ----- ----- ----- Net revenues.......... 100.0 100.0 100.0 100.0 (6.5) 59.2 66.4 Gross profit............ 18.3 23.9 20.9 20.5 21.9 39.2 63.2 Selling, general and administrative expense................ 17.2 22.2 22.5 19.5 20.4 60.9 44.7 ----- ----- ----- ----- Earnings (loss) from operations........... 1.1 1.7 (1.6) 1.0 46.8 (249.8) 201.5 Net earnings (loss)..... 0.0 1.0 (1.0) 0.6 *nm (249.7) 205.6 Operating Data (unaudited): Gross bookings.......... -- -- -- -- 15.2% 45.1% 75.8%
- -------- *nm--not meaningful Years Ended December 31, 1998 and December 31, 1997 Net Revenues. Net revenues for the year ended December 31, 1998 increased $68.3 million, or 66.4%, to $171.1 million. By category of net revenue, non- published fare sales increased $63.5 million, or 65.9%, to $159.8 million, and commissions from published fares increased $4.8 million, or 74.2%, to $11.3 million. The increase in commissions reflected an increase of $53.0 million, or 92.5%, to $110.3 million in gross bookings of published fares, partially offset by a decrease in commission rates from an average of 9.0% in 1997 to 7.8% in 1998. The increase in net revenue benefited overall from industry-wide growth in the leisure travel market and improving recognition of the Cheap Tickets brand name from marketing and advertising efforts and word of mouth. Net revenue at call centers also benefited from better productivity by call center reservation agents and the opening of a fourth call center in Colorado Springs in May of 1998. Cheap Tickets' net revenues through call centers and retail operations (including incentive bonuses) increased $56.4 million, or 54.9%, to $159.2 million. Net revenues through the Internet 27 were $11.9 million in 1998 compared with $176,000 in 1997. Net revenues through the Internet represented 7.0% of net revenues for the year ended December 31, 1998 and 17.2% of the total increase in net revenues from 1997 to 1998. Internet net revenues for the four quarters of operations grew as follows: first quarter 1998, $1.2 million; second quarter 1998, $2.3 million; third quarter 1998, $3.8 million, and fourth quarter 1998, $4.7 million. Gross Profit. Gross profit increased $13.6 million, or 63.2%, to $35.0 million, consistent with the rate of increase of gross bookings. As a percentage of net revenues, gross profit decreased from 20.9% to 20.5%. This decrease was primarily attributable to a decrease in gross margins of 0.7 percentage points on non-published fares. The decrease in non-published fare margins was primarily attributable to a contract renewal with one carrier at a less favorable rate. A decline in the proportion of non-published fares sold, partially offset by increased volume bonuses, also contributed to the reduction in gross profit. Selling, General and Administrative Expenses. For the year ended December 31, 1998, selling, general and administrative expenses increased $10.3 million, or 44.7%, to $33.4 million, and decreased as a percentage of net revenues from 22.5% to 19.5%. The major components of these increases were compensation, credit card and bank fees, and advertising costs. The increase in advertising costs was primarily attributable to Cheap Tickets' website launch in October 1997, including promotions on Yahoo, Travelocity and other websites. Internet marketing costs can be expected to increase significantly in future periods to promote Internet sales. Credit card fees increased as a result of volume and rate increases charged by Cheap Tickets' charge card associations. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily attributable to the leverage from increased sales. In 1998, Cheap Tickets issued stock options to employees to acquire an aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800 have an exercise price of $0.18 per share and 67,200 have an exercise price of $1.57 per share. Total compensation associated with these options amounted to $722,600, of which $26,325 has been charged to operations for the year ended December 31, 1998. The remainder will be charged over the remaining five-year vesting period of the options, with the exception of $1,062, which will be charged at the closing of the offering, at which time 140,000 options vest by their terms. Net Earnings (Loss). Cheap Tickets had net earnings of $1.1 million for the year ended December 31, 1998, compared with the prior year's loss of $1.0 million. This increase was attributable to increased net revenues, with a proportionately lower increase in selling, general and administrative expenses, partially offset by lower gross profit percentages. Years Ended December 31, 1997 and December 31, 1996 Net Revenues. Net revenues increased $38.3 million, or 59.2%, to $102.8 million, primarily from continued industry-wide growth in the leisure travel industry and enhanced recognition of the Cheap Tickets brand name from marketing and advertising efforts. The increase was also associated with increases in capacity, including the expansion of existing call centers and higher reservation agent productivity. During 1997, the increase in net revenues reflected the growth of non- published fare sales by $37.4 million, or 63.4%, to $96.4 million. By contrast, net revenues from commissions increased only $856,000, or 15.2%, to $6.5 million. The slower growth of net revenues from commissions was 28 attributable to slower growth in gross bookings of published fares and a decrease from 10% to 8% in commissions on published fares implemented by a number of air carriers during 1997. In 1997, nearly all of Cheap Tickets' net revenues were generated through call centers, with the exception of approximately $176,000 from Internet sales following the launch of Cheap Tickets' website in October 1997. Net revenues from non-published fare sales in 1997 represented 62.7% of gross bookings, compared with 55.7% in 1996. Gross Profit. Gross profit increased $6.1 million or 39.2% to $21.5 million and decreased as a percentage of net revenues from 23.9% to 20.9%. The 3% decrease was primarily attributable to a reduction in published fares margins of 2.4% of net revenues. A combination of a reduction in commissions as a percentage of net revenues and an overall industry reduction in published fare commission rates accounted for the decrease. A further decrease of 0.6% of net revenues from non-published fares was the result of a termination in 1997 of certain profitable routes and the imposition of various restrictions by a major carrier. Selling, General and Administrative Expenses. Cheap Tickets' selling, general and administrative expenses increased $8.7 million, or 60.9%, to $23.1 million and increased as a percentage of net revenues from 22.2% to 22.5%. These increases resulted primarily from increased employees and infrastructure to support higher levels of sales. The increase in compensation and employee benefits reflected the hiring of over 119 new employees, largely reservation agents and, to a lesser extent, support staff. Other major components of the increase were telephone expense, advertising costs, delivery expenses, and credit card and bank fees. Occupancy costs also rose, with the opening of three additional retail locations and the expansion of space in Honolulu and Los Angeles. Net Earnings (Loss). Cheap Tickets incurred a net loss in 1997 of $1.0 million, compared with net earnings of $674,000 in 1996. The decrease in net earnings was primarily attributable to the decrease in gross profit as a percentage of net revenues. Years Ended December 31, 1996 and December 31, 1995 Net Revenues. Net revenues decreased $4.5 million, or 6.5%, to $64.6 million. The decrease corresponded to a reduction in sales of non-published fares of $7.4 million, or 11.1%, to $59.0 million. Net revenues from commissions increased by $2.9 million, or 105.0%, to $5.6 million. The reduction in non-published fare sales was primarily attributable to the termination of a contract provision with one carrier that had required Cheap Tickets to sell non-published fares through certain travel agents at low margins, resulting in $10.5 million in net revenues from such sales in 1995, compared with $617,000 in 1996. The reduction in non-published fare sales was partially offset by increased sales of published fares and the commissions resulting therefrom. Overall gross bookings in 1996 increased $14.0 million, or 15.2% to $105.9 million, as the increase in gross bookings of published fares exceeded the decrease in gross bookings of non-published fares. Gross Profit. Gross profit increased $2.8 million or 21.9% to $15.4 million and increased as a percentage of net revenues from 18.3% to 23.9%. This increase was primarily attributable to 1) increases from published fares and volume bonuses of 4.7% of net revenues due to an increase in the proportion of these components as a percentage of total gross profit and 2) an increase in non-published fares attributable to the procurement of a favorable contract with a major carrier and cessation of the sales of low margin non-published fares to certain travel agents. 29 Selling, General and Administrative Expenses. Cheap Tickets' selling, general and administrative expenses increased $2.4 million, or 20.4%, to $14.4 million and increased as a percentage of net revenues from 17.2% to 22.2%. The largest component of the increase was compensation expense, which was primarily attributable to the opening of the Lakeport call center in January 1996. Net Earnings (Loss). Net earnings increased from $17,000 to $674,000. Higher margins on both non-published and published fare sales contributed to the increase. In addition, there was non-recurring income of $37,000 in 1996, compared with non-recurring expense in 1995 of $709,000. Seasonality and Quarterly Financial Information. Cheap Tickets' business is seasonal due primarily to customers' leisure travel patterns and changes in the availability of non-published fares. As a result, Cheap Tickets typically has higher sales and gross profit in the second and third quarters and lower sales and gross profit in the fourth quarter. During periods of high-volume air travel, such as occur in the fourth quarter of each year, Cheap Tickets historically has had access to fewer non-published fares, and such fares on certain major routes may be blacked out or otherwise unavailable. Online gross bookings may also tend to be seasonal and may decline or grow less rapidly in the summer months. The seasonal sales cycle is fairly predictable, but the cycle may shift year-to-year, corresponding to changes in the economy or other factors affecting the market such as price wars. This could lead to unusual volatility in revenues and earnings. 30 The following table sets forth selected unaudited quarterly financial information for each of the eight quarters in the period ended December 31, 1998, as well as such data expressed as a percentage of Cheap Tickets' net revenues for the periods presented. This information has been derived from unaudited statements of operations data that, in the opinion of management, are stated on a basis consistent with the audited financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information in accordance with GAAP. Cheap Tickets' results of operations for any quarter are not necessarily indicative of the results to be expected in any future period.
Quarter Ended (unaudited) -------------------------------------------------------------------- 1997 1998 ---------------------------------- -------------------------------- Sept. Sept. Mar. 31 June 30 30 Dec. 31 Mar. 31 June 30 30 Dec. 31 ------- ------- ------- ------- ------- ------- ------- ------- Results of operations: Non-published fares..... $17,798 $27,126 $28,789 $22,666 $30,449 $45,722 $46,823 $36,852 Commissions............. 1,381 1,691 1,602 1,796 1,949 2,491 3,614 3,215 ------- ------- ------- ------- ------- ------- ------- ------- Net revenues.......... 19,179 28,817 30,391 24,462 32,398 48,213 50,437 40,067 Cost of sales........... 15,104 22,782 24,097 19,386 25,959 39,016 39,572 31,520 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit............ 4,075 6,035 6,294 5,076 6,439 9,197 10,865 8,547 Selling, general and administrative expenses............... 4,389 5,735 6,439 6,530 6,430 8,128 9,535 9,319 ------- ------- ------- ------- ------- ------- ------- ------- Net operating income.... (314) 300 (145) (1,454) 9 1,069 1,330 (772) Other income (deductions)........... 9 (47) 9 27 35 22 32 80 ------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes........... (305) 253 (136) (1,427) 44 1,091 1,362 (692) Income taxes............ (125) 104 (56) (529) 18 447 559 (283) ------- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss)..... $ (180) $ 149 $ (80) $ (898) $ 26 $ 644 $ 803 $ (409) ======= ======= ======= ======= ======= ======= ======= ======= Basic earnings (loss) per share.............. $ (0.02) $ 0.01 $ (0.01) $ (0.07) $ (0.01) $ 0.04 $ 0.05 $ (0.04) Diluted earnings (loss) per share.............. $ (0.02) $ 0.01 $ (0.01) $ (0.07) $ (0.01) $ 0.03 $ 0.04 $ (0.03)
Operating Data: Gross bookings ......... $28,361 $40,764 $42,959 $41,590 $52,754 $70,431 $75,930 $71,018 ======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Net Revenues Quarter Ended (unaudited) -------------------------------------------------------------------- 1997 1998 ---------------------------------- -------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 ------- ------- -------- ------- ------- ------- -------- ------- Non-published fares..... 92.8% 94.1% 94.7% 92.7% 94.0% 94.8% 92.8% 92.0% Commissions............. 7.2 5.9 5.3 7.3 6.0 5.2 7.2 8.0 ----- ----- ----- ----- ----- ----- ----- ----- Net revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of sales........... 78.8 79.1 79.2 79.3 80.1 80.9 78.5 78.7 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ 21.2 20.9 20.8 20.7 19.9 19.1 21.5 21.3 Selling, general and administrative expenses............... 22.9 19.9 21.3 26.6 19.9 16.9 18.9 23.2 ----- ----- ----- ----- ----- ----- ----- ----- Net operating income.... (1.7) 1.0 (0.5) (5.9) 0.0 2.2 2.6 (1.9) Other income (deductions)........... 0.1 (0.1) 0.1 0.1 0.1 0.1 0.1 0.2 ----- ----- ----- ----- ----- ----- ----- ----- Earnings (loss) before income taxes........... (1.6) 0.9 (0.4) (5.8) 0.1 2.3 2.7 (1.7) Income taxes............ (0.7) 0.4 (0.1) (2.1) 0.0 1.0 1.1 (0.7) ----- ----- ----- ----- ----- ----- ----- ----- Net earnings (loss)..... (0.9)% 0.5% (0.3)% (3.7)% 0.1% 1.3% 1.6% (1.0)% ===== ===== ===== ===== ===== ===== ===== =====
31 Liquidity and Capital Resources For the year ended December 31, 1998, Cheap Tickets generated cash from operating activities of $2.0 million, compared with $1.5 million for the year ended December 31, 1997. For the year ended December 31, 1998, cash generated from operating activities was comprised principally of net earnings plus depreciation of $1.6 million and net changes in working capital and other accounts. For the year ended December 31, 1997, cash generated from operating activities was comprised principally of an increase in accounts payable of $2.5 million adjusted by changes in other accounts. For that period, there was a net loss of $1.0 million, offset by depreciation of $370,000. The primary account payable is the weekly settlement to the Airline Reporting Corporation for airline tickets purchased less commissions earned. This is generally a significant balance, and the timing of the current payment relative to month- end can cause fluctuations in month-end balances. For 1996, Cheap Tickets generated cash from operating activities of $411,000. This cash was generated primarily from the sum of net earnings and depreciation of $878,000, partially offset by changes in operating accounts. For the year ended December 31, 1998, Cheap Tickets used cash from investing activities of $4.8 million, while in the prior period it used cash in investing activities of $486,000. Cash used in investing activities for the year ended December 31, 1998 included net purchases of short term marketable securities for $4.9 million. Capital expenditures for the years ended December 31, 1998 and 1997 were $485,000 and $496,000, respectively. In 1998, Cheap Tickets received $496,000 in proceeds from the sale of a condominium office formerly used as a company office, of which $489,000 was used to pay the outstanding mortgage on the property. In 1997, Cheap Tickets raised $3.9 million net of issuance expenses from a private placement of preferred stock. In 1996, Cheap Tickets made $1.3 million in capital expenditures, primarily consisting of the furnishing and equipping of a new call center in Lakeport, California and the acquisition of additional equipment. At December 31, 1998, Cheap Tickets maintained on hand cash and cash equivalents of $3.0 million and short term marketable securities of $4.9 million. Cheap Ticket's net working capital was $3.5 million. Cheap Tickets has available a $3.0 million credit facility with a bank expiring on December 5, 1999. This facility accrues interest at either (1) the bank's base rate or (2) LIBOR plus an applicable margin, at Cheap Tickets' option. There were no drawdowns against this facility at December 31, 1998. Cheap Tickets had outstanding long-term debt net of current installments of $586,000 and capital lease obligations of $652,000. Long-term debt included $541,000 for a mortgage on the Lakeport, California call center. Cheap Tickets believes that the net proceeds from this offering, together with its current cash and cash equivalents, short term marketable securities and anticipated cash flow from operations will be sufficient to meet its anticipated cash needs for the required redemption of preferred stock, working capital, debt service and capital expenditures, at least for the foreseeable future. Cheap Tickets has budgeted approximately $9 million for capital expenditures in 1999 from proceeds of this offering, nearly all of which is intended to be used for technological improvements and upgrades. Cheap Tickets currently is seeking an increase in its bank lines, which are currently undrawn. If cash generated from internal operations is not sufficient to satisfy CheapTickets' liquidity requirements, Cheap Tickets may seek to increase available bank lines or sell additional equity or debt securities. The sale of convertible debt or equity securities could result in additional dilution to Cheap Tickets' shareholders. There is no assurance that financing will be available in amounts or on terms acceptable to Cheap Tickets, if at all. 32 Recently Issued Accounting Standards In 1998, Cheap Tickets adopted SFAS No. 130 "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 130 states that all items that are required to be recognized under generally accepted accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 did not have an effect on Cheap Tickets' financial statements since Cheap Tickets does not have elements of comprehensive income other than net earnings. SFAS No. 131 requires disclosures regarding segments of an enterprise and related information that reflects the different types of business activities in which the enterprise engages and the different economic environments in which it operates. The effect of implementing SFAS No. 131 was not significant as Cheap Tickets manages its business as a single operating segment, Cheap Tickets is domiciled entirely in the U.S. and substantially all of Cheap Tickets' revenues are derived from the sales of airline tickets. SFAS No. 132 standardized the disclosure requirements for pension and other postretirement benefits. The adoption of SFAS No. 132 does not change existing measurement or recognition standards for Cheap Tickets' defined contribution plan and does not have a material effect on Cheap Tickets' financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires the recognition of all derivative instruments as either assets or liabilities in the statement of financial position and measurement of those derivative instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Currently, Cheap Tickets does not hold derivative instruments or engage in hedging activities. The adoption of this standard is not expected to have a material effect on Cheap Tickets' financial statements. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In April 1998, the committee issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." These standards are effective for Cheap Tickets' year ending December 31, 1999. Cheap Tickets has not determined the impact of the implementation of these pronouncements. Year 2000 Compliance. Overview Cheap Tickets is taking steps to address potential Year 2000 problems. Cheap Tickets has formed a project team from its systems and technology, finance, telecom and operations departments. The project team is responsible for implementing the following four-phase process: (1) identifying the computer systems and products affected; (2) contacting vendors and suppliers; (3) determining the Year 2000 compliance status of each system and product; and (4) implementing any necessary changes. Although Cheap Tickets does not currently expect the impact of the Year 2000 issue will be material to systems still under evaluation, Cheap Tickets could discover (or fail to discover) Year 2000 issues in the course of its evaluation process that would have a material and adverse effect on Cheap Tickets' business, results of operations or financial condition if not properly addressed. 33 Cheap Tickets currently has three types of computer systems or programs which may be affected. They include: (a) reservations database systems, (b) PC/LAN systems and (c) non-informational technology systems. The reservations database systems involve the computer programs and products responsible for airline, cruise, car and hotel reservations and other transactional systems. PC/LAN systems include Cheap Tickets' personal computer network systems. Non- informational technology systems include systems or hardware containing embedded technology such as micro controllers. Cheap Tickets has completed phases one and two on these systems and is currently in the process of completing phase three. In addition, Cheap Tickets has already completed all four phases for several of its systems including SABRE reservations, TravelBase Accounting, Payroll, Credit Card Processing Software and Credit Card Processor. Other critical component systems, such as PC/LAN Hardware, PC/LAN Software and Telecommunications Systems are in the process of having necessary changes made to be Year 2000 compliant. Management anticipates that it will complete phase four for all of Cheap Tickets' significant computer systems by the end of the second quarter of 1999. If the systems material to Cheap Tickets' operations have not been made Year 2000 compliant upon completion of phases three and four, the Year 2000 issue could have a material and adverse effect on Cheap Tickets' business, results of operations and financial condition. Reservation Database Systems. The main supplier of the Cheap Tickets' reservation database systems is SABRE. Currently, over 90% of Cheap Tickets' computing transactions are processed through the SABRE systems. This includes transactions involving airline reservations, booking, ticketing, car and hotel rentals, cruises and accounting. SABRE has advised Cheap Tickets that it has a Year 2000 implementation plan in place. Further, SABRE has advised Cheap Tickets that it has already resolved Year 2000 issues for its main computer system--the airlines reservations system. Cheap Tickets intends to implement all changes required by SABRE for Cheap Tickets to be Year 2000 compliant by the end of the second quarter of 1999. There can be no assurances that SABRE will be Year 2000 compliant and that the impact of SABRE's non-compliance, if any, would not be material. PC/LAN Systems. Cheap Tickets is currently in the process of replacing all of its PC/LAN computing systems with a completion date scheduled for the second quarter of 1999. All the new PC/LAN systems being installed, including hardware, software, applications and operating systems, have been represented by their vendors to be Year 2000 compliant. Cheap Tickets believes that any systems that it has not yet replaced do not present any Year 2000 concerns because, to Cheap Tickets' knowledge, these systems already are Year 2000 compliant or will have Year 2000 upgrades available beginning in the first quarter of 1999. In addition, Cheap Tickets is currently requiring that any new systems it purchases meet Year 2000 compliance requirements. There can be no assurances that such PC/LAN computing systems will be Year 2000 compliant and that the impact of such non-compliance, if any, would not be material. Non-Informational Technology Systems. Cheap Tickets has not yet evaluated its non-informational technology systems. However, Cheap Tickets is working with facilities management in each of its operational centers to seek to achieve Year 2000 compliance for these systems before the end of the second quarter of 1999. In addition, Cheap Tickets has not yet developed a contingency plan in the event that any of its critical computer systems are not Year 2000 compliant by January 1, 2000. 34 Based on the steps being taken and progress to date, management estimates that the expenses for ensuring Year 2000 compliance of its computer products and systems will not have a material adverse effect on operations or earnings, and can be financed out of cash flow from operations. Despite such plans and Cheap Tickets' assessment of current hardware and software, the assessment of Cheap Tickets' current state of compliance may not be fully accurate, and Cheap Tickets' plans for achieving full compliance with Year 2000 issues may not in fact be fully successful. Cheap Tickets is also in the process of attempting to verify that all of the products supplied by third-party vendors have either resolved the Year 2000 issue or have a published plan to do so. In certain cases, such as with SABRE, Cheap Tickets has relied in good faith on representations and warranties regarding Year 2000 compliance provided to it by third-party vendors of hardware and software, and on consultants. Such representations and warranties may not be accurate in all material respects and the advice or assessments of consultants may not be reliable. If third parties are not able to make their systems Year 2000 compliant in a timely manner, it could have a material and adverse effect on Cheap Tickets' business, results of operations and financial condition. Cheap Tickets has not developed a contingency plan to address the possibility that SABRE is unable to achieve Year 2000 compliance and does not intend to do so. Federal Aviation Administration Readiness. The FAA's state of Year 2000 readiness may have a significant impact on air travel on or about January 1, 2000 and for an uncertain period of time thereafter. Air travel may be affected both by travelers' safety fears and by actual disruption caused by lack of Year 2000 readiness. The FAA reports that it has created the FAA Year 2000 Program Office. This office is responsible for all of the FAA's Year 2000 efforts and has established a schedule requiring all FAA systems to be Year 2000 compliant by June 30, 1999. In addition, according to the FAA, contingency plans are being developed for each FAA system, and for the agency itself. Disruption of air traffic on or about January 1, 2000, whether or not attributable to the state of FAA Year 2000 readiness, may have an adverse impact on Cheap Tickets. However, the effect, if any, is uncertain. Fear by travelers of disruption could result in reduced reservations for year-end flights and possibly less leisure travel generally at year-end. In addition, if such fears develop, the airlines may lower prices generally or engage in fare wars to attract customers. If the airlines did engage in such behavior, Cheap Tickets' business could be hurt. However, if air traffic is not disrupted, and airlines and the FAA, in fact, achieve Year 2000 readiness, air travel should return to normal levels shortly following January 1, 2000. In such a situation, the overall disruption to Cheap Tickets may be limited to the holiday vacation period which includes January 1, 2000. On the other hand, a breakdown of the air control system, or other breakdowns generally resulting in reduced air traffic or less safe air travel, could have more serious impact on the air travel business generally and could affect Cheap Tickets' business, results of operations and financial condition more adversely. Management has not drawn any conclusions about whether any such Year 2000 effect will be experienced and, if so, how it will affect Cheap Tickets. In addition, Cheap Tickets has not developed a contingency plan to address this situation and does not intend to do so. Finally, Year 2000 issues may impact other entities with which Cheap Tickets does business, including, for example, airlines and those responsible for maintaining telephone and Internet communications. Accordingly, Cheap Tickets cannot predict the effect of the Year 2000 problem on such entities. If these other entities fail to take preventive/or corrective actions in a timely manner, the Year 2000 issue could have a material and adverse effect on Cheap Tickets' business, results of operations and financial condition. Cheap Tickets has not yet developed a contingency plan to address the possibility that other entities with which it does business are unable to achieve Year 2000 compliance and does not intend to do so. 35 BUSINESS Cheap Tickets is a leading retail seller of discount tickets for domestic leisure air travel. In 1998, Cheap Tickets sold approximately 963,000 airline tickets through call centers, retail stores and its Internet site at "www.cheaptickets.com." Cheap Tickets has rights to buy these fares under contracts from over 30 airline carriers, including America West, American, Continental, Northwest, TWA and US Airways. Industry Background. Consumers in the United States spent $126 billion on travel through travel agencies in 1997, up from $101 billion in 1995, according to the Travel Weekly 1998 U.S. Travel Agency Survey. According to the same source, the leisure travel component of this market is also growing rapidly, as leisure travel accounted for $64.5 billion, or 51%, of total travel in 1997. Leisure travel bookings increased 30% from 1995 to 1997, the largest increase in recent years. Management believes that the growth in leisure travel has been driven by a number of factors, including an increase in disposable income levels in the United States, the aging of the population and the availability of affordable airfares. Airline travel (including business and leisure travel) continues to be the largest segment of the travel industry, with $70.5 billion, or 56%, of total travel booked through travel agencies in 1997. Airline Ticket Sales. Published Fares. Historically, airlines have sold tickets directly or through travel agencies on a commission basis. The traditional travel agency channel of distribution is highly fragmented, with few nationally recognized brands. According to The American Society of Travel Agents, over 23,000 travel agencies operate in more than 33,000 locations in the United States, and the average travel agency generates approximately $3.8 million in annual gross bookings per location. Travel agents are compensated primarily through commissions paid by airlines on tickets sold. Some travel agencies also charge service fees to their customers. Travel agents generally receive commissions of 8% of total ticket price, although these commissions are frequently capped at $25 for a domestic U.S. one-way ticket and $50 for a domestic round trip ticket. Airlines also generally pay approximately 5% in commissions for online sales. In addition, travel agencies can earn performance-based incentive compensation. Commissions are determined in the sole discretion of the airlines and are subject to frequent change. In recent years, airlines have reduced rates and capped per-ticket commissions generally payable to travel agencies. In addition, they have further reduced rates and capped commissions for online reservations. The downward pressure on commission rates may cause traditional travel agencies to charge service fees to their customers, shift their focus to higher margin, non-air travel services or reduce the level of customer service. Travel agencies typically book reservations through electronic global distribution services such as the SABRE system and Galileo International Partnership's Apollo system. Global distribution services provide real-time access for agents to extensive data on fares, availability, schedules and other travel information. This data is constantly changing, with as many as one million airfare changes made daily. Customers have historically had to rely on travel agents to access and interpret this rapidly changing information. Non-Published Fares. According to the American Transport Association, airline excess capacity in the United States was 32.5% from 1995 to 1997, and excess capacity is estimated to be 29.3% in 1998. The airlines can predict excess capacity up to a year in advance for specific routes 36 and times. Airlines are motivated to sell excess capacity at prices substantially lower than published tariffs because the marginal cost of filling excess seats is minimal. However, to succeed in this strategy, the airlines need assurance that sales of excess capacity at lower prices do not erode published fare structures. The ability to sell such seats without eroding published fare structures is a source of incremental profits for airlines. Management believes that it would be difficult for airlines to market their excess capacity directly to the public at discount prices because their discount fares would compete with their own regular published fares, and they would also risk drawing immediate price competition from other airlines. In fact, airlines generally have not sold excess capacity directly to the public, except in extremely limited situations, usually involving last-minute special offers and the use of frequent flier awards. Management believes that leisure travelers are particularly suited to the products offered by Cheap Tickets, as they are highly price sensitive and willing to be flexible on carriers, routes and times of travel. Airlines generally have sold excess capacity indirectly through intermediaries in a manner designed not to erode their published fare structures while at the same time maximizing incremental excess revenues. They have accomplished this by selling excess capacity to independent third parties under net fare contracts. The tickets are then resold by these third parties to the public at prices set by them, generally at a substantial discount below regularly published fares. The prices of these tickets are not published unless they have been published directly by the reseller in the media or otherwise, and the fares are not available from the airlines directly. Hence, they are referred to as "non-published fares." The profit margins on non-published fare sales generally exceed the commissions payable for sales of tickets on an agented basis. Non-published fares are restricted to specific routes and times, cannot be canceled or refunded, and generally contain other restrictions which, while making them unattractive for full-fare travelers, are acceptable to price sensitive leisure travelers with flexible itineraries. For international routes, management believes that the market for the sale of non-published fares is highly competitive, with numerous participants offering deeply discounted fares. For domestic routes, there are few sellers, and they generally have contracts with a small number of carriers for a limited number of routes. Among these, management believes Cheap Tickets is the leading seller of non-published fares for regularly scheduled domestic routes. Cheap Tickets has contracts with carriers covering most major domestic and international routes. The Growth of Internet Commerce, Products and Services. The enormous growth and acceptance of the Internet as a medium of communication and commerce presents significant opportunities for Cheap Tickets. According to Dataquest, more than 43 million households in America currently have Internet access and that number is projected to grow to nearly 95 million households by 2001. The factors driving this growth include the increasing number and decreasing cost of personal computers in homes and offices, technological innovations providing easier, faster and cheaper access to the Internet, the proliferation of content and services being provided on the Internet and the increasing use of the Internet by business and consumers as a medium for conducting business. The Internet possesses a number of unique and commercially powerful characteristics that differentiate it from traditional media: users communicate or access information without geographic limitations; users access dynamic and interactive content on a real-time basis; and users communicate and interact instantaneously. The Internet has created a dynamic and particularly attractive medium 37 for commerce, empowering customers to gather more comparative purchasing data than is feasible with traditional commerce systems, to shop in a more convenient manner and to interact with sellers in many new ways. Forrester Research estimates that online retail revenues will increase from approximately $4.8 billion in 1998 to approximately $17.4 billion by 2001. Online Travel Market. As a result of pressures on traditional travel distribution channels and the emergence of new "e-commerce" opportunities, the online travel industry has grown rapidly. The Internet provides a convenient and efficient medium for sales of airline tickets by affording customers direct access to up-to-the- minute travel information, including changing fares and routes, the ability to engage in competitive shopping, and the capacity to purchase tickets. According to Forrester Research, the online travel market is the second largest by dollar volume and fastest growing area of Internet commerce. Online airline travel bookings were $1.6 billion in 1998 and are expected to grow at a compounded annual growth rate of 46%, reaching $10.6 billion in 2003. In the online travel services market, Cheap Tickets competes for published fares with other entities that contain similar commercial websites, such as Expedia, which is operated by Microsoft Corporation, Travelocity, which is operated by SABRE Group Holdings Inc., a majority-owned subsidiary of American Airlines, Preview Travel, Inc., and Priceline.com, Inc. Many airlines also have established commercial websites for their published fares. With limited exceptions including, Priceline.com, Inc., to management's knowledge, non- published fares for regularly scheduled domestic routes are not currently offered by online travel companies. Cheap Tickets Business Strategy. Cheap Tickets' objective is to provide travel products to leisure travelers at discount prices and to enhance its position as a leading provider of non- published and published fares for domestic leisure travel. Cheap Tickets also seeks to benefit travel providers by selling airlines' otherwise unused excess capacity at high incremental margins without diluting their published fare structure. The principal elements of Cheap Tickets' strategy are: Broad Selection of Discounted Fares for Customers. Cheap Tickets offers a broad selection of non-published and published fares for regularly scheduled domestic routes at discounted prices, which management believes is unmatched in the industry. Cheap Tickets has access to domestic and international non- published fares for regularly scheduled flights through contracts with over 30 carriers, including America West, American, Continental, TWA and US Airways. Customers may book these fares up to a year in advance. Currently, Cheap Tickets offers approximately 375,000 non-published fares at any given time for most major domestic and international routes at discounts attractive for the leisure traveler. In addition, through the SABRE reservations system, Cheap Tickets offers approximately 45 million published airfares, including those of all major domestic and international commercial airlines. Cheap Tickets' non- published fares are integrated with these published fares on a special area of SABRE, to which only Cheap Tickets has access, permitting Cheap Tickets' reservation agents and its Internet customers to choose the least expensive itinerary. Established Direct Sale Business to Consumers. Cheap Tickets has been selling airline tickets directly to the public since its inception in 1986 and has an established infrastructure to execute its direct sales strategy. It sells its tickets through call centers, retail stores and the Internet. Cheap Tickets operates four call centers staffed by approximately 380 employees in Colorado Springs, 38 Honolulu, Los Angeles and Lakeport, California, 12 retail stores and a customer service center in Honolulu. The call centers provide toll-free telephone support and reservation services seven days a week at "1-800-OK-CHEAP." Online customers can access Cheap Tickets' easy-to-use website at "www.cheaptickets.com" at their convenience. Through its call centers, Cheap Tickets assists online customers to ensure that they have the full benefit of its services. Tickets are shipped on a next-day basis, and Cheap Tickets is planning to offer "E-tickets" by mid-1999. Established History of Yield Management for Airline Carriers. Cheap Tickets has consistently provided an efficient distribution channel to assist carriers in selling excess capacity without eroding fare structures. Cheap Tickets provides airlines with a yield management solution, enabling them to increase profits through incremental revenues accompanied by low marginal costs and, in some cases, to gain market share at the expense of competitors. Cheap Tickets targets leisure travelers who are willing to travel on certain routes to fill flights which normally have a low load factor. Restrictions placed on non- published fares allow Cheap Tickets to sell non-published fares aggressively to the public while leaving the airlines and travel and online agencies to service full fare customers who demand the convenience of tickets that can be exchanged or canceled and do not have advance purchase or minimum stay requirements. Demonstrated Ability to Match Excess Capacity to Consumer Demand. Cheap Tickets has proven to airlines that it can efficiently match airlines' excess capacity to consumer demand for leisure travel by selling increasing volumes of non-published fares. From 1996 through 1998, Cheap Tickets sold non-published fares of $59.0 million, $96.4 million, and $159.8 million, respectively. Management believes that Cheap Tickets' track record of selling excess capacity without compromising the airlines' fare structures provide a strong incentive for the airlines to continue to use Cheap Tickets for sale of domestic non- published fares. Cheap Tickets Growth Strategy. Cheap Tickets seeks to become the leading provider of discount travel products and services to leisure travelers. Cheap Tickets' growth strategy is to grow its customer base aggressively, expand strategic alliances, improve call center productivity, broaden its leisure travel offerings and consider possible selective acquisitions. The key elements of Cheap Tickets' growth strategy are as follows: Rapidly Expand Internet Bookings. Cheap Tickets intends to capitalize on its position in selling non-published fares to rapidly expand its Internet ticket sales. Management plans to accomplish this through increased marketing to heighten awareness of Cheap Tickets' product offerings and the Cheap Tickets brand. Cheap Tickets plans to broaden its online visibility and customer base through relationships with additional Internet content, commerce and service providers. Online access for Cheap Tickets' products began in October 1997. As of February 22, 1999, over 575,000 online users had registered at Cheap Tickets' website, 155,000 of them since December 1998. Internet gross bookings grew rapidly during 1998, from $2.2 million in the first quarter to $10.8 million in the fourth quarter. Approximately 15% of Cheap Tickets' gross bookings were made over the Internet in the fourth quarter. In 1998, Cheap Tickets had approximately $25 million in gross bookings from 97,000 Internet ticket sales. Management believes that Cheap Tickets' gross bookings from the Internet will continue to grow rapidly. Aggressively Build Brand Recognition Nationally and Internationally. Cheap Tickets has promoted itself almost exclusively through print media, primarily in Los Angeles, New York, San Francisco and Honolulu. In addition, a recent customer survey commissioned by Cheap Tickets 39 determined that 54% of customers learned of Cheap Tickets by word of mouth. This has translated into relatively low customer acquisition costs. The same survey reported that approximately 60% of Cheap Tickets' customers surveyed are from California, New York/New Jersey and Hawaii. With Cheap Tickets having established strong brand recognition regionally, management believes that the demand for discounted air travel presents opportunities for it to expand nationally. Among other initiatives, Cheap Tickets plans to broaden its news media advertising to other cities, including Chicago, Atlanta, Denver and St. Louis. In addition, Cheap Tickets also intends to explore avenues for international expansion. Cheap Tickets' strategy is to promote, advertise and broaden its brand recognition through a variety of marketing techniques. Enhance and Expand Strategic Relationships. Cheap Tickets currently has contractual relationships with more than 30 airlines, including America West, American, Continental, Northwest, TWA and US Airways. These relationships give Cheap Tickets access to non-published fares, which has helped Cheap Tickets to become a leading seller of non-published domestic fares to consumers. Cheap Tickets intends to continue to build these relationships through increased sales of excess capacity and seeks new relationships with other airlines, travel suppliers, Internet portals and travel-related website companies. Through these existing and new strategic relationships, Cheap Tickets seeks to broaden access to non-published fares and to reach additional customers. In addition, Cheap Tickets intends to build on its relationship with SABRE to enable it to continue to provide ease of access to what management believes to be the broadest available menu of discounted fares for regularly scheduled domestic routes. Expand Call Center Capacity through Improved Productivity. Cheap Tickets intends to continue to invest substantial resources in developing technological enhancements to its call centers. These will include a more automated front-end application for its reservation agents that will reduce errors and increase productivity; an intelligent call routing system to link Cheap Tickets' four call centers and to direct calls to specific agents best able to service particular customer needs and prioritize calls to reduce hold times; and an interactive voice response system to reduce the need for agents to answer general questions, thereby increasing the number of calls Cheap Tickets can service and the sales productivity of reservation agents. Management believes that such enhancements will increase sales and substantially improve operating efficiency. Broaden Existing Products and Services. Cheap Tickets currently realizes 98% of its gross bookings through airline ticket sales. However, it recently began selling cruise tickets, auto rentals and hotel reservations. Cheap Tickets intends to capitalize on its market leadership in non-published fares, brand recognition, Internet site, service infrastructure and customer base to promote these additional travel products. Cheap Tickets' product expansion strategy will be to focus on complementary products that require minimal incremental resources to sell and distribute. Make Selective Acquisitions. Cheap Tickets will consider the acquisition of companies which will add to its customer base, product lines, strategic relationships or distribution. Cheap Tickets currently has no agreements or understandings with respect to any such acquisitions. Products and Services. Leisure Airline Tickets. Cheap Tickets has the right to acquire non- published fares pursuant to contracts from carriers. Cheap Tickets then resells these tickets at profit margins which exceed the typical commissions payable for the sale of tickets on an agented basis. The prices Cheap Tickets offers to customers are generally at a substantial discount to published fares. Cheap Tickets purchases 40 these fares only when it resells them to customers, so that it does not have inventory carrying costs. Cheap Tickets' non-published fares are not available to consumers directly from the airlines and are not published, except as advertised by Cheap Tickets. Availability of non-published fares varies from route to route based on availability from the airline carriers. Cheap Tickets currently offers approximately 375,000 non-published fares at any given time, covering most major domestic and international routes. Cheap Tickets sells these tickets with limitations and restrictions that make them unattractive for full fare travelers, who seek the convenience of tickets that can be exchanged or canceled and do not have advance purchase or minimum stay requirements. In 1998, approximately 59% of Cheap Tickets' airline gross bookings were from non-published fares. For customers who are unable to find a non-published fare for a particular itinerary, Cheap Tickets also offers a full menu of regularly published fares. In 1994, Cheap Tickets became the first non-airline to file its non-published fares through the Airline Tariff Publishing Corporation. This allows Cheap Tickets to integrate its non-published fares with published fares in a special area of the SABRE reservations system to which only Cheap Tickets has access. This system automatically sorts through millions of fares, including Cheap Ticket's own non-published fares, to identify the lowest fares available for the desired itinerary. These fares are then posted in ascending price order for use by Cheap Tickets' reservation agents and Internet customers. For published fares, Cheap Tickets receives commissions on gross bookings. Airlines generally pay commissions of 8% of total ticket price, although these commissions are frequently capped at $25 for a domestic U.S. one-way ticket and $50 for a domestic round trip ticket. Airlines also generally pay approximately 5% in commissions for online sales. Cheap Tickets receives commissions at least as favorable as those received by travel agents, and with many carriers Cheap Tickets has negotiated more favorable commission rates. In addition, Cheap Tickets frequently benefits from performance-based override commissions. 41 The following table demonstrates the breadth and availability of Cheap Tickets' product and the cost advantages of its non-published fares. It compares the lowest roundtrip restricted fares for all domestic routes listed by The New York Times and The Wall Street Journal in their fare tables for the dates shown. Cheap Tickets' fares were lower than or comparable to the lowest available prices reported by the above publications in all the routes, with an average discount of approximately $65.50 or 20.1%.
Cheap Lowest Tickets Cost Savings Availability Published Lowest --------------- Travel Segment Date(1) Source Fare(2) Fare(3) Dollars Percent - ------------------------------------------------------------------------------------------ New York--Burlington, Vt..................... 12/28/98 NY Times $150 $148 $ 2 1.3% New York--Chicago....... 12/28/98 NY Times 221 185 36 16.3 New York--Ft. Myers, Fla.................... 12/28/98 NY Times 190 178 12 6.3 New York--San Diego..... 12/28/98 NY Times 275 197 78 28.4 New York--Tucson........ 12/28/98 NY Times 398 228 170 42.7 Boston--Washington...... 12/28/98 NY Times 114 114 -- -- Denver--Las Vegas....... 12/28/98 NY Times 178 174 4 2.2 Houston--Orlando........ 12/28/98 NY Times 198 191 7 3.5 Los Angeles--Portland, Ore.................... 12/28/98 NY Times 198 169 29 14.6 San Francisco--Austin, Tx..................... 12/28/98 NY Times 324 173 151 46.6 New York--Los Angeles... 01/05/99 Wall St. Journal 286 218 68 23.8 Boston--San Francisco... 01/05/99 Wall St. Journal 315 268 47 14.9 Los Angeles--Dallas..... 01/05/99 Wall St. Journal 293 199 94 32.1 San Diego--Denver....... 01/05/99 Wall St. Journal 477 211 266 55.8 Boston--San Francisco... 01/05/99 Wall St. Journal 315 268 47 14.9 Atlanta--Boston......... 01/05/99 Wall St. Journal 298 140 158 53.0 Orlando--Detroit........ 01/05/99 Wall St. Journal 168 168 -- -- New York--Miami......... 01/05/99 Wall St. Journal 176 166 10 5.7
- -------- (1) Represents the date on which the fares listed were available for sale. (2) Represents the lowest roundtrip restricted fare available for the travel segment and on the date indicated, as reported in the January 3, 1999 edition of The New York Times and the January 8, 1999 edition of The Wall Street Journal, as applicable. The Wall Street Journal fares were stated to be the lowest available, but not all small carriers were included. Advance purchase, midweek departure, length of stay and other restrictions may apply. (3) The prices shown were those available on Cheap Tickets' reservation database system for the dates and routes indicated. Other Travel Products and Services. Cheap Tickets has contractual relationships to sell cruises on Carnival Cruises and Princess Cruises. In 1998, gross bookings from cruises were approximately $3.3 million. Cheap Tickets also has contractual relationships with major auto rental companies to provide reservations. In 1998, gross bookings from auto rental reservations were approximately $1.4 million. Cheap Tickets has recently entered into a number of contracts to sell hotel room reservations. In 1998, gross bookings from hotel reservations were negligible. Cheap Tickets sees these other travel products and services as potential areas of future growth. Call Center Operations. At December 31, 1998, Cheap Tickets had approximately 380 reservation agents and other call center employees at its four call centers. Facilities are located in Honolulu, Colorado Springs, Los Angeles and Lakeport, California. Reservation agents at these call centers receive all in-bound calls to Cheap Tickets' toll free number "1-800-OK-CHEAP." On 42 average, the call centers receive approximately 120,000 calls per day. Reservation agents currently conduct fare searches for requested itineraries, sell airline tickets, explain rules and restrictions applicable to fares and ticket delivery details, identify retail ticket locations, and provide other assistance. The call centers also provide customer service for both call center customers and Internet users. Management intends to implement its intelligent call routing and interactive voice response technology in the second quarter of 1999 to increase the productivity of agents by giving callers automated fare search capability and answers to common information requests. Cheap Tickets compensates reservation agents on an incentive basis to maximize their productivity. Call centers are segmented into teams, which Cheap Tickets awards for the highest productivity and operating effectiveness. Internet Operations. Cheap Tickets' online reservations and ticketing service through its website at "www.cheaptickets.com" provides its customers access to information on schedules, availability and non-published and published fares and enables them to book their own travel arrangements at their convenience. The website is designed to provide customers with quick, efficient, and flexible service in a manner that facilitates comparison shopping. Cheap Tickets' online service automates the processing of customer orders, interacts with the systems of third party travel suppliers, and allows Cheap Tickets to gather, store and use customer and transaction information in a comprehensive and cost-efficient manner. The website allows customers to dispense with providing personal profile and payment information after their initial registration. The website has permitted Cheap Tickets to expand its customer base through better service while reducing transactional costs. The website contains customized software applications that interface the website with the electronic booking system and database. Cheap Tickets has contracted with SABRE for the development and hosting of the site, the development of the customized software applications, and access to the electronic booking system and database. Cheap Tickets also has developed its own proprietary customized software applications that interfaces the website directly with the SABRE electronic booking system and database. Cheap Tickets maintains a relational database containing information compiled from customer profiles, shopping patterns and sales data. Cheap Tickets analyzes information in this database to develop targeted marketing programs and provide personalized and enhanced customer service. Its database is scaleable to permit large transaction volumes with no significant software changes. Cheap Tickets' systems support automated e-mail communications with customers to facilitate confirmations of orders, provide customer support, obtain customer feedback and engage in targeted marketing programs. Cheap Tickets uses a combination of proprietary and industry-standard encryption and authentication measures designed to protect a customer's information. Cheap Tickets maintains an Internet firewall to protect its internal systems and all credit card and other customer information. Strategic Relationships. Airline Relationships. Cheap Tickets currently has contracts with more than 30 airlines. In 1998, Continental accounted for approximately 25% of Cheap Tickets' sales of non-published fares, and America West and TWA, 12% each. Cheap Tickets sells non-published fares purchased under these contracts, with minimum stay and advance purchase requirements, as non-refundable, non- endorsable and non-changeable tickets and without frequent flyer mileage or upgrades. Generally, the 43 airline contracts range from one to one and a half years in length and can be cancelled on short notice. None of these carriers has any obligation to renew the contracts at their expiration, but Cheap Tickets has consistently been successful in obtaining renewals. Management believes that Cheap Tickets' track record of selling excess capacity without compromising the airlines' fare structures provides a strong incentive for the airlines to continue to use Cheap Tickets for the sale of domestic non-published fares. Management believes that Cheap Tickets' success in matching excess capacity to consumer demand for low ticket prices comes from its strategy of directing its marketing efforts to leisure travelers and selling restricted tickets directly to the public in high volumes through call centers and over the Internet. Although Cheap Tickets has a consistent history of renewing its contracts, there are no assurances that any one or several of them will be renewed. SABRE Relationship. SABRE is a world leader in the electronic distribution of travel-related products and services and is a leading provider of information technology solutions for the travel and transportation industry. SABRE's electronic booking system and database contains flight schedules, availability, and published fare information for more than 400 airlines, 50 auto rental companies, 35,000 hotel properties, and dozens of railways, tour companies, passenger ferries, and cruise lines located throughout the world. Through the SABRE reservations system, Cheap Tickets offers approximately 45 million published airfares, including those of all major domestic and international commercial airlines. In addition, SABRE's electronic booking system and database hosts Cheap Tickets' non-published fare information through a unique arrangement that permits Cheap Tickets to integrate its non-published fares with published fares on a special area of the SABRE reservations system to which only Cheap Tickets has access. This system automatically sorts through millions of fares, including Cheap Ticket's own non-published fares, to identify the lowest fares available for the desired itinerary. These choices are then posted in ascending price order for use by Cheap Tickets' reservation agents and Internet customers. Cheap Tickets is currently negotiating a new five-year agreement with SABRE to continue use of SABRE's system. Marketing and Brand Awareness. Cheap Tickets' marketing strategy is to aggressively build the Cheap Tickets' brand name, enhance customer awareness and add new customers, both through call centers and online. Cheap Tickets has established Cheap Tickets as a leading discount travel services brand through limited marketing and promotion. In 1998, Cheap Tickets spent $3.8 million for sales and marketing expenses. It has promoted itself almost exclusively through print media, primarily in Los Angeles, New York, San Francisco and Honolulu. Cheap Tickets has advertised in The New York Times, The Washington Post, The Los Angeles Times, The Seattle Post Intelligencer, The San Diego Tribune, and The Orange County Register, among other publications. In addition, a recent customer survey commissioned by Cheap Tickets determined that 54% of customers learned of Cheap Tickets by word of mouth. Cheap Tickets' growth of Internet customers was primarily through media advertisements and limited online advertising. Cheap Tickets has advertised on Yahoo, Excite, Lycos, HotBot, Snap, OnSale and Travelocity, among others. Cheap Tickets has purchased various keywords and banners, typically under contracts of 30 to 90 days in duration. As limited funds were spent on Internet promotions, Cheap Tickets has experienced relatively low customer acquisition costs. In the future, Cheap Tickets' strategy is to promote, advertise and broaden its brand recognition through a variety of marketing techniques. In 1999, it plans to spend a significant amount of the proceeds from this Offering to increase advertising in news media and on leading websites. Additionally, Cheap Tickets plans to broaden its news media advertising to Chicago, Atlanta, Denver and St. Louis. 44 Competition. Competition for Non-Published Fares. Sellers of Non-Published Fares. Cheap Tickets' existing direct competition for non-published fares comes largely from companies that specialize in the distribution of discounted fares in the form of regularly scheduled and chartered flights. Management believes that the market for the sale of non- published fares is highly fragmented. For international routes, it is highly competitive, with numerous participants offering deeply discounted fares. For domestic routes, there are few sellers, and they generally have net fare contracts with a small number of carriers for a limited number of routes. Among these, management believes Cheap Tickets is the leading seller of non-published fares for regularly scheduled domestic routes. Cheap Tickets has contracts with many carriers covering most major domestic and international routes. As the domestic airline industry continues to evolve, other competitors could increase their share of the market, or new ones could enter the market. Online Travel Companies. Online travel companies are rapidly increasing their shares of airline ticket sales, but, with limited exceptions including Priceline.com, Inc., to management's knowledge, non-published fares for regularly scheduled domestic routes are not currently offered by online travel companies. If airlines were to make such fares generally available to online travel companies, presumably they would risk eroding published fare structures. However, there can be no assurance that one or more online companies, a number of which possess larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than Cheap Tickets, will not succeed in accessing non-published fares. Airlines and Travel Agents. Airlines do not generally offer non-published fares directly or indirectly through affiliates or travel agents for regularly scheduled travel, presumably to prevent the erosion of their published fare structure. Some airlines do offer limited special discounted fares through their Internet sites that are not generally made available to travel agents. These fares are typically offered only on a last-minute, "special sale" basis. In addition, some airlines offer special promotional fares, combining low base prices and the use of frequent flyer awards. Airlines may expand their offering of special promotional fares, enter the non-published fare market or sell non- published tickets through travel agents. Certain Competitive Factors Affecting Non-Published Fares. Published fares also compete with Cheap Tickets' non-published fares. They effectively establish price ceilings for Cheap Tickets' non-published fares. From time to time, airlines also offer special fares, which may compete directly with Cheap Tickets' discounted non-published fares. Direct competition also comes from the airlines when fare wars break out. Competition for Published Fares. In the sale of published fares, Cheap Tickets currently competes with airlines, traditional travel agents, online travel services and travel industry reservation databases. The online travel services market is new, rapidly evolving and intensely competitive, and Cheap Tickets expects such competition to intensify in the future. In the online travel services market, Cheap Tickets competes for published fares with similar commercial websites of other companies, such as Expedia, which is operated by Microsoft Corporation, Travelocity, which is operated by SABRE Group Holdings Inc., a majority-owned subsidiary of American Airlines, Preview Travel, Inc., Cendant Corporation, TravelWeb, which is operated by Pegasus, Internet Travel Network, Biztravel.com and TheTrip.com, among others. Several traditional travel agencies, including larger travel agencies such as American 45 Express Travel Related Services Co. Inc., Uniglobe Travel and Carlson Wagonlit Travel, have established, or may establish in the future, commercial websites offering online travel services. Several airlines also have established commercial websites to sell their tickets and offer other online travel services. Employees. As of December 31, 1998, Cheap Tickets had approximately 380 reservation agents and other call center employees, approximately 55 retail stores and cruise employees and approximately 155 corporate and administrative employees for a company-wide total of approximately 590 employees. Cheap Tickets' ability to attract and retain highly qualified employees will be the principal determinant of its success. Cheap Tickets has a policy of using performance- based and equity-based compensation programs to reward and motivate significant contributors among its employees. Competition for qualified personnel in the industry is intense. There can be no assurance that Cheap Tickets' current and planned staffing will be adequate to support its future operations or that management will be able to hire, train, retain, motivate and manage required personnel. Although none of Cheap Tickets' employees is represented by a labor union, there can be no assurance that its employees will not join or form a labor union. However, Cheap Tickets has not experienced any work stoppages and considers its relations with its employees to be good. Facilities. Cheap Tickets is headquartered in Honolulu, Hawaii where it leases an aggregate of approximately 16,100 square feet of space housing its corporate offices and a call center. Cheap Tickets' leases for such space expire in November 2000 and December 2003, with an option to renew such leases covering approximately 13,300 square feet for an additional five years. Cheap Tickets also leases an aggregate of approximately 5,400 square feet of retail or storage space in six other locations in Hawaii. In July 1994, Cheap Tickets entered into a lease for approximately 9,600 square feet in Los Angeles, California, to serve as one call center. In March 1998, Cheap Tickets entered into a lease for approximately 13,000 square feet in Colorado Springs, Colorado, to serve as another call center. Such leases expire in September 2004 and September 2003, respectively. Cheap Tickets is currently in negotiations for a new lease in the Colorado Springs area, which it anticipates will result in improved cost and space efficiencies. Cheap Tickets also leases an aggregate of approximately 8,800 square feet of retail and administrative space in five other locations in California, approximately 975 square feet of retail space in Seattle in one location, and approximately 1,650 square feet of retail and administrative space in New York in two locations. Cheap Tickets owns a 20,000 square-foot facility in Lakeport, California, which serves as a fourth call center. Cheap Tickets anticipates that it will require additional headquarters' space within the next 12 months. There can be no assurance that such additional space will be available on commercially reasonable terms, if at all. Legal Proceedings. Cheap Tickets is not currently subject to any material legal proceedings. Cheap Tickets may from time to time become a party to various legal proceedings arising in the ordinary course of our business. Any such proceeding against Cheap Tickets, even if not meritorious, could result in the expenditure of significant financial and managerial resources. 46 MANAGEMENT Directors and Executive Officers The names, ages and positions of Cheap Tickets' directors and officers as of February 22, 1999 are as follows:
Name Age Position ---- --- -------- Michael J. Hartley...... 49 Chairman of the Board, Chief Executive Officer and President F. Michael Bartholomew.. 51 Chief Operating Officer Dale K. Jorgenson....... 59 Chief Financial Officer and Vice President of Finance Tammy A. Ishibashi...... 31 Executive Vice President of Ticket Distribution Donald K. Klabunde...... 42 Vice President of Systems & Technology Ronald L. McElfresh..... 49 Vice President of Online Services Sandra T. Hartley....... 49 Vice President of Employee Relations and Director Lester R. Stiefel....... 47 Director of Human Resources LaMont C. Brewer........ 42 Director of Call Centers Ronald J. Tsolis, Jr. .. 30 Director of Pricing and Yield Management Giles H. Bateman(3)..... 53 Director, Nominee George R. Mrkonic(3).... 46 Director, Nominee Donald J. Phillips(1)(2)......... 59 Director Cece Smith(1)(2)........ 54 Director
- -------- (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Anticipated members of the Audit and Compensation Committees upon the completion of the offering. Michael J. Hartley, a co-founder of Cheap Tickets, has served as Chief Executive Officer, President and Director of the Company since Cheap Tickets' inception in August 1986, and has served as Chairman of the Board since January 1999. Mr. Hartley is the husband of Sandra T. Hartley, Cheap Tickets' Vice President of Employee Relations and the uncle of Tammy A. Ishibashi, Cheap Tickets' Executive Vice President of Ticket Distribution. Prior to founding Cheap Tickets, Mr. Hartley founded and sold one charter airline and served as an organizer of two other airlines. F. Michael Bartholomew has served as Chief Operating Officer of Cheap Tickets since January 1999. He joined the Company in December 1997 as Senior Vice President of Operations. From April 1994 to September 1997, Mr. Bartholomew was Vice President of Customer Management, at Providian Financial Corporation, a $10 billion public consumer financial services company. From May 1991 to April 1994, Mr. Bartholomew was President of Sierra Technology, a specialized management consulting company. Prior to that, Mr. Bartholomew was a Senior Advisor of the U.S. Special Forces, Navy Seals, U.S. Navy. Mr. Bartholomew holds a B.S. degree in Finance from St. Louis University. Dale K. Jorgenson joined Cheap Tickets in May 1998 as Chief Financial Officer and Vice President of Finance. Prior to that, from 1988 to 1998, he was Chief Financial Officer and Vice President of Finance, of Interpacific Hawaii Retail Group and DFS, Ltd. Hawaii Region, both large retail chains in Hawaii. Prior to that, he held similar positions for 14 years with Castle & Cooke, Inc., now Dole Food Co. Mr. Jorgenson holds a B.A. degree in Business Administration from the University of Washington and an M.B.A. degree from Golden Gate University. He is a certified public accountant. 47 Tammy A. Ishibashi has served as Executive Vice President of Ticket Distribution since February 1995 and is responsible for managing the retail stores and ticket distribution process, which includes fare filings with the Airline Tariff Publishing Corporation, ticket distribution, refunds and ARC reporting, and for overseeing the five departments necessary to accomplish this process. She joined Cheap Tickets as Treasurer in September 1990, a position she held until November 1993 when she was appointed to Second Vice President. Ms. Ishibashi served as a Director of Cheap Tickets from September 1990 until February 1999. Ms. Ishibashi is the niece of Michael J. Hartley, Cheap Tickets' Chairman of the Board, Chief Executive Officer and President, and Sandra T. Hartley, Cheap Tickets' Vice President of Employee Relations. Donald K. Klabunde has served as Vice President of Systems & Technology since January 1999. He joined Cheap Tickets in February 1998 as Director of Systems & Technology, to direct the day-to-day and strategic operation of the information and technology department in the planning, development, implementation, and support of technological/systems enhancements throughout the company. Prior to joining the Company, he worked for Deluxe Corporation, a financial services company, since 1980 in a variety of technical support and information and technology positions. Mr. Klabunde holds a B.A. degree from the University of Minnesota. Ronald L. McElfresh joined Cheap Tickets in January 1998 as Vice President of Online Services, to design, develop, implement and maintain Cheap Tickets' website. From 1996 to 1997, he worked at Digital Island, a global Internet service provider, as the Director of Marketing. From June 1995 to June 1996, he served as general manager at Hawaiian On-Line GTE, an Internet company. From October 1994 to June 1995, he worked at GTE, a telecommunications company, as an international services product manager, where he developed and managed telephony and worked on product development for GTE's original Internet services. From April 1989 to July 1993, Mr. McElfresh was the Director of Product Marketing of Brite Voice Systems, Inc., a telecommunications company. In October 1981, Mr. McElfresh co-founded INFOCOM, a multimedia development company, where he held various product development and marketing positions, most recently as General Manager, until October 1987. Mr. McElfresh holds a B.A. degree from Blackhawk College. Sandra T. Hartley, a co-founder of Cheap Tickets, has served as Vice President of Employee Relations since January 1999. Her responsibilities include employee relations and benefits, corporate functions and public relations. She served as Chief Executive Officer of Cheap Tickets from August 1986 until September 1998. From August 1986 until January 1999, she has served as Chairman of the Board of Directors. Ms. Hartley is the wife of Michael J. Hartley, Cheap Tickets' Chairman of the Board, Chief Executive Officer and President, and the aunt of Tammy A. Ishibashi, Cheap Tickets' Executive Vice President of Ticket Distribution. Lester R. Stiefel joined Cheap Tickets in April 1998 as Director of Human Resources, to head the human resources function and to ensure that policies and practices comply with employment laws and regulations and company standards. Prior to joining the company he worked at Citibank, a financial institution, as Vice President of Senior Resources Manager from 1986 to 1998, and at The Bank of Nova Scotia, a financial institution, from 1984 to 1986. Mr. Stiefel holds a B.A. degree from Herbert Lehman College and a Masters degree from Yeshiva University. LaMont C. Brewer joined Cheap Tickets in September 1998 as Call Center Manager for the Honolulu, Hawaii location. From February 1999, Mr. Brewer has served as Director of Call Centers. Prior to joining Cheap Tickets, he worked at Michigan Bell/Ameritech, a telecommunications company, since 1985 in different positions including general manager of a 380 station call center, 48 quality assurance manager and training supervisor. Mr. Brewer holds a B.A. degree from Wayne State University. Ronald J. Tsolis, Jr. joined Cheap Tickets in May 1998 as Director of Pricing and Yield Management to maximize the profitability of retail fares offered by the Company. From July 1993 to May 1998, he held management positions in Pricing, Planning, and Sales at US Airways. Mr. Tsolis holds a B.S. degree in Business Logistics from Pennsylvania State University. Giles H. Bateman has been nominated to serve as a Director of Cheap Tickets effective immediately upon the closing of this offering. He has served as a director of CompUSA Inc. since December 1991 and as Chairman of the Board of Directors since December 1993. Since January 1992, Mr. Bateman has been an investor in and director of other public and private companies, including Boatracs, Inc. and Beverages and More, Inc. In 1991, Mr. Bateman was a visiting professor at the University of San Diego Olin Hall School of Business Administration. Mr. Bateman was co-founder of The Price Company, the operator of The Price Club chain of warehouse club retail superstores. He served as a director and Chief Financial Officer of The Price Company from 1976 to 1991 and as Vice Chairman from 1986 to 1991. Since 1998, Mr. Bateman has volunteered as the Chairman of the Board of Trustees of The Hoffman Institute in Northern California. Mr. Bateman holds a B.A. degree from Oxford University and an M.B.A. degree from Harvard University. George R. Mrkonic has been nominated to serve as a Director of Cheap Tickets effective immediately upon the closing of this offering. He has served as the Vice Chairman of Borders Group, Inc. since December 1994, and a director since its formation in August 1994. He also served as President of Borders Group, Inc. from December 1994 until January 1997. Prior to joining Borders, Mr. Mrkonic served as Executive Vice President of Specialty Retailing Group of Kmart Corporation, where he had overall responsibility for the specialty retailing operations of Kmart including, among others, Borders, Inc. and Walden Book Company, Inc., from November 1990 to November 1994. Mr. Mrkonic is also a director of Champion Enterprises, Inc., a manufacturer and seller of manufactured homes and Syntel, Inc., a computer software and development company. Donald J. Phillips has been a Director of Cheap Tickets since June 1998. Since 1986, Mr. Phillips has been a general partner of Phillips-Smith Specialty Retail Group, a retail venture capital investment firm. Mr. Phillips serves as a director on the Board of Directors for several private companies, including Garden Escape, Inc. He previously served as a director of publicly-held retailers CompUSA, Inc., PETsMART, Inc. and A Pea in the Pod, Inc. Mr. Phillips holds a B.B.A. degree in Economics from Western Michigan University and an M.B.A. degree from Harvard University. Cece Smith has been a Director of Cheap Tickets since July 1997. Since 1986, Ms. Smith has been a general partner of Phillips-Smith Specialty Retail Group, a retail venture capital investment firm. Ms. Smith serves as a director on the Board of Directors of Hot Topic, Inc., a public specialty retailer of music- related apparel and accessories for young men and women, and a number of private retail companies. She previously served as a director of publicly-held retailers BizMart, Inc. and A Pea in the Pod, Inc. Ms. Smith holds a B.B.A. degree in Business Administration from the University of Michigan and an M.L.A. degree in Liberal Arts from Southern Methodist University. Ms. Smith served as a director from 1992 to 1997 and as Chairman from 1994 to 1996 of the Federal Reserve Bank of Dallas. 49 Members of the Board of Directors are elected each year at the Company's annual meeting of stockholders and serve until the following annual meeting of the stockholders and until their respective successors have been elected and qualified. Prior to his founding of Cheap Tickets in 1986, Mr. Hartley served from 1973 to 1978 as President and Chief Operating Officer of a commuter airline operating within Hawaii, which he subsequently sold. From 1974 to 1978, he also operated a Hawaii-based aviation center, which provided fuel and maintenance services and flight instruction. In 1977, Mr. Hartley pled guilty to the charge of conspiracy with the intent to distribute a controlled substance stemming from an event that occurred in 1975, when he was 25. He served a 90-day work release program and two and one half years' probation. From 1981 to 1986, Mr. Hartley was one of several founders of two start-up Hawaii-California airlines, Hawaii Express and Air-Hawaii. Eight months after Mr. Hartley had been dismissed as President by a dissident board, Hawaii Express failed in 1983. Mr. Hartley served as an outside consultant to Air Hawaii until its initial flight in November of 1985. Air Hawaii faced major fare wars from its competitors prior to filing for bankruptcy in the spring of 1986. Committees of the Board of Directors In January 1999, the Board established an Audit Committee and a Compensation Committee. The Audit Committee monitors the corporate financial reporting and the internal and external audits of Cheap Tickets. The Audit Committee currently consists of Directors Phillips and Smith. The Compensation Committee makes recommendations regarding Cheap Tickets' employee stock plans and makes decisions concerning salaries and incentive compensation for employees and consultants of Cheap Tickets. The Compensation Committee currently consists of Directors Phillips and Smith. It is anticipated that Giles Bateman and George Mrkonic will become members of both committees upon the closing of this offering. Director Compensation Nonemployee directors receive $2,500 for each Board meeting and $1,000 for each committee meeting attended in person as compensation for their services as directors. Further, directors are reimbursed for certain reasonable expenses incurred in attending Board or committee meetings. Each non-employee director will receive upon joining the Company an option to acquire 1,500 shares of common stock at an exercise price equal to the then fair market value. These options shall vest in equal increments over three years. Each non-employee director will also receive automatic annual grants of options to acquire $25,000 worth of common stock based on an exercise price equal to the fair market value of the common stock at the date of grant. Such options will vest in equal increments over three years. For more information on Cheap Tickets' 1999 Stock Incentive Plan please refer to "Employee Stock Plans--1999 Stock Incentive Plan" on page 54. Compensation Committee Interlocks and Insider Participation No interlocking relationship exists between Cheap Tickets' Board of Directors or Compensation Committee and any member of any other company's board of directors or compensation committee, nor has any such interlocking relationship existed in the past. Limitation of Liability and Indemnification Matters Limitation of liability under Certificate of Incorporation. Pursuant to the provisions of the Delaware General Corporation Law, Cheap Tickets' Certificate of Incorporation provides that 50 directors and officers of Cheap Tickets shall not be personally liable for monetary damages to Cheap Tickets or its stockholders for a breach of fiduciary duty as a director or officer, except for liability for: . a breach of the duty of loyalty to Cheap Tickets or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . an act related to the unlawful stock repurchase or payment of a dividend under Section 174 of Delaware General Corporation Law; and . transactions from which the director or officer derived an improper personal benefit. The limitation of liability provided in the Certificate of Incorporation does not affect the availability of equitable remedies such as injunctive relief or rescission. Indemnification Agreements. Cheap Tickets' Certificate of Incorporation, as amended, also authorizes Cheap Tickets to indemnify its officers, directors and other agents, by bylaws, agreements or otherwise, to the fullest extent permitted under Delaware law. Cheap Tickets has entered into separate indemnification agreements with its directors and officers which may, in some cases, be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require Cheap Tickets, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. Indemnification under Bylaws. Cheap Tickets' Bylaws, as amended, require Cheap Tickets to indemnify its directors and officers and permit Cheap Tickets to indemnify its other employees to the fullest extent permitted by law. Cheap Tickets believes that indemnification under its Bylaws, as amended, covers at least negligence and gross negligence on the part of the indemnified party. Indemnification under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Cheap Tickets pursuant to the foregoing provisions, or otherwise, Cheap Tickets has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Pending indemnification proceedings. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of Cheap Tickets where indemnification will be required or permitted. Cheap Tickets is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 51 Executive Compensation--Summary Compensation Table The following table sets forth all compensation paid by Cheap Tickets during fiscal 1998, 1997 and 1996 to (a) Cheap Tickets' principal executive officer during fiscal 1998, (b) up to four other most highly compensated executive officers of Cheap Tickets during fiscal 1998, and (c) up to two additional individuals who would have been among Cheap Tickets' four most highly compensated executive officers, but for the fact that they were not serving as executive officers of Cheap Tickets at the end of fiscal 1998.
Long-Term Compensation --------------- Annual Compensation ---------------------- Securities Name and Principal Underlying All Other Position Year Salary(1) Bonus Options/SARs(#) Compensation($) ------------------ ---- --------- ------- --------------- --------------- Michael J. Hartley(2)... 1998 $243,783 $50,000 -- $ -- Chairman of the Board, Chief Executive 1997 229,090 -- -- -- Officer and President 1996 154,170 15,750 -- -- Sandra T. Hartley(3).... 1998 235,500 12,500 -- -- Vice President, Employee Relations 1997 233,050 -- -- -- 1996 213,400 15,750 -- -- F. Michael Bartholomew(4)......... 1998 165,000 41,250 -- -- Chief Operating Officer 1997 6,875 -- -- -- 1996 -- -- -- -- Dale K. Jorgenson(5).... 1998 78,366 21,875 -- -- Chief Financial Officer and 1997 -- -- -- -- Vice President, Finance 1996 -- -- -- -- Tammy A. Ishibashi...... 1998 100,008 25,000 -- -- Executive Vice President, 1997 73,110 -- -- -- Ticket Distribution 1996 56,600 5,000 -- -- Paul Ouyang(6).......... 1998 201,923 -- -- -- 1997 225,000 -- -- 59,854(7) 1996 28,125 -- -- 45,895(8)
- -------- (1) Amounts shown are on a full-year basis and include cash and noncash compensation. (2) For fiscal year 1999, Mr. Hartley's annual salary will be approximately $387,000. (3) For fiscal year 1999, Mrs. Hartley's annual salary will be approximately $75,000. (4) Mr. Bartholomew's annual salary for 1997 would have been $165,000 if he had been with Cheap Tickets for the entire year. He joined Cheap Tickets in December 1997. For fiscal year 1999, Mr. Bartholomew's annual salary will be approximately $190,000. (5) Mr. Jorgenson's annual salary and bonus for 1998 would have been $150,000 and $45,000, respectively, if he had been with Cheap Tickets for the entire year. He joined Cheap Tickets in May 1998. For fiscal year 1999, Mr. Jorgenson's annual salary will be approximately $175,000. (6) Mr. Ouyang was the Chief Financial Officer of Cheap Tickets until March 23, 1998, at which time he left Cheap Tickets. (7) Includes reimbursement for legal fees and taxes. (8) Includes compensation in the form of stock issuances. 52 Option Grants During 1998 The following table sets forth certain information regarding stock options granted in 1998 to the officers named in the table on page 52.
Individual Grants --------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(4) --------------------- Number of Percent of Securities Total Options Underlying Granted to Options Employees in Exercise Price Expiration Name Granted(1) Fiscal Year(2) Per Share Date(3) 5% 10% - ---- ---------- -------------- -------------- ---------- ---------- ---------- F. Michael Bartholomew.. 140,000 19.2% $0.18 11/21/07 $ 15,848 $ 40,162 Dale K. Jorgenson....... 140,000 19.2% $0.18 5/19/08 15,848 40,162
- -------- (1) Options generally have a ten-year term and vest at a rate 20% per annum. (2) Cheap Tickets granted options for a total of 728,000 shares of common stock to employees of Cheap Tickets during 1998. (3) Options may terminate before their expiration dates if optionee's status as an employee or consultant is terminated or upon the optionee's death or disability. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent Cheap Tickets' estimate or projection of future prices of its common stock prices. The actual value realized may be greater or less than the potential realizable values set forth in the table. Aggregate Option Exercises in 1998 and Year-End Option Values The following table sets forth for each of the officers named in the table on page 52 certain information concerning the number of shares subject to both exercisable and unexercisable stock options as of December 31, 1998. Also reported are values for "in-the-money" options that represent the positive spread between the respective exercise prices of outstanding options and the fair market value of Cheap Tickets' common stock as of December 31, 1998. None of these officers exercised options during 1998.
Number of Securities Underlying Value of Unexercised Unexercised Options at In-The-Money Options at December 31, 1998 December 31, 1998(1) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Michael J. Hartley......... -- -- $ -- $ -- Sandra T. Hartley.......... -- -- -- -- F. Michael Bartholomew..... 28,000 112,000 280,560 1,122,240 Dale K. Jorgenson.......... -- 140,000 -- 1,402,800 Tammy A. Ishibashi......... -- -- -- -- Paul Ouyang................ -- -- -- --
- -------- (1) Calculated by determining the difference between the fair market value of the securities underlying the option at December 31, 1998 and the exercise price of the named officer's option. The fair market value at December 31, 1998 was deemed to be 85% of $12.00, the mid-point of the proposed initial public offering price range ($10.20). Employee Stock Plans 1997 Stock Option Plan Cheap Tickets' 1997 Stock Option Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended and for the granting of nonstatutory stock options to employees, directors and consultants. The 1997 53 plan was approved by the Board of Directors in February 1998 and by Cheap Tickets' shareholders in April 1998. Unless terminated sooner, the 1997 plan will terminate automatically in 2008. A total of 1,979,642 shares of common stock were reserved for issuance pursuant to the 1997 plan. As of December 31, 1998, options to purchase 728,000 shares of common stock were outstanding under the 1997 plan, and 1,251,642 shares of common stock remained available under the 1997 plan. No further options will be granted under the 1997 plan after the effective date of the offering. The 1997 plan may be administered by the Board of Directors or a committee of the Board, which serves as the plan administrator. The plan administrator has the power to determine the terms of the options granted, including the number of shares subject to each option, the exercisability thereof, and the form of consideration payable upon such exercise. Options granted under the 1997 plan are not generally transferable by the optionee. Generally each option is exercisable during the lifetime of the optionee only by him or her. Unless otherwise specified in the option agreement, options granted under the 1997 plan must be exercised within three months of the end of the optionee's status as an employee or consultant of Cheap Tickets', or within twelve months after his or her termination by death or disability, but in no event later than the expiration of the option's term. The exercise price of all incentive stock options granted under the 1997 plan must be at least equal to the fair market value of the common stock on the date of the grant. The exercise price of nonstatutory stock options must be at least equal to 85% of the fair market value of the common stock on the date of the grant. With respect to any optionee who owns stock possessing more than 10% of the voting power of all classes of Cheap Tickets' outstanding capital stock, the exercise price of any option must equal at least 110% of the fair market value of the common stock on the date of the grant and the term of any incentive stock option may not exceed five years. The term of other options under the 1997 plan may not exceed ten years. The consideration to be paid for the shares of common stock upon exercise of an option will be determined by the plan administrator and may include, cash, check, promissory note, shares of common stock, or the assignment of part of the proceeds from the sale of shares acquired upon exercise of the option. The 1997 plan provides that in the event of a merger or a sale of all or substantially all of Cheap Tickets' assets the plan administrator has the authority to provide for the full automatic vesting and exercisability of each option, including shares as to which the option would not otherwise be exercisable. If an option becomes exercisable in full in the event of a merger or sale of assets, the plan administrator will notify the optionee that the option is fully exercisable for a specified period from the date of the notice, and the option will terminate upon the expiration of that period. To the extent the option has not been previously exercised, each option will terminate immediately prior to the consummation of the merger or sale of assets. During 1998, Cheap Tickets granted to F. Michael Bartholomew an option to acquire 140,000 shares of common stock at an exercise price of $0.18 per share. Upon the completion of this offering, the option will be fully vested and exercisable. For more information on our capitalization before and after the offering, please refer to "Capitalization" on page 22. For more information on the dilution of Cheap Tickets common stock, please refer to "Dilution" on page 23. 1999 Stock Incentive Plan Cheap Tickets' 1999 Stock Incentive Plan, which was adopted by the Board of Directors in February 1999, is expected to be approved by Cheap Tickets' stockholders prior to the offering. From and after the offering, all further option grants will be made solely under the 1999 plan. 54 Initially, 1,260,000 shares of common stock, plus an annual increase to be added on the first day of Cheap Tickets' fiscal year beginning in 2000 equal to two percent of the number of shares outstanding as of such date or a lesser number of shares determined by the plan administrator of the 1999 plan are reserved for issuance under the 1999 plan. However the maximum number of shares available for grant of incentive stock options under the 1999 plan initially is 1,260,000 shares of common stock, plus an annual increase to be added on the first day of Cheap Tickets' fiscal year beginning in 2000 equal to the lesser of (a) 700,000 shares of common stock, (b) two percent of the number of shares outstanding as of such date; or (c) a lesser number of shares determined by the plan administrator of the 1999 plan. With respect to 1999 awards granted to directors or officers, the 1999 plan is administered by the Board of Directors or a committee designated by the Board of Directors constituted to permit 1999 awards to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder. With respect to 1999 awards granted to other participants, the 1999 plan is administered by the Board of Directors or a committee designated by the Board of Directors. In each case, the respective plan administrator shall determine the provisions, terms and conditions of each 1999 awards, including, but not limited to, the 1999 award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, shares of common stock, or other consideration) upon settlement of the 1999 award, payment contingencies and satisfaction of any performance criteria. The exercise price of options under the 1999 plan must be at least equal to the fair market value of the common stock on the date of grant, and the term of the option must not exceed ten years. The term of other 1999 awards will be determined by the respective plan administrator. With respect to an employee who owns stock possessing more than 10% of the voting power of all classes of Cheap Tickets' outstanding capital stock, the exercise price of any incentive stock option must equal at least 110% of the fair market value of the common stock on the grant date and the term of the option must not exceed five years. The exercise price or purchase price, if any, of other 1999 awards will be determined based on current market prices for Cheap Tickets' common stock by the respective plan administrator. The consideration to be paid for the shares of common stock upon exercise or purchase of a 1999 award will be determined by the plan administrator and may include cash, check, promissory note, shares of common stock, or the assignment of part of the proceeds from the sale of shares acquired upon exercise or purchase of the 1999 award. Pursuant to the 1999 plan, the Board of Directors has adopted the 1999 Non- Employee Director Option Program. Under this program, each non-employee director serving on Cheap Tickets' Board of Directors upon the offering and each non-employee director appointed to the Board following the offering will receive an option to acquire 1,500 shares of common stock at an exercise price per share equal to the then fair market value of the common stock at the date of grant. In addition, following each annual stockholders' meeting commencing with the annual meeting in 2000, each non-employee director who continues as a director following the meeting and who has served as a director for at least eight months will receive an option to acquire the number of shares equal to $25,000 divided by the fair market value per share on the date of such annual meeting rounded down to the next whole share in the case of any fractional share. These options will vest and become exercisable in three equal installments on each yearly anniversary of the grant date. In the event of a merger, sale of all or substantially all of Cheap Tickets' assets, the liquidation or dissolution of Cheap Tickets, the acquisition by any person or related groups of persons of securities possessing more than 50% of the voting power of Cheap Tickets' outstanding securities with certain exceptions, and certain changes in the composition of the Board of the Directors over a period of 36 months, 55 such options will vest and become fully exercisable. The plan administrator may provide for the full automatic vesting and exercisability of unvested options in anticipation of such a transaction. Each automatic option grant will have a term of ten years and will be transferable to the extent provided in the agreement evidencing the option. 401(k) Plan Cheap Tickets has a 401(k) plan pursuant to which eligible employees may elect to reduce their current salary by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) plan. Contributions to the 401(k) plan by Cheap Tickets are discretionary. The 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by participants to the 401(k) plan, and income earned on plan contributions, are not taxed to participants until withdrawn from the 401(k) plan. Employment Agreements Cheap Tickets does not have any employment agreements with any of its key personnel. Cheap Tickets has severance agreements with Michael J. Hartley and Sandra T. Hartley. Each of the severance agreements requires Cheap Tickets to pay the respective individual an amount equal to the lesser of (a) twice his or her respective annual salary or (b) $400,000 in the event that their employment is terminated either by Cheap Tickets without cause or by them for good reason. CERTAIN TRANSACTIONS During the last fiscal year, Cheap Tickets did not enter into any transaction required to be disclosed pursuant to Item 404 of Regulation S-K. 56 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of Cheap Tickets' common stock as of February 22, 1999, and is adjusted to reflect the sale of the shares offered hereby by (a) each person (or group of affiliated persons) who is known by Cheap Tickets to own beneficially more than 5% of Cheap Tickets' common stock, (b) each of Cheap Tickets' directors, (c) each of the Named Executive Officers, and (d) all directors and executive officers as a group.
Percentage Beneficially Number of Owned(1)(2) Shares ----------------- Beneficially Before After Name of Beneficial Owner Owned(1) Offering Offering - ------------------------ ------------ -------- -------- Michael J. Hartley (3)......................... 13,395,032 92.6% 64.0% Sandra T. Hartley (4).......................... 13,395,032 92.6 64.0 Donald J. Phillips (5)......................... 2,960,552 17.0 14.1 Cece Smith (6)................................. 2,960,552 17.0 14.1 Tammy A. Ishibashi (7)......................... 704,998 4.9 3.4 Paul Ouyang (8)................................ 373,646 2.6 1.8 F. Michael Bartholomew (9)..................... 140,000 * * Dale K. Jorgenson.............................. -- * * All directors and executive officers as a group (12 persons).................................. 17,200,582 97.9 81.6
- -------- * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable within 60 days of February 23, 1999 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of each other person. Except as indicated in the footnote to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting power and investment power with respect to the shares set forth opposite such stockholder's name. (2) Based on 14,473,676 shares of common stock outstanding prior to the offering and 20,943,132 outstanding upon the completion of the offering (assumes no exercise of Underwriters' over-allotment option) and the exercise of warrants to purchase 2,969,456 shares of common stock. (3) Includes 1,903,510 shares of common stock held by the Michael J. Hartley Living Trust, 4,794,006 shares of common stock held by the Hartley Investments Limited Partnership (held for the benefit of Michael J. Hartley) and 6,697,516 shares of common stock held by Sandra T. Hartley. Mr. Hartley is the husband of Sandra T. Hartley, Cheap Tickets' Vice President, Employee Relations who owns 6,697,516 shares of common stock. Mr. Hartley's address is 1440 Kapiolani Boulevard, Honolulu, Hawaii 96814. See note (4). (4) Includes 1,903,510 shares of common stock held by the Sandra T. Hartley Living Trust, 4,794,006 shares of common stock held by the Hartley Investments Limited Partnership (held for the benefit of Sandra T. Hartley) and 6,697,516 shares of common stock held by Michael J. Hartley. Ms. Hartley is the wife of Michael J. Hartley, Cheap Tickets' Chairman of the Board, Chief Executive Officer and President who owns 6,697,516 shares of common stock. Ms. Hartley's address is 1440 Kapiolani Boulevard, Honolulu, Hawaii 96814. See note (3). 57 (5) Represents warrants held by Phillips-Smith Specialty Retail Group III, L.P. to purchase 2,960,552 shares of common stock exercisable at or within 60 days of February 22, 1999. Mr. Phillips is a co-founder and general partner of Phillips-Smith Specialty Retail Group III, L.P. Mr. Phillips' address is c/o Phillips-Smith Specialty Retail Group, 5080 Spectrum Drive, Suite 805, West Addison, Texas 75001. Phillips-Smith Specialty Retail Group III, L.P. is the holder of the majority of the 425,000 shares of mandatorily redeemable preferred stock. See note (6). (6) Represents warrants held by Phillips-Smith Specialty Retail Group III, L.P. to purchase 2,960,552 shares of common stock exercisable at or within 60 days of February 22, 1999. Ms. Smith is a co-founder and general partner of Phillips-Smith Specialty Retail Group III, L.P. Ms. Smith's address is c/o Phillips-Smith Specialty Retail Group, 5080 Spectrum Drive, Suite 805, West Addison, Texas 75001. Phillips-Smith Specialty Retail Group III, L.P. is the holder of the majority of the 425,000 shares of mandatorily redeemable preferred stock. See note (5). (7) Ms. Ishibashi is the niece of Michael J. Hartley, Cheap Tickets' Chairman of the Board, Chief Executive Officer and President, and Sandra T. Hartley, Cheap Tickets' Vice President, Employee Relations. See notes (3) and (4). (8) Represents 373,646 shares held in the name of Paul Ouyang and Deborah Ouyang, Trustees of the Ouyang 1990 Trust. (9) Represents stock options held by Mr. Bartholomew to purchase 140,000 shares of common stock exercisable upon the closing of this offering, of which 28,000 are currently exercisable. 58 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Cheap Tickets consists of 70,000,000 shares of common stock, par value $0.001 per share and 10,000,000 shares of preferred stock par value $0.01 per share, of which all issued and outstanding preferred stock prior to the initial public offering shall be redeemed upon the closing of this offering. The following description of Cheap Tickets' capital stock does not purport to be complete and is subject to and qualified in its entirety by Cheap Tickets' Certificate of Incorporation and Bylaws and by the provisions of applicable Delaware law. The Certificate of Incorporation and Bylaws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of Cheap Tickets unless such takeover or change in control is approved by the Board of Directors. Common Stock As of December 31, 1998, there were 14,473,676 shares of common stock outstanding and those shares were held of record by four stockholders. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of Cheap Tickets, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of preferred stock, if any, then outstanding. The holders of common stock have the preemptive right to purchase their pro rata portion of any additional shares of common stock whether then or thereafter authorized. The common stock has no conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock to be outstanding after the offering will be fully paid and non-assessable. Preferred Stock Upon the closing of this offering, 10,000,000 shares of preferred stock will be authorized without any shares being issued and outstanding. The Board of Directors has the authority, without further action by the stockholders, to issue the shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking and purchase fund provisions, and the number of shares constituting any series and the designations of such series. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of Cheap Tickets. Cheap Tickets has no present plan to issue any additional shares of preferred stock. Mandatorily Redeemable Preferred Stock As of December 31, 1998, there were 425,000 shares outstanding of mandatorily redeemable preferred stock. All of these shares will be redeemed upon the completion of this offering. 59 Options As of December 31, 1998, (a) options to purchase a total of 728,000 shares of common stock were outstanding; and (b) up to 1,251,642 additional shares of common stock may be subject to options granted in the future under the 1997 Stock Option Plan. No further options will be granted under the 1997 Stock Option Plan after the offering. Options granted after the offering will be granted under the 1999 Stock Incentive Plan. Warrants As of December 31, 1998, Cheap Tickets had warrants outstanding to purchase an aggregate of 2,969,456 shares of common stock at an aggregate exercise price of $2,121. The warrants are subject to adjustment for stock splits, stock dividends and the like and expire on July 15, 2002. Cheap Tickets anticipates that the warrants will be exercised immediately prior to the closing of the offering. Registration Rights As of the effective date of the registration statement, holders of 2,969,456 shares of common stock will be entitled to registration rights with respect to their shares. Holders of such shares can require Cheap Tickets to register the shares at any time following 180 days after the offering, subject to certain conditions. Delaware Anti-Takeover Law and Certain Charter Provision Delaware Anti-Takeover Law Cheap Tickets is subject to Section 203 of the Delaware General Corporation Law. This is an anti-takeover law that restricts certain transactions and business combinations between a corporation and an interested stockholder owning 15% or more of the corporation's outstanding voting stock, for a period of three years from the date the stockholder becomes an interested stockholder. Subject to certain exceptions, unless the transaction is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock of the corporation, excluding shares held by the interested stockholder, this law prohibits significant business transactions such as a merger with, disposition of assets to, or receipt of disproportionate financial benefits by the interested stockholder, or any other transaction that would increase the interested stockholder's proportionate ownership of any class or series of the corporation's stock. The statutory ban does not apply if, upon consummation of the transaction in which any person becomes an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock of the corporation. This calculation does not include shares held by persons who are both directors and officers or by certain employee stock plans. Action by Written Consent Upon completion of this offering, Cheap Tickets' Certificate of Incorporation will provide that the holders of two-thirds of the outstanding voting capital stock can take action by written consent or at a duly called annual or special meeting of stockholders. This provision may have the effect of deterring hostile takeovers or delaying changes in control or management of Cheap Tickets. Transfer Agent and Registrar The transfer agent and registrar for the common stock is American Securities Transfer and Trust, Inc., a Colorado corporation. 60 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, Cheap Tickets will have approximately 20,943,132 shares of common stock outstanding assuming (a) no exercise of the underwriters' over-allotment option, (b) no exercise of outstanding options, and (c) the exercise of warrants to purchase an aggregate of 2,969,456 shares of common stock. Effective upon the consummation of this offering, assuming no exercise of outstanding options, Cheap Tickets will have outstanding options to purchase approximately 728,000 shares of common stock. Of the common stock outstanding upon completion of this offering, the 3,500,000 shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of Cheap Tickets, as that term is defined under the Securities Act and the regulations promulgated thereunder. The remaining 17,443,132 shares of common stock held by officers, directors, employees, consultants and other stockholders of Cheap Tickets were sold by Cheap Tickets in reliance on exemptions from the registration requirements of the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act. Any shares of common stock issued upon the exercise of options or warrants held by any of such persons will constitute restricted securities. None of the outstanding shares of common stock that are restricted securities will be eligible for sale in the public market as of the date of this prospectus in reliance on Rule 144(k) under the Securities Act. All 17,443,132 shares of common stock held by existing stockholders are subject to lock-up agreements with the representatives. None of the shares subject to such lock-up agreements may be sold or transferred during the applicable lock- up period without the consent of the underwriters except for transfers pursuant to gifts or certain partnership distributions and similar transfers in which the transferee enters into a substantially similar lock-up agreement. Upon the expiration of the lock-up agreements, all of such locked-up shares will become eligible for sale 180 days, respectively, after the date of this prospectus subject to the provisions of Rules 144(k), 144 or 701. The representatives may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. In general, under Rule 144 as currently in effect, a person, including an affiliate, who has beneficially owned restricted securities for a period of at least one year from the later of the date such restricted securities were acquired from Cheap Tickets or the date they were acquired from an affiliate, is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume in the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions relating to the number and notice of sale, manner of sale and the availability of current public information about Cheap Tickets. Further, under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from Cheap Tickets and the date they were acquired from an affiliate of Cheap Tickets, a holder of such restricted securities who is not an affiliate at the time of the sale and has not been an affiliate for at least three months prior to the sale would be entitled to sell the shares immediately after the date of this prospectus without regard to the volume and manner of sale limitations described above. Any employee, director or consultant to Cheap Tickets who purchased his or her shares pursuant to a written compensation plan or contract is entitled to rely on the resale provisions of Rule 701. This permits non- affiliates to sell their Rule 701 shares beginning 90 days after the date of this prospectus without having to comply with the volume limitations and 61 holding period restrictions of Rule 144. As of December 31, 1998, there were outstanding options to purchase approximately 728,000 shares which under certain circumstances would be available for sale pursuant to Rule 701, of which all of the shares underlying such options are subject to lock-up agreements. Prior to this offering, there has been no public market for the common stock of Cheap Tickets, and any sale of substantial amounts of common stock in the open market, or the availability of shares for sale, may adversely affect the market price of the common stock and the ability of Cheap Tickets to raise funds through equity offerings in the future. As of the effective date of the registration statement, holders of 2,969,456 shares of common stock will be entitled to registration rights with respect to their shares. Holders of such shares can require Cheap Tickets to register the shares at any time following 180 days after the date of this prospectus, subject to certain conditions. 62 UNDERWRITING The several underwriters named below, for which William Blair & Company, L.L.C. and Dain Rauscher Wessels, a Division of Dain Rauscher Incorporated, are acting as representatives, have severally agreed, subject to the terms and conditions set forth in the underwriting agreement by and among Cheap Tickets and the underwriters, to purchase from Cheap Tickets, and Cheap Tickets has agreed to sell to each of the underwriters, the respective number of shares of common stock set forth opposite each underwriters' name in the table below.
Number of Underwriter Shares ----------- --------- William Blair & Company, L.L.C. ................................... Dain Rauscher Wessels.............................................. --------- Total............................................................ =========
In the underwriting agreement, the underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the common stock being sold pursuant to the Underwriting Agreement if any of the common stock being sold pursuant to the underwriting agreement is purchased. There is, however, no obligation to purchase the shares covered by the over-allotment option granted in the underwriting agreement. In the event of default by any underwriter, the underwriting agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriters shall be increased or the underwriting agreement may be terminated. The representatives of the underwriters have advised Cheap Tickets that the underwriters propose to offer the common stock to the public initially at the public offering price set forth on the cover page of this prospectus and to selected dealers at such price less a concession of not more than $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After commencement of the initial public offering, the public offering price, and other selling terms may be changed by the representatives. Cheap Tickets has granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase up to an aggregate of 525,000 additional shares of common stock at the same price per share to be paid by the underwriters for the other shares offered hereby for the purpose of covering the sale of shares in excess of the shares initially allocated in the offering. If the underwriters purchase any such additional shares pursuant to this option, each of the underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the table above. The underwriters may exercise the option only for the purpose of covering excess sales, if any, made in connection with the distribution of the shares of common stock offered hereby. Stockholders of Cheap Tickets, who hold in the aggregate 17,443,132 shares of common stock, and Cheap Tickets have agreed that for a period of 180 days after the date of this prospectus, without the prior written consent of the representatives, they will not, directly or indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an option to purchase, or otherwise dispose of, other than by operation of law, any shares of common stock or securities convertible or exchangeable into, or exercisable for, common stock. This agreement does not extend to bona fide gifts to immediate family members of such persons who agree to be bound by such restrictions, or to limited partners or shareholders, who agree to be bound by such restrictions. In considering a request for its consent to a sale or transfer within the 180-day period, the representatives will take into account 63 various factors, including, but not limited to, the number of shares requested to be sold, the anticipated manner and timing of sale, the potential impact of the sale on the market for the common stock, and market conditions generally. Cheap Tickets may grant options and issue common stock under existing stock option or stock purchase plans and issue unregistered shares in connection with any outstanding convertible securities or options during the lock-up period. For information on shares available for sale following the offering, please refer to "Risk Factors--Substantial sales of our common stock could adversely affect our stock price" on pages 19 and 20. Cheap Tickets has agreed to indemnify the underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect thereof. The representatives have informed Cheap Tickets that the underwriters will not confirm, without client authorization, sales to their client accounts as to which they have discretionary authority. Prior to this offering, there was no public market for the common stock of Cheap Tickets. Consequently, the initial public offering price for the common stock will be determined by negotiations among Cheap Tickets and the representatives. Among the factors which will be considered in such negotiations are the prevailing market conditions, the results of operations of Cheap Tickets in recent periods, the market capitalizations and stages of development, and recent market prices of securities, of other companies which Cheap Tickets and the representatives believe to be comparable to Cheap Tickets, estimates of the business potential of Cheap Tickets, the present state of Cheap Tickets' development, the general condition of the securities markets at the time of this offering, and other factors which are deemed relevant. There can be no assurance that an active trading market will develop for the common stock or that the common stock will trade in the public market subsequent to this offering at or above the initial public offering price. During and after this offering, the underwriters may purchase and sell the common stock in the open market in order to facilitate this offering. Specifically, the underwriters may over-allot or otherwise sell more shares of common stock than have been sold to them by Cheap Tickets pursuant to the underwriting agreement. The underwriters may elect to cover any such excess sales position by purchasing shares of common stock in the open market or by exercising the over-allotment option granted to them by Cheap Tickets. The underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of shares of common stock sold in this offering for their account may be reclaimed by the syndicate if such shares are repurchased by the syndicate in stabilizing or covering transactions. The activities described above may stabilize, maintain, or otherwise affect the market price of the common stock and make such price higher than it might otherwise be in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales thereof. These activities, if commenced, may be discontinued at any time without notice and may be effected on the Nasdaq Stock Market or otherwise. Neither Cheap Tickets nor any of the underwriters makes any representation or prediction as to whether the underwriters will engage in such transactions or choose to discontinue any transactions engaged in or the direction or magnitude of any effect that such transactions may have on the price of the common stock. 64 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon by Morrison & Foerster LLP, Los Angeles, California. Certain matters in connection with this offering will be passed upon for the underwriters by Sonnenschein Nath & Rosenthal, Chicago, Illinois. EXPERTS The financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. In August 1998, Cheap Tickets selected PricewaterhouseCoopers LLP as its principal independent auditors to replace KPMG LLP. The decision to retain PricewaterhouseCoopers LLP was recommended by the Board of Directors. In connection with the audit for the years ended December 31, 1996 and 1997, and the period through August 1998, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of KPMG LLP, would have caused them to make reference to the matter in their report. The report of KPMG LLP on the financial statements of Cheap Tickets for the years ended December 31, 1996 and 1997 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. ADDITIONAL INFORMATION Cheap Tickets has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to Cheap Tickets and the shares of common stock offered hereby, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. Copies of such materials may be examined without charge at, or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 (telephone 202-942-8090), and at the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New York New York 10048. The Commission maintains a World Wide Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. Reports, proxy statements and other information concerning Cheap Tickets may also be inspected at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington D.C. 20006. 65 CHEAP TICKETS, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Balance Sheets............................................................. F-3 Statements of Operations................................................... F-4 Statements of Stockholders' Equity......................................... F-5 Statements of Cash Flows................................................... F-6 Notes to the Financial Statements.......................................... F-8
F-1 Report of Independent Accountants The Stockholders and Board of Directors Cheap Tickets, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Cheap Tickets, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Cheap Tickets' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Honolulu, Hawaii February 15, 1999 F-2 CHEAP TICKETS, INC. BALANCE SHEETS December 31, 1997 and 1998
1997 1998 ----------- ----------- Assets (Note 4) Current Assets: Cash and cash equivalents.......................... $ 6,254,406 $ 2,973,988 Marketable securities.............................. -- 4,935,229 Trade accounts and other receivables............... 663,969 924,348 Refundable income taxes............................ 663,209 -- Ticket inventories................................. 119,771 286,331 Other current assets............................... 259,719 725,692 ----------- ----------- Total current assets............................. 7,961,074 9,845,588 Property and equipment, net (Note 3)................. 2,520,046 2,999,418 Property held for sale............................... 550,000 -- Other assets......................................... 172,470 380,846 ----------- ----------- $11,203,590 $13,225,852 =========== =========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable................................... $ 4,385,778 $ 4,681,055 Accrued salaries................................... 337,455 399,167 Accrued vacation................................... 79,168 421,288 Accrued expenses and other liabilities............. 140,905 222,321 Current installments of long-term debt (Note 4).... 528,825 221,469 Current installments of capital lease obligations (Note 9).......................................... 132,722 287,809 Income taxes payable............................... -- 139,640 ----------- ----------- Total current liabilities........................ 5,604,853 6,372,749 Long-term debt, excluding current installments (Note 4).................................................. 598,139 585,556 Capital lease obligations, excluding current installments (Note 9)............................... 349,542 652,359 Other noncurrent liabilities......................... 217,598 93,961 ----------- ----------- Total liabilities................................ 6,770,132 7,704,625 ----------- ----------- Commitments (Notes 8, 9 and 12) Mandatorily redeemable cumulative preferred stock, $1 par value (aggregate involuntary liquidation preference of $4,250,000, plus unpaid cumulative dividends). Issued and outstanding 425,000 shares at December 31, 1997 and 1998 (Note 5)................. 3,621,896 4,136,028 ----------- ----------- Stockholders' Equity (Notes 5, 6, 11 and 12): Preferred stock, $1 par value. Authorized 5,000,000 shares; none issued at December 31, 1997 and 1998 (except for 425,000 shares of mandatorily redeemable cumulative preferred stock shown above)............................................ -- -- Common stock, $0.01 par value. Authorized 70,000,000 shares; issued and outstanding 14,847,322 shares at December 31, 1997 and 14,473,676 shares at December 31, 1998............ 10,605 10,338 Additional paid-in capital......................... 547,017 1,246,937 Unearned compensation.............................. (19,127) (696,275) Retained earnings.................................. 273,067 824,199 ----------- ----------- Total stockholders' equity....................... 811,562 1,385,199 ----------- ----------- $11,203,590 $13,225,852 =========== ===========
The accompanying notes are an integral part of the financial statements. F-3 CHEAP TICKETS, INC. STATEMENTS OF OPERATIONS Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 ----------- ----------- ------------ Non-published fares................... $58,981,893 $96,379,304 $159,845,855 Published fare commissions and bonuses.............................. 5,613,761 6,470,082 11,268,472 ----------- ----------- ------------ Net revenues........................ 64,595,654 102,849,386 171,114,327 Cost of sales......................... 49,167,998 81,370,511 136,067,182 ----------- ----------- ------------ Gross profit.......................... 15,427,656 21,478,875 35,047,145 Selling, general and administrative expenses (Notes 10, 11 and 12)................ 14,351,321 23,091,193 33,411,112 ----------- ----------- ------------ Net operating income (loss)........... 1,076,335 (1,612,318) 1,636,033 Other income (deductions): Gain (loss) on sale or disposal of property and equipment............. 3,680 (2,164) (48,786) Interest income..................... 81,987 183,723 374,269 Interest expense.................... (91,488) (185,428) (148,253) Other, net.......................... 42,185 994 (7,731) ----------- ----------- ------------ 36,364 (2,875) 169,499 ----------- ----------- ------------ Earnings (loss) before income taxes... 1,112,699 (1,615,193) 1,805,532 Income taxes (Note 7)................. 438,997 (606,633) 740,268 ----------- ----------- ------------ Net earnings (loss)................... 673,702 (1,008,560) 1,065,264 Preferred dividends................... -- (170,000) (340,000) Accretion of mandatorily redeemable cumulative preferred stock discount.. -- (87,066) (174,132) ----------- ----------- ------------ Income (loss) available to common shares............................... $ 673,702 $(1,265,626) $ 551,132 =========== =========== ============ Basic earnings (loss) per common share................................ $ 0.05 $ (0.09) $ 0.04 =========== =========== ============ Average common shares outstanding..... 14,249,480 14,847,322 14,567,084 =========== =========== ============ Diluted earnings (loss) per common share................................ $ 0.05 $ (0.09) $ 0.03 =========== =========== ============ Average diluted common shares outstanding.......................... 14,249,480 14,847,322 17,920,868 =========== =========== ============
The accompanying notes are an integral part of the financial statements. F-4 CHEAP TICKETS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1997 and 1998
Additional Total Common Paid-In Unearned Retained Stockholders' Stock Capital Compensation Earnings Equity ------- ---------- ------------ ---------- ------------- Balance at December 31, 1995................... $ 1,000 $ -- $ -- $ 865,066 $ 866,066 Net earnings.......... -- -- -- 673,702 673,702 Issuance of common stock (Note 11)...... 53 45,842 (45,895) -- -- Amortization of unearned compensation (Note 11)............ -- -- 3,824 -- 3,824 ------- ---------- --------- ---------- ---------- Balance at December 31, 1996................... 1,053 45,842 (42,071) 1,538,768 1,543,592 Net loss.............. -- -- -- (1,008,560) (1,008,560) Issuance of warrants (Note 5)............. -- 510,652 -- -- 510,652 Accretion to mandatorily redeemable cumulative preferred stock redemption price (Note 5)............. -- -- -- (87,066) (87,066) 1000-for-1 common stock split (Note 6)................... 9,477 (9,477) -- -- -- Stock dividend (Note 6)................... 75 -- -- (75) -- Accrual of dividends on mandatorily redeemable cumulative preferred stock (Note 5)................... -- -- -- (170,000) (170,000) Amortization of unearned compensation (Note 11)............ -- -- 22,944 -- 22,944 ------- ---------- --------- ---------- ---------- Balance at December 31, 1997................... 10,605 547,017 (19,127) 273,067 811,562 Net earnings.......... -- -- -- 1,065,264 1,065,264 Accretion to mandatorily redeemable cumulative preferred stock redemption price (Note 5)............. -- -- -- (174,132) (174,132) Accrual of dividends on mandatorily redeemable preferred stock (Note 5)....... -- -- -- (340,000) (340,000) Reversal of amortization of unearned compensation (Note 11)............ -- -- (3,820) -- (3,820) Forfeiture of common stock (Note 11)...... (267) (22,680) 22,947 -- -- Stock option compensation (Note 12).................. -- 722,600 (722,600) -- -- Amortization of unearned stock option compensation (Note 12).................. -- -- 26,325 -- 26,325 ------- ---------- --------- ---------- ---------- Balance at December 31, 1998 .................. $10,338 $1,246,937 $(696,275) $ 824,199 $1,385,199 ======= ========== ========= ========== ==========
The accompanying notes are an integral part of the financial statements. F-5 CHEAP TICKETS, INC. STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 ----------- ----------- ----------- Cash flows from operating activities: Net earnings (loss).................... $ 673,702 $(1,008,560) $ 1,065,264 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Deferred income taxes................ 11,263 (19,053) (102,049) Depreciation and amortization........ 204,552 370,237 563,514 Stock option compensation............ -- -- 26,325 Stock compensation expense (benefit)........................... 3,824 22,944 (3,820) Amortization of discount on marketable securities............... -- -- (51,029) Loss (gain) on sale or disposal of property and equipment.............. (3,680) 2,164 48,786 Changes in-- Trade accounts and other receivables........................ (632,912) 152,199 (269,202) Refundable income taxes............. 39,004 (663,209) 663,209 Ticket inventories.................. (260,023) 142,998 (166,560) Other current assets................ (42,540) (105,790) (289,087) Other noncurrent assets............. (67,924) (26,267) (242,743) Accounts payable.................... 384,344 2,516,670 295,276 Accrued salaries.................... 17,667 92,702 61,712 Accrued vacation.................... 18,622 31,460 342,120 Income taxes payable................ 200,336 (200,336) 139,640 Accrued expenses and other liabilities........................ (174,119) 89,606 81,416 Other noncurrent liabilities........ 38,440 64,952 (155,284) ----------- ----------- ----------- Net cash provided by operating activities........................ 410,556 1,462,717 2,007,488 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures................... (1,295,832) (496,406) (484,817) Proceeds from sale of property and equipment............................. 36,349 10,075 551,214 Purchase of marketable securities...... -- -- (4,884,200) ----------- ----------- ----------- Net cash used in investing activities........................ (1,259,483) (486,331) (4,817,803) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of mandatorily redeemable cumulative preferred stock and common stock warrants, net........ -- 3,875,482 -- Decrease in bank overdraft............. (233,777) -- -- Proceeds from issuance of long-term debt.................................. 928,213 -- 307,200 Principal payments on long-term debt... (54,019) (56,960) (627,138) Proceeds from issuance of other debt... -- 500,000 -- Principal payments on other debt....... -- (500,000) -- Principal payments on capital lease obligations........................... (46,117) (123,786) (150,165) ----------- ----------- ----------- Net cash provided by (used in) financing activities.............. 594,300 3,694,736 (470,103) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.................. (254,627) 4,671,122 (3,280,418) Cash and cash equivalents at beginning of period.............................. 1,837,911 1,583,284 6,254,406 ----------- ----------- ----------- Cash and cash equivalents at end of period................................. $ 1,583,284 $ 6,254,406 $ 2,973,988 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-6 CHEAP TICKETS, INC. STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 -------- -------- -------- Supplemental cash flow information: Cash paid during the year for: Interest........................................ $ 91,488 $185,428 $145,447 Income taxes, net of refunds received........... 188,394 275,965 39,467 Noncash investing and financing activities: Unearned compensation for stock options granted........................................ -- -- 722,600 Satisfaction of debt obligation (Note 10)....... -- 250,000 -- Acquisitions of new equipment through capital leases......................................... 501,423 150,744 608,069 Unearned compensation for stock compensation arrangement (Note 11).......................... 45,895 -- -- Accrued and unpaid dividends on mandatorily redeemable preferred stock..................... -- 170,000 340,000
The accompanying notes are an integral part of the financial statements. F-7 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Business Cheap Tickets, Inc. ("Cheap Tickets" or "the Company") was incorporated under the laws of the state of Hawaii on August 20, 1986, for the primary purpose of providing travel services, including airline tickets, cruise tickets, auto rentals, hotel reservations and other travel products. In February 1999, Cheap Tickets reincorporated in the state of Delaware. Cheap Tickets operates in Hawaii, California, New York and Washington, with approximately 18%, 10% and 8% of sales activity to customers residing in the state of Hawaii for the years ended December 31, 1996, 1997 and 1998, respectively. Cheap Tickets deals with over 100 airline carriers. Revenues from non-published fares through three of these airline carriers accounted for approximately 61%, 60% and 49% of total non-published fares for the years ended December 31, 1996, 1997 and 1998, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the estimated fair value of property held for sale, the valuation allowance for deferred tax assets and the allowance for doubtful receivables. Management believes that such provisions and allowances have been appropriately determined in accordance with generally accepted accounting principles. Cash Equivalents Cheap Tickets considers all highly liquid debt securities with original maturities of three months or less to be cash equivalents. Marketable Securities Cheap Tickets' marketable securities are categorized as available-for-sale securities as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Available-for-sale securities are reported at fair value with unrealized holding gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Ticket Inventories Ticket inventories, consisting of prepaid Hawaii inter-island airline coupons, are stated at the lower of cost or market. Cheap Tickets does not carry any other airline ticket inventories. Inventory cost is the acquisition price of the coupons or tickets. The specific identification method is used to determine the basis of inventory and cost of coupons or tickets removed from inventory. Trade Accounts and Other Receivables Trade accounts and other receivables primarily consist of commissions and volume bonuses from travel service providers. There were no allowances for doubtful accounts receivable at December 31, 1997 and 1998. F-8 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Property and Equipment Property and equipment are carried at cost. Equipment held under capital leases is stated at the lower of the present value of minimum lease payments or estimated fair value of the equipment at the inception of the lease. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements and equipment held under capital leases are amortized on the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter. The estimated depreciable lives of major classes of property and equipment are as follows: Building and improvements................................... 40 years Leasehold improvements...................................... 5 to 40 years Furniture, fixtures and office equipment.................... 5 to 7 years Computer equipment.......................................... 3 to 5 years Vehicles.................................................... 5 years
Property Held for Sale In 1995, Cheap Tickets moved its Hawaii operations to larger leased premises. The Company's commercial condominium office facility from which it moved, was held for sale at December 31, 1997. This property was stated at estimated fair value, less costs to sell. A write-down of $94,904 was recorded in 1995. The property was sold in August 1998 and a loss of $56,000 was recorded thereon. Revenue Recognition Revenues consist of non-published fares, commissions and overrides on published fares, and volume bonuses from a travel service network. Non- published fares are fares that are bought by Cheap Tickets under negotiated net fare contracts from various airline carriers and other travel service providers and resold to consumers at fares determined by Cheap Tickets generally at a significant discount off published fares. Cheap Tickets also sells travel services at regular published fares and earns a commission on such sales. Cheap Tickets recognizes revenues and commissions when earned, which is at the time the reservation is ticketed and payment is received. Such revenues are reported net of an allowance for cancellations and refunds. Due to the restrictive nature of Cheap Tickets' sales, which are generally noncancelable and nonrefundable, cancellations and refunds are not significant. Volume bonus and override revenues are recognized at the end of each monthly or quarterly measurement period if the specified target has been achieved. Advertising Advertising costs are expensed as incurred. Advertising expenses amounted to $1,453,392, $2,495,325 and $3,823,150 for the years ended December 31, 1996, 1997 and 1998, respectively. F-9 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Cheap Tickets adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on Cheap Tickets' financial position, results of operations, or liquidity. Fair Value of Financial Instruments The fair values of Cheap Tickets' long-term debt approximates carrying values based on current financing for similar loans available to the Company. The fair values of marketable securities are based on quoted prices. Accounting for Stock Based Compensation The Company accounts for employee stock based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, as permitted by SFAS No. 123, "Accounting for Stock Based Compensation." F-10 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Per Share Data The following is a reconciliation of the numerator and denominators of the basic and diluted earnings (loss) per common share:
Income Shares Per Share Years ended December 31, (Numerator) (Denominator) Amount ------------------------ ----------- ------------- --------- 1996: Basic Income available to common shares.... $ 673,702 14,249,480 $ 0.05 ====== Effect of dilutive securities.......... -- -- ----------- ---------- Diluted Net income and assumed conversions... $ 673,702 14,249,480 $ 0.05 =========== ========== ====== Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- 1997: Basic Loss available to common shares...... $(1,265,626) 14,847,322 $(0.09) ====== Effect of dilutive securities.......... -- -- ----------- ---------- Diluted Net loss and assumed conversions..... $(1,265,626) 14,847,322 $(0.09) =========== ========== ====== Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- 1998: Basic Income available to common shares.... $ 551,132 14,567,084 $ 0.04 ====== Effect of dilutive securities Common stock warrants................ -- 2,969,456 Stock options........................ -- 384,328 ----------- ---------- Diluted Net loss and assumed conversions..... $ 551,132 17,920,868 $ 0.03 =========== ========== ======
Net earnings (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Warrants to purchase 2,969,456 shares of common stock were outstanding in 1997 but were not included in the computation of diluted loss per share for the year ended December 31, 1997 since it would have had an antidilutive effect. Such warrants had a dilutive effect for the year ended December 31, 1998. F-11 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) New Pronouncements In 1998, Cheap Tickets adopted SFAS No. 130 "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 130 states that all items that are required to be recognized under generally accepted accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 did not have an effect on Cheap Tickets' financial statements since the Company does not have elements of comprehensive income other than net earnings. SFAS No. 131 requires disclosures regarding segments of an enterprise and related information that reflects the different types of business activities in which the enterprise engages and the different economic environments in which it operates. The effect of implementing SFAS No. 131 was not significant as Cheap Tickets manages its business as a single operation segment, is domiciled entirely in the U.S. and substantially all of the Company's revenues are derived from sales of airline tickets. SFAS No. 132 standardized the disclosure requirements for pension and other postretirement benefits. The adoption of SFAS No. 132 (which does not change existing measurement or recognition standards for Cheap Tickets' defined contribution plan) did not have a material effect on Cheap Tickets' financial statements. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires the recognition of all derivative instruments as either assets or liabilities in the statement of financial position and measurement of those derivative instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Currently, Cheap Tickets does not hold derivative instruments or engage in hedging activities. The adoption of this standard is not expected to have a material effect on Cheap Tickets' financial statements. In March 1998, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." These standards are effective for Cheap Tickets' year ending December 31, 1999. Cheap Tickets has not determined the impact of the implementation of these pronouncements. Reclassifications Certain amounts in the 1997 financial statements have been reclassified to conform with the 1998 presentation. These reclassifications had no effect on net loss as previously reported. 2. Marketable Securities Marketable securities at December 31, 1998 comprised U.S. government agency debt securities having contractual maturities of less than one year. The fair value of the debt securities approximated amortized cost. There were no sales of securities in 1996, 1997 and 1998. F-12 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) 3. Property and Equipment A summary of property and equipment at December 31, 1997 and 1998 is as follows:
1997 1998 ---------- ---------- Land.................................................. $ 158,239 $ 158,239 Building improvements................................. 741,761 741,761 Leasehold improvements................................ 339,807 358,737 Furniture, fixtures and office equipment (Note 9)..... 2,089,861 3,088,240 Vehicles.............................................. 122,916 122,916 ---------- ---------- 3,452,584 4,469,893 Less accumulated depreciation and amortization........ 932,538 1,470,475 ---------- ---------- $2,520,046 $2,999,418 ========== ==========
Depreciation and amortization amounted to $204,552, $370,237 and $563,514 for the years ended December 31, 1996, 1997 and 1998, respectively. 4. Debt Long-term debt at December 31, 1997 and 1998 consists of the following:
1997 1998 ---------- -------- Bank Debt- 3.125% above an indexed rate (total rate of 8.125% at December 31, 1998) note payable in monthly installments of $5,773 including interest, due May 1, 2012, collateralized by a first mortgage on land and building.................. $ 585,816 $564,890 1.5% above bank's base rate mortgage note, payable in monthly installments of $6,000 including interest, collateralized by property held for sale. The note was repaid in 1998............................................ 496,316 -- 10% note payable in monthly installments of $1,413 including interest, balance due January 26, 2001, collateralized by a vehicle............................... 44,832 31,785 Other- 8.25% note payable in monthly installments of $13,930 including interest, due February 28, 2000................. -- 210,350 ---------- -------- Total long-term debt..................................... 1,126,964 807,025 Less current installments of long-term debt................ 528,825 221,469 ---------- -------- Long-term debt, excluding current installments............. $ 598,139 $585,556 ========== ========
F-13 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) The aggregate maturities of long-term debt subsequent to December 31, 1998 are as follows: Year ending December 31 1999.............................................................. $221,469 2000.............................................................. 69,774 2001.............................................................. 29,995 2002.............................................................. 30,935 2003.............................................................. 33,545 Later years....................................................... 421,307 -------- $807,025 ========
Cheap Tickets has available a $3,000,000 credit facility with a bank expiring on December 5, 1999. Borrowings under the credit facility accrue interest at either (1) the bank's base rate (7.75% at December 31, 1998) or (2) LIBOR plus an applicable margin, as defined, at the Company's option. The credit facility is collateralized by deposit accounts with the bank, accounts receivable, inventory, furniture and equipment and intangible assets. The credit facility contains restrictive covenants which include requirements to maintain minimum tangible net worth and meet certain financial ratios. There were no outstanding borrowings under the credit facility at December 31, 1997 and 1998. 5. Mandatorily Redeemable Cumulative Preferred Stock In July 1997, Cheap Tickets issued and sold 425,000 shares of mandatorily redeemable cumulative preferred stock, with detachable warrants to purchase an aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate exercise price of $2,121, in exchange for cash consideration of $4,250,000 (the "Equity Transaction"). The net proceeds of $3,875,482, after reflecting transaction costs of $374,518, were allocated between the warrants and preferred stock based on their relative fair values, resulting in an allocation of $510,652 and $3,364,830 to the warrants and preferred stock, respectively. The value attributable to the warrants was recorded as additional paid-in capital. The excess of the redemption value of the preferred stock of $4,250,000 over the initial carrying value of $3,364,830 is being accreted by periodic charges to retained earnings through July 25, 2002. The accretion amounted to $87,066 and $174,132 for the years ended December 31, 1997 and 1998, respectively. The preferred stock has a par value of $1 per share, is nonvoting and accrues cumulative annual dividends of $.80 per share. The dividends are payable in quarterly installments commencing on July 25, 2002. Accrued dividends amounted to $170,000 and $340,000 for the years ended December 31, 1997 and 1998, respectively. Undeclared cumulative dividends amounted to $170,000 and $510,000 as of December 31, 1997 and 1998, respectively, and have been accrued as an addition to preferred stock in the accompanying balance sheets. The preferred stock has a liquidation preference such that in the event of any liquidation, dissolution or winding up of the Company, the preferred stockholders will be entitled to redeem each share for $10, plus all accrued and unpaid dividends thereon as of the liquidation date before any distribution to other stockholders. Accordingly, retained earnings may be restricted at the liquidation date if the amounts due to the preferred stockholders exceed the carrying value of the preferred stock. F-14 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Mandatory quarterly redemption of the lesser of one-twelfth of the largest number of shares of preferred stock outstanding at any time prior to July 25, 2002, or the number of shares outstanding on such scheduled redemption date, commences on July 25, 2002, at $10 per share, plus accrued and unpaid dividends thereon. Upon the closing of an initial public offering of Cheap Tickets' common stock, the sale of substantially all of the assets of the Company, or consolidation or merger involving Cheap Tickets, the Company will be required to redeem all outstanding shares of the preferred stock, plus all accrued and unpaid dividends thereon. Cheap Tickets also has the option to redeem all or part of the outstanding shares of preferred stock at any time for $10 per share, plus accrued and unpaid dividends thereon as of the date Cheap Tickets decides to redeem such shares. All redemptions will be settled with cash. Cheap Tickets does not have the option to settle redemptions with common stock. Redemption requirements, excluding accrued and unpaid dividends, subsequent to December 31, 1998 are as follows: Year ending December 31 1999............................................................ $ -- 2000............................................................ -- 2001............................................................ -- 2002............................................................ 708,333 2003............................................................ 1,416,667 Later years..................................................... 2,125,000 ---------- $4,250,000 ==========
6. Stockholders' Equity Common Stock Warrants The detachable common stock warrants issued in conjunction with the mandatorily redeemable cumulative preferred stock (see Note 5) are currently exercisable and provide the preferred stockholders the option to purchase an aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate exercise price of $2,121. The number of shares purchasable on the exercise of the warrants will be proportionately adjusted in the event of stock dividends, distributions, subdivisions, combinations, or other changes in common stock, warrants, issuance of convertible securities or other rights, as more fully described in the warrant agreement. Appropriate adjustments will also be made to the purchase price payable per share, but the aggregate purchase price payable of $2,121 shall remain the same. The warrants expire on July 15, 2002, except that the warrants terminate immediately upon the closing of an initial public offering of Cheap Tickets' common stock, the sale of substantially all of the assets of Cheap Tickets, or the consolidation or merger of Cheap Tickets in which at least 50% of the voting power of Cheap Tickets is transferred. In addition to any adjustments made to the number of shares purchasable as previously described, if immediately prior to the first to occur of an initial public offering, a sale or an acquisition (each, a "Transfer") and if the value of the consideration to be received by the warrant holder for its shares (assuming exercise of the warrant) in connection with the Transfer plus all dividends received by the warrant holder on its preferred stock as of the date of the Transfer are less than the redemption value of the warrant holder's preferred stock multiplied by 1.25n, where n equals the number of years (rounded to the F-15 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) nearest one hundredth of a year) between the date of the Transfer and the issue date of the warrant, then the number of shares purchasable on the exercise of the warrant shall be increased to eliminate such deficiency. The increase necessary to eliminate such deficiency may not result in the warrant holders owning over 30% of the common stock on a fully diluted basis as of the date of the Transfer. In such case, all additional sums necessary to eliminate such deficiency shall be paid by the Company to the warrant holder in cash upon, and as a condition to the consummation of, the Transfer. Common Stock On June 24, 1997, Cheap Tickets' Board of Directors approved an amendment to Cheap Tickets' articles of incorporation wherein the authorized common stock of Cheap Tickets was increased from 5,000 shares at $1 par value to 5,000,000 shares at $0.01 par value, and to effect a 1000-for-1 stock split. In connection with the stock split, $9,477 was transferred to common stock from additional paid-in capital, representing the adjustment to reflect the aggregate common stock par value subsequent to the aforementioned amendment. Subsequent to the stock split, a stock dividend was declared and issued to the common stockholders on a pro rata basis so that the common stock warrants, if and when exercised, would reflect a 15% common equity interest, considering the shares of common stock outstanding and the 1,979,642 shares of common stock to be reserved for issuance under the stock option plan established in April 1998 (see Note 12). In connection with Cheap Tickets' planned initial public offering of its common stock in February 1999, the authorized common stock of Cheap Tickets was increased from 5,000,000 shares at $0.01 par value to 70,000,000 shares at $0.001 par value. The Company also effected a 14-for-one stock split. In these financial statements, all per share amounts and number of shares have been restated to reflect the stock splits and stock dividend described above. As described in Note 11, 373,646 shares were forfeited by an officer upon his resignation in March 1998. Preferred Stock In February 1999, the authorized preferred stock of Cheap Tickets was increased from 5,000,000 shares at $1 par value to 10,000,000 shares at $0.01 par value. The board of directors has the authority to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, and liquidation preferences. Restriction on Declaration and Payment of Dividends In connection with the Equity Transaction, written approval from a majority of the holders of preferred stock, common stock warrants, and common stock issued upon exercise of warrants, is required for the declaration or payment of dividends to common stockholders. F-16 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) 7. Income Taxes Income tax expense (benefit) for the years ended December 31, 1996, 1997 and 1998 was as follows:
Federal State Total --------- --------- --------- Years ended December 31 1996: Current................................ $ 340,761 $ 86,973 $ 427,734 Deferred............................... 8,889 2,374 11,263 --------- --------- --------- $ 349,650 $ 89,347 $ 438,997 ========= ========= ========= 1997: Current................................ $(468,136) $(119,444) $(587,580) Deferred............................... (15,465) (3,588) (19,053) --------- --------- --------- $(483,601) $(123,032) $(606,633) ========= ========= ========= 1998: Current................................ $ 741,237 $ 101,080 $ 842,317 Deferred............................... (54,232) (47,817) (102,049) --------- --------- --------- $ 687,005 $ 53,263 $ 740,268 ========= ========= =========
Deferred tax benefit for the year ended December 31, 1997 includes a tax benefit of $36,247 for operating loss carryforwards. The actual income tax expense (benefit) for the years ended December 31, 1996, 1997 and 1998 differed from the expected income tax expense (benefit) computed by applying the U.S. federal income tax rate of 34% to earnings (loss) before income taxes due to the following:
1996 1997 1998 -------- --------- -------- Federal "expected" income tax expense (benefit).................................... $378,318 $(549,166) $613,881 State franchise and income taxes, net of federal income tax effect.................... 60,679 (81,201) 93,888 Other......................................... -- 23,734 32,499 -------- --------- -------- $438,997 $(606,633) $740,268 ======== ========= ========
F-17 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1997 and 1998 are presented below:
1997 1998 -------- -------- Deferred tax assets: Allowance for decline in value of property held for sale not deductible for tax purposes......................... $ 38,121 $ -- Accrued rent not deductible for tax purposes............. 27,203 21,201 Accrued vacation not deductible for tax purposes......... 31,211 165,145 State tax credit carryforward............................ -- 34,129 Unearned compensation not deductible for tax purposes.... -- 10,319 Net operating loss carryforward.......................... 36,247 -- -------- -------- Total gross deferred tax assets........................ 132,782 230,794 -------- -------- Deferred tax liabilities: Property and equipment, principally due to differences between accounting and tax depreciation and amortization............................................ (59,662) (63,166) Unearned compensation deductible for tax purposes........ (7,541) -- -------- -------- Total gross deferred tax liabilities................... (67,203) (63,166) -------- -------- Net deferred tax asset................................. $ 65,579 $167,628 ======== ======== Deferred tax assets and liabilities are presented in the accompanying balance sheets as follows: Other current assets..................................... $ 31,211 $199,274 Other noncurrent assets.................................. 34,368 -- Other noncurrent liabilities............................. -- (31,646) -------- -------- $ 65,579 $167,628 ======== ========
There was no valuation allowance provided for deferred tax assets as of December 31, 1996, 1997 and 1998. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not Cheap Tickets will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. 8. Profit Sharing and 401(k) Plan Cheap Tickets sponsors a defined contribution profit sharing plan covering all employees who attained the age of 20 and completed one year of service. Vesting occurs at a rate of 20% per year commencing in the second year of participation. Contributions to the plan were at the discretion of the board of directors. Cheap Tickets did not contribute to the plan in 1996. F-18 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) Effective January 1, 1997, Cheap Tickets converted the profit sharing plan into a qualified 401(k) defined contribution plan. The 401(k) defined contribution plan allows for voluntary participant contributions of up to 15% of eligible compensation. Employer contributions are discretionary and fully vest to the participant upon the participant's completion of seven years of service. Cheap Tickets did not contribute to the 401(k) defined contribution plan in 1997 and 1998. 9. Lease Commitments Cheap Tickets is obligated under capital leases for office equipment that expire at various dates through 2004. At December 31, 1997 and 1998, the gross amounts of office equipment and related accumulated amortization recorded under capital leases are as follows:
1997 1998 -------- ---------- Office equipment....................................... $652,167 $1,260,237 Less accumulated amortization (amortization expense charged to depreciation and amortization)............. 144,570 384,869 -------- ---------- $507,597 $ 875,368 ======== ==========
Cheap Tickets has noncancelable operating leases, primarily for office space, that expire at various dates through 2009. These leases generally contain renewal options for periods ranging from one to five years. Rent expense incurred for all operating leases amounted to $519,560, $851,709, and $1,175,289 for the years ended December 31, 1996, 1997 and 1998, respectively. Future minimum lease payments under noncancelable operating leases and future minimum capital lease payments as of December 31, 1998 are as follows:
Capital Operating Leases Leases ---------- ---------- Year ending December 31 1999................................................ $ 335,435 $ 923,400 2000................................................ 321,287 933,100 2001................................................ 268,323 621,700 2002................................................ 56,371 532,500 2003................................................ 49,133 533,300 Later years......................................... 14,435 1,984,400 ---------- ---------- Total minimum lease payments...................... 1,044,984 $5,528,400 ========== Less amounts representing interest (at rates ranging from 7.75% to 14.05%)................................ 104,816 ---------- Present value of net minimum capital lease payments........................................... 940,168 Less current installments of capital lease obligations.......................................... 287,809 ---------- Capital lease obligations, excluding current installments....................................... $ 652,359 ==========
F-19 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) 10. Incentive Reimbursements from Local Governments In 1996, Cheap Tickets commenced operations of a new reservation center in Lakeport, California. As an incentive for Cheap Tickets to operate at the location, the local government agreed to reimburse Cheap Tickets for certain payroll costs related to training. Estimated reimbursements associated with payroll costs incurred of approximately $458,000 and $28,000 in 1996 and 1997, respectively, have been recorded by Cheap Tickets as a reduction of selling, general and administrative expenses in the accompanying statements of operations. At December 31, 1996, $353,164 of these incentive reimbursements were to be collected from the local government. In 1997, $250,000 of the incentive reimbursements receivable was settled by offsetting the receivable with an outstanding debt obligation to the local government of $250,000, with the remaining receivable balance collected in full. No gain or loss was recognized on the offsetting of such amounts. Additional incentives provided by the local government included the waiver of certain expenses, including lease rent and property taxes totaling approximately $99,000 and $12,000 in 1996 and 1997, respectively. Cheap Tickets also received $95,400 associated with additional lease rent incentives in 1996 and had recorded this amount as a reduction of selling, general and administrative expenses in 1996. 11. Stock Compensation Arrangement In November 1996, Cheap Tickets entered into a Restricted Stock Grant and Shareholder Agreement (Agreement) whereby 747,292 shares of common stock, after giving effect to the stock splits and a common stock dividend (see Note 6), were granted to an officer of Cheap Tickets as compensation for his employment. There was a two year vesting period whereby the shares vested 50 percent after each year of service with Cheap Tickets. The estimated fair value of the common stock shares on the date of grant of $45,895 was being amortized as compensation expense over the two year vesting period. In March 1998, the officer resigned from Cheap Tickets. In connection with the resignation, the officer forfeited his nonvested shares of common stock issued under the Agreement. Such forfeited common stock amounted to 373,646 shares. The officer's forfeiture of the common shares resulted in a benefit of $3,820 in 1998 for the recovery of compensation expense previously taken and decreases in common stock and additional paid-in capital of $267 and $22,680, respectively. 12. Stock Option Plans Cheap Tickets established a stock option plan in April 1998 which provides for a maximum of 1,979,642 shares of common stock to be issued under the plan. In 1998 Cheap Tickets granted options for 728,000 shares of common stock with exercise prices less than the estimated market prices on the grant dates. The weighted-average grant-date fair value of options granted in 1998 was $1.30. The estimated compensation cost for these options amounted to $722,600 at the grant dates. Stock option compensation expense, included in selling, general and administrative expenses, was $26,325 for the year ended December 31, 1998. The remaining unamortized compensation cost of $696,275 at December 31, 1998 will be amortized over the future vesting periods of the options. The granted options have a five year vesting period, however, options F-20 CHEAP TICKETS, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) to purchase up to 140,000 shares will fully vest should Cheap Tickets complete an initial public offering of its stock. The granted options have a ten-year exercise period from the date of the grant. The following table summarizes activity under the stock option plan for 1998 and the status at December 31, 1998.
Options Outstanding --------------------- Average Exercise Shares Price ---------- ---------- Balance at December 31, 1997......................... -- $ -- Options granted...................................... 728,000 0.31 ---------- -------- Balance at December 31, 1998......................... 728,000 $ 0.31 ========== ========
At December 31, 1998, options for 660,800 shares have an exercise price of $0.18 per share with a weighted average remaining contractual life of 9.4 years and options for 67,200 shares have an exercise price of $1.57 per share with a weighted-average remaining contractual life of 9.8 years. No options were exercisable at December 31, 1998. Under SFAS No. 123, the fair value of each grant was estimated on the grant date using the minimum value method based on the following weighted-average assumptions: Expected dividend yield.......................................... 0.00% Risk-free interest rate.......................................... 5.80% Expected life of the options..................................... 10 years
Compensation cost has been charged against income for the stock option plan under APB No. 25. The pro forma net income and pro forma earnings per share for the year ended December 31, 1998 had Cheap Tickets elected to adopt the fair- value based method of accounting prescribed by SFAS No. 123 is presented below: Net income: As reported.................................................. $1,065,264 Pro forma.................................................... $1,061,513 Basic earnings per share: As reported ................................................. $ 0.04 Pro forma.................................................... $ 0.04 Diluted earnings per share: As reported.................................................. $ 0.03 Pro forma.................................................... $ 0.03
Cheap Tickets is establishing another stock option plan which is expected to be approved by Cheap Tickets' stockholders prior to Cheap Tickets' planned initial public offering of its common stock. F-21 [CHEAP TICKETS, INC. LOGO WITH PICTURES OF WORLDWIDE DESTINATIONS] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that which is set forth in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of common stock. ----------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Summary Financial Data................................................... 5 Risk Factors............................................................. 7 Forward Looking Statements............................................... 20 Use of Proceeds.......................................................... 21 Dividend Policy.......................................................... 21 Capitalization........................................................... 22 Dilution................................................................. 23 Selected Financial Data.................................................. 24 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 26 Business................................................................. 36 Management............................................................... 47 Certain Transactions..................................................... 56 Principal Stockholders................................................... 57 Description of Capital Stock............................................. 59 Shares Eligible for Future Sale.......................................... 61 Underwriting............................................................. 63 Legal Matters............................................................ 65 Experts.................................................................. 65 Additional Information................................................... 65 Index to Financial Statements............................................ F-1
----------------- Until , 1999 (25 days after the date of this prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,500,000 Shares www.cheaptickets.com Common Stock ----------------- PROSPECTUS , 1999 ----------------- William Blair & Company Dain Rauscher Wessels a division of Dain Rauscher Incorporated - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following is an itemized list of the estimated expenses to be incurred in connection with the Offering of the securities being offered hereunder other than underwriting discounts and commissions.
Amount to be Paid ---------- Registration fee.................................................. $ 15,985 NASD filing fee................................................... 6,250 Nasdaq National Market listing fee................................ 60,000 Printing and Engraving expenses................................... 150,000 Legal fees and expenses........................................... 300,000 Blue Sky qualification fees and expenses.......................... 5,000 Accounting fees and expenses...................................... 100,000 Directors' and Officers' liability insurance...................... 100,000 Transfer Agent and registrar fees................................. 15,000 Miscellaneous..................................................... 47,765 -------- Total........................................................... $800,000 ========
Item 14. Indemnification of Directors and Officers Section 145 of the DGCL contains detailed provisions on indemnification of directors and officers against expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred in connection with legal proceedings. Section 102(a)(7) of the DGCL permits a provision in the certificate of incorporation of each corporation organized thereunder, such as the Company, eliminating or limiting, with certain exceptions, the personal liability of a director of the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The Certificate of Incorporation of the Company eliminates the liability of each of its directors to its stockholders or the Company for monetary damages for breach of fiduciary duty to the full extent provided by the Delaware General Corporation Law (the "DGCL"), as such law exists or may hereafter be amended. Indemnification applies to any threatened, pending or completed action, suit or proceeding, whether, civil, criminal, administrative or investigative. Indemnification may include all expenses (including attorneys' fees, judgments, fines, ERISA excise taxes and amounts paid in settlement) reasonably incurred by the indemnified person. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number -------- ------- Form of Underwriting Agreement...................................... 1.1 Certificate of Incorporation........................................ 3.1 Form of First Amended and Restated Certificate of Incorporation..... 3.2 Bylaws.............................................................. 3.3 Form of First Amended and Restated Bylaws........................... 3.4 Form of Indemnification Agreements.................................. 10.4
II-1 Item 15. Recent Sales of Unregistered Securities From January 1, 1996 through December 31, 1998, the Company has issued and sold the following securities: (a) the Company issued and sold 5,950,000 shares of 8% Mandatorily Redeemable Preferred Stock and warrants to purchase up to 2,969,456 shares of Common Stock to Phillips-Smith Specialty Retail Group III, L.P. and Craig Foley for an aggregate purchase price of $4,250,000; and (b) the Company issued 373,646 shares of Common Stock to a former officer of the Company as compensation with an aggregate value of $22,948. The issuances described about were deemed exempt from registration under the Securities Act in reliance upon Sections 4(2) or 3(a) of the Securities Act. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. Item 16. Exhibits and Financial Statements (a) Exhibits and Financial Statement Schedules
Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement. 3.1* Certificate of Incorporation. 3.2* Form of First Amended and Restated Certificate of Incorporation. 3.3* Bylaws. 3.4* Form of First Amended and Restated Bylaws. 4.1* Specimen Stock Certificate. 5.1 Opinion of Morrison & Foerster LLP. 10.1* 1997 Stock Option Plan. 10.2* 1999 Stock Option Plan. 10.3* Form of Severance Agreement for Michael J. Hartley and Sandra T. Hartley. 10.4* Form of Indemnification Agreement. 10.5* The Commerce Tower Office Lease dated July 2, 1995 between Tosei Shoji Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the Commerce Tower Office Lease dated June 14, 1996 and the 2nd Amendment to the Commerce Tower Office Lease dated October 9, 1997. 10.6* Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap Tickets, Inc. 10.7* Lease Agreement dated January 19, 1994 between Airport Center Associates LP and Cheap Tickets, Inc., as amended by the 1st Amendment to Lease dated July 20, 1994 and the 2nd Amendment to Lease dated April 25, 1997. 10.8* Lease dated March 31, 1998 between Executive Tower of Colorado Springs, LLC and Cheap Tickets, Inc. 10.9+ 1994 Net Fare/Commission Agreement dated October 18, 1993 between Continental Airlines, Inc. and Cheap Tickets, Inc., as amended by Addendum dated November 12, 1998.
II-2
Exhibit Number Description ------- ----------- 10.10+ 1999 Net Consolidator Agreement dated November 1, 1998 between Trans World Airlines, Inc. and Cheap Tickets, Inc. 10.11+ Consolidator Agreement dated December 14, 1998 between America West Airlines, Inc. and Cheap Tickets, Inc. 10.12* Credit Agreement dated November 26, 1997 between Bank of Hawaii and Cheap Tickets, Inc., as amended by First Loan Modification Agreement dated as of June 15, 1998; and Security Agreement dated November 26, 1997 between Bank of Hawaii and Cheap Tickets, Inc. 10.13+ Subscriber Agreement dated December 31, 1998 between The SABRE Group, Inc. and Cheap Tickets, Inc., as amended by Amendment No. 1 to SABRE Subscriber Agreement dated December 31, 1998. 10.14+ Agreement for Negotiated Fares Maintenance dated July 15, 1994 between SABRE Travel Information Network and CTI Corporation. 10.15 Sabre TravelBase System Lease Agreement between SABRE Travel Information Network and Cheap Tickets, Inc. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Morrison & Foerster LLP (included in the opinion filed herewith as Exhibit 5.1). 24.1* Power of attorney (included on the signature page). 27.1* Financial Data Schedule. 99.1* Consent of Giles H. Bateman dated as of January 19, 1999. 99.2* Consent Letter of KPMG LLP dated January 19, 1999. 99.3* Consent of George R. Mrkonic dated as of February 23, 1999.
- -------- * Previously filed. + Portions have been omitted pursuant to a confidential treatment request. (b) Financial Statement Schedules No schedules are included because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. Item 17. Undertakings In accordance with Rule 430A of Regulation C under the Securities Act of 1933, as amended (the "Securities Act"), the undersigned registrant hereby undertakes: (a) To provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) That insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of either registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling II-3 person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (d) That, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Honolulu, County of Honolulu, State of Hawaii, as of March 16, 1999. CHEAP TICKETS, INC. By: /s/ Michael J. Hartley _________________________________ Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Honolulu, County of Honolulu, State of Hawaii, as of March 16, 1999.
Signature Title --------- ----- /s/ Michael J. Hartley Chief Executive Officer, ____________________________________ President and Chairman of Michael J. Hartley the Board of Directors /s/ Dale K. Jorgenson Vice President of Finance ____________________________________ and Chief Financial Officer Dale K. Jorgenson * Executive Vice President ____________________________________ Tammy A. Ishibashi * Director ____________________________________ Sandra T. Hartley * Director ____________________________________ Donald J. Phillips * Director ____________________________________ Cece Smith
*By: /s/ Michael J. Hartley __________________________ Attorney-in-Fact II-5 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement. 3.1* Certificate of Incorporation. 3.2* Form of First Amended and Restated Certificate of Incorporation. 3.3* Bylaws. 3.4* Form of First Amended and Restated Bylaws. 4.1* Specimen Stock Certificate. 5.1 Opinion of Morrison & Foerster LLP. 10.1* 1997 Stock Option Plan. 10.2* 1999 Stock Option Plan. 10.3* Form of Severance Agreement for Michael J. Hartley and Sandra T. Hartley. 10.4* Form of Indemnification Agreement. 10.5* The Commerce Tower Office Lease dated July 2, 1995 between Tosei Shoji Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the Commerce Tower Office Lease dated June 14, 1996 and the 2nd Amendment to the Commerce Tower Office Lease dated October 9, 1997. 10.6* Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap Tickets, Inc. 10.7* Lease Agreement dated January 19, 1994 between Airport Center Associates LP and Cheap Tickets, Inc., as amended by the 1st Amendment to Lease dated July 20, 1994 and the 2nd Amendment to Lease dated April 25, 1997. 10.8* Lease dated March 31, 1998 between Executive Tower of Colorado Springs, LLC and Cheap Tickets, Inc. 10.9+ 1994 Net Fare/Commission Agreement dated October 18, 1993 between Continental Airlines, Inc. and Cheap Tickets, Inc., as amended by Addendum dated November 12, 1998. 10.10+ 1999 Net Consolidator Agreement dated November 1, 1998 between Trans World Airlines, Inc. and Cheap Tickets, Inc. 10.11+ Consolidator Agreement dated December 14, 1998 between America West Airlines, Inc. and Cheap Tickets, Inc. 10.12* Credit Agreement dated November 26, 1997 between Bank of Hawaii and Cheap Tickets, Inc., as amended by First Loan Modification Agreement dated as of June 15, 1998; and Security Agreement dated November 26, 1997 between Bank of Hawaii and Cheap Tickets, Inc. 10.13+ Subscriber Agreement dated December 31, 1998 between The SABRE Group, Inc. and Cheap Tickets, Inc., as amended by Amendment No. 1 to SABRE Subscriber Agreement dated December 31, 1998. 10.14+ Agreement for Negotiated Fares Maintenance dated July 15, 1994 between SABRE Travel Information Network and CTI Corporation. 10.15 SABRE TravelBase System Lease Agreement between SABRE Travel Information Network and Cheap Tickets, Inc.
Exhibit Number Description ------- ----------- 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Morrison & Foerster LLP (included in the opinion filed herewith as Exhibit 5.1). 24.1* Power of attorney (included on the signature page). 27.1* Financial Data Schedule. 99.1* Consent of Giles H. Bateman dated as of January 19, 1999. 99.2* Consent Letter of KPMG LLP dated January 19, 1999. 99.3* Consent of Geroge R. Mrkonic dated as of February 23, 1999.
- -------- * Previously filed. + Portions have been omitted pursuant to a confidential treatment request. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 CHEAP TICKETS, INC. 3,500,000 Shares Common Stock/1/ Underwriting Agreement ______________, 1999 William Blair & Company, L.L.C. Dain Rauscher Wessels As Representatives of the Several Underwriters Named in Schedule A c/o William Blair & Company, L.L.C. 222 West Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: Section 1. Introductory. Cheap Tickets, Inc., a Delaware corporation ("Company"), has an authorized capital stock consisting of 10,000,000 shares of Preferred Stock, par value $0.01 per share, of which 425,000 shares of Preferred Stock were outstanding as of ___________, 1999 and 70,000,000 shares of Common Stock, par value $0.001 per share ("Common Stock"), of which 14,473,676 shares were outstanding as of such date. The Company proposes to issue and sell an aggregate of 3,500,000 shares of its authorized but unissued Common Stock to the several underwriters named in Schedule A as it may be amended by the Pricing ---------- Agreement hereinafter defined ("Underwriters"), who are acting severally and not jointly. Such total of 3,500,000 shares of Common Stock proposed to be sold by the Company is hereinafter referred to as the "Firm Shares." In addition, the Company proposes to grant to the Underwriters an option to purchase up to 525,000 additional shares of Common Stock ("Option Shares") as provided in Section 4 hereof. The Firm Shares and, to the extent such option is exercised, the Option Shares, are hereinafter collectively referred to as the "Shares." You have advised the Company that the Underwriters propose to make a public offering of their respective portions of the Shares as soon as you deem advisable after the registration statement hereinafter referred to becomes effective, if it has not yet become effective, and the Pricing Agreement hereinafter defined has been executed and delivered. Prior to the purchase and public offering of the Shares by the several Underwriters, the Company and the Representatives, acting on behalf of the several Underwriters, shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the - --------- form of an exchange of any standard form of written telecommunication between the Company and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares --------- will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of _____________ /1/ Plus an option to acquire up to 525,000 additional shares from the Company to cover overallotments. the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The registration statement referred to in Section 2(a) below (as amended, if applicable) at the time it becomes effective and the prospectus constituting a part thereof (including the information, if any, deemed to be part thereof pursuant to Rule 430A(b) and/or Rule 434), as from time to time amended or supplemented, are hereinafter referred to as the "Registration Statement," and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement became or becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b)), the term Prospectus shall refer to such revised prospectus from and after the time it was provided to the Underwriters for such use. If the Company elects to rely on Rule 434 of the 1933 Act, all references to "Prospectus" shall be deemed to include, without limitation, the form of prospectus and the term sheet, taken together, provided to the Underwriters by the Company in accordance with Rule 434 of the 1933 Act ("Rule 434 Prospectus"). Any registration statement (including any amendment or supplement thereto or information which is deemed part thereof) filed by the Company under Rule 462(b) ("Rule 462(b) Registration Statement") shall be deemed to be part of the "Registration Statement" as defined herein, and any prospectus (including any amendment or supplement thereto or information which is deemed part thereof) included in such registration statement shall be deemed to be part of the "Prospectus," as defined herein, as appropriate. The Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder are hereinafter collectively referred to as the "Exchange Act." The Company hereby confirms its agreements with the Underwriters as follows: Section 2. Representations and Warranties of the Company. Except as disclosed in the Registration Statement or the Prospectus, as the case may be, the Company represents and warrants to the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-70841) and a related preliminary prospectus with respect to the Shares have been prepared and filed with the Securities and Exchange Commission ("Commission") by the Company in conformity with the requirements of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "1933 Act;" unless indicated to the contrary, all references herein to specific rules are rules promulgated under the 1933 Act); and the Company has so prepared and has filed such amendments thereto, if any, and such amended preliminary prospectuses as may have been required to the date hereof and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. There have been or will promptly be delivered to you three signed copies of such registration statement and amendments, three copies of each exhibit filed therewith, and conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus or prospectuses and final forms of prospectus for each of the Underwriters. (b) The Company does not have any subsidiaries as defined in Rule 1.02 of Regulation S-X. 2 (c) The Company has not received any order of the Commission preventing or suspending the use of any preliminary prospectus, and has not received any notice that proceedings for that purpose are pending or contemplated by the Commission, and each preliminary prospectus has conformed in all material respects with the requirements of the 1933 Act and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; and when the Registration Statement became or becomes effective, and at all times subsequent thereto, up to the First Closing Date or the Second Closing Date hereinafter defined, as the case may be, the Registration Statement, including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b), if applicable, and the Prospectus and any amendments or supplements thereto, contained or will contain all statements that are required to be stated therein in accordance with the 1933 Act and in all material respects conformed or will in all material respects conform to the requirements of the 1933 Act, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, included or will include any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from any preliminary prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically for use in the preparation thereof. (d) The Company has been duly incorporated and are validly existing as corporations in good standing under the laws of its place of incorporation, with the corporate power and authority to own its properties and conduct its business as described in the Prospectus; the Company is duly qualified to do business as a foreign corporation under the corporation law of, and is in good standing as such in, each jurisdiction in which it owns or leases properties, has an office, or in which business is conducted and such qualification is required except in any such case where the failure to so qualify or be in good standing would not have a material adverse effect upon the condition (financial or otherwise), business, assets, results of operations or prospects of the Company or upon the Company's ability to perform its obligations under this Agreement or the transactions contemplated hereby (a "Material Adverse Effect"); and no proceeding of which the Company has knowledge has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. 3 (e) As of the date of this Agreement, the Company has an authorized and outstanding capitalization as described under the caption "Capitalization" in the Prospectus. The issued and outstanding shares of capital stock of the Company as set forth in the Prospectus have been duly authorized and validly issued, are fully paid and nonassessable, and conform in all material respects to the description thereof contained in the Prospectus; and except as described in the Prospectus, there is no commitment, plan or arrangement to issue, and no outstanding option, warrant or other right calling for the issuance of, any share of capital stock of the Company; and except as described in the Prospectus, there is outstanding no security or other instrument that by its terms is convertible into or exchangeable for capital stock of the Company, and there is no commitment, plan or arrangement to issue such a security or instrument. (f) The Shares to be sold by the Company have been duly authorized and when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable, and will conform in all material respects to the description thereof contained in the Prospectus. (g) The making and performance by the Company of this Agreement and the Pricing Agreement have been duly authorized by all necessary corporate action and will not violate any provision of the Company's charter or bylaws and will not result in the breach, or be in contravention, of any provision of any material agreement, franchise, License (as hereinafter defined), indenture, mortgage, deed of trust, or other instrument to which the Company is a party or by which the Company or its property may be bound or affected, or any order, rule or regulation applicable to the Company of any court (foreign, federal, state, local or otherwise), arbitration or other alternative dispute forum, foreign, federal, state, local or other government or governmental department, agency, board, commission, bureau or instrumentality or other regulatory authority (collectively, "Governmental Authority") having jurisdiction over the Company or any of its properties, or any order of any Governmental Authority entered in any proceeding to which the Company was or is now a party or by which it is bound. No consent, approval, authorization or other order of any Governmental Authority is required for the execution and delivery of this Agreement or the Pricing Agreement or the consummation of the transactions contemplated herein or therein, except for compliance with the 1933 Act and state or province securities laws applicable to the public offering of the Shares by the several Underwriters and clearance of such offering with the National Association of Securities Dealers, Inc. ("NASD"). This Agreement has been duly executed and delivered by the Company. (h) The accountants who have expressed their opinions with respect to the financial statements and schedules included in the Registration Statement are independent accountants as required by the 1933 Act. (i) The financial statements and schedules of the Company included in the Registration Statement, including the notes thereto, present fairly the financial position of the Company as of the respective dates of such financial statements, and the results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles consistently applied throughout 4 the periods involved, except as disclosed in the Prospectus; and the financial information set forth in the Prospectus under the captions "Summary Financial Data" and "Selected Financial Data" presents fairly on the basis stated in the Prospectus, the information set forth therein. (j) The Company is not in violation of its charter or bylaws or in default under any consent decree, order, writ, judgment, award or injunction of any Governmental Authority, or in default with respect to any material provision of any lease, loan agreement, note, franchise, License (as hereinafter defined), permit or other contract obligation to which it is a party; and there does not exist any state of facts which constitutes an event of default as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default, in each case, except for defaults which neither singly nor in the aggregate are material to the Company. (k) There are no material legal or governmental proceedings pending, or to the Company's knowledge, threatened to which the Company is or may be a party or of which material property owned or leased by the Company is or may be the subject, or which are related to environmental or discrimination matters which are not disclosed in the Prospectus, or which question the validity of this Agreement or the Pricing Agreement or any action taken or to be taken pursuant hereto or thereto. (l) Except as described in the Prospectus, there are no holders of securities of the Company having rights to registration thereof, preemptive rights or rights of first refusal to purchase Common Stock from the Company. All such holders of registration rights have waived such rights with respect to the offering being made by the Prospectus. (m) The Company has good and marketable title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those, if any, reflected in such financial statements (or elsewhere in the Prospectus) or which are not material to the Company. The Company holds its leased properties which are material to the Company under valid and binding leases. (n) The Company has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as contemplated by the Prospectus, the Company has not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business and there has not been any material adverse change in their condition (financial or otherwise), business, assets, results of operations or prospects nor any material change in their capital stock, short-term debt or long-term debt. Except as disclosed in writing to the Representatives prior to the date hereof, the Company has not received notice (either formally or informally) 5 of the non-renewal or anticipated non-renewal of one or more contracts currently maintained by the Company with any of its suppliers or customers, which non-renewal(s) would or could be expected to have a Material Adverse Effect. (p) There is no material document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. (q) The Company owns and possesses all right, title and interest in and to, or has duly licensed from third parties a valid, enforceable right to use, all patents, patent rights, trade secrets, inventions, know-how, trademarks, trade names, copyrights, service marks and other proprietary rights ("Trade Rights") material to the business of the Company. The Company has not received any notice of infringement, misappropriation or conflict from any third party as to such material Trade Rights which has not been resolved or disposed of and the Company has not infringed, misappropriated or otherwise conflicted with material Trade Rights of any third parties, which infringement, misappropriation or conflict would have a Material Adverse Effect. (r) The conduct of the business of the Company is in compliance in all respects with applicable foreign, federal, state, local and other laws and regulations, except where the failure to be in compliance would not have a Material Adverse Effect. The Company has no knowledge of, nor has the Company received notice of, any violation or alleged violation by the Company of any such laws or regulations. (s) All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times exempt from the registration requirements of the 1933 Act and were duly registered with or the subject of an available exemption from the registration requirements of the applicable state or province securities laws. (t) The Company have filed all necessary foreign, federal and state income, franchise, value-added, sales and use and similar tax returns and have paid all taxes shown as due thereon, and there is no tax deficiency that has been, or to the knowledge of the Company might be, asserted against the Company or any of its properties or assets that would or could be expected to have a Material Adverse Effect. (u) A registration statement relating to the Common Stock has been declared effective by the Commission pursuant to the Exchange Act and the Common Stock is duly registered thereunder. The Shares have been approved for listing on the Nasdaq National Market, subject to notice of issuance or sale of the Shares, as the case may be. (v) The Company is not, and does not intend to conduct its businesses in a manner in which it would become, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940, as amended ("Investment Company Act"). (w) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92- 198, An Act Relating to Disclosure ----------------------------- 6 of Doing Business with Cuba, and the Company further agrees that if it --------------------------- commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (x) The Company has obtained all material licenses, permits, certificates, authorizations, approvals or consents (collectively, the "Licenses") required by any Governmental Authority to properly and legally operate or conduct the business in which it is engaged on the date hereof and which are necessary or desirable for the successful conduct of its business as conducted and as proposed to be conducted. Each License has been duly obtained, is valid and in full force and effect, is renewable by its terms or in the ordinary course of business without the need to comply with any special qualifications or procedures or to pay any amount other than routine filing fees. The Company (i) is not subject to any pending or threatened administrative or judicial proceeding to revoke, cancel or declare any License granted to it invalid in any respect, (ii) is not acting outside the scope and authority granted to it pursuant to any such License, and is not otherwise in default or in violation with respect to any such License, and no event has occurred which constitutes, or with due notice or lapse of time or both may constitute, a default by it or a violation of, any License and (iii) has not permitted any License granted to it to lapse since its original effective date, except where such lapse did not have a Material Adverse Effect. The Company has completed and submitted, on a timely basis, all reports and filings associated with its business as are required by any Governmental Authority. (y) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of their properties and as is customary for companies engaged in similar businesses in similar industries. Section 3. Representations and Warranties of the Underwriters. The Representatives, on behalf of the several Underwriters, represent and warrant to the Company that the information set forth (a) on the cover page of the Prospectus with respect to price, underwriting discount and terms of the offering and (b) under "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and is correct and complete in all material respects. Section 4. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters named in Schedule A hereto, and the Underwriters agree, severally ---------- and not jointly, to purchase 3,500,000 Firm Shares from the Company at the price per share set forth in the Pricing Agreement. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Shares set forth opposite the name of such Underwriter in Schedule A hereto. ---------- The initial public offering price and the purchase price shall be set forth in the Pricing Agreement. 7 Delivery to you of certificates for the Firm Shares through the facilities of The Depository Trust Company shall be made against receipt of a wire transfer reference number issued by the Federal Reserve System evidencing payment of the purchase price therefore by the several Underwriters by wire transfer of immediately available funds, to an account specified in writing by the Company, at or before 11:00 A.M., Chicago Time, (a) on the third business day after the effective date of this Agreement, (b) if this Agreement is executed and delivered and becomes effective after 3:30 P.M., Chicago Time, the fourth business day after the effective date of this Agreement, or (c) at such other time on such other day, not later than ten business days after the effective date of this Agreement, as shall be agreed upon by the Representatives and the Company (the "First Closing Date"). Such certificates will be in such denominations and registered in such names as you request by notice to the Company prior to 10:00 A.M., Chicago Time, on the second business day preceding the First Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 525,000 Option Shares, at the same purchase price per share to be paid for the Firm Shares, for use solely in covering any overallotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the date of the initial public offering upon notice by you to the Company setting forth the aggregate number of Option Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date, shall not be earlier than three nor later than 10 full business days after delivery of such notice of exercise. The number of Option Shares to be purchased by each Underwriter shall be determined by multiplying the number of Option Shares to be sold by the Company pursuant to such notice of exercise by a fraction, the numerator of which is the number of Firm Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the ---------- denominator of which is the total number of Firm Shares (subject to such adjustments to eliminate any fractional share purchases as you in your absolute discretion may make). The manner of payment for and delivery of the Option Shares shall be the same as for the Firm Shares as specified in the preceding paragraph. You have advised the Company that each Underwriter has authorized you to accept delivery of its Shares, to make payment and to receipt therefor. You, individually and not as the Representatives of the Underwriters, may make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by you by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligation hereunder. Section 5. Covenants of the Company. The Company covenants and agrees that: (a) The Company will advise you promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the 8 institution of any proceedings for that purpose, or of any notification of the suspension of qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceedings for that purpose, and will also advise you promptly of any request of the Commission for amendment or supplement of the Registration Statement, of any preliminary prospectus or of the Prospectus, or for additional information. (b) The Company will give you notice of its intention to file or prepare any amendment to the Registration Statement (including any post- effective amendment) or any Rule 462(b) Registration Statement or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Shares which differs from the prospectus on file at the Commission at the time the Registration Statement became or becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) and any term sheet as contemplated by Rule 434) and will furnish you with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which you or counsel for the Underwriters shall reasonably object. (c) If the Company elects to rely on Rule 434 of the 1933 Act, the Company will prepare a term sheet that complies with the requirements of Rule 434. If the Company elects not to rely on Rule 434, the Company will provide the Underwriters with copies of the form of prospectus, in such numbers as the Underwriters may reasonably request, and file with the Commission such prospectus in accordance with Rule 424(b) of the 1933 Act by the close of business in New York City on the second business day immediately succeeding the date of the Pricing Agreement. If the Company elects to rely on Rule 434, the Company will provide the Underwriters with copies of the form of Rule 434 Prospectus, in such numbers as the Underwriters may reasonably request, by the close of business in New York on the business day immediately succeeding the date of the Pricing Agreement. (d) If at any time when a prospectus relating to the Shares is required to be delivered under the 1933 Act any event occurs as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend or supplement the Prospectus, including any amendments or supplements thereto and including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Shares which differs from the prospectus on file with the Commission at the time of effectiveness of the Registration Statement, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) to comply with the 1933 Act, the Company promptly will advise you thereof and will promptly prepare and file with the Commission an amendment or supplement (in form and substance satisfactory to counsel for the Underwriters) which will correct such statement or omission or an amendment which will effect such compliance; and, in case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement, the Company upon request, but at the expense of such Underwriter, will prepare promptly such prospectus or 9 prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the 1933 Act. (e) The Company will not, prior to the earlier of the Second Closing Date or termination or expiration of the option relating to the Option Shares, enter into any material transaction, other than in the ordinary course of business, except as contemplated by the Prospectus. (f) The Company will not acquire any capital stock of the Company prior to the earlier of the Second Closing Date or termination or expiration of the option relating to the Option Shares nor will the Company declare or pay any dividend or make any other distribution upon the Common Stock payable to stockholders of record on a date prior to the earlier of the Second Closing Date or termination or expiration of the option relating to the Option Shares, except in either case as contemplated by the Prospectus. (g) As soon as practicable, but in any event not later than 15 months after the effective date of the Registration Statement, the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of at least 12 months beginning after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the 1933 Act. (h) During such period as a prospectus is required by law to be delivered in connection with offers and sales of the Shares by an Underwriter or dealer, the Company will furnish to you at its expense, subject to the provisions of subsection (d) hereof, copies of the Registration Statement, the Prospectus, each preliminary prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you may reasonably request, for the purposes contemplated by the 1933 Act. (i) The Company will cooperate with the Underwriters in qualifying or registering the Shares for sale under the securities laws of such jurisdictions as you designate, and will continue such qualifications in effect so long as reasonably required for the distribution of the Shares. In connection with such qualification or registration of the Shares, the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not currently qualified or where it would be subject to taxation as a foreign corporation. (j) During the period of five years hereafter, the Company will furnish you and each of the other Underwriters with a copy (i) as soon as practicable after the filing thereof, of each report filed by the Company with the Commission, any securities exchange or the NASD, (ii) as soon as practicable after the release thereof, of each material press release in respect of the Company, (iii) as soon as available, of each report of the Company mailed to stockholders and (iv) any additional information of a public nature concerning the Company or its business that you may reasonably request. (k) The Company will use the net proceeds received by it from the sale of the 10 Shares being sold by it in the manner specified in the Prospectus. (l) If, at the time of effectiveness of the Registration Statement, any information shall have been omitted therefrom in reliance upon Rule 430A and/or Rule 434, then immediately following the execution of the Pricing Agreement, the Company will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A, Rule 424(b) and/or Rule 434, copies of an amended Prospectus, or, if required by such Rule 430A and/or Rule 434, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. If required, the Company will prepare and file, or transmit for filing, a Rule 462(b) Registration Statement not later than the date of the execution of the Pricing Agreement. If a Rule 462(b) Registration Statement is filed, the Company shall make payment of, or arrange for payment of, the additional registration fee owing to the Commission required by Rule 111. (m) The Company will comply with all registration, filing and reporting requirements of the Exchange Act and the Nasdaq National Market which may from time to time be applicable to the Company. (n) The Company agrees not to sell, contract to sell or otherwise dispose of any Common Stock or securities convertible into Common Stock (except Common Stock issued pursuant to currently outstanding options, warrants or convertible securities) for a period of 180 days after this Agreement becomes effective without the prior written consent of William Blair & Company, L.L.C. The Company has obtained similar agreements from each of its officers and directors. At or before the time the Pricing Agreement is executed, the Company shall have delivered to you a lock-up agreement substantially in the form of Exhibit B hereto from each of the --------- Company's officers, directors and stockholders in which each such person agrees not to offer, sell, contract to sell or otherwise dispose of any Common Stock or any securities exercisable for or convertible into Common Stock for a period of 180 days after the date of such lock-up agreement without the prior written consent of William Blair & Company, L.L.C. (o) The Company will promptly deliver to the Representatives copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Shares under the 1933 Act. (p) Prior to the First Closing Date, the Company will issue no press release or other communication to the public, directly or indirectly, with respect to the Company or any of its subsidiaries or with respect to the financial condition, results of operations, business, properties, assets or liabilities of any of them, or the offering of the Shares, without your prior consent, which consent shall not be unreasonably withheld. Section 6. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective as to all of its provisions or is terminated, the Company agrees to pay (i) all costs, fees and expenses (other than legal fees and disbursements of counsel for the Underwriters and the expenses incurred by the Underwriters) incurred in connection with the performance of the Company's obligations hereunder, including 11 without limiting the generality of the foregoing, all fees and expenses of legal counsel for the Company and of the Company's independent accountants, all costs and expenses incurred in connection with the preparation, printing, filing and distribution of the Registration Statement, each preliminary prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Pricing Agreement and the blue sky memorandum, (ii) all costs, fees and expenses (including reasonable legal fees and disbursements of counsel for the Underwriters) incurred by the Underwriters in connection with qualifying or registering all or any part of the Shares for offer and sale under applicable state or province securities laws, including the preparation of a blue sky memorandum relating to the Shares and clearance of such offering with the NASD; and (iii) all fees and expenses of the Company's transfer agent, printing of the certificates for the Shares and all transfer taxes, if any, with respect to the sale and delivery of the Shares to the several Underwriters. Section 7. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Shares on the First Closing Date and the Option Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective either prior to the execution of this Agreement or not later than 1:00 P.M., Chicago Time, on the first full business day after the date of this Agreement, or such later time as shall have been consented to by you but in no event later than 1:00 P.M., Chicago Time, on the third full business day following the date hereof; and prior to the First Closing Date or the Second Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company or you, shall be contemplated by the Commission. If the Company has elected to rely upon Rule 430A and/or Rule 434, the information concerning the initial public offering price of the Shares and price-related information shall have been transmitted to the Commission for filing pursuant to Rule 424(b) within the prescribed period and the Company will provide evidence satisfactory to the Representatives of such timely filing (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rules 430A and 424(b)). If a Rule 462(b) Registration Statement is required, such Registration Statement shall have been transmitted to the Commission for filing and become effective within the prescribed time period and, prior to the First Closing Date, the Company shall have provided evidence of such filing and effectiveness in accordance with Rule 462(b). (b) The Shares shall have been qualified for sale under the state or province securities laws of such jurisdictions as shall have been specified by the Representatives. (c) The legality and sufficiency of the authorization, issuance and sale or transfer and sale of the Shares hereunder, the validity and form of the certificates representing the 12 Shares, the execution and delivery of this Agreement and the Pricing Agreement, and all corporate proceedings and other legal matters incident thereto, and the form of the Registration Statement and the Prospectus (except financial statements) shall have been approved by counsel for the Underwriters. (d) You shall not have advised the Company that the Registration Statement or the Prospectus or any amendment or supplement thereto, contains an untrue statement of fact, which, in the opinion of counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (e) Subsequent to the execution and delivery of this Agreement, there shall not have occurred any change, or any development involving a prospective change, in or affecting particularly the business or properties of the Company or its subsidiaries, whether or not arising in the ordinary course of business, which, in the judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or purchase of the Shares as contemplated hereby. (f) There shall have been furnished to you, as Representatives of the Underwriters, on the First Closing Date or the Second Closing Date, as the case may be, except as otherwise expressly provided below: (i) An opinion of Morrison & Foerster LLP, counsel for the Company, addressed to the Underwriters and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: 13 (1) the Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to own its properties and conduct its business as described in the Prospectus. The Company is duly qualified to transact business as a foreign corporation, and is in good standing in the States of Hawaii, California, Colorado and New York. There are no other jurisdictions other than the above where the failure to qualify to do business as a foreign corporation would have a Material Adverse Effect; (2) this Agreement and the Pricing Agreement have been duly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company; (3) the Shares have been duly authorized and, upon delivery to the Underwriters against payment therefor in accordance with the terms of this Agreement and the Pricing Agreement, will be validly issued, fully paid and nonassessable and will be free of any pledge, lien, encumbrance, claim, or rights of first refusal in favor of, stockholders with respect to any of the Shares or the issuance or sale thereof (other than any pledge, lien, encumbrance, claim or right of first refusal of a purchaser of Shares), and the issuance of the Shares is not subject to preemptive rights. The Shares to be sold hereunder have been duly and validly authorized and qualified for inclusion on the Nasdaq National Market, subject to notice of issuance; (4) all outstanding shares of the Company's Common Stock have been duly authorized, validly issued and are fully paid and nonassessable and free of preemptive rights; (5) the execution and delivery of this Agreement and the Pricing Agreement and the performance by the Company of its terms will not violate any federal or applicable state securities law or will not materially violate any statute, order, rule or regulation of any Governmental Authority having jurisdiction over the Company; (6) the execution and delivery of this Agreement and the Pricing Agreement and the performance by the Company of their terms do not violate or result in a violation of the Company's certificate of incorporation or bylaws or any judgment, order or decree, known to such counsel, of any court or arbiter, to which the Company is a party, and, to such counsel's knowledge, will not constitute a material breach of the terms, conditions or provisions of or constitute a default under any contract, undertaking, indenture, License or other agreement or instrument by which the Company or its property is now bound or to which the Company is now a party; (7) the authorized capital stock of the Company, of which there is outstanding the amount set forth in the Registration Statement and the 14 Prospectus, conforms in all material respects to the description thereof contained under the heading "Description of Capital Stock" in the Prospectus; (8) the Registration Statement has become effective under the 1933 Act, and such counsel is not aware after reasonable inquiry and investigation that any stop order suspending the effectiveness thereof has been issued or any proceedings for that purpose have been instituted or are pending or threatened under the 1933 Act; (9) the Registration Statement and Prospectus, as of the effective date thereof, complied as to form in all material respects with the requirements of the 1933 Act (except as to the financial statements, supporting schedules, footnotes and other financial and statistical information included therein, as to which such counsel expresses no opinion). Such counsel does not know of any statutes, rules and regulations required to be described or referred to in the Registration Statement or the Prospectus that are not described; (10) the statements under the captions "Management -- Stock Option Plan" and "-- 401(k) Plan," "Description of Capital Stock" and "Risk Factors -- Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present, in all material respects, the information required to be disclosed with respect to such documents and matters by the 1933 Act and the rules and regulations thereunder; (11) there are no legal or governmental proceedings pending or threatened, and no contract or other document, known to such counsel of a character required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that is not described or filed, as required; (12) no authorization, approval or consent of any court or governmental authority or agency is required in connection with the transactions contemplated by this Agreement and the Pricing Agreement, except such as have been obtained under the Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the several Underwriters; (13) to such counsel's knowledge after reasonable inquiry and investigation, the Company is not in violation of its charter or is in breach of, or in default under (nor has any event occurred which, with notice, lapse of time or both would constitute a breach of, or default under) any indenture, lease, credit agreement or other agreement or instrument to which the Company is a party or by which the Company's properties may be bound are affected, where such violation or breach or default could have a Material 15 Adverse Effect; (14) except as disclosed in the Prospectus, no person has the right, contractual or otherwise, to cause the Company to issue, or register pursuant to the 1933 Act, any shares of capital stock of the Company, in connection with the issuance and sale of the Shares to be sold by the Company to the Underwriters pursuant to this Agreement; (15) the Company is not an "investment company" or a person "controlled by" an "investment company" within the meaning of the Investment Company Act; and (16) to such counsel's knowledge after reasonable inquiry and investigation, the Company has obtained all material Licenses required by any Governmental Authority to properly and legally operate or conduct the business in which it is engaged on the Closing Date and which are necessary or desirable for the successful conduct of its business as it is conducted and proposed to be conducted, and each such material License has been duly obtained, is valid and in full force and effect, and is renewable by its terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amount other than routine filing fees. To such counsel's knowledge after reasonable inquiry and investigation, the Company (a) is not subject to any pending or threatened administrative or judicial proceeding to revoke, cancel or declare any material License granted to it invalid in any respect, (b) is not acting outside the scope and authority granted to it pursuant to any such License, or otherwise in default or in violation with respect to any such material License, and no event has occurred which constitutes, or with due notice or lapse of time or both may constitute, a default by it or a violation of, any material License and (c) has not permitted any material License granted to it to lapse since its original effective date. In addition, such counsel shall state that they have participated in conferences with the Representatives and with representatives of the Company and its accountants concerning the Registration Statement and the Prospectus and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements. Based upon and subject to the foregoing, such counsel has no reason to believe that either the Registration Statement (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434, if applicable) or the Prospectus, or the Registration Statement or the Prospectus as amended or supplemented (except for the financial statements and other statistical or financial data included therein as to which such counsel need express no opinion), as of their respective effective or issue dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or 16 necessary to make the statements therein not misleading or that the Prospectus as amended or supplemented, if applicable, as of the First Closing Date or the Second Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. In rendering such opinion, such counsel may state that they are relying upon the certificate of the Company's Chief Executive Officer, and the transfer agent for the Common Stock, as to the number of shares of Common Stock at any time or times outstanding. Such counsel may also rely upon the opinions of competent local counsel satisfactory to counsel to the Underwriters as to legal matters in jurisdictions other than those in which they are domiciled and, as to factual matters, on certificates of officers of the Company and of state or province officials, in which case their opinion is to state that they are so doing and copies of such opinions or certificates are to be attached to the opinion unless such opinions or certificates (or, in the case of certificates, the information therein) have been furnished to the Representatives in other form. (ii) Such opinion or opinions of Sonnenschein Nath & Rosenthal, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the validity of the Shares to be sold by the Company, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. (iii) A certificate of the chief executive officer and the principal financial officer of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) the representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date; and (2) the Commission has not issued an order preventing or suspending the use of the Prospectus or any preliminary prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the knowledge of the respective signers after reasonable inquiry and investigation, no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. 17 The delivery of the certificate provided for in this subparagraph shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (1) and (2) of this subparagraph to be set forth in such certificate. (iv) At the time the Pricing Agreement is executed and also on the First Closing Date or the Second Closing Date, as the case may be, there shall be delivered to you a letter addressed to you, as Representatives of the Underwriters, from PricewaterhouseCoopers LLP, independent auditors, the first one to be dated the date of the Pricing Agreement, the second one to be dated the First Closing Date and the third one (in the event of a second closing) to be dated the Second Closing Date, to the effect set forth in Schedule B. There ---------- shall not have been any change or decrease specified in the letters referred to in this subparagraph which makes it impractical or inadvisable in the judgment of the Representatives to proceed with the public offering or purchase of the Shares as contemplated hereby. (v) At or before the time the Pricing Agreement is executed, there shall be delivered to you a lock-up agreement substantially in the form of Exhibit B hereto from each of the Company's officers, --------- directors and stockholders, in which each such person agrees not to offer, sell, contract to sell or otherwise dispose of any Common Stock or any securities exercisable for or convertible into Common Stock for a period of 180 days after the date of such lock-up agreement without the prior written consent of William Blair & Company, L.L.C. (vii) Such further certificates and documents as you may reasonably request. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to you and to Sonnenschein Nath & Rosenthal, counsel for the Underwriters, which approval shall not be unreasonably withheld. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification to the Company without liability on the part of any Underwriter or the Company, except for the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof. Section 8. Reimbursement of Underwriters' Expenses. If the sale to the Underwriters of the Shares on the First Closing Date is not consummated because any condition of the Underwriters' obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, unless such failure to satisfy such condition or to comply with any provision hereof is due to the default or omission of any Underwriter, the Company agrees to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been reasonably incurred by you and them in connection 18 with the proposed purchase and sale of the Shares. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 6 and Section 10 shall at all times be effective and shall apply. Section 9. Effectiveness of Registration Statement. You and the Company will use your and its best efforts to cause the Registration Statement to become effective, if it has not yet become effective, and to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. Section 10. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the 1933 Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the 1933 Act, the Exchange Act or other foreign, federal or state statutory law or regulation, at common law or otherwise (including in settlement of any litigation if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A and/or Rule 434, if applicable, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that (i) any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use therein; or (ii) if such statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus and (1) any such loss, claim, damage or liability suffered or incurred by any Underwriter (or any person who controls any Underwriter) resulted from an action, claim or suit by any person who purchased Shares which are the subject thereof from such Underwriter in the offering and (2) such Underwriter failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Shares in any case where such delivery is required by the 1933 Act. In addition to their other obligations under this Section 10(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 10(a), it will reimburse the Underwriters on a monthly basis for all reasonable legal and other expenses incurred for one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters which shall be designated in writing by William Blair & Company, L.L.C. in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and 19 enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company shall not be liable for any settlement of such action, suit or proceeding effected without its written consent, which consent shall not be unreasonably withheld. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the 1933 Act or the Exchange Act, against any losses, claims, damages or liabilities to which the Company, or any such director, officer or controlling person may become subject under the 1933 Act, the Exchange Act or other foreign, federal or state statutory law or regulation, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto in reliance upon and in conformity with Section 3 of this Agreement or any other written information furnished to the Company by such Underwriter through the Representatives specifically for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. In addition to their other obligations under this Section 10(b), the Underwriters agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 10(b), they will reimburse the Company on a monthly basis for all reasonable legal and other expenses incurred for one separate firm of attorneys (in addition to any local counsel) at any time for the Company which shall be designated in writing by the Company in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. No Underwriter shall be liable for any settlement of such action, suit or proceeding effected without the written consent of all of the Underwriters, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party except to the extent that the indemnifying party was prejudiced by such failure to notify. In case any such action is brought 20 against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, or the indemnified and indemnifying parties may have conflicting interests which would make it inappropriate for the same counsel to represent both of them, the indemnified party or parties shall have the right to select separate counsel to assume such legal defense and otherwise to participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defense in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Representatives in the case of paragraph (a) representing all indemnified parties not having different or additional defenses or potential conflicting interest among themselves who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such proceeding. (d) If the indemnification provided for in this Section is unavailable to an indemnified party under paragraphs (a) or (b) hereof in respect of any losses, claims, damages or liabilities referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the 21 Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The respective relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion in the case of the Company as the total price paid to the Company for the Shares by the Underwriters (net of underwriting discount but before deducting expenses), and in the case of the Underwriters as the underwriting discount received by them bears to the total of such amounts paid to the Company and received by the Underwriters as underwriting discount in each case as contemplated by the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section are several in proportion to their respective underwriting commitments and not joint. (e) The provisions of this Section shall survive any termination of this Agreement. Section 11. Default of Underwriters. It shall be a condition to the agreement and obligation of the Company to sell and deliver the Shares hereunder, and of each Underwriter to purchase the Shares hereunder, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representatives of all such Shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Shares hereunder on the First Closing Date and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10 percent of the total number of Shares which the Underwriters are obligated to purchase on the First Closing Date, the Representatives may make arrangements satisfactory to the Company for the purchase of such Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriters agreed but failed to purchase on such date. If any Underwriter or Underwriters so default and the aggregate number of Shares with respect to which such default or defaults occur is more than the above percentage and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company, except for the expenses to be paid by the Company pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof. In the event that Shares to which a default relates are to be purchased by the nondefaulting Underwriters or by another party or parties, the Representatives or the Company shall have the right 22 to postpone the First Closing Date for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. Section 12. Effective Date. This Agreement shall become effective upon execution and delivery of this Agreement and the Pricing Agreement. Section 13. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you or by you by notice to the Company at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company to any Underwriter (except for the expenses to be paid or reimbursed pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof) or of any Underwriter to the Company. (b) This Agreement may also be terminated by you prior to the First Closing Date, and the option referred to in Section 4, if exercised, may be cancelled at any time prior to the Second Closing Date, if (i) trading in securities on the New York Stock Exchange shall have been suspended or minimum prices shall have been established on such exchange, or (ii) a banking moratorium shall have been declared by Illinois, New York, or United States authorities, or (iii) there shall have been any change in financial markets or in political, economic or financial conditions which, in the opinion of the Representatives, either renders it impracticable or inadvisable to proceed with the offering and sale of the Shares on the terms set forth in the Prospectus or materially and adversely affects the market for the Shares, or (iv) there shall have been an outbreak of major armed hostilities between the United States and any foreign power which in the opinion of the Representatives makes it impractical or inadvisable to offer or sell the Shares. Any termination pursuant to this paragraph (b) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to any Underwriter (except for expenses to be paid or reimbursed pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof). Section 14. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, principals, members, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder. Section 15. Notices. All communications hereunder will be in writing and, if sent to the Underwriters will be mailed, delivered, telecopied or telegraphed and confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, Attn: Mark A. 23 Timmerman, Fax (312) 368-9418, with a copy to Arthur J. Simon, Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, Fax (312) 876-7934; and if sent to the Company will be mailed, delivered or telegraphed and confirmed to the Company at its corporate headquarters with a copy to Henry M. Fields, Esq., Morrison & Foerster LLP, 555 West Fifth Street, Suite 3500, Los Angeles, California 90013-1024, Fax (213) 892-5454. Section 16. Successors. This Agreement and the Pricing Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors, personal representatives and assigns, and to the benefit of the officers and directors and controlling persons referred to in Section 10, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. Section 17. Representation of Underwriters. You will act as Representatives for the several Underwriters in connection with this financing, and any action under or in respect of this Agreement taken by you will be binding upon all the Underwriters. Section 18. Partial Unenforceability. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section, paragraph or provision hereof. Section 19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. Section 20. Applicable Law. This Agreement and the Pricing Agreement shall be governed by and construed in accordance with the laws of the State of New York. [Remainder of page intentionally left blank] 24 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters including you, all in accordance with its terms. Very truly yours, CHEAP TICKETS, INC. By: ___________________________________ Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. WILLIAM BLAIR & COMPANY, L.L.C. DAIN RAUSCHER WESSELS Acting as Representatives of the several Underwriters named in Schedule A. WILLIAM BLAIR & COMPANY, L.L.C. By: _____________________________ A Principal 25 Schedule A
==================================================================================== Underwriter Number of Firm - ----------- Shares to be Purchased --------------------- - ------------------------------------------------------------------------------------ William Blair & Company, L.L.C............................ - ------------------------------------------------------------------------------------ Dain Rauscher Wessels..................................... - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ ---------- - ------------------------------------------------------------------------------------ TOTAL..................................................... ========== ====================================================================================
26 Schedule B Comfort Letter for Cheap Tickets, Inc. To Be Delivered by PricewaterhouseCoopers LLP (1) They are independent public accountants with respect to the Company and its subsidiaries within the meaning of the 1933 Act. (2) In their opinion the financial statements and schedules of the Company and its subsidiaries included in the Registration Statement and the financial statements of the Company from which the information presented under the captions "Summary Financial Data" and "Selected Financial Data" has been derived which are stated therein to have been examined by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act. (3) On the basis of specified procedures (but not an examination in accordance with generally accepted auditing standards), including inquiries of certain officers of the Company responsible for financial and accounting matters as to transactions and events subsequent to December 31, 1998, a reading of minutes of meetings of the stockholders and directors of the Company since December 31, 1998, a reading of the latest available interim unaudited financial statements of the Company (with an indication of the date thereof) and other procedures as specified in such letter, nothing came to their attention which caused them to believe that (i) the unaudited financial statements of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act or that such unaudited financial statements are not fairly presented in accordance with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, (ii) the amounts in "Summary Financial Data" and "Selected Financial Data" included in the Prospectus do not agree with or are not derivable from the corresponding amounts in the audited financial statements or unaudited financial statements (as applicable) from which such amounts were derived, and (iii) at a specified date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there was any change in the capital stock or long-term debt or short-term debt (other than normal payments) of the Company on a basis or any decrease in net current assets or stockholders' equity as compared with amounts shown on the latest unaudited balance sheet of the Company included in the Registration Statement or for the period from the date of such balance sheet to a date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there were any decreases, as compared with the corresponding period of the prior year, in net sales, income before income taxes or in the total or per share amounts of net income except, in all instances, for changes or decreases which the Prospectus discloses have occurred or may occur or which are set forth in such letter. (4) They have carried out specified procedures, which have been agreed to by the Representatives, with respect to certain information in the Prospectus specified by the Representatives, and on the basis of such procedures, they have found such information to be in agreement with the general accounting records of the Company. EXHIBIT A CHEAP TICKETS, INC. ___________ Shares Common Stock/2/ PRICING AGREEMENT ----------------- __________, 1999 William Blair & Company, L.L.C. Dain Rauscher Wessels As Representatives of the Several Underwriters c/o William Blair & Company 222 West Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: Reference is made to the Underwriting Agreement dated ____________, 1999 (the "Underwriting Agreement") relating to the sale by the Company and the purchase by the several Underwriters for whom William Blair & Company and Dain Rauscher Wessels are acting as representatives (the "Representatives"), of the above Shares. All terms herein shall have the definitions contained in the Underwriting Agreement except as otherwise defined herein. Pursuant to Section 4 of the Underwriting Agreement, the Company agrees with the Representatives as follows: 1. The initial public offering price per share for the Shares shall be $__________. 2. The purchase price per share for the Shares to be paid by the several Underwriters shall be $_________, being an amount equal to the initial public offering price set forth above less $________ per share. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters, including you, all in accordance with its terms. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. ______________ /2/ Plus an option to acquire up to ____________ additional shares to cover overallotments. Very truly yours, CHEAP TICKETS, INC. By: ______________________________ Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. WILLIAM BLAIR & COMPANY, L.L.C. DAIN RAUSCHER WESSELS Acting as Representatives of the several Underwriters named in Schedule A. WILLIAM BLAIR & COMPANY, L.L.C. By: _____________________________ A Principal EXHIBIT B CHEAP TICKETS, INC. LOCK-UP AGREEMENT ----------------- William Blair & Company & Dain Rauscher Wessels, as Representatives c/o William Blair & Company 222 West Adams Street Chicago, IL 60606 Re: Cheap Tickets, Inc. ------------------- Ladies and Gentlemen: In order to induce William Blair & Company and Dain Rauscher Wessels (the "Representatives") to enter in to a certain underwriting agreement with Cheap Tickets, Inc., a Delaware corporation (the "Company"), with respect to the public offering of shares of the Company's Common Stock, par value $ 0.001 per share ("Common Stock"), the undersigned hereby agrees that for a period of 180 days following the date of the final prospectus filed by the Company with the Securities and Exchange Commission in connection with such public offering, the undersigned will not, without the prior written consent of the Representatives, directly or indirectly, (i) offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an option to purchase or otherwise dispose of, other than by operation of law, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act of 1933, as the same may be amended or supplemented from time to time (such shares, the "Beneficially Owned Shares") or (ii) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall not apply to shares of the Company's Common Stock (i) acquired through the Company's directed shares program or (ii) acquired on the open market and that shares so acquired may be sold or otherwise disposed of without regard to this Agreement. Notwithstanding the foregoing, if the undersigned is an individual, he or she may transfer any Shares either during his or her lifetime or on death by will or intestacy to his or her immediate family or to a trust the beneficiaries of which are exclusively the undersigned and/or a member or of his or her immediate family or to a charitable organization; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Shares transferred subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. For purposes of this Agreement, "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor and "charitable organization" shall mean an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, if the undersigned is a partnership, the partnership may transfer any Shares to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, and any partner who is an individual may transfer such Shares by gift, will or intestate succession to his or her spouse or lineal descendants or ancestors; and if the undersigned is a corporation, the corporation may transfer such Shares to any shareholder or subsidiary of such corporation and any shareholder who is an individual may transfer Shares by gift, will, or intestate succession to his or her immediate family or to a charitable organization; provided, however, that in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Shares subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. The undersigned agrees that the provisions of this agreement shall be binding also upon the successors, assigns, heirs and personal representatives of the undersigned. The undersigned agrees and consents to the placing of legends and/or the entry of stop transfer instructions with the Company's transfer agent against the transfer of any shares of Common Stock or Beneficially Owned Shares held by the undersigned except in compliance with this Agreement. It is understood that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, you will release us from our obligations under this Agreement. This Agreement shall terminate and be of no further force or effect in the event that the offering contemplated by the Underwriting Agreement is not completed on or before October 31, 1999. Very truly yours, __________________________ (Signature) __________________________ (Title) __________________________ (Date) EX-5.1 3 FORM OF OPINION OF MORRISON & FOERSTER Exhibit 5.1 [On Morrison & Foerster Letterhead] [March, 10, 1999] Cheap Tickets, Inc. 1440 Kapiolani Boulevard, Suite 800 Honolulu, Hawaii 96814 Re: Registration Statement on Form S-1 No. 333-70841 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-1 of Cheap Tickets, Inc., a Delaware corporation (the "Company"), initially filed with the Securities and Exchange Commission on January 20, 1999, and all amendments thereto (collectively, the "Registration Statement"), relating to the registration under the Securities Act of 1933, as amended, of up to 4,025,000 shares (the "Stock") of the Company's common stock, $.001 par value (including up to 525,000 shares subject to the underwriters' over-allotment option). The Stock is to be sold to the underwriters named in the Registration Statement for resale to the public. As counsel to the Company, we have examined the proceedings taken by the Company in connection with the issuance and sale by the Company of the Stock. We are of the opinion that the shares of Stock to be offered and sold by the Company have been duly authorized and, when issued and sold by the Company in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally issued, fully paid and nonassessable. We hereby consent to the inclusion of this opinion as an exhibit to the Registration Statement and any amendments thereto and to the reference to our firm under the caption "Legal Matters" in the prospectus included therein. Very truly yours, /s/ Morrison & Foerster LLP Morrison & Foerster LLP EX-10.9 4 1994 NET FARE/COMMISSION AGREEMENT Exhibit 10.9 Note: Portions of this exhibit indicated by "[*]" are subject to a confidential treatment request, and have been omitted from this exhibit. Complete, unredacted copies of this exhibit have been filed with the Securities and Exchange Commission as part of this Company's confidential treatment request. [LETTERHEAD OF CONTINENTAL AIRLINES, INC.] 1994 NET FARE/COMMISSION AGREEMENT WHOLESALER: C.T.I. dba CHEAP TICKET 738 Kaheka Street, #301 Honolulu, HI 96814 ARC #: 12-601676 CONTRACT #: C094 4026 --------- The following agreement is hereby entered into between Continental Airlines, Inc. ("Continental"), and the Wholesaler/Consolidator ("Agent") identified above: Continental and the Agent agree as follows: 1. Continental will provide the Agent with a net airfare program and/or a commission program to the applicable origin and destination points listed as "unpublished tariffs" in Attachment A hereto. The Agent agrees to comply with the special terms and conditions of each individual unpublished tariff as listed in Attachment A1 hereto. 2. Upon receipt of this signed agreement, Continental will assign the Agent special fare basis codes and/or authorization codes, which must be marked on all tickets issued by the Agent. Tickets must be issued in accordance with the ticketing procedures as stated on Attachment B hereto. 3. This agreement shall be valid upon execution by a duly authorized Continental Airlines representative, and shall be effective until further written notice. 4. This agreement is subject to cancellation by either party at any time without penalty, upon a thirty (30) day written notice. 5. Tickets issued in conjunction with this agreement may be issued only at the ARC number(s) noted above and all branch locations of that home office locations as reported to Continental by the Airline Reporting Corporation (ARC). Unauthorized ticketing at other ARC locations will result in debit memos at the lowest applicable retail fare on the date ticket was issued in the class of service booked and the termination of this agreement. Full payment will be made for all tickets in accordance with and through standard ARC reporting procedures. Tickets will be limited to confirmed seating. Open tickets will not be allowed. Tickets must be issued on standard ARC stock and must be validated on Continental. 6. Tickets issued in conjunction with this agreement must be sold as part of a bona fide tour program, unless otherwise specified in the applicable attachments. Tour programs must include a prepaid land portion consisting of a two night minimum hotel stay. The minimum retail price for inclusive tours must be greater than Continental's lowest published airfare in applicable markets. Net airfares and/or commission levels may not be sold, advertised or promoted in any way as "air only", unless otherwise specified in the applicable attachments. Failure to comply with this provision shall result, upon notice, in immediate cancellation of this agreement. 7. In the event of flight delays, cancellations or passenger rerouting, the same amenities will be provided by Continental to passengers hereunder as are customarily provided by Continental under involuntary re-route procedures to regular economy fare passengers on scheduled service. 8. If Continental's service in any market covered by this agreement is (1) terminated, (2) canceled or (3) suspended, this agreement will be terminated with respect to such market. 9. If the Agent or Continental uses the other's name or trademarks in advertising or promotion, the material must clearly state the Agents ticketing and refund responsibility as well as Continental's limitation of liability and conditions of carriage. 10. All advertising and promotional material relating to the services of either party must be approved in writing by the other party prior to its use, including but not limited to the use of logos, trademarks, trade names or service marks. 11. Agent agrees to indemnify Continental against any expense, loss, damage, claim or suit (including reasonable attorney's fees) arising hereunder, made or brought against Continental by reason of Agent's default or failure to perform hereunder or claims based on the tour programs, except such matters as arise out of the air transportation provided by Continental. 12. Continental has the right to terminate, suspend or modify this agreement in the event of an assignment, sale, transfer or change in the Agent ownership during the term of this agreement. Agent may not assign any right or delegate any duty hereunder without the express written consent of Continental. 13. Increases and/or reductions in net fare programs and/or commission programs will be effective twenty-one (21) days from the date of notice from Continental to the Agent. Continental reserves the right to increase net airfares and/or reduce commission levels on five (5) days notice if fuel prices rise more than 10% in any given period of time. Passengers booked and ticketed prior to the effective ticketing date of a net airfare increase and/or reduction of commission may travel using previous fare/commission levels. Passengers booked and not ticketed prior to the effective ticketing date of a net airfare increase and/or reduction of commission must be ticketed at the new levels. 14. Increase/reductions to or additions of tax, fees and or surcharge amounts will be effective immediately for all passengers not ticketed and it will be the responsibility of the Agent to collect all such taxes, fees and surcharges at the time of ticketing. 15. Agent will advise passengers in writing that OnePass and or any other type of upgrade/discount certificates are not permitted in conjunction with the net airfares provided herein. OnePass mileage accrual is permitted, unless otherwise stated herein. 16. The net airfares and/or commission levels on Attachment "A" do not automatically apply to groups of 10 or more. All groups must be requested and booked through the preferred accounts department at 1-800-243-4366 and are subject to approval by Continental Airlines. Agents with commission programs may not use commission levels on negotiated group rates. Tour Conductor tickets are not applicable to nets/commissions on Attachment "A", unless otherwise specified. 17. Both Continental and Agent shall be considered as independent contractors, and nothing contained herein shall be construed so as to create an agency relationship, partnership or joint venture, and each party shall be responsible for their respective actions. 18. Continental shall have no responsibility or liability to Agent for any loss, damage, delay or prevention of the completion of any flight subject to this agreement, resulting from any occurrences or acts beyond the control of Continental. 19. The terms and conditions of this agreement are strictly confidential. Any breach of confidentiality, duplication, use or disclosure of this agreement in whole or in part shall immediately render this agreement null and void at the option of the non-breaching party. 20. This agreement shall be governed by the laws of the State of Texas. Agreement with, and acceptance of, the above conditions is indicated by the signatures below.
C.T.I. dba CHEAP TICKET CONTINENTAL AIRLINES, INC. /s/ Michael J. Hartley /s/ Richard L. Ensign - ------------------------------ ---------------------------------- Name Richard L. Ensign Sr. Director-Leisure Sales General Manager - ------------------------------ Title Date: 10/21/93 Date: 10/25/93 ------------------------- -----------------------
[LETTERHEAD OF CONTINENTAL AIRLINES, INC.] ADDENDUM NOVEMBER 12, 1998 MR. MICHAEL HARTLEY C.T.I.-CHEAP TICKETS 1440 KAPIOLANI BLVD #800 HONOLULU, HI 96814 REF: NET FARES CONTRACT #: CO944026 ARC: 12601676 DEAR MR. HARTLEY: This letter and the enclosed Attachment A(s) will serve as an addendum to the above mentioned contract and is subject to the terms, conditions, rules, and regulations of that contract. The enclosed Attachment A(s) include: SEE ATTACHMENT Your agreement to this addendum is indicated by the signature below. Please sign both originals of this addendum and return both copies, including all attachments to the address below. Failure to sign and return this addendum within five(5) days will void the above mentioned contract: Continental Airlines ATTN: JIM COMPTON 2929 ALLEN PARKWAY, SUITE 1227 Houston, TX 77019 Thank you for your cooperation and support. C.T.I. CONTINENTAL AIRLINES, INC. CHEAP TICKETS /s/ Michael Hartley /s/ Jim Compton - ---------------------- ---------------------- NAME JIM COMPTON STAFF V.P. PRICING President & CEO - ---------------------- Title 11/17/98 11/24/98 - ---------------------- ---------------------- Date Date CONTINENTAL AIRLINES 1998/99 DOMESTIC CONSOLIDATOR UPFRONT COMMISSION DESTINATION: MAINLAND U.S./CANADA (serviced by CO/CO Express) - -------------------------------------------------------------- ATTACHMENT A // ORIGINAL
- ----------------------------------------------------------------------------------------------------------------------------------- TICKETS CAN ONLY BE ISSUED ON OR AFTER: 06NOV98 TICKETS CAN ONLY BE ISSUED ON OR BEFORE: 29DEC98 TRAVEL MUST COMMENCE ON OR AFTER: 06NOV98 TRAVEL MUST BE COMPLETED ON OR BEFORE: 31DEC99 - ---------------------------------------------------------------------------------------------------------------------------------- MARKETS: TO/FROM any mainland U.S./Canadian city serviced by CO and CO Express NOTE: Commission program does -not- apply when booking travel via a Continental code-share partner. (i.e., AC, F9, GP, HP, etc.) - ----------------------------------------------------------------------------------------------------------------------------------- TRAVEL DATES: See travel dates listed above. All travel must be completed on/before 31DEC99. - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DISCOUNT: [*] - ----------------------------------------------------------------------------------------------------------------------------------- FARES: Commission/Discount level applies to any roundtrip coach class fare. Commission/Discount level does-not-apply to YONEPASS, First or Businessfirst. Not valid in "Q" class. - ----------------------------------------------------------------------------------------------------------------------------------- BLACKOUT DATES: Applicable published fare blackout dates WILL APPLY. - ----------------------------------------------------------------------------------------------------------------------------------- BOOKING CLASS: All space MUST be booked in the applicable published fare class of service, excluding "Q" class. - ----------------------------------------------------------------------------------------------------------------------------------- TICKET DESIGNATOR: D046 Must be placed after the published fare basis in the FARE BASIS/TICKET DESIGNATOR BOX. (EXAMPLE: BNE71P/D046) - ----------------------------------------------------------------------------------------------------------------------------------- AUTHORIZATION CODE: [*] Must be placed in the TOUR CODE BOX of each ticket issued. - ----------------------------------------------------------------------------------------------------------------------------------- ADVANCE PURCHASE: PUBLISHED FARES -WITH- AN ADVANCE PURCHASE REQUIREMENT: ------------------------------------------------------ Tickets must be issued at least [*] prior to scheduled departure date. PUBLISHED FARES WITHOUT AN ADVANCE PURCHASE REQUIREMENT: ---------------------------------------------------------------------------------------- Applicable published far rules apply. - ----------------------------------------------------------------------------------------------------------------------------------- MINIMUM STAY: Two (2) night stay with a Friday or Saturday night stay-O-applicable published fare rule, whichever is more restricted. - ----------------------------------------------------------------------------------------------------------------------------------- MAXIMUM STAY: Appl. pub. fare apply -OR- tvi completed on/before 31DEC99, whichever is first. - ----------------------------------------------------------------------------------------------------------------------------------- ONE-WAY TRAVEL: NOT PERMITTED. ALL TRAVEL MUST BE ON A ROUNDTRIP BASIS. - ----------------------------------------------------------------------------------------------------------------------------------- UPGRADES: NOT allowed. NO EXCEPTIONS. - ----------------------------------------------------------------------------------------------------------------------------------- CHILDREN'S FARES: NOT allowed. NO EXCEPTIONS. - ----------------------------------------------------------------------------------------------------------------------------------- FARE RULES: ALL other published fare rules WILL APPLY. - ----------------------------------------------------------------------------------------------------------------------------------- NAME CHANGES: Once a PNR has been booked, name changes WILL -NOT- be allowed. - ----------------------------------------------------------------------------------------------------------------------------------- TICKETING: Tickets must be plated on CO (005), reported through ARC and must clearly indicate the following: - ----------------------------------------------------------------------------------------------------------------------------------- FARE BASIS/TICKET DESIGNATOR: (Published fare basis)/ D046 - ----------------------------------------------------------------------------------------------------------------------------------- CLASS OF SERVICE BOX: (Fare class which corresponds with the published fare used) - ----------------------------------------------------------------------------------------------------------------------------------- NOT VALID BEFORE: (Date of departure) - ----------------------------------------------------------------------------------------------------------------------------------- NOT VALID AFTER: (Appl. max. stay from date of departure -OR- 31DEC99, whichever is first) - ----------------------------------------------------------------------------------------------------------------------------------- FARE/TAX/TOTAL: (Published FARE/TAX/TOTAL -MUST- appear on ALL coupons) - ----------------------------------------------------------------------------------------------------------------------------------- FARE COLLECTION BOX: (Fare amount collected) - ----------------------------------------------------------------------------------------------------------------------------------- SURCHARGES/PFC'S: (MUST appear on ALL coupons) - ----------------------------------------------------------------------------------------------------------------------------------- COMMISSION BOX: [*] - ----------------------------------------------------------------------------------------------------------------------------------- TOUR CODE BOX: [*] - ----------------------------------------------------------------------------------------------------------------------------------- ENDORSEMENT BOX: Valid [*] only/nonend/nontrans/(appl pnlty) - ----------------------------------------------------------------------------------------------------------------------------------- FORM OF PAYMENT: (Form of payment)/ Refundable by Tour Operator ONLY - ----------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL RULES: Tickets issued at published airfare levels that do not correspond with the class of service booked will be debited at the unrestricted coach class fare for the entire itinerary. This commission program applies to published fares -ONLY-. This commission program is -NOT- combinable with any other discount programs, coupons, certificates, etc. Continental reserves the right to cancel this program at any time. If canceled, a cancellation notice will be sent in writing from CO Leisure Marketing. Verbal changes to the contract, fares or rules and guidelines will -NOT- be honored. All changes are valid -ONLY- when received in writing from CO Leisure Marketing. HUB TRAFFIC: Percent of total passengers not to exceed 10% from EWR/CLE/IAH. (As reported by CO)
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. . 1998/99 DOMESTIC CONSOLIDATOR NET FARE PROGRAM: Q CLASS ATTACHMENT A // REVISION 1 . 1998/99 SUMMER DOMESTIC CONSOLIDATOR NET FARE PROGRAM: Q CLASS ATTACHMENT A // REVISION 1 . 1998/99 DOMESTIC CONSOLIDATOR NET FARE PROGRAM: V CLASS ATTACHMENT A // REVISION 2 . 1998/99 SUMMER DOMESTIC CONSOLIDATOR NET FARE PROGRAM: V CLASS ATTACHMENT A // REVISION 2 **CHANGE: ONEWAY FARES NOT PERMITTED. CONTINENTAL AIRLINES, INC. 1998/1999 DOMESTIC CONSOLIDATOR PROGRAM ATTACHMENT A // REVISION 1 CHANGE: ONEWAYS NOT PERMITTED.
- -------------------------------------------------------------------- TICKETS ISSUED ON OR AFTER: 11DEC98 TICKETS ISSUED ON OR BEFORE: 28DEC99 TRAVEL COMMENCE ON OR AFTER: 11DEC98 TRAVEL COMPLETE ON OR BEFORE: 31DEC99 - --------------------------------------------------------------------
ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*] ZONE 2 AL / GA / NC / SC / TN ZONE 3 FL ZONE 4 IL / IN / KY / OH (EXCLUDING CLE) ZONE 5 MI / MN / NE / WI ZONE 6 AR / MS / LA ZONE 7 KS / MO / OK / TX (EXCLUDING IAH) ZONE 8 AZ / CO / NV / NM /UT ZONE 9 CA / OR / WA / Alberta / British Columbia ZONE 10 HI / AK ZONE 11 EWR ZONE 12 CLE ZONE 13 IAH FARE CODE: NU076 ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13 - ------------------------------------------------------------------------------------------ 1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and guidelines)
- ----------------------------------------------------------------------------------------------------------------------------------- FARE VALIDITY: [*] - ----------------------------------------------------------------------------------------------------------------------------------- BLACKOUT DATES: NOV 25, 28, 29, 30; DEC 18-23, 27-30 1998; JAN 1-3; JUL 1-AUG 22; NOV 24, 28, 29; DEC 19-23, 27-30 1999. - ----------------------------------------------------------------------------------------------------------------------------------- ADVANCE PURCHASE: [*] advance purchase required. - ----------------------------------------------------------------------------------------------------------------------------------- BOOKING CLASS: "Q" class, subject to availability. - ----------------------------------------------------------------------------------------------------------------------------------- TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges. - ----------------------------------------------------------------------------------------------------------------------------------- COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE. - ----------------------------------------------------------------------------------------------------------------------------------- MINIMUM STAY: [*] night stay required. - ----------------------------------------------------------------------------------------------------------------------------------- MAXIMUM STAY: None. - ----------------------------------------------------------------------------------------------------------------------------------- ONE-WAY FARES: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is not available, then the net far does not apply. Fares listed are valid via CO/CO Express ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC, F9, GP, HP, etc.) - ----------------------------------------------------------------------------------------------------------------------------------- OPENJAWS: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- CIRCLE TRIPS: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance. - ----------------------------------------------------------------------------------------------------------------------------------- CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee. - ----------------------------------------------------------------------------------------------------------------------------------- STANDBY: NOT PERMITTED. - -----------------------------------------------------------------------------------------------------------------------------------
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. CONTINENTAL AIRLINES, INC. 1999 SUMMER DOMESTIC CONSOLIDATOR PROGRAM ATTACHMENT A // REVISION 1 CHANGE: ONEWAYS NOT PERMITTED, CORRECTED TRAVEL COMMENCE ON OR AFTER DATE.
- ------------------------------------------------- TICKETS ISSUED ON OR AFTER: 11DEC98 TICKETS ISSUED ON OR BEFORE: 20AUG99 TRAVEL COMMENCE ON OR AFTER: 01JUL99 TRAVEL COMPLETE ON OR BEFORE: 22AUG99 - -------------------------------------------------
ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*] ZONE 2 AL / GA / NC / SC / TN ZONE 3 FL ZONE 4 IL / IN / KY / OH (EXCLUDING CLE) ZONE 5 MI / MN / NE / WI ZONE 6 AR / MS / LA ZONE 7 KS / MO / OK / TX (EXCLUDING IAH) ZONE 8 AZ / CO / NV / NM /UT ZONE 9 CA / OR / WA / Alberta / British Columbia ZONE 10 HI / AK ZONE 11 EWR ZONE 12 CLE ZONE 13 IAH FARE CODE: NU078 ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13 - ------------------------------------------------------------------------------------------ 1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------ 13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and guidelines)
- ------------------------------------------------------------------------------------------------------------------------------------ FARE VALIDITY: [*] - ------------------------------------------------------------------------------------------------------------------------------------ BLACKOUT DATES: JUL 4, 6 - ------------------------------------------------------------------------------------------------------------------------------------ ADVANCE PURCHASE: [*] advance purchase required. - ------------------------------------------------------------------------------------------------------------------------------------ BOOKING CLASS: "Q" class, subject to availability. - ------------------------------------------------------------------------------------------------------------------------------------ TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges. - ------------------------------------------------------------------------------------------------------------------------------------ COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE. - ------------------------------------------------------------------------------------------------------------------------------------ MINIMUM STAY: [*] night stay required. - ------------------------------------------------------------------------------------------------------------------------------------ MAXIMUM STAY: None. - ------------------------------------------------------------------------------------------------------------------------------------ ONE-WAY FARES: NOT PERMITTED. - ------------------------------------------------------------------------------------------------------------------------------------ RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is not available, then the net far does not apply. Fares listed are valid via CO/CO Express ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC, F9, GP, HP, etc .) - ------------------------------------------------------------------------------------------------------------------------------------ OPENJAWS: NOT PERMITTED. - ------------------------------------------------------------------------------------------------------------------------------------ CIRCLE TRIPS: NOT PERMITTED. - ------------------------------------------------------------------------------------------------------------------------------------ CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance. - ------------------------------------------------------------------------------------------------------------------------------------ CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee. - ------------------------------------------------------------------------------------------------------------------------------------ STANDBY: NOT PERMITTED. - ------------------------------------------------------------------------------------------------------------------------------------
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. CONTINENTAL AIRLINES, INC. 1998/1999 DOMESTIC CONSOLIDATOR PROGRAM ATTACHMENT A // REVISION 2 CHANGE: ONEWAYS NOT PERMITTED. - -------------------------------------------- TICKETS ISSUED ON OR AFTER: 11DEC98 TICKETS ISSUED ON OR BEFORE: 28DEC99 TRAVEL COMMENCE ON OR AFTER: 11DEC98 TRAVEL COMPLETE ON OR BEFORE: 31DEC99 - -------------------------------------------- ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*] ZONE 2 AL / GA / NC / SC / TN ZONE 3 FL ZONE 4 IL / IN / KY / OH (EXCLUDING CLE) ZONE 5 MI / MN / NE / WI ZONE 6 AR / MS / LA ZONE 7 KS / MO / OK / TX (EXCLUDING IAH) ZONE 8 AZ / CO / NV / NM /UT ZONE 9 CA / OR / WA / Alberta / British Columbia ZONE 10 HI / AK ZONE 11 EWR ZONE 12 CLE ZONE 13 IAH FARE CODE: NU077
ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13 - --------------------------------------------------------------------------------------------- 1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ---------------------------------------------------------------------------------------------
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and guidelines)
- ----------------------------------------------------------------------------------------------------------------------------------- FARE VALIDITY: [*] - ----------------------------------------------------------------------------------------------------------------------------------- BLACKOUT DATES: NOV 25, 28, 29, 30; DEC 18-23, 27-30 1998; JAN 1-3; JUL 1-AUG 22; NOV 24, 28, 29; DEC 19-23, 27-30 1999. - ----------------------------------------------------------------------------------------------------------------------------------- ADVANCE PURCHASE: [*] advance purchase required. - ----------------------------------------------------------------------------------------------------------------------------------- BOOKING CLASS: "V" class, subject to availability. - ----------------------------------------------------------------------------------------------------------------------------------- TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges. - ----------------------------------------------------------------------------------------------------------------------------------- COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE. - ----------------------------------------------------------------------------------------------------------------------------------- MINIMUM STAY: [*] night stay required. - ----------------------------------------------------------------------------------------------------------------------------------- MAXIMUM STAY: None. - ----------------------------------------------------------------------------------------------------------------------------------- ONE-WAY FARES: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is not available, then the net far does not apply. Fares listed are valid via CO/CO Express ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC, F9, GP, HP, etc.) - ----------------------------------------------------------------------------------------------------------------------------------- OPENJAWS: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- CIRCLE TRIPS: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance. - ----------------------------------------------------------------------------------------------------------------------------------- CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee. - ----------------------------------------------------------------------------------------------------------------------------------- STANDBY: NOT PERMITTED. - -----------------------------------------------------------------------------------------------------------------------------------
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. CONTINENTAL AIRLINES, INC. 1999 SUMMER DOMESTIC CONSOLIDATOR PROGRAM ATTACHMENT A // REVISION 2 CHANGE: ONEWAYS NOT PERMITTED. - ---------------------------------------------- TICKETS ISSUED ON OR AFTER: 11DEC98 TICKETS ISSUED ON OR BEFORE: 20AUG99 TRAVEL COMMENCE ON OR AFTER: 01JUL99 TRAVEL COMPLETE ON OR BEFORE: 22AUG99 - ---------------------------------------------- ZONE 1 CT / DC / ME / MD / MA / NH / NJ [*] ZONE 2 AL / GA / NC / SC / TN ZONE 3 FL ZONE 4 IL / IN / KY / OH (EXCLUDING CLE) ZONE 5 MI / MN / NE / WI ZONE 6 AR / MS / LA ZONE 7 KS / MO / OK / TX (EXCLUDING IAH) ZONE 8 AZ / CO / NV / NM /UT ZONE 9 CA / OR / WA / Alberta / British Columbia ZONE 10 HI / AK ZONE 11 EWR ZONE 12 CLE ZONE 13 IAH FARE CODE: NU078 ZONE 1 2 3 4 5 6 7 8 9 10 11 12 13 - --------------------------------------------------------------------------------------------- 1 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 2 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 3 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 4 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 5 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 6 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 7 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 8 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 9 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 10 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 11 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 12 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------- 13 [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] - ---------------------------------------------------------------------------------------------
RULES AND GUIDELINES (See Attachments A1.1, A1.2 & B for additional rules and guidelines)
- ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- FARE VALIDITY: [*] - ----------------------------------------------------------------------------------------------------------------------------------- BLACKOUT DATES: JUL 4, 6 - ----------------------------------------------------------------------------------------------------------------------------------- ADVANCE PURCHASE: [*] advance purchase required. - ----------------------------------------------------------------------------------------------------------------------------------- BOOKING CLASS: "V" class, subject to availability. - ----------------------------------------------------------------------------------------------------------------------------------- TAXES / SURCHARGES: All fares DO NOT INCLUDE Federal Tax, PFC's and/or surcharges. - ----------------------------------------------------------------------------------------------------------------------------------- COMMISSION: Fares are ROUNDTRIP NET NON COMMISSIONABLE. - ----------------------------------------------------------------------------------------------------------------------------------- MINIMUM STAY: [*] night stay required. - ----------------------------------------------------------------------------------------------------------------------------------- MAXIMUM STAY: None. - ----------------------------------------------------------------------------------------------------------------------------------- ONE-WAY FARES: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- RESTRICTED FLIGHTS: Fares are valid via the MOST DIRECT PUBLISHED ROUTING. If a published routing is not available, then the net far does not apply. Fares listed are valid via CO/CO Express ONLY. Fares are NOT valid via a Continental code-share partner (i.e., AC, F9, GP, HP, etc .) - ----------------------------------------------------------------------------------------------------------------------------------- OPENJAWS: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- CIRCLE TRIPS: NOT PERMITTED. - ----------------------------------------------------------------------------------------------------------------------------------- CHANGES: Seventy-five dollar ($75) change fee for ticket reissuance. - ----------------------------------------------------------------------------------------------------------------------------------- CANCELLATION PENALTY: Seventy-five dollar ($75) cancellation fee. - ----------------------------------------------------------------------------------------------------------------------------------- STANDBY: NOT PERMITTED. - -----------------------------------------------------------------------------------------------------------------------------------
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. CONTINENTAL AIRLINES ATTACHMENT A1.1//ORIGINAL 1997 DOMESTIC WHOLESALE RULES AND GUIDELINES (All other terms and conditions of the net fare agreement apply) COMBINABILITY: Net fare levels are not combinable with published fares, - ------------- other net fare programs, group/convention discounts, coupon/certificate offers, override commission programs or any other type of discount/negotiated fare. Net fare levels are combinable with other net fare levels within the same program. RESERVATIONS: Names are due at the time of booking. Reservations must be - ------------ booked in the class of service indicated by the alpha net airfare indicator. EXAMPLE: "Q" net fares must be booked in "Q" class of service and "V" net fares must be booked in "V" class of service. GROUPS: FOR GROUP PROCEDURES SEE ATTACHMENT "A1.2" - ------ PREPAIDS: NOT PERMITTED. NO EXCEPTIONS. - -------- UPGRADES: NOT PERMITTED: NO EXCEPTIONS - -------- CHILDREN'S FARES: NOT PERMITTED, unless otherwise specified on Attachment "A" - ---------------- fare sheet. TICKETING PROCEDURES: SEE ATTACHMENT "B". - ---------- NAME CHANGES: Once a PNR has been booked, name changes will not be allowed. - ------------ Clerical changes (ie. spellings) are permitted. AIRPORT/FUEL SURCHARGES: Surcharges must appear on all flight coupons and must be - ---------- remitted through ARC. PASSENGER FACILITY CHARGES (PFC'S): PFC charges apply to all net tickets when an approved PFC - --------------- city is included in the itinerary. PFC's ARE-NOT-ABSORBED IN CONNECTING MARKETS. ILLNESS EXTENSION OF VALIDITY: NOT ALLOWED. - ----------- REFUNDS: Totally unused tickets are refundable with a fifty dollar - ------- ($50) cancellation penalty unless otherwise specified on Attachment "A". Passengers may incur penalties from the tour operator. LOST TICKETS: Standard lost ticket application procedures-will-apply. - ------------ Service charge may apply. VERBAL CHANGES TO THE CONTRACT, FARES OR RULES AND GUIDELINES WILL-NOT-BE HONORED. ALL CHANGES ARE VALID ONLY WHEN RECEIVED IN WRITING FROM CONTINENTAL LEISURE MARKETING. CONTINENTAL AIRLINES ATTACHMENT A1.2// ORIGINAL 1997 DOMESTIC AND INTERNATIONAL WHOLESALE GROUP PROCEDURES (All other terms and conditions of the net fare agreement apply) GROUPS: The net airfares and/or commission levels on Attachment "A" - ------ do-not-automatically apply to groups of 10 or more. All groups must be requested and booked through the Preferred Accounts Desk at 1-800-243-4366, and are subject to approval by CO. The appropriate class of service, as stated on Attachment "A", must be available and booked on all flights for the net/published fare used. ------------------------------------------------------------ Agents with commission programs may not use override commission levels on negotiated group rates. Tour conductor tickets are -not-applicable, unless otherwise specified on Attachment "A". ----------------------------------------------------------- THE FOLLOWING PROCEDURES WILL APPLY TO ALL FUTURE GROUP BOOKINGS ASSOCIATED WITH THE NET AIRFARES LISTED ON ATTACHMENT "A". "AGENT" AGREES TO PAY APPLICABLE PENALTIES PER EACH SEAT NOT UTILIZED. DEPOSITS: GROUPS BOOKED 91 OR MORE DAYS PRIOR TO DEPARTURE: - -------- - A $25.00 per person refundable deposit is required. - Deposit is due fourteen (14) days after booking -OR- 90 days prior to departure, whichever is first. - Deposit must be remitted in the form of an MCO. The MCO should be sent to the following address: CONTINENTAL AIRLINES ATTN: Preferred Accounts Desk Supervisor P.O. Box 60455 Houston, TX 77205-0455 - Deposit will be returned to the "Agent" at least 21 days prior to departure for ticket issuance. GROUPS BOOKED WITHIN 91 DAYS OF DEPARTURE: - Deposit -not- required. *NOTE: Deposit guarantees seats only. Fare is subject to change (see Net Fare Agreement - paragraph #13) DUE DATE FOR NAMES: GROUPS BOOKED 21 OR MORE DAYS PRIOR TO DEPARTURE: - --------- - All names are due 21 days prior to departure. GROUPS BOOKED 20-7 DAYS PRIOR TO DEPARTURE: - All names are due within 72 hours of booking -OR- seven (7) days prior to departure, whichever is first. GROUPS BOOKED WITHIN 7 DAYS OF DEPARTURE: - All names are due at the time of booking. UTILIZATION: GROUPS BOOKED 45 OR MORE DAYS PRIOR TO DEPARTURE: - ----------- - 80% utilization is required of space held at 45 days. If group drops below 80% between 45 days and the departure date, "Agent" will be debited for $40.00 per each seat not utilized. GROUPS BOOKED WITHIN 45 DAYS OF DEPARTURE: - 80% utilization is required of space held at the time of booking. If group drops below 80% between the time of booking and the departure date, "Agent" will be debited for $40.00 per each seat not utilized. CONTINENTAL AIRLINES ATTACHMENT B// ORIGINAL "BULK" TICKETING PROCEDURES // REVISED TICKETS MUST BE PLATED ON CONTINENTAL (005), REPORTED THROUGH ARC AND MUST CLEARLY INDICATE THE FOLLOWING: - ------------------------------ - ------------------------------------------------------------------------------- FARE BASIS BOX: (Corresponding fare code/by segment/as shown on Attachment "A" - ------------------------------------------------------------------------------- CLASS OF SERVICE BOX: (Fare class which corresponds with the net fare used) - ------------------------------------------------------------------------------- NOT VALID BEFORE: (Date of departure) - ------------------------------------------------------------------------------- NOT VALID AFTER: (Appl. max. stay from date of departure, per Attachment "A") - ------------------------------------------------------------------------------- FARE/TAX/TOTAL: FARE/TAX/TOTAL must appear on AGENTS/AUDITORS coupons ONLY. "BULK" must appear on all passenger coupons. - ------------------------------------------------------------------------------- SURCHARGES/PFC'S: (Must appear on -ALL- coupons) - ------------------------------------------------------------------------------- COMMISSION BOX: "0" (Zero) - ------------------------------------------------------------------------------- TOUR CODE BOX: (Blank) - ------------------------------------------------------------------------------- *ENDORSEMENT BOX: Valid CO/COEX only/NONEND/NONTRANS/NOCHGS/APPL PNLTY - ------------------------------------------------------------------------------- FORM OF PAYMENT: (Form of Payment) / REFUNDABLE BY TOUR OPERATOR ONLY - ------------------------------------------------------------------------------- *NOTE: Endorsement Box must include applicable restrictions as listed on Attachment "A". The above listed restrictions are to be used as an example. TICKETS ISSUED AT THE AIRFARE LEVELS LISTED ON ATTACHMENT "A" THAT DO NOT CORRESPOND WITH THE CLASS OF SERVICE BOOKED WILL BE DEBITED AT THE LOWEST UNRESTRICTED COACH CLASS FARE FOR THE ENTIRE ITINERARY. - ------------------------------------------------------------------------------- PFC PROCEDURES: PFC's must appear in the "TAX" BOX of all tickets coupons as "XF". If other fees are collected in addition to the PFC's, "XT" and the TOTAL AMOUNT must appear in the "TAX" BOX of all ticket coupons. --------------------------------------------------- SHOWING PFC'S ON A MANUAL TICKET: -------------------------------- Show the "XF" in the "FROM/TO" BOX, leave the "CARIRER" BOX blank. In the "FARE CALCULATION" BOX list, in itinerary order, the AIRPORT CODE followed by the AMOUNT INDICATOR for the PFC amount collected. --------------------------------------------------- SHOWING PFC'S ON AN AUTOMATED TICKET: At the end of the fare calculation enter "XF", the AIRPORT CODE and AMOUNT INDICATOR for each airport to which the PFC applies. - ------------------------------------------------------------------------------- EX-10.10 5 1999 NET CONSOLIDATOR AGREEMENT Exhibit 10.10 Note: Portions of this exhibit indicated by "[*]" are subject to a confidential treatment request, and have been omitted from this exhibit. Complete, unredacted copies of this exhibit have been filed with the Securities and Exchange Commission as part of the Company's confidential treatment request. -------------------------- 1999 NET CONSOLIDATOR PROGRAM ================================================================================ YOUR FIRM: CTI Proposal Date: January 19, 1998 1440 Kapiolani Blvd. Your Firm ARC: 1260167/05-51326 8th Floor Effective Date: November 1, 1998 Honolulu, HI 96814 Termination Date: October 31, 1999 (hereinafter "Your Firm") DISTRICT: LAX AGREEMENT NO: CON99005
This Agreement, when accepted shall constitute the entire Agreement between Your Firm and Trans World Airlines, Inc. ("TWA") with respect to net fares applicable to the markets identified herein, for air travel on TWA or Trans World Express ("TWE") commencing with the above Effective Date and continuing through the above Termination Date, and is subject to the General Terms and Conditions set forth on the following pages. This Agreement supersedes and replaces all previous understandings and agreements, whether oral or written with respect to the subject matter hereof. The net fares offered to Your Firm are predicated on the following: 1. All travel must originate in the USA, with no westbound origination, and must be round-trip, open-jaw, circle trip, or one-way. One way transatlantic travel permitted at 60% of the applicable round-trip fare. 2. All travel must be sold consisting of a [*] minimum, ninety (90) day maximum stay. 3. All fares are quoted in U.S. dollars and are payable in U.S. dollars (regardless of the currency rate of exchange). Payment must be made in cash only; payment by credit card or MCO is not acceptable. 4. Net fares, surcharges and applicable fees are not subject to commission. 5. Net fares are exclusive of fuel, departure, passenger facility, airport, terminal and/or security taxes or surcharges, which when applicable must be added to the fare collected from the passenger, and shown on the ticket(s) when issued. Outbound date determines round trip seasonal fares only. Surcharges, fees, sell-up differentials are applicable based on actual differentials are applicable based on actual date of travel and must be added to the fares regardless of departure date and/or season. Any passenger routing must be the same as the routing of any TWA published fare for that city pair. 6. Travel may not be combined with or ticketed in conjunction with any other fare on TWA/TWE (except for fares listed in this Agreement) or any other carrier or airline fare. 7. Net fares must be ticketed within [*] days of booking a reservation; however, for bookings made within [*] days of departure ticketing must occur within [*] hours. 8. No block space is permitted; group bookings (10 or more passengers) require specific authorization from TWA's Group Desk, and are subject to the terms and conditions applicable to TWA Group Desk sales procedures. 9. Net fares are subject to change upon fifteen (15) days prior written notice. 10. All sales are subject to audit by TWA. Booking or ticketing violations will subject Your Firm to debit memo, cancellation of booking and/or immediate termination of this Agreement, at the sole discretion of TWA. 11. During the term of this Agreement, Your Firm agrees to ticket an average of [*] net flown (based on true origin and destination) passengers per month. 12. No tour conductor, student, infant, senior, site, agency discounts are permitted. 13. All tickets must be issued on standard stock with TWA (015) validation. No manual ticketing is permitted. 14. In the event of departure date weather conditions or TWA encounters operational difficulties which result in flight cancellation, delay or misconnection, TWA will provide transportation on its next available flight in the same class of service as originally ticketed, at no additional cost to passenger. TWA does not guarantee reprotection of passengers on another airline. 15. No name changes allowed on ticketed reservations (PNR). [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. 1999 NET CONSOLIDATOR PROGRAM ================================================================================ GENERAL TERMS AND CONDITIONS 1. This agreement shall become effective as of the date indicated above provided one (1) copy, signed by Your Firm is returned to TWA within thirty day of the date TWA signed this Agreement. In the event this Agreement is not so returned, it shall be construed as an offer only and shall be deemed automatically revoked. Any alterations, deletions or additions to the Terms and Conditions of this Agreement will not be effective without the express written approval of TWA. 2. Either party may cancel this Agreement at anytime, with or without cause, upon 30 days prior written notice to the other. 3. Your Firm can not promote TWA in conjunction with this program in any way including, but not limited to, written advertisement or print through newspapers, magazines, and/or facsimile solicitations. 4. Transportation shall be used in accordance with applicable tariffs and the conditions of carriage and rules and regulations of TWA. Tickets may not be used in conjunction with any special marketing programs conducted by TWA from time to time and shall not qualify for TWA Aviator Program mileage credit. 5. Tickets may not be endorsed over to other airlines for carriage, refund or exchange. Individual passengers shall be responsible for payment of excess baggage charges, upgrades and other charges incurred after issuance of tickets. 6. Your Firm agrees to notify TWA promptly, in writing in the event there are changes in the ownership, operation or control of Your Firm. 7. Your Firm agrees to take all reasonable and appropriate measures to keep this Agreement confidential, with the exception of those details necessary for the normal conduct of Your Firm's business. 8. Neither TWA nor Your Firm will in any manner or by any device, either directly or indirectly, act in violation of any applicable law, governmental order or regulation including the provisions of TWA's tariffs and Your Firm's appointment or provision for the conduct of business as established by ARC. 9. Tickets must be issued only at Your Firm's home office set forth on the preceding page hereof and Your Firm's branch office locations filed as such with the Airline Reporting Corporation ("ARC"). 10. In the event TWA terminates your firms Your Firm Sales Agreement, this Agreement shall also terminate as of the same date. 11. This Agreement is governed by the laws of the State of Missouri. 1999 NET CONSOLIDATOR PROGRAM ================================================================================
MARKETS: USA to: All TWA International destinations except TLV/CAI/RUH - ------- SURCHARGE DATES: See attached schedule - --------------- BOOKING CLASS: "T" Coach Transatlantic and Domestic SELLUP: "V" Coach Transatlantic and Domestic - ------------- FARES: See attached schedule - ----- FARE BASIS CODE: TLCONS/TKCONS/THCONS SELLUP: VLCONS/VKCONS/VHCONS - --------------- TICKET DESIGNATOR/ NF99 SELLUP: NF99 - ------------------ DISCOUNTS: None - --------- CHANGES: Reticketing (including the reissuance of lost tickets) is the responsibility of the Your Firm. All - ------- changes/cancellations must be made at least 24 hours prior to the flight on which the passenger has reservations. Once ticketed, all changes will be subject to a $100.00 fee provided origin and destination do not change, minimum/maximum stay requirements are met, and space in appropriate booking class is available. CANCELLATION: A $150.00 service charge applies refunded tickets provided the reservation was cancelled prior to - ------------ departure. Refund does not apply to NOSHOW reservations or partially used tickets. Refund request must be submitted to TWA Passenger Refunds within 60 days of original travel date. In the event of death or the hospitalization of the passenger, there will be no penalty provided valid documentation is provided. TICKETING All tickets must be issued on standard stock with TWA (015) validation. All tickets must be booked - --------- from direct access availability with ticket numbers appearing in PNR. For Non-Worldspan users, ticket PROCEDURES: numbers must be transmitted via GFAXX (OSI) Field. - ---------- Remarks (Endorsement Box) - Valid only on TWA/$100.00 change fee apply/$150.00 Cancellation ------------------------- penalty. Fare Basis Box/ -------------- Ticket Designator Box - Assigned fare basis code/ticket designator code extended ----------------------- to all flight coupons. No dollar should appear on flight coupon or passenger receipt. Total Box (Flight coupon) - "Bulk Fare" and Government fees and taxes should appear ------------------------ on flight coupon. Prepaid Ticketing and MCO's are not permitted. FARE BASIS/BOOKING CLASSS TICKET DESIGNATOR AVIATOR MILES ------------------------- ----------------- ------------- (See seasonal fare page) [*] NF99 NONE (See seasonal fare page) [*] NF99 NONE
AGREED TO AND ACCEPTED BY: Trans World Airlines, Inc. NAME: /s/ Michael J. Hartley /s/ Richard G. McBee ------------------------ TITLE: President & CEO Richard G. McBee ------------------------ DATE: 9-24-98 Staff Vice President - Sales Programs ------------------------ CONSOLIDATOR WINTER SEASON ROUNDTRIP NET FARES --------------------------------- November 1, 1998 - March 31, 1999
NYC ZONE ZONE STL ZONE ZONE 1 2 3 4 ----------------------------------------------------------------------------------------------------- PAR [*] [*] [*] [*] [*] [*] ----------------------------------------------------------------------------------------------------- MAD [*] [*] [*] [*] [*] [*] ----------------------------------------------------------------------------------------------------- BCN [*] [*] [*] [*] [*] [*] ----------------------------------------------------------------------------------------------------- LIS [*] [*] [*] [*] [*] [*] ----------------------------------------------------------------------------------------------------- MIL [*] [*] [*] [*] [*] [*] ----------------------------------------------------------------------------------------------------- ROM [*] [*] [*] [*] [*] [*] ----------------------------------------------------------------------------------------------------- LON [*] [*] [*] [*] [*] [*] -----------------------------------------------------------------------------------------------------
* ONLY APPLICABLE WITH CHI/DTT/CLE ZONE 1 - ALB BDL BOS CHI CLE DTT ORF PHL PIT RIC ROC SDQ SJU WAS ZONE 2 - MIA FLL FMY JAX ORL PBI SRQ TPA ZONE 3 - ALO ATL BHM BMI BNA BRL CGI CID CMH CMI COU CVG DAY DEC DFW DSM EVV FSD FWA FYV GRR IAH ICT IND JLN LEX LIT LNK MEM MKC MKE MLI MSN MSP MSY MWA OKC OMA PAH PIA RDU SBN SDF SGF SHV SPI SUX TBN TUL TYS UIN ZONE 4 - ABQ AUS COS DEN LAX LAS ONT PDX PHX RNO SAN SAT SEA SFO SJC SLC SMF SNA ============================================================================= Security Charge: U.S. Departure Tax Westbound Customs and Immigration Fee/Westbound Aphis Tax/Passenger Facility Charge (PFC's) and Applicable Foreign Taxes are not included. ============================================================================= AIRFARES: Round-trip U.S. Origin Travel BOOKING CLASS: "T" FARE BASIS: TLCONS SELLUP: INTO "V" CLASS [*] ONE-WAY / [*] ROUND-TRIP FARE BASIS: VLCONS DISCOUNTS: NONE OPEN JAW: Single open-jaw travel permitted provided the applicable one-way fares are used. STOP OVERS: NONE SURCHARGE: TRAVEL ORIGINATING DECEMBER 15-24, 1998 [*]
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. CONSOLIDATOR SHOULDER SEASON ROUNDTRIP NET FARES ------------------------------------------------ APRIL 1, - MAY 31, 1999
NYC ZONE ZONE STL ZONE ZONE 1 2 3 4 - ------------------------------------------------------------------------------------------------------------------------- PAR [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- MAD [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- BCN [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- LIS [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- MIL [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- ROM [*] [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- LON [*] [*] [*] [*] [*] [*] - -------------------------------------------------------------------------------------------------------------------------
* ONLY APPLICABLE WITH CHI/DTT/CLE ZONE 1 - ALB BDL BOS CHI CLE DTT ORF PHL PIT RIC ROC SDQ SJU WAS ZONE 2 - MIA FLL FMY JAX ORL PBI SRQ TPA ZONE 3 - ALO ATL BHM BMI BNA BRL CGI CID CMH CMI COU CVG DAY DEC DFW DSM EVV FSD FWA FYV GRR IAH ICT IND JLN LEX LIT LNK MEM MKC MKE MLI MSN MSP MSY MWA OKC OMA PAH PIA RDU SBN SDF SGF SHV SPI SUX TBN TUL TYS UIN ZONE 4 - ABQ AUS COS DEN LAX LAS ONT PDX PHX RNO SAN SAT SEA SFO SJC SLC SMF SNA ================================================================================ Security Charge: U.S. Departure Tax Westbound Customs and Immigration Fee/Westbound Aphis Tax/Passenger Facility Charge (PFC's) and Applicable Foreign Taxes are not included. ================================================================================ AIRFARES: Round-trip U.S. Origin Travel BOOKING CLASS: "T" FARE BASIS: TKCONS SELLUP: INTO "V" CLASS [*] ONE-WAY / [*] ROUND-TRIP FARE BASIS: VLKCONS DISCOUNTS: NONE OPEN JAW: Single open-jaw travel permitted provided the applicable one-way fares are used. STOP OVERS: NONE SURCHARGE: TRAVEL ORIGINATING FRIDAY/SATURDAY/SUNDAY [*]
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. IMPORTANT! Please Retain and Refer To At Time of Ticketing BULK/NET TICKETING INSTRUCTIONS TWA's Bulk/Net Fare Agreements with net fares to TWA destinations: Please refer to the contract for the applicable markets, fares, fare basis codes, and ticket designators. To issue tickets correctly please follow the instructions below. 1. Always use the APPLICABLE FARE BASIS CODE followed by the ASSIGNED TICKET DESIGNATOR. IT IS EXTREMELY IMPORTANT THAT THIS COMPLETE CODE BE USED IN THE FARE BASIS/TICKET DESIGNATOR BOX. Note: a slash is required between the fare basis code and the ticket designator. 2. Booking Class: Applicable booking class of the Bulk/Net fare specified in your contract. 3. The following information must be printed on the ticket:
Remarks/Endorsement Box---------------------------VALID ON TWA ONLY/$$$$ CHANGE FEE/ NON-REFUNDABLE (Replace $$$$ with applicable change fee amount as stated in contract). Fare Basis Box/Ticket Designator------------------ASSIGNED FARE BASIS CODE/TICKET DESIGNATOR extended to ALL coupons and travel segments. Equivalent Fare Paid Box (Auditors Coupon)--------ALLOCATE BASE FARE, TAX, PASSENGER FACILITY CHARGES AND OTHER APPLICABLE GOVERNMENT FEES AND TAXES. Total all amounts Total Box (Flight Coupon)-------------------------"BULK FARE", plus government fees and taxes. Fare amount must not be written on Passenger Coupon or Flight Coupon.
TICKETS ISSUED INCORRECTLY ARE SUBJECT TO DEBIT MEMOS ----------------------------------------------------- EX-10.11 6 CONSOLIDATOR AGREEMENT DATED 12/14/1998 Exhibit 10.11 Note: Portions of this exhibit indicated by "[*]" are subject to a confidential treatment request, and have been omitted from this exhibit. Complete, unredacted copies of this exhibit have been filed with the Securities and Exchange Commission as part of the Company's confidential treatment request. AMERICA WEST AIRLINES CONSOLIDATOR AGREEMENT This Agreement is made on this 14th day of December, 1998, between America West Airlines, Inc., a Delaware corporation, at 4000 East Sky Harbor Boulevard, Phoenix, Arizona 85034 (herein "America West") and Cheap Tickets, Inc., a Hawaii corporation, at 1440 Kapiolani Blvd., Suite 800, Honolulu, Hawaii 96814 (herein "Customer"). The parties agree on the following mutual covenants: 1. Fares: a. Seats sold will be at specific fare levels in markets specified by America West and under the conditions stated in Attachments A and B herein. b. The net fares herein shall be applicable for travel wholly over the services of America West and America West Express, all other codeshare flights are not applicable. Net fares are as shown on Net Fare Sheets under Attachment A, herein. c. Net fares are subject to change at the sole and complete discretion of America West. Written notice shall be provided to Customer not less than five (5) business days prior to the effective ticketing date of any net fare change, or two (2) business days for electronic filing of fares. Customer agrees that it will pay the changed fare amounts for all tickets issued as of the effective date of such net fare change. By signing and returning the confirmation page of all Bulk Program Advisories, Customer acknowledges receipt of said advisories. Failure to sign and return confirmation does not release customer from adherence to any revisions made on such advisories. d. The [*] Fare [*] allows Customer to take applicable commission levels on published fares. Restrictions and commission are as stated in Attachment B, herein. e. Fares do not include the following: US Transportation or International Taxes; Fuel Surcharges; Passenger Facility Charges; and/or other city/governmental surcharges. 2. Payment/Reporting: Customer agrees to issue tickets on standard industry ticket stock. In accordance with ARC policies and procedures, tickets will be reported and funds due for tickets will be remitted through ARC each week. Invoices for other than ticket sales shall be due and payable within fifteen (15) days from the date of invoice, and shall not be subject to any offset or deduction for any purposes. 3. Advertising: Customer agrees that it will not use the America West trade name or service marks in any advertising, promotional material, brochures, printed matter or signs or internet web sites without the prior review and written approval of such material by America West. [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. 4. Internet: If customer utilizes an Internet website to facilitate the sale of America West seats, customer agrees to the following: a) A complete list of all Internet website addresses connected to the sale of the America West seats will be provided to America West within ten (10) business days of submission of this signed Agreement. Any additions, deletions or corrections to this list must be communicated to America West within ten (10) business days of said additions, deletions or corrections. b) If a website contains restricted pages that are used to facilitate business, customer agrees to provide passwords necessary to gain access to restricted pages. 5. Contract Non-Compliance: a. America West is entitled to receive compensation for the full value of the coach fare in the event that inventory sold is not ticketed in accordance with Attachment A and B. b. Compensation due America West will be invoiced to Customer due and payable (15) business days after notification. c. Revenue Accounting will continue to advise Customer through issuance of debit memos or invoices of compensation due America West when reservations are found booked and/or ticketed in the wrong class of service, or for other booking or ticketing irregularities including but not limited to individual CRS bookings that qualify as a group, and booking published fares without ticketing in accordance with tariff rules. America West will recover CRS fees as well as full ticket value of any booking irregularity. 6. Default: In the event Customer fails to make payment as required by this Agreement, America West shall provide written notice to customer to cure such default within five (5) working days from the date of such notice. In the event such non-payment is not cured within said five (5) days, this Agreement shall be terminated immediately. If Customer fails to perform any other terms of this Agreement and is in default thereof, this Agreement may be terminated after thirty (30) days written notice of those matters in default being given and the failure of Customer to cure such default. America West shall be free to pursue all legal and equitable remedies available for any default. 7. Terms and Termination: a. The term of this Agreement is from January 1, 1999 through December 31, 1999, with all travel completed by January 31, 2000, and either party may terminate this Agreement without cause by giving not less than thirty (30) days prior written notice of their intention to do so. Such termination shall not relieve either party from payment of amounts currently due and owing, and neither party may terminate this Agreement if that party is in default in the performance of this Agreement. b. Should Customer fail to perform it's duties as outlined in this Agreement and such default shall continue after thirty (30) days written notice to correct such default, then America West may terminate this Agreement. 8. Lost Tickets: When a passenger loses his/her America West ticket, the passenger may purchase a replacement ticket for the portion lost, and will be refunded the price of the replacement ticket, provided the itinerary (flight number, travel date, city) of the replacement ticket is exactly the same as the lost ticket. If a replacement ticket is not purchased for the exact itinerary, no refund will be made. 9. Confidentiality: The terms and conditions of this Agreement are strictly confidential. Any breach of Confidentiality, duplication of the Agreement and/or its Attachments, use or disclosure of this Agreement in whole or in part for any purpose shall immediately render this Agreement null and void and subject to immediate cancellation at the option of America West. 10. Entire Agreement: This Agreement represents the entire understanding between the parties. No waiver, alteration, or modification of any of the provisions herein shall be binding unless in writing and signed by and authorized agent or representative of the parties. 11. Assignment and Binding Effect: The provisions of this Agreement shall be binding upon any successor to either of the parties, but shall not be assignable by Customer. 12. Attorney's Fees: In the event that an action is necessary to enforce the terms of this Agreement, the prevailing party in such action shall be entitled to recover its reasonably attorney's fees and costs. 13. Applicable Law: The laws of the State of Arizona shall govern this Agreement. 14. ARC Numbers: A current and complete list of ARC numbers included under this Agreement must be provived to America West within ten (10) business days of submission of this signed Agreement. This information should be either mailed or e-mailed to: Laura Loveland America West Airlines 4000 E. Sky Harbor Blvd. HY-SPO Phoenix, Arizona 85034 E-mail address: llovlnd@goodnet.com ------------------- If the number of ARC locations exceeds ten (10), Customer agrees to provide ARC numbers on a 3 1/2" IBM compatible diskette in MS Excel format. The file will also include the address and phone number for each 8-digit ARC number. Any additions, deletions or corrections to this ARC list must be submitted to America West within ten (10) business days of said additions, deletions or corrections. CHEAP TICKETS, INC. AMERICA WEST AIRLINES, INC. By: /s/ Michael J. Hartley By: /s/ Ron L. Cole ----------------------------- ---------------------------- Michael J. Hartley Ron L. Cole President & CEO Vice President, Sales Date: 12-18-98 Date: 1-20-99 --------------------------- -------------------------- Initial: /s/ L.G. ----------------------- L. Gardner Initial: /s/ J.C. ----------------------- J. Carhart Initial: /s/ J.S. ----------------------- J. Schmidt ATTACHMENT A, NET FARE PROGRAM ------------------------------
PROGRAM TITLE: Cheap Tickets, Inc. - -------------- Address: 1440 Kapiolani Boulevard, Suite 800, Honolulu, Hawaii 96814 Primary ARC Number(s): 12601676, 12916120, 033514526, 33965750, 36975820, 50523911 Automation System: Sabre Contact: Michael J. Hartley Phone: (808) 945-7439 Fax: (808) 946-0610 E-mail: mhartley@cheaptickets.com RESERVATIONS: Booked by Customer Only, through automation. Bookings made [*] are permitted with [*] - ------------ non-commissionable surcharge. Booking Class: Day: V class Night: KN class Groups: Not Permitted. OSI Entries: 3 OSI HP CTCT 808-945-7439 CHEAP TICKETS, INC. 3 OSI HP CHANGES THROUGH CONSOLIDATOR ONLY 3 OSI HP FLIGHTFUND CREDIT NOT PERMITTED 3 OSI HP TKNA 401 xxxx xxx xxx TICKET INFORMATION: - ------------------ Changes: $100, non-commissionable fee per ticket. Ticket reissuance by tour operator only, prior to original travel date only. Changes to name, origin, or destination are not permitted. Once travel has commenced, changes to return are not permitted (standby travel only). Fares: As listed on Consolidator Net Fare list. All net fares are subject to change with five (5) business days notice or two (2) business days for electronic filing of fares. Fares are round-trip net, non-commissionable, and do not include taxes. Tax/PFC/Fuel surcharges are not included. Net fares are subject to change until ticketed. Advance purchase required as stated on current advisory. **Night fares will apply for LAX to East Coast when using the LAX-CMH non-stop flight only. Because the LAS-CMH non-stop only connects to day flights, the night fare may be used when the connecting flight out of CMH departs at or before 8:50 a.m. Applicable East Coast cities are BOS, BWI, DCA, EWR, LGA, MDW, PHL. Fare Basis Code: Round Trip Day Flights: Off Peak: VLPOCN Peak: VLPPCN Round Trip Night Flights: Off Peak: KNLPOCN Peak: KNLPPCN One Way Day Flights: Off Peak: VLPOCNO Peak: VLPPCNO One Way Night Flights: Off Peak: KNLPOCNO Peak: KNLPPCNO IT Code: ITLPCTI (in tour code box) Restrictions: Non-refundable with the exception of cases of Death of the passenger (properly documented). Non-transferable. Ticketing Agency: Cheap Tickets, Inc. Ticket Time Limit: All tickets must be issued [*]. Ticket Entries: 1. Base Net Fare, Tax and Total on Auditor's Coupon Only. 2. Flight coupons shall show zero (0) or BULK plus applicable XF charges. 3. Itinerary in linear on all coupons followed by the Base Net Fare. (i.e., [*] is shown as [*]) 4. Not valid before date of travel. 5. Not valid after return date of travel. PROGRAM SPECIFICS: - ----------------------- Days/Travel Off Peak: [*] in both directions. Peak: [*] in both directions. Flight Fund: Not Permitted Markets: Systemwide Minimum Stay: Night flights: [*] / Day Flights: [*] Maximum Stay: 30 days Open Jaw: Permitted Open Returns: Not Permitted PTA/TBM Not Permitted Routing: Published HP routings only. Codeshare flights are not applicable. Rule 240: Permitted Standby: $100 non-commissionable fee collected at airport. Permitted on night flights only, within 30 days of original travel date. Stopover: Not Permitted Waitlists: Not Permitted
[*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. ATTACHMENT B, PUBLISHED OVERRIDE (Individual Travel) ----------------------------------------------------
RESERVATIONS: - ------------ Booking Class: Applicable to published fare type. Groups: Not Permitted. Reservations: Booked by Tour Operator only. TICKET INFORMATION: - ------------------ Applicable Fares: America West published fares in effect at the time of ticketing, and according to the Tariff rules of that published fare (except as stated below). See `Restriction' below. *Disclaimer: Certain short-term, introductory or other published promotional fares may not apply. Restrictions: All published rules/fares apply, except the following: Companion Fares do not apply. Promotional/Other discounts do not apply. (Senior Discounts, vouchers, etc.) F class excursion fares do not apply. (FE14 etc.) [*] [*] Fare Basis Code: Applicable to the published fare used. IT Code: ITLPCTIPBA. Must be shown in Tour Code Box. Ticketing Agency: Cheap Tickets, Inc. Primary ARC Number(s): 12601676, 12916120, 033514526, 33965750, 36975820, 50523911 Ticket Entries: All published fare ticket entries are required, with the exception of the following: The discounted published fare may be omitted from the Base, Tax and Total box of the passenger coupons only. The discounted published fare must be shown on all auditors coupons. PROGRAM SPECIFICS: - ----------------- Markets: Same markets as listed on attached consolidator pricing list. Routing: Published HP routings only. Codeshare flights are not applicable.
All published rules apply, unless otherwise stated above. [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. EX-10.13 7 SUBSCRIBER AGREEMENT Exhibit 10.13 Note: Portions of this exhibit indicated by "[*]" are subject to a confidential treatment request, and have been omitted from this exhibit. Complete, unredacted copies of this exhibit have been filed with the Securities and Exchange Commission as part of the Company's confidential treatment request. SABRE SUBSCRIBER AGREEMENT - (UNITED STATES) This SABRE* Subscriber Agreement (the "Agreement") is entered into by and between The SABRE Group, Inc. ("TSG") and the undersigned ("Customer"), effective as of December 31, 1998 ("Effective Date") regarding the provision of products and services set forth herein to Customer's locations within the United States and its territories. 1. LEASE TERM 1.1 Lease. For the term specified in Article 1.2 below, TSG shall lease to Customer the System, as defined herein. 1.2 Term. The lease term of the System identified on Schedule A shall commence on the Effective Date and shall continue for 60 months ("Initial Term"). The lease term of any additional System installed prior to the twenty-fourth (24th) month after the Effective Date shall terminate at the end of the Initial Term. Commencing on the twenty-fifth (25th) month, any additional System installed shall have a term of sixty (60) months from the date of its installation ("Additional Term"). Any additional System installed after the Effective Date shall be subject to the same terms and conditions as this Agreement. 2. DEFINITIONS The following terms shall have the following meanings in this Agreement: 2.1 Agreement means this SABRE Subscriber Agreement, and all Amendments, Schedules and Supplements made a part hereof. 2.2 Charges has the meaning given in Article 3.2. 2.3 Communication Protocol means the rules or standards on how data transmission takes place across computer networks. 2.4 Confidential Information means this Agreement, any and all applicable rights to patents, copyrights, trademarks and trade secrets, proprietary and confidential information of TSG or Customer, their affiliates, subsidiaries, successors or assigns concerning their past, present or future research, development, business activities or affairs, finances, properties, methods of operation, processes and systems, agreements (including without limitation private fare or special discount agreements) related to the business of TSG or Customer. 2.5 Information Provider means any party, other than Customer, which provides information for inclusion in the SABRE System, including, without limitation, Reed Elsevier Inc., the publisher of the Official Airline Guide. 2.6 Instructions means any and all manuals, operating procedures, manufacturer's recommendations, rules, and instructions delivered or made available to Customer by TSG either in hard-copy or via the SABRE System, and which must be complied with by Customer. Such Instructions may be unilaterally revised or amended by TSG at any time. 2.7 Internet means the global computer network commonly referred to as the "Internet". 2.8 Internet Connection means any connection between the Internet and the SABRE System or System for the purpose of allowing clients of Customer to make direct reservations for the products and services offered in the SABRE System. 2.9 ISP means any third party computer network which connects Customer or its employees to the SABRE System or the System via the Internet. ISPs and ISP supplied equipment such as datalines or browser software are not included in the definitions of the SABRE System or the System. - ----------------- *SABRE is a registered trademark of a subsidiary of The SABRE Group, Inc. 2.10 Non-SABRE Traffic means data other than that passing to and from the SABRE System which is transmitted and received by Customer using the System. 2.11 Non-Standard System means any hardware, software, communication access devices or firmware not acquired from TSG, including any such Non-Standard System acquired from an ISP. 2.12 PNR means a passenger name record created in the SABRE System. 2.13 Participant means any air carrier (including scheduled, charter, domestic and international airlines), car rental company, surface transportation carrier, hotel or lodging provider, railroad, steamship company, cruise or tour operator or other vendor of travel related products, information or services which has an agreement with TSG for the display of information regarding its products or services in the SABRE System. 2.14 Prohibited Segment means a Travel Service Segment for which no corresponding space has been reserved within the transporting carrier's internal reservation system. 2.15 SABRE Booking means an airline, hotel, tour, rental car or cruise Segment that obligates a Participant to pay a booking fee to TSG and that is created in or processed through the SABRE System by Customer during any one calendar month or that is secured to Customer's location, less cancellations made prior to the Segment Activity Date. SABRE Bookings are credited in the latter of (i) the calendar month in which the Segment Activity Date occurs or (ii) the calendar month in which the Segment is actually processed by the SABRE System for billing to the Participant. SABRE Bookings may include additional product or service Segments in the future at TSG's sole discretion. 2.16 SABRE Component means all memory, disk storage space, ports and any other element of the Standard Equipment. 2.17 SABRE Licensee means a person or entity licensed to market the SABRE System in a designated area of the world. 2.18 SABRE Subscriber means a person or entity, other than an airline, which utilizes the SABRE System to make reservations. The term "SABRE Subscriber" shall include any person or entity making reservations through any version of the SABRE System or through a SABRE Licensee. 2.19 SABRE System means TSG's global distribution system (commonly referred to as a computerized reservation system) which collects, stores, processes, displays and distributes information through computer terminals concerning air and ground transportation, lodging and other travel related products and services offered by travel suppliers and which enables SABRE Subscribers to (i) reserve or otherwise confirm the use of, or make inquiries or obtain information in relation to, such products and services and/or (ii) issue tickets for the acquisition or use of such products and services. 2.20 Schedule A means the document reflecting the Charges and any applicable discounts for the System as amended by any additional documents. 2.21 Segment means (a) for airline bookings, each separate flight segment reservation identified by a separate flight number in a PNR, multiplied by the number of passengers booked in such PNR for such flight segment; (b) for hotel bookings, each separate reservation that is processed through the SABRE System with an action status code of HK, KK or KL regardless of the number of rooms, suites or other accommodations or the number of persons or the duration of the stay; (c) for car rental bookings, each separate reservation that is processed through the SABRE System with an action status code of HK, KK or KL regardless of the number of vehicles or persons or the duration of the rental; and (d) for cruise and tour bookings, each separate reservation that is created in or processed through the SABRE System and confirmed by that Participant, regardless of the number of cabins or travelers or the duration of the cruise or tour. The term Segment does not include Prohibited Segments. 2.22 Segment Activity Date means the first date listed in a PNR for the relevant Segment. 2.23 Site means Customer's location at which the System is to be installed as identified on Schedule A. 2.24 Standard Equipment means the items of hardware and communication access devices, including, without limitation, communication data lines and networks, leased to Customer by TSG in accordance with this Agreement and identified on Schedule A. 2.25 Supplement means a document reflecting any changes to the System, and/or Charges or discounts related thereto, all as agreed to by the parties. A Supplement will be provided by TSG upon request of Customer. 2.26 System means the Standard Equipment, SABRE Component, System Software and/or Internet Connection. 2.27 System Software means that software delivered by TSG to Customer. 2.28 Transaction means a grouping of characters transmitted to the SABRE System whether such transmission is made in the SABRE System manually or automated, including transmissions made through an Internet Connection. Each transmission to the SABRE System from Customer constitutes one Transaction. No input message may exceed three hundred (300) characters in length. 2.29 Transaction Limit has the meaning given in Article 10.3. 2.30 Transaction Ratio has the meaning given in Article 3.3. 2.31 Travel Service Segment means a SABRE Booking entered in the SABRE System with an action status code of GK, GL, BK, BL, HN, YK, HK*, or HL*. 3. CHARGES AND PAYMENTS 3.1 Prepayment. Upon execution of this Agreement by Customer, Customer shall pay to TSG the non-refundable prepayment as shown on Schedule A. If the System is installed, the prepayment shall be credited against the Customer's first Charges. 3.2 Charges. All amounts payable to TSG ("Charges") shall be due and payable in United States dollars within fifteen (15) days of the date of TSG's invoice, without setoff or counterclaim. 3.3 Additional Charges. Customer agrees to pay to TSG additional Charges at TSG's then prevailing rate for services and materials including without limitation the following: (a) the installation or removal of Standard Equipment; (b) Standard Equipment relocation within the Site; (c) each Site disconnect or relocation to different premises; (d) modifications, upgrades, enhancements or additions of Standard Equipment and/or System Software; (e) any applicable fees for non-compliance with any payment terms; (f) installation of peripheral devices requested by Customer; (g) processing Transactions which exceed the level of one hundred thirty (130) Transactions per SABRE Booking ("Transaction Ratio"); (h) materials for use with the Standard Equipment, including, but not limited to, ticket stock for use with thermal ticket printers; and (i) connecting the System to other TSG approved networks or systems. The Transaction Ratio is subject to change by TSG upon thirty (30) days advance notice to Customer. 3.4 Variables. If Customer elects to use certain variables including, without limitation, Ticketing and Invoice/Itinerary functions or Microfiche, Customer shall pay all Charges for much variables based an TSG's then prevailing rate. 3.5 Increases. TSG shall have the right to increase, the Charges, other than the Fixed Monthly Charges identified on Schedule A, for the remaining term of this Agreement upon thirty (30) days advance written notice to Customer. If the increase exceeds ten percent (10%) of the Charges in any consecutive twelve month period, Customer may terminate this Agreement upon written notice to TSG within fifteen days of receipt of TSG's notice of the increase. Notwithstanding the foregoing, the Charges for data lines or other communication access devices, shall be subject to increase, at any time and without limitation, to cover any increase in the cost imposed upon TSG by the telecommunications vendor. 3.6 Modifications. TSG's completion of any modification to the System or Customer's payment of any revised Charges related thereto, whichever occurs first, constitutes acceptance and ratification of the modifications to the System and the revised Charges and/or discounts related thereto. 3.7 Interest. Charges not paid when due shall accrue interest at the rate of eighteen percent (18%) per annum or the highest rate permitted by the governing law indicated in Article 15.1, whichever is less. 3.8 Taxes. Customer shall pay any taxes, or assessments including any interest or penalty thereon levied as a result of this Agreement, excluding taxed measured by the net income of TSG. Customer shall indemnify and hold harmless TSG from all costs, fines and expenses (including reasonable legal costs) incurred by TSG resulting from Customer's failure to pay taxes as provided in this Article. 4. INSTALLATION AND DELIVERY 4.1 Delivery. TSG shall arrange for delivery of the System F.O.B. the Site, on the estimated installation date, as identified on Schedule A. 4.2 Installation. Subject to Article 4.3, TSG shall install, or cause to be installed, the System at the Site. Customer shall allow installation of the System at the Site. Customer's failure to do so or to give adequate assurance that it will do so on the estimated installation date will constitute an Event of Default pursuant to Article 14.1.2. 4.3 Customer's Obligations Prior to Installation. Customer, at its expense, shall be responsible for preparing, on or before the estimated installation date, the Site for the System in accordance with the Instructions. If installation of the System is prevented or delayed because of Customer's failure to prepare the Site, TSG shall use reasonable efforts to install the System upon Customer's compliance with this Article and upon payment of all reasonable expenses incurred by TSG resulting from Customer's failure to prepare the Site. 4.4 Relocation and Possession. Customer shall at all times keep the System in its sole possession and control at the Site. Customer shall not move any part of the System from the Site without first obtaining the written consent of TSG. Such consent will not be unreasonably withhold. 4.5 Communication Access. Except when Customer utilizes an ISP to access the SABRE System, TSG or its designated third party shall install the necessary communication access device to connect the System to the SABRE System and other approved systems or networks. All such devices are either owned by TSG or such third-party, are subject to this Agreement, and shall be returned to TSG or the third-party as TSG directs upon termination of the Agreement. 4.6 Non-Standard System. 4.6.1 Subject to Customer's compliance with all other terms and conditions of this Agreement, TSG agrees to allow Customer to connect or use Non-Standard System with the System without TSG's prior written consent, except to the extent that such Non-Standard System consists or communications data lines, emulator boards, gateways, routers, ticket printers or other devices connecting directly to the System or SABRE System ("Reserved Equipment"). TSG consent for Reserved Equipment shall be conditioned upon TSG certification and approval prior to its use with the System. Such consent may be withheld in order to preserve the integrity of the SABRE System and the System. 4.6.2 Customer shall represent and warrant to TSG that the Non-Standard System and its connection to the System conforms in all respects to TSG's Non- Standard System standards and specifications, a copy of which Customer may request from TSG, and will not be altered or modified without prior notice to TSG. 4.6.3 Customer shall remove all Non-Standard System placed on or within the Standard Equipment prior to TSG's removing such Standard Equipment from Customer's Site. TSG disclaims, and Customer hereby waives and indemnifies, any responsibility or liability on the part of TSG, under any theory whatsoever, for any Non-Standard System that Customer has failed to remove from the Standard Equipment prior to TSG's removing such Standard Equipment from Customer's site. 4.6.4 Customer shall not use Non-Standard System in conjunction with the System for any function not specifically outlined in this Agreement and any use or attempted use for any other function shall constitute an Event of Default under Article 14.1.2. 4.6.5 Customer shall also ensure that TSG has access to Customer's Site on request for conducting on-site inspections, testing or to oversee installation of the Non-Standard System. Customer is responsible for ensuring that any Standard Equipment at Customer's Site is connected to the System for the purposes of performing testing and diagnostics on such Standard Equipment by TSG's designated agent. If TSG reasonably determines that the Non-Standard System is causing, or contributing to, a problem with the System, the SABRE System or another SABRE Subscriber's access to or operation of the SABRE System, then TSG has the right to immediately restrict access to the SABRE System upon notice to Customer as provided for in this Agreement and TSG shall have no liability to Customer for such restriction of access. 4.6.6 Customer agrees that its continued right to maintain the connection between the Non-Standard System and the System and/or the SABRE System and to use the Non-Standard System in connection with the Standard Equipment shall be dependent upon Customer's full cooperation with requests by TSG to repair, alter, modify, or where necessary, de-install the Non-Standard System if TSG reasonably determines that the Non-Standard System, or a component thereof, is impairing the System, the SABRE System or another SABRE Subscriber's access to or operation of the SABRE System. 4.6.7 Customer shall pay TSG's then prevailing rate for all employee resources expended by TSG for, but not limited to, TSG's monitoring of the installation of the Non-Standard System and/or expended in connection with on- site, inspection and/or testing of the Non-Standard System after installation, service calls and any travel and incidental expenses incurred by TSG's personnel or vendors for the conduct of such monitoring, inspecting, testing or service calls; provided, however, that after the initial installation of the Non- Standard System, TSG will make such on-site inspections or test only where it reasonably believes that the Non-Standard System is impairing the System, the SABRE System or another SABRE Subscriber's access to or operation of the SABRE System. 4.6.8 Customer agrees that TSG has first and complete access to the SABRE Component. If, as a result of Customer's use of Non-Standard System, an upgrade of the SABRE Component is required, Customer shall comply with the applicable provisions of this Agreement. 4.6.9 TSG reserves the right to modify the SABRE System or the System, even if such modification requires changes in Customer's Non-Standard System. TSG will make reasonable efforts to notify Customer in advance of such changes. Any expenses incurred in modifying Customer's Non-Standard System to conform to the SABRE System or System modifications shall be the sole responsibility of Customer. 4.7 Acceptance of System. Upon installation of the System and establishment of a successful connection with the SABRE System and any other TSG approved systems or networks, Customer shall be deemed to have accepted the System. Any use of the System, additional System and/or Non-Standard System further constitutes acceptance of this Agreement by Customer. 5. REPAIRS AND MAINTENANCE 5.1 Repairs and Maintenance. Upon prompt notification from Customer, TSG or its designated agent shall promptly repair and maintain or replace the Standard Equipment provided that the Standard Equipment has been subject to reasonable operation. Customer shall not make any modifications nor attempt to perform repairs or maintenance of any kind to the System. 5.2 Limitation. TSG is not responsible for repairs and maintenance of any Non- Standard System or other hardware, software or communication access devices at Customer's Site or at the locations of other TSG approved systems or networks beyond the point at which they are connected to the System and/or the SABRE System. 5.3 Notification. Customer shall promptly inform TSG of any breakdown of the Standard Equipment by contacting SABRE Customer Services. Customer shall maintain a record of all occasions upon which repair or maintenance service is performed and make such records available to TSG upon request. 5.4 Charges. Repair or maintenance services on Standard Equipment during normal business hours (9:00 a.m. to 6:00 p.m. local time, Monday through Friday, excluding legal holidays) are included in the Charges, provided that the Customer has not been negligent and the Standard Equipment has been subject to reasonable operation; otherwise, Customer will be charged a service fee in accordance with TSG's or its independent contractor's then prevailing rates. 5.5 Non-Standard System. All maintenance of the Non-Standard System shall be the sole responsibility of the Customer. TSG will accept calls to SABRE Customer Services regarding a malfunction of the Non-Standard System if TSG determines that the malfunction is not attributable to the Non-Standard System. Customer shall pay TSG's then prevailing maintenance charges for any maintenance calls for the SABRE System or the System if TSG reasonably determines that the problems were caused by or attributable to the Non-Standard System. 6. TITLE AND OWNERSHIP OF SYSTEM The System leased hereunder shall remain the property of TSG. Customer shall not in any other manner dispose of the System or any part thereof or suffer any lien or legal process to be incurred or levied on the System. 7. INSURANCE 7.1 General. Customer shall take all necessary precautions to protect the System installed at Customer's Site. 7.2 At its own cost, Customer shall procure and maintain insurance, from an insurer and on terms and conditions acceptable to TSG, insuring the System against all risk of loss or damage, including, without limitation, the risk of fire, theft and any other such risks as are customarily insured in a standard all risk policy. Such insurance shall also provide the following: 7.2.1 Full replacement value coverage for the Standard Equipment, which value is set forth on Schedule A; 7.2.2 An endorsement naming TSG as a co-insured and as a loss payee to the extent of its interest in the Standard Equipment; and 7.2.3 An endorsement requiring the insurer to give TSG at least thirty (30) days prior written notice of any intended cancellation, non-renewal, material change in coverage or, within thirty (30) days of the event, written notice of any default in the payment of a premium. 7.3 Risk of loss for and damage to the System shall pass to the Customer upon delivery of the System to the Site. 7.4 TSG may request at any time proof of such insurance and/or other form of surety from Customer. The failure of Customer to produce such proof or surety within thirty (30) days of the request by TSG will be considered an Event of Default as defined in Article 14.1.2 herein. 8. TITLE AND OWNERSHIP OF CONFIDENTIAL INFORMATION 8.1 Each party's Confidential Information shall remain that party's exclusive property. 8.2 Each party shall maintain the confidentiality of the other party's Confidential Information at all times during and after the term or this Agreement. Neither party shall use, sell, sublicense, transfer, publish, disclose, display, or otherwise make available to others, except as authorized in this Agreement the Confidential Information of the other party or any other material relating to the Confidential Information of the other party nor shall either party permit its officers, employees, agents, contractors or subcontractors to divulge the other party's Confidential Information without that party's prior written consent. 8.3 Customer shall use the data, other then Non-SABRE Traffic, transmitted under this Agreement ("Data") solely for the benefit of itself and its customers in connection with rendering the following services: (i) air carrier, hotel, car and rail reservations, including schedule quotations; (ii) customer accounting and record keeping activities; or (iii) the sale of or reservations for other miscellaneous products or services offered in the SABRE System. Customer shall not publish, disclose or otherwise make available to any third party any compilation of Data obtained from the SARRE System. However, Customer may use specific Data for the benefit of its customers in connection with any reservation or schedule quotation production of a hard copy travel itinerary, invoice, statement or ticket. 8.4 Nothing in this Agreement shall be interpreted to limit in any way TSG's right to use, market, sell or publish any booking related data subject only to any applicable laws or regulations. 9. SYSTEM SOFTWARE LICENSE 9.1 Ownership of System Software. Customer acknowledges that TSG or the original manufacturer of the System Software, as applicable, owns or has licensed from the owner, copyrights in the respective System Software and that ownership and title are retained by the manufacturer or its licensor. All applicable rights to patents, copyrights, trademarks, and trade secrets inherent in the System Software and pertinent thereto are and shall remain TSG's or the original manufacturer's sole and exclusive property. Any copy of such System Software must incorporate any copyright, trade secret, or trademark notices or legends appearing in the original version delivered to Customer. 9.2 Grant of License. Subject to the provisions of this Agreement and for the term specified in Article 1.2, either TSG or the original manufacturer grants to Customer a non-transferable, non-exclusive limited license to use the System Software subject to the following restrictions: (a) Customer shall use the System Software solely in connection with its use of the SABRE System, (b) the System Software shall be used and installed solely at the Site and solely used on the Standard Equipment or Non-Standard System authorized under Article 4.6, (c) the System Software shall be used solely for internal purposes and only in the ordinary course of business, (d) Customer shall not compile, reverse compile, decompile, disassemble, reverse assemble or reverse engineer the System Software or any portion thereof, (e) the System Software shall not be copied or reprinted in whole or in part except (i) a reasonable number of copies of each program may be made in machine readable form for reasonable archival or backup purposes or (ii) when TSG has granted permission to do so, (f) Customer shall not lease, sell, license, sublicense or otherwise transfer the System Software to any other party, and (g) the terms of this Agreement shall govern the System Software license unless modified by a license which may be associated with a particular software product, wherein the license associated with that particular software product shall govern. 9.3 Modification Rights. Customer shall not modify the System Software or merge such software into other programs or create derivative works based on such software. Additionally, Customer shall not delete or cause to be deleted the System Software from the Standard Equipment. Notwithstanding anything to the contrary contained herein, noncompliance with this provision shall constitute an Event of Default under this Agreement and this Agreement shall immediately terminate and Customer shall be obligated to pay TSG damages as specified in Article 14.2 hereof. 9.4 Upgrades and Modifications. All tangible objects containing or relating to the System Software are the sole and exclusive property of TSG or the manufacturer. In the event TSG modifies the System Software, it may deliver such modified System Software to Customer at its then current charge, if any, and Customer shall promptly return to TSG any and all tangible objects relating to all previous versions of the System Software as provided in Article 15.7. Customer shall be solely responsible for protecting all software not obtained from TSG hereunder and the data related thereto in the event of a software upgrade. Customer, in order to receive an upgraded or updated program, shall comply with any and all terms, conditions and Instructions requested by TSG. 9.5 Operating Program. 9.5.1 Customer acknowledges that the System Software may incorporate, in part, copyrighted materials pertinent to the Operating Program as identified on Schedule A ("Operating Program"). Customer agrees that such copyrighted portions shall be subject to the Operating Program copyright and license. 9.5.2 If Customer requires additional Operating Programs, Customer shall notify TSG and TSG will provide Customer with additional copies to support additional video agent sets pursuant to this Agreement. 9.5.3 Customer will look only to TSG and not to the manufacturer for any support, maintenance, assistance and upgrades and the like with respect to the Operating Program and the manufacturer shall have no liability to Customer in relation to the Operating Program. 9.5.4 No action, regardless of form, arising out of the license of the Operating Program may be brought more then two years after the cause of action has arisen. 9.5.5 Customer shall physically retain a copy of the Conditions of Use for SABRE Users (Attachment I) with each applicable video agent set or dedicated fileserver/processor eligible to use such Operating Program. 10. OPERATION OF THE SABRE SYSTEM AND THE SYSTEM 10.1 Operation of System. 10.1.1 The SABRE System and the System shall be operated by Customer or solely for the purposes and functions expressly permitted by this Agreement and in strict accordance with the Instructions. Customer shall not in any way utilize the System for the direct or indirect purpose of bypassing or circumventing the SABRE System in communicating in any way with Participants. Any violation of this provision will be deemed an Event of Default under Article 14.1.2. 10.1.2 Customer may use the System to transmit and receive Non-SABRE Traffic only from those systems or networks approved in writing by TSG. Customer acknowledges that in cases of communications capacity limits being reached, data transmission through the System with the SABRE System will be given priority over any Non-SABRE Traffic. 10.1.3 Customer shall access the SABRE System only through the System, an ISP or another system or device authorized in writing by TSG. 10.1.4 Customer shall take all precautions necessary to prevent unauthorized operation or misuse of the SABRE System or the System, including without limitation, speculative booking, shell bookings, reservation of space in anticipation of demand, or improper record or access. In the event of misuse of the SABRE System or the System, TSG reserves the right, in addition to all rights under the Agreement, to immediately terminate the Agreement. 10.1.5 Customer shall not enter any Prohibited Segments into the SABRE System. Prohibited Segments so entered shall not be calculated in determining productivity levels under the Agreement. All Travel Services Segments shall be removed from the SABRE System should corresponding space be canceled direct via telephone with the transporting carrier. 10.2 Non-Exclusivity. This Agreement is not exclusive and nothing in the Agreement is intended to preclude or prohibit Customer from using any other computerized [illegible] expected use of the System is the Fixed Monthly Discount Booking Level stated in Schedule A. 10.3 Transaction Volume. Notwithstanding the provisions of Article 3.3(g), TSG shall have the right, upon thirty (30) days notice to Customer to limit Customer to generating no more then one hundred thirty (130) Transactions per SABRE Booking ("Transaction Limit"). The Transaction Limit may be changed by TSG upon thirty (30) days advance notice to Customer. 10.4 Training. TSG will make available introductory SABRE System training during the installation process. For purposes of this Article, the installation process is defined as anytime between contract signing by both Customer and TSG through two months after installation is complete. 10.4.1 Upon written request from Customer, at such time that installation is complete, additional training may be offered subject to availability and at TSG's then prevailing rate per person, per class. The additional training charge will be assessed on Customer's monthly invoice. 10.4.2 The training described in Article 10.4 shall be performed at a location designated by TSG. 10.4.3 Except as otherwise provided herein, Customer is responsible for all training of all its employes in the proper use of the SABRE System. 10.4.4 In addition to the training described in Article 10.4, TSG may offer to Customer supplemental training programs on a local level at TSG's then prevailing rate and method of delivery. Such training may consist of, but not be limited to, workshops, seminars, self-paced instruction and individual consultations. 10.4.5 Customer and its trainees agree to comply with all training procedures and rules established by TSG, and TSG reserves the right to remove any Customer trainee from the training program if such trainee fails to comply with such procedures and rules. 10.4.6 TSG may, at its discretion, monitor or test Customer's employee's training levels. If TSG determines the training level of any one or more of Customer's employees to be insufficient, then Customer will institute such additional training at its own expense (including, if necessary, additional training by TSG at TSG's then prevailing charges) as may be necessary to bring Customer's employees to the level of training required by TSG. 11. WARRANTY, AND LIMITATION OF WARRANTY, LIABILITY AND REMEDY 11.1 SABRE Warranty. TSG agrees to use reasonable efforts to maintain the availability of the SABRE System, but shall have no liability for interruptions in the operation of the SABRE System except as specifically provided herein. Subject to the terms hereof, in the event that the SABRE System is not operable ninety-five percent (95%) of the total normal business hours each month, excluding periods for maintenance of Standard Equipment or other scheduled down time ("Normal Time"), TSG will reduce the monthly Charges (on a pro-rata basis according to the percentage of Normal Time during which the SABRE System was not operable at least ninety-five percent (95%) of the Normal Time. For purposes of this article, normal business hours shall be 9:00 a.m. to 6:00 p.m., local time, Monday through Saturday. The SABRE System shall be deemed inoperable if Customer is unable, after calling SABRE Customer Service to make any SABRE Bookings as a result of a failure attributable to the SABRE System. To request a reduction under this Article, Customer shall submit a written record to TSG and request an adjustment in the monthly charges. Customer's written records must be submitted in a timely manner and include, at a minimum, the date and time of the outage, the time the outage was reported to SABRE Customer Service, the time the SABRE System was restored (within normal business hours as defined above) and the type of outage. 11.2 Limited Warranty of the System. In the event of a material malfunction or defect in an unaltered component of the System that substantially affects performance of the System that is reported by Customer to TSG and that can be reproduced by TSG, TSG will use reasonable efforts to correct such malfunction or defect without additional charge to Customer. THE FOREGOING SHALL BE CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY MALFUNCTION OR DEFECT IN THE SYSTEM. IF SUCH MALFUNCTION OR DEFECT MATERIALLY IMPAIRS CUSTOMER'S USE OF THE SYSTEM AND CANNOT BE CURED AS PROVIDED IN THIS SECTION, THEN CUSTOMER'S ALTERNATE SOLE AND EXCLUSIVE REMEDY SHALL BE TO TERMINATE THIS AGREEMENT WITHOUT FURTHER LIABILITY TO TSG FOR DAMAGES HEREUNDER. 11.3 Exclusion of Other Warranties. EXCEPT AS SPECIFICALLY PROVIDED IN THIS ARTICLE, THE USE OF THE SABRE SYSTEM, THE DATA DERIVED FROM THE SABRE SYSTEM, THE SYSTEM AND/OR ANY COMPONENTS THEREOF ARE PROVIDED TO CUSTOMER BY TSG, ANY INFORMATION PROVIDER OR THE OWNER OF ANY ELEMENT OF THE SYSTEM (AS THE CASE MAY BE) "AS IS AND WITH ALL FAULTS". ALL OTHER WARRANTIES ARE HEREBY DISCLAIMED INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF ACCURACY, COMPLETENESS AND NON-INFRINGEMENT OF THE DATA DERIVED FROM THE SABRE SYSTEM, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY IMPLIED WARRANTIES ARISING OUT OF COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE. 11.4 Limitation of Liability. 11.4.1 NEITHER TSG NOR ANY INFORMATION PROVIDER NOR ANY OWNER OF ANY ELEMENT OF THE SYSTEM OR THE SABRE SYSTEM SHALL BE LIABLE TO CUSTOMER OR ANY THIRD PARTY FOR ANY INJURY, LOSS, CLAIM OR DAMAGE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF TSG OR ANY INFORMATION PROVIDER OR BY ANY OWNER OF ANY ELEMENT OF THE SYSTEM OR BY EVENTS BEYOND THE CONTROL OF TSG OR OF ANY OF THOSE OTHER PERSONS. 11.4.2 IF A PASSENGER USES A CONFIRMED TICKET FOR AIR TRANSPORTATION ISSUED PURSUANT TO A RESERVATION MADE BY CUSTOMER BY MEANS OF THE SABRE SYSTEM AND IS REFUSED CARRIAGE BECAUSE OF AN OVERSALE OF SEATS OR THE LACK OF RECORD OF SUCH RESERVATION, THE SOLE REMEDY OF CUSTOMER SHALL BE AS SET FORTH IN THE TARIFF OF THE REFUSING CARRIER OR APPLICABLE TERMS AND CONDITIONS OF THE CARRIER'S CONTRACT OF CARRIAGE. 11.4.3 TO THE EXTENT THAT TSG HAS ANY LIABILITY UNDER THIS AGREEMENT OR UNDER ANY THEORY OF LIABILITY, TSG'S CUMULATIVE LIABILITY FOR DAMAGES TO CUSTOMER HEREUNDER SHALL BE LIMITED TO THE LESSER OF (1) CUSTOMER'S DIRECT DAMAGES, (2) THE TOTAL AMOUNT OF CHARGES ACTUALLY PAID BY CUSTOMER TO TSG PURSUANT TO THIS AGREEMENT OVER THE TERM OF THIS AGREEMENT, OR (3) ONE MILLION DOLLARS ($1,000,000). 11.4.4 NEITHER TSG NOR ANY INFORMATION PROVIDER NOR ANY OWNER OF ANY ELEMENT OF THE SYSTEM SHALL BE LIABLE TO CUSTOMER UNDER ANY THEORY OF LIABILITY OR ANY FORM OF ACTION, INCLUDING NEGLIGENCE FOR ANY INCIDENTAL, SPECIAL, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES UNDER ANY CIRCUMSTANCES, INCLUDING BUT NOT LIMITED TO LOST PROFITS, REVENUE OR SAVINGS, OR THE LOSS OF USE OF ANY DATA, EVEN IF THAT PERSON THAT WOULD HAVE BEEN LIABLE IN THE ABSENCE OF THIS SECTION HAD BEEN ADVISED OF, KNEW, OR SHOULD HAVE KNOWN, OF THE POSSIBILITY THEREOF. 11.5 NON-SABRE TRAFFIC. CUSTOMER ACKNOWLEDGES THAT IT IS SOLELY LIABLE FOR THE CONTENT, ACCURACY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON- INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OR OTHER THIRD PARTY RIGHTS, OF THE NON-SABRE TRAFFIC. CUSTOMER WARRANTS THAT THE TRANSMISSION AND RECEIPT OF NON-SABRE TRAFFIC BY CUSTOMER IS NOT IN CONTRAVENTION OF ANY LAWS, RULES OR REGULATIONS. FURTHER, CUSTOMER HEREBY WARRANTS THAT IT HAS ENTERED INTO SUCH SEPARATE AGREEMENTS AS IT DEEMS NECESSARY OR APPROPRIATE WITH THE SYSTEMS OR NETWORK PROVIDERS FOR THE TRANSMISSION AND RECEIPT BY CUSTOMER OF THE NON-SABRE TRAFFIC AND, IN PARTICULAR, CUSTOMER WARRANTS THAT IT SHALL BE SOLELY LIABLE TO THESE PROVIDERS FOR ANY MALFUNCTION OR OTHER ADVERSE IMPACT EXPERIENCED BY SAID PROVIDERS AS A RESULT OF THE TRANSMISSION AND RECEIPT BY CUSTOMER OF THE NON- SABRE TRAFFIC. 12. INDEMNIFICATION 12.1 Customer and TSG ("Indemnitor") hereby agree to indemnity and hold each other, their affiliates, subsidiaries, successors end assigns and their officers, directors, agents and employees ("Indemnitees") harmless from and against third-party liabilities, including, but not limited to, attorneys' fees, and other expenses incident, thereto, ("Claims") which may be threatened against, or recoverable from the Indemnitees by reason of any injuries to or death of persons or loss of, damage to, or destruction of property to the extent arising out of or in connection with any act, or omission of the Indemnitor. 12.2 Customer will indemnify TSG for any Claims, including debt memos issued by Participants, arising from Customer's misuse of the SABRE System including, without limitation, making fraudulent bookings and/or failing to honor Participant ticketing and fare rules. 13. ASSIGNMENT 13.1 Assignment Or Sublease By Customer. Customer shall not sublease, transfer or assign this Agreement or any portion thereof, or any right or obligation hereunder, unless customer has obtained the prior written consent of TSG, which consent shall not be unreasonably withheld. Any attempted assignment in violation of this Article shall be void. 13.2 Assignment by TSG. TSG shall have the right to sell, transfer, assign or delegate its, interests, rights and/or obligations, without the prior consent of Customer, and, provided that such transferee or assignee assumes all of TSG's obligations, TSG shall be released of all obligations after the effective date of such sale, transfer, delegation or assignment. 14. TERMINATION AND DEFAULT 14.1 Default By Customer. The occurrence of any one or more of the following events shall constitute a non-exclusive event of default (the "Event of Default") pursuant to the terms of this Agreement: 14.1.1 Customer falls to pay any amount when due; 14.1.2 Any representation by Customer is discovered to be materially misleading or inaccurate, or Customer fails to perform any material covenant, agreement, obligation, term or condition contained herein; 14.1.3 Customer terminates or cancels this Agreement or any portion thereof, except as expressly permitted in this Agreement; 14.1.4 Customer ceases to do business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay debts as they become due, acquiesces in the appointment of a trustee, receiver or liquidator for it or any substantial part of its assets or properties, or executes an agreement to sell all or substantially all of its assets without obtaining the consent for assignment of this Agreement under Article 13.1; 14.1.5 Customer fails to secure and maintain Airlines Reporting Corporation ("ARC") accreditation for ticketing of reservations; 14.1.6 Events of Default described in 14.1.1, 14.1.2 and 14.1.4 shall not be cause for termination if Customer cures such failure within fifteen (15) days after date of written notice from TSG. If Customer cures its failure as provided in this provision, said failure shall not be considered to be an Event of Default for the purposes of Article 14.2. 14.2 TSG's Rights Upon Termination. Upon the occurrence of an Event of Default and subject to Article 14.1.6, TSG shall have the right to any one or more of the following remedies; (i) terminate this Agreement and Customer's access to the SABRE System, the System and any other approved systems or networks; (ii) seek all legal and equitable remedies to which it is entitled; and (iii) retake immediate possession of the System. If Customer's Event of Default results in termination, Customer agrees to pay to TSG damages suffered by TSG as a result of such Event of Default. 14.3 Termination By Customer. In the event that TSG breaches any material term of this Agreement, which breach continues for a period of fifteen (15) days after TSG receives from Customer written notice which sets forth the specific breach and Customer's intent to terminate the Agreement if such breach is not cured, then Customer may immediately terminate the Agreement upon separate written notice to TSG. Customer may not otherwise cancel, terminate, modify, repudiate, excuse or substitute this Agreement without TSG's prior written consent, which TSG may withhold in its absolute discretion. 15. MISCELLANEOUS 15.1 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA. CUSTOMER HEREBY SUBMITS AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS AND THE COURTS OF THE STATE OF TEXAS IN ANY DISPUTE ARISING OUT OF THIS AGREEMENT AND AGREES THAT SERVICE OF PROCESS SHALL BE SUFFICIENT IF MADE ON THE SECRETARY OF STATE OF THE STATE OF TEXAS WITH A COPY TO BE SENT, REGISTERED MAIL TO THE CUSTOMER AT THE ADDRESS SET FORTH IN SCHEDULE A OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO TSG. 15.2 Binding Effect. Except as otherwise provided, this Agreement shall inure to the benefit of and bind the successors and assigns of the parties hereto. 15.3 Deletion of Equipment. During the term of the Agreement, Customer may delete up to [*] of the installed productive video agent sets, video agent set terminal addresses and printers, contingent upon the following: (a) Customer provides documentation of a substantial decrease in the number of SABRE Bookings, which decrease is the result of the loss of its commercial accounts and/or customer base; (b) Customer notifies TSG, in writing, of the description and location of the equipment to be deleted (the "Deleted Equipment"); (c) Customer pays to TSG the then current de-installation charges for the Deleted Equipment plus any outstanding Charges for such Deleted Equipment up through the Stop Billing Date which TSG will specify to Customer; and (d) Customer will forfeit all right and equity, if any, in the Deleted Equipment removed from Customer's location. 15.3.1 If Customer complies with the requirements identified in 15.3 above, TSG shall de-install the Deleted Equipment and disconnect it from the System. 15.3.2 TSG shall defer all Charges related to the Deleted Equipment ("Deferred Charges") from the Stop Billing Date to the termination date of this Agreement on the following conditions: (a) the Additional Term and all other terms and conditions of this Agreement that would have applied to the Deleted Equipment shall apply to any Standard Equipment added to the System after the Stop Billing Date, up to an amount equal in number and type to the Deleted Equipment or such lesser amount agreed to by TSG ("Re-installed Equipment"); and (b) Customer shall pay TSG all applicable Charges for the Re-installed Equipment, including installation, lease, maintenance and use Charges, at TSG's then current rates. 15.3.3 The Deferred Charges shall be deemed waived by TSG at the end of the Initial Term of the Agreement or any renewal thereof if Customer has not breached this Agreement. Interest shall accrue on the Deferred Charges at the maximum rate allowed by applicable law from the date of the deferral until payment. In addition to all other rights under Article 14.2, TSG shall be entitled to immediate payment of the Deferred Charges plus interest upon default by Customer. 15.4 Entire Agreement. This Agreement and the Instructions constitute the entire agreement of the parties as to the matter set forth herein and shall supersede any previous understandings, agreements, representations, statements, negotiations and undertakings, whether written or oral, between the parties relating to the matters set forth herein. Any amendment to this Agreement must be in writing and signed by the authorized representatives of both parties. 15.5 Force Majeure. TSG and Customer shall be relieved of their obligations hereunder in the event and to the extent and only so long as that performance is delayed or prevented by any cause reasonably beyond their control, including, but not limited to, acts of God, public enemies, war, civil disorder, fire, flood, explosion, labor disputes or strikes, or any acts or orders of any governmental authority, inability to obtain supplies and materials (including without limitation computer hardware) or any delay or deficiency caused by the electrical or telephone line suppliers or other third parties. [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. 15.6 Notices. Unless otherwise stated, notices given or required under this Agreement must be in writing and shall be deemed delivered upon deposit through the United States Mail, to TSG at P.O. Box 619815, MD 3558, Dallas/Fort Worth, Texas, 75261-9615 (to be sent to the attention of SABRE Travel Information Network, Financial Services) or to the Customer at the address set forth in Schedule A. 15.7 Return of System. Upon the termination of this Agreement for any reason, Customer, at its sole cost and expense, shall return the System and all Confidential information as requested by TSG, in good repair, condition and working order, less normal and ordinary wear and tear, by delivering it to a common carrier selected and designated by TSG, F.O.B. the destination designated by TSG in writing. 15.8 SABRE System Modification. TSG retains the right to modify the SABRE System, at its discretion at any time during the term of this Agreement. However, such modifications will not materially impair Customer's ability to access and use the SABRE System in the manner expressly permitted in this Agreement. 15.9 Severability. Any provision of this Agreement which may be determined by a court or other competent governmental authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective, only to the extent of such prohibition or unenforceability, without invalidating the remaining provisions thereof, unless said prohibition or unenforceability materially alters the rights or obligations of either party. 15.10 Subsequent Acts of Government. In the event that there is any change in any statute, rule, regulation or order governing the operation of computerized reservations systems, or air transportation generally or the SABRE System, which in any way materially impairs the benefits of this Agreement to TSG, then the parties hereto will commence consultation in order to determine what, if any, changes to this Agreement are necessary or appropriate, including, but not limited to, early termination of this Agreement. If the parties hereto are unable to agree upon changes in the Agreement in response to such new statute, rule, order or regulation within thirty (30) days after commencement of such consultation, this Agreement may be canceled by TSG upon giving Customer ninety (90) days prior written notice of such cancellation. If TSG elects to terminate the Agreement pursuant to this Article, except for Customer's obligation to pay any and all Charges incurred through the date of termination, each party shall be relieved of any future obligations under this Agreement as of the effective date of cancellation. each party shall bear its own costs and expenses incurred as a result of said termination. Customer does not have the right to terminate the Agreement under this provision. 15.11 Surviving Sections. If the term of the Agreement expires or is terminated for any reason before Customer has paid to TSG all of the sums due, the Agreement shall survive such expiration or termination to the extent necessary to protect TSG's rights until all sums owed to TSG have been paid. Notwithstanding anything to the contrary referenced herein, Articles 6, 8, 11 and 12 shall survive the termination of this Agreement. 15.12 Waiver. A failure or delay of either party to require strict performance to enforce a provision of this Agreement or a previous waiver or forbearance by either party shall in no way be construed as a waiver or continuing waiver of any provision of this Agreement. 15.13 Acknowledgment. Customer hereby acknowledges that TSG has offered Customer a SABRE Subscriber Agreement with three (3) year term with reasonable terms and conditions. 16. INTERNET CONNECTIONS 16.1 Limited License. Customer may establish an Internet Connection using TSG's products or a third party application. Customer is hereby given a limited license to utilize data transmitted from the SABRE System for purposes of developing, operating and maintaining a reservation booking site solely for the use of its customers and according to the other limitations contained in the Agreement, including, without limitation, Article 8.3. All uses of the SABRE System through an Internet Connection will be considered uses by Customer under this Agreement. Customer may not utilize any data transmitted from the SABRE System for purposes of developing, operating or maintaining a reservation booking site or any other redisplay of SABRE System data for any third party including any un-affiliated travel agencies. 16.2 Termination. The limited license granted in Article 16.1 may be terminated by TSG for any reason upon five (5) days written notice to Customer. Upon such termination Customer must immediately remove the Internet Connection and cease utilizing data transmitted under the Agreement for purposes of developing, operating or maintaining a reservation booking site. 16.3 Branding. Customer agrees to adhere to the branding standards and requirements as communicated by TSG which may be modified from time to time upon thirty (30) days advance notice to Customer. 16.4 Charges. Customer will pay a Charge for each PNR created through an Internet Connection at TSG's then current rate. 17. TSG RESERVES THE RIGHT TO CHANGE SABRE GUARANTEE PROGRAM RULES, REGULATIONS, AND SPECIAL OFFERS WITHOUT NOTICE, AND TO END SABRE GUARANTEE PROGRAMS WITHOUT NOTICE IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth below. ALL SIGNATURES MUST BE IN BLACK INK CUSTOMER By: /s/ Mike Hartley --------------------------------------- (Signature) Name: Mike Hartley ------------------------------------ (Print Name) Title: President ----------------------------------- Agency Name: Cheap Tickets, Inc. ----------------------------- Pseudo City Code: 2 DF0 ------------------------ THE SABRE GROUP, INC. By: /s/ Darla K. Couture -------------------------------------- (Signature) Name: Darla K. Couture ------------------------------------ (Print Name) Title: Finance Mgr. ----------------------------------- 3/11/99 ATTACHMENT I Conditions of Use for SABRE Users 1. QUALIFYING USE. The manufacturer has made this package available to you through The SABRE Group, whether directly or indirectly, on the understanding that it is being supplied to you primarily for use with the SABRE System, and not with a view to resale or other re-marketing. 2. COPYRIGHT AND OTHER RIGHTS. The manufacturer's programs contain material in which the manufacturer and in many cases the manufacturer's suppliers, retain proprietary rights. The manufacturer wants these programs to be fully useable by you for the purpose for which they are supplied, that is, in connection with a computer. No infringement of the rights of the manufacturer or of the manufacturer's suppliers will occur provided that the following conditions are observed with respect to each program: a. The program is used only on: (i) a single machine; or (ii) on any workstation connected to a single fileserver which is primarily used in connection with the SABRE System. b. The program is copied into machine-readable or printed form for backup or modification purposes only in support of use on a single machine, or on a workstation connected to the SABRE System; c. However, certain diskettes marked "Copy Protected" may include mechanisms to limit or inhibit copying of the program; d. The program is modified or merged into another program only for use on a single machine or on a workstation connected to the SABRE System. Any portion so merged continues to be subject to these conditions; e. The copyright notice is reproduced and included in any copy or modifications made of the program and in any program merged into other programs; and f. If the program package is transferred to another party, all copies and modifications made of the program must be transferred or destroyed. You do not retain any right with respect to the transferred package. The other party agrees to observes all of these Conditions of Use. Any other act involving reproduction or use of, or other dealing in the program is prohibited. You are reminded that it may be necessary to obtain local and United States licenses to export or re-export this package. No statements contained in this package shall affect the statutory rights of any person. AMENDMENT NO. 1 TO SABRE SUBSCRIBER AGREEMENT This Amendment to that certain SABRE Subscriber Agreement is made and entered into this 31st day of December, 1998, between The SABRE Group, Inc. ("TSG") and Cheap Tickets, Inc. ("Customer"). RECITALS WHEREAS, TSG and Customer have entered into that certain SABRE Subscriber Agreement, dated as of 31 December 1998 (the "Agreement"); and WHEREAS, it is in the best interest of the parties to modify certain provisions of the Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein, TSG and Customer hereby agree as follows: 1. Effective Date. The effective date of this Amendment is 31 December 1998. 2. Cash Advance. TSG agrees to pay to Customer the following, as SABRE Promotional Support, pursuant to the schedule set out below contingent upon the Agreement and this Amendment have been signed by both Customer and TSG: [*] within [*] after the Agreement and this Amendment have been signed by both parties. If an Event of Default as defined in Article 14.1 of the Agreement occurs, TSG's obligations under this Amendment are nullified and Customer will be immediately obligated to repay to TSG all monies paid by TSG to Customer pursuant to this Amendment. 3. Line of Credit. TSG shall extend to Customer a line of credit in the following amount, which amount will be applied automatically toward the payment of TSG Charges. Such line of credit shall be applied each month until the total amount is exhausted. Unless an Event of Default as defined in Article 14.1 of the Agreement occurs, any unused portion of this line of credit shall be applied in its entirety as a line of credit to the subsequent SABRE subscriber agreement between TSG and Customer, with the conditions as set forth in this paragraph. If an Event of Default as defined in Article 14.1 of the Agreement occurs, or upon termination of this Agreement without concurrent execution of a subsequent SABRE subscriber agreement, any unused portion of this line of credit shall revert to TSG and be unavailable for Customer's use.
[*] Line of Credit ------- ---------------- 1 [*] [*] 2 [*] [*] 3 [*] [*] 4 [*] [*] 5 [*] [*]
4. Current and Expansionary Devices. Upon the Effective Date of this Amendment and provided Customer meets the terms and conditions as set forth below and in the Agreement TSG shall provide, each month during the term hereof, fixed monthly discounts to offset the charges for the services and products listed below that are either currently installed or installed subsequent to the Effective Date of the Agreement: (a) data lines, fileservers, gateways, SABRE video agent sets, SABRE Printers, Satellite Ticket Printers (STP's) or any other equipment standard to the SABRE System, provided the following: (i) TSG will not provide fileservers, gateways or SABRE video agent sets at Customer call center locations; (ii) TSG will provide currently installed equipment at Customer locations other than at Customer call centers; (iii) TSG will provide expansionary SABRE gateways and SABRE video agent sets at Customer locations other than at Customer call centers, [*] [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. based on total Customer SABRE Bookings and Customer SABRE gateways and SABRE video agent sets on the Effective Date of this Agreement at Customer locations other than at Customer call centers; (iv) TSG will provide expansionary SABRE Printers and Satellite Ticket Printers (STP's) [*] based on total Customer SABRE Bookings and Customer SABRE Printers and Satellite Ticket Printers (STP's) on the Effective Date of this Agreement; (v) TSG will provide expansionary SABRE data lines [*] based on total Customer SABRE Bookings and Customer SABRE data lines on the Effective Date of this Agreement. Equivalent Data Line is defined as [*]; (vi) TSG will not provide maintenance for equipment that is not owned by TSG; (b) SABREscribe; (c) installation, de-installation, move and relocation charges (excluding charges associated with moves or relocations outside the ordinary course of business which shall be determined by Customer's past practices, which shall be billed to Customer at TSG's then prevailing rate); (d) variable charges for Branch Access, Bargain Finder Plus, FACTS Report, Option 6 Interface, Invoice and Itinerary, Microfiche, Ticketing, ARC Report, SABRE Report Managers, Classified Fares, STARS and SABRE Re-Check; (e) [*] of the monthly lease and SMU Charges for SABRE TravelBase equipment, operating system licenses and software license fee sufficient to process [*] SABRE Bookings per year [*]; provided, however, that if TSG does not offer, [*]. Offset of charges related to SABRE TravelBase or other back-office product is contingent upon Customer's agreement to the conditions as set forth in (i) Appendix A to this Agreement and (ii) the SABRE TravelBase System Lease Agreement between Customer and TSG which his effective at that time; (f) [*] SABRE TravelBase workstations in Year One of this Agreement, increasing up to a total of not more than [*] SABRE TravelBase workstations by Year Five of the Agreement, as TSG and Customer jointly determine that a need for such SABRE TravelBase workstations exists; in addition, TSG will provide to Customer sufficient software licenses for Customer-owned SABRE TravelBase workstations. 5. Additional Standard Equipment. TSG agrees to allow Customer to add Standard Equipment in excess of that provided for in paragraph 4, and Customer and TSG agree that all Standard Equipment added under this paragraph 5 will be charged on a monthly basis at TSG's then prevailing rate. Customer and TSG agree that the rate charged is the rate that applies to the actual piece of Standard Equipment most recently added by Customer. TSG agrees to allow Customer to choose to pay for this additional Standard Equipment with either cash or funds from Customer's Line of Credit. 6. Booking Threshold Adjustments. TSG agrees to offer Customer, as new products are introduced, the option to pay for those products at standard non-discriminatory rates as described in the product offering. 7. Booking Threshold. Notwithstanding anything contained herein, TSG shall have no obligation to perform the undertakings set forth in paragraph 4 unless: (a) the Standard Equipment is available for purchase by TSG on reasonable terms and conditions from the manufacturer, and (b) Customer processes a minimum of the following number of SABRE Bookings [*] (the "[*]Volume Threshold") during the term of the Agreement:
[*] Minimum SABRE Bookings ------- -------------------------------- 1 [*] [*] 2 [*] [*] 3 [*] [*] 4 [*] [*] 5 [*] [*]
Notwithstanding anything contained herein, TSG shall have no obligation to perform the undertakings set forth in paragraph 9 unless Customer achieves the Monthly Booking Threshold as described herein. [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. 8. SABRE Bookings Below [*] Volume Threshold. In the event Customer fails to achieve the [*] Volume Threshold in paragraph 7 for each [*] measurement period, Customer shall pay to TSG an amount equal to the prevailing booking fee that TSG charges to airlines that participate in the full availability features of the SABRE System multiplied by the difference between the [*] Volume Threshold and the actual SABRE Bookings at all the Customer's locations. Measurement of the [*] Volume Threshold shall be performed by TSG on a [*] basis commencing on the Effective Date of the Agreement. 9. [*] (Base Bookings). TSG and Customer agree that if Customer processes SABRE Bookings as described in the table below, [*]. [*] may be [*], provided however, Customer is current in its payments due to TSG. [*] upon the happening of an Event of Default under the terms of the Agreement. Customer and TSG agree that TSG is under no obligation to provide any credits, offsets or discounts of any kind to Customer beyond the Initial Term of the Agreement.
[*] SABRE Booking Level [*] ----- --------------------- ----- [*] For SABRE Bookings between [*] [*] per SABRE Booking [*] For SABRE Bookings above [*] [*] per SABRE Booking
10. [*] (Incremental Bookings). TSG and Customer agree that if Customer processes SABRE Bookings above the Volume Threshold described in the table below at the end of [*], TSG shall establish a [*] in excess of the levels stated in the table below. [*] Charges not covered by this Agreement. [*] upon completion of each [*], provided however, Customer is current in its payments due to TSG. In the event that Customer processes SABRE Bookings above the Volume Threshold within the first three quarters of Agreement Years 2, 3, 4 or 5, TSG agrees to allow Customer to convert to cash, for payment at the third quarter measurement period, an amount equal to [(SABRE Bookings processed by Customer during the first three quarters of that Agreement Year minus SABRE Booking Volume Threshold for that Agreement Year) multiplied by $0.75], provided however, Customer is current in its payments due TSG. Any unused portion of this [*] upon the happening of an Event of Default under the terms of the Agreement.
[*] SABRE Booking Volume Threshold [*] ----- -------------------------------- ----- [*] [*] SABRE Booking [*] [*] [*] SABRE Booking [*] [*] [*] SABRE Booking [*] [*] [*] SABRE Booking [*] [*] [*] SABRE Booking [*]
11. SABREscan. TSG and Customer agree to a contractual SABREscan rate of [*] Transactions per SABRE Booking. Transactions and SABRE Bookings include, but are not limited to, those generated by Customer retail, call-center and on-line ("Internet") locations. Customer agrees that SABREscan will be measured monthly using a twelve-month rolling average, and Customer agrees to pay TSG on a quarterly basis an additional charge at the rate of [*] per Host Transaction for Host Transactions which exceed the level of [*] Host Transactions per SABRE Booking. 12. Fares Filing. TSG and Customer agree to retain in force the provisions of the agreement termed "SABRE Agreement for Negotiated Fares Maintenance" dated 15 July 1994, throughout the term of the Agreement. Customer agrees to pay TSG the monthly charge of [*] for these services. Should TSG's costs to provide Customer's fares [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. filing decline substantially below [*] per month, TSG agrees to reduce Customer's charges associated with this fares filing. TSG agrees to guarantee fares filed by Customer as set forth in Appendix B. 13. SABRE Terminal Addresses (TAs). Customer agrees to pay TSG the sum of [*] for every Terminal Address exceeding the [*] total number allowed by TSG below.
Year Total Number of TAs Allowed ------ --------------------------- Year 1 [*] Year 2 [*] Year 3 [*] Year 4 [*] Year 5 [*]
14. Internet On-line Bookings. Customer agrees to pay TSG the sum of [*] for every ticketed Passenger Name Record ("PNR") created which utilizes Customer's Internet website for all or part of the booking process. 15. Credit Card Address Verification ("AVS"). Customer agrees to pay TSG the sum of [*] for every automated credit card address verification ("AVS") query Customer processes through SABRE. [*]. 16. Turbo SABRE License Fees. Customer agrees to pay TSG the sum of [*] for each additional Turbo SABRE license utilized by Customer during the term of this Agreement. TSG agrees [*] by Customer on or after the Effective Date of this Agreement [*] of its purchase date. 17. TSG Technical Support. Customer agrees to pay TSG the sum of [*] per hour for any TSG in-house technical support provided to Customer by TSG during the term of this Agreement. Customer agrees that TSG is under no obligation to provide technical support to Customer, and agrees to pay TSG for the services of any outside parties (including but not limited to consultants and subcontractors), which may be passed through to Customer at rates which may exceed [*] per hour. Customer also agrees to pay TSG's reasonable administrative costs and travel and incidentals expenses associated with any Customer technical support provided by or on behalf of TSG. 18. Reduction in Number of Data Lines. Provided that Customer reduces its usage of SABRE data lines, TSG shall provide Customer additional amounts in Customer's paragraph 3 Line of Credit. These additional amounts shall be calculated monthly as [(41 minus Customer's number of Equivalent Data Lines in that month) multiplied by $250 per month].
Number of Equivalent Number of Equivalent Data Line Data Lines Data Line Data Lines 96 KB X .25 1 384 KB Frame Relay 6 56 KB Frame Relay 2 512 KB Frame Relay 7 ISDN 2 768 KB Frame Relay 8 128 KB Frame Relay 3 1024 KB Frame Relay 10 256 KB Frame Relay 5 1536 KB Frame Relay 11
19. Reports. Reports showing the number of SABRE Bookings shall be provided by TSG on a monthly basis. Invoicing, if necessary, will be made at the end of each month and Customer agrees to pay all amounts due to TSG, including applicable taxes, within thirty (30) days of the invoice date. 20. Monthly Reconciliation. The reports will be reconciled by TSG and Customer each month. The semi-annual measurement will be calculated using the reconciled information. 21. Yearly Reconciliation. Upon each anniversary of the Effective Date, there shall be a reconciliation of payments/credits made throughout the year. Such reconciliation shall consist of the following: the total SABRE Bookings over the year shall be compared to the Booking Threshold as defined in paragraph 7 and the differentiation shall be applied to the formula herein regarding SABRE Bookings above or below the Booking Threshold as applicable ("The Reconciled Amount"). The Reconciled Amount, and all [*] Volume Threshold incentives under paragraph 10 shall be compared to the actual amount of payments/credits provided during the same year and TSG shall invoice or credit Customer for the difference between The Reconciled Amount and the actual amount paid/credited during the year. 22. Acquisitions. If at any time during the term of the Agreement, Customer purchases or otherwise acquires all of the assets of any travel agency which utilizes SABRE, then such travel agencies shall be bound by the terms and conditions as set forth in the Agreement and this Amendment. Notwithstanding the foregoing, all outstanding receivables at the time of acquisition by Customer must be paid to TSG prior to inclusion of the acquired locations and/or equipment under the terms of the Agreement, unless otherwise agreed to by both parties. Customer and travel agency acquired must both notify TSG in [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. writing of the acquisition and must provide at a minimum (i) the pseudo city code of acquired location(s), (ii) total number of productive devices being acquired, and (iii) the effective date of the acquisition. 23. Communications Costs. Commencing on the first anniversary of the Effective Date but not more than once every contract year, TSG shall have the right to decrease the Yearly Volume Threshold Incentives to recover any actual increases in communication costs during the upcoming year. TSG shall provide to Customer satisfactory evidence of such increased communication costs. 24. SABRE System Reliability. In the event Customer is unable to generate SABRE Bookings through the System or the SABRE System for a period of four or more consecutive hours, or 32 (thirty-two) hours within any calendar month, due to the negligence of TSG, TSG and Customer agree to negotiate an appropriate financial remedy for Customer. 25. Wholly Owned Offices/Outlets. The terms and conditions of the Agreement and this Amendment are only applicable to wholly owned offices/outlets of Customer and shall not apply to any franchise or associate operation. 26. Confidentiality. It is expressly understood and agreed that this Amendment and the Agreement, and each and every provision hereof, shall be held and treated as confidential and shall not be disclosed by Customer to any other person, firm, organization, association, or entity, of any and every kind, whether public, private or governmental, for any reason, or at any time, without the prior written consent of TSG (except that Customer may disclose the provisions of the Agreement and this Amendment to its attorney and/or accountant), unless such disclosure is required by law or legal process. In the event of such disclosure, this Amendment and the Agreement may be terminated immediately by TSG, without notice to Customer, and TSG shall have the right to pursue any remedies available to it in law or in equity. 27. Defined Terms. The defined terms used in this Amendment shall have the meaning assigned to such terms in the Agreement. 28. Agreement. Except as otherwise provide herein, all other terms of the Agreement remain in full force and effect. In the event of any conflict between the terms of the Agreement and this Amendment, the Amendment shall control. 29. Termination of Prior Agreements. All oral or written agreements entered into by the parties prior to the effective date of the Agreement and this Amendment which relate to the maintenance or use of the SABRE System or any portion thereof shall be deemed terminated upon execution of the Agreement and this Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year written below.
CUSTOMER THE SABRE GROUP, INC. By: /s/ Mike Hartley By: /s/ Darla K. Couture ----------------------------- --------------------------------- (Signature) (Signature) Name: Mike Hartley Name: D.K. Couture 3/11/99 --------------------------- ------------------------------- (Print Name) (Print Name) Title: President Title: -------------------------- ------------------------------ Date: 2/25/99 Date: --------------------------- ------------------------------- PCC: 2DF0 ----------------------------
Appendix A Cheap Tickets, Inc.-TSG TravelBase Operating Conditions TravelBase system performance, and TravelBase's resultant ability to process the transactions associated with a given number of SABRE Bookings, is dependent upon a broad range of factors. Many of these factors rest solely within the control of Customer. Customer agrees to operate TravelBase in an efficient manner, in a manner for which it was designed, and in a manner in keeping with Customer's Past Practices. Customer agrees to consult with TSG prior to any use of TravelBase outside of Customer's Past Practices. Such use would include, but is not limited to, substantially greater report size or frequency, highly automated interactive reporting or other database interaction for which TravelBase is not currently used by Customer, substantial increase in record sizes, and any substantial increase in the number of concurrent connections to TravelBase. Customer and TSG agree to mutually confer to determine how to respond to any Customer business need that might result in Customer's use of TravelBase outside of Customer's Past Practices. Customer and TSG also agree to make good faith efforts to negotiate, to mutual satisfaction, any financial impacts related to providing such a solution to Customer. In the event that these good-faith negotiations are unsuccessful Customer agrees that TSG is under no obligation to provide or support that use of TravelBase outside of Customer's Past Practices. If Customer proceeds with such usage of TravelBase outside of Customer's Past Practices without TSG's written concurrence, Customer agrees to (i) pay TSG for any additional cost incurred by TSG resulting from that usage and (ii) hold TSG harmless, in the event that TravelBase is unable to adequately process Customer's data. Past Practices include, but are not limited to, Customer's current . Number of concurrent users . Number of concurrent connections per user . Number of transactions per SABRE Booking . Average size of transaction record . Peak size of transaction record . Number of reporting links . Report size . Frequency and timing of reporting queries Customer agrees to limit the total number of months of data stared on the TravelBase system to 35 months. Appendix B Cheap Tickets, Inc.--TSG Fare Filing Guarantee TSG is committed to providing quality information and guarantees the fares that are auto-priced and ticketed in our system. In order to provide accurate fares, TSG must control the content and is therefore unable to guarantee fares that have been changed or manipulated and those that do not adhere to the fare rules. This document should clarify the types of fares and ticketing practices TSG will and will not guarantee. Criteria for Debit Memo Reimbursement - ------------------------------------- Debit Memos for the following types of fares and ticketing practices will generally be paid by TSG; however, such debit memo will be reimbursed only when error is caused by the SABRE System's pricing functionality. For example, a debit memo caused by an incorrect ticket designator would not be paid by TSG: 1. Phase 3.0 tickets: tickets auto-priced and ticketed through the SABRE System (See exceptions listed below) 2. Phase 3.75 tickets: tickets showing ticket designator TSG will NOT pay Debit Memos related to certain types of faring and/or ticketing practices including, but not limited to, the following: 1. Fare quotes 2. Handwritten tickets 3. Phase 4.0 tickets 4. Phase 3.5 tickets 5. Phase 3.75 tickets which have an error not caused by the SABRE System's pricing functionality, including tickets with incorrect ticket designators 6. Airline schedule changes Messages not received by the subscriber which result in additional charges to the customer 7. Add-collects made to customers due to a change in itinerary from the original ticket 8. Ghost tickets, printer problems and outages, refund penalties due to refunding a round trip ticket when only a portion of the ticket is used, or a non-refundable ticket 9. Failure to report a ticket during a sales reporting period 10. Credit Card charges made by the Airline for incorrect credit card authorization codes, use of incorrect credit card, over-extending floor limits, or use of black-listed or stolen cards 11. Phase 3.0 tickets that have been manipulated and subject to the overrides listed below: - Tax exemptions that are a result of in override of the SABRE System's tax program (subscriber is responsible for showing proof of tax exemption status to die airline and collect all appropriate taxes) - Senior Citizen Discount override when fire rules states no Senior Citizens Discount are allowed on specific fare basis - Endorsement violations that are a result of a ticketing override - Canceled and Re-booked itineraries for the purpose of extending the ticketing limit. Ticketing requirements must be met and ticket must be issued within the time frame of the initial booking of SABRE record. - Passive Segment bookings and fees, i.e.: Debit Memos issued for incorrect booking code when the itinerary has been passively booked in a class of service not applicable to the fare used. Debit memos issued for segment fees for usage of my passive status code such as GK or BK - Commission over-collection by agency - Plating fees by Airlines - Point beyond ticketing when traveler has not completed the trip booked - Back to back ticketing when multiple round trips are booked in one PNR - Validation override Terms and Conditions - -------------------- TSG reserves the right to modify and/or cancel its Fare Guarantee Policy at any time without notice. Neither TSG nor its affiliates shall be liable to Customer, nor deemed to be in default of this Agreement on account of any delays, errors, malfunctions, or breakdown with respect to the equipment, data or services provided under this Agreement, regardless of its negligence. TSG and its affiliates disclaim and Customer hereby waives all warranties, expressed or implied, including but not limited to, any warranty of merchantability or fitness for intended use of any equipment, data or services furnished under this Agreement, or any liability in negligence, tort or strict liability with respect to the equipment data or services furnished hereunder. Customer agrees that neither TSG nor any affiliate of TSG shall be liable to it for consequential damages under any circumstances (including loss of revenues related to the presentation and/or selling of travel-related products or services). The above terms and conditions relate directly to TSG's fare filing activities on behalf of Customer. The terms and conditions as set forth in the Agreement shall continue to apply, and in the event of any conflict between these terms and conditions, die Agreement shall control. Contacts & More Information - --------------------------- Submission of New Debit Memos: ----------------------------- Via fax: (917) 963-4659 Via mail: ATTN: Pricing Team SABRE WorldFare Pricing Team Mail Drop 1457 P.O. Box 619615 DFW Airport, TX 75261-9615 Inquiries about Previously Submitted Debit Memos: ------------------------------------------------ Queue: QP/IQAS or QP/IQAG EX-10.14 8 AGREEMENT FOR NEGOTIATED FARES MAINTENANCE Exhibit 10.14 Note: Portions of this exhibit indicated by "[*]" are subject to a confidential treatment request, and have been omitted from this exhibit. Complete, unredacted copies of this exhibit have been filed with the Securities and Exchange Commission as part of the Company's confidential treatment request. SABRE AGREEMENT --------------- FOR --- NEGOTIATED FARES MAINTENANCE ---------------------------- THIS AGREEMENT is made as of the 15th day of July, 1994, by and between SABRE TRAVEL INFORMATION NETWORK ("STIN"), a division of AMERICAN AIRLINES, INC. a Delaware corporation having its principal address at 4200 American Boulevard, Fort Worth, Texas 76155 (American), and CTI CORPORATION, a corporation having its principal place of business at 738 Kaheka Street, Honolulu, Hawaii ("Customer"). RECITALS A. STIN provides computerized reservations services for travel agents with related data processing activities through its SABRE Computerized Reservations System which is a database of fares and pricing data. B. Customer operates a travel agency and enters into contractual arrangements for negotiated fares with carriers operating air transportation services. C. The parties desire to enter into an agreement governing the SABRE display and maintenance of the Customer's negotiated fares. SECTION 1. DEFINITIONS. The following definitions shall apply to this Agreement. 1.1 ATPCo is the Airline Tariff Publishing Company which is a vendor of fares data to the airline industry. 1.2 Fare Base Management is a department of SABRE Computer Services. Fare Base Management shall be responsible for updating and maintenance of the Negotiated Fares, Fare Rules, Fare Routings and other related information. 1.3 Fare Rule is a set of provisions, limitations or conditions applicable to a specific Negotiated Fare or set of Negotiated Fares as reflected in a single rule number assigned by ATPCo. The same ATPCo rule number in two tariffs will be construed to be two rules. 1.4 Fare Routing is the path of travel the traveler must follow to obtain the Negotiated Fare from the appropriate carrier. 1.5 Implementation Date is August 2, 1994 but will be extended one day for each day after July 21 that ATPCo fails to deliver the Customer's Negotiated Fares through an acceptable transmission to Fare Base Management. If the revised implementation Date falls on a weekend or legal holiday, the date will be further extended until the following Tuesday. 1.5 Negotiated Fares are fares subject to various rules and restrictions which are negotiated by Customer with various air transportation carriers and which are evidenced by valid contracts with the applicable air carriers. 1.6 SABRE System Database is the database of fares, rules and restrictions maintained in STIN's SABRE Computerized Reservations System. SECTION 2. RESPONSIBILITIES OF STIN 2.1. STIN agrees to process the Customer's Negotiated Fares, Fare Rules and Fare Routings into the SABRE System Database and to maintain Customer's Negotiated Fares and the Fare Rules and Fare Routings pertaining to such fares, subject to the following terms and conditions: a. STIN agrees to process and maintain Customer's Negotiated Fares, together with the applicable Fare Rules and Fare Routings, to the extent that such rules and routings are, at STIN's sole discretion, practical for inclusion in the SABRE System. However, notwithstanding the above, STIN shall not, at any time, be required to maintain more than [*] Customer Fare Rules within the SABRE System Database. b. STIN shall use its best efforts to provide SABRE access to Customer's Negotiated Fares, Fare Rules and Fare Routings by the Implementation Date. In the event that Customer does not have access to its Negotiated Fares, Fare Rules and Fare Routings by the Implementation Date, it may terminate this contract which shall be its exclusive remedy for STIN's failure to meet the Implementation Date. c. After the initial implementation of Customer's existing Negotiated Fares, Fare Rules and Fare Routings in the SABRE System Database, STIN will make changes or additions to the Customer's Negotiated Fares, Fare Rules and Fare Routings upon Customer's written request to Fare Base Management. Such changes or additions will be made within [*] days of receipt of Customer's request whenever reasonably practical. d. Should all or part of Customer's data be lost or destroyed Fare Base Management shall use its best efforts to reconstruct the data within twenty four (24) hours of such loss or destruction; in the event that such loss of Customer's data is caused, in whole or in part, by force majeure or Customer's negligence such reconstruction shall be at Customer's expense; and in any other event, such reconstruction shall be at STIN's expense. To the extent that reconstruction of the Customer's data requires data solely in Customer's possession, STIN shall use its best efforts to reconstruct the database within twenty four (24) hours of receiving such data from the Customer. e. STIN shall, under no circumstances, be responsible for calculating the Negotiated Fares under the Customer's contracts with various air carriers. Instead, the Customer's Negotiated Fares will be added to the SABRE System Database solely through transmissions or magnetic tapes received from ATPCo. STIN assumes no responsibility or liability for the accuracy of any information received from ATPCo. 2.2. STIN shall bill the Customer on a monthly basis. Payment is due upon receipt of each monthly invoice. 2.3. STIN shall use its best efforts to assure that data supplied by the Customer is promptly and accurately incorporated into the SABRE Database; however, STIN does not warrant the accuracy or completeness of the data so incorporated, nor does it assume liability for consequential damages resulting from any delay in, or error or omission made in the course of such incorporation, whether or not solely attributable to STIN's negligence or other conduct. 2.4. SABRE Downtime. Customer recognizes that from time to time, SABRE and/or access to Customer's Negotiated Fares, Fare Rules and Fare Routings may be unavailable due to unexpected failures and routine maintenance, upgrading or repairs. STIN shall not be liable for any such downtime. [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. SECTION 3. RESPONSIBILITIES OF CTI CORPORATION 3.1 Customer Representations and Warranties. Customer makes the following representations and warranties: a. The Customer warrants that the Negotiated Fares, Fare Rules, Fare Routings and any other data it supplies under this Agreement is based on fully and validly executed contractual agreements between the Customer and various carriers on whose behalf it is authorized to sell transportation. b. Customer warrants the accuracy and reliability of all Negotiated Fares, Fare Rules, Fare Routings and any other information it supplies to STIN under this contract and assumes sole responsibility and liability (if any) for providing this information to STIN on behalf of those carriers with whom contracts for Negotiated Fares exist. c. Customer warrants that in executing this agreement and in supplying the Negotiated Fares, Fare Rules, Fare Routings and any other information hereunder, it is not in breach of any existing contracts or in violation of any Federal or State statutes, rules or regulations. 3.2 Information Supplied. In supplying data to be included in the SABRE System Database, the Customer shall conform to the standards and procedures as prescribed in attached Schedule 1 and as amended from time to time by mutual consent. 3.3 Customer Payment. Customer shall pay STIN each of the following charges for services provided pursuant to this Agreement. a. A one time implementation fee of [*] for development, testing and for the inputting of the Customer's existing Negotiated Fares, Fare Rules, Fare Routings and other related information into the SABRE System Database, which shall be due and payable within thirty (30) days of the Implementation Date. b. A charge for each request change or addition to the SABRE System Database as follows: i. A filing fee of [*] to be charged each time Customer request STIN to make one or more changes or additions to the existing SABRE System Database. ii. An additional processing fee of [*] per Fare Rule or Fare Routing for each change or addition to the existing SABRE System Database. However, nothwithstanding the above, STIN shall waive this [*] processing fee for a given number of requested changes or additions as set forth in the following chart. Number of Customer Fare Number of Changes / Additions For Rules in SABRE System Which No Processing Fee Will Be Database Charged 1 - 75 [*] 76 - 100 [*] 100 - 125 [*] 126 - 200 [*] [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. c. A monthly maintenance and storage fee based on the number of Fare Rules maintained in the SABRE System Database as shown in the following chart.
Number of Customer Fare Monthly Maintenance Rules in SABRE System and Storage Database Fee 1 - 75 [*] 76 - 100 [*] 100 - 125 [*] 125 - 200 [*]
d. The filling fee of [*] and the processing fee of [*] shall be [*] made to the Customer's Negotiated Fares, Fare Rules of Fare Routings during the first [*] days after the actual Implementation Date. SECTION 4. TERM, DEFAULT AND TERMINATION PROVISIONS 4.1. Term. This Agreement shall be effective for a period of one (1) year from the date of this Agreement or until terminated pursuant to Sections 2.1(b), 4.4. or 4.5 of this Agreement. In the event that this Agreement has not been terminated prior to the expiration of one (1) year, it shall continue in effect thereafter until terminated by either party upon ninety (90) days written notice. 4.2. Price Increases. At the end of the one (1) year initial term of this agreement, STIN may increase the charges set forth in Section 3.3 of this Agreement. STIN agrees to notify Customer in writing at least thirty (30) days prior to any such price increase. 4.3 Default. The occurrence of any one (1) or more of the following events shall constitute an event of default pursuant to this Agreement ("Event of Default"). a. Customer fails to pay or cause to be paid any amounts due hereunder as it becomes due in accordance with the terms of this Agreement and such failure continues for a period of five (5) days after receipt of written notice from STIN that Customer is in default under this Agreement. b. Either party has materially breached or misrepresented any representation, warranty, or covenant given by it in this Agreement. c. Customer commences bankruptcy or insolvency proceedings or Customer ceases to do business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay debts as they become due, or acquiesces in the appointment of a trustee, receiver or liquidator for it or any substantial part of its assets. 4.4 Termination. Upon occurrence of an Event of Default, the non-defaulting party shall have the right to (i) terminate this Agreement, and if Customer is the defaulting party. Customer's access to SABRE; and (ii) seek all legal and equitable remedies to which it is entitled. 4.5 Right to Terminate if Claim is Made. In the event that any claim is made or threatened to be made against STIN by one of the carriers with whom Customer has Negotiated Fares, Fare Rules or Fare Routings and such claim arises out of STIN's performance under this Agreement, STIN may, in its sole discretion, terminate this Agreement without any further obligation or liability on the part of STIN. [*] The redacted portion, indicated by this symbol, is the subject of a confidential treatment request. SECTION 5. LIMITATION ON LIABILITY 5.1 STIN shall not be liable to Customer for any loss, claim or damage caused in whole or in part by STIN's negligence or by contingencies beyond STIN's control in procuring, collecting, compiling, abstracting, Interpreting, communicating, processing or delivering Negotiated Fares, Fare Rules or Fare Routings through SABRE. However, if errors in data are due to circumstances under STIN's direct control, STIN shall use its best efforts to correct such errors within 72 hours after notification by the Customer of the error. Although STIN shall use its best efforts to accurately maintain Customer's Negotiated Fares, Fare Rules and Fare Routings in the SABRE System Database, the foregoing limitation on liability includes, but is not limited to, any liability in contract or tort, for the difference between the fare reflected in SABRE, or on tickets autopriced and issued by SABRE, the Customer's actual Negotiated Fares. 5.2 STIN DISCLAIMS AND CUSTOMER HEREBY WAIVES ANY WARRANTIES EXPRESS OR IMPLIED INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR INTENDED USE OF SERVICES FURNISHED HEREUNDER OR ANY LIABILITY IN NEGLIGENCE OR TORT WITH RESPECT TO THE SERVICES FURNISHED HEREUNDER. CUSTOMER AGREES THAT STIN SHALL NOT BE LIABLE TO IT FOR CONSEQUENTIAL DAMAGES UNDER ANY CIRCUMSTANCES. SECTION 6. INDEMNITY Customer hereby agrees to indemnify and hold STIN, its officers, directors, agents and employees harmless from and against any and all liabilities, damages, losses, expenses, claims, demands, suits, debit memos, fines or judgments including, but not limited to, attorney's fees, costs and expenses incident thereto, which may be suffered by, accrue against, be charged to or recoverable from STIN, its officers, directors, agents, or employees, by reason of losses (including lost profits), damages, injuries or deaths of persons arising out of or in connection with, STIN's performance of the terms if this Agreement or any negligent act, error, or omission of the Customer. SECTION 7. MISCELLANEOUS PROVISIONS 7.1 Force Majeur. STIN shall not be liable for delays in or failure of performance hereunder caused by acts of God, strikes or other labor disputes, fires, or for any other delay or failure resulting from a cause beyond its reasonable control. 7.2 Assignment. Customer shall not transfer or assign this Agreement, or any right or obligation under it by operation of law or otherwise, without the prior written consent of STIN. 7.3 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA. CUSTOMER HEREBY SUBMITS AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS AND THE COURTS OF THE STATE OF TEXAS IN ANY DISPUTE ARISING OUT OF THIS AGREEMENT AND AGREES THAT SERVICE OF PROCESS SHALL BE SUFFICIENT IF MADE ON THE SECRETARY OF STATE OF THE STATE OF TEXAS WITH A COPY TO BE SENT, REGISTERED MAIL TO THE CUSTOMER AT THE ADDRESS SET FORTH BELOW OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO STIN. BELOW OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO STIN. 7.4 Notices. Notices given or required under this Agreement shall be deemed delivered if sent by United States mail, postage prepaid, fax, or by telex, to the respective address of SABRE Travel Information Network or Customer set forth below: STIN: Customer: SABRE Travel Information Network C.T.I. Corporation - ------------------------------------ --------------------------------------- P.O. Box 819816 738 Kaheka Street #301 - ------------------------------------ --------------------------------------- DFW Airport, TX 75261-9616 Honolulu, HI 86814 - ------------------------------------ --------------------------------------- 7.5 Waiver. A failure or delay of STIN to require strict performance or to enforce a provision of this Agreement shall in no way be construed as a waiver or continuing waiver of any provision of this Agreement. 7.6 Severability. Any provision of this Agreement which may be determined in a court or other competent government authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition and unenforceability, without invalidating the remaining provisions thereof, unless such prohibition or unenforceability materially after the rights or obligations of either party. 7.7 Entire Agreement. This Agreement shall constitute the entire agreement of the parties as to the matters set forth herein and shall supersede any previous understandings, whether written or oral, between the parties relating to the matters set forth herein. Any amendment to this Agreement must be in writing and signed by the authorized representatives of both parties. 7.8 Effective Date. This Agreement shall not be effective until countersigned by an authorized representative of STIN. IN WITNESS WHEREOF, STIN and Customer have executed this Agreement as of the date first above written. CTI CORPORATION STIN By: Customer /s/ Mike Hartley By: /s/ -------------------------- -------------------------- Name: Mike Hartley Name: ------------------------ ------------------------- Title: General Manager Title: ---------------------- ------------------------ QCP Schedule for SABRE Vendor WDM WDM QCP SABRE Transmission Update Freetext Processing Load Times Cutoff Cutoff Time QCP 09:00 09:30 09:30 - 13:00 - 1 ATP Dom 13:00 14:00 QCP 11:30 11:30 - 11:45 12:00 - 18:30 - 2 ATP Int'l 10:00 12:00 18:30 20:30 ATP Dom 11:30 QCP 14:00 19:00 19:00 - 23:00 - 3 ATP Int'l 14:00 23:00 02:30 SITA 17:00 QCP 19:00 23:00 21:45 23:00 - 03:00 - 4 ATP Int'l 03:00 06:30 ATP Dom QCP 04:30 05:00 05:00 - 07:30 - 5 ATP Int'l 07:30 10:00 Sat/ 16:00 18:00 14:30 18:00 - 20:30 - Sun ATP Int'l 20:30 08:30 ATP Dom
Reference WorldFare Data Management - -------------------------------------------------------------------------------- GFS, Commercial, and SABRE Categories/Tables IMS Menu Screens (see chart for specific category screens): Main Menu /FOR TQOAD Fare Class Application /FOR TQOGU Rule /FOR TQODH Fares Update (Fare Record) /FOR PFQOAQ Browse for Footnotes/Rules /FOR TQOKI or /FOR TQOKJ or /FOR TQOKK QCP Table /FOR TQOKR
- ------------------------------------------------------------------------------------------------------- QCP (IMS) Auto SABRE RD GFS /FOR TQODG MRT Rules Freetext - ------------------------------------------------------------------------------------------------------- 01 Booking Code WAR 412 02 Penalty 16 402 03 Reservation/Ticketing 05 008 TQODF 04 Minimum Stay 06 001 TQOCE 05 Maximum Stay 07 002 TQOCD 06 Day/Time 02 005 TQOCC 07 Season 03 03 08 Blackouts 11 11 09 Effective/Expired 14-15 003 TQOCI Sales/Travel 006 TQOCZ 10 Flight Application 04 014 TQOCO WAR* 11 Stopovers 08 009 TQONF WAR* 408 12 Ticket Issue 15 016 TQONW 420 13 Surcharges 12 015 TQOCN 936 14 Discounts 19-22 012 TQOCL 406 15 Reroute 16 404 16 Transfers 09 09 17 Combinability 10 10 18 Open Return 05 410 19 Refunds 16 416 20 Special Provision 13 011 TQOCG 21 Co-terminals WAR* 418 22 Int'l Construction 114/116 23 Group 26 414 24 Tour 27 422 25 Deposit 27 424 26 Misc. 23 426 Ticket Endorsements 18 108
* Limited WAR applications - -------------------------------------------------------------------------------- Version 2.3 Categories-1 10/27/97 EX-10.15 9 SABRE TRAVELBASE SYSTEM LEASE AGREEMENT EXHIBIT 10.15 SABRE TRAVELBASE SYSTEM LEASE AGREEMENT --------------------------------------- The SABRE TravelBase System Lease Agreement (the "Agreement") is entered into by and between the SABRE Travel Information Network, a division of American Airlines, Inc. ("American") and the undersigned ("Customer"), as of the date executed by American below ("Effective Date") regarding the provision of products and services set forth herein. Article 1 - Term - ---------------- 1.1 The term of the SABRE TravelBase System shall commence on the completion of data conversion (the "Effective Date") and shall continue in effect for the number of months as stated on the Schedule ("Initial term") unless terminated as provided herein. Any additional SABRE TravelBase System installed subsequent to the date of execution of this Agreement by American shall be subject to the terms and conditions of this Agreement and shall have a term as specified on the Supplement ("Additional Term"), commencing on the date of installation. Upon expiration of the applicable term, the Agreement for such SABRE TravelBase System shall continue on a month-to-month basis until termination by either party upon thirty days notice. Article 2 - Definitions - ----------------------- 2.1 Agreement means this SABRE TravelBase System Lease Agreement, and all Amendments, Schedules and Supplements made a part hereof. 2.2 Confidential Information means this Agreement, any and all applicable rights to patents, copyrights, trademarks and trade secrets, proprietary and confidential information of American or its affiliates, subsidiaries, successors or assigns concerning their past, present or future research, development, business activities or affairs, finances, properties, methods of operation, processes and systems, agreements, related to the business of American. 2.3 Instructions means any and all manuals, operation procedures, manufacturer's recommendations, rules and instructions delivered or made available to Customer (either in hard copy, verbally or on-line) all of which must be complied with by Customer. Such Instructions may be unilaterally revised or amended by American at any time in its sole discretion. 2.4 SABRE TravelBase System means the Standard Equipment, SABRE TravelBase System Components, Instructions and/or the SABRE TravelBase System Software as identified on the Schedule and all Supplements. 2.5 SABRE TravelBase System Component means all memory, disk storage space, ports, workstations, printers and any other element of the Standard Equipment. 2.6 SABRE TravelBase System Software means that Software delivered by American to Customer as identified on the Schedule and all Supplements including all upgrades, improvements, enhancements and modifications thereto. 2.7 Schedule means the document reflecting the Charges and term for the SABRE TravelBase System. 2.8 Standard Equipment means the items of computer hardware leased to Customer by American in accordance with this Agreement. 2.9 Supplement means the document reflecting any changes to the SABRE TravelBase System, and/or charges or credits related thereto. Article 3 - Charges and Payment - ------------------------------- 3.1 Prepayment. Upon execution, Customer shall pay to American the prepayment as shown on the Schedule. When the SABRE TravelBase System is installed, the prepayment shall be credited against the Customer's first Charges. 3.2 Charges. All amounts payable to American ("Charges") shall be due and payable within fifteen days of the date of American's invoice, without set off or counterclaim. 3.3 Additional Charges. Customer agrees to pay to American an additional charge at American's then prevailing rate for services and materials including without limitation the following: (a) the installation or removal of Standard Equipment; (b) excess cable or teflon coated cable required for installation; (c) Standard Equipment relocation within the site; (d) additional support and expenses outside of the scope of this Agreement. 3.4 Increases. American shall have the right to increase the Charges as shown on the Schedule and any Supplements for the remaining term of this Agreement upon thirty days written notice to the Customer. The total amount of such increase shall not exceed ten percent of the Charges in any consecutive twelve-month period. Hardware maintenance payments may be increased; however, such increase may not be more than a rounded-up percentage equal to the percentage of increase charged to American by its maintenance vendors. 3.5 Interest. Charges not paid when due shall accrue interest at the rate of eighteen percent per annum or the highest rate permitted by Texas law, whichever is less. 3.6 Taxes. Customer shall pay any taxes, or assessments including any interest or penalty thereon levied as a result of this Agreement, excluding taxes measured by the net income of American. Customer shall indemnify and hold harmless American from all costs, fines and expenses (including reasonable legal costs) incurred by American resulting from Customer's failure to pay taxes as provided in this Article. Article 4 - Installation and Delivery - ------------------------------------- 4.1 Delivery. American shall arrange for delivery of the SABRE TravelBase System F. O. B. to the site, as identified on the Schedule and all Supplements thereto. 4.2 Installation. Subject to Article 4.3, American shall install, or cause to be installed, the SABRE TravelBase System at the site. 4.3 Customer's Obligations Prior to Installation. Customer, at its expense, shall be responsible for preparing the site for SABRE TravelBase System in accordance with the Instructions. If installation of the SABRE TravelBase System is prevented or delayed because of Customer's failure to prepare the site, American shall use reasonable efforts to install the SABRE TravelBase System upon Customer's with this Article and upon payment of all reasonable expenses incurred by American resulting from Customer's failure to prepare the site. In the event installation of the SABRE TravelBase System is delayed as a result of Customer's actions or failure to take action, American shall begin invoicing Customer under Article 3 and the term of the Agreement shall commence. Customer shall commence payments notwithstanding the fact that the SABRE TravelBase System has not been installed. In addition, American shall discontinue the installation process of the SABRE TravelBase System until all applicable SABRE TravelBase hardware components have been installed, even though American has begun the billing process. Once Customer complies with the installation requirements, American shall proceed with the installation process. 4.4 Relocation and Possession. Customer shall at all times keep the SABRE TravelBase System in its sole possession and control at the site. Customer shall not move any part of the SABRE TravelBase System from or within the site without first obtaining the written consent of American. 4.5 Communications Access. Customer shall provide at its own expense such communication lines in accordance with the Instructions for access by American or its designated third-party to the SABRE TravelBase System. 4.6 Non-Standard System. Customer shall not connect or use any hardware, or firmware not acquired from American with the SABRE TravelBase System without American's prior written consent, which shall be granted provided that such hardware, or firmware is approved by American for use with SABRE TravelBase System and Customer executes the Non-Standard System Amendment. 4.7 Acceptance of SABRE TravelBase System. Upon installation of the SABRE TravelBase System, Customer shall be deemed to have accepted the SABRE TravelBase System. Any use of the SABRE TravelBase System, and/or SABRE TravelBase System Components or SABRE TravelBase System Software further constitutes acceptance of the Agreement and applicable Amendments and Supplements by the Customer. Article 5 - Repairs and Maintenance - ----------------------------------- 5.1 Repairs and Maintenance. Upon prompt notification from Customer, American or its designated agent, shall repair and maintain the Standard Equipment and shall keep it in good working order provided that the Standard Equipment has been subject to reasonable operation. Customer shall not make any modifications nor attempt to perform repairs or maintenance of any kind without previous written permission from American. American or its designated agent, shall have free access to the Standard Equipment at reasonable times during normal business hours (9:00 a.m. to 5:00 p.m. local time, Monday through Friday, excluding legal holidays) to provide such service. Damage resulting from negligence, transport, repairs not done by American or its agents, will not be covered. 5.2 Changes to Coverage. If Customer has title to hardware he may elect, at any time during the term of the Agreement, to discontinue or change hardware maintenance upon giving American ninety days written notice. 5.3 Limitations. Items consumed in the normal course of business, including but not limited to printer ribbons and software media are excluded from coverage. When in the course of normal usage and due to normal wear and tear, a piece of Standard Equipment may no longer be maintained or repaired, it will be the responsibility of the Customer to replace the Standard Equipment. 5.4 Charges. Repair or maintenance services on Standard Equipment during normal business hours (9:00 a.m. to 5:00 p.m. local time, Monday through Friday, excluding legal holidays) are included in the Charges, provided that the Customer has not been negligent and the Standard Equipment has been subject to reasonable operation; otherwise, Customer will be charged a service fee in accordance with American's or its designated third-party's then prevailing rates. Article 6 - Title and Ownership of SABRE TravelBase System - ---------------------------------------------------------- 6.1 Title and Ownership of SABRE TravelBase Standard Equipment. The SABRE TravelBase System leased hardware hereunder shall remain the property of American. Customer shall not in any other manner dispose of the SABRE TravelBase System or any part thereof or suffer any lien or legal process to be incurred or levied on the SABRE TravelBase System. 6.2 Risk of Loss. Risk of loss for and damage to the SABRE TravelBase System shall pass to the Customer upon delivery of the SABRE TravelBase System to the site. Article 7 - Insurance - --------------------- 7.1 General. Upon delivery of any part of the SABRE TravelBase System to the site, Customer shall maintain Comprehensive General Liability (including bodily injury, product liability, property damage and contractual liability) and All Risk Property Insurance. 7.2 Comprehensive General Liability. The Comprehensive General Liability coverage shall be in the amount not less than one million dollars combined single limit. The coverage shall include the following special provisions: (a) American, its officers, agents and employees, shall be named as additional insureds; (b) The policy(ies) shall specifically insure the indemnification provision included in this Agreement; (c) Such insurance shall be primary without any right of contribution from any insurance maintained by the additional insureds; and (d) Insurers will provide American with thirty days' prior written notice of any cancellation or material change. 7.3 All Risk Property. The All Risk Property insurance shall be in an amount to cover the replacement value of the Standard Equipment as set forth in the Schedule and all Supplements. Such policy shall: (a) name American as additional insured; (b) name American as the sole loss payee for loss of the Standard Equipment; (c) be primary without right of contribution from any insurance carried by American; and (e) provide that American will b e given thirty days' prior written notice of any cancellation or material change of such policy. 7.4 Certificates. Customer will provide to American, on or before delivery of any part of the SABRE TravelBase System to the site, a Certificate issued by its insurer(s), evidencing the insurance coverage required by this Article. If American does not receive such Certificates of insurance prior to delivery of the SABRE TravelBase System, American may obtain insurance and Customer shall reimburse American for all amounts paid by American to obtain such insurance. Article 8 - Confidential Information - ------------------------------------ 8.1 The Confidential Information shall remain American's property. 8.2 Customer shall maintain in perpetuity the confidentiality of the Confidential Information using the highest degree of care. Customer shall not use, sell, sublicense, transfer, publish, disclose, display, or otherwise make available to others, except as authorized in this Agreement, the Confidential Information or any other material relating to the Confidential Information at any time before or after the termination of this Agreement nor shall Customer permit its officers, employees, agents, contractors or subcontractors to divulge the Confidential Information without prior written consent of American. Article 9 - SABRE TravelBase System Software License - ---------------------------------------------------- 9.1 Ownership of SABRE TravelBase System Software. Customer acknowledges that American or the original manufacturer of the SABRE TravelBase System Software, as applicable, owns or has licensed from the owner, copyrights in the respective SABRE TravelBase System Software and that ownership and title are retained by the manufacturer or its licensor. All applicable rights to patents, copyrights, trademarks, and trade secrets inherent in the SABRE TravelBase System Software and pertinent thereto are and shall remain American's or the original manufacturer's sole and exclusive property. Any copy of such Software must incorporate any copyright, trade secret, or trademark notices or legends appearing in the original version delivered to Customer. 9.2 Grant of License. Subject to the provisions of this Agreement and for the term specified on the Schedule, either American or the original manufacturer grants to Customer a non-transferable, non-exclusive, limited license to use the SABRE TravelBase System Software subject to the following restrictions: (a) Customer shall use the SABRE TravelBase System Software only to process data related to Customer's own travel agency business transactions, (b) Customer must do business as a bona fide travel agency, (c) the SABRE TravelBase System Software shall be used and installed solely at the site and solely used on the Standard Equipment, or other equipment authorized by American, (d) the SABRE TravelBase System Software shall be used solely for internal purposes and only in the ordinary course of business; (e) Customer shall not reserve engineer, compile, reverse compile, decompile, disassemble, or reverse assemble the SABRE TravelBase System Software or any portion thereof, (f) the SABRE TravelBase System Software shall not be copied or reprinted in whole or in part except (i) a reasonable number of copies of each program may be made in machine readable form for reasonable archival or backup purposes, or (ii) when American as granted permission to do so, and (g) Customer shall not lease, sell, license, sublicense or otherwise transfer the SABRE TravelBase System Software to any other party. Nothing in this Agreement shall convey title to the SABRE TravelBase System Software to Customer. 9.3 Modification Rights. Customer shall not modify the SABRE TravelBase System Software or merge such software into other programs or create derivates works based on such software. 9.4 Upgrades and Modifications. All tangible objects containing or relating to the SABRE TravelBase System Software are the sole and exclusive property of American or the manufacturer. In the event American, in its sole discretion, modifies the SABRE TravelBase System Software, it may deliver such modified SABRE TravelBase System Software to Customer at its then current charge, if any, and Customer shall promptly return to American any and all tangible objects relating to the SABRE TravelBase System Software as provided in Article 15.7. Customer shall install all such modifications within ninety days of receipt of the new revision of SABRE TravelBase System Software. Customer shall be solely responsible for protecting all software not obtained from American hereunder and the data related thereto in the event of a software upgrade. Customer, in order to receive an upgraded or updated program, shall comply with any and all terms and conditions and Instructions imposed by American. 9.5 Processing Units. The SABRE TravelBase System Software resided solely on the processing units (the "Fileserver" and "Database server"). In the event a Fileserver or Database server is upgraded, replaced or moved, Customer shall be solely responsible for moving and protecting all software not obtained from American and the data related thereto. 9.6 Operating Program. 9.6.1 Customer acknowledges that the SABRE TravelBase System Software incorporates, in part, copyrighted materials pertinent to the Operating Program as identified on the Schedule. Customer agrees that such copyrighted portions shall be subject to the Operating Program copyright and license. 9.6.2 Customer will look only to American and not to the manufacturer for any support, maintenance, assistance and upgrades and the like with respect to the Operating Program and the manufacturer shall have no liability to Customer in relation to this program. 9.6.3 No action, regardless of form, arising out the license of the Operating Program may be brought more than two years after the cause of action has arisen. 9.6.4 THE LICENSE OF THE OPERATING PROGRAM, IF MANUFACTURED BY IBM, SHALL BE CONSTRUED AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND THE UNITED STATES OF AMERICA NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT. 9.7 SABRE TravelBase System Software. 9.7.1 Customer acknowledges and agrees that Customer is not entitled to any greater warranty with respect to the SABRE TravelBase System Software than the warranty received by American from its supplier of the respective SABRE TravelBase System Software. 9.7.2 EXCEPT AS SPECIFICALLY PROVIDED BELOW, THE SABRE TRAVELBASE SYSTEM SOFTWARE IS PROVIDED TO CUSTOMER AS IS AND WITH ALL ITS FAULTS WITHOUT ANY WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR THOSE IMPLIED WARRANTIES ARISING OUT OF COURSE OF PERFORMANCE, COURSE OF DEALING, USAGE OF TRADE OR ANY OTHER WARRANTY. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SABRE TRAVELBASE SYSTEM SOFTWARE IS WITH THE CUSTOMER. SHOULD THE SABRE TRAVELBASE SYSTEM SOFTWARE PROVE DEFECTIVE, CUSTOMER SHALL ASSUME THE ENTIRE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO CUSTOMER. THIS WARRANTY GIVES THE CUSTOMER SPECIFIC LEGAL RIGHTS AND CUSTOMER MAY ALSO HAVE OTHER RIGHTS WHICH VARY FROM STATE TO STATE. ADDITIONALLY, CUSTOMER ASSUMES RESPONSIBILITY FOR THE SELECTION OF THE SABRE TRAVELBASE SYSTEM SOFTWARE TO ACHIEVE CUSTOMER'S INTENDED RESULTS, AND FOR THE INSTALLATION AND USE OF THE RESULTS OBTAINED FROM THE SABRE TRAVELBASE SYSTEM SOFTWARE. 9.7.3 Notwithstanding the above, the media on which the SABRE TravelBase System Software is encoded is warranted to the Customer against defects in material or workmanship for a period of three months from the receipt of original purchase by Customer. If during such period, Customer discovers any defect in the media, Customer may return the media to American and American shall, as Customer's sole and exclusive remedy, repair, or replace the defective media. Article 10 - Documentation and Training - --------------------------------------- 10.1 Documentation. For each SABRE TravelBase System purchased hereunder, American will provide at the time of delivery of the SABRE TravelBase System, one copy of all such manuals as may be relative to the installation and operation of the SABRE TravelBase System and all such on-line documentation as may be available to enable a Customer's personnel to use and understand the operation thereof. Additional copies may be purchased at American's then prevailing rate. 10.2 Training. For each SABRE TravelBase System purchased, American shall provide to Customer prior to installation of the Standard Equipment, training for a specific number of Customer employees an the basic use and operation of the SABRE TravelBase System Software as described an the schedule. This training must be completed prior to the installation of the SABRE TravelBase System. Additional classes may be offered on more advanced modules of the software as then may be available to the Customer. Some modules have a mandatory training requirement prior to the implementation of those modules. 10.2.1 Training for additional employees will be offered subject to availability and at American's then prevailing rate per person, per class. The additional training charge will be assessed on Customer's monthly invoice. A prepayment may be necessary to secure a place in the class. 10.2.2 The training described in Article 10.2 shall be performed at a location designated by American. 10.2.3 In addition to the charge for training, American reserves the right to charge all costs incidental to such training, including transportation, meals, and lodging. 10.2.4 Except as otherwise provided herein, Customer is responsible for all training of all its employees in the proper use of SABRE TravelBase. American has the right to require further training at the Customer's expense before adding or changing levels of software support or adding additional software options. 10.2.5 In addition to the training described in Article 10.2, American may offer to Customer supplemental training programs at a local Level. Such training may consist of, but not limited to, workshops, seminars, and individual consultations. These will be made available at American's then prevailing rate. 10.2.6 Customer and its trainees agree to comply with all training procedures and rules established by American, and American reserves the right to remove any Customer trainee from the training program if such trainee fails to comply with such procedures and rules. 10.2.7 American may at its discretion, monitor or test Customer's employee's training levels. If American determines the training level to be insufficient, the Customer will institute such additional training, at its own expense (including, if necessary, additional training by American at American's then prevailing rate) as may be necessary to bring Customer's employees to the level of training required by American. Article 11 - Software Support - ----------------------------- 11.1 Software Support. American agrees to provide software support to assist the Customer's personnel of an understanding of the use of SABRE TravelBase. Such support will be in the form of a Help Desk available at specified times and hours via telephone. Support will be limited to the SABRE TravelBase System Software provided by American and the formation of files by SABRE TravelBase System Software prior to transfer or export. The hours of support offered will be 7:00 a.m. to 9:00 p.m. Central time, Monday through Friday and 8.00 a.m. to 3:00 p.m. Central time on Saturdays excluding legal holidays which am subject to change. Unless otherwise specified, support will be limited to the Customer officer who signs this Agreement, or with whom Customer officer designates by providing the Help Desk telephone number. 11.2 Support Levels. American will provide ninety days of unlimited support from the Effective Date. Thereafter, the support level elected by the Customer shall be provided at American's then prevailing rate. Customer may elect any level as described in the Article 11.2.2 for the Initial Term. With thirty days written notice, Customer may upgrade the service level at any time during the contract term. With thirty days written notice, Customer may reduce the service level at the end of each twelve month period. 11.2.1 Definition of Call Type (i) Billable Calls. Customer will be charged for these calls. Calls include, but are not limited to operator knowledge for which information is available in a manual or accessible on-line, accounting knowledge relating to the procedures and processing of tickets, and ARC/BSP documents, other vendor/suppliers relating to questions that should be directed to CRS vendors, forms or suppliers, hardware and software not sold or supported by American. (ii) Non-Billable Calls. Customer will not be charged for these calls. Calls include, but are not limited to Hardware Maintenance where a vendor is dispatched. 11.2.2 Definition of Support Levels. (i) Level I. Customer may call for support as desired and required. Customer must pay for each Billable Call at the rate specified on the Schedule and any Supplements. Such Charges will appear an the monthly invoice. (ii) Level II. Customer may call for support as desired and required. Customer will be allocated, at no charge, a limited number of Billable Calls per month as specified on the Schedule and any Supplements. All Billable Calls over that number will be charged at the rate specified on the Schedule and any Supplements. (iii) Level III. Customer may call for support as desired and required. There will be no charge for the Billable Calls at this level. Customer shall be billed a monthly flat rate for this support option. Article 12 - Warranty, and Limitation of Warranty, Liability and Remedy - ----------------------------------------------------------------------- 12.1 Standard Equipment. The Standard Equipment shall be delivered and installed in good working order. 12.2 SABRE TravelBase System Software. The SABRE TravelBase System Software provided will be in good working order when installed. SABRE TravelBase System Software and any additions, changes, improvements, and enhancements provided the Customer hereunder shall conform to any applicable requirements or rules of the Airline Reporting Corporation ("ARC"), Bank Settlement Plan ("BSP") or the International Air Transport Association ("IATA") as approved by the Department of Transportation ("DOT") 12.3 Limitation of Warranty. THE LIMITED EXPRESSED WARRANTIES SPECIFIED HEREIN ARE THE ONLY WARRANTIES MADE BY AMERICAN AND THE MANUFACTURER AND THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE OF SABRE TRAVELBASE OR THE SABRE TRAVELBASE SYSTEM OR ANY LIMITATION STATEMENTS REGARDING CAPACITY. SUITABILITY FOR USE, OR PERFORMANCE OF THE SABRE TRAVELBASE SYSTEM OR ANY COMPONENTS THEREOF, WHETHER MADE BY AMERICAN OR OTHERWISE, WHICH IS NOT CONTAINED IN THIS AGREEMENT, SHALL BE DEEMED TO BE A WARRANTY FOR ANY PURPOSE OR GIVE RISE TO ANY LIABILITY OF AMERICAN OR THE MANUFACTURER. 12.4 Limitation of Remedies. In the event of a material malfunction or defect in an unaltered component of the SABRE TravelBase System that can be reproduced by American, American will provide reasonable services to correct such malfunction or defect. Customer will supply American with such input files and other materials as may be necessary to enable American to diagnose and correct the malfunction or defect. THE FORGOING SHALL BE CUSTOMER'S SOLE AND EXCLUSIVE PRIMARY REMEDY FOR ANY MALFUNCTION OR DEFECT IN THE SABRE TRAVELBASE SYSTEM. IF SUCH MALFUNCTION OR DEFECT MATERIALLY IMPAIRS CUSTOMER'S USE OF THE SABRE TRAVELBASE SYSTEM AND CANNOT BE CURED AS PROVIDED IN THIS PARAGRAPH, THEN CUSTOMER'S ALTERNATE SOLE AND EXCLUSIVE REMEDY SHALL BE TO TERMINATE THIS AGREEMENT WITHOUT FURTHER LIABILITY TO AMERICAN FOR DAMAGES HEREUNDER. 12.5 Limitation of Liability. CUSTOMER WAIVES ALL LIABILITY IN TORT, OF AMERICAN AND THE RESPECTIVE MANUFACTURER INCLUDING WITHOUT LIMITATION ANY LIABILITY ARISING FROM NEGLIGENCE. NOTWITHSTANDING THE FOREGOING, AMERICAN'S LIABILITY TO CUSTOMER HEREUNDER SHALL BE LIMITED TO THE TOTAL AMOUNT OF CHARGES ACTUALLY PAID BY CUSTOMER TO AMERICAN PURSUANT TO THIS AGREEMENT. NEITHER AMERICAN NOR ANY MANUFACTURER SHALL BE LIABLE TO CUSTOMER FOR ANY INCIDENTAL, OR CONSEQUENTIAL DAMAGES, UNDER ANY CIRCUMSTANCES, INCLUDING BUT NOT LIMITED TO LOST PROFITS, REVENUE OR SAVINGS, OR THE LOSS OF USE OF ANY DATA, EVEN IF AMERICAN OR THE MANUFACTURER HAS BEEN ADVISED OF, KNOWN, OR SHOULD HAVE KNOWN, OF THE POSSIBILITY THEREOF. Article 13 - Indemnification - ---------------------------- Customer and American hereby agree to indemnify and hold each other, their affiliates, subsidiaries, successors and assigns and their officers, directors, agents, and employees ("Indemnitees") harmless from and against third-party liabilities, including, but not limited to, attorney's fees, and other expenses incident thereto, which may be threatened against, or recoverable from the Indemnitees by reason of any injuries to or death of persons or loss of, damage to, or destruction of property arising out of or in connection with any act, or omission of Customer or American, including without limitation any act, or omission constituting negligence. Article 14 - Assignment - ----------------------- 14.1 Assignment Or Sublease By Customer. CUSTOMER SHALL NOT SUBLEASE, TRANSFER OR ASSIGN THIS AGREEMENT OR ANY PORTION THEREOF, OR ANY RIGHT OR OBLIGATION HEREUNDER, UNLESS CUSTOMER HAS OBTAINED THE PRIOR WRITTEN CONSENT OF AMERICAN. ANY ATTEMPTED ASSIGNMENT IN VIOLATION OF THIS ARTICLE SHALL BE VOID. 14.2 Assignment by American. American shall have the right to sell, transfer, assign or delegate its interests, rights and/or obligations, without the prior consent of Customer, and, provided that such transferee or assignee assumes all of American's obligations, American shall be released of all obligations after the effective date of such sale, transfer, delegation or assignment. Article 15 - Termination and Default - ------------------------------------ 15.1 Default by Customer. The occurrence of any one of the following events shall constitute a non-exclusive event of default (the "Event of Default") pursuant to the terms of this Agreement. 15.1.1 Customer fails to pay any amount when due; 15.1.2 Customer ceases to be a bona fide travel agency; 15.1.3 Any representation by Customer is discovered to be materially misleading or inaccurate, or Customer fails to perform any material covenant, agreement, obligation, term or condition contained herein; 15.1.4 Customer ceases to do business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay debts as they become due, acquiesces in the appointment of a trustee, receiver or liquidator for it or any substantial part of its assets or properties. Sells, or executes an agreement to sell all or substantially all of its assets without the consent of American. 15.1.5 Events of Default described in 15.1.1, 15.1.3 and 15.1.4 shall not be cause for termination if Customer cures such failure within fifteen days after date or written notice from American. If Customer cures its failure as provided in this provision, said failure shall not be considered to be an Event of Default for the purposes of Article 15.2. 15.2 American's Rights Upon Termination. Upon the occurrence of an Event of Default and subject to Article 15.1.6, American shall have the right to any one or more of the following remedies: (i) terminate this Agreement; (ii) seek all legal and equitable remedies to which it is entitled and; (iii) retake immediate possession of the SABRE TravelBase System. If Customer's Event of Default results in termination Customer agrees to pay to American, in full settlement of the damages American will suffer as a result of such Event of Default, an amount calculated to estimate American's damages as liquidated damages as follows: 15.2.1 the applicable charge to disconnect the Standard Equipment; plus 15.2.2 the applicable costs, expenses and damages which American may sustain by reason of the default, including, without limitation, reasonable legal fees incurred by American; plus 15.2.3 the sum of the remaining monthly payments discounted to the then present value at an eight percent per annum rate. 15.3 Termination by Customer. In the event that American breaches any material term of this Agreement, which breach continues for a period of fifteen days after date of written notice from Customer, then Customer may terminate this Agreement immediately upon written notice to American. Except as limited by this Agreement, upon termination, Customer may seek all legal and equitable remedies to which it is entitled. Customer may not otherwise cancel, terminate, modify, repudiate, excuse or substitute this Agreement without American's prior written consent, which American may withhold in its absolute discretion. Article 16 - Miscellaneous - -------------------------- 16.1 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA. CUSTOMER HEREBY SUBMITS AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS AND THE COURTS OF THE STATE OF TEXAS IN ANY DISPUTE ARISING OUT OF THIS AGREEMENT AND AGREES THAT SERVICE OF PROCESS SHALL BE SUFFICIENT IF MADE ON THE SECRETARY OF STATE OF THE STATE OF TEXAS WITH A COPY TO BE SENT, REGISTERED MAIL TO THE CUSTOMER AT THE ADDRESS SET FORTH IN THE SCHEDULE OR SUCH OTHER ADDRESS AS CUSTOMER MAY LATER SPECIFY BY WRITTEN NOTICE TO AMERICAN. 16.2 Binding Effect. Except as otherwise provided, the Agreement shall inure to the benefit of and bind the successors and assigns of the parties hereto. 16.3 Entire Agreement. This Agreement and the Instructions constitute the entire agreement of the parties as to the matters set forth herein and shall supersede any previous understandings, agreements, representations, statements, negotiations and undertakings, whether written or oral, between the parties relating to the matters set forth herein. Any Amendment to this Agreement must be in writing and signed by the authorized representatives of both parties. 16.4 Force Majeure. American shall be relieved of its obligations hereunder in the event and to the extent that performance is delayed or prevented by any cause reasonably beyond its control, including, but not limited to acts of God, public enemies, war, civil disorder, fire, flood, explosion, labor dispute or strikes, or any acts or orders of any governmental authority, inability to obtain supplies and materials (including and without limitation computer hardware) or any delay of deficiency caused by the electrical or telephone line suppliers or other third parties. 16.5 Notices. Unless otherwise stated, notices given or required under this Agreement must be in writing and shall be deemed delivered (i) upon deposit through the United States Mail, to American at P.O. Box 619616, MD _____, Dallas Fort Worth Airport, Texas 75261-9616 (to be sent to the attention of SABRE Travel Information Network, Financial Services) or to the Customer at the address set forth in the Schedule, or (ii) upon dispatch, if sent by SABRE as follows: If to American: QP/_____ and if to Customer: to the Pseudo City Code as set forth in the Schedule or Supplement. 16.6 Return of SABRE TravelBase System. Upon the termination of this Agreement for any reason, Customer, at its sole cost and expense, shall return all Confidential Information as requested by American, in good condition, less normal wear and tear. 16.7 Modifications. American retains the right to modify the SABRE TravelBase System, at its discretion at any time during the term of this Agreement. However, such modifications will not materially impair Customer's ability to access and use SABRE TravelBase in the manner expressly permitted in this Agreement. During the term hereof, American shall make additions, changes, improvements or enhancements in the SABRE TravelBase System Software necessary to enable Customer to comply with applicable requirements or rules of ARC, BSP or IATA, as approved by DOT. 16.8 Severability. Any provision of this Agreement which may be determined by a court or other competent governmental authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent such prohibition or unenforceability, without invalidating the remaining provisions thereof, unless said prohibition or unenforceability materially alters the rights or obligations of either party. 16.9 Surviving Sections. If the term of the Agreement expires or is otherwise terminated for any reason before Customer has paid to American all of the sums due, the Agreement, the Schedule, and all Supplements shall survive such expiration or termination to the extent necessary to protect American's rights until all sums owed to American have been paid. Notwithstanding anything to the contrary referenced herein Articles 6, 8, 11 and 12 shall survive the termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth below. Customer American Airlines, Inc. By: /s/ Michael J. Hartley By: ------------------------- ------------------------- (Signature) (Signature) Name: Name: ------------------------- ----------------------- (Print Name) (Print Name) Title: Title: Manager - Financial Services ------------------------- SABRE TravelBase Network Date: Date: ------------------------- ------------------------- Agency Name: PCC -------------------- ----- EX-23.1 10 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 (File No. 333-70841) of our report dated February 15, 1999 on our audits of the financial statements of Cheap Tickets, Inc. We also consent to the references to our firm under the captions "Experts" and "Selected Financial Data." /s/ PricewaterhouseCoopers LLP Honolulu, Hawaii March 15, 1999 -----END PRIVACY-ENHANCED MESSAGE-----