-----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, AQTihqbFBP1P1e50y6Wl2AC5LTB7qZn5cehNORKF6wS9Eum87vY3pdyVlENKs7Kc 2sFYCLlLw9TzRokucT6ubA== 0000898430-01-001150.txt : 20010409 0000898430-01-001150.hdr.sgml : 20010409 ACCESSION NUMBER: 0000898430-01-001150 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 10-K SEC ACT: SEC FILE NUMBER: 000-25279 FILM NUMBER: 1589115 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 10-K 1 0001.txt FORM 10-K FOR PERIOD ENDED 12/31/2000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Form 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 or [_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to Commission File No.: 000-25279 ---------------- CHEAP TICKETS, INC. (Exact name of Registrant as specified in its charter) Delaware 99-0338363 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number)
1440 Kapiolani Boulevard Honolulu, Hawaii 96814 (Address of principal executive offices, including zip code) (808) 945-7439 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---------- ---------- (Title of each class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of March 15, 2001 was approximately $66,600,000 based upon the closing sale price of the Registrant's Common Stock on such date, as reported on the Nasdaq National Market. Shares of Common Stock held by each executive officer and director and each person owning more than 5% of the outstanding Common Stock of the Registrant have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 15, 2001, the Registrant had 24,270,542 shares of Common Stock, $.001 par value per share, outstanding. ---------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders scheduled to be held on May 21, 2001 are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- All historical financial information contained in this Annual Report on Form 10-K has been restated to comply with recently issued accounting standards as discussed on page 29 (see Note 1 to the Financial Statements). From time to time, Cheap Tickets may make certain statements that contain "forward-looking" information or statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "anticipate," "believe," "expect," "estimate," "project," "plan" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Annual Report on Form 10-K, and in Cheap Tickets' other filings with the SEC. Although Cheap Tickets believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including, without limitation those identified under "Risk Factors." Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current or future operations may vary materially from those anticipated, estimated, or projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. PART I Item 1. Business. Cheap Tickets is one of the leading retail sellers of discount tickets for domestic leisure travel. Offering more than 1 million non-published airfares on more than 40 major airlines, Cheap Tickets sells directly to consumers through its Internet site, located at "www.cheaptickets.com;" through its toll-free number, 1-800-OKCHEAP; and at its 10 retail stores. For the year ended December 31, 2000, Cheap Tickets sold more than 2.1 million airline tickets, primarily through its call centers and its Internet site. Cheap Tickets was incorporated in Hawaii in August 1986 and reincorporated in Delaware in February 1999. 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 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 1 million 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. For the years ended December 31, 1999 and 2000, approximately 64% and 57%, respectively, 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. For published fares, Cheap Tickets receives commissions on gross bookings. Airlines generally pay commissions of 5% 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. Cheap Tickets receives commissions at least as favorable as those received by travel agents, and with many carriers 2 Cheap Tickets has negotiated more favorable commission rates. In addition, Cheap Tickets frequently benefits from performance-based override commissions. 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 Tickets' 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. Other Travel Products and Services. Cheap Tickets has contractual relationships to sell cruises on Carnival Cruises and Princess Cruises and also has contractual relationships with major auto rental companies to provide reservations. Cheap Tickets has also entered into a number of contracts to sell hotel room reservations. Such alternative products represented 3% of Cheap Tickets' gross bookings for the year ended December 31, 2000. Management views these other travel products and services as potential areas of future growth. Call Center Operations. At December 31, 2000, Cheap Tickets had approximately 602 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 average, the call centers received approximately 22,000 calls per day in 2000. 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. Cheap Tickets uses an intelligent call routing and interactive voice response technology that enables callers to direct inquiries in an automated phone-based environment. By automating caller activities and compensating agents on an incentive basis, Cheap Tickets seeks to maximize agent productivity. Call centers are segmented into teams, which are rewarded for the highest productivity and operating effectiveness. Internet Operations. Cheap Tickets accepts online reservations and provides ticketing service through its website at "www.cheaptickets.com." On the website, customers can access information on schedules, availability and non- published and published fares and 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 requires users to complete a profile before searching for fares. 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 an 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 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. 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. 3 Strategic Relationships Airline Relationships. Cheap Tickets currently has contracts with more than 40 airlines. For the year ended December 31, 2000, approximately 48% of sales of non-published fares came from tickets acquired from three airlines. 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 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 440 airlines, 50 auto rental companies, 47,000 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 millions of 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 Tickets' 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. Marketing and Brand Awareness Cheap Tickets intends to aggressively build brand awareness. Traditionally Cheap Tickets has depended primarily on print and, more recently, Internet- based advertising. During 2000, Cheap Tickets launched a campaign using television, print, radio promotions and the Internet. As part of its branding program Cheap Tickets plans to increase its marketing and advertising expenditures. It will also continue to pursue a highly targeted Internet-based advertising campaign. Its Internet advertising efforts will be targeted using keyword search and banner ads on Internet sites frequented by its target consumer base. Through such targeted efforts, Cheap Tickets seeks to obtain a high return for its advertising expenditures. It is a featured advertiser on the Travelocity website. Cheap Tickets also advertises on Yahoo!, Excite, Lycos, HotBot, Snap.com and OnSale. Through its banner advertisements, Cheap Tickets has achieved "click-through" rates to its website in 2000 as high as 6 percent. Competition Competition for Non-Published Fares Sellers of Non-Published Fares. Cheap Tickets' existing direct competition for non-published fares comes largely from online companies that specialize in the distribution of discounted fares. Online competition has developed rapidly from a small number of sellers to a large number of sellers. Competition in the sale of non-published fares also continues to come from a large number of other sellers, primarily using call centers or the Internet, or a combination of both. The market for the sale of non-published discounted fares for international routes is more competitive than that for domestic routes. As the leisure travel market evolves, other competitors could increase their share of the market, or new ones could enter the market. 4 Online Travel Companies. Online travel companies traditionally have established a strong market presence primarily based on the sale of published fares. Some of these companies also sell non-published fares. Two primary online competitors have emerged in the sale of non-published fares. The leading online competitor is Priceline.com, which has induced a number of major domestic airlines to supply non-published fares by offering warrants and other forms of equity compensation in the company. Priceline.com sells tickets in an auction-based process where the customer offers a price and Priceline.com then seeks to find a ticket to match the customer's offer. The other online competitor is Hotwire.com, which began operations in September of 2000. Hotwire acquires non-published fares primarily from five domestic airlines that are Hotwire shareholders. Hotwire sells tickets in an opaque environment in which the customer identifies a citypair and date for travel and Hotwire displays a fare. The customer then has 30 minutes to accept the fare, without knowing the carrier brand, schedule, connections or equipment type. If the customer chooses not to accept the fare, he or she is restricted from using Hotwire for the same citypair and date for 72 hours. By contrast, the Cheap Tickets customer immediately can buy a fare posted on the Cheap Tickets website or available through a call center, and unlike both Priceline and Hotwire, a Cheap Tickets customer can choose a specific airline and learn the schedule, connections, if any, and equipment prior to making the purchase. Notwithstanding the difference in purchase procedures, Priceline and Hotwire have emerged as vigorous competitors. Other start-up online companies are also attempting to enter the market by acquiring non-published fares by offering airlines equity participations in their companies. 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. Many 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 promotion fares, percentage discount off of the published fare, bonus frequent flier mileage, or the ability to combine frequent flier miles with a low base fare when purchased on their respective Internet sites. 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, Cendant Corporation, TravelWeb, which is operated by Pegasus, Internet Travel Network, Biztravel.com and TheTrip.com, among others. In addition, a new entrant named Orbitz, jointly owned by five airlines (American, Continental, Delta, Northwest and United) is expected to begin operations in June 2001. Several traditional travel agencies, including larger travel agencies such as American 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. A number of Cheap Tickets' competitors possess larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than Cheap Tickets. 5 Employees As of December 31, 2000, Cheap Tickets had 1,051 employees including 602 reservation agents and other call center employees, 60 retail store employees, 15 cruise employees, 257 operations support employees and 117 corporate and administrative 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. Operating Segments See Operating Segments section in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 to the financial statements for a detailed discussion on operating segments. 6 Risk Factors In addition to the other information we provide in this Annual Report on Form 10-K, you should carefully consider the following risks 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 forward-looking statements contained herein. 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. For access to non-published fares, we depend on travel suppliers with which we have no long-term or exclusive contracts. For the year ended December 31, 2000, approximately 97% of our gross bookings came from the sale of airline tickets. Non-published fares represented about 57% of our airline gross bookings and 57% of total revenue, 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 40 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 a limited number of suppliers. For the year ended December 31, 2000, approximately 48% of our sales of non-published fares came from tickets we bought from three airlines. 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. 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. 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 7 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 30% of our revenue for the year ended December 31, 2000 from airline commissions, including incentive overrides, paid by airlines. However, the airlines 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 which recently occurred in the fourth quarter of 2000. This could lead to unusual volatility in revenue and earnings. Gross profit may be impacted by a number of different factors, including: . the number 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; . the amount of volume bonuses; and . changes in service fees and advertising revenue volumes. 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 revenue and earnings. For example, the regulatory changes affecting the energy industry instituted in 1996 by the California government has caused power prices to increase. Under the revised regulatory scheme, utilities were encouraged to sell their plants, which traditionally had produced most of California's power, to independent energy companies that were expected to compete aggressively on price. Instead, due in part to a shortage of supply, wholesale prices have increased dramatically over the past year. If wholesale prices continue to increase, our operating expenses will likely increase, as two of our call centers are located in California. 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. 8 A decline in leisure travel or disruptions in travel generally could hurt our business. We earn almost all our revenue 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 select 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. Some of our competitors have agreements to buy non-published fares from our major suppliers. For example, Priceline.com, Inc. signed an agreement to purchase non-published tickets from Continental, United and American Airlines and others and has granted warrants to purchase Priceline.com common stock to certain carriers, and Hotwire.com acquires non-published fares primarily from five domestic airlines that are its shareholders. Our competitors may be able to induce one or more of our suppliers of non-published fares, through pricing, equity or other incentives, 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. Some of our competitors may be able to devote greater resources to marketing and promotional campaigns on the 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. For a more complete description of the competitive environment in which we operate, please refer to "Business-- Competition." 9 The success of our business will depend on continued growth of online commerce and Internet infrastructure. Our future revenue 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 rate 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 revenue 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 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 intend to expand significantly our advertising expense, including national television and radio promotions, but these expenditures may not result in increased business activity or the desired enhancement of brand recognition. 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; 10 . 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. These developments could render our existing online sites and proprietary technology and systems to become quickly obsolete. Our inability to modify or adapt our infrastructure in a timely manner or the expenses incurred in making such adaptations 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 occurrence 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 Tukwila, Washington and Herndon, Virginia; The SABRE Group'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. The operations of several major online companies have, in the past, been disrupted by "data floods" from hackers, and we may be vulnerable to similar acts of sabotage. In addition, California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. In the event of an acute power shortage, which occurs when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout California. Our California call centers currently do not have backup generators or alternate sources of power in the event of a blackout. 11 We currently do not carry adequate business interruption insurance. 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 damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. 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 third parties to host our online system's infrastructure, web and database servers. We currently rely on SABRE 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 we or SABRE ever elect to terminate the existing relationship, we would be forced to convert to another provider or develop our own solution. This conversion would require a substantial commitment of time and resources and potentially hurt our business. Our current reservation systems may not be able to handle all calls adequately. 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. 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 beyond planned levels of improvement. If we fail to expand and upgrade in a timely manner, our business could be hurt. In addition, we may not be able to: . project accurately the rate or timing of increases in demand; . 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. 12 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. 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, Executive Chairman of the Board, Sam Galeotos, President and Chief Executive Officer, 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 have employment agreements with only certain of our key personnel. In addition, most members of our senior management group have been recruited and hired over the past 24 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 be 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. 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 revenue from such expanded services or products sufficient to offset their development or offering cost could hurt our business. Our alternative products, including cruises, auto rentals and hotel room reservations, represented less than 3% of our gross bookings for the year ended December 31, 2000. Our business strategy is to increase the percentage of such alternate travel offerings as a percentage of our revenue. 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. 13 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; . the inability to generate revenue 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 revenue 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. Alternatively, 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 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." 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 14 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. 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 travel services through an online or Internet service. 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 and Internet commerce. Although currently, there are not many laws and regulations that directly apply to the Internet and commercial online services, 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, advertising, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online and Internet 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 property ownership, sales and other taxes, libel, personal jurisdiction, choice of law and privacy apply to the Internet and commercial online services. These issues may take years to resolve. For example, tax authorities in 15 a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online and Internet 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 legislation could allow state and local government to impose taxes on Internet-based sales, and such taxes could hurt our business. Our stock price is likely to be volatile. The market price of our 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 frequently reach levels that bear no relationship to the operating performance of these companies. These market prices often are not sustainable and are subject to wide variations. Recently, the Nasdaq National Market, in general, and our stock and the stock of our competitors, in particular, has experienced substantial price and volume fluctuations, in many cases without any direct relationship to the affected companies' operating performance. An outgrowth of this market volatility is the significant vulnerability of our stock price and the stock prices of our competitors to any actual or perceived fluctuation in the strength of the markets we serve, no matter how minor in actual or perceived consequence. These broad market and industry factors have and may in the future cause the market price of our stock to decline, regardless of our actual operating performance. 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. At December 31, 2000, Michael J. Hartley, Executive Chairman of the Board of Cheap Tickets, together with his affiliates, beneficially owned approximately 48% of our outstanding common stock, subject to certain 16 adjustments. 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 effectively 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. Anti-takeover provisions affecting us could prevent or delay a change of control. Our Board of Directors has 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. 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. Forward-Looking Statements Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as "anticipate," "believe," "expect," "estimate," "project," "plan" and similar expressions. These forward-looking statements include statements relating to our expectations as to: . future growth in travel products and services other than leisure airline tickets; . our ability to enhance consumer awareness and add new customers through our brand name; . increasing our marketing and advertising expenditures to support our brand name and to obtain a high return for our advertising expenditures; . pursuing a highly targeted Internet-based advertising campaign; . an increasing portion of gross bookings and revenue in future periods will be represented from sources other than airline ticket sales and by online gross bookings and online revenue; . our continuing ability to obtain non-published fares; . increasing operating expenses in anticipation of future sales; . significant growth in the number of users and amount of traffic on the Internet; . the addition of key personnel in the future and our ability to effectively manage the growth of our operations and personnel; . broadening the scope and content of our business through the acquisition of existing and complimentary businesses; . the non-materiality of our interest rate exposure; and . sufficiency of our current cash and cash equivalents, short term marketable securities and anticipated cash flow from operations to meet our anticipated cash needs for working capital, debt service and capital expenditures, at least for the foreseeable future. 17 Management cautions that these forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. Some of the factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following possibilities: . uncertainty regarding demand for our products in general; . actual and potential competition for leisure travel customers and for discount tickets; . the strength and breadth of the market for leisure travel; . the continued growth of online commerce and Internet infrastructure; . the success of our advertising programs and the strength of our brand recognition; . our ability to enter into new supply agreements and to expand, enhance and renew existing supply agreements; . our ability to retain and attract key personnel and to manage growth effectively; . our ability to maintain and renew our technological infrastructure and to maintain the security of our communications network; . our ability to obtain needed services from reliable third parties; and . the availability of sufficient liquidity and capital resources for the future. Some of these factors and additional risks and uncertainties are further discussed under the other factors identified in the "Risk Factors" section beginning on page 7. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties including the risks set forth above. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward- looking statements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations. Item 2. Properties. Cheap Tickets is headquartered in Honolulu, Hawaii, where it leases an aggregate of approximately 38,704 square feet of space housing its corporate offices and a call center. The leases for this space expire in December 2003, with an option to renew. Cheap Tickets also leases an aggregate of approximately 7,300 square feet of retail or storage space in five other locations in Hawaii. In July 1994, Cheap Tickets entered into a lease expiring in September 2004 for approximately 9,600 square feet in Los Angeles, California, to serve as one call center. In June 1999, Cheap Tickets entered into a lease expiring in June 2009 for approximately 25,000 square feet to house its Colorado Springs, Colorado call center. Cheap Tickets also leases an aggregate of approximately 8,800 square feet of retail and administrative space in five other locations in California and approximately 975 square feet of retail space in Seattle in one location. Cheap Tickets owns a 20,000 square-foot facility in Lakeport, California, which serves as a fourth call center. Item 3. Legal Proceedings. Cheap Tickets may from time to time become a party to various legal proceedings arising in the ordinary course of its business. Any such proceeding against Cheap Tickets, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of stockholders during the fourth quarter of 2000. 18 PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. Nasdaq National Market Listing Our common stock trades on the Nasdaq National Market under the symbol "CTIX." The following table sets forth the range of high and low closing sales prices of our common stock, as reported by the Nasdaq National Market, for the periods indicated. As of March 15, 2001, there were approximately 5,178 holders of record of our common stock.
High Low ------ ------ Quarter ended March 31, 1999 (from March 19, 1999).......... $33.63 $25.88 Quarter ended June 30, 1999................................. $45.00 $27.31 Quarter ended September 30, 1999............................ $66.63 $31.06 Quarter ended December 31, 1999............................. $32.63 $12.25 Quarter ended March 31, 2000................................ $18.50 $12.13 Quarter ended June 30, 2000................................. $15.31 $ 9.69 Quarter ended September 30, 2000............................ $13.88 $ 9.50 Quarter ended December 31, 2000............................. $11.13 $ 7.16
Dividends We have never declared or paid dividends on our common stock and anticipate for the foreseeable future that all earnings will be retained for use in our business. The payment of any future dividends will be at the discretion of our board of directors. The Delaware General Corporation Law also restricts our ability to pay dividends. The Delaware General Corporation Law provides that a Delaware Corporation may pay dividends either (1) out of the corporation's surplus (as defined by Delaware law), or (2) if there is no surplus, out of the corporation's net profit for the fiscal year in which the dividend is declared or the preceding fiscal year. Any determination in the future to pay dividends will depend on our financial condition, capital requirements, results of operations, contractual limitations, legal restrictions and any other factors our board of directors deems relevant. 19 Item 6. Selected Financial Data. The historical financial information below and elsewhere in this Annual Report on Form 10-K has been restated to comply with recently issued accounting standards as discussed on page 29 (see Note 1 to the Financial Statements).
Years Ended December 31, ----------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- --------- --------- (in thousands, except per share data, tickets sold and registered internet users) Results of Operations: Revenue: Non-published fares......... $ 9,814 $ 15,009 $ 23,779 $ 45,698 $ 56,179 Commissions and bonuses..... 5,614 6,470 11,268 22,349 29,781 Service fees and other...... 1,228 1,787 3,169 5,960 12,482 -------- -------- -------- --------- --------- Total revenue(1).......... 16,656 23,266 38,216 74,007 98,442 Cost of sales(1).............. 1,880 3,036 4,244 6,790 7,541 -------- -------- -------- --------- --------- Gross profit.................. 14,776 20,230 33,972 67,217 90,901 Selling, general and administrative expenses...... 13,700 21,842 32,336 58,446 80,289 -------- -------- -------- --------- --------- Net operating income (loss)... 1,076 (1,612) 1,636 8,771 10,612 Other income (deductions)..... 37 (3) 169 4,088 8,588 -------- -------- -------- --------- --------- Earnings (loss) before income taxes........................ 1,113 (1,615) 1,805 12,859 19,200 Income taxes.................. 439 (606) 740 5,272 7,188 -------- -------- -------- --------- --------- Net earnings (loss)....... $ 674 $ (1,009) $ 1,065 $ 7,587 $ 12,012 ======== ======== ======== ========= ========= Basic earnings (loss) per share........................ $ 0.05 $ (0.09) $ 0.04 $ 0.33 $ 0.52 Shares used in computing basic earnings (loss) per share.... 14,249 14,847 14,567 20,731 23,171 Diluted earnings (loss) per share........................ $ 0.05 $ (0.09) $ 0.03 $ 0.31 $ 0.51 Shares used in computing diluted earnings (loss) per share.................... 14,249 14,847 17,921 22,060 23,545 Balance Sheet Data Net working capital........... $ 466 $ 2,356 $ 3,473 $ 134,142 $ 138,735 Total Assets.................. 5,999 11,204 13,226 155,610 166,485 Long-term debt................ 1,715 948 1,238 3,893 2,452 Mandatorily redeemable preferred stock(2)........... -- 3,622 4,136 -- -- Stockholders' equity.......... 1,544 812 1,385 138,613 150,795 Other Operating Data (unaudited) Gross bookings(3) Non-published fares......... $ 58,982 $ 96,379 $159,846 $ 317,260 $ 380,272 Published fares............. 46,962 57,295 110,287 178,065 285,254 -------- -------- -------- --------- --------- Total gross bookings...... $105,944 $153,674 $270,133 $ 495,325 $ 665,526 ======== ======== ======== ========= ========= Airline tickets sold.......... 357,551 554,403 960,879 1,828,186 2,134,260 Call centers................ 357,551 551,973 865,015 1,276,007 1,293,673 Internet.................... -- 2,430 95,864 552,179 840,587 Registered Internet users, as of........................... -- 18,891 420,023 2,593,574 8,682,630
- -------- (1) Revenue consists of gross margin on the sale of non-published fares, published fare commissions, net advertising revenue and service fees. Cost of sales consists of distribution costs related to the sale of tickets. Commissions, including incentive overrides, are earned primarily on published fares sold and include certain other payments based on the volume of transactions. (2) The mandatorily redeemable preferred stock was redeemed on March 24, 1999. The redemption price was approximately $4.8 million, including accrued dividends. (3) Gross bookings represents the aggregate retail value of tickets sold under non-published fares and published fares. Revenue as reported in Cheap Tickets' statement of operations represents the gross margin on the sales of non-published fares and commissions earned on the sale of published 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 that year-to-year changes in such information provide a useful measure of market acceptance of Cheap Tickets products. 20 Item 7. 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. Some of the statements under this caption 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 Annual Report. 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 Annual Report. Overview Cheap Tickets is principally engaged in the sale of discount tickets for domestic leisure 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' revenue historically had been generated by ticket sales through Cheap Tickets' four call centers and, to a lesser extent, through 10 walk-in retail stores. In October 1997, Cheap Tickets broadened its ticket distribution by offering online booking at "www.cheaptickets.com." Internet bookings accounted for approximately 29% of total gross bookings in 1999, and approximately 38% during the year ended December 31, 2000. At December 31, 2000, Cheap Tickets had approximately 8.7 million registered online users. Cheap Tickets expects online gross bookings and online revenue to represent an increasing portion of gross bookings and revenue in future periods. Gross bookings represent the aggregate retail value of tickets sold under non-published fares and published fares. Cheap Tickets records as revenue in its statement of operations only the commissions earned by Cheap Tickets on the sale of published fares and gross margin on the sale of non-published fares. Gross bookings are not required by generally accepted accounting principles ("GAAP") 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 that year-to-year changes in such information provide a useful measure of market acceptance of Cheap Tickets' products. Revenue consists of gross margin on non-published fare sales, published fare commissions, net advertising revenue and service fees. Cheap Tickets' cost of sales consists of distribution costs related to the sale of tickets. Commissions, including incentive overrides, are earned primarily on published air fares sold and include certain other payments based on the volume of transactions. Gross profits include (1) the gross profit on non-published sales where Cheap Tickets establishes the markup and retail price, (2) commissions earned on the sale of published fares sold, (3) net advertising revenue and (4) service fees less distribution costs. Cheap Tickets earns higher profits on the sale of non-published fares than on the sale of published fares. 21 Substantially all of Cheap Tickets' gross bookings represent sales of airline tickets. For the years ended December 31, 1999 and 2000, approximately 99% and 97% respectively, of gross bookings arose from airline ticket sales. The remaining gross bookings arose from sales of cruise tickets, auto rentals, hotel reservations and other travel related products. Cheap Tickets expects gross bookings from sources other than airline ticket sales to increase in future periods. Cheap Tickets' selling, general and administrative expenses include all operating and corporate overhead. Major expense categories include compensation, advertising, communications, credit card bank fees and occupancy. Results of Operations The following table sets forth, for the years ended December 31, 1998, 1999 and 2000, information derived from the statement of operations of Cheap Tickets expressed as a percentage of revenue, and the percentage change in such items and in gross bookings for the years ended December 31, 1998, 1999 and 2000, 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) of Total Revenue Over Prior Periods ------------------- ------------------------- Year Ended December 31, Year Ended December 31, ------------------- ------------------------- 1998 1999 2000 1998 to 1999 1999 to 2000 ----- ----- ----- ------------ ------------ Results of Operations: Revenue: Non-published fares.......... 62.2% 61.7% 57.1% 92.2% 22.9% Commissions and bonuses...... 29.5 30.2 30.3 98.3 33.3 Service fees and other....... 8.3 8.1 12.6 88.1 109.4 ----- ----- ----- Total revenue.............. 100.0 100.0 100.0 93.7 33.0 Gross profit................... 88.9 90.8 92.3 97.9 35.2 Selling, general and administrative expenses....... 84.6 79.0 81.6 80.7 37.4 ----- ----- ----- Net operating income....... 4.3 11.9 10.8 436.1 21.0 Net earnings................... 2.8 10.3 12.2 612.4 58.3 Operating Data (unaudited): Gross bookings................. n/a n/a n/a 83.4% 34.4%
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Total Revenue. Total revenue for the year ended December 31, 2000 increased $24.4 million, or 33.0%, to $98.4 million. Non-published fare revenue increased $10.5 million or 22.9% and represented 57.1% of total revenue. The increase in non-published fare revenue was the result of an increase in the number of non-published tickets sold and higher margins on non-published fares from more effective yield management. Gross bookings of non-published fares increased $63.0 million, or 19.9%, to $380.3 million. Non-published fares decreased from 64.1% of gross bookings last year to 57.1% this year. Commissions and bonuses increased $7.4 million, or 33.2%, to $29.8 million. The $7.4 million increase reflected an increase in the amount of published fares sold and an increase in volume incentives received from our global distribution system or GDS supplier. Gross bookings of published fares increased from 35.9% to 42.9% of total gross bookings year over year. Service fees and other revenue includes gross service fees and a small amount of banner advertising. The increase from $6.0 million in 1999 to $12.5 million in 2000 was primarily the result of increases in service fees. Cheap Tickets began banner advertising on its website in the fourth quarter of 2000. 22 Accelerated usage of Internet commerce in the leisure travel market, broader recognition of the Cheap Tickets brand name, particularly through the Internet and advertising to targeted markets contributed to the growth in total revenue. Total revenue through call centers and retail operations increased $8.2 million, or 15.6% to $61.0 million. Of this $8.2 million increase, $5.6 million reflected an increase in sales and $2.6 million represented an increase in service fee revenue. Higher gross bookings in the call centers and higher non-published margins, volume bonuses, and service fees largely accounted for this increase in revenue. Total revenue through the Internet, increased $16.2 million, to $37.4 million. Internet revenue equaled 38.0% of total revenue for the year ended December 31, 2000 compared with 28.7% for the year ended December 31, 1999. Fourth quarter banner advertising resulted in revenue of $133,152. In 2000, the Internet published sales mix increased from 43% to 48% of total Internet bookings. Gross Profit. Gross profit increased $23.7 million, or 35.2% to $90.9 million. As a percentage of total revenue, gross profit increased from 90.8% to 92.3%. Of the increase of $23.7 million, $10.5 million was the result of increased non-published revenue, $7.4 million was from higher published commissions and GDS fees, and $5.8 million was substantially from the margin on service fees. Cost of sales consists of the distribution costs of tickets. Both non- published revenue and commissions in total revenue have no associated costs of sale and are included 100% in gross profit. Selling, General and Administrative Expenses. For the year ended December 31, 2000, selling, general and administrative expenses increased $21.8 million, or 37.4%, to $80.3 million, and increased as a percentage of total revenue from 79.0% to 81.6%. Advertising expenses increased by $7.5 million, representing an increase from 15.0% to 18.9% of total revenue. Compensation and volume related costs increased, but these and all other costs in the aggregate were less than 1999 as a percentage of total revenue. Net Earnings. For the year ended December 31, 2000, Cheap Tickets' net earnings increased $4.4 million, or 58.3% to $12.0 million. This increase reflected: 1) higher total revenue; 2) increased gross profit from higher volumes and margins; 3) increased interest from investments; and 4) a fourth quarter adjustment due to a lower effective tax rate resulting from actions taken to reduce state income taxes. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Total Revenue. Total revenue for the year ended December 31, 1999 increased $35.8 million, or 93.7%, to $74.0 million. Non-published fare revenue increased $21.9 million, or 92.2%, to $45.7 million. The increase in non- published fare revenue reflected a significant increase in the amount of non- published tickets sold. Commissions and bonuses increased $11.1 million, or 98.3%, to $22.3 million. The $11.1 million increase in commissions and bonuses reflected an increase in the amount of published fares sold and an improvement in bonus overrides as a percentage of total revenue. Gross bookings of published fares decreased from 40.8% to 35.9% of total gross bookings. Strong growth in the leisure travel market and particularly in air travel, improving recognition of the Cheap Tickets brand from both increased exposure coincident with becoming a public company and significantly higher advertising expenditures in 1999 compared with 1998, and increasing acceptance of Internet commerce in 1999 all contributed to this growth in total revenue. Total revenue through call centers and retail operations increased $18.1 million, or 52.0% to $52.8 million. The $18.1 million increase reflected the effect of operations in 1999 of a new call center that opened in late May 1998 and increased productivity and staffing in the remainder of the call centers. Total revenue through the Internet increased $17.7 million, to $21.2 million. Total revenue through the Internet represented 28.7% of total revenue for the year ended December 31, 1999 compared with 9.1% for the 23 year ended December 31, 1998. In 1999, the non-published fare component in the Internet sales mix increased from 44% to 57% of total Internet bookings. Gross Profit. Gross profit increased $33.2 million, or 97.9% to $67.2 million. As a percentage of total revenue, gross profit increased from 88.9% to 90.8%. In 1999, a lower percentage of published fares and lower margins on non-published fares reduced the gross profit percent of total revenue, but was offset somewhat by higher performance-based commission income earned. An industry-wide reduction in published fare commissions from 8% to 5% in the fourth quarter of 1999 had a minor impact on the year's results. Selling, General and Administrative Expenses. For the year ended December 31, 1999, selling, general and administrative expenses increased $26.1 million, or 80.1%, to $58.4 million, and decreased as a percentage of total revenue from 84.6% to 79.0%. The decrease in selling, general, and administrative expenses as a percentage of total revenue was primarily attributable to decreases in compensation, telephone and rent expense and most other expenses as a percentage of total revenue. These decreases were partially offset by increases, as a percentage of total revenue, in credit card charges and advertising expenses. Advertising expenses targeted to increase Internet sales were $4.9 million higher for the year ended December 31, 1999, and overall brand advertising, primarily through print media, increased by $2.4 million. Net Earnings. For the year ended December 31, 1999, Cheap Tickets' net earnings increased $6.5 million, or 612.4% to $7.6 million. This increase reflected higher total revenue, increased gross profit from these higher volumes, and lower selling, general, and administrative expenses as a percentage of total revenue as a result of proportionately lower operating leverage. Operating Segments Cheap Tickets' reported segments are comprised of Internet and Call Center/Other operations. 24 The accounting policies of the segments are the same as those used in the preparation of Cheap Tickets' consolidated financial statements. Cheap Tickets evaluates the performance of its operating segments based on segment operating income, which includes sales and marketing expenses and other overhead charges directly attributable to the operating segment. Certain expenses managed outside of the operating segments are excluded, such as corporate expenses, including other income and expense items, unallocated shared expenses, and income taxes. Asset information by operating segment is not reported since Cheap Tickets does not identify assets by segment. Total revenue by segment
Year Ended Year Ended Year Ended December 31, 1998 December 31, 1999 December 31, 2000 ----------------- ----------------- ----------------- Percent Percent Percent In of In of In of Segments Thousands Total Thousands Total Thousands Total - -------- --------- ------- --------- ------- --------- ------- Internet.................. $ 3,481 9% $21,212 29% $37,399 38% Call Center/Other......... 34,735 91% 52,795 71% 61,043 62% ------- --- ------- --- ------- --- Total revenue........... $38,216 100% $74,007 100% $98,442 100% ======= === ======= === ======= === Gross profit by segment Year Ended Year Ended Year Ended December 31, 1998 December 31, 1999 December 31, 2000 ----------------- ----------------- ----------------- Percent Percent Percent In of In of In of Segments Thousands Total Thousands Total Thousands Total - -------- --------- ------- --------- ------- --------- ------- Internet.................. $ 3,087 9% $18,960 28% $34,155 38% Call Center/Other......... 30,885 91% 48,257 72% 56,746 62% ------- --- ------- --- ------- --- Gross profit............ $33,972 100% $67,217 100% $90,901 100% ======= === ======= === ======= === Operating income by segment Year Ended Year Ended Year Ended December 31, 1998 December 31, 1999 December 31, 2000 ----------------- ----------------- ----------------- Percent Percent Percent In of In of In of Segments Thousands Total Thousands Total Thousands Total - -------- --------- ------- --------- ------- --------- ------- Internet.................. $ 1,257 14% $ 7,929 42% $16,325 64% Call Center/Other......... 7,420 86% 11,014 58% 8,999 36% ------- --- ------- --- ------- --- Operating income........ $ 8,677 100% $18,943 100% $25,324 100% ======= === ======= === ======= ===
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 by Segment Total Revenue. Total revenue through the Internet increased $16.2 million, or 76.31% to $37.4 million. Total revenue through the Internet represented 38% of total revenue for the year ended December 31, 2000 compared with 29% for the year ended December 31, 1999. In 2000, revenue increased due to additional advertising spent, growing acceptance of Internet commerce and a significant increase in new registered users to our website. In 2000, published fare gross bookings increased from 43% to 48% of total Internet bookings. Total revenue through call centers increased $8.2 million, or 15.6% to $61.0 million. Of this $8.2 million increase, $5.6 million was produced from increased sales volume and $2.6 million represented an increase in service fee revenue. The increase in revenue was due to increased bookings from advertising and additional staffing, as well as higher non-published margins and volume bonuses. 25 Gross Profit. Gross profit from Internet sales increased $15.2 million, or 80.1% to $34.1 million. As a percentage of total revenue, Internet gross profit increased from 89.4% for the year ended December 31, 1999 to 91.3% for the year ended December 31, 2000. Increased margin was largely due to higher volumes and higher margins on non-published fare revenue combined with increased incentive bonuses and net service fee income. Call center gross profit increased $8.5 million, or 17.6% to $56.7 million. As a percentage of total revenue, gross profit from call centers increased from 91.4% in 1999 to 93.0% in 2000. Increased non-published fare margins, higher incentive bonuses and net service fee income contributed to the increase in gross profit as a percentage of total revenue. Operating Income. Operating income from Internet sales increased $8.4 million, or 105.9% to $16.3 million. As a percentage of total revenue, Internet operating income increased from 37.4% for the year ended December 31, 1999 to 43.7% for the year ended December 31, 2000. Operating expenses as a percentage of total revenue decreased from 52.0% to 47.7%. Call center operating income decreased $2.0 million, or 18.3% to $9.0 million. As a percentage of total revenue, operating income from call centers decreased from 20.9% in 1999 to 14.7% in 2000. Increased compensation costs for reservation agents and customer care staffing, allocated advertising, and other general and administrative costs as a percentage of total revenue reduced operating income. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 by Segment Total Revenue. Total revenue through the Internet increased $17.8 million, or 509.4% to $21.2 million. Sales volumes increased as a result of additional advertising, growing acceptance of Internet commerce, and a significant increase in registered users to our website. The non-published fare component in the Internet sales mix increased from 44% in 1998 to 57% of total Internet bookings in 1999, contributing to the total revenue growth. Total revenue through call centers increased $18.1 million, or 52.0% to $52.8 million. The increase resulted from good consumer demand, increased productivity and staffing in the call centers, and full year versus partial year sales from a fourth call center opened in late May of 1998. Gross Profit. Gross profit from Internet sales increased $15.9 million, or 514.2% to $19.0 million. As a percentage of total revenue, Internet gross profit increased from 88.7% for the year ended December 31, 1998 to 89.4% for the year ended December 31, 1999. A higher percentage of non-published fare revenue via the Internet increased gross profit as a percentage of total revenue along with higher performance-based commission income earned. Call center gross profit increased $17.4 million, or 56.2% to $48.3 million. As a percentage of total revenue, gross profit from call centers increased from 88.9% in 1998 to 91.4% in 1999. An increase in the non- published fare revenue contributed to the increase in gross profit as a percentage of total revenue. Operating Income. Operating income from Internet sales increased $6.7 million, or 530.8% to $7.9 million. As a percentage of total revenue, Internet operating income increased from 36.1% for the year ended December 31, 1998 to 37.4% for the year ended December 31, 1999. Lower operating expenses as a percentage of total revenue contributed to the increased operating income as a percentage of total revenue. Call center operating income increased $3.6 million to $11.0 million. As a percentage of total revenue, operating income from call centers decreased from 21.4% in 1998 to 20.9% in 1999. Operating expenses as a percentage of total revenue increased from 67.5% to 70.5%. 26 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 also tend to follow the same seasonal pattern. 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 revenue and earnings. The following table sets forth selected unaudited quarterly financial information for each of the eight quarters in the period ended December 31, 2000, as well as such data expressed as a percentage of Cheap Tickets' revenue 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 ----------------------------------------------------------------------- 1999 2000 ---------------------------------- ----------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 ------- -------- -------- -------- -------- -------- -------- -------- (unaudited) Results of Operations: Revenue: Non-published fares... $ 8,111 $ 14,387 $ 15,136 $ 8,063 $ 12,912 $ 17,233 $ 18,049 $ 7,985 Commissions and bonuses.............. 4,566 5,155 6,391 6,238 6,262 8,763 7,239 7,517 Service fees and other................ 1,127 1,477 1,841 1,515 2,057 3,583 3,966 2,876 ------- -------- -------- -------- -------- -------- -------- -------- Total revenue........ 13,804 21,019 23,368 15,816 21,231 29,579 29,254 18,378 Cost of sales........... 1,472 1,875 1,999 1,445 1,807 2,247 2,082 1,405 ------- -------- -------- -------- -------- -------- -------- -------- Gross profit............ 12,332 19,144 21,369 14,371 19,424 27,332 27,172 16,973 Selling, general and administrative expenses............... 10,812 14,341 18,235 15,057 17,484 21,405 22,524 18,876 ------- -------- -------- -------- -------- -------- -------- -------- Net operating income (loss)................. 1,520 4,803 3,134 (686) 1,940 5,927 4,648 (1,903) Other income............ 124 687 1,222 2,054 1,915 2,041 2,345 2,287 ------- -------- -------- -------- -------- -------- -------- -------- Earnings before income taxes.................. 1,644 5,490 4,356 1,368 3,855 7,968 6,993 384 Income taxes............ 674 2,251 1,786 561 1,542 3,069 2,727 (150) ------- -------- -------- -------- -------- -------- -------- -------- Net earnings......... $ 970 $ 3,239 $ 2,570 $ 807 $ 2,313 $ 4,899 $ 4,266 $ 534 ======= ======== ======== ======== ======== ======== ======== ======== Basic earnings per share.................. $ 0.02 $ 0.15 $ 0.11 $ 0.03 $ 0.10 $ 0.21 $ 0.18 $ 0.02 Diluted earnings per share.................. $ 0.01 $ 0.15 $ 0.11 $ 0.03 $ 0.10 $ 0.21 $ 0.18 $ 0.02 Operating Data: Gross bookings.......... $89,740 $135,296 $149,646 $120,643 $158,617 $193,096 $180,295 $133,517 ======= ======== ======== ======== ======== ======== ======== ========
27
As a Percentage of Total Revenue Quarter Ended ----------------------------------------------------------------- 1999 2000 -------------------------------- -------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 ------- ------- -------- ------- ------- ------- -------- ------- (unaudited) Revenue: Non-published fares... 58.8% 68.4% 64.8% 51.0% 60.8% 58.3% 61.7% 43.4% Commissions and bonuses.............. 33.1 24.5 27.3 39.4 29.5 29.6 24.7 40.9 Service fees and other................ 8.2 7.0 7.9 9.6 9.7 12.1 13.6 15.6 ----- ----- ----- ----- ----- ----- ----- ----- Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of sales........... 10.7 8.9 8.6 9.1 8.5 7.6 7.1 7.6 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ 89.3 91.1 91.4 90.9 91.5 92.4 92.9 92.4 Selling, general and administrative expenses............... 78.3 68.2 78.0 95.2 82.4 72.4 77.0 102.7 ----- ----- ----- ----- ----- ----- ----- ----- Net operating income (loss)................. 11.0 22.9 13.4 -4.3 9.1 20.0 15.9 -10.4 Other income............ 0.9 3.3 5.2 13.0 9.0 6.9 8.0 12.4 ----- ----- ----- ----- ----- ----- ----- ----- Earnings before income taxes.................. 11.9 26.1 18.6 8.6 18.2 26.9 23.9 2.1 Income taxes............ 4.9 10.7 7.6 3.5 7.3 10.4 9.3 -0.8 ----- ----- ----- ----- ----- ----- ----- ----- Net earnings......... 7.0% 15.4% 11.0% 5.1% 10.9% 16.6% 14.6% 2.9% ===== ===== ===== ===== ===== ===== ===== =====
- -------- Note: Percentages may not add due to rounding. Liquidity and Capital Resources For the year ended December 31, 2000, Cheap Tickets generated cash from operating activities of $9.7 million, compared with $10.5 million for the year ended December 31, 1999. For the year ended December 31, 2000, cash generated from operating activities was comprised principally of net earnings of $12.0 million plus depreciation of $2.9 million less an increase in trade accounts receivable of $2.5 million and net changes in working capital and other accounts. For the year ended December 31, 1999, cash generated from operating activities was comprised principally of net earnings of $7.6 million plus depreciation of $1.6 million and net changes in working capital and other accounts. The primary trade account receivable is the volume-based commission earned on the sale of airline tickets. The timing of the current receipts relative to month-end or changes in sales volume can cause fluctuations in month-end balances. For the year ended December 31, 2000, Cheap Tickets used cash in investing activities of $8.7 million, while in the prior period we used cash in investing activities of $96.8 million. Cash used in investing activities for the year ended December 31, 2000 included net purchases of short term marketable securities of $1.4 million and capital expenditures of $7.4 million. For the year ended December 31, 1999, net purchases of short-term marketable securities were $93.6 million and capital expenditures were $3.2 million. In 1999, Cheap Tickets received net proceeds from an initial public offering and a follow-on offering of $144.6 million, after deduction of underwriters' fees and other costs of issuance less $4.8 million to redeem mandatorily redeemable preferred stock and accumulated dividends. At December 31, 2000, Cheap Tickets maintained on hand cash and cash equivalents of $40.3 million and short term marketable securities of $100.5 million. Cheap Tickets' net working capital was $138.7 million. Cheap Tickets had outstanding long-term debt and capital lease obligations, net of current installments, of $491,000 and $1,961,000, respectively. In January 2000, Cheap Tickets completed a stock repurchase program. Cheap Tickets repurchased 1,037,288 shares of its outstanding common stock for an aggregate price of $14.7 million through periodic open market transactions. All funds required for the repurchase of common stock were obtained from available cash resources and marketable securities. 28 Cheap Tickets believes that its current cash and cash equivalents, short term marketable securities and anticipated cash flow from operations will be sufficient to meet its anticipated cash needs for working capital, debt service and capital expenditures, at least for the foreseeable future. Cheap Tickets spent approximately $7.4 million and $3.2 million for capital expenditures in 2000 and 1999, respectively, nearly all of which was used for technological improvements and upgrades. If cash generated from internal operations is not sufficient to satisfy Cheap Tickets' liquidity requirements, Cheap Tickets may seek to acquire 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' stockholders. There is no assurance that financing will be available in amounts or on terms acceptable to Cheap Tickets, if at all. Recently Issued Accounting Standards Cheap Tickets implemented several new accounting pronouncements in the fourth quarter of 2000 that affected its revenue recognition policies. These new pronouncements included EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" SAB 101 "Revenue Recognition in Financial Statements," and EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." To promote the comparability of our financial statements, all periods presented have been restated to conform with these new pronouncements. EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" required that we report our revenue from sales of non-published fares on a net basis. Accordingly, only the net margin on the sale of non-published fares is reported as revenue. Previously we reported the sales of these fares on a gross basis, whereby the gross booking or retail amount was reported as revenue, and the amount we paid to the airline carrier was reported as cost of sales. The implementation of EITF 99-19 did not affect the reporting of commissions on published fares, which was and continues to be reported on a net basis. SAB 101 "Revenue Recognition in Financial Statements" required us to delay recognition of revenue until tickets had been delivered to our customers. Previously, we reported revenue once the reservation was ticketed and payment was received. This change in our policy did not have a material impact on our financial statements. Under EITF 00-10 "Accounting for Shipping and Handling Fees and Costs," we now report distribution, handling and service fees as revenue. The related cost of distribution is reported as cost of sales. Previously we reported distribution costs as part of selling, general and administrative expenses with the fees charged to our customers as an offset to that expense. There are a number of other recently issued accounting pronouncements that affect companies like Cheap Tickets, including EITF 99-17 "Accounting for Barter Transactions," EITF 00-14 "Accounting for Certain Sales Incentives," EITF 00-21 "Accounting for Multiple-Element Revenue Arrangements," FIN 44 "Accounting for Certain Transactions involving Stock Compensation," EITF 00-23 "Issues Related to the Accounting for Stock Compensation under APB 25 and FIN 44," EITF 00-02 "Accounting for Website Development Costs," and SFAS 133 "Accounting for Derivative Instruments and Hedging Activities." These accounting pronouncements did not or will not have a material effect on our financial statements as we either do not enter into such transactions, or we have previously been in compliance with the guidance of these pronouncements. 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Cheap Tickets does not use derivative financial instruments. We generally place our marketable security investments in high credit quality instruments, primarily U.S. Government obligations and corporate obligations with contractual maturities of less than one year. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is not material. Item 8. Financial Statements and Supplementary Data. See pages F-1 through F-21 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this Annual Report. We incorporate by reference in Items 10 to 13 below certain sections of our definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31, 2000. Item 10. Directors and Executive Officers. Information required by this Item 10 is incorporated by reference in this Annual Report from our definitive proxy statement to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31, 2000. Item 11. Executive Compensation. Information required by this Item 11 is incorporated by reference in this Annual Report from our definitive proxy statement to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required by this Item 12 is incorporated by reference in this Annual Report from our definitive proxy statement to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31, 2000. Item 13. Certain Relationships and Related Transactions. Information required by this Item 13 is incorporated by reference in this Annual Report from our definitive proxy statement to be filed pursuant to Regulation 14A with the SEC within 120 days after December 31, 2000. 30 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements Our financial statements, the management statement, and the report of independent accountants are set forth on pages F-1 through F-21 (See index on page F-1). (a)(2) Financial Statement Schedules All schedules to our financial statements are omitted because of the absence of the conditions under which they are required. (a)(3) List of Exhibits See Exhibit Index. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2000. (c) Exhibits Reference is made to the Exhibits index and exhibits filed as a part of this Annual Report. (d) Additional Financial Statements Not applicable. Exhibits
Exhibit No. Description Note No. ----------- ----------- -------- 3.1(1) Certificate of Incorporation. 3.2(1) Form of First Amended and Restated Certificate of Incorporation. 3.3(1) Bylaws. 3.4(1) Form of First Amended and Restated Bylaws. 10.1(1)# 1997 Stock Option Plan. 10.2(2)# Amended and Restated 1999 Stock Incentive Plan. 10.3(1)# Form of Severance Agreement for Michael J. Hartley and Sandra T. Hartley. 10.4(1)# Form of Indemnification Agreement. 10.5(3) 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, the 2nd Amendment to the Commerce Tower Office Lease dated October 9, 1997, the 3rd Amendment of Commerce Tower Office Lease dated December 2, 1998, the Amendment of Commerce Tower Office Lease for Additional Premises, Suite 901 dated July 14, 1999, and the Amendment of Commerce Tower Office Lease for Additional Premises, Suite 915 dated July 14, 1999. 10.6(1) Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap Tickets, Inc. 10.7(1) 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.
31
Exhibit No. Description Note No. ----------- ----------- -------- 10.8(3) Commercial Lease Agreement dated December 22, 1998 between Connell Development Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the Commercial Lease Agreement dated May 17, 1999. 10.9(1)+ 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(1)+ 1999 Net Consolidator Agreement dated November 1, 1998 between Trans World Airlines, Inc. and Cheap Tickets, Inc. 10.11(1)+ Consolidator Agreement dated December 14, 1998 between America West Airlines, Inc. and Cheap Tickets, Inc. 10.12(1) 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(1)+ 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(1)+ Agreement for Negotiated Fares Maintenance dated July 15, 1994 between SABRE Travel Information Network and CTI Corporation. 10.15(1) Sabre TravelBase System Lease Agreement between SABRE Travel Information Network and Cheap Tickets, Inc. 10.16(4)+ 2000 Net Consolidator Program Agreement dated June 23,1999 between Trans World Airlines, Inc. and Cheap Tickets, Inc. 10.17(5)# Employment Agreement dated as of October 25, 1999 between Sam E. Galeotos and Cheap Tickets, Inc. 10.17.1# Amendment No. 1 to Employment Agreement dated as of October 18, 2000 by and between Cheap Tickets, Inc. and Sam E. Galeotos. 10.18(5)# Promissory Note dated October 31, 1999 by Sam E. Galeotos to Cheap Tickets, Inc. 10.19(5)+ Consolidator Agreement dated February 4, 2000 between America West Airlines, Inc. and Cheap Tickets, Inc. 10.20(6)# Employment Agreement dated as of January 24, 2000 between Paul B. Halstead and Cheap Tickets, Inc. 10.20.1# Amendment No. 1 to Employment Agreement dated as of September 29, 2000 by and between Cheap Tickets, Inc. and Paul B. Halstead. 10.21(6)# Employment Agreement dated as of January 24, 2000 between Jason D. Horstman and Cheap Tickets, Inc. 23.1 Consent of PricewaterhouseCoopers LLP.
- -------- (1) Incorporated by reference from Registration Statement No. 333-70841, as amended, originally filed with Securities and Exchange Commission on January 20, 1999. (2) Incorporated by reference from definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 7, 2000. (3) Incorporated by reference from Registration Statement No. 333-84323, as amended, originally filed with Securities and Exchange Commission on August 3, 1999. 32 (4) Incorporated by reference from Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 15, 1999. (5) Incorporated by reference from Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000. (6) Incorporated by reference from Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2000. # Management contract or compensatory plan or arrangement. + Portions have been omitted pursuant to a confidential treatment request. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 30, 2001. CHEAP TICKETS, INC. /s/ Michael J. Hartley By: _________________________________ Name: Michael J. Hartley Title: Executive Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Michael J. Hartley March 30, 2001 ___________________________________________ Michael J. Hartley Executive Chairman of the Board /s/ Sam E. Galeotos March 30, 2001 ___________________________________________ Sam E. Galeotos President and Chief Executive Officer and Director /s/ Samuel D. Horgan March 30, 2001 ___________________________________________ Samuel E. Horgan Vice President of Finance and Chief Financial Officer /s/ Cece Smith March 30, 2001 ___________________________________________ Cece Smith Director /s/ George R. Mrkonic March 30, 2001 ___________________________________________ George R. Mrkonic Director /s/ Giles H. Bateman March 30, 2001 ___________________________________________ Giles H. Bateman Director /s/ A. Maurice Myers March 30, 2001 ___________________________________________ A. Maurice Myers Director /s/ Jeffrey Watanabe March 30, 2001 ___________________________________________ Jeffrey Watanabe Director
34 CHEAP TICKETS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Stockholders' Equity............................ F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to the Consolidated Financial Statements............................. F-8
F-1 Report of Independent Accountants The Stockholders and Board of Directors Cheap Tickets, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Cheap Tickets, Inc. and subsidiary at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's 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 auditing standards generally accepted in the United States of America 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. Honolulu, Hawaii February 6, 2001 F-2 CHEAP TICKETS, INC. CONSOLIDATED BALANCE SHEETS December 31, 1999 and 2000
1999 2000 ------------ ------------ ASSETS ------ Current Assets: Cash and cash equivalents........................ $ 40,717,517 $ 40,324,823 Marketable securities (Note 2)................... 98,579,668 100,485,312 Trade accounts and other receivables............. 4,519,775 6,994,705 Refundable income taxes ......................... 355,568 659,115 Ticket inventories............................... 348,263 464,313 Other current assets ............................ 1,370,158 2,119,395 ------------ ------------ Total current assets........................... 145,890,949 151,047,663 Property and equipment, net (Notes 3 and 4)........ 9,263,101 13,570,529 Other assets....................................... 456,665 1,867,229 ------------ ------------ $155,610,715 $166,485,421 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable................................. $ 7,131,497 $ 7,357,882 Accrued salaries................................. 1,763,380 1,596,056 Accrued vacation................................. 540,000 680,000 Accrued expenses and other liabilities........... 376,592 837,172 Current installments of long-term debt (Note 4).. 132,806 25,774 Current installments of capital lease obligations (Note 9)........................................ 1,405,080 1,415,210 Deferred revenue, current........................ 400,000 400,000 ------------ ------------ Total current liabilities...................... 11,749,355 12,312,094 Long-term debt, excluding current installments (Note 4).......................................... 516,503 491,330 Capital lease obligations, excluding current installments (Note 9)............................. 3,376,119 1,960,477 Deferred revenue, non-current ..................... 1,200,000 800,000 Other noncurrent liabilities....................... 155,879 126,485 ------------ ------------ Total liabilities.............................. 16,997,856 15,690,386 ------------ ------------ Commitments and contingencies (Notes 8, 9, and 12) Stockholders' Equity (Notes 5, 6, 10 and 11): Preferred stock, $0.01 par value Authorized--10,000,000 shares Issued--none in 1999 and 2000................... -- -- Common stock, $0.001 par value Authorized--70,000,000 shares Issued--24,025,413 shares in 1999 and 24,250,362 shares in 2000................................. 24,025 24,250 Additional paid-in capital....................... 146,002,475 145,873,281 Unearned compensation............................ (382,094) (82,906) Retained earnings................................ 7,708,455 19,720,412 Treasury stock, at cost--1,037,288 common shares in 1999 and 2000................................ (14,740,002) (14,740,002) ------------ ------------ Total stockholders' equity..................... 138,612,859 150,795,035 ------------ ------------ $155,610,715 $166,485,421 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 CHEAP TICKETS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998, 1999 and 2000
1998 1999 2000 ----------- ----------- ----------- Revenue: Non-published fares.................. $23,778,674 $45,698,235 $56,179,308 Commissions and bonuses.............. 11,268,472 22,349,477 29,780,600 Service fees and other............... 3,169,185 5,960,082 12,482,253 ----------- ----------- ----------- Total revenue...................... 38,216,331 74,007,794 98,442,161 Cost of sales.......................... 4,244,673 6,790,759 7,541,402 ----------- ----------- ----------- Gross profit........................... 33,971,658 67,217,035 90,900,759 Selling, general and administrative expenses.............................. 32,335,625 58,445,947 80,289,421 ----------- ----------- ----------- Net operating income................... 1,636,033 8,771,088 10,611,338 Other income (deductions): Interest income...................... 374,269 4,310,746 9,113,987 Interest expense..................... (148,253) (261,256) (374,932) Loss on sale or disposal of property and equipment....................... (48,786) (19,839) (124,109) Loss on sale of marketable securities.......................... -- (18,512) (77,703) Other, net........................... (7,731) 76,994 51,349 ----------- ----------- ----------- 169,499 4,088,133 8,588,592 ----------- ----------- ----------- Earnings before income taxes........... 1,805,532 12,859,221 19,199,930 Income taxes (Note 7).................. 740,268 5,272,281 7,187,973 ----------- ----------- ----------- Net earnings........................... 1,065,264 7,586,940 12,011,957 Preferred dividends.................... (340,000) (78,712) -- Accretion of mandatorily redeemable cumulative preferred stock discount... (174,132) (36,657) -- Redemption of mandatorily redeemable cumulative preferred stock............ -- (587,315) -- ----------- ----------- ----------- Income available to common shares...... $ 551,132 $ 6,884,256 $12,011,957 =========== =========== =========== Basic earnings per common share........ $ 0.04 $ 0.33 $ 0.52 =========== =========== =========== Average common shares outstanding...... 14,567,084 20,731,375 23,171,498 =========== =========== =========== Diluted earnings per common share...... $ 0.03 $ 0.31 $ 0.51 =========== =========== =========== Average diluted common shares outstanding........................... 17,920,868 22,060,051 23,544,887 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 CHEAP TICKETS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1998, 1999 and 2000
Common Stock Additional ------------------- Paid-in Unearned Retained Treasury Total Shares Amount Capital Compensation Earnings Stock Stockholders' ---------- ------- ------------ ------------ ----------- ------------ ------------- Balance at December 31, 1997................... 1,060,523 $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 cumulative preferred stock (Note 5)......... -- -- -- (340,000) -- (340,000) Reversal of amortization of unearned compensation (Note 10).................... -- -- (3,820) -- -- (3,820) Forfeiture of common stock (Note 10)........ (26,689) (267) (22,680) 22,947 -- -- -- Stock option compensation (Note 11).................... -- 722,600 (722,600) -- -- -- Amortization of unearned stock option compensation........... -- -- 26,325 -- -- 26,325 ---------- ------- ------------ --------- ----------- ------------ ------------ Balance at December 31, 1998................... 1,033,834 10,338 1,246,937 (696,275) 824,199 -- 1,385,199 Net earnings............ -- -- -- 7,586,940 -- 7,586,940 14-for-1 common stock split.................. 13,439,842 4,136 (4,136) -- -- -- -- Accretion to mandatorily redeemable cumulative preferred stock redemption price (Note 5)..................... -- -- -- (36,657) -- (36,657) Accrual of dividends on mandatorily redeemable cumulative preferred stock (Note 5)......... -- -- -- (78,712) -- (78,712) Redemption of mandatorily redeemable cumulative preferred stock (Note 5)......... -- -- -- (587,315) -- (587,315) Exercise of common stock warrants (Note 5)...... 2,969,375 2,969 (848) -- -- -- 2,121 Sale of common stock under public offerings, net of expenses (Note 6)..................... 6,525,000 6,525 144,603,522 -- -- -- 144,610,047 Exercise of stock options................ 56,560 56 13,565 -- -- -- 13,621 Other issuance of common stock.................. 802 1 12,982 -- -- -- 12,983 Purchase of 1,037,288 treasury shares........ -- -- -- -- (14,740,002) (14,740,002) Income tax benefit for stock option compensation........... -- 350,674 -- -- -- 350,674 Amortization and forfeiture of unearned stock option compensation........... -- (220,221) 314,181 -- -- 93,960 ---------- ------- ------------ --------- ----------- ------------ ------------ Balance at December 31, 1999................... 24,025,413 24,025 146,002,475 (382,094) 7,708,455 (14,740,002) 138,612,859 Net earnings............ -- -- -- 12,011,957 -- 12,011,957 Expense related to 1999 public offerings....... -- (10,682) -- -- -- (10,682) Exercise of stock options................ 218,100 218 55,335 -- -- -- 55,553 Other issuance of common stock.................. 6,849 7 80,493 -- -- -- 80,500 Amortization and forfeiture of unearned stock option compensation........... -- (254,340) 299,188 -- -- 44,848 ---------- ------- ------------ --------- ----------- ------------ ------------ Balance at December 31, 2000................... 24,250,362 $24,250 $145,873,281 $ (82,906) $19,720,412 $(14,740,002) $150,795,035 ========== ======= ============ ========= =========== ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-5 CHEAP TICKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1999 and 2000
1998 1999 2000 ----------- ------------- ------------- Cash flows from operating activities: Net earnings...................... $ 1,065,264 $ 7,586,940 $ 12,011,957 Adjustments to reconcile net earnings to net cash provided by operating activities-- Deferred income taxes............ (102,049) (151,875) (157,786) Depreciation and amortization.... 563,514 1,630,599 2,861,288 Stock option compensation........ 26,325 93,960 44,848 Stock compensation expense (benefit)....................... (3,820) -- -- Amortization of discount on marketable securities........... (51,029) (38,703) (614,076) Loss on sale or disposal of property and equipment.......... 48,786 19,839 124,109 Loss on sale of marketable securities...................... -- 18,512 77,703 Changes in: Trade accounts and other receivables................... (269,202) (3,595,427) (2,474,930) Refundable income taxes........ 663,209 (4,894) (303,547) Ticket inventories............. (166,560) (61,932) (116,050) Other current assets........... (289,087) (422,787) (591,451) Other noncurrent assets........ (242,743) (79,900) (1,411,656) Accounts payable............... 295,276 2,450,443 226,385 Accrued salaries............... 61,712 1,364,213 (167,324) Accrued vacation............... 342,120 118,712 140,000 Income taxes payable........... 139,640 (139,640) -- Accrued expenses and other liabilities................... 81,416 154,271 460,580 Deferred revenue............... -- 1,600,000 (400,000) Other noncurrent liabilities... (155,284) (7,886) (29,394) ----------- ------------- ------------- Net cash provided by operating activities........ 2,007,488 10,534,445 9,680,656 ----------- ------------- ------------- Cash flows from investing activities: Capital expenditures.............. (484,817) (3,159,988) (7,424,733) Proceeds from sale of property and equipment........................ 551,214 10,900 133,000 Purchases of marketable securities....................... (4,884,200) (119,209,534) (133,491,545) Proceeds from sale of marketable securities....................... -- 25,585,286 132,122,274 ----------- ------------- ------------- Net cash used in investing activities.................. (4,817,803) (96,773,336) (8,661,004) ----------- ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock, net of expenses paid...... -- 144,638,771 125,371 Redemption of mandatorily redeemable cumulative preferred stock............................ -- (4,838,712) -- Purchases of treasury stock....... -- (14,740,002) -- Proceeds from issuance of long- term debt........................ 307,200 235,875 -- Principal payments on long-term debt............................. (627,138) (393,591) (132,205) Principal payments on capital lease obligations................ (150,165) (919,921) (1,405,512) ----------- ------------- ------------- Net cash provided by (used in) financing activities.... (470,103) 123,982,420 (1,412,346) ----------- ------------- ------------- Net increase (decrease) in cash and cash equivalents... (3,280,418) 37,743,529 (392,694) Cash and cash equivalents at beginning of period................ 6,254,406 2,973,988 40,717,517 ----------- ------------- ------------- Cash and cash equivalents at end of period............................. $ 2,973,988 $ 40,717,517 $ 40,324,823 =========== ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-6 CHEAP TICKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1998, 1999 and 2000
1998 1999 2000 -------- ---------- ---------- Supplemental cash flow information: Cash paid during the year for: Interest.................................... $145,447 $ 264,062 $ 374,932 Income taxes, net of refunds received....... 39,467 5,538,910 7,223,419 Noncash investing and financing activities: Unearned compensation for stock options granted.................................... 722,600 -- -- Acquisitions of new equipment through capital leases............................. 608,069 4,760,952 -- Accrued and unpaid dividends on mandatorily redeemable preferred stock................. 340,000 -- --
The accompanying notes are an integral part of the consolidated financial statements. F-7 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Business Cheap Tickets, Inc. ("Cheap Tickets" or "the Company" or "we/our") 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. The Company sells directly to consumers through its Internet site, its 4 call centers and at its 10 retail stores. We deal with over 100 airline carriers. Revenues from non-published fares through three of these airline carriers accounted for approximately 49%, 49% and 48% of total non-published fares for 1998, 1999 and 2000, respectively. In April 2000, the Company formed a subsidiary, Cheap Tickets Europe, Ltd., which was incorporated under the laws of the United Kingdom. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the useful lives of property and equipment, the valuation allowance for deferred tax assets and the allowance for doubtful receivables. Management believes that such estimates have been appropriately determined in accordance with generally accepted accounting principles. Cash Equivalents We consider all highly liquid debt securities with original maturities of three months or less to be cash equivalents. Marketable Securities Our 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 amortized cost, which approximates fair value due to their relatively short maturities. Ticket Inventories Ticket inventories, consisting of prepaid Hawaii inter-island airline coupons, are stated at the lower of cost or market. We do 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. F-8 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Trade Accounts and Other Receivables Trade accounts and other receivables primarily consist of commissions and volume bonuses from travel service providers. The Company does not extend credit to customers. There were no allowances for doubtful accounts receivable at December 31, 1999 and 2000. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. The Company's policy is to place its cash, cash equivalents and investments with high quality financial institutions, governmental agencies and corporate entities and to limit the amount of credit exposure. Cash balances are generally in excess of available insured depository limits. 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. When fixed assets are sold or retired, cost and accumulated depreciation are eliminated from the accounts, and gains or losses are recorded in income. Website maintenance costs are expensed as incurred. 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
Revenue Recognition The Company implemented several new accounting pronouncements in the fourth quarter of 2000 that affected its revenue recognition policies. These new pronouncements included EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent", SAB 101 "Revenue Recognition in Financial Statements", and EITF 00-10 "Accounting for Shipping and Handling Fees and Costs". To promote the comparability of our financial statements, all periods presented have been restated to conform with these new pronouncements. EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" required that we report our revenue from sales of non-published fares on a net basis. Accordingly, only the net margin on the sale of non-published fares is reported as revenue. Previously we reported the sales of these fares on a gross basis, whereby the gross booking or retail amount was reported as revenue, and the amount we paid to the airline carrier was reported as cost of sales. The implementation of EITF 99-19 did not affect the reporting of commissions on published fares, which was and continues to be reported on a net basis. SAB 101 "Revenue Recognition in Financial Statements" required us to delay recognition of revenue until tickets had been delivered to our customers. Previously, we reported revenue once the reservation was ticketed and payment was received. This change in our policy did not have a material impact on our financial statements. F-9 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" we now report distribution, handling and service fees as revenue. The related cost of distribution is reported as cost of sales. Previously we reported distribution costs as part of selling, general and administrative expenses with the fees charged to our customers as an offset to that expense. Revenue is reported net of an allowance for cancellations and refunds. Due to the restrictive nature of our sales, which are generally noncancelable and nonrefundable, cancellations and refunds are not significant. Volume bonus and override revenue are recognized at the end of each monthly or quarterly measurement period if the specified target has been achieved. Bonuses received in connection with contract acceptances or extensions are deferred and recognized as income over the life of the contract. Advertising revenue from internet banner advertising is reported on a net basis, which is the net amount remitted to the Company by its advertising service provider. Such revenue has been immaterial to date. Advertising Advertising costs are expensed as incurred. Advertising expenses amounted to $3,823,150, $11,132,308 and $18,616,812 for 1998, 1999 and 2000, respectively. 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 adheres to the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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. Fair Value of Financial Instruments The fair values of Cheap Tickets' long-term debt approximate 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 CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Foreign Currency Translation The functional currency of the Company's U.K. subsidiary is the local currency. Assets and liabilities of the foreign subsidiary are translated into US dollars at year-end exchange rates, and revenue and expenses are translated at average rates prevailing during the year. Translation adjustments have been immaterial to date. Per Share Data The following is a reconciliation of the numerator and denominators of basic and diluted earnings per common share:
Income Shares Per Share Years ended December 31, (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 income and assumed conversions.... $ 551,132 17,920,868 $0.03 =========== ========== ===== Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- 1999: Basic Income available to common shares..... $ 6,884,256 20,731,375 $0.33 ===== Effect of dilutive securities Common stock warrants................. -- 658,975 Stock options......................... -- 625,112 Option--IPO overallotment............. -- 44,589 ----------- ---------- Diluted Net income and assumed conversions.... $ 6,884,256 22,060,051 $0.31 =========== ========== ===== Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- 2000: Basic Income available to common shares..... $12,011,957 23,171,498 $0.52 ===== Effect of dilutive securities Stock options......................... -- 373,389 ----------- ---------- Diluted Net income and assumed conversions.... $12,011,957 23,544,887 $0.51 =========== ========== =====
Net earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. F-11 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) New Pronouncements There are a number of recently issued accounting pronouncements that affect companies like Cheap Tickets, including EITF 99-17 "Accounting for Barter Transactions", EITF 00-14 "Accounting for Certain Sales Incentives", EITF 00- 21 "Accounting for Multiple-Element Revenue Arrangements", FIN 44 "Accounting for Certain Transactions involving Stock Compensation", EITF 00-23 "Issues Related to the Accounting for Stock Compensation under APB 25 and FIN 44", EITF 00-02 "Accounting for Website Development Costs", and SFAS 133 "Accounting for Derivative Instruments and Hedging Activities". These accounting pronouncements did not or will not have a material effect on our financial statements as we either do not enter into such transactions, or we have previously been in compliance with the guidance of these pronouncements. Reclassifications Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform with the 2000 presentation. These reclassifications had no effect on net earnings as previously reported. 2. Marketable Securities A summary of marketable securities at December 31 follows:
1999 2000 ----------- ------------ Fixed income securities: Corporate notes and obligations.................. $70,161,197 $ 82,637,290 U.S. government obligations...................... 8,752,838 3,293,552 State and municipal obligations ................. 7,200,000 -- Commercial paper................................. 7,065,633 14,554,470 ----------- ------------ 93,179,668 100,485,312 Equity securities: Preferred stocks................................. 5,400,000 -- ----------- ------------ $98,579,668 $100,485,312 =========== ============
All fixed income securities at December 31, 2000 have contractual maturities of less than one year. The cost of securities sold is based on the specific identification method. There were no sales of securities in 1998. Sales of securities for 1999 and 2000 are summarized below:
1999 2000 ----------- ------------ Fixed income securities: Cash proceeds..................................... $14,585,286 $126,722,274 Gross realized gains.............................. -- 19,859 Gross realized losses............................. 18,214 97,562 Equity securities: Cash proceeds..................................... $11,000,000 $ 5,400,000 Gross realized gains.............................. -- -- Gross realized losses............................. 298 --
F-12 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Property and Equipment A summary of property and equipment at December 31, 1999 and 2000 is as follows:
1999 2000 ----------- ----------- Land ............................................... $ 158,239 $ 158,239 Building improvements............................... 767,601 782,407 Leasehold improvements.............................. 723,630 913,919 Furniture, fixtures and equipment (Note 9).......... 10,493,752 17,404,796 Vehicles............................................ 197,620 197,620 ----------- ----------- 12,340,842 19,456,981 Less accumulated depreciation and amortization...... 3,077,741 5,886,452 ----------- ----------- $ 9,263,101 $13,570,529 =========== ===========
Depreciation and amortization expense amounted to $563,514, $1,630,599 and $2,861,288 for 1998, 1999 and 2000, respectively. 4. Debt Long-term debt at December 31, 1999 and 2000 consists of the following:
1999 2000 -------- -------- Bank Debt: 3.125% above an indexed rate (total rate of 9.875% at December 31, 2000) note payable in monthly installments of $6,308, including interest, due May 1, 2012, collateralized by a first mortgage on land and building................................................ $540,904 $517,104 6.80% note payable in monthly installments of $16,448 including interest, due May 28, 2000.................... 80,859 -- Other: 8.25% note payable in monthly installments of $13,930 including interest, due February 28, 2000............... 27,546 -- -------- -------- Total long-term debt..................................... 649,309 517,104 Less current installments of long-term debt.............. 132,806 25,774 -------- -------- Long-term debt, excluding current installments........... $516,503 $491,330 ======== ========
The aggregate maturities of long-term debt subsequent to December 31, 2000 are as follows:
Year ending December 31 ----------------------- 2001.............................................................. $ 25,774 2002.............................................................. 28,438 2003.............................................................. 31,376 2004.............................................................. 34,619 2005.............................................................. 38,197 Later years....................................................... 358,700 -------- $517,104 ========
F-13 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 was being accreted by periodic charges to retained earnings. The accretion amounted to $174,132, $36,657 and none for 1998, 1999 and 2000, respectively. The preferred stock had a par value of $1 per share, was nonvoting and accrued cumulative annual dividends of $.80 per share. Accrued dividends amounted to $340,000, $78,712 and none for 1998, 1999 and 2000, respectively. Undeclared cumulative dividends amounted to $510,000 at December 31, 1998 and were accrued as an addition to preferred stock in the accompanying balance sheets. By its terms, the preferred stock was required to be redeemed at the time of an initial public offering of Cheap Tickets' common stock. The initial public offering of Cheap Tickets' common stock occurred on March 19, 1999. The redemption price was equal to its price of issuance, $4,250,000, plus accrued dividends of $589,000 at March 24, 1999, the date of redemption. Unamortized accretion of $587,315 on March 24, 1999 was charged against retained earnings. Coincident with the redemption of the preferred stock, the warrants were exercised and 2,969,375 shares were issued in a cashless exercise. 6. Stockholders' Equity 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 split. As described in Note 10, 373,646 shares were forfeited by an officer upon his resignation in March 1998. Public Offerings On March 19, 1999, Cheap Tickets completed an initial public offering of its common stock in which 3,500,000 shares were issued at an offering price of $15 per share. The offering raised $47.7 million after underwriting discounts and other related costs of issuance. Concurrently with the issuance of 3,500,000 shares in the offering, warrants for 2,969,375 shares were exercised. In connection with the initial public offering, the underwriters had the option to purchase an additional 525,000 shares of common stock. They exercised this option on April 19, 1999. Net proceeds to Cheap Tickets were $7.3 million after underwriting discounts and other costs of issuance. On August 20, 1999, Cheap Tickets completed a secondary public offering of its common stock, whereby 5,750,000 shares were sold at an offering price of $38.00 per share. Of the total shares sold, 2,500,000 were offered by Cheap Tickets and 3,250,000 were offered by certain existing stockholders. Net proceeds to Cheap Tickets were $89.6 million after underwriting discounts and other related costs of issuance. F-14 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, priviledges and restrictions, thereof, including dividend rights, conversion rights, voting rights, terms of redemption, and liquidation preferences. 7. Income Taxes Income tax expense (benefit) for the years ended December 31, 1998, 1999 and 2000 was as follows:
Years ended December 31 Federal State Foreign Total ----------------------- ---------- ---------- --------- ---------- 1998: Current...................... $ 741,237 $ 101,080 $ -- $ 842,317 Deferred..................... (54,232) (47,817) -- (102,049) ---------- ---------- --------- ---------- $ 687,005 $ 53,263 $ -- $ 740,268 ========== ========== ========= ========== 1999: Current...................... $4,431,488 $ 992,668 $ -- $5,424,156 Deferred..................... (186,816) 34,941 -- (151,875) ---------- ---------- --------- ---------- $4,244,672 $1,027,609 $ -- $5,272,281 ========== ========== ========= ========== 2000: Current...................... $6,069,672 $1,276,086 $ -- $7,345,758 Deferred..................... (40,707) 41,864 (158,942) (157,785) ---------- ---------- --------- ---------- $6,028,965 $1,317,950 $(158,942) $7,187,973 ========== ========== ========= ==========
A tax benefit of $350,674 was credited directly to additional paid-in capital for stock option compensation in 1999. The actual income tax expense for 1998, 1999 and 2000 differed from the expected income tax expense computed by applying the U.S. federal income tax rate of 34% to earnings before income taxes due to the following:
1998 1999 2000 -------- ---------- ---------- Federal "expected" income tax expense...... $613,881 $4,372,135 $6,527,976 Additional federal income tax expense at 35%....................................... -- 28,592 91,999 State franchise and income taxes, net of federal income tax effect................. 93,888 844,021 871,320 Tax exempt interest income................. -- -- (321,236) Other, net................................. 32,499 27,533 17,914 -------- ---------- ---------- $740,268 $5,272,281 $7,187,973 ======== ========== ==========
F-15 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1999 and 2000 are presented below:
1999 2000 --------- --------- Deferred tax assets: Accrued rent not deductible for tax purposes........ $ 15,323 $ 8,266 Accrued vacation not deductible for tax purposes.... 147,600 181,333 State tax credit carryforward....................... -- 99,937 Unearned compensation not deductible for tax purposes........................................... 49,317 66,053 Capital loss carryforward........................... -- 38,577 State franchise tax................................. 243,573 305,864 U.K. net operating loss carryforward................ -- 158,942 --------- --------- Total gross deferred tax assets................... 455,813 858,972 --------- --------- Deferred tax liabilities: Property and equipment, principally due to differences between accounting and tax depreciation and amortization................................... (166,090) (358,883) Other............................................... -- (3,478) --------- --------- Total gross deferred tax liabilities.............. (166,090) (362,361) --------- --------- Net deferred tax asset............................ $ 289,723 $ 496,611 ========= =========
There was no valuation allowance provided for deferred tax assets as of December 31, 1999 and 2000. 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 plan for its employees which is designed to be qualified under section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the 401(k) plan through payroll deductions within statutory and plan limits. Cheap Tickets did not contribute to the plan in 1998. Cheap Tickets contributed $415,000 in 1999 and 2000. F-16 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Lease Commitments Cheap Tickets is obligated under capital leases for equipment that expire at various dates through 2004. At December 31, 1999 and 2000, the gross amounts of equipment and related accumulated amortization recorded under capital leases are as follows:
1999 2000 ---------- ---------- Equipment............................................. $6,021,188 $5,982,006 Less accumulated amortization (amortization expense charged to depreciation and amortization expense).... 1,274,484 2,756,025 ---------- ---------- $4,746,704 $3,225,981 ========== ==========
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 $1,175,289, $1,430,902 and $1,926,705 for 1998, 1999 and 2000, respectively. Future minimum lease payments under noncancelable operating and capital leases as of December 31, 2000 are as follows:
Capital Operating Leases Leases ---------- ---------- Year ending December 31 ----------------------- 2001................................................ $1,660,686 $1,241,335 2002................................................ 998,674 1,158,830 2003................................................ 670,616 1,161,380 2004................................................ 440,610 630,596 2005................................................ -- 401,119 Later years......................................... -- 1,175,623 ---------- ---------- Total minimum lease payments..................... 3,770,586 $5,768,883 ========== Less amounts representing interest (at rates ranging from 7.75% to 14.05%).............................. 394,899 ---------- Present value of minimum capital lease payments.... 3,375,687 Less current installments of capital lease obligations........................................ 1,415,210 ---------- Capital lease obligations, excluding current installments...................................... $1,960,477 ==========
10. 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 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. F-17 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Stock Option Plans Cheap Tickets' 1997 Stock Option plan provided for the issuance of up to 1,979,642 shares of common stock. 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, $93,960 and $44,848 for 1998, 1999 and 2000, respectively. The remaining unamortized compensation cost of $696,275, $382,094 and $82,906 (net of forfeitures) at December 31, 1998, 1999 and 2000, respectively will be amortized over the future vesting periods of the options. The granted options have a five-year vesting period and a ten- year exercise period from the date of the grant. However, options to purchase up to 140,000 shares fully vested upon Cheap Tickets' initial public offering of its stock. Cheap Tickets' 1999 Stock Incentive Plan was adopted by the Board of Directors in February 1999 and approved by the stockholders prior to the initial public offering. All grants subsequent to the initial public offering were and will be made under the 1999 Stock Incentive Plan. Under the 1999 Stock Incentive Plan, 1,260,000 shares plus an annual increase to be added on the first day of Cheap Tickets' fiscal year beginning 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 Stock Incentive Plan were reserved for issuance. The Plan requires that the exercise price be at least equal to the fair market value of the common stock on the date of the grant, and the term of the option not exceed ten years. For all optionees holding less than 10% of the voting power of all classes of Cheap Tickets' oustanding capital stock, an exercise price equal to market value at date of grant will not create any requirement for excess compensation charges. Pursuant to the 1999 Stock Incentive Plan, the Board of Directors adopted the 1999 non-employee Director Option Program. Under this program, each non- employee director appointed to the Board received an option to acquire 1,500 shares of common stock at an exercise price equal to the then fair market value of the common stock at the date of grant. In 2000, stockholders approved and ratified the Amended and Restated 1999 Stock Incentive Plan. Under the plan, the number of shares reserved for issuance was increased by 240,000 shares and the annual increase to be added on the first day of Cheap Tickets' fiscal year beginning 2001 was increased from 2 percent to 3 percent of the number of shares outstanding as of such date. F-18 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes activity under the stock option plans:
Weighted Weighted Average Average Exercise Grant-Date Shares Price Fair Value --------- -------- ---------- Balance at December 31, 1997................. -- $ -- Granted...................................... 728,000 0.31 $ 1.30 --------- Balance at December 31, 1998................. 728,000 0.31 Granted--exercise price equals fair value.... 764,500 16.58 16.58 Exercised.................................... (56,560) 0.24 Forfeited.................................... (82,500) 2.35 --------- Balance at December 31, 1999................. 1,353,440 9.37 Granted--exercise price equals fair value.... 1,239,158 10.56 10.56 Exercised.................................... (218,100) 0.25 Forfeited.................................... (96,960) 5.03 --------- Balance at December 31, 2000................. 2,277,538 11.08 ========= Options exercisable at: December 31, 1999.......................... 190,120 $ 0.23 December 31, 2000.......................... 345,830 $10.32
Options outstanding and exercisable at December 31, 2000 were as follows:
Options Outstanding Options Exercisable at December 31, 2000 at December 31, 2000 -------------------------------- ---------------------- Average Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life in Years Shares Price --------------- --------- -------- ------------- ---------- ----------- $ 0.18-$ 1.57........ 309,980 $ 0.21 7.43 66,380 $ 0.18 7.19- 16.19........ 1,930,658 12.46 5.28 271,550 12.21 27.31- 37.50........ 36,900 29.87 8.19 7,900 30.33 --------- ---------- 2,277,538 $11.08 5.62 345,830 $ 10.32 ========= ==========
Under SFAS No. 123, the fair value of each grant was estimated on the grant date using the minimum value method in 1998 and the Black-Scholes valuation model in 1999 and 2000 based on the following weighted-average assumptions:
1998 1999 2000 ----- ----- ------ Expected dividend yield................................ 0.00% 0.00% 0.00% Average risk-free interest rate........................ 5.73% 6.01% 5.96% Expected volatility.................................... 0.00% 67.00% 102.87% Expected life of the options, in years................. 10.00 6.18 5.98
F-19 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 years ended December 31, 1998, 1999 and 2000 had Cheap Tickets elected to adopt the fair-value based method of accounting prescribed by SFAS No. 123 is presented below:
1998 1999 2000 ---------- ---------- ----------- Net income: As reported............................. $1,065,264 $7,586,940 $12,011,957 Pro forma............................... $1,061,513 $6,528,713 $ 5,335,563 Basic earnings per share: As reported............................. $ 0.04 $ 0.33 $ 0.52 Pro forma............................... $ 0.04 $ 0.28 $ 0.23 Diluted earnings per share: As reported............................. $ 0.03 $ 0.31 $ 0.51 Pro forma............................... $ 0.03 $ 0.26 $ 0.23
12. Contingencies Litigation Various legal proceedings are pending against Cheap Tickets. The ultimate liability of Cheap Tickets, if any, cannot be determined at this time. Based upon consultation with counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on Cheap Tickets' financial position, results of operations or liquidity. 13. Segment Information In the fourth quarter of 1999, management began managing its business as two reportable operating segments based on revenue distribution channels which include the Internet and Call Centers (including retail stores). Revenue, including non-published fares, published fare commissions and bonuses and cost of sales and operating expenses, are disaggregated by operating segment. Certain expenses managed outside of the operating segments are excluded, such as general corporate expenses. The exclusion of such expenses from the operating segments represents a change from prior years. Prior year information has been restated to conform with our current measurement. The Company does not allocate assets by operating segment nor are the segments evaluated by this criteria. The difference between segment operating income reported below and net operating income reflected in the Consolidated Statements of Operations represents unallocated general corporate expenses. The reporting segments follow the same accounting policies used for the Company's financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon operating income. There were no intersegment sales or transfers. F-20 CHEAP TICKETS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information on the reporting segments for 1998, 1999 and 2000 follows:
1998 1999 2000 ---------------------------------- ----------------------------------- ----------------------------------- Call Call Call Internet Centers Total Internet Centers Total Internet Centers Total ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Revenue......... $3,481,000 $34,735,000 $38,216,000 $21,212,000 $52,795,000 $74,007,000 $37,399,000 $61,043,000 $98,442,000 Cost of sales... 394,000 3,850,000 4,244,000 2,252,000 4,538,000 6,790,000 3,244,000 4,297,000 7,541,000 ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit.... 3,087,000 30,885,000 33,972,000 18,960,000 48,257,000 67,217,000 34,155,000 56,746,000 90,901,000 Operating expenses....... 1,830,000 23,465,000 25,295,000 11,031,000 37,243,000 48,274,000 17,830,000 47,747,000 65,577,000 ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income......... $1,257,000 $ 7,420,000 $ 8,677,000 $ 7,929,000 $11,014,000 $18,943,000 $16,325,000 $ 8,999,000 $25,324,000 ========== =========== =========== =========== =========== =========== =========== =========== =========== Other: Depreciation expense (included in operating expenses) $ 95,000 $ 469,000 $ 564,000 $ 309,000 $ 1,321,000 $ 1,630,000 $ 280,000 $ 1,587,000 $ 1,867,000
Substantially all of the Company's revenue is derived from sales in the United States. F-21 EX-10.17.1 2 0002.txt AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT 10/18/2000 EXHIBIT 10.17.1 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT --------------------------------------- THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is made as of October 18, 2000 (this "Amendment") by and between Cheap Tickets, Inc., a Delaware corporation (the "Company"), and Sam E. Galeotos ("Executive"). All capitalized terms not defined herein shall have the meaning ascribed to such terms in the Agreement (as defined in Recital A below). RECITALS A. Employment Agreement. Executive and the Company are parties to that -------------------- certain Employment Agreement, dated as of October 25, 1999 (the "Agreement"), pursuant to which Executive is employed by the Company, as a senior executive of the Company, in accordance with and subject to the terms and conditions set forth therein. B. Amendment to Employment Agreement. The Board of Directors of the --------------------------------- Company has considered the valuable contribution Executive has provided to the Company and have approved and ratified that the Agreement be amended to provide Executive with certain additional benefits in the event Executive's employment is terminated as a result of, or in connection with, a Corporate Transaction, Change in Control or Related Entity Disposition (as each such capitalized term is defined hereinbelow). NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Amendment to the Agreement. The Agreement is hereby amended as -------------------------- follows: (a) Section 3.1(b) -- Bonus. Section 3.1(b) is hereby amended and restated to read in its entirety as follows: "Bonus. Upon attainment by the Company and Executive of financial and ----- operational goals determined annually in advance by the Board in consultation with Executive, an annual bonus in the amount of fifty percent (50%) of the annual salary, payable at the time and pursuant to the procedures regularly established, and as they may be amended, by the Company during the course of this Agreement. If the Company and Executive exceed such financial and operational goals, the bonus shall be at an increased percentage of the annual salary, not to exceed seventy-five percent (75%) thereof, on a graduated scale, as determined annually in advance by the Board in consultation with Executive. In the event of any Corporate Transaction, Change in Control or Related Entity Disposition, as each such capitalized term is defined hereinbelow (any such event, a "Corporate Event"), the bonus shall be prorated and paid to the date of such Corporate Event. The terms "Change in Control" and "Related Entity Disposition" shall have the respective meanings assigned to them in the Company's 1999 Stock Incentive Plan (the "Option Plan"), a copy of which is 1 attached hereto as Schedule I. The term "Corporate Transaction" shall mean any of the following transactions: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations); (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (iv) an acquisition by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities." (b) Section 3.1(c) -- Stock Options. Section 3.1(c) is hereby amended and restated to read in its entirety as follows: "Stock Option. An option (the "Stock Option") to purchase six hundred ------------ thousand (600,000) shares of Common Stock of the Company (the "Option Shares"), in accordance with and subject to the terms and conditions of that certain Stock Option Award Agreement (the "Stock Option Award Agreement") of even date herewith between the Company and Executive, a copy of which is attached hereto as Exhibit A and incorporated by reference herein. With respect to the Stock Option and any and all other stock options awarded to Executive at any time, notwithstanding any provision to the contrary in the Stock Option Award Agreement or any other stock option award agreements relating to such other stock options, and to the extent necessary, the Stock Option Award Agreement and all such stock option award agreements are hereby amended to provide that, (i) if, during the first three (3) years of the Employment Term, Executive's employment with the Company is terminated either by the Company without Cause (as defined in Section 4.3 below) or by Executive for Good Reason (as defined in Section ----------- ------- 4.4 below), additional Option Shares shall vest and become exercisable --- immediately prior to such termination, so that an aggregate of sixty percent (60%) of all Option Shares under the Stock Option (including those that have already vested) shall have vested and become exercisable; (ii) if, at any time during the Employment Term, there occurs a Corporate Event or a Change of Control (as defined in subparagraph (b) of Section 4.4 ----------- below), all unvested Option Shares shall immediately vest and become exercisable; and (iii) in the event of an anticipated Corporate Transaction following or pursuant to which the Stock Option will not be assumed by the successor corporation or its parent, all unvested Option Shares shall vest and become fully exercisable for a period of at least 10 days prior to the date of the consummation of the Corporate Transaction and, if Executive is precluded from exercising such Stock Option under federal or state securities laws or other applicable laws, the Company shall pay Executive the 2 difference between (X) the per share price that the stockholders of the Company will receive as a result of consummation of the Corporate Transaction and (Y) the exercise price of the Stock Option, multiplied by the total number of Option Shares not previously exercised (provided that the amount in clause (X) is greater than the amount in clause (Y))." ---------- ---------- (c) Section 3.1(e) -- Gross-Up. Section 3.1(e) is hereby amended and restated to read in its entirety as follows: "Gross-Up. Irrespective of whether Executive is employed on the last -------- day of a given calendar year, the Company shall pay to Executive, on or before the last day of such calendar year with respect to which any Forgiveness Payment or Gross-Up Amounts (as defined in Section 3.3(d) -------------- below) are reportable, an amount (the "Gross-Up Payment") such that, after the payment of federal, state and local income and employment taxes on such amount, Executive shall have received amounts free and clear of such taxes equal to the Forgiveness Payment and Gross-Up Amounts; provided that the Company may withhold from any Gross-Up Payment any federal, state, local income and employment taxes required to be withheld from the Gross-Up Payment, the Forgiveness Payment and the Gross-Up Amounts (in aggregate) and paid over to governmental authorities. For purposes of determining the amount of any Gross-Up Payment, Executive shall be deemed (i) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made, and (ii) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. The Company and Executive shall cooperate in good faith to determine the amount of any Gross-Up Payment payable hereunder. If the Company and Executive cannot agree on the amount of any Gross-Up Payment so payable, the Company and Executive shall mutually select an independent accounting firm to make the determination. Notwithstanding anything herein to the contrary, the maximum Gross-Up Payment payable by the Company to Executive shall not exceed one hundred percent (100%) of the amount forgiven. Additionally, to the extent that any payment or benefit to Executive, resulting from the occurrence of a Corporate Event pursuant to this Section ------- 3 or Section 5 below, would be treated as payments subject to excise tax - --------- due to their inclusion as "excess parachute payments" under Section 280G(b) of the Internal Revenue Service Code, the Company shall reimburse Executive for such excise tax and for an amount sufficient to offset or "gross-up" the tax impact of the reimbursement payment." 3 (d) Section 4.4 -- By Executive For Good Reason. Section 4.4 is hereby amended to include new subsections (e) and (f), which shall read in their entirety as follows: "(e) Executive's base salary is reduced, after a Corporate Event, to a level below that in effect immediately preceding the consummation of such Corporate Event or at any time thereafter. (f) Executive is required, after a Corporate Event, to be based at any place outside a 50-mile radius from Executive's job location or residence prior to such Corporate Event except for reasonably required travel on business which is not materially greater than such travel requirements prior to the Corporate Event and provided that Executive has not consented to such relocation." (e) Section 5 -- Severance. Section 5 is hereby amended and restated to read in its entirety as follows: "Severance. In the event Executive's employment with the Company is --------- terminated either by the Company without Cause or by Executive for Good Reason, the Company shall pay and provide to Executive a severance in an amount equal to two and one-half (2-1/2) times the annual salary set forth in Section 3.1(a) above, as applicable at the time of termination, payable -------------- over a period of twenty-four (24) months from the effective date of termination, in forty-eight (48) equal semi-monthly installments. Notwithstanding the foregoing, if Executive's employment is terminated either by the Company without Cause or by Executive for Good Reason within one (1) year after a Corporate Event, the Company shall alternatively pay and provide to Executive the following benefits: (a) A severance in an amount equal to three (3) times the annual salary set forth in Section 3.1(a) above, as applicable at the time of -------------- termination, payable over a period of twenty-four (24) months from the effective date of termination, in forty-eight (48) equal semi-monthly installments; (b) Outplacement services up to $30,000; (c) Medical insurance coverage for one (1) year on the same terms as provided by the Company; and (d) Forgiveness of any outstanding principal amount payable by Executive under the Note." (f) Schedule I. The Company's 1999 Stock Incentive Plan, which is attached hereto as Exhibit A to this Amendment, is hereby included as Schedule I to the Agreement. 2. Effect of this Amendment. Except as amended hereby, the Agreement ------------------------ shall remain in full force and effect. 4 3. Execution in Counterparts and By Facsimile. This Amendment may be ------------------------------------------ executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and same agreement. A facsimile execution copy of this Amendment shall be binding and have the same force and effect as the original of this Amendment. [Signature Page is the Next Page] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to Employment Agreement to be executed as of the date first written above. "Company" CHEAP TICKETS, INC., a Delaware corporation By: /s/ Mike Hartley ------------------------------------ Name: Mike Hartley ---------------------------------- Title: CEO --------------------------------- "Executive" /s/ Sam E. Galeotos --------------------------------------- SAM E. GALEOTOS Exhibit A --------- Schedule I ---------- 1999 Stock Incentive Plan of Cheap Tickets, Inc. EX-10.20.1 3 0003.txt AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT 09/29/2000 EXHIBIT 10.20.1 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT --------------------------------------- THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is made as of September 29, 2000 (this "Amendment") by and between Cheap Tickets, Inc., a Delaware corporation (the "Company"), and Paul B. Halstead ("Executive"). All capitalized terms not defined herein shall have the meaning ascribed to such terms in the Agreement (as defined in Recital A below). RECITALS A. Employment Agreement. Executive and the Company are parties to that -------------------- certain Employment Agreement, dated as of January 24, 2000 (the "Agreement"), pursuant to which Executive is employed by the Company, as a senior executive of the Company, in accordance with and subject to the terms and conditions set forth therein. B. Amendment to Employment Agreement. The [Compensation Committee and] --------------------------------- Board of Directors of the Company have considered the valuable contribution Executive has provided to the Company and [have approved and ratified] that the Agreement be amended to provide Executive with certain additional benefits in the event Executive's employment is terminated as a result of, or in connection with, a Corporate Transaction, Change in Control or Related Entity Disposition (as each such capitalized term is defined hereinbelow). NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Amendment to the Agreement. The Agreement is hereby amended as -------------------------- follows: (a) Section 3.1(b) -- Bonus. Section 3.1(b) is hereby amended and restated to read in its entirety as follows: "Bonus. Upon attainment by the Company and Executive of financial and ----- operational goals determined annually in advance by the Board in consultation with Executive, an annual bonus in the amount of twenty-five percent (25%) of the annual salary, payable at the time and pursuant to the procedures regularly established, and as they may be amended, by the Company during the course of this Agreement. If the Company and Executive exceed such financial and operational goals, the bonus shall be at an increased percentage of the annual salary, not to exceed fifty percent (50%) thereof, on a graduated scale, as determined annually in advance by the Board in consultation with Executive. In the event of any "Corporate Transaction," "Change in Control" or "Related Entity Disposition" (as each such capitalized term is defined in the Company's 1999 Stock Incentive Plan, a copy of which is attached hereto as Schedule I) (any such event, a "Corporate Event"), the bonus shall be prorated and paid to the date of the Corporate Event." 1 (b) Section 3.1(c) -- Stock Options. Section 3.1(c) is hereby amended and restated to read in its entirety as follows: "Stock Option. An option (the "Stock Option") to purchase one hundred ------------ thousand (100,000) shares of Common Stock of the Company (the "Option Shares"), in accordance with and subject to the terms and conditions of that certain Stock Option Award Agreement (the "Stock Option Award Agreement") of even date herewith between the Company and Executive, a copy of which is attached hereto as Exhibit A and incorporated by reference herein. Notwithstanding any provision therein to the contrary, in the event of a Corporate Event, on the date immediately preceding the effective date of such Corporate Event, fifty percent (50%) of all unvested Option Shares (those vesting earliest) under the Stock Option shall immediately vest and become exercisable. The remaining fifty percent (50%) of the unvested Option Shares shall vest and become exercisable one (1) year from the effective date of the Corporate Event (unless by their terms they vest at an earlier date). If, within the first year following the date of the Corporate Event, Executive's employment with the Company is terminated either by the Company without Cause (as defined in Section 4.3 below) or by ----------- Executive for Good Reason (as defined in Section 4.4 below), the remaining ----------- fifty percent (50%) of the unvested Option Shares shall vest and become exercisable at the date upon which such termination occurs. Additionally, in the event of a Corporate Event, if the acquiring or merged company does not assume Executive's Stock Option and is unable to substitute comparable stock options for the remaining fifty percent (50%) of the unvested Option Shares, all such Option Shares shall vest and become exercisable at the date of such Corporate Event." (c) Section 3 -- Compensation, Benefits, Expenses. Section 3 is hereby amended to include a new Section 3.4, which shall read in its entirety as follows: "Taxes. To the extent that any payment or benefit to Executive, ----- resulting from the occurrence of a Corporate Event pursuant to this Section ------- 3 or Section 5 below, would be treated as payments subject to excise tax - --------- due to their inclusion as "excess parachute payments" under Section 280G(b) of the Internal Revenue Service Code, the Company shall reimburse Executive for such excise tax and for an amount sufficient to offset or "gross-up" the tax impact of the reimbursement payment." (d) Section 4.4 -- By Executive For Good Reason. Section 4.4 is hereby amended to include a new subsection (e), which shall read in its entirety as follows: "Executive is required, after a Corporate Event, to be based at any place outside a 50-mile radius from Executive's job location or residence prior to such Corporate Event except for reasonably required travel on business which is not materially greater than such travel requirements prior to the Corporate Event and provided that Executive has not consented to such relocation." 2 (e) Section 5 -- Severance. Section 5 is hereby amended and restated to read in its entirety as follows: "Severance. In the event Executive's employment with the Company is --------- terminated either by the Company without Cause or by Executive for Good Reason, the Company shall pay and provide to Executive a severance in an amount equal to the annual salary set forth in Section 3.1(a) above, as -------------- applicable at the time of termination, payable over a period of twelve (12) months from the effective date of termination, in twenty-four (24) equal semi-monthly installments. Notwithstanding the foregoing, if Executive's employment is terminated either by the Company without Cause or by Executive for Good Reason within one (1) year after a Corporate Event, the Company shall alternatively pay and provide to Executive the following benefits: (a) A severance in an amount equal to two (2) times the annual salary set forth in Section 3.1(a) above, as applicable at the time of -------------- termination, payable over a period of twenty-four (24) months from the effective date of termination, in forty-eight (48) equal semi-monthly installments; (b) Outplacement services up to $30,000; (c) Medical insurance coverage for one (1) year on the same terms as provided by the Company; and (d) Forgiveness of any outstanding principal amount payable by Executive under the Note." (f) Schedule I. The Company's 1999 Stock Incentive Plan, which is attached hereto as Exhibit A to this Amendment, is hereby included as Schedule I to the Agreement. 2. Effect of this Amendment. Except as amended hereby, the Agreement ------------------------ shall remain in full force and effect. 3. Execution in Counterparts and By Facsimile. This Amendment may be ------------------------------------------ executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and same agreement. A facsimile execution copy of this Amendment shall be binding and have the same force and effect as the original of this Amendment. [Signature Page is the Next Page] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to Employment Agreement to be executed as of the date first written above. "Company" CHEAP TICKETS, INC., a Delaware corporation By: /s/ Sam E. Galeotos ------------------------------ Name: Sam E. Galeotos Title: President "Executive" By: /s/ Paul B. Halstead ---------------------------------- PAUL B. HALSTEAD Exhibit A --------- SCHEDULE I ---------- 1999 Stock Incentive Plan of Cheap Tickets, Inc. EX-23.1 4 0004.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-78465 and No. 333-46724) of Cheap Tickets, Inc. of our report dated February 6, 2001 relating to the financial statements, which appears in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Honolulu, Hawaii March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----