##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q



|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------------

OR



|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|----- |  | -----------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2001

Commission File No. 001-14353

CLASSIC VACATION GROUP, INC.
(Exact name of Registrant as specified in its charter)

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|New York                                                       |  | 13-1894567                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |  |                                        
|                                                              
|                                                              
|                                                              
|                                                              
|One North First Street, Suite 300, San Jose, CA                |  | 95113                                  
|                                                               |  |                                        
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code: (408) 882-8455

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES  X          NO

As of November 7, 2001 there were 14,392,825 shares of Registrants Common
Stock outstanding.

1



---

TABLE OF CONTENTS



|                                           |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION             
|                                           | ITEM 1. Financial Statements                                                                 
|                                           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                           | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           |                                                                                               | Results of Operations (unaudited)                   
|                                           |                                                                                               | Liquidity and Capital Resources                     
|                                           | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION                
|                                           | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|NOTE PURCHASE AGREEMENT                   
|7.5% CONVERTIBLE SENIOR SUBORDINATED NOTE 
|7.5% EXCHANGEABLE SENIOR SUB0RDINATED NOTE
|AGREEMENT TO TENDER                       
|WAIVER                                    



---



##### Table of Contents



INDEX

|        |  |                                                                                                                 |  |          |    | 
|------- |  | --------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|        |  |                                                                                                                 |  | Page No.
|        |  |                                                                                                                 |  |         
|PART I  |  | FINANCIAL INFORMATION                                                                                           |  |          | 3  | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|Item 1. |  | Financial Statements (unaudited)                                                                                |  |          | 3  | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|        |  | Condensed Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000                            |  |          | 3  | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2001 and 2000 |  |          | 4  | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30, 2001 and 2000           |  |          | 5  | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|        |  | Notes to Condensed Consolidated Financial Statements                                                            |  |          | 6  | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                           |  |          | 12 | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|        |  | Results of Operations                                                                                           |  |          | 15 | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|        |  | Liquidity and Capital Resources                                                                                 |  |          | 18 | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  |          | 21 | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|PART II |  | OTHER INFORMATION                                                                                               |  |          | 22 | 
|       
|       
|       
|       
|        |  |                                                                                                                 |  |          |    | 
|       
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                |  |          | 22 | 

2



---



##### Table of Contents









PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements




CLASSIC VACATION GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |              |     |   |         | 
|---------------------------------------------------------------------------------------- | -------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------ | --- | ------------- | ------- | ------------ | --- | - | ------- | 
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     | September 30, |         | December 31,
|ASSETS                                                                                   |                                        | 2001                                                                                                                   |                                                | 2000                                
|                                                                                         |                                        |                                                                                                                        |                                                |                                     
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     | (unaudited)   |         |              |     |  
|Current assets:                                                                          |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Cash and cash equivalents (includes $4,223 and $11,633
of restricted cash, respectively) |                                        | $                                                                                                                      | 25,935                                         |                                      |     | $             | 24,432  |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Restricted short-term investments                                                        |                                        |                                                                                                                        | 5,150                                          |                                      |     |               |        |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Accounts receivable, net of allowance of $2,249 and $2,096, respectively                 |                                        |                                                                                                                        | 18,744                                         |                                      |     |               | 21,224  |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Other current assets                                                                     |                                        |                                                                                                                        | 3,811                                          |                                      |     |               | 4,303   |             
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                         |                                        |                                                                                                                        |                                                | Total current assets                 |     |               | 53,640  |              |     |   | 49,959  | 
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|Property and equipment, net                                                              |                                        |                                                                                                                        | 4,568                                          |                                      |     |               | 4,588   |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Goodwill and intangible assets, net                                                      |                                        |                                                                                                                        | 69,942                                         |                                      |     |               | 78,476  |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Other assets                                                                             |                                        |                                                                                                                        | 122                                            |                                      |     |               | 124     |             
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                         |                                        |                                                                                                                        |                                                | Total assets                         |     | $             | 128,272 |              |     | $ | 133,147 | 
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |                                        |                                                                                                                        | LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY |                                      |     |               |         |              |     |   |        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Current liabilities:                                                                     |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Accounts payable and accrued expenses                                                    |                                        | $                                                                                                                      | 57,105                                         |                                      |     | $             | 62,239  |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Customer deposits                                                                        |                                        |                                                                                                                        | 44,065                                         |                                      |     |               | 37,919  |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Short-term convertible notes payable                                                     |                                        |                                                                                                                        |                                               |                                      |     |               | 690     |             
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                         |                                        |                                                                                                                        |                                                | Total current liabilities            |     |               | 101,170 |              |     |   | 100,848 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Other long-term liabilities                                                              |                                        |                                                                                                                        | 1,255                                          |                                      |     |               | 480     |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Convertible notes payable                                                                |                                        |                                                                                                                        | 30,136                                         |                                      |     |               | 27,500  |             
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                         |                                        |                                                                                                                        |                                                | Total liabilities                    |     |               | 132,561 |              |     |   | 128,828 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Commitments and Contingencies (Note 3)
Shareholders (deficit) equity:                   |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |                                        | Preferred Stock, $.01 par value, 6,000,000 shares authorized,
no shares issued and outstanding                         |                                                |                                      |    |               |         |              |    |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |                                        | Common Stock, $.01 par value, 60,000,000 shares authorized, 14,775,816
shares issued and 14,392,825 shares outstanding |                                                |                                      | 148 |               |         |              | 148 |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Additional paid-in capital             |                                                                                                                        |                                                | 95,873                               |     |               |         | 95,817       |    
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Deferred compensation                  |                                                                                                                        |                                                |                                     |     |               |         | (17          | )  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Retained deficit                       |                                                                                                                        |                                                | (97,994                              | )   |               |         | (89,313      | )  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Treasury stock, 382,991 shares at cost |                                                                                                                        |                                                | (2,316                               | )   |               |         | (2,316       | )  
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|                                                                                         |                                        |                                                                                                                        |                                                | Total shareholders (deficit) equity |     |               | (4,289  | )            |     |   | 4,319   | 
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             
|Total liabilities and shareholders (deficit) equity                                     |                                        | $                                                                                                                      | 128,272                                        |                                      |     | $             | 133,147 |             
|                                                                                         |                                        |                                                                                                                        |                                                |                                      |     |               |         |             

The accompanying notes are an integral part of these condensed consolidated balance sheets.

3



---



##### Table of Contents






CLASSIC VACATION GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |         |        |       |  
|----------------------------------------------------- | -------------------- | ---------------- | ------------ | ------ | ------------------ | ----- | ----------------- | ------- | ---- | ----- | ------ | ------ | ------ | ------ | ------- | ------- | ------ | ----- | -
|                                                      |                      |                  |              |        | Three Months Ended |       | Nine Months Ended
|                                                      |                      |                  |              |        |                    |       |                  
|                                                      |                      |                  |              |        | September 30,      |       | September 30,    
|                                                      |                      |                  |              |        |                    |       |                  
|                                                      |                      |                  |              |        | 2001               |       | 2000              |         | 2001 |       | 2000  
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |       
|Net revenues                                          |                      | $                | 30,388       |        |                    | $     | 40,620            |         |      | $     | 84,016 |        |        | $      | 104,366 |        
|                                                     
|                                                     
|                                                     
|                                                     
|Operating expenses                                    |                      |                  | 26,731       |        |                    |       | 35,664            |         |      |       | 74,637 |        |        |        | 94,939  |        
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                      |                  | Gross profit |        |                    | 3,657 |                   |         |      | 4,956 |        |        |        | 9,379  |         |         |        | 9,427 |  
|                                                     
|                                                     
|                                                     
|                                                     
|General and administrative expenses                   |                      |                  | 1,653        |        |                    |       | 3,198             |         |      |       | 5,209  |        |        |        | 8,041   |        
|                                                     
|                                                     
|                                                     
|                                                     
|Depreciation and amortization                         |                      |                  | 1,150        |        |                    |       | 1,488             |         |      |       | 3,521  |        |        |        | 5,232   |        
|                                                     
|                                                     
|                                                     
|                                                     
|Restructuring and impairment charges                  |                      |                  | 7,378        |        |                    |       | 38,382            |         |      |       | 8,020  |        |        |        | 38,382  |        
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                      | Loss from operations |                  |              | (6,524 | )                  |       |                   | (38,112 | )    |       |        | (7,371 | )      |        |         | (42,228 | )     
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|Other income (expense)                               
|                                                      |                      | Interest
income  |              |        | 376                |       |                   |         | 953  |       |        |        | 1,248  |        |         |         | 2,303  |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                      | Interest
expense |              |        | (764               | )     |                   |         | (834 | )     |        |        | (2,588 | )      |         |         | (3,127 | )    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                      | Other            |              |        | (10                | )     |                   |         |     |       |        |        | 75     |        |         |         | (1     | )    
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                      |                      |                  | Total        |        |                    | (398  | )                 |         |      | 119   |        |        |        | (1,265 | )       |         |        | (825  | )
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|Loss before income taxes                              |                      |                  | (6,922       | )      |                    |       | (37,993           | )       |      |       | (8,636 | )      |        |        | (43,053 | )      
|                                                     
|                                                     
|                                                     
|                                                     
|Income tax provision                                  |                      |                  | (15          | )      |                    |       | (60               | )       |      |       | (45    | )      |        |        | (60     | )      
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                      | Net loss             |                  | $            | (6,937 | )                  |       | $                 | (38,053 | )    |       | $      | (8,681 | )      |        | $       | (43,113 | )     
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|Basic and diluted net loss per share                  |                      | $                | (0.48        | )      |                    | $     | (2.64             | )       |      | $     | (0.60  | )      |        | $      | (3.00   | )      
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|Basic and diluted weighted average
shares outstanding |                      |                  | 14,393       |        |                    |       | 14,393            |         |      |       | 14,393 |        |        |        | 14,393  |        
|                                                      |                      |                  |              |        |                    |       |                   |         |      |       |        |        |        |        |         |        

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



---



##### Table of Contents






CLASSIC VACATION GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                    |       |        |         |  
|------------------------------------------------------------------------ | ------------------------------------- | -------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------------------------------------------- | ----- | ------------------ | ------ | ------------------ | ----- | ------ | ------- | -
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       | Nine Months Ended 
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                   
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       | September 30, 2001 |        | September 30, 2000
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         | Cash flows from operating activities: |                                                                      |                                               |                                                                                 |       |                    |        |                    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Net loss                                                                        |       | $                  | (8,681 | )                  |       | $      | (43,113 | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Adjustments to reconcile net loss to net cash provided by operating activities: |       |                    |        |                    |       |        |         |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Depreciation and amortization                                                   |       |                    | 3,521  |                    |       |        | 5,232   |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Non-cash interest expense                                                       |       |                    | 1,946  |                    |       |        |        |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Amortization of deferred financing costs                                        |       |                    | 416    |                    |       |        | 549     |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Non-cash compensation expense                                                   |       |                    | 73     |                    |       |        | 8       |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Non-cash portion of restructuring and impairment charges                        |       |                    | 6,346  |                    |       |        | 35,034  |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Changes in operating assets and liabilities:                                    |       |                    |        |                    |       |        |         |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Accounts receivable                                                             |       |                    | 2,480  |                    |       |        | (12,448 | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Other assets                                                                    |       |                    | 472    |                    |       |        | 7,597   |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Accounts payable and accrued expenses                                           |       |                    | (3,206 | )                  |       |        | 21,970  |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Customer deposits                                                               |       |                    | 6,146  |                    |       |        | 13,188  |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Other liabilities                                                               |       |                    | 775    |                    |       |        | 698     |  
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      |                                               | Net cash provided by operating activities                                       |       |                    | 10,288 |                    |       |        | 28,715  |  
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      |                                               | Cash flows from investing activities:                                           |       |                    |        |                    |       |        |         |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Purchases of property and equipment                                             |       |                    | (1,707 | )                  |       |        | (2,460  | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Payment of deferred acquisition consideration                                   |       |                    | (1,750 | )                  |       |        |        |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Net (purchases) sales of investments                                            |       |                    | (5,150 | )                  |       |        | 103     |  
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      |                                               | Net cash used in investing activities                                           |       |                    | (8,607 | )                  |       |        | (2,357  | )
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      |                                               | Cash flows from financing activities:                                           |       |                    |        |                    |       |        |         |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Payments on capital lease obligations                                           |       |                    | (178   | )                  |       |        | (264    | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Repayment of borrowings from credit agreement                                   |       |                    |       |                    |       |        | (29,431 | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Proceeds from convertible note                                                  |       |                    |       |                    |       |        | 27,500  |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      |                                               | Deferred financing costs                                                        |       |                    |       |                    |       |        | (1,386  | )
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      | Net cash used in financing activities         |                                                                                 |       | (178               | )      |                    |       | (3,581 | )      
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      | Net increase in cash and cash equivalents     |                                                                                 |       | 1,503              |        |                    |       | 22,777 |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       |                                                                      | Cash and cash equivalents beginning of period |                                                                                 |       | 24,432             |        |                    |       | 24,152 |        
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                         |                                       |                                                                      | Cash and cash equivalents end of period       |                                                                                 | $     | 25,935             |        |                    | $     | 46,929 |        
|                                                                         |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|Supplemental disclosures of cash flow
information:                       |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       | Income tax refunds received, net of payments                         |                                               | $                                                                               | 231   |                    |        | $                  | 2,397 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       | Interest paid                                                        |                                               |                                                                                 | 174   |                    |        |                    | 2,251 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Supplemental disclosures of non cash investing and financing activities: |                                       |                                                                      |                                               |                                                                                 |       |                    |        |                   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                       | Issuance of convertible notes payable as payment of interest expense |                                               | $                                                                               | 1,946 |                    |        | $                  |      |       

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



---



##### Table of Contents






CLASSIC VACATION GROUP, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)

1. Business Description and Organization

Classic Vacation Group, Inc., and subsidiaries, (the Company) is one of
the largest U.S. providers of customized vacation products. The Company
assembles air, hotel, rental car and other travel components in bulk and
provides complete vacations to travelers primarily through other resellers of
travel including retail travel agents and international tour wholesalers. The
Company primarily provides flexible independent travel programs for
individuals, as well as escorted tours and group packages. The Companys
operations are primarily concentrated in one market segment, leisure travel. In
May 2001 the Company changed its name from Global Vacation Group, Inc. The
Companys common stock trades on the American Stock Exchange under the symbol
CLV.

Headquartered in San Jose, California, the Company markets its major
products under the brand names Classic Custom Vacations (Classic) and Allied
Tours (Allied). Classic creates customized vacation packages for U.S.
travelers seeking an individualized vacation. The Allied brand creates packages
for international travelers visiting North America. The Company also operates
Island Resort Tours (IRT), a smaller domestic vacation provider;
International Travel & Resorts (ITR), a hotel representation company; and the
private label vacation fulfillment operations for Amtrak Vacations and Hyatt
Vacations.

Risks and Other Important Factors

The tragic events of September 11, 2001 had a significant and material
adverse impact upon the travel and hospitality industries. These events have
adversely impacted the Company and have created greater uncertainty with
respect to the predictability of the Companys future operating results. The
disruption in travel that resulted from the terrorist attacks led to
significant cancellations of existing bookings resulting in lower revenues and
the continuing concern about possible additional terrorist attacks has resulted
in a significant slowdown in advanced booking patterns for future travel. In
response, the Company has taken certain actions to reduce operating costs and
secure additional financing. In September 2001, the Company reduced its
workforce by 220 employees or approximately 30 percent and implemented other
cost reduction measures (see Note 6). In November 2001, the Company secured
approximately $24.25 million in financing from an entity formed and controlled
by the Companys principal note holder and principal shareholder in connection
with a plan by that entity to take the Company private (see Note 7). This
financing is in the form of notes payable (the Notes), which require the
Company to meet certain covenants and other restrictions and is governed by a
note purchase agreement (the Note Purchase Agreement). Among other covenants
and restrictions, the Notes require the Company to become privately held by
October 2002 and to maintain certain customer booking levels. If the Company
does not comply with these covenants, the lenders may demand payment of amounts
then outstanding under the Notes. Additionally, should another terrorist
attack occur, as defined by the Note Purchase Agreement, prior to the Company
borrowing the full $24.25 million, the Company may be precluded from further
borrowings under the Note Purchase Agreement. Management believes that the
reductions in operating costs together with the additional financing will allow
the Company to sustain operations through at least March 2003. However, there
can be no assurance that the Company will not require additional capital in
2002 or will be able to comply with the terms of the Notes.

The Company receives advance payments and deposits prior to commencement
of travel. Accordingly, the Companys current liabilities exceed its current
assets. As of September 30, 2001, current liabilities exceed current assets by
approximately $47.5 million. If the float generated by these advance payments
were to shrink, and the Company was required to find an alternative source of
capital, one may not be available at terms acceptable to the Company. Such
event could have a material adverse effect on the business, financial condition
and results of operations of the Company.

6



---



##### Table of Contents



The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has been advised by its
independent public accountants that if the Company cannot achieve sufficient
customer booking levels to maintain debt compliance, sustain its customer
deposits and related cash flows, or the Company has not restructured itself as
a privately held entity prior to the completion of their audit of the Companys
financial statements for the year ending December 31, 2001, their auditors
report on those financial statements will be modified to reflect this potential
going concern contingency.

The Companys operations are subject to certain risks and uncertainties,
including, among others, domestic and international political and economic
conditions impacting travel patterns, current and potential competitors with
greater resources, dependence on effective information systems, changing
industry dynamics related to new methods of distribution within the travel
industry, industry consolidations, seasonal fluctuations in operating results,
dependence on rapidly changing technologies, reliance on key personnel, and
dependence on travel suppliers.

2. Summary of Significant Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results including the Companys ability to
collect accounts receivable could differ from those estimates.

The quarterly condensed consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and include, in
the opinion of the Company, all adjustments, consisting of normal and recurring
adjustments, necessary for a fair presentation of interim period results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations. The Company believes that its disclosures are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included in the Companys 2000 Form 10-K.
The results of operations for the three and nine month periods ended September
30, 2001 are not necessarily indicative of the results to be expected for the
full year.

There have been no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies,
refer to Note 2 to the Consolidated Financial Statements and related Notes
thereto included in the Companys 2000 Form 10-K.

Net Revenues

Net revenues include commissions and markups on travel products and
services, volume bonuses received from travel suppliers, cancellation fees and
other ancillary fees such as travel waiver and insurance products. Net
revenues are generally recognized upon the commencement of travel. For the nine
months ended September 30, 2001 and 2000, the Company had net revenues of $84.0
million and $104.4 million, respectively, derived from total dollar value of
travel products and services of $374.6 million and $464.8 million,
respectively.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and liabilities are computed based on
the difference between the financial statement and income tax bases of assets
and liabilities using the enacted marginal tax rate. SFAS No. 109 requires that
a net deferred tax asset be reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the net deferred tax asset will not be realized. Due to cumulative net
losses incurred by the Company, the Company has provided for a valuation
allowance to fully reserve its deferred tax assets.

7



---



##### Table of Contents



Long-lived Assets

The Company reviews its long-lived assets, including property and
equipment, identifiable intangibles, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets. As part of the $8.0 million
restructuring and impairment charge incurred during the nine months ended
September 30, 2001, the Company recognized an impairment charge of
approximately $6.3 million against long-lived assets. After taking into
account the restructuring and impairment charge, management believes that its
long-lived assets are recoverable.

The Companys estimates of anticipated net revenues, gross profits, the
remaining estimated lives of tangible and intangible assets, or both, could be
reduced significantly in the future due to changes in technology, domestic and
international events impacting travel, regulation, or competitive pressures in
any of the Companys individual operating brands, or its ability to continue as
a going concern. As a result, the carrying amount of long-lived assets and
intangibles including goodwill could be materially reduced in the future.

Net Income (Loss) per Share

Basic income or loss per share is computed by dividing net income or loss
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted income or loss per share includes
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.

The treasury stock effect of options to purchase 1,472,220 and 1,038,792
shares of common stock outstanding at September 30, 2001 and 2000,
respectively, has not been included in the computations of diluted loss per
share for the three and nine months ended September 30, 2001 and 2000, as such
effect would be anti-dilutive. The effect of the convertible notes has also
not been included in the computation of diluted loss per share for the three
and nine months ended September 30, 2001 and September 30, 2000, as such effect
would also be anti-dilutive.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivatives fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The adoption of SFAS No. 133 for the fiscal
year beginning January 1, 2001 did not have a material impact on the Companys
financial position, or the results of operations.

In June 2001, the FASB approved SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001. Any
goodwill resulting from acquisitions completed after June 30, 2001 will not be
amortized. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 will result in the Companys
discontinuation of amortization of its goodwill; however, the Company will be
required to test its goodwill for impairment under the new standard beginning
in the first quarter 2002, which could have an adverse effect on the Companys
future results of operations if an impairment occurs. The Company has not
completed an evaluation of the Companys goodwill under the impairment
guidelines of SFAS No. 142.

Reclassifications

Certain reclassifications have been made in the 2000 financial statements
to conform to the 2001 presentation.

8



---



##### Table of Contents



3. Commitments and Contingencies

The Company is periodically a party to disputes arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of the Company, and adequate provision for any potential
losses has been made on the accompanying condensed consolidated financial
statements.

The Company is a party to an agreement whereby it is obligated to fund a
portion of the future costs of a reward points fulfillment program under
certain conditions. The Company has recorded a liability in the accompanying
condensed consolidated financial statements for its estimated share of the cost
to fulfill points earned to date, but not yet redeemed, based upon managements
estimate of future costs. If actual future costs per point fulfilled, or the
total points redeemed vary, the Companys actual liability may differ
materially from the amount recorded in the accompanying condensed consolidated
financial statements.

4. Subordinated Convertible Debt

In June 2000, the Company raised $27.5 million from the issuance of a
subordinated convertible note (the 9% Note). Under terms of the transaction,
the Company issued a 9% seven-year subordinated note, convertible into common
stock at a price of $5.25 per share. The 9% Note may be converted, at any time,
in total or partial to common stock. Under the terms of the 9% Note, the
Company is required to meet certain financial ratios and covenants including a
debt-to-equity ratio and a fixed charge coverage ratio, among others. In
connection with the issuance of the 9% Note, the Company incurred approximately
$1.4 million in financing costs, which are being amortized over the term of the
9% Note.

Interest is payable quarterly. To date the Company has elected to make
interest payments required under the 9% Note in the form of additional
convertible notes (together with the 9% Note, the 9% Notes) with $2.6 million
outstanding at September 30, 2001. On October 1, 2001 the Company issued an
additional note to satisfy interest payable for the three months ended
September 30, 2001 of $676,000. Through August 1, 2003 the Company can elect
to pay quarterly interest due in either cash, additional notes with terms
identical to the 9% Notes, or common stock.

Subsequent to September 30, 2001 the Company entered into a financing
agreement with an affiliate of the primary holder of the 9% Notes (See Note 7).
In connection with that financing, the holders of the 9% Notes agreed to a
modification and waiver of certain financial covenants under the 9% Notes
through March 2003. However, if the Company were to default on the notes
involved with the new financing, such event would also result in a default
under the 9% Notes. Likewise, a default under the 9% Notes would result in a
default under the new financing.

5. Bank Credit Facilities

In March 2001 the Company entered into a bank credit facility for the
purpose of securing standby letters of credit with a total capacity of $5.0
million (the LC Facility). The LC Facility does not allow for cash
borrowings. The LC Facility, which expires on May 1, 2004 is secured by a
certificate of deposit in the amount of $5.2 million. At September 30, 2001
there were approximately $4.1 million of standby letters of credit outstanding
under the LC Facility with $922,000 available.

At September 30, 2001 the Company also had $502,000 of additional standby
letters of credit outstanding from a different financial institution. These
letters of credit are secured a standby letter of credit issued under the
Companys LC Facility.

9



---



##### Table of Contents



6. Restructuring and Impairment Charges

In July 2000 the Company initiated a restructuring and consolidation of
its Vacations by Globetrotters (Globetrotters) branded operations into its
Classic brand. As part of this consolidation, the Company migrated its
Globetrotters branded products to the Classic technology platform.
Additionally, the Company closed its Washington, D.C. headquarters office. The
consolidation of the brands were substantially complete at December 31, 2000.
In May 2001 the Company announced additional staff reductions as well as the
departure of certain members of its Allied Tours management team. Following
the terrorist attacks in September 2001 the Company made additional staff
reductions, closed its Classic Chicago reservations center, and reviewed the
carrying values of its long-lived assets. The restructuring and impairment
charges for the nine months ended September 30, 2001 include approximately $6.3
million related to the impairment of goodwill, $935,000 related to employee
severance payments including benefits, and $739,000 related to lease
obligations and other restructuring costs. Since the restructuring was
initially announced last year a total of 353 employees have been terminated as
part of the Companys restructuring efforts. Included in this number are 237
employees terminated in the nine months ended September 30, 2001, and 220
employees or approximately 30% of the then workforce who were terminated after
September 11, 2001. The Company continues to review its operations for
opportunities to further reduce costs and create additional efficiencies. As a
result, the Company may incur additional restructuring charges in future
periods.

As part of the restructuring the Company has been required to make
additional severance payments to certain separated employees as well as fund
certain continuing lease obligations for office space no longer in use. The
following summarizes accrued restructuring costs and cash payments for the nine
months ended September 30, 2001 (in thousands):

|                                                |  |                   |        |                     |  |                       |       |   |  |   |        |  
|----------------------------------------------- |  | ----------------- | ------ | ------------------- |  | --------------------- | ----- | - |  | - | ------ | -
|                                                |  |                   |        |                     |  | Lease obligations and |       |   |  |  
|                                                |  | Employee          |        | other restructuring |  |                       |       |  
|                                                |  | termination costs |        | costs               |  | Total                
|                                                |  |                   |        |                     |  |                      
|Accrued restructuring costs, December 31, 2000  |  | $                 | 1,502  |                     |  | $                     | 778   |   |  | $ | 2,280  |  
|                                               
|                                               
|                                               
|                                               
|                                                |  |                   |        |                     |  |                       |       |   |  |   |        |  
|                                               
|                                               
|                                               
|                                               
|Additional charges accrued                      |  |                   | 935    |                     |  |                       | 739   |   |  |   | 1,674  |  
|                                               
|                                               
|                                               
|                                               
|                                                |  |                   |        |                     |  |                       |       |   |  |   |        |  
|                                               
|                                               
|                                               
|                                               
|Cash payments                                   |  |                   | (1,635 | )                   |  |                       | (410  | ) |  |   | (2,045 | )
|                                               
|                                               
|                                               
|                                               
|                                                |  |                   |        |                     |  |                       |       |   |  |   |        |  
|                                               
|                                               
|                                               
|                                               
|Accrued restructuring costs, September 30, 2001 |  | $                 | 802    |                     |  | $                     | 1,107 |   |  | $ | 1,909  |  

As part of the restructuring, the Company reviewed the carrying values of
its long-lived assets, including property, equipment, and goodwill related to
its IRT and ITR subsidiaries (collectively Island), which operate from New
York City. Island was particularly hard hit by the tragedies of September 11
and experienced a significant drop in business. The impact led the Company to
reassess its long-term strategy with regard to Island and review the
recoverability of the long-lived assets related to the Island business. To
determine the recoverability of its long-lived assets the Company evaluates the
probability that future undiscounted cash flows will be less than the carrying
amount of the assets. The fair value of the long-lived assets including
goodwill was determined based upon the discounted cash flows to be derived from
the Island business. Management believes that the future cash flows from
Island will be limited, and as such recorded an impairment charge of
approximately $6.3 million representing approximately 95% of the remaining
goodwill related to Island.

7. Subsequent Event  November 2001 Financing

In November 2001 the Company entered into a financing agreement with an
entity formed and controlled by its principal note holder and its principal
shareholder to provide a cash infusion of up to $24.25 million through the sale
of convertible notes and other notes exchangeable for convertible notes. This
financing became necessary as a result of the impact on the Company of the
September 11 terrorist attacks. At the initial closing the Company sold $5.0
million of 71/2% convertible senior subordinated notes and $5.0 million of
71/2% exchangeable senior subordinated notes (collectively, the 71/2%
Notes). The 71/2% Notes are senior to the 9% Notes (described in Note 4).
The convertible notes are convertible into the Companys common stock at $0.15
per share at the option of the holder at any time after March 31, 2002. The
exchangeable notes are exchangeable for convertible notes after the Companys
shareholders approve an increase in the Companys authorized capital to at
least 200 million shares. The Companys majority shareholder, a party to the
agreement, has committed to vote in favor of the increase in

10



---



##### Table of Contents



authorized shares at the Companys next scheduled shareholders meeting
assuring the increase in authorized capital. Subject to certain conditions the
Company has an additional $14.25 million available for borrowing through April
30, 2002 under the financing agreement in the form of additional exchangeable
notes. The 7 1/2% Notes mature on December 31, 2006. Interest is payable
quarterly beginning March 1, 2002, and until June 1, 2003 can be paid in the
form of additional 7 1/2% Notes.

The
7 1/2% Notes are subject to certain covenants and conditions
including a requirement that the Company become privately held by October 2002.
In conjunction with the financing the holders of the 7 1/2% Notes have
committed to make a tender offer for all of the shares of the Companys common
stock that they do not own (the Tender Offer). If at least 50 percent of the
shares they do not already own are tendered, the holders will be required to
take the Company private, and pay the shareholders $0.15 per share in cash.
The Tender Offer will not expire until at least December 31, 2001. On a fully
diluted basis, assuming the maximum $24.25 million is borrowed and assuming the
exchangeable notes are exchanged for convertible notes upon the anticipated
increase in authorized capital, the holders of the 7 1/2% Notes and their
affiliates will effectively control 97.7% of the Companys common stock.

The financing agreement contains a provision whereby if prior to December
31, 2001 the Company obtains an alternative financing proposal that the
Companys board of directors determines is more favorable to the Company, the
Company may terminate all aspects of the financing arrangement by repaying any
outstanding borrowings and reimbursing the holders for its out-of-pocket
expenses related to the financing and the Tender Offer. The holders of the
7 1/2% Notes have agreed to tender the shares that they hold (currently 70.0%
of the Companys outstanding common stock) if the alternative financing
proposal involves a tender offer for all of the Companys common stock in an
amount above $0.15 per share.

In addition to the requirement that the Company become privately held by
October 2002, the Companys access to make additional borrowings under the
agreement, and its continued compliance with the 7 1/2% Notes are dependent
upon certain financial covenants and other restrictions including a requirement
that it maintain certain levels of advanced bookings. Additionally, the
Company is allowed to make additional borrowings under the financing agreement
only if the Companys consolidated unrestricted cash net of outstanding checks
and drafts falls below $7 million and if the Companys chief financial officer
certifies that additional borrowings are necessary. Under the terms of the
agreement, if additional acts of terrorism were to occur, the Company may be
precluded from making additional borrowings.

In connection with this financing, the holders of the Companys 9% Notes
agreed to the modification and waiver of certain financial covenants under the
9% Notes until March 2003. However, if the Company were to default on the
7 1/2% Notes, such event would also result in a default under the 9% Notes.
Likewise, a default under the 9% Notes would result in a default under the
7 1/2% Notes.

11



---



##### Table of Contents






ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION

The matters discussed in this Form 10-Q include forward-looking statements
that involve risks or uncertainties. While forward-looking statements are
sometimes presented with numerical specificity, they are based on various
assumptions made by management regarding future circumstances, over many of
which the Company has little or no control. A number of important factors,
including those identified under the caption Risk Factors in the Companys
2000 Form 10-K, as well as factors discussed elsewhere in this Form 10-Q, could
cause the Companys actual results to differ materially from those in
forward-looking statements or financial information. Actual results may differ
from forward-looking results for a number of reasons, including the following:
(i) changes in general economic conditions and other factors that affect demand
for travel products or services; (ii) changes in the vacation travel industry;
(iii) changes in the Companys relationships with travel suppliers; (iv)
competitive factors (including changes in travel distribution methods); and (v)
the success of the Companys operating, integration and growth strategies.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected.

Overview

Classic Vacation Group, Inc., (formerly Global Vacation Group, Inc.), and
subsidiaries, (the Company) assembles air, hotel, rental car and other travel
components in bulk and provides complete vacations to travelers primarily
through other resellers of travel including retail travel agents and
international tour wholesalers. The Company markets vacation packages for
travelers to resort destinations including Hawaii, the Caribbean Islands,
Mexico and Europe as well as various continental North American destinations.

The Company markets its products and services under multiple brands
including Classic Custom Vacations (Classic), which markets customized
vacation packages having preferred agreements with the largest leisure travel
agency groups in the U.S and Allied Tours (Allied), which creates and
coordinates packages and tours for international travel wholesalers selling
vacations to North America. Additionally, the Companys private label brands
provide outsourced vacation packaging for both Amtrak Vacations and Hyatt
Vacations. The Companys Island Resort Tours brand markets vacation packages
principally to the Caribbean and is operated together with International Travel
& Resorts, a hotel representation company for properties also primarily located
in the Caribbean (collectively Island). The Company also provides affinity
group marketing and awards program fulfillment services.

Impact of September 11 Terrorist Attacks  Restructuring and Impairment Charges

The tragic events of September 11, 2001 had a significant and material
adverse impact upon the travel and hospitality industries. These events have
adversely impacted the Company and have created greater uncertainty with
respect to the predictability of the Companys future operating results. The
disruption in travel that resulted from the terrorist attacks led to
significant cancellations of existing bookings resulting in lower revenues and
the continuing concern about possible additional terrorist attacks has resulted
in a significant slowdown in advanced booking patterns for future travel. In
response, the Company has taken certain actions to reduce operating costs and
secure additional financing. In September 2001, the Company reduced its
workforce by 220 employees or approximately 30 percent and implemented other
cost reduction measures.

Principally as a result of the effects of September 11, the Company
recorded restructuring and impairment charges of $7.4 million for the three
months ended September 30, 2001 including an impairment charge for goodwill
related to Island of approximately $6.3 million, $293,000 for severance related
to reductions in staff, and $739,000 for lease costs and other restructuring
charges related to the closure of Classics Chicago reservations center.

12



---



##### Table of Contents



As part of the restructuring, the Company reviewed the carrying values of
its long-lived assets, including property, equipment, and goodwill related to
Island, which operates from New York City. Island was particularly hard hit by
the tragedies of September 11 and experienced a significant drop in business.
The impact led the Company to reassess its long-term strategy with regard to
Island and review the recoverability of the long-lived assets related to the
Island business. To determine the recoverability of its long-lived assets the
Company evaluates the probability that future undiscounted cash flows will be
less than the carrying amount of the assets. The fair value of the long-lived
assets including goodwill was determined based upon the discounted cash flows
to be derived from the Island business. Management believes that the future
cash flows from Island will be limited, and as such recorded an impairment
charge of approximately $6.3 million representing approximately 95% of the
remaining goodwill related to Island.

The Company continues to review its operations for opportunities to
further reduce costs and create additional efficiencies. As a result, the
Company may incur additional restructuring charges in future periods.

Subsequent Event  Financing Transaction and Tender Offer

In November 2001 the Company entered into a financing agreement with an
entity formed and controlled by its principal note holder and its principal
shareholder to provide a cash infusion of up to $24.25 million through the sale
of convertible notes and other notes exchangeable for convertible notes. This
financing became necessary as a result of the impact on the Company of the
September 11 terrorist attacks. At the initial closing the Company sold $5.0
million of 7 1/2% convertible senior subordinated notes and $5.0 million of
7 1/2% exchangeable senior subordinated notes (collectively, the 7 1/2%
Notes). The 7 1/2% Notes are senior to the Companys outstanding 9%
subordinated convertible notes. The convertible notes are convertible into the
Companys common stock at $0.15 per share at the option of the holder at any
time after March 31, 2002. The exchangeable notes are exchangeable for
convertible notes after the Companys shareholders approve an increase in the
Companys authorized capital to at least 200 million shares. The Companys
majority shareholder, a party to the agreement, has committed to vote in favor
of the increase in authorized shares at the Companys next scheduled
shareholders meeting assuring the increase in authorized capital. Subject to
certain conditions the Company has an additional $14.25 million available for
borrowing from this same entity through April 30, 2002 under the financing
agreement in the form of additional exchangeable notes. The 7 1/2% Notes
mature on December 31, 2006. Interest is payable quarterly beginning March 1,
2002, and until June 1, 2003 can be paid in the form of additional 7 1/2%
Notes.

The 7 1/2% Notes are subject to certain covenants and conditions
including a requirement that the Company become privately held by October 2002.
In conjunction with the financing the holders of the 7 1/2% Notes has
committed to make a tender offer for all of the shares of the Companys common
stock that they do not already own (the Tender Offer). If at least 50
percent of the shares they do not own are tendered, the holders will be
required to take the Company private, and pay the shareholders $0.15 per share
in cash. The Tender Offer will not expire until at least December 31, 2001.
On a fully diluted basis, assuming the maximum $24.25 million is borrowed and
assuming the exchangeable notes are exchanged for convertible notes upon the
anticipated increase in authorized capital, the holders of the 7 1/2% Notes
and their affiliates will effectively control 97.7% of the Companys common
stock.

The Companys board of directors does not expect to make any
recommendation to shareholders as to whether they should tender their shares in
response to the Tender Offer.

The financing agreement contains a provision whereby if prior to December
31, 2001 the Company obtains an alternative financing proposal that the
Companys board of directors determines is more favorable to the Company, the
Company may terminate all aspects of the financing arrangement by repaying any
outstanding borrowings and reimbursing the holders for its out-of-pocket
expenses related to the financing and the Tender Offer. The holders of the
7 1/2% Notes have agreed to tender the shares that they hold (currently 70.0%
of the Companys outstanding common stock) if the alternative financing
proposal involves a tender offer for all of the Companys common stock in an
amount greater than $0.15 per share.

13



---



##### Table of Contents



The Companys board of directors appointed a special committee of
independent directors to evaluate the proposal (the Special Committee). The
Special Committee has made no recommendation as to whether shareholders should
tender their shares in the Tender Offer. The Special Committee received
financial advice from an investment banking firm retained by the Special
Committee. The investment banking firms engagement will continue throughout
the term of the Tender Offer for the purpose of seeking a more favorable
financing alternative. There can be no assurances that a more favorable
financing offer will be obtained before December 31, 2001.

Sources of Revenue

Net revenues include commissions and markups on travel products and
services, volume bonuses received from travel suppliers, cancellation fees and
other ancillary fees such as travel waiver products and are generally
recognized upon the commencement of travel. The travel waiver products sold by
the Company enable customers to cancel or make changes to advance reservations
and obtain refunds without penalty in certain circumstances. Customers who do
not purchase waivers are generally subject to change fees or cancellation
penalties if they make changes or cancel advance reservations, which are
deducted from any refund paid. For the nine months ended September 30, 2001
and 2000, the Company had net revenues of $84.0 million and $104.4 million,
respectively, derived from total dollar values of travel products and services
of $374.6 million and $464.8 million, respectively.

Expenses

Operating expenses include travel agent commissions, salaries, credit card
merchant fees, telecommunications, advertising and other costs associated with
the selling and processing of travel reservations, products and services.
Commission payments to travel agents are typically based on a percentage of the
price paid for the travel product or service, but in certain circumstances are
fixed dollar amounts. Reservations agents are compensated either on an hourly
basis, a commission basis or a combination of the two. The Companys telephone
costs primarily relate to the cost of incoming calls on toll-free numbers.
General and administrative expenses consist primarily of compensation and
benefits to administrative and other non-sales personnel, fees for professional
services, and other general office expenses.

Interest Income

The Company derives a significant portion of its pre-tax results from
interest earned on funds related to customer deposits and prepayments for
vacation products. Generally, the Company requires a deposit within one week of
making a travel reservation. Reservations are typically made two to four months
prior to departure. Additionally, for packaged tours, the Company generally
requires that the entire cost of the vacation be paid in full 45 to 60 days
before departure, unless reservations are made closer to departure. While terms
vary, the Company generally pays for the vacation components after the
customers departure. In the period between receipt of a deposit or prepayment
and the payment of related expenses, these funds are invested in cash and
investment-grade securities. This cycle is typical in the packaged tour
industry and earnings generated on deposits and prepayments are integral to the
Companys operating model and pricing strategies. The Companys investment
policy is to only invest funds in cash equivalents and investment grade
securities. For the nine months ended September 30, 2001 and 2000, the Company
had interest income of $1.2 million (1.5% of net revenues) and $2.3 million
(2.2% of net revenues), respectively.

14



---



##### Table of Contents






Results of Operations (unaudited)

The following table summarizes the Companys historical results of
operations as a percentage of net revenues for the nine months ended September
30, 2001 and 2000.

|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |       |  
|------------------------------------ | -------------------- | - | ------------------------------- | ------ | ---- |  | ------ | ---- | - | - | ------- | ------- | - |  | ----- | ----- | -
|                                     |                      |   | Nine Months Ended September 30,
|                                     |                      |   |                                
|                                     |                      |   | 2001                            |        | 2000
|                                     |                      |   |                                 |        |     
|                                     |                      |   | Amount                          |        | %    |  | Amount |      | %
|                                     |                      |   |                                 |        |      |  |        |      |  
|Net revenues                         |                      | $ | 84,016                          |        |      |  | 100.0  |      |   | $ | 104,366 |         |   |  | 100.0 |      
|                                    
|                                    
|                                    
|                                    
|Operating expenses                   |                      |   | 74,637                          |        |      |  | 88.8   |      |   |   | 94,939  |         |   |  | 91.0  |      
|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |      
|                                     | Gross profit         |   |                                 | 9,379  |      |  |        | 11.2 |   |   |         | 9,427   |   |  |       | 9.0   |  
|                                    
|                                    
|                                    
|                                    
|General and administrative expenses  |                      |   | 5,209                           |        |      |  | 6.2    |      |   |   | 8,041   |         |   |  | 7.7   |      
|                                    
|                                    
|                                    
|                                    
|Depreciation and amortization        |                      |   | 3,521                           |        |      |  | 4.2    |      |   |   | 5,232   |         |   |  | 5.0   |      
|                                    
|                                    
|                                    
|                                    
|Restructuring and impairment charges |                      |   | 8,020                           |        |      |  | 9.5    |      |   |   | 38,382  |         |   |  | 36.8  |      
|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |      
|                                     | Loss from operations |   |                                 | (7,371 | )    |  |        | (8.7 | ) |   |         | (42,228 | ) |  |       | (40.5 | )
|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |      
|Interest income                      |                      |   | 1,248                           |        |      |  | 1.5    |      |   |   | 2,303   |         |   |  | 2.2   |      
|                                    
|                                    
|                                    
|                                    
|Interest expense                     |                      |   | (2,588                          | )      |      |  | (3.1   | )    |   |   | (3,127  | )       |   |  | (3.0  | )    
|                                    
|                                    
|                                    
|                                    
|Other                                |                      |   | 75                              |        |      |  |       |      |   |   | (1      | )       |   |  |      |      
|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |      
|Loss before income taxes             |                      |   | (8,636                          | )      |      |  | (10.3  | )    |   |   | (43,053 | )       |   |  | (41.3 | )    
|                                    
|                                    
|                                    
|                                    
|Income tax provision                 |                      |   | (45                             | )      |      |  |       |      |   |   | (60     | )       |   |  |      |      
|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |      
|Net loss                             |                      | $ | (8,681                          | )      |      |  | (10.3  | )    |   | $ | (43,113 | )       |   |  | (41.3 | )    
|                                     |                      |   |                                 |        |      |  |        |      |   |   |         |         |   |  |       |      

Net revenues for the nine months ended September 30, 2001 and 2000, were
$84.0 million and $104.4 million, respectively. The decrease in net revenues
of 19.5% for the nine months ended September 30, 2001 was principally due to
restructuring of the Companys Vacations by Globetrotters brand in which
certain unprofitable products were discontinued. In addition, net revenues
decreased due to the slowing global economy; the strength of the U.S. dollar,
which negatively impacted the Companys inbound U.S. products; and the
disruption of travel related to the September 11 terrorist attacks in New York
and Washington, D.C. Certain of the Companys emerging products (principally
the Companys Classic Caribbean and Classic Mexico products) have continued to
grow at significant rates offsetting in part the slowing revenues of the
Companys more mature products.

Operating expenses for the nine months ended September 30, 2001 and 2000,
were $74.6 million and $94.9 million, respectively, or 88.8% and 91.0%,
respectively, of net revenues. The decrease in operating expenses as a
percentage of net revenues and corresponding improvement in gross profit margin
is primarily attributable to cost reductions and the elimination of certain
unprofitable products resulting from the Companys continued restructuring.
The overall reduction in operating expenses is also attributable to reductions
in certain variable operating expenses as a result of lower net revenues.

General and administrative expenses for the nine months ended September
30, 2001 and 2000 were $5.2 million and $8.0 million, respectively, or 6.2% and
7.7%, respectively, of net revenues. The decrease in general and administrative
expenses of 35.0% is primarily due to decreases in headcount and outside
services related to the Companys restructuring of its Globetrotters brand and
closing of its Washington, D.C. headquarters office.

Depreciation and amortization for the nine months ended September 30, 2001
and 2000 was $3.5 million and $5.2 million, or 4.2% and 5.0%, respectively, of
net revenues. The decrease is principally due to the reduction in depreciable
and amortizable assets as a result of the impairment charge recorded in 2000 as
part of the Companys restructuring.

15



---



##### Table of Contents



Restructuring and impairment charges for the nine months ended September
30, 2001 and 2000 were $8.0 million and $38.4 million, respectively. Charges
for the nine months ended September 30, 2001 included approximately $6.3
million for the substantial impairment of goodwill related to Island, $935,000
for severance costs including benefits related to the 237 employees terminated
as part of restructuring during the current year, and $739,000 for lease costs
and other restructuring expenses principally related to the closing of
Classics Chicago reservation center in response to the events of September 11.
For the nine months ended September 30, 2000, charges included $35.0 million
for the impairment of long-lived assets, $2.3 million for severance costs
including benefits, and $1.1 million for lease costs and other restructuring
expenses. The prior year restructuring and impairment charges were primarily
related to the restructuring and consolidation of the Companys discontinued
Globetrotters products, and the closure the Companys Washington, D.C.
headquarters office.

Interest income for the nine months ended September 30, 2001 and 2000 was
$1.2 million and $2.3 million, respectively, or 1.5% and 2.2%, respectively, of
net revenues. The lower amount of interest income earned was due to lower
interest rates as well as lower levels of investable funds as a result of the
reduction in customer deposits related to its discontinued products and the
slowing economy.

Interest expense for the nine months ended September 30, 2001 and 2000 was
$2.6 million and $3.1 million, respectively. The decrease in interest expense
for the nine months ended September 30, 2001 is principally due to lower
percentage borrowing costs compared to the prior year.

Other income for the nine months ended September 30, 2001 of $75,000 was
primarily related to foreign currency gains related to the Companys Classic
Europe product. The Company does not specifically hedge its foreign currency
transactions.

The provision for income taxes for the nine months ended September 30,
2001 and 2000 was $45,000 and $60,000, respectively, for estimated state income
taxes. The benefit that would normally be attributable to the loss before
income taxes for the nine months ended September 30, 2001 and 2000 was offset
by valuation allowances provided against the related deferred tax assets. The
valuation allowances are a result of the Companys history of significant
operating losses.

Net loss for the nine months ended September 30, 2001 and 2000 was $8.7
million and $43.1 million, respectively, or 10.3% and 41.3%, respectively, of
net revenues. For both periods the net loss is principally due to
restructuring and impairment charges of $8.0 million and $38.4 million,
respectively. The improvement for the current year is also due to reductions
in operating and general and administrative expenses as a result of the
Companys restructuring and consolidation.

16



---



##### Table of Contents



The following table summarizes the Companys historical results of
operations as a percentage of net revenues for the three months ended September
30, 2001 and 2000.

|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |       |  
|----------------------------------- | -------------------- | - | -------------------------------- | ------ | ---- |  | ------ | ----- | - | - | ------- | ------- | - |  | ----- | ----- | -
|                                    |                      |   | Three Months Ended September 30,
|                                    |                      |   |                                 
|                                    |                      |   | 2001                             |        | 2000
|                                    |                      |   |                                  |        |     
|                                    |                      |   | Amount                           |        | %    |  | Amount |       | %
|                                    |                      |   |                                  |        |      |  |        |       |  
|Net revenues                        |                      | $ | 30,388                           |        |      |  | 100.0  |       |   | $ | 40,620  |         |   |  | 100.0 |      
|                                   
|                                   
|                                   
|                                   
|Operating expenses                  |                      |   | 26,731                           |        |      |  | 88.0   |       |   |   | 35,664  |         |   |  | 87.8  |      
|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |      
|                                    | Gross profit         |   |                                  | 3,657  |      |  |        | 12.0  |   |   |         | 4,956   |   |  |       | 12.2  |  
|                                   
|                                   
|                                   
|                                   
|General and administrative expenses |                      |   | 1,653                            |        |      |  | 5.4    |       |   |   | 3,198   |         |   |  | 7.9   |      
|                                   
|                                   
|                                   
|                                   
|Depreciation and amortization       |                      |   | 1,150                            |        |      |  | 3.8    |       |   |   | 1,488   |         |   |  | 3.7   |      
|                                   
|                                   
|                                   
|                                   
|Restructuring charge                |                      |   | 7,378                            |        |      |  | 24.3   |       |   |   | 38,382  |         |   |  | 94.4  |      
|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |      
|                                    | Loss from operations |   |                                  | (6,524 | )    |  |        | (21.5 | ) |   |         | (38,112 | ) |  |       | (93.8 | )
|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |      
|Interest income                     |                      |   | 376                              |        |      |  | 1.2    |       |   |   | 953     |         |   |  | 2.3   |      
|                                   
|                                   
|                                   
|                                   
|Interest expense                    |                      |   | (764                             | )      |      |  | (2.5   | )     |   |   | (834    | )       |   |  | (2.1  | )    
|                                   
|                                   
|                                   
|                                   
|Other                               |                      |   | (10                              | )      |      |  | 0.0    |       |   |   |        |         |   |  |      |      
|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |      
|Loss before income taxes            |                      |   | (6,922                           | )      |      |  | (22.8  | )     |   |   | (37,993 | )       |   |  | (93.6 | )    
|                                   
|                                   
|                                   
|                                   
|Income tax provision                |                      |   | (15                              | )      |      |  | (0.0   | )     |   |   | (60     | )       |   |  | (0.1  | )    
|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |      
|Net loss                            |                      | $ | (6,937                           | )      |      |  | (22.8  | )     |   | $ | (38,053 | )       |   |  | (93.7 | )    
|                                    |                      |   |                                  |        |      |  |        |       |   |   |         |         |   |  |       |      

Net revenues for the three months ended September 30, 2001 and 2000, were
$30.4 million and $40.6 million, respectively. The decrease in net revenues of
25.1% for the three months ended September 30, 2001 was due to: (a)
restructuring of the Companys Vacations by Globetrotters brand in which
certain unprofitable products were discontinued, (b) the disruption of travel
related to the September 11 terrorist attacks in New York and Washington, D.C.,
and (c) the weakness in the global economy. The Company has continued to
experience revenue growth in certain emerging products (principally the
Companys Classic Caribbean and Classic Mexico products); however, the weakness
in the global economy has led to lower revenues in other more mature products
(principally the Companys Classic Hawaii and its Allied Tours inbound U.S.
products).

The Companys net revenues generally are highest in the second and third
quarters of the year, while its expenses, as a percentage of net revenues,
generally are highest in the first and fourth quarters.

Operating expenses for the three months ended September 30, 2001 and 2000,
were $26.7 million and $35.7 million, respectively, or 88.0% and 87.8%,
respectively, of net revenues. Operating expenses include certain fixed costs
that would typically result in an anticipated increase in operating expenses as
a percentage of net revenues when revenues decrease. The increase for the
three months ended September 30, 2001 was limited to only 20 basis points due
to significant cost reductions and the elimination of certain unprofitable
products within the past twelve months.

General and administrative expenses for the three months ended September
30, 2001 and 2000 were $1.7 million and $3.2 million, respectively, or 5.4% and
7.9%, respectively, of net revenues. The decrease in general and administrative
expenses of 48.3% is primarily due to decreases in headcount and outside
services related to the Companys restructuring of its Globetrotters brand and
closing of its Washington, D.C. headquarters office.

Depreciation and amortization for the three months ended September 30,
2001 and 2000 was $1.2 million and $1.5 million, or 3.8% and 3.7%,
respectively, of net revenues. The decrease is principally due to the reduction
in depreciable and amortizable assets as a result of the impairment charge
recorded in 2000 as part of the Companys restructuring.

17



---



##### Table of Contents



Restructuring and impairment charges for the three months ended September
30, 2001 and 2000 were $7.4 million and $38.4 million, respectively. Charges
for the three months ended September 30, 2001 included approximately $6.3
million for the substantial impairment of goodwill related to Island, $293,000
for severance costs including benefits related to the 230 employees terminated
during the quarter, principally in response to the events of September 11, and
$739,000 for lease costs and other restructuring expenses principally related
to the closing of Classics Chicago reservation center, which was also in
response to the events of September 11. For the three months ended September
30, 2000, charges included $35.0 million for the impairment of long-lived
assets, $2.3 million for severance costs including benefits, and $1.1 million
for lease costs and other restructuring expenses. The prior year restructuring
and impairment charges were primarily related to the restructuring and
consolidation of the Companys discontinued Globetrotters products, and the
closure the Companys Washington, D.C. headquarters office.

Interest income for the three months ended September 30, 2001 and 2000 was
$376,000 and $953,000, respectively, or 1.2% and 2.3%, respectively, of net
revenues. The lower amount of interest income earned was due to lower interest
rates earned as a result of general reductions in market interest rates and
lower levels of investable funds as a result of the reduction in customer
deposits related to the Companys discontinued products and the slowdown in the
economy.

Interest expense for the three months ended September 30, 2001 and 2000
was $764,000 and $834,000, respectively. The decrease in interest expense for
the three months ended September 30, 2001 was due to expenses incurred in the
prior year related to the Companys bank credit facility that was terminated in
the current year. The effect of theses nonrecurring expenses was partially
offset by additional interest incurred due to the issuance of additional
convertible notes during the past twelve months as payment of interest on the
Companys current outstanding debt.

Other expense for the three months ended September 30, 2001 was $10,000
and primarily represented foreign currency losses related to the Companys
Classic Europe product. The Company does not specifically hedge its foreign
currency transactions.

The income tax provision recognized for the three months ended September
30, 2001 and 2000 was $15,000 and $60,000, respectively for estimated state
income taxes. The benefit that would normally be attributable to the loss
before income taxes for the three months ended September 30, 2001 and 2000 was
offset by valuation allowances provided against the related deferred tax
assets. The valuation allowances are a result of the Companys history of
significant operating losses.

Net loss for the three months ended September 30, 2001 and 2000 was $6.9
million and $38.1 million, principally the result of restructuring and
impairment charges of $7.4 million and $38.4 million, respectively.




Liquidity and Capital Resources

The Company receives advance payments and deposits prior to commencement
of travel. The Companys pricing of its products and services is determined, in
part, based upon the amount and timing of advance payments received. A number
of states have regulations with respect to the financial security and handling
of customer deposits made in advance of travel. The Company believes it is in
compliance with all applicable regulations relating to customer deposits. The
Companys investment policy restricts investments to investment-grade
securities.

The tragic events of September 11 had a significant and material adverse
impact on the travel and hospitality industries. These events have adversely
impacted the Company and have created greater uncertainty with respect to the
predictability of the Companys liquidity and capital resources. The
disruption in travel that resulted from the terrorist attacks led to
significant cancellations of existing bookings resulting in lower revenues and
the continuing concern about possible additional terrorist attacks has resulted
in a significant slowdown in advanced booking patterns for future travel.

18



---



##### Table of Contents



As is typical in the vacation wholesale industry, the Company relies upon
the float generated by advanced bookings to fund operations and has
historically operated with an expected working capital deficit. At September
30, 2001 the Companys current liabilities exceeded current assets by $47.5
million, compared to $49.9 million at September 30, 2000. If the float
generated by advanced bookings were to shrink due to the slowdown in travel,
consumers waiting closer to the time of travel to make their travel plans, or
other factors that might restrict the Companys access to the float, the
Company would be required to find an alternative source of capital.

Because the Company anticipates that the current slowdown in advance
bookings may continue and the full impact of the September 11 events may not
yet be known, in November 2001 the Company secured up to $24.25 million in
additional financing with 7 1/2% Notes (defined above). The 7 1/2% Notes
require the Company to meet certain covenants and other restrictions.
Specifically, the 7 1/2% Notes require the Company to become privately held by
October 2002 and to meet certain customer booking levels or the lenders may
demand payment of amounts then outstanding under the 7 1/2% Notes. The
financing under the 7 1/2% Notes is available to the Company in multiple
tranches. In November 2001 the Company received the first $10 million under
the financing, with the remaining $14.25 million available for future
borrowings subject to certain conditions, including the absence of additional
terrorism. Management believes that current available financing together with
recent reductions in operating expenses will enable the Company to sustain
operations through at least March 2003. However, there can be no assurances
that if advance booking trends deteriorate further or continue at their current
depressed levels for an extended period, if the average lead time for advanced
bookings shortens, or if other events or conditions were to restrict the
availability to the Company of the float from advance customer payments, the
financing arranged may not be sufficient and the Company may be required to
find an additional source of capital. An alternative source of capital would
also be required if the Company were to fail to continue to comply with the
terms of the 7 1/2% Notes and the lender were to require prepayment as a
result of such default. Additional or alternative sources of capital may not
be available to the Company at the time they might be needed, or may not be
available at terms acceptable to the Company. Such an event could have a
material adverse effect on the business, financial condition and results of the
Company. The 7 1/2% Notes mature on December 31, 2006. Interest is payable
quarterly beginning March 1, 2002, and through June 1, 2003 interest is payable
in either cash or additional 7 1/2% Notes.

The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has been advised by its
independent public accountants that if the Company cannot achieve sufficient
customer booking levels to maintain debt compliance, sustain its customer
deposits and related cash flows, or the Company has not restructured itself as
a privately held entity prior to the completion of their audit of the Companys
financial statements for the year ending December 31, 2001, their auditors
report on those financial statements will be modified to reflect this potential
going concern contingency.

At September 30, 2001, the Company had cash and cash equivalents of $21.7
million, excluding $4.2 million of cash restricted pursuant to contracts with
private label partners. Contracts with certain of the Companys private label
partners require that certain funds including customer deposits be segregated
from general cash reserves and restrict the disbursement of these funds prior
to the commencement of travel. At September 30, 2001 the Company had
short-term investments of $5.2 million consisting of a certificate of deposit.
The Company has pledged the certificate of deposit as collateral securing
stand-by letters of credit.

At September 30, 2001 the Company maintained a credit facility (LC
Facility) used to secure standby letters of credit with a capacity of $5.0
million. At September 30, 2001 there were approximately $4.1 million of
stand-by letters of credit outstanding under the LC Facility with $922,000
available for the issuance of additional standby letters of credit. The LC
Facility matures on May 1, 2004. The LC Facility is collateralized with a
certificate of deposit of $5.2 million.

Prior to August 2001 the Company also maintained a second credit facility
with a consortia of lending institutions. This second facility had been used
to finance the acquisition of several of the Companys subsidiaries in 1998 and
1999. Borrowings for acquisitions were repaid in 2000. This facility was also
used to secure standby letters of credit until the Companys LC Facility was
secured in March 2001. The Company terminated this credit facility in August
2001. At September 30, 2001 the Company had $502,000 of standby letters of
credit outstanding with one of the banks participating in this facility. These
standby letters of credit are secured by a standby letter of credit under the
Companys LC Facility.

19



---



##### Table of Contents



At September 30, 2001 the Company had $30.1 million of 9% convertible
subordinated notes (the 9% Notes) related to a $27.5 million cash infusion
raised in June 2000 from a private investor. The 9% Notes which matures on
July 1, 2007 are convertible at any time by the holder into the Companys
common stock at a conversion price of $5.25 per share. Interest is payable
quarterly. Through August 1, 2003 the Company can elect to pay quarterly
interest due in either cash, additional notes with the same terms as the
original 9% Note, or common stock. To date the Company has elected to make
interest payments in the form of additional convertible notes. In October 2001
the Company issued an additional 9% Note in the amount of $676,000 as payment
for interest due October 1, 2001.

During the nine months ended September 30, 2001, net cash provided by
operations was $10.3 million. Net cash used in investing activities was $8.6
million including $1.7 million for additions to property and equipment, $5.2
million for the purchase of a certificate of deposit used to collateralize the
Companys new credit facility and $1.7 million paid during the period as
deferred acquisition consideration related the Companys 1999 acquisition of
Island Resort Tours. Net cash used in financing activities was $178,000
representing repayment of capital lease obligations.

During the nine months ended September 30, 2000 net cash provided by
operations was $28.7 million. Net cash used in investing activities was $2.4
million principally related to additions to property and equipment. Net cash
used in financing activities was $3.6 million representing the repayment of
borrowings under the credit facility of $29.4 million and repayment of capital
lease obligations of $264,000 less the net proceeds received on the 9% Note
during the period of $26.1 million. The net proceeds of the 9% Note include
$1.4 million of deferred financing costs paid.

The decrease in cash provided by operations from $28.7 million to $10.3
million was primarily due to a reduction in the customer deposit and accounts
payable float generated by both the Company discontinuing certain unprofitable
products as part of its restructuring in 2000 as well as the decrease in the
Companys revenues due to the slowing economy and the disruption of travel
related to the terrorist attacks on September 11. The impact of the reduction
in the float was softened by changes in the Companys receivables. For the
nine months ended September 30, 2000 accounts receivable increased by $12.4
million resulting in a use of funds. For the same nine months ended September
30, 2001 accounts receivable decreased by $2.5 million resulting in a source of
funds. This $14.9 million difference in the source of funds related to
accounts receivable was due to increased collection efforts and the
discontinuation of certain unprofitable products as part of the Companys
restructuring, as well as overall lower revenues related to the softening
economy and the disruption of travel in September 2001. In spite of the
increase in the source of funds related to accounts receivable of $14.9
million, the overall source of funds from operations decreased by $18.4 million
principally due to a decrease in the source of funds related to accounts
payable, accrued expenses and customer deposits as a result of a decrease in
the float available to the Company. The Company arranged the 7 1/2% Notes
because it anticipates that the float available to the Company may continue to
decrease. While the Company believes that the 7 1/2% Notes will be sufficient
to meet the Companys needs, there can be no assurances that given the
uncertainty of the current environment that they will be sufficient, and an
additional source of capital may be required. If needed, such additional
source of capital may not be available to the Company, or may not be available
at terms acceptable to the Company. Such an event could have a material
adverse effect on the business, financial condition and results of the Company.

The Companys operations are seasonal in nature. Historically the Company
generates cash from operations during the first and second quarters, and uses
cash in operations during the third and fourth quarters. The $10.3 million of
cash provided by operations for the nine months ended September 30, 2001 is not
necessarily indicative of the results to be expected for the full year.
Additionally, the effects of the September 11 terrorism may not be fully
reflected as of September 30, 2001 and historical trends may not be reliable
until the current global economic and political situation stabilizes and
consumer travel patterns return to normal.

Although the Company expects to not be profitable for the year ending
December 31, 2001, the Company anticipates that its existing cash, cash from
operations, and currently available credit under its 7 1/2% Notes will
provide sufficient resources to enable the Company to meet its working capital
needs, planned capital expenditures and other obligations through at least at
least March 2003.

20



---



##### Table of Contents



Fluctuations in Quarterly Results of Operations

The leisure travel industry is seasonal and the Companys results have
fluctuated because of these seasonal variations. Net revenues and gross profit
for the Company are generally higher in the second and third quarters.
Exclusive of the Companys losses attributable to its former Globetrotters
brand that led to the Companys restructuring, the Company has historically
reported net losses in the fourth and first quarters. Due to significant
levels of advance payments and advance booking patterns, the Companys cash
flow from operations has historically been positive in the first two quarters,
and negative in third and fourth quarters of recent years. The timing of when
certain holidays fall (e.g. Easter) can also lead to fluctuations in the
Companys quarterly results. The Company expects this seasonality to continue
in the future. The Companys quarterly results may also be subject to changes
in the mix of services offered by the Company, domestic and international
political and economic conditions impacting travel patterns, extreme weather
conditions or other factors affecting leisure travel.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivatives fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company adopted SFAS No. 133 for the
fiscal year beginning January 1, 2001 and noted no material impact on the
Companys financial position, or results of operations.

In June 2001, the FASB approved SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001. Any
goodwill resulting from acquisitions completed after June 30, 2001 will not be
amortized. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 will result in the Companys
discontinuation of amortization of its goodwill; however, the Company will be
required to test its goodwill for impairment under the new standard beginning
in the first quarter 2002, which could have an adverse effect on the Companys
future results of operations if an impairment occurs. The Company has not
completed an evaluation of the Companys goodwill under the impairment
guidelines of SFAS No. 142.




ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the market risks faced by the
Company or in how those risks are managed since December 31, 2000. Refer to
the Companys 2000 Form 10-K for a discussion about market risk as well as the
discussion of the effect that recent changes in interest rates may have on the
Companys results of operations as contained in Item 2 above.

21



---



##### Table of Contents









PART II. OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------



| | 1) |  | 10.48 Note Purchase Agreement Dated November 2, 2001 between
the Registrant and CVG Investment, LLC.             
| | -- |  | -----------------------------------------------------------------------------------------------------------------
|
| | 2) |  | 10.49 7 1/2% Convertible Senior Subordinated Note Dated
November 5, 2001                                         
|
| | 3) |  | 10.50 7 1/2% Exchangeable Senior Subordinated Note Dated
November 5, 2001                                        
|
| | 4) |  | 10.51 Agreement to Tender dated November 2, 2001 between CVG
Investments LLC, their affiliates and the Registrant
|
| | 5) |  | 10.52 Waiver Dated November 2, 2001 between GV Investments,
LLC and the Registrant                               
|
| | 6) |  | 3.1 (BETA) Restated Certificate of Incorporation of the
Registrant as Amended                                    
|
| | 7) |  | 3.2 (LAMDA) Amended and Restated By-laws of the Registrant                                                       

Incorporated herein by reference:



| | (BETA)  |  | Previously filed as the same exhibit number on August 14,
2001 under a Form 10-Q (file no 001-14353)      
| | ------- |  | ----------------------------------------------------------------------------------------------------------
|
| | (LAMDA) |  | Previously filed as the same exhibit number under a
Registration Statement on Form S-1 (file no 333-52673)



|(b) |  | Reports on Form 8-K during the quarter ended September 30, 2001.
|--- |  | ----------------------------------------------------------------
|   
|    |  | None.                                                           

22



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                       |  |                              |                                                                       
|---------------------- |  | ---------------------------- | ----------------------------------------------------------------------
|Date: November 8, 2001 |  |                              |                                                                       
|                      
|                      
|                      
|                      
|                       |  | CLASSIC VACATION GROUP, INC.
|                      
|                      
|                      
|                      
|                       |  | By:                          | /s/ Debbie A. Lundquist                                               
|                      
|                      
|                      
|                      
|                       |  |                              |                                                                       
|                       |  |                              | Debbie A. Lundquist
Executive Vice President
& Chief Financial Officer

23