item 14 exhibits financial statement schedules reports form 8k a1 financial statements financial statements report independent accountants set forth pages see index page a2 financial statement schedules financial statements omitted absence conditions required a3 list exhibits see exhibit index b reports form 8k reports form 8k filed fourth quarter 1999 c exhibits reference made exhibits index exhibits filed part annual report additional financial statements applicable exhibits incorporated reference registration statement 33370841 amended originally filed securities exchange commission january 20 1999 incorporated reference registration statement 33384323 amended originally filed securities exchange commission august 3 1999 incorporated reference quarterly report form 10q filed securities exchange commission november 15 1999 management contract compensatory plan arrangement portions omitted pursuant confidential treatment request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 29 2000 cheap tickets inc michael j hartley name michael j hartley title chief executive officer chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated cheap tickets inc report independent accountants stockholders board directors cheap tickets inc opinion accompanying balance sheets related statements operations stockholders equity cash flows present fairly material respects financial position cheap tickets inc december 31 1998 1999 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp honolulu hawaii february 7 2000 cheap tickets inc balance sheets december 31 1998 1999 accompanying notes integral part financial statements cheap tickets inc statements operations years ended december 31 1997 1998 1999 accompanying notes integral part financial statements cheap tickets inc statements stockholders equity years ended december 31 1997 1998 1999 accompanying notes integral part financial statements cheap tickets inc statements cash flows years ended december 31 1997 1998 1999 accompanying notes integral part financial statements cheap tickets inc statements cash flows continued years ended december 31 1997 1998 1999 cheap tickets inc notes financial statements 1 summary significant accounting policies business cheap tickets inc cheap tickets company incorporated laws state hawaii august 20 1986 primary purpose providing travel services including airline tickets cruise tickets auto rentals hotel reservations travel products february 1999 cheap tickets reincorporated state delaware company operates hawaii california colorado new york washington cheap tickets deals 100 airline carriers revenues non published fares three airline carriers accounted approximately 60 49 total nonpublished fares 1997 1998 1999 respectively use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ significantly estimates material estimates particularly susceptible significant change relate determination useful lives property equipment valuation allowance deferred tax assets allowance doubtful receivables management believes estimates appropriately determined accordance generally accepted accounting principles cash equivalents cheap tickets considers highly liquid debt securities original maturities three months less cash equivalents marketable securities cheap tickets marketable securities categorized availableforsale securities defined statement financial accounting standards sfas 115 accounting certain investments debt equity securities availableforsale securities reported amortized cost approximates fair value ticket inventories ticket inventories consisting prepaid hawaii interisland airline coupons stated lower cost market cheap tickets carry airline ticket inventories inventory cost acquisition price coupons tickets specific identification method used determine basis inventory cost coupons tickets removed inventory trade accounts receivables trade accounts receivables primarily consist commissions volume bonuses travel service providers allowances doubtful accounts receivable december 31 1998 1999 property equipment property equipment carried cost equipment held capital leases stated lower present value minimum lease payments estimated fair value equipment inception lease depreciation property equipment calculated straightline method estimated useful lives cheap tickets inc notes financial statementscontinued respective assets leasehold improvements equipment held capital leases amortized straightline method estimated useful life asset lease term whichever shorter fixed assets sold retired cost accumulated depreciation eliminated accounts gains losses recorded income estimated depreciable lives major classes property equipment follows revenue recognition revenues consist nonpublished fares commissions overrides published fares volume bonuses travel service network non published fares bought cheap tickets negotiated net fare contracts various airline carriers travel service providers resold consumers fares determined cheap tickets whereby cheap tickets credit card merchant record nonpublished fares generally sold significant discount published fares cheap tickets also sells travel services regular published fares company credit card merchant record earns commission sales cheap tickets recognizes revenues commissions earned time reservation ticketed payment received revenues reported net allowance cancellations refunds due restrictive nature cheap tickets sales generally noncancelable nonrefundable cancellations refunds significant volume bonus override revenues recognized end monthly quarterly measurement period specified target achieved bonuses received connection contract acceptances extensions deferred recognized income life contract advertising costs expensed incurred advertising expenses amounted 2495325 3823150 11132308 1997 1998 1999 respectively income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date cheap tickets inc notes financial statementscontinued impairment longlived assets longlived assets disposed cheap tickets adheres provisions sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset future net cash flows undiscounted without interest expected generated asset assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets disposed reported lower carrying amount fair value less costs sell fair value financial instruments fair values cheap tickets longterm debt approximate carrying values based current financing similar loans available company fair values marketable securities based quoted prices accounting stock based compensation company accounts employee stock based compensation accordance accounting principles board opinion 25 accounting stock issued employees related interpretations permitted sfas 123 accounting stock based compensation cheap tickets inc notes financial statementscontinued per share data following reconciliation numerator denominators basic diluted earnings loss per common share net earnings loss per share computed using weighted average number common equivalent shares outstanding period warrants purchase 2969456 shares common stock outstanding 1997 included computation diluted loss per share 1997 since would antidilutive effect new pronouncements 1998 cheap tickets adopted sfas 130 reporting comprehensive income sfas 131 disclosures segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits sfas 130 states items required recognized generally accepted accounting principles components comprehensive income reported financial statement displayed prominence financial cheap tickets inc notes financial statementscontinued statements adoption sfas 130 effect cheap tickets financial statements since company elements comprehensive income net earnings sfas 131 requires disclosures regarding segments enterprise related information reflects different types business activities enterprise engages different economic environments operates cheap tickets manages business two operating segments established internet call center operations see note 13 sfas 132 standardized disclosure requirements pension postretirement benefits adoption sfas 132 change existing measurement recognition standards cheap tickets defined contribution plan material effect cheap tickets financial statements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 establishes accounting reporting standards derivative instruments hedging activities sfas 133 requires recognition derivative instruments either assets liabilities statement financial position measurement derivative instruments fair value june 1999 fasb issued sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 original effective date sfas 133 fiscal quarters fiscal years beginning june 15 1999 result issuance sfas 137 effective date sfas 133 fiscal quarters fiscal years beginning june 15 2000 currently cheap tickets hold derivative instruments engage hedging activities adoption sfas 133 amended sfas 137 expected material effect cheap tickets financial statements fasb issued sfas 134 october 1998 sfas 136 june 1999 apply cheap tickets february 1999 fasb issued sfas 135 rescission fasb statement 75 technical corrections effective shortly issuance material effect cheap tickets financial statements january 1999 cheap tickets adopted statement position sop 981 accounting costs computer software developed obtained internal use sop 985 reporting costs startup activities issued accounting standards executive committee acsec american institute certified public accountants aicpa implementation pronouncements material effect cheap tickets financial statements reclassifications certain amounts 1997 1998 financial statements reclassified conform 1999 presentation reclassifications effect net income loss previously reported cheap tickets inc notes financial statementscontinued 2 marketable securities summary marketable securities december 31 follows debt securities december 31 1999 contractual maturities less one year cost securities sold based specific identification method sales securities 1997 1998 sales securities 1999 summarized 3 property equipment summary property equipment december 31 1998 1999 follows depreciation amortization expense amounted 370237 563514 1630599 1997 1998 1999 respectively cheap tickets inc notes financial statementscontinued 4 debt longterm debt december 31 1998 1999 consists following aggregate maturities longterm debt subsequent december 31 1999 follows 5 mandatorily redeemable cumulative preferred stock july 1997 cheap tickets issued sold 425000 shares mandatorily redeemable cumulative preferred stock detachable warrants purchase aggregate 2969456 shares common stock cheap tickets aggregate exercise price 2121 exchange cash consideration 4250000 equity transaction net proceeds 3875482 reflecting transaction costs 374518 allocated warrants preferred stock based relative fair values resulting allocation 510652 3364830 warrants preferred stock respectively value attributable warrants recorded additional paidin capital excess redemption value preferred stock 4250000 initial carrying value 3364830 accreted periodic charges retained earnings accretion amounted 87066 174132 36657 1997 1998 1999 respectively preferred stock par value 1 per share nonvoting accrued cumulative annual dividends 80 per share accrued dividends amounted 170000 340000 78712 1997 1998 1999 respectively undeclared cumulative dividends amounted 510000 december 31 1998 accrued addition preferred stock accompanying balance sheets cheap tickets inc notes financial statementscontinued terms preferred stock required redeemed time initial public offering cheap tickets common stock initial public offering cheap tickets common stock occurred march 19 1999 redemption price equal price issuance 4250000 plus accrued dividends 589000 march 24 1999 date redemption unamortized accretion 587315 march 24 1999 charged retained earnings coincident redemption preferred stock warrants exercised 2969375 shares issued cashless exercise 6 stockholders equity common stock june 24 1997 cheap tickets board directors approved amendment cheap tickets articles incorporation wherein authorized common stock cheap tickets increased 5000 shares 1 par value 5000000 shares 001 par value effect 1000for1 stock split connection stock split 9477 transferred common stock additional paidin capital representing adjustment reflect aggregate common stock par value aforementioned amendment subsequent stock split stock dividend declared issued common stockholders pro rata basis common stock warrants described note 5 exercised would reflect 15 common equity interest considering shares common stock outstanding 1979642 shares common stock reserved issuance stock option plan established april 1998 see note 11 february 1999 authorized common stock cheap tickets increased 5000000 shares 001 par value 70000000 shares 0001 par value company also effected 14forone stock split financial statements per share amounts number shares restated reflect stock splits stock dividend described note 10 373646 shares forfeited officer upon resignation march 1998 public offerings march 19 1999 cheap tickets completed initial public offering common stock 3500000 shares issued offering price 15 per share offering raised 477 million underwriting discounts related costs issuance concurrently issuance 3500000 shares offering warrants 2969375 shares exercised connection initial public offering underwriters option purchase additional 525000 shares common stock exercised option april 19 1999 net proceeds cheap tickets 73 million underwriting discounts costs issuance august 20 1999 cheap tickets completed secondary public offering common stock whereby 5750000 shares sold offering price 3800 per share total shares sold 2500000 offered cheap tickets 3250000 offered certain existing stockholders net proceeds cheap tickets 896 million underwriting discounts related costs issuance preferred stock february 1999 authorized preferred stock cheap tickets increased 5000000 shares 1 par value 10000000 shares 001 par value board directors authority issue shares preferred stock one series fix rights preferences priviledges restrictions thereof including dividend rights conversion rights voting rights terms redemption liquidation preferences cheap tickets inc notes financial statementscontinued restriction declaration payment dividends connection equity transaction described note 5 written approval majority holders preferred stock common stock warrants common stock issued upon exercise warrants required declaration payment dividends common stockholders however restriction removed upon redemption mandatorily redeemable cumulative preferred stock march 24 1999 7 income taxes income tax expense benefit years ended december 31 1997 1998 1999 follows tax benefit 350674 credited directly additional paidin capital stock option compensation deferred tax benefit year ended december 31 1997 includes tax benefit 36247 operating loss carryforwards actual income tax expense benefit 1997 1998 1999 differed expected income tax expense benefit computed applying us federal income tax rate 34 earnings loss income taxes due following cheap tickets inc notes financial statementscontinued tax effects temporary differences give rise deferred tax assets deferred tax liabilities december 31 1998 1999 presented valuation allowance provided deferred tax assets december 31 1997 1998 1999 assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely cheap tickets realize benefits deductible differences amount deferred tax asset considered realizable however could reduced near term estimates future taxable income reduced 8 profit sharing 401k plan cheap tickets sponsors qualified 401k defined contribution plan covering employees attained age 20 completed one year service 401k defined contribution plan allows voluntary participant contributions 15 eligible compensation employer contributions discretionary fully vest participant upon participants completion seven years service cheap tickets contribute 401k defined contribution plan 1997 1998 cheap tickets contributed 415000 1999 cheap tickets inc notes financial statementscontinued 9 lease commitments cheap tickets obligated capital leases equipment expire various dates 2004 december 31 1998 1999 gross amounts equipment related accumulated amortization recorded capital leases follows cheap tickets noncancelable operating leases primarily office space expire various dates 2009 leases generally contain renewal options periods ranging one five years rent expense incurred operating leases amounted 851709 1175289 1430902 1997 1998 1999 respectively future minimum lease payments noncancelable operating capital leases december 31 1999 follows 10 stock compensation arrangement november 1996 cheap tickets entered restricted stock grant shareholder agreement whereby 747292 shares common stock giving effect stock splits common stock dividend see note 6 granted officer cheap tickets compensation employment two year vesting period whereby shares vested 50 percent year service cheap tickets estimated fair value common stock shares date grant 45895 amortized compensation expense two year vesting period march 1998 officer resigned cheap tickets connection resignation officer forfeited nonvested shares common stock issued agreement forfeited common stock amounted 373646 shares officers forfeiture common shares resulted benefit 3820 1998 recovery compensation expense previously taken decreases common stock additional paidin capital 267 22680 respectively cheap tickets inc notes financial statementscontinued 11 stock option plans cheap tickets 1997 stock option plan provided issuance 1979642 shares common stock 1998 cheap tickets granted options 728000 shares common stock exercise prices less estimated market prices grant dates weightedaverage grantdate fair value options granted 1998 130 estimated compensation cost options amounted 722600 grant dates stock option compensation expense included selling general administrative expenses 26325 93960 1998 1999 respectively remaining unamortized compensation cost 696275 382094 net forfeitures december 31 1998 1999 respectively amortized future vesting periods options granted options fiveyear vesting period tenyear exercise period date grant however options purchase 140000 shares fully vested upon cheap tickets initial public offering stock cheap tickets 1999 stock incentive plan adopted board directors february 1999 approved stockholders prior initial public offering grants subsequent initial public offering made 1999 stock incentive plan 1999 stock incentive plan 1260000 shares plus annual increase added first day cheap tickets fiscal year beginning 2000 equal two percent number shares outstanding date lesser number shares determined plan administrator 1999 stock incentive plan reserved issuance plan requires exercise price least equal fair market value common stock date grant term option exceed ten years optionees holding less 10 voting power classes cheap tickets oustanding capital stock exercise price equal market value date grant create requirement excess compensation charges pursuant 1999 stock incentive plan board directors adopted 1999 nonemployee director option program non employee director appointed board received option acquire 1500 shares common stock exercise price equal fair market value common stock date grant following table summarizes activity stock option plans cheap tickets inc notes financial statementscontinued options outstanding exercisable december 31 1999 follows sfas 123 fair value grant estimated grant date using minimum value method 1998 blackscholes valuation model 1999 based following weightedaverage assumptions compensation cost charged income stock option plan apb 25 pro forma net income pro forma earnings per share years ended december 31 1998 1999 cheap tickets elected adopt fairvalue based method accounting prescribed sfas 123 presented 12 contingencies litigation various legal proceedings pending cheap tickets ultimate liability cheap tickets cannot determined time based upon consultation counsel management expect aggregate liability resulting proceedings would material effect cheap tickets financial position results operations liquidity cheap tickets inc notes financial statementscontinued 13 segment information fourth quarter 1999 management began managing business two reportable operating segments based revenue distribution channels include internet call centers including retail stores net revenues including nonpublished fares published fare commissions bonuses cost sales operating expenses including general administrative expenses disaggregated operating segment accordance sfas 131 segment information provided periods presented except 1997 due insignificance internet segment year company allocate assets operating segment segments evaluated criteria reporting segments follow accounting policies used companys financial statements described summary significant accounting policies management evaluates segments performance based upon operating income intersegment sales transfers information reporting segments 1998 1999 follows substantially companys net revenues derived sales airline tickets united states item 14 exhibits financial statement schedules reports form 8k a1 financial statements financial statements management statement report independent accountants set forth pages see index page a2 financial statement schedules financial statements omitted absence conditions required a3 list exhibits see exhibit index b reports form 8k reports form 8k filed fourth quarter 2000 c exhibits reference made exhibits index exhibits filed part annual report additional financial statements applicable exhibits 1 incorporated reference registration statement 33370841 amended originally filed securities exchange commission january 20 1999 2 incorporated reference definitive proxy statement schedule 14a filed securities exchange commission april 7 2000 3 incorporated reference registration statement 33384323 amended originally filed securities exchange commission august 3 1999 4 incorporated reference quarterly report form 10q filed securities exchange commission november 15 1999 5 incorporated reference annual report form 10k filed securities exchange commission march 30 2000 6 incorporated reference quarterly report form 10q filed securities exchange commission may 15 2000 management contract compensatory plan arrangement portions omitted pursuant confidential treatment request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized march 30 2001 cheap tickets inc michael j hartley name michael j hartley title executive chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated cheap tickets inc index consolidated financial statements report independent accountants stockholders board directors cheap tickets inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity cash flows present fairly material respects financial position cheap tickets inc subsidiary december 31 1999 2000 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed honolulu hawaii february 6 2001 cheap tickets inc consolidated balance sheets december 31 1999 2000 accompanying notes integral part consolidated financial statements cheap tickets inc consolidated statements operations years ended december 31 1998 1999 2000 accompanying notes integral part consolidated financial statements cheap tickets inc consolidated statements stockholders equity years ended december 31 1998 1999 2000 accompanying notes integral part consolidated financial statements cheap tickets inc consolidated statements cash flows years ended december 31 1998 1999 2000 accompanying notes integral part consolidated financial statements cheap tickets inc consolidated statements cash flows continued years ended december 31 1998 1999 2000 accompanying notes integral part consolidated financial statements cheap tickets inc notes consolidated financial statements 1 summary significant accounting policies business cheap tickets inc cheap tickets company weour incorporated laws state hawaii august 20 1986 primary purpose providing travel services including airline tickets cruise tickets auto rentals hotel reservations travel products february 1999 cheap tickets reincorporated state delaware company sells directly consumers internet site 4 call centers 10 retail stores deal 100 airline carriers revenues nonpublished fares three airline carriers accounted approximately 49 48 total nonpublished fares 1998 1999 2000 respectively april 2000 company formed subsidiary cheap tickets europe ltd incorporated laws united kingdom principles consolidation consolidated financial statements include accounts company wholly owned subsidiary significant intercompany balances transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ significantly estimates material estimates particularly susceptible significant change relate determination useful lives property equipment valuation allowance deferred tax assets allowance doubtful receivables management believes estimates appropriately determined accordance generally accepted accounting principles cash equivalents consider highly liquid debt securities original maturities three months less cash equivalents marketable securities marketable securities categorized availableforsale securities defined statement financial accounting standards sfas 115 accounting certain investments debt equity securities available forsale securities reported amortized cost approximates fair value due relatively short maturities ticket inventories ticket inventories consisting prepaid hawaii interisland airline coupons stated lower cost market carry airline ticket inventories inventory cost acquisition price coupons tickets specific identification method used determine basis inventory cost coupons tickets removed inventory cheap tickets inc notes consolidated financial statementscontinued trade accounts receivables trade accounts receivables primarily consist commissions volume bonuses travel service providers company extend credit customers allowances doubtful accounts receivable december 31 1999 2000 concentrations credit risk financial instruments potentially subject company concentrations credit risk consist primarily cash equivalents investments companys policy place cash equivalents investments high quality financial institutions governmental agencies corporate entities limit amount credit exposure cash balances generally excess available insured depository limits property equipment property equipment carried cost equipment held capital leases stated lower present value minimum lease payments estimated fair value equipment inception lease depreciation property equipment calculated straightline method estimated useful lives respective assets leasehold improvements equipment held capital leases amortized straightline method estimated useful life asset lease term whichever shorter fixed assets sold retired cost accumulated depreciation eliminated accounts gains losses recorded income website maintenance costs expensed incurred estimated depreciable lives major classes property equipment follows revenue recognition company implemented several new accounting pronouncements fourth quarter 2000 affected revenue recognition policies new pronouncements included eitf 9919 reporting revenue gross principal versus net agent sab 101 revenue recognition financial statements eitf 0010 accounting shipping handling fees costs promote comparability financial statements periods presented restated conform new pronouncements eitf 9919 reporting revenue gross principal versus net agent required report revenue sales nonpublished fares net basis accordingly net margin sale nonpublished fares reported revenue previously reported sales fares gross basis whereby gross booking retail amount reported revenue amount paid airline carrier reported cost sales implementation eitf 9919 affect reporting commissions published fares continues reported net basis sab 101 revenue recognition financial statements required us delay recognition revenue tickets delivered customers previously reported revenue reservation ticketed payment received change policy material impact financial statements cheap tickets inc notes consolidated financial statementscontinued eitf 0010 accounting shipping handling fees costs report distribution handling service fees revenue related cost distribution reported cost sales previously reported distribution costs part selling general administrative expenses fees charged customers offset expense revenue reported net allowance cancellations refunds due restrictive nature sales generally noncancelable nonrefundable cancellations refunds significant volume bonus override revenue recognized end monthly quarterly measurement period specified target achieved bonuses received connection contract acceptances extensions deferred recognized income life contract advertising revenue internet banner advertising reported net basis net amount remitted company advertising service provider revenue immaterial date advertising costs expensed incurred advertising expenses amounted 3823150 11132308 18616812 1998 1999 2000 respectively income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date impairment longlived assets longlived assets disposed cheap tickets adheres provisions sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset future net cash flows undiscounted without interest expected generated asset assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets disposed reported lower carrying amount fair value less costs sell fair value financial instruments fair values cheap tickets longterm debt approximate carrying values based current financing similar loans available company fair values marketable securities based quoted prices accounting stock based compensation company accounts employee stock based compensation accordance accounting principles board opinion 25 accounting stock issued employees related interpretations permitted sfas 123 accounting stock based compensation cheap tickets inc notes consolidated financial statementscontinued foreign currency translation functional currency companys uk subsidiary local currency assets liabilities foreign subsidiary translated us dollars yearend exchange rates revenue expenses translated average rates prevailing year translation adjustments immaterial date per share data following reconciliation numerator denominators basic diluted earnings per common share net earnings per share computed using weighted average number common equivalent shares outstanding period cheap tickets inc notes consolidated financial statementscontinued new pronouncements number recently issued accounting pronouncements affect companies like cheap tickets including eitf 9917 accounting barter transactions eitf 0014 accounting certain sales incentives eitf 00 21 accounting multipleelement revenue arrangements fin 44 accounting certain transactions involving stock compensation eitf 0023 issues related accounting stock compensation apb 25 fin 44 eitf 0002 accounting website development costs sfas 133 accounting derivative instruments hedging activities accounting pronouncements material effect financial statements either enter transactions previously compliance guidance pronouncements reclassifications certain amounts 1998 1999 financial statements reclassified conform 2000 presentation reclassifications effect net earnings previously reported 2 marketable securities summary marketable securities december 31 follows fixed income securities december 31 2000 contractual maturities less one year cost securities sold based specific identification method sales securities 1998 sales securities 1999 2000 summarized cheap tickets inc notes consolidated financial statementscontinued 3 property equipment summary property equipment december 31 1999 2000 follows depreciation amortization expense amounted 563514 1630599 2861288 1998 1999 2000 respectively 4 debt longterm debt december 31 1999 2000 consists following aggregate maturities longterm debt subsequent december 31 2000 follows cheap tickets inc notes consolidated financial statementscontinued 5 mandatorily redeemable cumulative preferred stock july 1997 cheap tickets issued sold 425000 shares mandatorily redeemable cumulative preferred stock detachable warrants purchase aggregate 2969456 shares common stock cheap tickets aggregate exercise price 2121 exchange cash consideration 4250000 equity transaction net proceeds 3875482 reflecting transaction costs 374518 allocated warrants preferred stock based relative fair values resulting allocation 510652 3364830 warrants preferred stock respectively value attributable warrants recorded additional paidin capital excess redemption value preferred stock 4250000 initial carrying value 3364830 accreted periodic charges retained earnings accretion amounted 174132 36657 none 1998 1999 2000 respectively preferred stock par value 1 per share nonvoting accrued cumulative annual dividends 80 per share accrued dividends amounted 340000 78712 none 1998 1999 2000 respectively undeclared cumulative dividends amounted 510000 december 31 1998 accrued addition preferred stock accompanying balance sheets terms preferred stock required redeemed time initial public offering cheap tickets common stock initial public offering cheap tickets common stock occurred march 19 1999 redemption price equal price issuance 4250000 plus accrued dividends 589000 march 24 1999 date redemption unamortized accretion 587315 march 24 1999 charged retained earnings coincident redemption preferred stock warrants exercised 2969375 shares issued cashless exercise 6 stockholders equity common stock february 1999 authorized common stock cheap tickets increased 5000000 shares 001 par value 70000000 shares 0001 par value company also effected 14forone stock split financial statements per share amounts number shares restated reflect stock split described note 10 373646 shares forfeited officer upon resignation march 1998 public offerings march 19 1999 cheap tickets completed initial public offering common stock 3500000 shares issued offering price 15 per share offering raised 477 million underwriting discounts related costs issuance concurrently issuance 3500000 shares offering warrants 2969375 shares exercised connection initial public offering underwriters option purchase additional 525000 shares common stock exercised option april 19 1999 net proceeds cheap tickets 73 million underwriting discounts costs issuance august 20 1999 cheap tickets completed secondary public offering common stock whereby 5750000 shares sold offering price 3800 per share total shares sold 2500000 offered cheap tickets 3250000 offered certain existing stockholders net proceeds cheap tickets 896 million underwriting discounts related costs issuance cheap tickets inc notes consolidated financial statementscontinued preferred stock february 1999 authorized preferred stock cheap tickets increased 5000000 shares 1 par value 10000000 shares 001 par value board directors authority issue shares preferred stock one series fix rights preferences priviledges restrictions thereof including dividend rights conversion rights voting rights terms redemption liquidation preferences 7 income taxes income tax expense benefit years ended december 31 1998 1999 2000 follows tax benefit 350674 credited directly additional paidin capital stock option compensation 1999 actual income tax expense 1998 1999 2000 differed expected income tax expense computed applying us federal income tax rate 34 earnings income taxes due following cheap tickets inc notes consolidated financial statementscontinued tax effects temporary differences give rise deferred tax assets deferred tax liabilities december 31 1999 2000 presented valuation allowance provided deferred tax assets december 31 1999 2000 assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely cheap tickets realize benefits deductible differences amount deferred tax asset considered realizable however could reduced near term estimates future taxable income reduced 8 profit sharing 401k plan cheap tickets sponsors defined contribution plan employees designed qualified section 401k internal revenue code eligible employees permitted contribute 401k plan payroll deductions within statutory plan limits cheap tickets contribute plan 1998 cheap tickets contributed 415000 1999 2000 cheap tickets inc notes consolidated financial statementscontinued 9 lease commitments cheap tickets obligated capital leases equipment expire various dates 2004 december 31 1999 2000 gross amounts equipment related accumulated amortization recorded capital leases follows cheap tickets noncancelable operating leases primarily office space expire various dates 2009 leases generally contain renewal options periods ranging one five years rent expense incurred operating leases amounted 1175289 1430902 1926705 1998 1999 2000 respectively future minimum lease payments noncancelable operating capital leases december 31 2000 follows 10 stock compensation arrangement november 1996 cheap tickets entered restricted stock grant shareholder agreement whereby 747292 shares common stock granted officer cheap tickets compensation employment two year vesting period whereby shares vested 50 percent year service cheap tickets estimated fair value common stock shares date grant 45895 amortized compensation expense two year vesting period march 1998 officer resigned cheap tickets connection resignation officer forfeited nonvested shares common stock issued agreement forfeited common stock amounted 373646 shares officers forfeiture common shares resulted benefit 3820 1998 recovery compensation expense previously taken decreases common stock additional paidin capital 267 22680 respectively cheap tickets inc notes consolidated financial statementscontinued 11 stock option plans cheap tickets 1997 stock option plan provided issuance 1979642 shares common stock 1998 cheap tickets granted options 728000 shares common stock exercise prices less estimated market prices grant dates weightedaverage grantdate fair value options granted 1998 130 estimated compensation cost options amounted 722600 grant dates stock option compensation expense included selling general administrative expenses 26325 93960 44848 1998 1999 2000 respectively remaining unamortized compensation cost 696275 382094 82906 net forfeitures december 31 1998 1999 2000 respectively amortized future vesting periods options granted options fiveyear vesting period ten year exercise period date grant however options purchase 140000 shares fully vested upon cheap tickets initial public offering stock cheap tickets 1999 stock incentive plan adopted board directors february 1999 approved stockholders prior initial public offering grants subsequent initial public offering made 1999 stock incentive plan 1999 stock incentive plan 1260000 shares plus annual increase added first day cheap tickets fiscal year beginning 2000 equal two percent number shares outstanding date lesser number shares determined plan administrator 1999 stock incentive plan reserved issuance plan requires exercise price least equal fair market value common stock date grant term option exceed ten years optionees holding less 10 voting power classes cheap tickets oustanding capital stock exercise price equal market value date grant create requirement excess compensation charges pursuant 1999 stock incentive plan board directors adopted 1999 nonemployee director option program non employee director appointed board received option acquire 1500 shares common stock exercise price equal fair market value common stock date grant 2000 stockholders approved ratified amended restated 1999 stock incentive plan number shares reserved issuance increased 240000 shares annual increase added first day cheap tickets fiscal year beginning 2001 increased 2 percent 3 percent number shares outstanding date cheap tickets inc notes consolidated financial statementscontinued following table summarizes activity stock option plans options outstanding exercisable december 31 2000 follows sfas 123 fair value grant estimated grant date using minimum value method 1998 blackscholes valuation model 1999 2000 based following weightedaverage assumptions cheap tickets inc notes consolidated financial statementscontinued compensation cost charged income stock option plan apb 25 pro forma net income pro forma earnings per share years ended december 31 1998 1999 2000 cheap tickets elected adopt fairvalue based method accounting prescribed sfas 123 presented 12 contingencies litigation various legal proceedings pending cheap tickets ultimate liability cheap tickets cannot determined time based upon consultation counsel management expect aggregate liability resulting proceedings would material effect cheap tickets financial position results operations liquidity 13 segment information fourth quarter 1999 management began managing business two reportable operating segments based revenue distribution channels include internet call centers including retail stores revenue including nonpublished fares published fare commissions bonuses cost sales operating expenses disaggregated operating segment certain expenses managed outside operating segments excluded general corporate expenses exclusion expenses operating segments represents change prior years prior year information restated conform current measurement company allocate assets operating segment segments evaluated criteria difference segment operating income reported net operating income reflected consolidated statements operations represents unallocated general corporate expenses reporting segments follow accounting policies used companys financial statements described summary significant accounting policies management evaluates segments performance based upon operating income intersegment sales transfers cheap tickets inc notes consolidated financial statementscontinued information reporting segments 1998 1999 2000 follows substantially companys revenue derived sales united states item 7 managements discussion analysis financial condition results operations following discussion read conjunction financial statements cheap tickets statements caption constitute forwardlooking statements involve known unknown risks uncertainties factors may cause actual results levels activity performance achievements materially different future results levels activity performance achievements expressed implied forwardlooking statements factors include among things listed additional factors could affect operating results elsewhere annual report cases identify forwardlooking statements terminology may could expects plans intends anticipates believes estimates predicts potential continue negative terms comparable terminology although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance achievements moreover neither anyone else assumes responsibility accuracy completeness statements duty update forwardlooking statements date annual report overview cheap tickets principally engaged sale discount tickets domestic leisure air travel majority gross bookings historically come sale nonpublished fares cheap tickets acquires airlines resells public profit cheap tickets purchases nonpublished fares resells customers inventory carrying costs fares cheap tickets sets resale prices meet demands leisure travelers looking lowest price cheap tickets also sells published fares receives commissions airlines sales nonpublished fares generally carry higher margins percentage gross bookings commissions published fare bookings cheap tickets revenues historically generated ticket sales cheap tickets four call centers lesser extent 12 walkin retail stores october 1997 cheap tickets broadened ticket distribution offering online booking wwwcheapticketscom internet bookings accounted approximately 9 total gross bookings 1998 approximately 29 year ended december 31 1999 december 31 1999 cheap tickets 26 million registered online users cheap tickets expects online gross bookings online net revenues represent increasing portion gross bookings net revenues future periods gross bookings represent aggregate retail value tickets sold nonpublished fares published fares difference gross bookings revenues reported cheap tickets statement operations derives solely difference revenue treatment accorded sales published fares respect published fares cheap tickets records revenue statement operations commissions earned cheap tickets sale fares gross bookings represent retail value sales published fares respect nonpublished fares revenues reported cheap tickets statement operations equivalent gross bookings retail value fares gross bookings required generally accepted accounting principles considered isolation substitute information prepared accordance gaap management uses gross bookings key indicator general business activity success promotional efforts capacity handle customer demand efficiency reservation agents addition management believes gross bookings provide useful comparison historical periods yeartoyear changes information provide useful measure market acceptance cheap tickets products net revenues consist sales nonpublished fares commissions net revenues sales nonpublished fares represent revenues sale tickets purchased airlines cheap tickets cost sales consists net fare cost paid carriers purchase nonpublished fares commissions including incentive overrides earned primarily published air fares sold include certain payments based volume transactions gross profits include 1 gross profit nonpublished sales cheap tickets establishes markup retail price 2 commissions earned sale published fares sold cost sale component published fare sales whereas cost sale component non published fare sales cheap tickets earns higher profits sale non published fares sale published fares substantially cheap tickets gross bookings represent sales airline tickets years ended december 31 1998 1999 approximately 98 99 respectively gross bookings arose airline ticket sales remaining gross bookings arose sales cruise tickets auto rentals hotel reservations travel related products cheap tickets expects gross bookings sources airline ticket sales increase future periods cheap tickets selling general administrative expenses include operating corporate overhead major expense categories include compensation advertising communications credit card bank fees occupancy delivery costs results operations following table sets forth years ended december 31 1997 1998 1999 information derived statement operations cheap tickets expressed percentage net revenues percentage change items gross bookings years ended december 31 1997 1998 1999 compared prior period trends illustrated following table necessarily indicative future results year ended december 31 1999 compared year ended december 31 1998 net revenues net revenues year ended december 31 1999 increased 1685 million 985 3396 million nonpublished fare sales increased 1574 million 985 3173 million increase non published fare sales reflected significant increase number non published tickets sold commissions increased 111 million 983 223 million 111 million increase commissions reflected increase number published fares sold improvement bonus overrides percentage net revenues gross bookings published fares decreased 408 359 total gross bookings strong growth leisure travel market particularly air travel improving recognition cheap tickets brand increased exposure coincident becoming public company significantly higher advertising expenditures 1999 compared 1998 increasing acceptance internet commerce 1999 contributed growth net revenues net revenues call centers retail operations including allocated incentive bonuses increased 915 million 575 2505 million 915 million increase 420 million reflected effect operations 1999 new call center opened late may 1998 increased productivity staffing remainder call centers largely accounted rest increase net revenues internet including allocated incentive bonuses increased 770 million 891 million net revenues internet represented 262 net revenues year ended december 31 1999 compared 70 year ended december 31 1998 largest component net revenues nonpublished fare retail value 1999 component internet sales mix increased 44 57 total internet bookings gross profit gross profit increased 330 million 942 680 million percentage net revenues gross profit decreased 205 200 commissions net revenue associated cost goods sold included 100 gross profit 1999 lower percentage published fares lower margins nonpublished fares reduced gross profit percent net revenues offset somewhat higher performancebased commission income earned 1999 industrywide reduction published fare commissions 8 5 fourth quarter 1999 minor impact years results may reduce future gross profit selling general administrative expenses year ended december 31 1999 selling general administrative expenses increased 259 million 774 593 million decreased percentage net revenues 195 174 decrease selling general administrative expenses percentage net revenue primarily attributable decreases compensation telephone rent expense expenses percentage net revenues decreases partially offset increases percentage net revenues credit card charges advertising expenses advertising expenses increased 73 million representing increase 22 33 net revenues advertising expenses targeted increase internet sales 49 million higher year ended december 31 1999 overall brand advertising primarily print media increased 24 million net earnings year ended december 31 1999 cheap tickets net earnings increased 65 million 6124 76 million increase reflected higher net revenues increased gross profit higher volumes lower selling general administrative expenses percentage net revenues result proportionately lower operating leverage years ended december 31 1998 december 31 1997 net revenues net revenues year ended december 31 1998 increased 683 million 664 1711 million category net revenue non published fare sales increased 635 million 659 1598 million commissions published fares increased 48 million 742 113 million increase commissions reflected increase 530 million 925 1103 million gross bookings published fares partially offset decrease commission rates average 90 1997 78 1998 increase net revenue benefited overall industrywide growth leisure travel market improving recognition cheap tickets brand name marketing advertising efforts word mouth net revenue call centers also benefited better productivity call center reservation agents opening fourth call center colorado springs may 1998 cheap tickets net revenues call centers retail operations including incentive bonuses increased 564 million 549 1592 million net revenues internet 119 million 1998 compared 176000 1997 net revenues internet represented 70 net revenues year ended december 31 1998 172 total increase net revenues 1997 1998 internet net revenues four quarters operations grew follows first quarter 1998 12 million second quarter 1998 23 million third quarter 1998 38 million fourth quarter 1998 47 million gross profit gross profit increased 136 million 632 350 million consistent rate increase gross bookings percentage net revenues gross profit decreased 209 205 decrease primarily attributable decrease gross margins 07 percentage points nonpublished fares decrease nonpublished fare margins primarily attributable contract renewal one carrier less favorable rate decline proportion nonpublished fares sold partially offset increased volume bonuses also contributed reduction gross profit selling general administrative expenses year ended december 31 1998 selling general administrative expenses increased 103 million 447 334 million decreased percentage net revenues 225 195 major components increases compensation credit card bank fees advertising costs increase advertising costs primarily attributable cheap tickets website launch october 1997 including promotions yahoo travelocity websites credit card fees increased result volume rate increases charged cheap tickets charge card associations decrease selling general administrative expenses percentage net revenues primarily attributable leverage increased sales 1998 cheap tickets issued stock options employees acquire aggregate 728000 shares cheap tickets common stock 660800 exercise price 018 per share 67200 exercise price 157 per share total compensation associated options amounted 722600 26325 charged operations year ended december 31 1998 remainder charged remaining fiveyear vesting period options exception 1062 charged closing cheap tickets initial public offering march 1999 time 140000 options vested terms net earnings loss cheap tickets net earnings 11 million year ended december 31 1998 compared prior years loss 10 million increase attributable increased net revenues proportionately lower increase selling general administrative expenses partially offset lower gross profit percentages operating segments net revenues segment gross profit segment years ended december 31 1999 december 31 1998 segment net revenues net revenues internet including allocated incentive bonuses increased 770 million 6394 891 million retail value nonpublished fares largest component net revenues nonpublished fare component internet sales mix increased 44 1998 57 total internet bookings 1999 contributing net revenue growth sales volumes increased result additional advertising growing acceptance internet commerce significant increase registered users website net revenues call centers including allocated incentive bonuses increased 915 million 575 2505 million increase reflected effect operations 1999 new call center opened late may 1998 increased productivity staffing remainder call centers gross profit gross profit internet sales increased 165 million 5189 197 million percentage net revenues internet gross profit decreased 265 year ended december 31 1998 221 year ended december 31 1999 higher percentage nonpublished fares sold via internet decreased gross profit percentage net revenues offset somewhat higher performancebased commission income earned 1999 call center gross profit increased 165 million 517 483 million percentage net revenues gross profit call centers decreased 200 1998 193 1999 increase sale nonpublished fares contributed decrease gross profit percentage net revenues seasonality quarterly financial information cheap tickets business seasonal due primarily customers leisure travel patterns changes availability nonpublished fares result cheap tickets typically higher sales gross profit second third quarters lower sales gross profit fourth quarter periods highvolume air travel occur fourth quarter year cheap tickets historically access fewer non published fares certain major routes may blacked otherwise unavailable online gross bookings may also tend seasonal may decline grow less rapidly summer months seasonal sales cycle fairly predictable cycle may shift yeartoyear corresponding changes economy factors affecting market price wars could lead unusual volatility revenues earnings following table sets forth selected unaudited quarterly financial information eight quarters period ended december 31 1999 well data expressed percentage cheap tickets net revenues periods presented information derived unaudited statements operations data opinion management stated basis consistent audited financial statements include adjustments consisting normal recurring adjustments necessary fair presentation information accordance gaap cheap tickets results operations quarter necessarily indicative results expected future period liquidity capital resources year ended december 31 1999 cheap tickets generated cash operating activities 105 million compared 20 million year ended december 31 1998 year ended december 31 1999 cash generated operating activities comprised principally net earnings plus depreciation totalling 92 million increase accounts payable 25 million year ended december 31 1998 cash generated operating activities comprised principally net earnings plus depreciation 16 million net changes working capital accounts primary account payable weekly settlement airline reporting corporation airline tickets purchased less commissions earned generally significant balance timing current payment relative monthend cause fluctuations monthend balances year ended december 31 1999 cheap tickets used cash investing activities 968 million prior period used cash investing activities 48 million cash used investing activities year ended december 31 1999 included net purchases short term marketable securities 936 million capital expenditures 32 million year ended december 31 1998 capital expenditures 485000 1999 cheap tickets received net proceeds initial public offering followon offering 1446 million deduction underwriters fees costs issuance less 48 million redeem mandatorily redeemable preferred stock accumulated dividends 1998 cheap tickets received 496000 proceeds sale condominium office formerly used company office 489000 used pay outstanding mortgage property december 31 1999 cheap tickets maintained hand cash equivalents 407 million short term marketable securities 986 million cheap tickets net working capital 1341 million cheap tickets available 3 million credit facility bank expired december 5 1999 cheap tickets outstanding longterm debt net current installments 516000 capital lease obligations 3376000 january 2000 cheap tickets completed stock repurchase program cheap tickets repurchased 1037288 shares outstanding common stock aggregate price 147 million periodic open market transactions funds required repurchase common stock obtained available cash resources marketable securities cheap tickets believes current cash equivalents short term marketable securities anticipated cash flow operations sufficient meet anticipated cash needs working capital debt service capital expenditures least foreseeable future cheap tickets spent approximately 79 million capital expenditures 1999 nearly used technological improvements upgrades cash generated internal operations sufficient satisfy cheap tickets liquidity requirements cheap tickets may seek acquire bank lines sell additional equity debt securities sale convertible debt equity securities could result additional dilution cheap tickets stockholders assurance financing available amounts terms acceptable cheap tickets recently issued accounting standards 1998 cheap tickets adopted sfas 130 reporting comprehensive income sfas 131 disclosures segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits sfas 130 states items required recognized generally accepted accounting principles components comprehensive income reported financial statement displayed prominence financial statements adoption sfas 130 effect cheap tickets financial statements since company elements comprehensive income net earnings sfas 131 requires disclosures regarding segments enterprise related information reflects different types business activities enterprise engages different economic environments operates cheap tickets manages business two operating segments established internet call center operations sfas 132 standardized disclosure requirements pension postretirement benefits adoption sfas 132 change existing measurement recognition standards cheap tickets defined contribution plan material effect cheap tickets financial statements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 establishes accounting reporting standards derivative instruments hedging activities sfas 133 requires recognition derivative instruments either assets liabilities statement financial position measurement derivative instruments fair value june 1999 fasb issued sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 original effective date sfas 133 fiscal quarters fiscal years beginning june 15 1999 result issuance sfas 137 effective date sfas 133 fiscal quarters fiscal years beginning june 15 2000 currently cheap tickets hold derivative instruments engage hedging activities adoption sfas 133 amended sfas 137 expected material effect cheap tickets financial statements fasb issued sfas 134 october 1998 sfas 136 june 1999 apply cheap tickets february 1999 fasb issued sfas 135 rescission fasb statement 75 technical corrections effective shortly issuance material effect cheap tickets financial statements january 1999 cheap tickets adopted statement position sop 981 accounting costs computer software developed obtained internal use sop 985 reporting costs startup activities issued accounting standards executive committee acsec american institute certified public accountants aicpa implementation pronouncements material effect cheap tickets financial statements year 2000 compliance cheap tickets taken steps address potential year 2000 problems cheap tickets formed project team systems technology finance telecom operations departments project team responsible implementing following fourphase process 1 identifying computer systems products affected 2 contacting vendors suppliers 3 determining year 2000 compliance status system product 4 implementing necessary changes although date impact year 2000 issues material systems cheap tickets could experience residual year 2000 issues could material adverse effect cheap tickets business results operations financial condition properly addressed cheap tickets currently three types computer systems programs may affected residual year 2000 issues include 1 reservations database systems 2 pclan systems 3 noninformational technology systems reservations database systems involve computer programs products responsible airline cruise car hotel reservations transactional systems pclan systems include cheap tickets personal computer network systems noninformational technology systems include systems hardware containing embedded technology micro controllers reservation database systems main supplier cheap tickets reservation database systems sabre currently 90 cheap tickets computing transactions processed sabre systems includes transactions involving airline reservations booking ticketing car hotel rentals cruises accounting sabre advised cheap tickets year 2000 implementation plan place sabre advised cheap tickets resolved year 2000 issues main computer systemthe airlines reservations system turn cheap tickets implemented changes required sabre cheap tickets year 2000 compliant assurances sabre compliant residual year 2000 issues impact sabres noncompliance would material pclan systems cheap tickets completed replacement pclan computing systems new pclan systems installed including hardware software applications operating systems represented vendors year 2000 compliant cheap tickets believes systems yet replaced present year 2000 concerns cheap tickets knowledge systems already year 2000 compliant addition cheap tickets currently requiring new systems purchases meet year 2000 compliance requirements assurances pclan computing systems compliant residual year 2000 issues impact noncompliance would material noninformational technology systems cheap tickets evaluated non informational technology systems operational centers achieved year 2000 compliance systems cheap tickets developed contingency plan event critical computer systems compliant residual year 2000 issues management believes expenses ensuring year 2000 compliance computer products systems material adverse effect operations earnings financed cash flow operations despite cheap tickets assessment current hardware software assessment cheap tickets current state compliance may fully accurate cheap tickets plans achieving full compliance residual year 2000 issues may fact fully successful cheap tickets also process attempting verify products supplied thirdparty vendors either resolved year 2000 issue published plan certain cases sabre cheap tickets relied good faith representations warranties regarding year 2000 compliance provided thirdparty vendors hardware software consultants representations warranties may accurate material respects advice assessments consultants may reliable third parties able make systems year 2000 compliant timely manner could material adverse effect cheap tickets business results operations financial condition cheap tickets developed contingency plan address possibility sabre unable achieve compliance residual year 2000 issues intend federal aviation administration readiness july 21 1999 faa announced computer systems fully year 2000 compliant according faas announcement compliance verified independent contractor faas state year 2000 readiness could significant impact air travel uncertain period time january 1 2000 air travel may affected travelers safety fears actual disruption caused residual year 2000 issues possible air traffic disruption breakdown air control system breakdowns generally resulting reduced air traffic less safe air travel could serious impact air travel business generally could affect cheap tickets business results operations financial condition adversely management drawn conclusions whether residual year 2000 effect experienced affect cheap tickets addition cheap tickets developed contingency plan address situation intend effect entities finally year 2000 issues may impact entities cheap tickets business including example airlines responsible maintaining telephone internet communications accordingly cheap tickets cannot predict effect year 2000 problems entities fail take preventiveor corrective actions timely manner year 2000 issues could material adverse effect cheap tickets business results operations financial condition cheap tickets yet developed contingency plan address possibility entities business unable achieve compliance year 2000 issues intend additional factors could affect operating results addition information provide annual report form 10k carefully consider following risks may cause actual results levels activity performance achievements materially different future results levels activity performance achievements expressed implied forwardlooking statements contained herein risks face risks yet known us others currently believe material could later turn could hurt business access nonpublished fares depend travel suppliers longterm exclusive contracts year ended december 31 1999 approximately 99 gross bookings came sale airline tickets nonpublished fares represented 64 airline gross bookings 93 net revenues believe continuing ability obtain nonpublished fares key success business could hurt refusals airlines renew contracts supply nonpublished fares lack available excess capacity extended time period renewals contracts less favorable terms cancellation contracts nonpublished fares tickets acquire airlines resell consumers substantial discounts published fares airlines sell us tickets nonpublished fares primarily dispose excess capacity without eroding published fare structures contracts 35 airlines permit us acquire nonpublished fares routes designated contracts specified prices contracts require airlines provide specific quantity tickets deal us exclusively although terms vary typical contract period one half years many cancelable 30 days notice less consistent record renewing contracts airlines may decide business us dispose excess capacity others times past airlines renewed contracts us less favorable terms may continue occur future addition may times less excess capacity sell large percentage sales nonpublished fares currently comes limited number suppliers year ended december 31 1999 approximately 49 sales non published fares came tickets bought three airlines continental represented approximately 20 twa represented approximately 20 america west represented approximately 9 1998 three airlines represented 49 sales nonpublished fares one carriers discontinue supply nonpublished fares us business could hurt percentages nonpublished fare sales represented leading carriers likely change year depending upon variety factors including availability excess capacity carrier breadth routes nonpublished fares available typically engage ongoing discussions existing carriers increasing routes available sale nonpublished fares time also discuss potential new relationships supply nonpublished fares carriers currently contracts travel suppliers may acquired continue deal us believe continued ability obtain nonpublished fares key success many contracts shortterm cancelled short notice depend relationships suppliers continued supply nonpublished fares also depend continuation suppliers policy selling excess capacity nonpublished fares acquisition one suppliers could hurt relationship supplier andor could change suppliers policy dealing excess capacity 1999 reno air acquired american airlines year ended december 31 1999 reno air accounted approximately 5 sales nonpublished fares american airlines made former reno air routes available us sale nonpublished fares decline airline commission rates elimination commissions could hurt business earned approximately 33 gross profit year ended december 31 1999 commissions including incentive overrides paid airlines however airlines required pay particular commission rates commissions air carriers reduce restrict eliminate altogether commissions impose surcharges tickets sold time could hurt business recent years airlines reduced rates capped perticket commissions addition reduced rates capped commissions online reservations potential fluctuations financial results makes financial forecasting difficult annual quarterly results operations may expectations public market analysts investors could result decline value common stock business seasonal due customers leisure travel patterns changes availability nonpublished fares typically higher sales gross profit second third quarters lower sales gross profit fourth quarter historically experienced losses net income fourth quarter periods highvolume air travel occur fourth quarter year historically access fewer nonpublished fares certain major routes may unavailable online gross bookings may also tend seasonal may decline grow less rapidly summer months seasonal sales cycle fairly predictable cycle may shift yeartoyear corresponding changes economy factors affecting market price wars recently occurred fourth quarter 1999 could lead unusual volatility revenues earnings gross profit may impacted number different factors including number fares sold percentage gross bookings represented nonpublished fare sales gross margin percentages nonpublished fare sales percentages turn impacted sales mix airlines whose net fare prices us vary competitive factors various routes possible elimination profitable routes rates commissions published fare sales amount volume bonuses change factors could materially affect gross margins operating results future periods events outside control including set forth risk factors may cause us experience significant fluctuations revenues earnings intend increase operating expenses anticipation future sales increased sales occur subsequent periods may experience downward fluctuations earnings past securities class action litigation often brought company following periods volatility market price securities may future target similar litigation securities litigation could result substantial costs divert managements attention resources decline leisure travel disruptions travel generally could hurt business earn almost revenues travel industry particularly leisure travel leisure travel highly sensitive personal discretionary spending levels thus tends decline general economic downturns addition adverse trends events tend reduce leisure travel likely hurt business may include political instability regional hostilities terrorism fuel price escalation travelrelated accidents bad weather airline travel related strikes number airlines currently various stages negotiation unions representing employees negotiations fail unions select strike effect slowdown business could harmed face actual potential competition many sources compete ticket sales travel wholesalers consolidators online travel companies airlines travel agents based price quality service customer leisure travel market also compete frequent flyer awards charter flights increased competition may result reduced operating margins loss market share decreased brand recognition ultimately may able compete successfully current future competitors among factors success depends heavily access non published fares brand recognition ability systems integrate nonpublished fares published fares offer customers broad choice competitors including air carriers longer histories larger customer bases greater brand recognition significantly greater financial marketing resources competitors may able replicate factors make us successful may also enter strategic commercial relationships larger established wellfinanced companies competitors agreements buy nonpublished fares major suppliers example pricelinecom inc signed agreement purchase nonpublished tickets continental united american airlines others granted warrants purchase pricelinecom common stock certain carriers competitors may able induce one suppliers non published fares pricing equity incentives cease business us business us less favorable terms might also able build strong brand recognition leisure travel market widespread advertising marketing efforts certain competitors may able devote greater resources marketing promotional campaigns internet competitors may also devote substantially resources website systems development developments could bring heavy competitive pressures bear us also face prospect competition potential competitors yet leisure travel market believe potential competitors likely large wellfinanced companies existing brand name recognition proven retail distribution ability complete description competitive environment operate please refer item 1 businesscompetition success business depend continued growth online commerce internet infrastructure future revenues profits depend certain degree upon widespread acceptance use internet online services medium commerce customers sellers acceptance growth internet use continue hurt business rapid growth use internet online services recent phenomenon growth may continue sufficiently broad base customers may accept continue use internet medium commerce demand market acceptance recently introduced products services internet subject high level uncertainty proven products services us achieve significant growth customers historically used traditional means commerce instead need elect purchase products services online sellers products services need accept expand use internet channel distribution revenues profits depend customers visiting website actually purchasing tickets customers could potentially use site route information choose purchase tickets directly airlines elsewhere internet experienced expected continue experience significant growth number users amount traffic success depend upon development maintenance internets infrastructure cope increased traffic require reliable network backbone necessary speed data capacity security timely development complementary products high speed modems providing reliable internet access services major online service providers internet experienced outages delays result software hardware failures could face outages delays future outages delays likely affect level internet usage processing transactions cheap tickets website unlikely could make level orders lost circumstances increased phone orders addition internet could lose viability reason delays development adoption new standards handle increased levels activity increased government regulation adoption new standards government regulation may require us incur substantial compliance costs brand may achieve broad recognition necessary succeed believe must maintain enhance cheap tickets brand continue attract expand business failure maintain enhance brand could hurt business success cheap tickets brand depend certain extent ability enhance advertising programs number internet sites offer competing services increases importance establishing maintaining brand name recognition many online sites already well established brands online services travel industry generally intend expand significantly advertising expense including national television radio promotions expenditures may result increased business activity desired enhancement brand recognition could adversely affect results operations may unable manage rapid growth effectively rapidly significantly expanded operations anticipate significant expansion inability manage growth effectively could hurt business recently added number key managerial technical employees expect add additional key personnel future expansion placed expect continue place significant strain management operational financial resources manage expected growth operations personnel plan improve upgrade transactionprocessing operational customer service financial systems procedures controls maintain expand relationships various travel service suppliers internet portals travelrelated website companies third parties necessary business expand finance administrative operations staff continue attract train manage employee base implement disaster recovery program current planned personnel systems procedures controls may inadequate support planned growth management may able identify manage exploit existing potential market opportunities successfully may able keep industrys rapid technological changes industry compete characterized rapid technological change changes user customer requirements preferences frequent new product service introductions embodying new technologies emergence new industry standards practices emerging importance internet proliferation companies offering internetbased products services developments could render existing online sites proprietary technology systems quickly obsolete inability modify adapt infrastructure timely manner expenses incurred making adaptations could hurt business result required continually improve performance features reliability services particularly response competitive offerings success depend part ability enhance existing services develop new services costeffective timely manner development proprietary technology entails significant technical business risks requires substantial expenditures lead time may able adapt successfully customer requirements emerging industry standards addition widespread adoption internet networking telecommunications technologies could require us incur substantial expenditures modify adapt services infrastructure computer communications systems vulnerable business interruptions ability receive fill orders call centers online provide highquality customer service largely depends efficient uninterrupted operation computer communications hardware systems occurrence interruptions delays loss data inability accept confirm customer reservations could hurt business online servers located sunnyvale california herndon virginia sabre groups computers located tulsa oklahoma communication systems located four call centers accounting systems computers located hawaii systems operations vulnerable damage interruption power loss telecommunications failure breakins natural disasters similar events recently operations several major online companies disrupted data floods hackers may vulnerable similar acts sabotage currently carry adequate business interruption insurance although adopted network security measures servers vulnerable computer viruses physical electronic breakins similar disruptions kinds events could lead interruptions delays loss data inability accept confirm customer reservations occurrence foregoing risks could hurt business interruptions service third parties could hurt business rely certain thirdparty computer systems thirdparty service providers including computerized central reservation systems airline hotel industries make airline ticket hotel room reservations interruption thirdparty services deterioration performance could hurt business arrangement third parties terminated may find alternative source systems support timely basis commercially reasonable terms rely third parties print airline tickets arrange delivery rely third parties host online systems infrastructure web database servers currently rely sabre general reservations system including customer profiling making reservations credit card verification confirmations currently 90 computing transactions processed sabre systems technology relationship sabre internet operations increase dependency sabre ever elect terminate existing relationship would forced convert another provider conversion could require substantial commitment time resources hurt business current reservation systems may able handle calls adequately call centers able answer calls service inquiries adequately systems lack capacity handle demands customers cause unanticipated system disruptions slower response times poor customer service impaired quality speed reservations confirmations delays reporting accurate financial information problems could hurt business experience substantial increase web traffic reservations beyond expected levels may need expand upgrade technology transactionprocessing systems network infrastructure beyond planned levels improvement fail expand upgrade timely manner business could hurt addition may able project accurately rate timing increases demand upgrade systems infrastructure accommodate future traffic levels integrate successfully newly developed purchased technology existing systems upgrade expand systems timely efficient manner online security breaches could hurt business secured transmission confidential information public networks essential maintain consumer supplier confidence compromise security occur could hurt business concerns security transactions conducted internet potential compromise customer privacy may inhibit growth commercial online services means conducting commercial transactions expended significant resources protect security breaches alleviate problems caused breaches may need make expenditures purpose future rely encryption authentication technology licensed third parties provide security authentication necessary transmit securely confidential information customer credit card numbers addition maintain extensive confidential database customer profiles transaction information current security measures may adequate advances computer capabilities new discoveries field cryptography events developments may result compromise breach methods use protect customer transaction personal data party circumvent security might able misappropriate proprietary information cause interruptions operations security breaches could also expose us risk loss litigation possible liability failing secure confidential customer information lose key personnel cannot recruit additional personnel business may suffer depend substantially continued services performance senior management particularly michael j hartley chairman board chief executive officer sam galeotos president chief operating officer certain key personnel loss services executive officers key employees could hurt business employment agreements certain key personnel addition members senior management group recruited hired past 24 months individuals may able fulfill responsibilities adequately may remain us future success also depends ability identify attract hire train retain motivate highly skilled technical managerial marketing customer service personnel competition personnel intense location headquarters hawaii may also make difficult attract qualified personnel mainland may able attract assimilate retain sufficiently qualified personnel particular may encounter difficulties attracting sufficient number qualified software developers online services transaction processing systems failure retain attract necessary technical managerial marketing customer service personnel could hurt business impair growth strategy although none employees represented labor union employees may join form labor union business could hurt offer new services successfully plan introduce new expanded services inability generate revenues expanded services products sufficient offset development offering cost could hurt business alternative products including cruises auto rentals hotel room reservations represented less 1 gross bookings year ended december 31 1999 business strategy increase percentage alternate travel offerings percentage revenues may able offer services costeffective timely manner efforts may successful new service favorably received customers could damage reputation brand name expansion services could also require significant additional expenses may strain management financial operational resources cannot obtain alternate travel offerings future may able benefit fully growth strategy business could hurt make acquisitions successful may future broaden scope content business acquisition existing complementary businesses may successful overcoming problems encountered connection acquisitions inability could hurt business may consider acquisition companies providing similar services international markets sectors travel industry future acquisitions would expose us increased risks include risks associated assimilation new operations sites personnel diversion resources existing businesses sites technologies inability generate revenues new sites content sufficient offset associated acquisition costs maintenance uniform standards controls procedures policies impairment relationships employees customers result integration new businesses acquisitions may also result additional expenses associated amortization acquired intangible assets potential businesses business could hurt international expansion successful one component growth strategy expand internationally international expansions present us special problems adapting foreign business customs regulations managing staff effectively distance address problems adequately international expansion may produce desired results could hurt business may expend significant financial management resources establish local offices overseas create localized user interfaces comply local customs regulations revenues generated international operations insufficient offset expense establishing maintaining business could hurt date experience developing localized versions online sites offshore call centers limited experience marketing distributing travel services internationally may able expand operations successfully markets conducting business international level also involves certain inherent risks unexpected changes regulatory requirements tariffs trade barriers difficulties staffing managing foreign operations political instability currency rate fluctuations seasonality leisure travel certain countries potentially adverse tax consequences may unable meet future capital requirements may able fund expansion develop enhance products services respond competitive pressures lack adequate funds could hurt business alternatively raise additional funds issuing equity convertible debt securities percentage ownership stockholders diluted new securities could rights preferences privileges senior common stock currently commitments additional financing cannot certain additional financing available future extent required available acceptable terms information managements view liquidity capital resources please refer managements discussion analysis financial condition results operationsliquidity capital resources success depends ability protect intellectual property trademarks copyrights trade secrets regard copyrights service marks trademarks trade secrets similar intellectual property critical success claims infringement misappropriation third parties may hurt business rely combination laws contractual restrictions including trademark copyright law trade secret protection confidentiality andor license agreements employees customers partners others establish protect proprietary rights however laws contractual restrictions may sufficient prevent misappropriation technology deter others developing similar technologies pursue registration certain key trademarks service marks united states effective trademark service mark copyright trade secret protection may available every country products services made available steps taken protect proprietary rights may adequate third parties may infringe misappropriate copyrights trademarks trade dress similar proprietary rights may required incur significant expenses preserving rights addition parties may assert infringement claims us may subject legal proceedings claims time ordinary course business including claims alleged infringement trademarks intellectual property rights third parties us claims even meritorious could result expenditure significant financial managerial resources domain names currently hold internet domain name wwwcheapticketscom well various related names third parties may acquire domain names infringe otherwise decrease value trademarks proprietary rights may hurt business domain names generally regulated internet regulatory bodies regulation domain names united states foreign countries subject change regulatory bodies could establish additional toplevel domains appoint additional domain name registrars modify requirements holding domain names relationship regulations governing domain names laws protecting trademarks similar proprietary rights unclear result may acquire maintain wwwcheapticketscom domain name countries conduct business regulatory legal uncertainties could harm business certain segments travel industry heavily regulated united states governments accordingly certain services offered us affected regulations new legislation regulation application laws regulations jurisdictions whose laws currently apply business application existing laws regulations internet commercial online services could hurt business subject federal regulations prohibiting unfair deceptive practices addition federal regulations concerning display presentation information currently applicable airline booking services could extended us future well laws regulations aimed protecting customers accessing online travel services california hawaii certain states required register seller travel comply certain disclosure requirements participate states restitution fund also subject regulations applicable businesses generally laws regulations applicable online commerce currently laws regulations directly apply internet commercial online services however possible laws regulations may adopted respect internet commercial online services covering issues user privacy pricing content copyrights distribution antitrust characteristics quality products services growth development market online commerce may prompt calls stringent consumer protection laws would likely impose additional burdens companies conducting business online adoption additional laws regulations may decrease growth internet commercial online services turn could decrease demand products services increase cost business otherwise hurt business moreover many states currently great uncertainty whether existing laws governing issues property ownership sales taxes libel personal privacy apply internet commercial online services issues may take years resolve example tax authorities number states well congressional advisory commission currently reviewing appropriate tax treatment companies engaged online commerce new state tax regulations may subject us additional state sales income taxes federal legislation imposing certain limitations ability states impose taxes internetbased sales enacted 1998 internet tax freedom act legislation known imposes electronic commerce threeyear moratorium state local taxes imposed october 1 1998 taxes discriminatory internet access possible legislation could renewed terminates october 2001 failure renew legislation could allow state local government impose taxes internetbased sales taxes could hurt business stock price likely volatile market price common stock likely volatile could subject significant fluctuations response factors following beyond control quarterly variations operating results operating results vary expectations securities analysts investors changes expectations future financial performance including financial estimates securities analysts investors changes market valuations travel internet online service companies announcements technological innovations new services us competitors announcements us competitors significant contracts acquisitions strategic partnerships joint ventures capital commitments loss one major travel suppliers additions departures key personnel future sales common stock market price volume fluctuations domestic international stock markets often experience extreme price volume fluctuations well general political economic conditions recession interest rate currency rate fluctuations may adversely affect market price common stock market prices stocks internetrelated technology companies frequently reach levels bear relationship operating performance companies market prices often sustainable subject wide variations past securities class action litigation often brought company following periods volatility market price securities may future target similar litigation securities litigation could result substantial costs divert managements attention resources market price stock could adversely affected significant portion stock closely controlled march 13 2000 michael j hartley chairman board chief executive officer president cheap tickets sandra hartley vice president employee relations director wife michael j hartley together respective affiliates beneficially owned approximately 490 outstanding common stock subject certain adjustments ownership could discourage others initiating potential merger takeover change control transactions result market price common stock could adversely affected act together effectively ability control outcome matters requiring stockholder approval including election removal directors merger consolidation sale substantially assets control management affairs antitakeover provisions affecting us could prevent delay change control board directors authority issue 10000000 shares preferred stock determine price rights preferences privileges restrictions including voting rights shares without vote action stockholders could adverse impact market price common stock present plans issue shares preferred stock may rights holders common stock may subject adversely affected rights holders preferred stock may issued future moreover issuance preferred stock may effect delaying deferring preventing change control cheap tickets without action stockholders may adversely affect voting rights holders common stock certain provisions charter documents including provisions permitting stockholders take action written consent twothirds vote limiting ability stockholders raise matters meeting stockholders without giving advance notice may effect delaying preventing changes control management cheap tickets governance provisions also could hurt market price common stock item 7a item 7 managements discussion analysis financial condition results operations following discussion read conjunction financial statements cheap tickets statements caption constitute forwardlooking statements involve known unknown risks uncertainties factors may cause actual results levels activity performance achievements materially different future results levels activity performance achievements expressed implied forwardlooking statements factors include among things listed risk factors elsewhere annual report cases identify forward looking statements terminology may could expects plans intends anticipates believes estimates predicts potential continue negative terms comparable terminology although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance achievements moreover neither anyone else assumes responsibility accuracy completeness statements duty update forwardlooking statements date annual report overview cheap tickets principally engaged sale discount tickets domestic leisure travel majority gross bookings historically come sale nonpublished fares cheap tickets acquires airlines resells public profit cheap tickets purchases non published fares resells customers inventory carrying costs fares cheap tickets sets resale prices meet demands leisure travelers looking lowest price cheap tickets also sells published fares receives commissions airlines sales nonpublished fares generally carry higher margins percentage gross bookings commissions published fare bookings cheap tickets revenue historically generated ticket sales cheap tickets four call centers lesser extent 10 walkin retail stores october 1997 cheap tickets broadened ticket distribution offering online booking wwwcheapticketscom internet bookings accounted approximately 29 total gross bookings 1999 approximately 38 year ended december 31 2000 december 31 2000 cheap tickets approximately 87 million registered online users cheap tickets expects online gross bookings online revenue represent increasing portion gross bookings revenue future periods gross bookings represent aggregate retail value tickets sold nonpublished fares published fares cheap tickets records revenue statement operations commissions earned cheap tickets sale published fares gross margin sale nonpublished fares gross bookings required generally accepted accounting principles gaap considered isolation substitute information prepared accordance gaap management uses gross bookings key indicator general business activity success promotional efforts capacity handle customer demand efficiency reservation agents addition management believes gross bookings provide useful comparison historical periods yeartoyear changes information provide useful measure market acceptance cheap tickets products revenue consists gross margin nonpublished fare sales published fare commissions net advertising revenue service fees cheap tickets cost sales consists distribution costs related sale tickets commissions including incentive overrides earned primarily published air fares sold include certain payments based volume transactions gross profits include 1 gross profit nonpublished sales cheap tickets establishes markup retail price 2 commissions earned sale published fares sold 3 net advertising revenue 4 service fees less distribution costs cheap tickets earns higher profits sale nonpublished fares sale published fares substantially cheap tickets gross bookings represent sales airline tickets years ended december 31 1999 2000 approximately 99 97 respectively gross bookings arose airline ticket sales remaining gross bookings arose sales cruise tickets auto rentals hotel reservations travel related products cheap tickets expects gross bookings sources airline ticket sales increase future periods cheap tickets selling general administrative expenses include operating corporate overhead major expense categories include compensation advertising communications credit card bank fees occupancy results operations following table sets forth years ended december 31 1998 1999 2000 information derived statement operations cheap tickets expressed percentage revenue percentage change items gross bookings years ended december 31 1998 1999 2000 compared prior period trends illustrated following table necessarily indicative future results year ended december 31 2000 compared year ended december 31 1999 total revenue total revenue year ended december 31 2000 increased 244 million 330 984 million nonpublished fare revenue increased 105 million 229 represented 571 total revenue increase nonpublished fare revenue result increase number nonpublished tickets sold higher margins nonpublished fares effective yield management gross bookings nonpublished fares increased 630 million 199 3803 million nonpublished fares decreased 641 gross bookings last year 571 year commissions bonuses increased 74 million 332 298 million 74 million increase reflected increase amount published fares sold increase volume incentives received global distribution system gds supplier gross bookings published fares increased 359 429 total gross bookings year service fees revenue includes gross service fees small amount banner advertising increase 60 million 1999 125 million 2000 primarily result increases service fees cheap tickets began banner advertising website fourth quarter 2000 accelerated usage internet commerce leisure travel market broader recognition cheap tickets brand name particularly internet advertising targeted markets contributed growth total revenue total revenue call centers retail operations increased 82 million 156 610 million 82 million increase 56 million reflected increase sales 26 million represented increase service fee revenue higher gross bookings call centers higher nonpublished margins volume bonuses service fees largely accounted increase revenue total revenue internet increased 162 million 374 million internet revenue equaled 380 total revenue year ended december 31 2000 compared 287 year ended december 31 1999 fourth quarter banner advertising resulted revenue 133152 2000 internet published sales mix increased 43 48 total internet bookings gross profit gross profit increased 237 million 352 909 million percentage total revenue gross profit increased 908 923 increase 237 million 105 million result increased nonpublished revenue 74 million higher published commissions gds fees 58 million substantially margin service fees cost sales consists distribution costs tickets non published revenue commissions total revenue associated costs sale included 100 gross profit selling general administrative expenses year ended december 31 2000 selling general administrative expenses increased 218 million 374 803 million increased percentage total revenue 790 816 advertising expenses increased 75 million representing increase 150 189 total revenue compensation volume related costs increased costs aggregate less 1999 percentage total revenue net earnings year ended december 31 2000 cheap tickets net earnings increased 44 million 583 120 million increase reflected 1 higher total revenue 2 increased gross profit higher volumes margins 3 increased interest investments 4 fourth quarter adjustment due lower effective tax rate resulting actions taken reduce state income taxes year ended december 31 1999 compared year ended december 31 1998 total revenue total revenue year ended december 31 1999 increased 358 million 937 740 million nonpublished fare revenue increased 219 million 922 457 million increase non published fare revenue reflected significant increase amount non published tickets sold commissions bonuses increased 111 million 983 223 million 111 million increase commissions bonuses reflected increase amount published fares sold improvement bonus overrides percentage total revenue gross bookings published fares decreased 408 359 total gross bookings strong growth leisure travel market particularly air travel improving recognition cheap tickets brand increased exposure coincident becoming public company significantly higher advertising expenditures 1999 compared 1998 increasing acceptance internet commerce 1999 contributed growth total revenue total revenue call centers retail operations increased 181 million 520 528 million 181 million increase reflected effect operations 1999 new call center opened late may 1998 increased productivity staffing remainder call centers total revenue internet increased 177 million 212 million total revenue internet represented 287 total revenue year ended december 31 1999 compared 91 year ended december 31 1998 1999 nonpublished fare component internet sales mix increased 44 57 total internet bookings gross profit gross profit increased 332 million 979 672 million percentage total revenue gross profit increased 889 908 1999 lower percentage published fares lower margins nonpublished fares reduced gross profit percent total revenue offset somewhat higher performancebased commission income earned industrywide reduction published fare commissions 8 5 fourth quarter 1999 minor impact years results selling general administrative expenses year ended december 31 1999 selling general administrative expenses increased 261 million 801 584 million decreased percentage total revenue 846 790 decrease selling general administrative expenses percentage total revenue primarily attributable decreases compensation telephone rent expense expenses percentage total revenue decreases partially offset increases percentage total revenue credit card charges advertising expenses advertising expenses targeted increase internet sales 49 million higher year ended december 31 1999 overall brand advertising primarily print media increased 24 million net earnings year ended december 31 1999 cheap tickets net earnings increased 65 million 6124 76 million increase reflected higher total revenue increased gross profit higher volumes lower selling general administrative expenses percentage total revenue result proportionately lower operating leverage operating segments cheap tickets reported segments comprised internet call centerother operations accounting policies segments used preparation cheap tickets consolidated financial statements cheap tickets evaluates performance operating segments based segment operating income includes sales marketing expenses overhead charges directly attributable operating segment certain expenses managed outside operating segments excluded corporate expenses including income expense items unallocated shared expenses income taxes asset information operating segment reported since cheap tickets identify assets segment total revenue segment year ended december 31 2000 compared year ended december 31 1999 segment total revenue total revenue internet increased 162 million 7631 374 million total revenue internet represented 38 total revenue year ended december 31 2000 compared 29 year ended december 31 1999 2000 revenue increased due additional advertising spent growing acceptance internet commerce significant increase new registered users website 2000 published fare gross bookings increased 43 48 total internet bookings total revenue call centers increased 82 million 156 610 million 82 million increase 56 million produced increased sales volume 26 million represented increase service fee revenue increase revenue due increased bookings advertising additional staffing well higher nonpublished margins volume bonuses gross profit gross profit internet sales increased 152 million 801 341 million percentage total revenue internet gross profit increased 894 year ended december 31 1999 913 year ended december 31 2000 increased margin largely due higher volumes higher margins nonpublished fare revenue combined increased incentive bonuses net service fee income call center gross profit increased 85 million 176 567 million percentage total revenue gross profit call centers increased 914 1999 930 2000 increased nonpublished fare margins higher incentive bonuses net service fee income contributed increase gross profit percentage total revenue operating income operating income internet sales increased 84 million 1059 163 million percentage total revenue internet operating income increased 374 year ended december 31 1999 437 year ended december 31 2000 operating expenses percentage total revenue decreased 520 477 call center operating income decreased 20 million 183 90 million percentage total revenue operating income call centers decreased 209 1999 147 2000 increased compensation costs reservation agents customer care staffing allocated advertising general administrative costs percentage total revenue reduced operating income year ended december 31 1999 compared year ended december 31 1998 segment total revenue total revenue internet increased 178 million 5094 212 million sales volumes increased result additional advertising growing acceptance internet commerce significant increase registered users website nonpublished fare component internet sales mix increased 44 1998 57 total internet bookings 1999 contributing total revenue growth total revenue call centers increased 181 million 520 528 million increase resulted good consumer demand increased productivity staffing call centers full year versus partial year sales fourth call center opened late may 1998 gross profit gross profit internet sales increased 159 million 5142 190 million percentage total revenue internet gross profit increased 887 year ended december 31 1998 894 year ended december 31 1999 higher percentage nonpublished fare revenue via internet increased gross profit percentage total revenue along higher performancebased commission income earned call center gross profit increased 174 million 562 483 million percentage total revenue gross profit call centers increased 889 1998 914 1999 increase non published fare revenue contributed increase gross profit percentage total revenue operating income operating income internet sales increased 67 million 5308 79 million percentage total revenue internet operating income increased 361 year ended december 31 1998 374 year ended december 31 1999 lower operating expenses percentage total revenue contributed increased operating income percentage total revenue call center operating income increased 36 million 110 million percentage total revenue operating income call centers decreased 214 1998 209 1999 operating expenses percentage total revenue increased 675 705 seasonality quarterly financial information cheap tickets business seasonal due primarily customers leisure travel patterns changes availability nonpublished fares result cheap tickets typically higher sales gross profit second third quarters lower sales gross profit fourth quarter periods highvolume air travel occur fourth quarter year cheap tickets historically access fewer non published fares certain major routes may blacked otherwise unavailable online gross bookings also tend follow seasonal pattern seasonal sales cycle fairly predictable cycle may shift yeartoyear corresponding changes economy factors affecting market price wars could lead unusual volatility revenue earnings following table sets forth selected unaudited quarterly financial information eight quarters period ended december 31 2000 well data expressed percentage cheap tickets revenue periods presented information derived unaudited statements operations data opinion management stated basis consistent audited financial statements include adjustments consisting normal recurring adjustments necessary fair presentation information accordance gaap cheap tickets results operations quarter necessarily indicative results expected future period note percentages may add due rounding liquidity capital resources year ended december 31 2000 cheap tickets generated cash operating activities 97 million compared 105 million year ended december 31 1999 year ended december 31 2000 cash generated operating activities comprised principally net earnings 120 million plus depreciation 29 million less increase trade accounts receivable 25 million net changes working capital accounts year ended december 31 1999 cash generated operating activities comprised principally net earnings 76 million plus depreciation 16 million net changes working capital accounts primary trade account receivable volumebased commission earned sale airline tickets timing current receipts relative monthend changes sales volume cause fluctuations monthend balances year ended december 31 2000 cheap tickets used cash investing activities 87 million prior period used cash investing activities 968 million cash used investing activities year ended december 31 2000 included net purchases short term marketable securities 14 million capital expenditures 74 million year ended december 31 1999 net purchases shortterm marketable securities 936 million capital expenditures 32 million 1999 cheap tickets received net proceeds initial public offering followon offering 1446 million deduction underwriters fees costs issuance less 48 million redeem mandatorily redeemable preferred stock accumulated dividends december 31 2000 cheap tickets maintained hand cash equivalents 403 million short term marketable securities 1005 million cheap tickets net working capital 1387 million cheap tickets outstanding longterm debt capital lease obligations net current installments 491000 1961000 respectively january 2000 cheap tickets completed stock repurchase program cheap tickets repurchased 1037288 shares outstanding common stock aggregate price 147 million periodic open market transactions funds required repurchase common stock obtained available cash resources marketable securities cheap tickets believes current cash equivalents short term marketable securities anticipated cash flow operations sufficient meet anticipated cash needs working capital debt service capital expenditures least foreseeable future cheap tickets spent approximately 74 million 32 million capital expenditures 2000 1999 respectively nearly used technological improvements upgrades cash generated internal operations sufficient satisfy cheap tickets liquidity requirements cheap tickets may seek acquire bank lines sell additional equity debt securities sale convertible debt equity securities could result additional dilution cheap tickets stockholders assurance financing available amounts terms acceptable cheap tickets recently issued accounting standards cheap tickets implemented several new accounting pronouncements fourth quarter 2000 affected revenue recognition policies new pronouncements included eitf 9919 reporting revenue gross principal versus net agent sab 101 revenue recognition financial statements eitf 0010 accounting shipping handling fees costs promote comparability financial statements periods presented restated conform new pronouncements eitf 9919 reporting revenue gross principal versus net agent required report revenue sales nonpublished fares net basis accordingly net margin sale nonpublished fares reported revenue previously reported sales fares gross basis whereby gross booking retail amount reported revenue amount paid airline carrier reported cost sales implementation eitf 9919 affect reporting commissions published fares continues reported net basis sab 101 revenue recognition financial statements required us delay recognition revenue tickets delivered customers previously reported revenue reservation ticketed payment received change policy material impact financial statements eitf 0010 accounting shipping handling fees costs report distribution handling service fees revenue related cost distribution reported cost sales previously reported distribution costs part selling general administrative expenses fees charged customers offset expense number recently issued accounting pronouncements affect companies like cheap tickets including eitf 9917 accounting barter transactions eitf 0014 accounting certain sales incentives eitf 0021 accounting multipleelement revenue arrangements fin 44 accounting certain transactions involving stock compensation eitf 0023 issues related accounting stock compensation apb 25 fin 44 eitf 0002 accounting website development costs sfas 133 accounting derivative instruments hedging activities accounting pronouncements material effect financial statements either enter transactions previously compliance guidance pronouncements item 7a item 7a quantitative qualitative disclosures market risk cheap tickets use derivative financial instruments generally place marketable security investments high credit quality instruments primarily us government obligations corporate obligations contractual maturities less one year expect material loss marketable security investments therefore believe potential interest rate exposure material item 8 item 7a quantitative qualitative disclosures market risk cheap tickets use derivative financial instruments generally place marketable security investments high credit quality instruments primarily us government obligations corporate obligations contractual maturities less one year expect material loss marketable security investments therefore believe potential interest rate exposure material item 8 item 8 financial statements supplementary data see pages annual report form 10k item 9 item 8 financial statements supplementary data see pages annual report form 10k item 9 