SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 000-25279
CHEAP TICKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 99-0338363
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1440 Kapiolani Blvd., Honolulu, Hawaii 96814
(Address of principal executive offices) (Zip Code)
(808) 945-7439
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
As of May 8, 2001, the Registrant had 24,271,942 shares of Common Stock,
$.001 par value per share, outstanding.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)..................... 3
- Consolidated Balance sheets at December 31, 2000 and March 31,
2001............................................................ 3
- Consolidated Statements of operations for the three months ended
March 31, 2000 and 2001.......................................... 4
- Consolidated Statement of stockholders' equity for the
three months ended March 31, 2001................................ 5
- Condensed consolidated statements of cash flows for the three
months ended March 31, 2000 and 2001............................. 6
- Notes to consolidated financial statements....................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 9
Item 3. Quantitative and Qualitative
Disclosure about Market Risk.......................................13
PART II OTHER INFORMATION..................................................14
Item 1. Legal Proceedings..................................................14
Item 2. Changes in Securities and Use of Proceeds..........................14
Item 3. Defaults Upon Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 5. Other Information..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................15
SIGNATURES.........................................................15
2
All historical financial information contained in this Quarterly Report on
Form 10-Q has been restated to comply with recently issued accounting standards
as discussed on page 7 (see Note 1 to Notes to Consolidated Financial
Statements).
PART I
FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEAP TICKETS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, March 31,
2000 2001
----------- --------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 40,325 $ 53,482
Marketable securities 100,485 96,539
Trade accounts and other receivables 6,995 7,981
Refundable income taxes 659 268
Ticket inventories 464 419
Other current assets 2,119 2,701
-------- --------
Total current assets 151,047 161,390
Property and equipment, net 13,571 14,990
Other assets 1,867 1,461
-------- --------
$166,485 $177,841
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,358 $ 16,794
Accrued salaries 1,596 2,086
Accrued vacation 680 750
Accrued expenses and other liabilities 837 945
Current installments of long-term debt 26 26
Current installments of capital lease obligations 1,415 1,362
Deferred revenue, current 400 400
Income taxes payable - 354
-------- --------
Total current liabilities 12,312 22,717
Long-term debt, excluding current installments 491 485
Capital lease obligations, excluding current installments 1,961 1,665
Deferred revenue, noncurrent 800 700
Other noncurrent liabilities 126 212
-------- --------
Total liabilities 15,690 25,779
Stockholders' Equity:
Preferred stock, $0.01 par value as of December 31, 2000 and
March 31, 2001. Authorized 10,000 shares; Issued and
Outstanding none at December 31, 2000 and March 31, 2001. - -
Common stock, $.001 par value. Authorized 70,000 shares; 24 24
Issued and outstanding 24,250 shares at December 31, 2000 and
24,272 shares at March 31, 2001.
Additional paid-in capital 145,874 145,954
Unearned compensation (83) (76)
Retained earnings 19,720 20,900
Treasury stock, at cost--1,037 common shares at December 31,
2000 and March 31, 2001. (14,740) (14,740)
-------- --------
Total stockholders' equity 150,795 152,062
-------- --------
$166,485 $177,841
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
CHEAP TICKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(unaudited)
Three months ended
March 31,
------------------
2000 2001
------- -------
Revenue:
Non-published fares $12,912 $12,530
Commissions and bonuses 6,262 10,017
Service fees and other 2,057 2,327
------- -------
Total revenue 21,231 24,874
Cost of sales 1,807 1,958
------- -------
Gross profit 19,424 22,916
Selling, general and administrative expenses 17,484 23,177
------- -------
Net operating income (loss) 1,940 (261)
Other income (deductions):
Interest income 2,063 2,146
Interest expense (105) (76)
Other, net (43) (15)
------- -------
Earnings before income taxes 3,855 1,794
Income taxes 1,542 614
------- -------
Net earnings $ 2,313 $ 1,180
======= =======
Income available to common shares $ 2,313 $ 1,180
======= =======
Basic earnings per common share $ 0.10 $ 0.05
======= =======
Average common shares outstanding 23,104 23,232
======= =======
Diluted earnings per common share $ 0.10 $ 0.05
======= =======
Average diluted common shares outstanding 23,574 23,592
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
4
CHEAP TICKETS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Additional Total
Common Paid-In Unearned Retained Treasury Stockholders'
Stock Capital Compensation Earnings Stock Equity
-------------- ----------- ------------ -------- -------- -------------
Shares Amount
------ ------
Balance, December 31, 2000 24,250 $24 $145,874 $(83) $19,720 $(14,740) $150,795
Net earnings - - - - 1,180 - 1,180
Exercise of stock options 22 - 4 - - - 4
Income tax benefit of stock option - - 76 - - - 76
compensation
Amortization and forfeiture of stock option
compensation - - - 7 - - 7
------ --- -------- ---- ------- -------- --------
Balance, March 31, 2001 24,272 $24 $145,954 $(76) $20,900 $(14,740) $152,062
====== === ======== ==== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
CHEAP TICKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
-------------------
2000 2001
-------- --------
Cash flows from operating activities:
Net earnings $ 2,313 $ 1,180
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Deferred income taxes - (207)
Depreciation and amortization 637 732
Stock option compensation 7 7
Amortization of (discount)/premium on marketable securities 7 (176)
Loss on sale or disposal of property and equipment 45 63
Loss/(gain) on sale of marketable securities 12 (40)
Changes in operating assets and liabilities 9,539 10,001
-------- --------
Net cash provided by operating activities 12,560 11,560
Cash flows from investing activities:
Capital expenditures (283) (2,214)
Proceeds from sale of property and equipment 105 -
Purchase of marketable securities (38,085) (40,126)
Proceeds from sale of marketable securities 36,059 44,288
-------- --------
Net cash provided by (used in) investing activities (2,204) 1,948
Cash flows from financing activities:
Proceeds from issuance of common stock, net of expenses paid 58 4
Principal payments on long-term debt (82) (6)
Principal payments on capital lease obligations (363) (349)
-------- --------
Net cash used in financing activities (387) (351)
Net increase in cash 9,969 13,157
Cash and cash equivalents at beginning of period 40,718 40,325
-------- --------
Cash and cash equivalents at end of period $ 50,687 $ 53,482
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
CHEAP TICKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Cheap
Tickets, Inc. ("Cheap Tickets") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation for the periods reported. Certain information and note
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules or regulations, although management
believes that the disclosures made are adequate to make the information
presented not misleading.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2000 and
the notes thereto included in Cheap Tickets' Annual Report on Form 10-K for the
year ended December 31, 2000 filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of results expected for the full fiscal year or for any
future period.
Principles of Consolidation
The consolidated financial statements include the accounts of Cheap Tickets
and its wholly-owned subsidiary. All significant intercompany transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the useful lives of property and
equipment, the valuation allowance for deferred tax assets and the allowance for
doubtful receivables. Management believes that such estimates have been
appropriately determined in accordance with generally accepted accounting
principles.
Revenue Recognition
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.
Revenue is reported net of an allowance for cancellations and refunds. Due
to the restrictive nature of our sales, which are generally noncancellable 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.
7
Advertising revenue from internet banner advertising is reported on a net
basis, which is the net amount remitted to Cheap Tickets by its advertising
service provider. Such revenue has been immaterial to date.
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.
2. Net Income Per Share
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows (in thousands,
except per share data).
Three months ended
March 31,
------------------
2000 2001
Numerator:
Income available to common shares........... $ 2,313 $ 1,180
------- -------
Denominator:
Shares - basic............................. 23,104 23,232
Effect of Dilutive Securities:
Common stock warrants.................... -- --
Stock options............................ 470 360
------- -------
Shares - diluted........................... 23,574 23,592
------- -------
Basic earnings per share:..................... $ 0.10 $ 0.05
======= =======
Diluted earnings per share:................... $ 0.10 $ 0.05
======= =======
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period.
Options to purchase 1,599,508 shares of common stock at a range of $10.25
to $35.875 were outstanding during the three months ended March 31, 2001 but
were not included in the computation of the diluted EPS because the options'
exercise price was greater than the average market price of the common stock.
8
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
Overview
Cheap Tickets is principally engaged in the sale of discount tickets
for domestic leisure 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 is generated by ticket sales through Cheap
Tickets' four call centers, on-line through our website at www.cheaptickets.com,
--------------------
and to a lesser extent through 10 walk-in retail stores. In the first quarter of
2001, gross bookings were derived approximately 60% from call centers and retail
stores and 40% from online bookings. During this quarter, Cheap Tickets added
approximately 2.1 million registered online users. At March 31, 2001, total
online registered users were approximately 10.8 million. Cheap Tickets expects
online gross bookings and 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 profit 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.
Cheap Tickets' gross bookings are substantially comprised of airline
ticket sales. For the three months ended March 31, 2000 and 2001, approximately
98% and 96% 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.
Revenue consists of gross profit 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, (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.
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.
9
Results of Operations
Three months ended March 31, 2001 and March 31, 2000
Total revenue. Total revenue for the first quarter of 2001 increased $3.6
million, or 17.2%, to $24.9 million. Commissions and bonuses increased $3.8
million, or 60%, to $10.0 million. The $3.8 million increase in commissions and
bonuses primarily reflected two factors: first, a $2.3 million increase in
commissions on increased sales of published fares; and second, an improvement in
airline overrides and higher incentives received from our global distribution
system or GDS supplier on higher sales volumes. Published fare sales as a
percentage of total revenue increased from 29.5% to 40.3%. Total gross bookings
rose 21.0% for the first quarter 2001 over the same quarter in 2000, to $192.0
million.
Service fees and other revenue includes gross service fees and banner
advertising. The modest increase can be attributed to increased amounts
received from banner advertising offset by a decrease in service fees collected
due to a free service fee promotion on the Internet for the first quarter of
2001.
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 $2.8
million, or 20.7%, to $16.2 million due to increased productivity and higher
call volume due to increased advertising.
Total revenue from Internet sales increased $864,000 to $8.7 million. Total
revenue through the Internet represented 34.8% of total revenue in the first
quarter of 2001, compared with 36.7% in the first quarter of 2000. Total
Internet gross bookings for the first quarter increased 29.4% over the first
quarter 2000 to $77.7 million. The decrease in online sales as a percent of
total revenue was the result of a higher proportion of published fares sold in
first quarter 2001 compared with the same period in 2000.
Gross Profit. Gross profit for the first quarter of 2001 increased $3.5
million, or 18.0%, to $22.9 million, as a result of a 17.2% percentage increase
in total revenue. As a percentage of total revenue, gross profit increased from
91.5% to 92.1%. This increase can mainly be attributed to higher published fare
commissions and overrides.
Selling, General and Administrative Expenses. For the three months ended
March 31, 2001, selling, general and administrative expenses increased $5.7
million, or 32.6%, to $23.2 million, and increased as a percentage of total
revenue from 82.3% to 93.2%. The increase in selling, general and administrative
expenses as a percentage of total revenue was primarily due to increased
advertising, technology related expenses, and higher staffing in key
departments. Advertising expenses increased by $2.2 million, representing an
increase from 15.3% to 21.9% of total revenue, reflecting a new marketing
strategy implemented in the first quarter, including a television campaign and
increased e-mail outreach. Advertising expenses targeted to increase Internet
sales were $1.5 million higher for the three months ended March 31, 2001.
Net Earnings. Net earnings for the three months ended March 31, 2001
decreased $1.1 million, or 49.0% to $1.2 million. The decrease reflected
increased expenditures related to advertising, technological and infrastructure
related initiatives.
Operating Segments
Cheap Tickets' reported segments are comprised of Internet and Call
Center/Other operations.
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
contribution, 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.
10
Total revenue by segment
------------------------
Three Months Ended March 31, 2001 Three Months Ended March 31, 2000
--------------------------------- ---------------------------------
Percent Percent
In Thousands of Total In Thousands of Total
--------------------------------- ---------------------------------
Segments
- --------
Internet $ 8,660 35% $ 7,796 37%
Call Center/Other 16,214 65% 13,435 63%
--------------------------------- ---------------------------------
Total revenue $24,874 100% $21,231 100%
================================= =================================
Gross profit by segment
-----------------------
Three Months Ended March 31, 2001 Three Months Ended March 31, 2000
--------------------------------- ---------------------------------
Percent Percent
In Thousands of Total In Thousands of Total
--------------------------------- ---------------------------------
Segments
- --------
Internet $ 7,614 33% $ 7,063 36%
Call Center/Other 15,302 67% 12,361 64%
--------------------------------- ---------------------------------
Gross profit $22,916 100% $19,424 100%
================================= ================================-
Operating contribution by segment
---------------------------------
Three Months Ended March 31, 2001 Three Months Ended March 31, 2000
--------------------------------- ---------------------------------
Percent Percent
In Thousands of Total In Thousands of Total
--------------------------------- ---------------------------------
Segments
- --------
Internet $2,211 49% $3,533 69%
Call Center/Other 2,308 51% 1,571 31%
--------------------------------- ---------------------------------
Operating
contribution $4,519 100% $5,104 100%
================================= =================================
Three Months Ended March 31, 2001 and March 31, 2000 by Segment
Total Revenue. Total revenue through the Internet increased $864,000, or
11.1% to $8.7 million. Total revenue through the Internet represented 35% of
total revenue for the first quarter of 2001 compared to 37% for the first
quarter of 2000. This decrease in the proportion of revenue was the result of
more published fares in the sales mix for the first quarter of 2001 as compared
to the same period last year. Sales volumes increased as a result of a targeted
advertising campaign, growing acceptance of Internet commerce, and a significant
increase in registered users to our website. Total Internet gross bookings for
the first quarter increased 29.4% over the first quarter 2000 to $77.7 million.
Total revenue through call centers and retail operations increased $2.8
million, or 20.7%, to $16.2 million due to increased productivity and higher
call volume due to increased advertising expenses.
Gross Profit. Gross profit from Internet sales increased $551,000, or 7.8%
to $7.6 million. As a percentage of total revenue, Internet gross profit
decreased from 90.6% to 87.9%. The decrease was mainly the result of a free
service fee promotion on Internet sales for the 1st quarter of 2001.
Call center gross profit increased $2.9 million, or 23.8% to $15.3 million.
As a percentage of total revenue, gross profit from call centers increased from
92.0% to 94.4% for the three months ended March 31, 2000 and 2001, respectively.
Call center gross profit increased as a percentage of total revenue due to
increased published fare commissions, including higher volume incentives and net
service fee income.
11
Operating Contribution. Operating contribution from Internet sales
decreased $1.3 million to $2.2 million. The decrease in operating contribution
was primarily due to higher advertising expenditures and to a lesser extent,
increased technological costs related to enhancement of the Cheap Tickets
website.
Call center operating contribution increased $737,000, or 46.9% to $2.3
million. As a percentage of total call center revenue, operating contribution
increased from 11.7% to 14.2% for the three months ended March 31, 2000 and
2001, respectively. Call center operating contribution increased due to higher
gross profit and no percentage increase in expenses.
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.
Liquidity and Capital Resources
For the three months ended March 31, 2001, Cheap Tickets generated cash
from operating activities of $11.6 million, compared with $12.6 million for the
three months ended March 31, 2000. For the three months ended March 31, 2001,
cash generated from operating activities was comprised principally of net
earnings of $1.2 million plus depreciation of $732,000, an increase in trade
accounts payable of $9.4 million and net changes in working capital and other
accounts. For the three months ended March 31, 2000, cash generated from
operating activities was comprised principally of net earnings of $2.3 million
plus depreciation of $637,000, an increase in accounts payable of $8.4 million
and net changes in working capital and other accounts. The primary account
payable is the weekly settlement to the Airline Reporting Corporation for
airline tickets purchased less commissions earned. This is generally a
significant balance and the timing of the current payment relative to month-end
can cause fluctuations in month-end balances.
For the three months ended March 31, 2001, Cheap Tickets received cash from
investing activities of $2.0 million, while in the prior period it used cash in
investing activities of $2.2 million. Cash received from investing activities
for the three months ended March 31, 2001 included net sales of short-term
marketable securities of $4.2 million and capital expenditures of $2.2 million.
For the three months ended March 31, 2000, net purchases of short-term
marketable securities were $2.0 million and capital expenditures were $283,000.
At March 31, 2001, Cheap Tickets maintained on hand cash and cash
equivalents of $53.5 million and short-term marketable securities of $96.5
million. Cheap Tickets' net working capital was $138.7 million. Cheap Tickets
had outstanding long-term debt net of current installments of $485,000 and
capital lease obligations of $1,665,000.
In January 2000, Cheap Tickets completed its stock repurchase program.
Cheap Tickets repurchased 1,037,288 shares of its outstanding common stock for
an aggregate price of $14.7 million through periodic open market transactions.
All funds required for the repurchase of common stock were obtained from
available cash resources and marketable securities.
Cheap Tickets believes that its current cash and cash equivalents, short-
term marketable securities and anticipated cash flow from operations will be
sufficient to meet its anticipated cash needs for working capital, debt service
and capital expenditures, at least for the foreseeable future. If cash
generated from internal operations is not sufficient to satisfy Cheap Tickets'
liquidity requirements, Cheap Tickets may seek to acquire bank 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.
12
Risks Associated with Forward-Looking Statements
Forward-Looking Statements contained in this Quarterly Report on Form 10-Q
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:
. an increasing portion of gross bookings and revenue in future periods will be
represented by online gross bookings and online revenue;
. 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.
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:
. the continued growth of online commerce and Internet infrastructure;
. our ability to enter into new supply agreements and to expand, enhance and
renew existing supply agreements;
. 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
contained in our Annual Report on Form 10-K for the year ended December 31,
2000. 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 Quarterly Report on Form 10-Q to conform such statements
to actual results or to changes in our expectations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Cheap Tickets does not use derivative financial instruments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
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PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Cheap Tickets may from time to time become a party to various legal
proceedings arising in the ordinary course of its business. Any such proceeding
against Cheap Tickets, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.22 Employment Agreement dated as of February 5, 2001, as amended,
between Samuel D. Horgan and Cheap Tickets, Inc.
10.23 Promissory Note dated February 27, 2001 by Samuel D. Horgan to Cheap
Tickets, Inc.
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, Cheap Tickets filed one report on
Form 8-K dated February 27, 2001 regarding Regulation FD disclosure in
connection with restated revenue information of Cheap Tickets for each quarterly
period in the years ended 1999 and 2000.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEAP TICKETS, INC.
(Registrant)
/s/ Michael J. Hartley
Date: May 14, 2001
Michael J. Hartley
Executive Chairman of the Board
/s/ Sam E. Galeotos
Date: May 14, 2001
Sam E. Galeotos
President and Chief Executive Officer
/s/ Samuel D. Horgan
Date: May 14, 2001
Samuel D. Horgan
Chief Financial Officer and Vice President (Principal
Financial Officer and Principal Accounting Officer)
15