================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER 0-29296
TRAVEL SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2030324
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NUMBER)
220 CONGRESS PARK DRIVE, DELRAY BEACH, FLORIDA 33445-7289
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 266-0860
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: ____
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. X
The aggregate market value of voting stock held by non-affiliates of
the Company as of 25th day of March 1998, was approximately $203,812,656 based
on the $31.25 closing sale price for the Common Stock on the Stock Market on
such date. For purposes of this computation, all executive officers and
directors of the Company have been deemed to be affiliates. Such determination
should not be deemed to be an admission that such directors and officers are, in
fact, affiliates of the Registrant.
The number of shares of Common Stock of the Registrant outstanding as
of the 25th day of March, 1998, was 10,351,991.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Travel Services International, Inc. (the "Company") was established to
create a leading specialized distributor of leisure travel services. All of the
Company's operating subsidiaries (the "Operating Companies") are specialized
distributors of travel services, providing airline, cruise and/or European auto
rental reservations. Unlike travel agents, specialized distributors, such as the
Operating Companies, focus on a single segment of the travel service industry
and thus provide a greater level of expertise with respect to that segment.
Specialized distributors offer travel providers, such as airlines, cruise lines
and auto rental companies, an alternative distribution channel through which
significant amounts of capacity are sold in return for preferential pricing,
commissions or other key benefits, such as discounts or cooperative advertising
payments. Through consolidation of specialized distributors, the Company is able
to offer both travel agents and travelers a single source of competitively
priced products and services along with extensive expertise within and across
multiple leisure travel segments.
As leaders in their respective segments, the Operating Companies have
experienced significant internal growth. The combined pro forma net revenues of
the "1997 Operating Companies" (consisting of the "Founding Companies" (Travel
800, LLC, D-FW Tours, Inc., Cruises Only, LLC, Cruises Inc. and Auto Europe,
LLC) and the "1997 Acquired Companies" (CruiseOne, Inc., Cruise World, Inc.,
Cruise Fairs of America and Ship'N' Shore Cruises, Inc.) increased from $39.0
million in 1994 to $78.7 million in 1997, representing a 26.3% compound annual
growth rate. The 1997 Operating Companies recognized pro forma net revenue of
$78.7 million on reservations representing over $400 million in travel services.
The Company has negotiated arrangements with many major airlines, cruise lines
and European auto rental companies, including travel providers such as
Continental Airlines, Inc., Delta Air Lines, Inc., Carnival Cruise Lines, Royal
Caribbean Cruise Lines, Avis Europe Limited and Europcar International S.A. To
enhance its strong internal growth, the Company intends to implement world-class
technology, realize cross-selling opportunities and capitalize on cost
efficiencies and economies of scale. In addition, the Company has implemented
and will continue an aggressive acquisition program to broaden its travel
service offerings and consolidate the highly fragmented specialized leisure
travel service industry.
INDUSTRY OVERVIEW
U.S. travelers spent in excess of $200 billion on business and leisure
travel in 1996, with leisure travelers comprising approximately 65% of the total
travel market. The U.S. travel market has grown at a compounded annual growth
rate of 6.6% over the past four years. The overall leisure market is expected to
continue to grow at a similar rate over the next several years, driven by: (i)
positive consumer fundamentals; (ii) favorable demographics; (iii) substantial
capital investment in innovative new product (nearly $9 billion in the cruise
segment alone over the next five years); and (iv) improved distribution and
access to desired destinations. The travel industry's principal providers
include airlines, cruise lines, auto rental companies, hotels and railroads.
Historically these travel providers have relied on their internal sales
departments and travel agencies as their primary distribution channels. These
traditional distribution channels have not enabled travel providers to maximize
utilization of their capacity and generally have offered limited expertise to
the traveler. The internal sales department of a travel provider can offer
in-depth knowledge about its services but will not offer alternative services
from other travel providers. Travel agents, while enabling a traveler to compare
multiple options from different travel providers, often lack extensive expertise
about the specific services being offered.
Travel providers are increasingly utilizing specialized distributors to
sell capacity. By focusing on specific segments of the travel service industry,
these companies are able to act more efficiently as distributors of capacity.
Specialized distributors assist travel providers both on a spot basis and with
longer term yield management. Many travel agents are seeking ways to cut their
costs, diversify their revenue sources and strengthen their relationships with
travelers they serve. As a result, the Company believes that travel agents seek
specialized distributors that offer better customer service, competitive prices
and attractive commission structures. In addition, specialized distributors are
able to offer both travel agents and travelers in-depth knowledge about specific
services from many different travel providers, which is becoming increasingly
important as the number of travel options continues to expand. During 1996,
commercial airlines carried approximately 500 million passengers and posted
domestic and international passenger growth of 7% and 6%, respectively. Airlines
rely heavily on travel agents and specialized distributors to supplement their
own internal marketing efforts. Given their focus on air travel and their
corresponding large volumes of reservations, specialized distributors often
receive preferential pricing from
<PAGE>
domestic airlines. In addition, international airlines also offer specialized
distributors controlled access to capacity at discounted prices and typically
utilize a limited number of specialized distributors in order to increase
capacity utilization without disrupting their overall pricing strategy. These
specialized distributors are then able to offer non-published discounted fares
for domestic and international flights to both travel agents and travelers.
The number of North American cruise passengers increased to 5.1 million
in 1997 from 1.4 million in 1980, representing an 8.4% compound annual growth
rate. Industry analysts forecast an 8% compound growth rate increase in new
supply over the next five years; in 1998, seven large vessels will be introduced
and drive a 10% weighted average increase in capacity. The cruise market is
largely untapped, with just 8% of North Americans having ever taken a cruise.
The cruise industry represents less than 2% of the vacation travel market. The
character of a cruise varies significantly among the different cruise lines and
cruise ships. In addition, a cruise vacation, which consists of lodging,
entertainment, dining and travel, typically represents a large portion of a
traveler's vacation budget. As a result, cruise sales require significant
marketing time and effort in comparison with other travel services. Cruise lines
traditionally have relied primarily on third party distributors to sell
virtually all of their berth capacity. While travel agents remain an important
channel of distribution for cruise lines, specialized cruise vacation
distributors have become an increasingly significant source of capacity
utilization and, accordingly, are given preferential pricing, cooperative
advertising dollars and access to preferred berth locations. In contrast to most
traditional travel agents, specialized cruise distributors offer travelers
extensive knowledge of cruise options available and are able to provide more
detailed information with respect to daily excursions and other amenities.
According to a survey by the European Travel Commission, there were
approximately 9.0 million U.S. tourists visiting Europe in 1996, a 6.5% increase
from 1995. Unlike domestic auto rental providers which, to a large extent,
market directly to travelers in the U.S., European auto rental providers rely
heavily on third party distributors to market to U.S. customers traveling
abroad. As in the U.S., European auto rental providers focus on the business
traveler segment which peaks in the spring and fall seasons. As a result,
specialized distributors in the U.S. serve an important role to these European
auto rental providers by supplementing their sales efforts during non-peak
periods. In addition, these specialized distributors serve as a centralized and
efficient source of information on pricing and availability of reservations to
travel agents in the U.S.
The market for specialized distributors of leisure travel services is
fragmented, with numerous companies offering services in a single travel
segment. These specialized distributors generally have made little investment in
technology to improve their selling effectiveness, efficiencies and access to
information. Furthermore, most of these companies lack the scale necessary to
obtain preferential pricing from travel providers and to create effective
national marketing campaigns. The Company believes significant opportunities are
available to a well capitalized company providing a broad offering of
specialized travel services with a high level of customer service and
state-of-the-art technology infrastructure.
BUSINESS STRATEGY
The Company's objective is to be the leading specialized distributor of
leisure travel services. In order to achieve this goal, the Company has a
focused business strategy based upon the following key principles:
PROVIDE EXTENSIVE EXPERTISE IN SPECIFIC TRAVEL SEGMENTS. Each of the
Operating Companies is a specialist in a particular travel segment. By
leveraging the expertise of the Operating Companies and future acquisitions, the
Company will provide a higher level of expertise and information for a broader
array of travel services than may be available through traditional distribution
channels. For example, the Company's cruise sales personnel represent virtually
every cruise line and focus exclusively on selling cruises. In order to enhance
their knowledge, these agents are given periodic cruise vacations and have
access to proprietary reviews on most ships. As a result, the Company believes
that it is better able to assist customers in choosing the specific cruise
vacation that best suits their particular needs. Through the Company's
technology, detailed information about ships, itineraries, destinations and
other data will be available to the Company's sales personnel at their desktops.
MAINTAIN AND ENHANCE STRONG STRATEGIC RELATIONSHIPS WITH TRAVEL
PROVIDERS. The Company believes that the strategic relationships with its travel
providers have been and will continue to be integral to its success. As leaders
in their respective segments, the Operating Companies have negotiated with many
travel providers for pricing that is preferential to published fares and
preferred access to capacity. These strategic relationships enable the Company
to provide a comprehensive service offering within each travel segment and to
offer prices that are lower than would be generally available to travelers and
travel agents. In addition, the Company is negotiating with various travel
suppliers to create direct technology links with those suppliers, thereby making
the transaction of business between the parties easier and more efficient.
2
<PAGE>
OFFER HIGH LEVELS OF CUSTOMER SERVICE. The Company believes that
maintaining high levels of customer service is critical to its ability to
generate significant repeat business. In addition to the Company's competitive
prices, customer service is an important differentiating factor to both the
leisure traveler who is making a significant investment in a vacation and the
travel agent who is seeking attractive commission structures and the ability to
make travel arrangements with greater ease. There are many examples of the
Company's commitment to customer service: Auto Europe maintains 24-hour
toll-free numbers connected directly to its customer service department in the
U.S. from which its customers in Europe can obtain emergency assistance from an
English speaking contact with access to the appropriate emergency roadside
assistance in the relevant foreign location; Diplomat Tours provides real-time
fare quotes (via fax) to travel agents using voice recognition technology and
provides certain other advantages to its top customers; Ship `N' Shore makes
outbound calls to customers to offer "last minute" deals as they become
available. Other customer service initiatives offered by the Company include fax
vouchers, extended weekday and weekend hours, proprietary cruise ship reviews
and a commitment to minimize telephone waiting time. The Company has committed a
significant portion of its technology budget to the creation of an extensive
customer database. Through the information collected in this database, the
Company will be in a position to provide additional services to its customers.
BRAND STRATEGY. The Company is reviewing various strategies in
connection with brand recognition and marketing of its services, and expects to
implement a comprehensive brand and marketing plan in the coming year. Such
plans may include the replacement of certain existing brands with a single, more
identifiable brand, along with the preservation of existing brands that have a
strong identity and loyal following.
IMPLEMENT STATE-OF-THE-ART TECHNOLOGY INFRASTRUCTURE. A key element of
the Company's growth and business strategy is the implementation of world-class
information and telecommunications technologies. Via the deployment of its
Web-based applications, the Company will have the necessary tools to sell faster
and better and to provide superior levels of customer service. At the center of
the technology strategy is the Company's investment in customer information and
product/service information, which will be maintained in state-of-the-art
database management systems. These technologies will be implemented in each of
the Company's operating locations and complement all distribution channels,
including call centers, home-based agents, third-party contractors, franchisees
and the Internet. By leveraging its telecommunications volumes, the Company
expects to more effectively manage its voice communications-related expenses,
while increasing the efficiency of its sales personnel and minimizing telephone
waiting time for its customers.
CAPITALIZE ON MANAGEMENT EXPERTISE. The Company's executive management
team has a high level of industry experience. In addition, the Company believes
that the experienced local management teams at the Operating Companies have an
in-depth understanding of their respective markets and businesses and have built
strong relationships with travel providers and customers. As the Company
implements "best practices" and achieves economies of scale, local management
will implement operating strategies and programs. The Company utilizes stock
ownership as well as appropriate incentive compensation to ensure that the
objectives of local management are aligned with those of the Company.
GROWTH STRATEGY
The Company plans to achieve its goal to become the leading specialized
distributor of leisure travel services by implementing an internal growth
strategy and pursuing an aggressive acquisition program.
IMPLEMENT INTERNAL GROWTH STRATEGY. While the Company intends to
continue to acquire specialized distributors of leisure travel services, strong
internal revenue growth remains the core of the Company's growth strategy. From
1994 to 1997, the 1997 Operating Companies, on a combined pro forma basis,
experienced revenue growth of 26.3% compounded annually. The Company believes
that the growth of Operating Companies individually will be enhanced by: (i)
continued growth in the leisure travel industry; (ii) introduction of
world-class technology; and (iii) expansion of sales and marketing programs. In
addition, the Company expects to realize the following key benefits on a
combined basis:
/bullet/ EMBRACE MULTIPLE SELLING MODELS AND DISTRIBUTION CHANNELS.
The Company's strategic operating model includes utilizing
multiple distribution channels. Use of these channels allows
the Company to sell its products and services in numerous ways
to accommodate the buying habits and behaviors of travelers
and travel agents. The Company embraces four distinct channels
of
3
<PAGE>
distribution: (i) call centers staffed with highly trained
sales personnel; (ii) home-based agents (including
franchisees) who provide specialized knowledge and service to
their local markets; (iii) travel agents; and (iv) the
Internet/World Wide Web. The Company believes that utilizing
multiple distribution channels differentiates it from
competitors who offer their products via a single channel. The
multiple channel approach decreases the Company's risks within
any individual distribution channel.
/bullet/ CROSS-SELLING. The Company believes that significant
cross-selling opportunities exist that will further enhance
the Company's revenue growth. Each of the Operating Companies
specializes in one segment of the travel market. Consolidation
of these companies enables the Company to offer "one-stop
shopping" for a variety of travel services, while still
providing extensive expertise. For example, Travel 800, which
currently focuses on domestic air travel, has begun to satisfy
international air travel requests through Diplomat Tours and
offer international travelers a European auto rental option
through Auto Europe. Auto Europe has installed software from
D-FW Tours, which specializes in international airline ticket
sales to travel agents, and is now able to book European air
travel for its auto rental customers. Similarly, each of the
cruise reservation companies will have the technology to be
able to provide travelers with domestic and international
airline reservations related to their cruise vacation through
Travel 800, D-FW Tours and Diplomat Tours.
/bullet/ BEST PRACTICES. The Company has identified certain best
practices at Operating Companies that can be implemented at
other Operating Companies in order to generate incremental
revenue and enhance profitability. Such best practices include
marketing techniques, operations strategies and cost
efficiencies. For example, the Operating Companies have begun
to cross-implement such programs as travel insurance and
cooperative marketing.
/bullet/ ECONOMIES OF SCALE. The Company believes that it can achieve
significant economies of scale through the combination of the
Operating Companies and future acquisitions and that its size
and relationships with travel providers is a key competitive
advantage in gaining market share and enhancing revenue
opportunities. The Company should benefit from greater
purchasing power in such key expense areas as
telecommunications, advertising, travel insurance and courier
expenses. The Company believes that it can substantially
reduce the total operating expenses of the Operating Companies
and other acquired businesses by eliminating or consolidating
certain duplicative marketing, back-office and administrative
functions and by creating shared services centers.
PURSUE AN AGGRESSIVE ACQUISITION PROGRAM. The Company believes that the
leisure travel service industry continues to be highly fragmented with
significant opportunities for consolidation. The Company has implemented an
aggressive acquisition program targeting other leading specialized distributors
of leisure travel services. Since the acquisition of the five Founding Companies
in July 1997, the Company has acquired seven specialized travel distributors and
one software development company, and has entered into a definitive agreement to
acquire an additional specialized travel distributor. The Company continues to
seek acquisitions within its core airline, cruise line and European auto rental
market segments in order to gain market share. In addition, the Company plans to
acquire companies that specialize in the distribution of travel services
complementary to those currently offered by the Company, such as tour operators
and specialized distributors of hotel and rail reservations. Acquisitions of
this nature will enhance the Company's ability to be a single source of leisure
travel services for its customers. Finally, the Company may also pursue
international acquisitions that will enable the Company to expand its business
model for domestic and international leisure travel originating in countries
other than the U.S.
While acquisitions are a primary component of its growth strategy, the
Company is focused on making strategic acquisitions rather than "tuck-in" or
smaller acquisitions. As a result, the Company seeks to acquire high quality
companies with longstanding reputations within their specific travel service
segments. Generally, these companies will: (i) be run by successful, experienced
entrepreneurs whom the Company will generally endeavor to retain; (ii) have
strong relationships with travel providers and an emphasis on customer service;
and (iii) have demonstrated growth and profitability. Once companies are
acquired, they are quickly integrated to facilitate the opportunities for
revenue enhancement and margin improvement and to capitalize on the strategic
purpose for the acquisition.
The Company believes that the opportunity to join under the Travel
Services International umbrella is attractive to many specialized distributors
of travel services. The Company offers owners of potential acquisition
candidates: (i) significant opportunities to enhance the growth of their
businesses through cross-selling other travel
4
<PAGE>
services and capitalizing on various distribution channels; (ii) the opportunity
to increase sales via the utilization of world-class technology; (iii) the
Company's financial strength and visibility as a public company; (iv) the
potential for increased profitability as a result of the Company's
centralization of certain administrative functions, marketing opportunities and
other economies of scale; and (v) near-term liquidity.
The Company believes that it continues to be well positioned to carry
out its acquisition program. The Company believes that the experience,
reputation and relationships of the Operating Companies' management is of
significant value in the Company's attempts to acquire other specialized
distributors of travel services. In addition, the Company relies on the industry
experience of its senior management, particularly Joseph Vittoria, the Chairman
and Chief Executive Officer, who is the former Chief Executive Officer of Avis,
Inc. and a founding member of the World Travel and Tourism Council, a global
organization of the chief executive officers of companies engaged in all sectors
of the travel and tourism industry. The Company continually reviews various
strategic acquisition opportunities and has held preliminary discussions with a
number of acquisition candidates. As of the date of this Report, the Company is
a party to a binding agreement regarding the acquisition of CruiseMasters, Inc.
See "--Pending Acquisitions." The Company is not a party to any other binding
agreements as of the date of this Report.
As consideration for acquisitions, the Company uses various
combinations of Common Stock and cash and may, in the future, also use notes.
The Company plans to register under the Securities Act certain shares of its
Common Stock that were issued in connection with acquisitions and additional
shares for use by the Company as all or a portion of the consideration to be
paid in future acquisitions.
RECENT ACQUISITIONS
The five Founding Companies were acquired simultaneously with the
consummation of the Company's initial public offering. The additional four 1997
Operating Companies and Trax were acquired in November and December of 1997. The
Company completed the following acquisitions during January and February of
1998:
DIPLOMAT TOURS, INC. AND INTERNATIONAL AIRLINE CONSOLIDATORS. On
January 20, 1998, the Company completed the acquisition of substantially all of
the assets and assumption of substantially all of the liabilities of Diplomat
Tours, Inc., a California corporation, and International Airline Consolidators,
a sole proprietorship (collectively, "Diplomat Tours"). Diplomat Tours, located
in Sacramento, California, is a specialized distributor of international airline
reservations. The acquisition of Diplomat Tours expanded the Company's presence
in the international airline reservations market.
GOLD COAST TRAVEL AGENCY CORPORATION, INC., D/B/A GOLD COAST CRUISE
CENTER. The Company acquired all of the outstanding capital stock of Gold Coast
Travel Agency Corporation, Inc., a Florida corporation ("Gold Coast") effective
February 1, 1998. Gold Coast is a specialized distributor of cruise vacations,
operating out of a central reservations center in North Miami, Florida. The
acquisition of Gold Coast further expanded the Company's presence in the cruise
reservations market and added new marketing opportunities via cable and
satellite television commercials.
AUTONET INTERNATIONAL, INC. On February 20, 1998, the Company completed
the acquisition of all of the outstanding capital stock of, and business assets
relating to, AutoNet International, Inc., a Delaware corporation ("AutoNet").
AutoNet, a specialized distributor of auto rental reservations to travel agents
and travelers, expanded the Company's presence in the European auto rental
reservations business.
PENDING ACQUISITIONS
CRUISEMASTERS, INC. On March 25, 1998, the Company entered into a
definitive agreement to acquire all of the outstanding capital stock of
CruiseMasters, Inc., a California corporation ("CruiseMasters"). CruiseMasters
is a specialized distributor of cruise vacations, operating out of a central
reservations center in the Los Angeles, California, area. In addition to
strengthening the Company's position on the West Coast, the acquisition of
CruiseMasters will add expertise in direct mail marketing and a focus on the
high-end cruise market.
SERVICES
The Company, through the Operating Companies, distributes leisure
travel services primarily for domestic and international air travel, cruises and
European auto rentals. The Company currently provides its services nationwide
through the use of toll-free telephone numbers. Typically, potential customers
call the Company, often in response to an advertisement or other promotion. The
Company's sales personnel assist potential customers, whether travel agents or
travelers, in selecting the appropriate travel arrangement and making the
reservation.
5
<PAGE>
The following table sets forth certain information with respect to the
Operating Companies:
<TABLE>
<CAPTION>
PRIMARY
OPERATING TRAVEL SERVICE DISTRIBUTION
COMPANY PRIMARY LOCATION PRIVIDED CHANNEL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Auto Europe Portland, Maine European auto rentals Call center
AutoNet International Delray Beach, Florida European auto rentals Call center
Cruise Fairs of America Los Angeles, California Cruise vacations Call center
CruiseOne Deerfield Beach, Florida Cruise vacations Franchisees
Cruise World New York Tri-State area Cruise vacations Retail outlets
Cruises Inc. Syracuse, New York Cruise vacations Independent
contractors
Cruises Only Orlando, Florida Cruise vacations Call center
D-FW Tours Dallas, Texas International air Call center
Diplomat Tours(1) Sacramento, California International air Call center
Gold Coast Cruises North Miami, Florida Cruise vacations Call center
Ship 'N' Shore(2) Englewood, Florida Cruise vacations Call center
Travel 800 San Diego, California Domestic air Call center
</TABLE>
- -----------------------
(1) Includes Diplomat Tours, Inc. and International Airline Consolidators.
(2) Includes Ship `N' Shore Cruises, Inc., SNS Coachline, Inc., SNS Travel
Marketing, Inc., Cruise Mart, Inc. and Cruise Time, Inc.
AIR TRAVEL. The Company provides reservations for domestic airline
flights through Travel 800 and for international flights through D-FW Tours and
Diplomat Tours. Through strategic relationships with most major airlines, each
of Travel 800, D-FW Tours, and Diplomat Tours is generally able to offer fares
below published rates. Travel 800 sells exclusively to travelers and relies
primarily on its reputation and mnemonic telephone numbers such as
1-800-FLY-CHEAP and 1-800-LOW-FARE, to attract business. D-FW Tours sells
primarily to travel agents utilizing multiple fax distribution technology to
advise travel agents of special fares and promotions. Diplomat Tours also has
traditionally sold primarily to travel agents.
CRUISE. The Company, through Cruises Only, Cruises Inc., CruiseOne,
Cruise World, Cruise Fairs of America, Ship `N' Shore, and Gold Coast Cruises,
(collectively, the "Cruise Division") provides reservations for cruises on all
major cruise lines. Typically, berths are booked on behalf of its customers at
specified discounts from the published prices. In addition, the Company is
permitted to reserve more desirable berths on a number of cruises, which gives
the Company an "exclusive" right to sell these berths for a period of time. If
the Company does not sell these reserved berths, they are returned to the cruise
lines at a specified time, generally 60 or 90 days prior to sailing, at no cost
to the Company. Virtually all of the Company's customers for its cruise services
are travelers. The Cruise Division also focuses on advising large groups, such
as affinity groups, corporate groups and business seminars, in selecting the
appropriate cruise. In addition, the Cruise Division sells Alaska land tours
through Ship `N' Shore Cruises. The Cruise Division advises travelers and
assists them in selecting the cruise that best fits their particular needs and
desires. This requires the Company's sales personnel to have extensive knowledge
about the character of the various cruise lines and the differences in their
ships and cruises offered. The Company's sales personnel undergo extensive
in-house training, participate in frequent seminars conducted by cruise lines
and often receive complementary passes for cruises. Through the Company's
technology, detailed information about ships, itineraries, destinations and
other data will be available to the sales personnel at their desktops. The sales
personnel endeavor to develop relationships with travelers in order to encourage
repeat business. The Company provides extensive services to its cruise customers
in the form of periodic mailings of information, reviews of various cruises and
ships, advice regarding planning for the specific cruise and assistance in
preparing the necessary travel documents. In
6
<PAGE>
addition to reserving a berth on a cruise, reservation agents can give customers
information about the activities, shopping, sightseeing and restaurants
available at the various ports at which the cruise stops and can make
reservations for these activities. Sales personnel at Ship `N' Shore Cruises,
for example, make no less than two trips to Alaska for training in connection
with selling Alaska cruises and land tours. In 1997, the Cruise Division
recognized revenue on reservations for over 200,000 passengers on over 45 cruise
lines, representing gross sales of approximately $211 million.
EUROPEAN AUTO RENTAL. The Company, through Auto Europe and AutoNet
International, provides reservations in the U.S. and Canada for auto rentals in
Europe. The Company has agreements with a number of auto rental companies that
operate in Europe, such as Alamo Europe, Avis Europe Limited, EuroDollar and
Europcar International S.A., which provide automobiles to the Company for
rental. Approximately 90% of Auto Europe's customers are travel agents. AutoNet
International has also traditionally focused on sales through travel agents.
Auto Europe's field representatives establish and maintain relationships with a
majority of the travel agents located in the U.S. Auto rentals in Europe pose a
number of challenges for a U.S. traveler. In addition to costs such as drop off
fees and airport levies, travelers run the risk of additional costs associated
with currency fluctuations and rate changes if they do not pre-pay in U.S.
dollars. Travelers are also faced with age restrictions, lack of flexibility in
drop off and pick up and insurance complications. Further, the difficulty
obtaining air conditioned, automatic transmission cars makes the European auto
rental process difficult for travelers. The Company is able to simplify the
process and overcome many of these challenges for travel agents and travelers.
The Company maintains 24-hour toll-free numbers connected directly to its
customer service department in the U.S. from which its customers in Europe can
obtain emergency assistance. These toll-free numbers provides the customer with
an English speaking contact with access to the appropriate emergency roadside
assistance in the relevant foreign location.
INFORMATION TECHNOLOGY
The effective application of technology will be critical to the success
of the Company. The Company has adopted an information technology strategy that
is focused on delivering value to its customers and travel providers and to the
Company's operations, while enabling efficient and effective "back-office"
processes.
The core of the Company's information technology strategy is the
implementation of "Universal" architecture, a series of browser-based
applications that will be available to virtually anyone who wishes to access and
sell or purchase the Company's products and services. The Universal architecture
platform will allow the Company to sell better and faster, enabling real-time
access to preferred fares and rates, inventories, product information, and
customer profiles and history. The Company is investing in its customer
information database, with the goal of owning the most comprehensive collection
of customer information in the leisure travel industry.
Use of a variety of distribution channels allows the Company to put its
products on many shelves, thereby empowering customers to investigate their
options and buy when and where they are most comfortable. The Company
embraces four distinct channels of distribution: (i) call centers staffed with
highly-trained sales personnel, a core competency of the Company, (ii)
home-based agents, including both independent contractors and franchisees, who
provide specialized knowledge and service to their local markets, (iii) travel
agents who sell the Company's products as a service to their own customers, and
(iv) the Internet/World Wide Web, where the Company intends to sell via its own
label, as well as through partnerships and alliances with branded sites. The
Company believes that embracing these multiple distribution channels
differentiates it from competitors who utilize a single distribution channel.
The multiple channel approach decreases the Company's risks within any
individual distribution channel.
The Company's Universal architecture strategy consists of two key
components: the Universal Agent and the Universal Manager. The Universal Agent
applications are being designed to streamline and enhance the selling process.
The design of these applications permits simultaneous access to multiple source
systems, including the Company's own database of preferred rates and fares, and
central reservation systems that hold inventory, such as SABRE, Amadeus and
Apollo. The Company is also pursuing opportunities to gain direct access to
inventories of travel providers. The acquisition of TRAX Software, Inc. in
November, 1997, provided the Company with a significant jump-start on the design
of the Universal Agent applications, through the logic contained within the TRAX
software and by leveraging the in-depth industry knowledge of the TRAX
developers who joined the Company. The Universal Manager applications will
provide the tools necessary to allow the Company to consolidate back-office
processes, including customer service, ticketing and fulfillment, and
accounting.
7
<PAGE>
Another key element to the Company's technology strategy is investment
in database management tools and infrastructure, including data warehousing
tools to facilitate management reporting and decision support activities. The
customer information database is at the center of this effort. The Company
believes that its customer information database will be the most comprehensive
in the leisure travel industry, thus affording the Company the opportunity to be
more proactive and creative than its competitors in its marketing, sales and
customer service efforts.
TRAVEL PROVIDER RELATIONSHIPS
The Operating Companies have negotiated arrangements with many major
airline, cruise line and European auto rental companies. In 1997, (i) two auto
rental companies represented an aggregate of 87% of European auto rental pro
forma net revenues; (ii) six cruise lines represented an aggregate of 74% of
cruise pro forma net revenues; and (iii) two airlines represented an aggregate
of 52% of airline pro forma net revenues.
The following table sets forth a list of certain of the Company's
travel providers:
<TABLE>
<CAPTION>
EUROPEAN
CRUISE LINES AIRLINES AUTO RENTAL COMPANIES
------------ -------- ---------------------
<S> <C> <C>
Carnival Cruise Lines American Airlines Alamo Europe
Celebrity Cruise Line British Airways Avis Europe Limited
Holland America Continental Airlines Budget
Norwegian Cruise Line Delta Air Lines Europcar International S.A.
Princess Cruises Northwest Airlines
Royal Caribbean Cruise Lines US Airways
United Airlines
</TABLE>
The Company receives from certain travel providers pricing that is
preferential to published fares which enables the Company to offer prices lower
than would be generally available to travelers and travel agents. The Company's
agreements with its travel providers can generally be cancelled or modified by
the travel provider upon relatively short notice. Other distributors may have
similar arrangements with travel providers, some of which may provide better
availability or more competitive pricing than that offered by the Company.
SALES AND MARKETING
The Company engages in different marketing and advertising programs
depending on the particular travel service and whether the customers are
primarily travel agents or travelers. The Company markets domestic air travel
service through the use of various toll-free numbers, such as 1-800-FLY-CHEAP
and 1-800-LOW-FARE. The Company markets its other services to travelers in
numerous ways, principally through newspaper and magazine advertisements
highlighting toll-free numbers and special travel offers. In addition, Gold
Coast Cruises advertises on cable and satellite television. In many cases, the
travel providers contribute to the cost of the advertising and marketing. To
market directly to travel agents, the Company uses dedicated sales personnel,
direct mailings and fax distribution technology. Most of the Operating Companies
have sites on the World Wide Web. The Company expects to consolidate these sites
to provide a single, clear message and consistent product and service offerings
to travelers and travel agents, and to allow on-line booking of reservations.
The Company believes it will be able to significantly increase its revenue base
by offering travel agents and travelers a broader range of travel services
through a single telephone call to any of the Company's locations or through its
Web site. In addition, the Company will focus on increasing its revenues from
its existing customers by cross-selling its services and broadening its service
offerings.
COMPETITION
The travel service industry is extremely competitive and has low
barriers to entry. The Company competes with other distributors of travel
services, its travel providers, travel agents, tour operators and group travel
sponsors, some of which have more experience, brand name recognition and/or
financial resources than the Company. The Company competes for customers based
upon service, price and specialized in-depth knowledge and, with respect to
sales to travel agents, attractive commission structures. The Company's travel
providers may decide to compete more directly with the Company and restrict the
availability of tickets or services or the ability of the Company to offer
tickets or services at a preferential price. Other distributors may have similar
arrangements with certain travel providers, some of which may provide better
availability or more competitive pricing than that offered
8
<PAGE>
by the Company. Furthermore, some travel agents and group travel sponsors have a
strong presence in their geographic area which may make it difficult for the
Company to attract customers in those areas.
EMPLOYEES
As of December 31, 1997, the Company had 888 full-time employees, of
whom 209 were employed in connection with auto rental services, 449 were
employed in connection with cruise services, 217 were employed in connection
with air services, and 13 were employed at the Company's corporate headquarters.
In addition, the Company had contracts with 172 independent contractors and 324
franchisees, and used temporary employees as required to meet the needs of
seasonal demand. The Company believes that its relations with its employees,
independent contractors and franchisees are good.
QUALIFICATION OF FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including without limitation statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause actual
results, experience and the performance or achievements of the Company to be
materially different from those anticipated, expressed or implied by the
forward-looking statements. In evaluating the Company's business, the following
factors, in addition to the Risk Factors set forth below and other information
set forth herein, should be carefully considered: successful integration of
systems; factors affecting internal growth and management of growth; dependence
on travel providers; success of the acquisition strategy and availability of
acquisition financing; success in entering new segments of the travel market and
new geographic areas; dependence on technology; labor and technology costs;
advertising and promotional efforts; risks associated with the travel industry
generally; seasonality and quarterly fluctuations; competition; and general
economic conditions. In addition, the Company's business strategy and growth
strategy involve a number of risks and challenges, and there can be no assurance
that these risks and other factors will not have a material adverse effect on
the Company.
RISK FACTORS
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION. Travel
Services International, Inc. was founded in April 1996 but conducted no
operations and generated no revenues prior its initial public offering in July
1997, when it acquired the five Founding Companies. Subsequent to July 1997, the
Company acquired an additional seven travel distributors and one software
development company. Prior to such acquisitions, the Operating Companies
operated as separate independent entities. Currently, the Company relies on the
existing reporting systems of the Operating Companies for financial reporting.
There can be no assurance that the Company will be able to successfully
integrate the operations of these businesses or institute the necessary
Company-wide systems and procedures to successfully manage the combined
enterprise on a profitable basis. The Company's executive management group was
assembled in connection with the initial public offering, and there can be no
assurance that the management group will be able to continue to effectively
manage the combined entity or effectively implement and carry out the Company's
internal growth strategy and acquisition program. The consolidated financial
statements cover periods when the Operating Companies were not under common
control or management and, therefore, may not be indicative of the Company's
future financial or operating results. The inability of the Company to
successfully integrate the Operating Companies, and future acquisitions, would
have a material adverse effect on the Company's business, financial condition,
and results of operations, and would make it unlikely that the Company's
acquisition program will continue to be successful.
A number of the Operating Companies offer different travel services,
utilize different capabilities and technologies and target different client
segments. While the Company believes that there are substantial opportunities to
cross-market and integrate these businesses, these differences increase the risk
inherent in successfully completing such integration. Further, there can be no
assurance that the Company's strategy to be the leading specialized distributor
of leisure travel services will be successful, or that the customers of the
Operating Companies will accept the Company as a distributor of a variety of
specialized travel services.
DEPENDENCE ON TRAVEL PROVIDERS. The Company is dependent upon travel
providers for access to their capacity. The Company receives from certain travel
providers pricing that is preferential to published fares which
9
<PAGE>
enables the Company to offer prices, for certain products, lower than would be
generally available to travelers and travel agents. Other distributors may have
similar arrangements with travel providers, some of which may provide better
availability or more competitive pricing than that offered by the Company. The
Company anticipates that a significant portion of the Company's revenues will
continue to be derived from the sale of capacity for relatively few travel
providers. In 1997, (i) two auto rental companies represented an aggregate of
87% of European auto rental pro forma net revenues; (ii) two cruise lines
represented an aggregate of 74% of cruise pro forma net revenues; and (iii) two
airlines represented an aggregate of 52% of airline combined pro forma net
revenues. The Company's agreements with its travel providers can generally be
cancelled or modified by the travel provider upon relatively short notice. The
loss of a contract, changes in the Company's pricing agreements or commission
schedules or more restricted access to travel providers' capacity could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company
intends to increase its revenues, expand the markets it serves and increase its
service offerings in part through the acquisition of additional specialized
distributors of leisure travel services. There can be no assurance that the
Company will be able to identify, acquire or profitably manage additional
businesses or successfully integrate acquired businesses into the Company
without substantial costs, delays or other operational or financial problems.
Increased competition for acquisition candidates may develop, in which event
there may be fewer acquisition opportunities available to the Company as well as
higher acquisition prices. Further, acquisitions involve a number of special
risks, including possible adverse effects on the Company's operating results,
diversion of management's attention, failure to retain key personnel, risks
associated with unanticipated events or liabilities and amortization of acquired
intangible assets, some or all of which could have a material adverse effect on
the Company's business, financial condition and results of operations,
particularly in the fiscal quarters immediately following the consummation of
such transactions. Customer dissatisfaction or performance problems at a single
acquired company could also have an adverse effect on the reputation of the
Company. The Company may also seek international acquisitions that may be
subject to additional risks associated with doing business in such countries. In
addition, there can be no assurance that the Operating Companies or other
businesses acquired in the future will achieve anticipated revenues and
earnings. The Company continually reviews various strategic acquisition
opportunities and has held discussions with a number of such acquisition
candidates. As of the date of this report, the Company has a binding agreement
with respect to the acquisition of CruiseMasters, Inc. but is not a party to any
other binding agreements with respect to any acquisition.
RISKS RELATED TO ACQUISITION FINANCING. The Company intends to finance
future acquisitions by using shares of its Common Stock for a substantial
portion of the consideration to be paid. In the event that the Common Stock does
not maintain a sufficient market value, or potential acquisition candidates are
otherwise unwilling to accept Common Stock as part of the consideration for the
sale of their businesses, the Company may be required to utilize more of its
cash resources, if available, in order to initiate and maintain its acquisition
program. If the Company has insufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through debt or equity
financings. Although the Company has an available line of credit, there can be
no assurance that such line of credit will be sufficient or that other financing
will be available on terms the Company deems acceptable. If the Company is
unable to obtain financing sufficient for all of its desired acquisitions, it
may be unable to fully carry out its acquisition strategy.
DEPENDENCE UPON TECHNOLOGY. The Company's business is currently
dependent upon a number of different information and telecommunication
technologies to facilitate its access to information and manage a high volume of
inbound and outbound calls. Any failure of this technology would have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, during 1996, Cruises Only's results of operations were
adversely affected by unanticipated shortcomings in the functionality of call
center software installed as part of a new telephone system. In addition, the
Company is dependent upon certain third party vendors, including central
reservation systems operators such as SABRE Group and Amadeus for access to
certain information. Any failure of these systems or restricted access by the
Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
Currently, all of the Operating Companies utilize separate computer
systems, several of which utilize different applications. The Company expects
that it will replace these systems during the coming years with the Company's
"Universal" applications architecture. There can be no assurance that the
contemplated replacement of these systems will be successful, replaced according
to the expected time frame, completed without any disruption to the Company's
business or that it will result in the intended cost efficiencies. The Company
believes that the Universal applications platform will be a competitive
advantage for the Company. However, there can be no assurance that the Company
will be successful in maintaining such a competitive advantage.
10
<PAGE>
The technology systems being used currently at the Company's
headquarters are Year 2000 compliant, and new systems currently under
development by the Company are working with compliant standards. An assessment
of the Year 2000 readiness of the technology currently being used in the
Operating Companies has not yet been completed, and the Company cannot make any
assurances with respect to such readiness at this time. The assessment being
conducted by the Company includes inquiries of management and certification
requests from hardware and software vendors. New systems under development by
the Company are expected to replace some of the older software applications
currently in use at certain Operating Companies. There can be no assurance,
however, that such replacements will be made or will be made on time.
MANAGEMENT OF GROWTH; FACTORS AFFECTING INTERNAL GROWTH. The Company
expects to grow internally and through acquisitions. The Company expects to
expend significant time and effort in expanding existing businesses and
identifying, completing and integrating acquisitions. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations as they expand. Any future growth also will impose
significant added responsibilities on members of senior management, including
the need to identify, recruit and integrate new senior level managers and
executives. There can be no assurance that such additional management will be
identified and retained by the Company. To the extent that the Company is unable
to manage its growth efficiently and effectively, or is unable to attract and
retain qualified management, the Company's business, financial condition and
results of operations could be materially adversely effected. The Operating
Companies have experienced revenue and earnings growth on a pro forma basis over
the past few years. There can be no assurance that the Operating Companies will
continue to experience internal growth comparable to these levels, if at all.
From time to time, certain of the Operating Companies have been unable to hire
and train as many qualified sales personnel as necessary to meet the demands of
their businesses. Factors affecting the ability of the Operating Companies to
continue to experience internal growth include, but are not limited to, the
ability to expand the travel services offered, the continued relationships with
certain travel providers and travel agents, the ability to recruit and retain
qualified sales personnel, continued access to capital and the ability to
cross-sell services among the Operating Companies.
RISKS ASSOCIATED WITH THE TRAVEL INDUSTRY; GENERAL ECONOMIC CONDITIONS.
The Company's results of operations are dependent upon factors affecting the
travel industry. The Company's revenues and earnings are especially sensitive to
events that affect domestic and international air travel, cruise travel and auto
rentals in Europe. A number of factors, including political instability, armed
hostilities, international terrorism, extreme weather conditions, a rise in fuel
prices, a decline in the value of the U.S. dollar, labor disturbances and
excessive inflation, could result in an overall decline in demand for travel.
These types of events could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, demand for
the Company's travel services may be significantly related to the general level
of economic activity and employment in the U.S. Therefore, any significant
economic downturn or recession in the U.S. could have a material adverse effect
on the Company's business, financial condition and results of operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS. The domestic and international
leisure travel industry is extremely seasonal. The results of each of the
Operating Companies have been subject to quarterly fluctuations caused primarily
by the seasonal variations in the travel industry, especially the leisure travel
segment. Net revenues and net income for the Operating Companies are generally
higher in the second and third quarters, however, seasonality is dependent on
the particular leisure travel service sold. The Company expects seasonality to
continue in the future on a combined basis. Three of the Operating Companies
experienced an operating loss in the fourth quarter of 1997. The Company may
experience losses in quarters in the future. The Company's quarterly results of
operations may also be subject to fluctuations as a result of the timing and
cost of acquisitions, business focus of acquisition targets, fare wars by travel
providers, changes in relationships with certain travel providers, changes in
the mix of services offered by the Company, the timing of the payment of volume
bonuses by travel providers, extreme weather conditions or other factors
affecting travel. Unexpected variations in quarterly results could also
adversely affect the price of the Common Stock, which in turn could limit the
ability of the Company to make acquisitions.
SUBSTANTIAL COMPETITION. The travel service industry is extremely
competitive and has low barriers to entry. The Company competes with other
distributors of travel services, travel providers, travel agents, tour operators
and group travel sponsors, some of which have greater experience, brand name
recognition and/or financial resources than the Company. The Company's travel
providers may decide to compete more directly with the Company and restrict the
availability of tickets or services or the ability of the Company to offer
tickets or services at a preferential price. In addition, other distributors may
have relationships with certain travel providers providing better availability
or more competitive pricing than that offered by the Company. Furthermore, some
travel agents and group travel sponsors have a strong presence in their
geographic area which may make it difficult for the Company to attract customers
in those areas.
11
<PAGE>
RELIANCE ON KEY PERSONNEL. The Company's operations are dependent on
the efforts and relationships of Joseph V. Vittoria and the other executive
officers as well as the senior management of the Operating Companies.
Furthermore, the Company will likely be dependent on the senior management of
any businesses acquired in the future. If any of these individuals become unable
to continue in their role the Company's business or prospects could be adversely
affected. Although the Company or a subsidiary has entered into an employment
agreement with each of the Company's executive officers and the Chief Executive
Officer of each of the Operating Companies, there can be no assurance that such
individuals will continue in their present capacity for any particular period of
time. The Company does not maintain key man life insurance covering any of its
executive officers or other members of senior management.
VOTING CONTROL OF EXISTING MANAGEMENT AND STOCKHOLDERS. The Company's
executive officers and directors, and entities affiliated with them, and holders
of at least 5% of the outstanding Common Stock, as of March 25, 1998,
beneficially own shares of Common Stock representing 42.3% of the total voting
power of the Common Stock (47.5% if all shares of Restricted Common Stock were
converted into Common Stock). These persons, if acting in concert, will be able
to exercise control over the Company's affairs and are likely to be able to
elect the entire Board of Directors and to control the disposition of any matter
submitted to a vote of stockholders.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. The market price of the Common Stock may be adversely affected by the
sale, or availability for sale, of substantial amounts of the Common Stock in
the public market. The 2,875,000 shares sold in the initial public offering are,
and the shares to be issued pursuant to a future shelf registration will be,
freely tradable unless acquired by affiliates of the Company.
As of March 25, 1998, the holders of Common Stock who did not purchase
shares on the open market own 7,476,991 shares of Common Stock, including (i)
the sellers of the Operating Companies who received, in the aggregate, 4,992,490
shares in connection with such acquisitions and (ii) management and founders of
the Company who own 2,484,501 shares. These shares have not been registered
under the Securities Act and, therefore, may not be sold unless registered under
the Securities Act or sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144. Holders of 5,906,726 of such shares have
agreed with the Company not to sell, transfer or otherwise dispose of any of
these shares for one year following consummation of the initial public offering
(until July 28, 1998) and have certain demand registration rights beginning two
years after the initial public offering and certain piggyback registration
rights with respect to these shares. Holders of 1,351,704 of such shares have
certain demand registration rights with respect to the registration of such
shares on a shelf registration statement, which may be filed during the second
quarter of 1998.
The Company expects to register additional shares of its Common Stock
under the Securities Act for use by the Company as consideration for recent and
future acquisitions. Upon issuance, those shares will generally be freely
tradable, unless the resale thereof is contractually restricted. When possible,
the Company will seek restrictions on the shares issued as consideration for
future acquisitions that are at least as restrictive as those described in the
preceding paragraph, however, such restrictions may not be available in certain
cases, such as transactions accounted for using the pooling of interests method
of accounting.
POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the initial public
offering, there was no public market for the Common Stock, and, although a
public market has now been developed, there can be no assurance that the public
market for the Common Stock will be active or continue. The market price of the
Common Stock may be subject to significant fluctuations in response to numerous
factors, including variations in the annual or quarterly financial results of
the Company or its competitors, changes by financial research analysts in their
estimates of the earnings of the Company or the failure of the Company to meet
such estimates, conditions in the economy in general or in the travel industry
in particular, unfavorable publicity or changes in applicable laws and
regulations (or judicial or administrative interpretations thereof) affecting
the Company or the travel service industry. From time to time, the stock market
experiences significant price and volume volatility, which may affect the market
price of the Common Stock for reasons unrelated to the Company's performance.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of
Directors of the Company is authorized to issue preferred stock in one or more
series without stockholder action. The Board of Directors of the Company serve
staggered terms. The existence of this "blank-check" preferred stock and the
staggered Board of Directors could render more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors.
12
<PAGE>
ITEM 2. PROPERTIES
As of December 31, 1997, the Company had 25 office facilities, two of
which it owns and 23 of which are leased. The Company believes that its
facilities are adequate for the near term. As the Company continues to implement
its growth strategy, certain changes are expected, such as combinations of
facilities, expansion of other facilities, and the implementation of new call
centers or shared services centers. The Company's facilities are set forth
below:
<TABLE>
<CAPTION>
OWNED/ EXPIRATION SQUARE ANNUAL
COMPANY LOCATION LEASED DATE FEET RENT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Auto Europe Portland, ME Owned -- 38,000 --
AutoNet International Delray Beach, FL Leased (1) -- -- --
Cruise Fairs of America Los Angeles, CA Leased 1/31/99 4,758 $123,000
CruiseOne Deerfield Beach, FL Leased 9/30/00 4,316 70,500
Cruises Inc. Syracuse, NY Leased 2/28/06 10,600 168,000
Cruises Only Orlando, FL Owned -- 37,600 --
Cruise World Wilton, CT Leased 10/31/02 2,600 36,000
Cruise World Fresh Meadows, NY Leased 9/30/07 1,000 17,000
Cruise World Rockville Center, NY Leased 4/30/07 1,500 20,000
Cruise World Huntington, NY Leased 9/30/00 1,000 22,000
Cruise World Westbury, NY Leased 1/31/99 1,135 22,000
Cruise World Briarcliff Manor, NJ Leased 3/31/02 2,300 29,000
Cruise World Morristown, NJ Leased 11/30/00 1,404 18,000
Cruise World Ridgewood, NJ Leased 12/31/97(2) 900 16,000
D-FW Tours Dallas, TX Leased 7/31/98 12,443 143,000
Diplomat Tours Sacramento, CA Leased 8/31/99 6,000 107,000
Gold Coast Cruises North Miami, FL Leased 8/31/12 13,000 150,000
Ship `N' Shore Englewood, FL Leased 11/20/02 7,214 90,000
Ship `N' Shore Anchorage, Alaska Leased 5/30/97(2) 900 16,000
Ship `N' Shore Williamsville,NY Leased 7/31/01 1,000 15,000
Ship `N' Shore Fort Myers, FL Leased 2/28/00 1,500 13,500
Ship `N' Shore Longboat Key, FL Leased 8/31/00 964 12,000
Ship `N' Shore Anchorage, Alaska Leased 5/8/98 1,250 16,000
Travel 800 San Diego, CA Leased 7/31/98 12,800 139,000
Travel Services
International Delray Beach, FL Leased 1/19/03 7,426 74,000
</TABLE>
- ------------------------
(1) Contained within the Company's corporate headquarters.
(2) Location continues to be occupied on a month-to-month basis, with the
consent of the landlord.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal claims and actions arising in
the ordinary course of business. The Company believes that none of these actions
will have a material adverse effect on its business, financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "TRVL." The following table sets forth the high and low closing
prices for each quarter (or partial quarter) in 1997 and 1998, as quoted on The
Nasdaq Stock Market:
HIGH LOW
---- ---
1997
Third Quarter (from July 22, 1997) 25 5/8 19 5/8
Fourth Quarter 26 19 1/2
1998
First Quarter (through March 25, 1998) 31 1/4 18
The closing price of the Company's Common Stock , as reported by The
Nasdaq Stock Market, on March 25, 1998 was $31.25. The approximate number of
record holders of the Common Stock as of March 25, 1998 was 113. The Company
believes that a larger number of beneficial owners hold such shares in
depository or nominee form.
The Company intends to retain all of its earnings, if any, to finance
the expansion of its business and for general corporate purposes, including
future acquisitions, and does not anticipate paying any cash dividends on its
Common Stock for the foreseeable future. In addition, the Company's line of
credit includes restrictions on the ability of the Company to pay cash dividends
without the consent of the lender.
The following is certain information concerning all sales of securities
by the Company during the year ended December 31, 1997 that were not registered
under the Securities Act:
(a) Travel Services International, Inc. was organized in April 1996 and
issued 100 and 200 shares of its Common Stock to its Founders, Capstone Partners
LLC and Alpine Consolidated, LLC, respectively, at a per share price of $.01.
The offer and sale of these shares was exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) thereof because, among other
things, the offers and sales were made to a small number of sophisticated
investors who had access to information about the Company and were able to bear
the risk of loss of their investment. On May 14, 1997, the number of these
shares were increased by a 5,444.45 to one stock split.
(b) During the first quarter of 1997, 851,166 shares of Common Stock were
issued to persons who were to become officers, directors, key employees, or
holders of more than 5% of the stock of the Company at a per share price of
$.01. The offers and sales of these shares were exempt from registration under
the Securities Act of 1933 in reliance on Section 4(2) thereof because, among
other things, the offers and sales were made to a small number of sophisticated
investors or executive officers or directors of the Company who had access to
the information about the Company and were able to bear the risk of loss of
their investment.
(c) In July 1997, the Company issued the following shares in connection
with the acquisition of the five Founding Companies: 333,334 shares in
connection with the acquisition of Cruises, Inc.; 908,334 shares in connection
with the acquisition of Cruises Only; 1,083,334 shares in connection with the
acquisition of Auto Europe; 902,778 shares in connection with the acquisition of
Travel 800; and 194,445 shares in connection with the acquisition of D-FW Tours.
The offers and sales of these shares were exempt from registration under
the Securities Act of 1933 in reliance on Section 4(2) thereof because, among
other things, the offers and sales were made to a small number of sophisticated
investors or directors of the Company who had access to the information about
the Company and were able to bear the risk of loss of their investment.
(d) In November 1997, the Company issued the following shares in
connection with the acquisitions of the following four Operating Companies and
Trax Software, Inc.: 328,492 shares in connection with the acquisition of
CruiseOne; 326,704 shares in connection with the acquisition of CruiseWorld;
471,508 shares in connection with the acquisition of Ship `N' Shore; 225,000
shares in connection with the acquisition of Cruise Fairs; and 32,985
14
<PAGE>
shares in connection with the acquisition of Trax.
The offers and sales of these shares were exempt from registration under
the Securities Act of 1933 in reliance on Section 4(2) thereof because the
offers and sales were made to sophisticated investors who had access to the
information about the Company and were able to bear the risk of loss of their
investment.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
On July 28, 1997, the Company consummated its initial public offering
(the "Offering") and the combinations of five Founding Companies (the
"Combinations"). For accounting purposes, Auto Europe, one of the Founding
Companies, was designated as the "accounting acquiror." The other four Founding
Companies were accounted for using the purchase method of accounting. In
November 1997, the Company acquired four other operating companies under
transactions accounted for using the pooling of interests method of accounting
(the "Pooling Acquisitions"). Accordingly, the historical financial data for
each year presented represent those of Auto Europe and the Pooling Acquisitions,
and include the operations of the other four Founding Companies and the Company
only since July 28, 1997.
Pro forma combined results of operations and pro forma diluted earnings
per share for the Company are presented which give effect to the results of the
Company combined with all the Founding Companies as if the Combinations had
occurred at the beginning of each respective year, along with certain
adjustments associated with the Combinations and the Pooling Acquisitions which
are described below. The pro forma financial data have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Founding Companies been
under common control prior to the Combinations, or which may result in the
future.
The historical financial data of the Company as of December 31, 1996
and 1997 and for each of the five years ending December 31, 1993, 1994, 1995,
1996, and 1997 have been derived from the audited consolidated financial
statements of the Company included elsewhere herein and from the Company's
Registration Statement dated July 22, 1997. The historical financial data for
the years ended December 31, 1993 and 1994 represent those of Auto Europe, as
those of the Pooling Acquisitions are not material to the results of operations.
The information contained in these tables should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA COMBINED (1):
STATEMENTS OF OPERATIONS DATA:
(in thousands, except share and per share data) YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues $52,660 $62,073 $78,730
Operating expenses 31,569 39,444 48,262
------- ------- -------
Gross profit 21,091 22,629 30,468
General and administrative expenses 13,847 13,325 17,449
Goodwill amortization 1,234 1,234 1,234
------- ------- -------
Income from operations 6,010 8,070 11,785
Other expense, net (175) (356) (154)
------- ------- -------
Income before provision for income taxes 5,835 7,714 11,631
Provision for income taxes 2,451 3,240 4,885
------- ------- -------
Pro forma net income $ 3,384 $ 4,474 $ 6,746
======== ======= =======
Per Share Data:
Pro forma diluted earnings per share $ .33 $ .44 $ .66
========== ========= =========
Shares used in computing pro forma
diluted earnings per share 10,133,430 10,133,430 10,277,335
========== ========== ==========
</TABLE>
16
<PAGE>
- -----------------------
(1) The pro forma combined financial data includes the results of the Company
and each Founding Company as if the Combinations had occurred at the beginning
of each respective year, along with certain adjustments associated with the
Pooling Acquisitions. The pro forma results include the effects of: (i) the
Combinations; (ii) non-recognition of the non-recurring, non-cash compensation
charge of $7.1 million recorded by the Company in February 1997 related to
Common Stock issued to founders and management of the Company; (iii)
amortization of goodwill resulting from the Combinations; (iv) certain
adjustments to salaries, bonuses, and benefits to former owners and key
management of the Founding Companies and the Pooling Acquisitions, to which such
persons have agreed prospectively ("Compensation Differential"); (v) reversal
of acquisition costs associated with Pooling Acquisitions; and (vi) provision
for income taxes as if pro forma income was subject to corporate federal and
state income taxes during the periods.
<TABLE>
<CAPTION>
HISTORICAL:
STATEMENTS OF OPERATIONS DATA:
(in thousands, except share
and per share data) YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $12,208 $17,156 $30,024 $35,776 $58,387
Operating expenses 8,469 11,101 19,079 24,034 36,969
------- ------- ------- ------- -------
Gross profit 3,739 6,055 10,945 11,742 21,418
General and administrative expenses 3,986 6,276 10,534 11,139 16,842
Goodwill amortization - - - - 514
------- ------- ------- ------- -------
Operating income (247) (221) 411 603 4,062
Other expense, net ( 19) (28) ( 43) (186) (83)
------- ------- ------- ------- -------
Income before provision for taxes (266) (249) 368 417 3,979
Provision for income taxes 0 0 147 167 852
------- ------- ------- ------- -------
Net income $ (266) $ (249) $ 221 $ 250 $ 3,127
========= ======== ========== ======== ========
Per Share Data:
Basic earnings per share $ (.11) $ (.10) $ .09 $ .10 $ .55
========= ========= ========= ======== ========
Diluted earnings per share $ (.11) $ (.10) $ .09 $ .10 $ .53
========= ========= ========= ======== ========
Shares used in computing basic
earnings per share 2,435,038 2,435,038 2,435,038 2,435,038 5,730,832
========= ========= = ========= ========= =========
Shares used in computing
diluted earnings per share 2,435,038 2,435,038 2,435,038 2,435,038 5,869,814
========= ========= ========= ========= =========
BALANCE SHEET DATA (in thousands): DECEMBER 31,
------------------------------
1996 1997
---- ----
Working capital (deficit) $ (5,224) $ 1,286
Total assets $ 11,093 $ 67,609
Long-term debt $ 2,272 $ 4,129
Stockholders' equity $ 290 $ 50,579
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Company's Consolidated Financial Statements and related
Notes thereto appearing elsewhere herein.
INTRODUCTION
The Company was established to create a leading specialized distributor
of leisure travel services to both travel agents and travelers. All of the
Operating Companies (including five Founding Companies acquired in July 1997
concurrently with the consummation of the Company's initial public offering) are
specialized distributors of travel services, providing airline, cruise or
European auto rental reservations. For accounting purposes, Auto Europe, one of
the Founding Companies, was designated as the "accounting acquiror." The other
four Founding Companies were accounted for using the purchase method of
accounting; goodwill of $41.4 million was recorded which is being amortized over
35 years. The Company also acquired four specialized distributors of cruises in
November 1997 which were accounted for using the pooling of interests method of
accounting (the "Pooling Acquisitions"). Accordingly, the historical financial
statements for each year presented represent those of Auto Europe and the
Pooling Acquisitions, and include the balances and transactions of the other
four Founding Companies and the Company only since July 28, 1997. Therefore, pro
forma combined results of operations for the Company are also presented which
give effect to the results of the Company combined with all the Founding
Companies as if the Combinations had occurred at the beginning of each
respective year, along with certain adjustments associated with the Combinations
and the Pooling Acquisitions.
The Company's revenue is derived primarily from the sale of travel
related services, including airline tickets, cruise berths and auto rentals. The
Company does not record the total gross amounts of the travel services sold to
consumers and travel agents. Net revenues recorded by the Company include
commissions and markups on travel services, volume bonuses and override
commissions from travel service providers, processing and delivery fees, and
franchise fees. The Company records net revenues when earned, which for auto
rentals and airline tickets is at the time a reservation is booked and ticketed
and for cruise bookings is when the customer is no longer entitled to a full
refund of the cost of the cruise, which is generally 45 to 90 days prior to the
sailing date. The Company provides an allowance for cancellations, reservation
changes and currency exchange guarantees which is based on historical
experience.
Operating expenses include compensation of sales and sales support
personnel, commissions, credit card merchant fees, telecommunications, mail,
courier, marketing and other expenses that vary with revenues. Commissions to
travel agents are typically based on a percentage of the gross amount of the
travel services sold. The Company's sales personnel are compensated either on an
hourly basis, a commission basis or a combination of the two, with the vast
majority of agents receiving a substantial portion of their compensation based
on sales generated. The Company's independent contractors selling cruises
receive a portion of the commissions earned by the Company. Conversely, the
Company receives a portion of commissions earned by its franchisees selling
cruises.
General and administrative expenses include compensation and benefits
to management and administrative employees, fees for professional services,
rent, information services, depreciation, travel and entertainment, office
services, and other overhead costs.
Prior to the Combinations, the stockholders of Auto Europe elected to
be taxed under the provisions of Subchapter S of the Internal Revenue Code.
Under these provisions, Auto Europe was not subject to taxation for federal
purposes. Under S Corporation status, stockholders report their share of taxable
earnings or losses in their personal tax returns. Auto Europe recorded a
deferred tax asset and a corresponding reduction of income tax expense of
approximately $543,000 on July 28, 1997, representing net deferred taxes at that
date which were not previously recorded because of Auto Europe's previous status
under Subchapter S of the Internal Revenue Code.
The Company's business and growth strategies encompass many components,
including providing extensive expertise in specific travel segments and
high levels of customer service, embracing multiple selling models and
distribution channels, implementing cross selling opportunities across travel
segments, pursuing an aggressive acquisition program, and implementing
state-of-the-art technology infrastructure. The Company believes there are
18
<PAGE>
also opportunities to reduce costs in the future in the areas of
telecommunications, advertising and marketing, mail and courier, insurance and
credit card merchant fees.
RESULTS OF OPERATIONS - PRO FORMA COMBINED
Pro forma combined results of operations are presented which give
effect to the results of the Company combined with all the Founding Companies as
if the Combinations had occurred at the beginning of each respective year, along
with certain adjustments associated with the Combinations and the Pooling
Acquisitions. The pro forma combined results of operations include the effects
of: (i) the Combinations; (ii) non-recognition of the non-recurring, non-cash
compensation charge of $7.1 million recorded by the Company in 1997 related to
Common Stock issued to founders and management of the Company; (iii)
amortization of goodwill resulting from the Combinations; (iv) certain
adjustments to salaries, bonuses, and benefits to former owners and key
management of the Founding Companies and the Pooling Acquisitions, to which such
persons have agreed prospectively ("Compensation Differential"); (v) pro forma
acquisition costs associated with Pooling Acquisitions; and (vi) provision for
income taxes as if pro forma income was subject to corporate federal and state
income taxes during the periods.
These pro forma combined results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Founding Companies been
under common control prior to the Combinations, or which may result in the
future.
The following table sets forth, for 1995, 1996, and 1997, certain items
derived from the Company's Pro Forma Combined Statement of Selected Financial
Data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Operating expenses 59.9 63.5 61.3
---- ---- ----
Gross profit 40.1 36.5 38.7
General and administrative expenses,
excluding goodwill 26.3 21.5 22.2
</TABLE>
19
<PAGE>
1997 COMPARED TO 1996
Combined net revenues increased $16.6 million, or 26.8%, from $62.1
million in 1996 to $78.7 million in 1997. This increase is attributable to
increases in average revenue per transaction in the airline, auto rental and
cruise reservations segments as well as increased volumes of travel services
sold in each segment. Average net revenues per transaction increased 1.9%, 7.3%
and 6.6% from 1996 to 1997 in the airline, auto rental and cruise segments,
respectively. From 1996 to 1997, airline reservations increased from 223,000 to
274,000 (22.9%), auto rental reservations increased from 208,000 to 259,000
(24.5%), and cruise reservations increased from 179,000 to 208,000 (16.2%). In
1997, 19.65%, 41.49% and 38.86% of net revenues were generated in the airline,
auto rental and cruise segments, respectively, compared to 19.1%, 41.4%, and
39.5% in 1996.
Combined operating expenses increased $8.9 million, or 22.5%, from
$39.4 million in 1996 to $48.3 million in 1997. Approximately 67.5% and 68.7% of
operating expenses in 1996 and 1997, respectively, are for salaries and benefits
and for commissions to travel agencies, independent contractors and employees.
As a percentage of net revenues, total operating expenses decreased from 63.5%
in 1996 to 61.3% in 1997. Several types of operating expenses, including
salaries and commission expenses, telecommunications, mail and courier and
marketing, decreased as a percentage of net revenues by less than 1%, while
credit card transaction fees increased marginally as a percentage of net
revenues. One of the Operating Companies experienced unanticipated problems with
call center software installed as part of a new telephone system which
negatively affected net revenues in 1996; the system was replaced in July 1996.
Combined general and administrative expenses increased $4.1 million, or
30.9%, from $13.3 million in 1996 to $17.4 million in 1997, and were 21.5% and
22.2%, respectively, of net revenues. In 1997, general and administrative
expenses approximating two percent of net revenues were for expenses associated
with being a public company and additional corporate overhead at the Company's
headquarters which did not exist prior to the Offering.
1996 COMPARED TO 1995
Combined net revenues increased $9.4 million, or 17.9%, from $52.7
million in 1995 to $62.1 million in 1996. This increase is primarily
attributable to increases in volumes of travel services sold in the airline,
auto rental and cruise reservations segments.
Combined operating expenses increased $7.9 million, or 24.9%, from
$31.6 million in 1995 to $39.4 million in 1996. As a percentage of net revenues,
total operating expenses increased from 59.9% in 1996 to 63.5% in 1996,
primarily due to higher commission expenses as a percentage of net revenues at
Auto Europe. These higher commissions did not impact the average revenue per car
(after commissions) recognized by Auto Europe, but resulted in higher commission
expense as a percentage of net revenue.
Combined general and administrative expenses decreased $522,000, or
3.8%, from $13.8 million in 1995 to $13.3 million in 1996, and were 26.3% and
21.5%, respectively, of net revenues. Decreases were primarily the result of
spreading overhead costs over a larger revenue base in 1996 and non-recurring
legal expenses incurred in 1995.
RESULTS OF OPERATIONS - HISTORICAL
The following table sets forth, for 1995, 1996 and 1997, certain items
derived from the Company's Consolidated Historical Statements of Operations
Selected Financial Data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Operating expenses 63.5 67.2 63.3
---- ---- ----
Gross profit 36.5 32.8 36.7
General and administrative expenses,
excluding goodwill 35.1 31.1 28.8
</TABLE>
20
<PAGE>
1997 COMPARED TO 1996
Net revenues increased $22.6 million, or 63.1%, from $35.8 million in
1996 to $58.4 million in 1997. This increase is primarily attributable to a
27.0% increase in net revenues from auto rental reservations and a 19.7%
increase in cruise net revenues of the Pooling Acquisitions, as well as the
Combinations of the other four Founding Companies on July 28, 1997.
Operating expenses increased $13.0 million, or 54.2%, from $24.0
million in 1996 to $37.0 million in 1997. As a percentage of net revenues, total
operating expenses decreased from 67.2% in 1996 to 63.3% in 1997, primarily due
to lower salaries and commission expenses as a percentage of net revenues at
Auto Europe, and also because operating expenses of Pooling Acquisitions and the
four other Founding Companies are lower as a percentage of net revenues than at
Auto Europe.
General and administrative expenses increased $5.7 million, or 51.4%,
from $11.1 million in 1996 to $16.8 million in 1997, and were 31.1% and 28.8%,
respectively, of net revenues. This decrease as a percentage of net revenues was
the result of Pooling Acquisitions and the four other Founding Companies
generally having lower general and administrative expenses as a percentage of
net revenues than Auto Europe, and the result of expenses associated with being
a public company and corporate overhead which did not exist prior to the
Offering.
1996 COMPARED TO 1995
Net revenues increased $5.8 million, or 19.3%, from $30.0 million in
1995 to $35.8 in 1996. This increase is attributable to a 17.3% and a 24.1%
increase in net revenues from car rental reservations and cruise reservations,
respectively.
Operating expenses increased $4.9 million, or 25.7%, from $19.1 million
in 1995 to $24.0 million in 1996. As a percentage of net revenues, total
operating expenses increased from 63.5% in 1995 to 67.2% in 1996, primarily due
to higher salaries and commission expenses as a percentage of net revenues at
Auto Europe. These higher commissions did not impact the average revenue per car
(after commissions) recognized by Auto Europe, but resulted in higher commission
expense as a percentage of net revenue.
General and administrative expenses increased $605,000, or 5.8%, from
$10.5 million in 1995 to $11.1 million in 1996, and were 35.1% and 31.1%,
respectively, of net revenues. This decrease as a percentage of net revenues was
the result of spreading overhead costs over a larger revenue base in 1996.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS
During the year ended December 31, 1997, net cash provided by operating
activities of the Company was approximately $3.1 million. Capital expenditures
were $2.9 million and net repayment of debt was $3.7 million, including
short-term debt repayments of $2.3 million. Capital distributions by the Company
totaled $5.1 million during the year ended December 31, 1997, which includes $5
million consideration paid to the former stockholder of Auto Europe, the
accounting acquiror. Cash pledged for a mortgage and notes payable was $3
million.
On a pro forma combined basis, during the year ended December 31, 1997,
pro forma net cash provided by operating activities of the Company was $8.2
million.
The Company believes that its capital resources are adequate in the
near term. In the long term the Company may need to increase its capital
resources by obtaining additional credit and by initiating a secondary offering
of its capital stock.
OFFERING AND COMBINATIONS
On July 22, 1997, the Company's Registration Statement on Form S-1 was
declared effective. On July 28, 1997, the Company consummated its initial public
offering of its common stock, and simultaneously consummated the combinations of
the five Founding Companies. As a result of the Combinations, the Company
acquired the outstanding capital stock of Cruises Inc., D-FW Tours, Inc., and
D-FW Travel Arrangements, Inc., and acquired substantially all of the assets of
Auto Europe, Inc. (Maine), Cruises Only, Inc and 800-Ideas, Inc.
On July 28, 1997, the Company issued an aggregate of 6,297,225 shares
of Common Stock in connection with the Combinations (3,422,225 shares) and the
Offering (2,875,000 shares). Shares issued in connection with the Offering were
sold to the public at $14.00 per share. The net proceeds to the Company from the
Offering (after deducting underwriting discounts, commissions and estimated
offering expenses) were approximately $33.2 million. Of this amount, $29.1
million represents the cash portion of the purchase price relating to the
Combinations (including $5 million paid to the former stockholder of Auto
Europe, the accounting acquiror, and working capital adjustments and estimated
reimbursements to stockholders of three of the Founding Companies that had
elected S Corporation status under the Internal Revenue Code for certain taxes
that will be incurred by them in connection with the Combinations). Of the
remaining $4.1 million, $1.6 million has been used for general corporate
purposes.
CREDIT FACILITY
On October 15, 1997, the Company entered into a credit agreement (the
"Credit Agreement") with NationsBank, N.A. with respect to a $20 million
revolving line of credit (the "Credit Facility") and a term loan facility of
approximately $2 million (the "Term Loan"). The Credit Facility may be used for
letters of credit not to exceed $2 million, acquisitions, capital expenditures,
refinancing of subsidiaries' debt and for general corporate purposes. The Credit
Agreement requires the Company to comply with various loan covenants, which
include maintenance of certain financial ratios, restrictions on additional
indebtedness and restrictions on liens, guarantees, advances, capital
expenditures, sale of assets and dividends. At December 31, 1997, the Company
was in compliance with applicable loan covenants. Interest on outstanding
balances of the Credit Facility are computed based on the Eurodollar Rate plus a
margin ranging from 1.25% to 2.0%, depending on certain financial ratios.
Availability fees of 25 basis points per annum payable on the unused portion of
the Credit Facility and a facility fee are paid equal to 5/8 of one percent of
the aggregate principal balance on the Term Loan. The Credit Facility has a
three-year term and is secured by substantially all the assets of the Company,
including the stock and membership interests in the Founding Companies and any
future material subsidiaries, as defined. The Company, each Founding Company and
all other current and future material subsidiaries are required to guarantee
repayment of all amounts due under the Credit Facility. The Credit Agreement
requires the Company to secure an interest rate hedge on fifty percent of the
outstanding principal amount borrowed under the Credit Facility and one hundred
percent of the outstanding balance on the Term Loan. The Term Loan is to be used
to refinance the mortgage note payable to Barnett Bank.
On March 27, 1998, the Company received a commitment from NationsBank
to increase the credit facility to $30 million, of which up to $3 million can be
used for letters of credit. As of March 27, 1998, outstanding
22
<PAGE>
borrowings under the Credit Facility totaled $8.6 million. The Credit Agreement
requires the Company to secure an interest rate hedge on fifty percent of the
outstanding principal amount borrowed under the Credit Facility. On March 17,
1998, the Company entered into an interest rate swap hedge agreement with
NationsBank, N.A. with a fixed rate of 5.98% and a maturity date of October 15,
2001, covering $4.3 million of outstanding debt under the Credit Facility.
ACQUISITIONS
On November 19, 1997, the Company completed the acquisitions of all of
the outstanding capital stock of CruiseOne, Inc., Cruise World, Inc., and The
Anthony Dean Corporation. The aggregate consideration paid for these
acquisitions was 880,196 shares of common stock. On November 21, 1997, the
Company completed the acquisitions of all of the outstanding capital stock of
Ship `N' Shore Cruises, Inc., Cruise Time, Inc., SNS Coachline, Inc., Cruise
Mart, Inc. and SNS Travel Marketing, Inc. The aggregate consideration paid for
these acquisitions was 471,508 shares of common stock. These November 1997
acquisitions (collectively, the "Pooling Acquisitions") are accounted for using
the pooling of interests method of accounting and, accordingly, the consolidated
financial statements for the periods presented have been restated to include the
Pooling Acquisitions.
On December 2, 1997, the Company completed the acquisition of all of
the outstanding capital stock of Trax Software, Inc. ("Trax"). The aggregate
consideration paid was 32,985 of common stock. Trax developed software products
designed for specialized distributors of leisure travel services. This software
is the foundation of the reservations booking functionality of the Company's
integrated selling, service, product development and customer information
systems now under development. The acquisition is accounted for using the
purchase method of accounting. Accordingly, the operations of Trax have been
included in the accompanying consolidated financial statements from the date of
acquisition. The historical operations of Trax when compared to the historical
operations of the Company are not significant.
On January 20, 1998, the Company completed the acquisition of
substantially all of the assets and assumption of substantially all of the
liabilities of Diplomat Tours, Inc. and International Airline Corporation
(collectively, "Diplomat"). The aggregate consideration paid for Diplomat
consisted of 21,821 shares of common stock and $2.1 million in cash. Diplomat is
a specialized distributor of international airline reservations. The acquisition
is accounted for using the purchase method of accounting. The historical
operations of Diplomat when compared to the historical operations of the Company
are not significant.
On February 9, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Gold Coast Travel Agency Corporation, Inc.
("Gold Coast"). The aggregate consideration paid for Gold Coast consisted of
163,775 shares of common stock and $6.25 million in cash and $500,000 in
contingent consideration (based upon performance in the 1998 fiscal year). Gold
Coast is a specialized distributor of cruise reservations. The acquisition is
accounted for as a purchase. The historical operations of Gold Coast when
compared to the historical operations of the Company are not significant.
The Company has entered into a definitive agreement to acquire all the
outstanding capital stock of Cruise Masters, Inc., a California corporation,
pursuant to a Stock Purchase Agreement dated as of March 25, 1998. The aggregate
consideration is valued at $4.3 million, all of which will be paid in shares of
common stock of the Company. The acquisition is expected to be accounted for
using the pooling of interests method of accounting.
TECHNOLOGY
The Company's Universal architecture strategy consists of two key
components: the Universal Agent and the Universal Manager. The Universal Agent
applications are being designed to streamline and enhance the selling process.
The design of these applications permits simultaneous access to multiple source
systems, including the Company's own database of preferred rates and fares, and
central reservation systems that hold inventory, such as SABRE, Amadeus and
Apollo. The Company is also pursuing opportunities to gain direct access to
inventories of travel providers. The acquisition of TRAX in November, 1997,
provided the Company with a significant jump-start on the design of the
Universal Agent applications, through the logic contained within the TRAX
software and by leveraging the in-depth industry knowledge of the TRAX
developers who joined the Company. The Universal Manager applications will
provide the tools necessary to allow the Company to consolidate back-office
processes, including customer service ticketing and fulfillment, and accounting.
Another key element to the Company's technology strategy is investment in
database management tools and infrastructure, including data warehousing tools
to facilitate management reporting and decision support activities. The customer
information database is at the
23
<PAGE>
center of this effort. The Company believes that its customer information
database will be the most comprehensive in the leisure travel industry, thus
affording the Company the opportunity to be more proactive and creative than its
competitors in its marketing, sales and customer service efforts.
The Company believes that aggregate costs to develop the Universal
Agent and the Universal Manager will be approximately $12-$15 million over the
next three years.
The technology systems being used currently at the Company's
headquarters are Year 2000 compliant, and new systems currently under
development by the Company are working with compliant standards. An assessment
of the Year 2000 readiness of the technology currently being used in the
Operating Companies has not yet been completed, and the Company cannot make any
assurances with respect to such readiness at this time and cannot quantify the
costs, if any, to bring the Operating Companies into compliance. The assessment
being conducted by the Company, includes inquiries of management and
certification requests from hardware and software vendors. New systems under
development by the Company are expected to replace some of the older software
applications currently in use at certain Operating Companies. There can be no
assurance, however, that such replacements will be made or will be made on time.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The domestic and international leisure travel industry is extremely
seasonal. The results of the Operating Companies have been subject to quarterly
fluctuations caused primarily by the seasonal variations in the travel industry,
especially the leisure travel segment. Net revenues and operating income of Auto
Europe are generally higher in the first and second quarters and net revenues
and operating income of the remaining Operating Companies are generally higher
in the second and third quarters. The Company expects this seasonality to
continue in the future on a combined basis. Three of the Operating Companies
experienced an operating loss in the fourth quarter of 1997. Operating Companies
may experience quarterly losses in the future.
The Company's quarterly results of operations may also be subject to
fluctuations as a result of the timing and cost of acquisitions, fare wars by
travel providers, changes in relationships with certain travel providers
(including commission rates and programs), changes in the mix of services
offered by the Company, changes in timing of measurement and payment of volume
bonuses by travel providers, extreme weather conditions or other factors
affecting travel or the economy. Unexpected variations in quarterly results
could adversely affect the Company's results of operations, as well as the price
of the Common Stock, which in turn could limit the ability of the Company to
make acquisitions.
The Company believes that the commission caps implemented by major
airlines in 1997 will have limited effect on the Company's financial position.
The Company has a diversified product line with commissions on international and
domestic airline ticket reservations representing less than 20% of combined net
revenues. Furthermore, none of the Company's international and only a minority
of its domestic airline ticket reservation commissions are based on retail
commission rates paid by airlines to traditional travel agents.
NEW ACCOUNTING PRONOUNCEMENTS
The Company implemented several new accounting pronouncements and
standards in 1997. Pursuant to AICPA Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" the
Company has begun to capitalize certain direct costs related to strategic
systems development projects; $185,000 was capitalized in 1997. In accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the fair value method of accounting for stock-based
compensation plans for non-employees was used, while the intrinsic value method
continues to be used for stock options issued to employees. The Company also
adopted SFAS No. 128, "Earnings Per Share." Basic earnings per common share
calculations are determined by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted earnings per common
share calculations are determined by dividing net income by the weighted average
number of common shares and dilutive common share equivalents (options)
outstanding.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Company is in the process of determining its preferred format. The
adoption of SFAS No, 130 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
In June 1997, the FASB issued Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about product and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS 131 will have no impact on
consolidated results of operations, financial position or cash flow.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA; INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
TRAVEL SERVICES INTERNATIONAL, INC.:
Report of Independent Certified Public Accountants............................................26
Consolidated Balance Sheets as of December 31, 1996 and 1997..................................27
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997........................................................................28
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997...........................................................29
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997........................................................................30
Notes to Consolidated Financial Statements....................................................31
Schedule II - Valuation and Qualifying Accounts...............................................45
CRUISES ONLY, INC.:
Report of Independent Public Accountants......................................................46
Balance Sheet as of July 27, 1997.............................................................47
Statement of Income for the Seven-Month Period Ended July 27, 1997............................48
Statement of Changes in Stockholders' Deficit for the Seven-Month
Period Ended July 27, 1997.................................................................49
Statement of Cash Flows for the Seven-Month Period ended July 27, 1997........................50
Notes to Financial Statements.................................................................51
800-IDEAS, INC.:
Report of Independent Public Accountants......................................................55
Balance Sheet as of July 27, 1997.............................................................56
Statement of Income for the Seven-Month Period Ended July 27, 1997............................57
Statement of Changes in Stockholders' Equity for the Seven-Month
Period Ended July 27, 1997.................................................................58
Statement of Cash Flows for the Seven-Month Period ended July 27, 1997........................59
Notes to Financial Statements.................................................................60
CRUISES INC.:
Report of Independent Public Accountants......................................................63
Balance Sheet as of July 27, 1997.............................................................64
Statement of Income for the Seven-Month Period Ended July 27, 1997............................65
Statement of Changes in Stockholders' Equity for the Seven-Month
Period Ended July 27, 1997.................................................................66
Statement of Cash Flows for the Seven-Month Period ended July 27, 1997........................67
Notes to Financial Statements.................................................................68
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Travel Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Travel Services
International, Inc., and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travel Services
International, Inc., and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/S/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
West Palm Beach, Florida
February 13, 1998 (except with respect to the matters discussed
in Note 15, as to which the date is March 27, 1998).
26
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
DECEMBER 31,
-------------------------------------
1996 1997
----------------- ------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 921,000 $ 7,270,000
Accounts receivables, net 1,028,000 4,361,000
Receivables and notes from affiliates and employees 566,000 605,000
Prepaid expenses 718,000 842,000
Deferred income taxes - 773,000
Other current assets 69,000 200,000
----------------- ------------------
Total current assets 3,302,000 14,051,000
Property and equipment, net 5,468,000 11,194,000
Goodwill, net - 41,701,000
Other assets 2,323,000 663,000
----------------- ------------------
Total assets $ 11,093,000 $ 67,609,000
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,309,000 $ 433,000
Due to affiliates 300,000 478,000
Trade payables and accrued expenses 5,917,000 11,854,000
----------------- ------------------
Total current liabilities 8,526,000 12,765,000
Long-term debt, net of current portion 2,272,000 4,129,000
Deferred income and other long-term liabilities 5,000 136,000
Commitments and contingencies (note 14)
Stockholders' Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized;
none outstanding - -
Common stock, $0.01 par value; 50,000,000 shares authorized;
2,435,038 and 10,166,415 shares outstanding, respectively 24,000 101,000
Additional paid-in capital 440,000 47,993,000
Retained earnings (deficit) (174,000) 2,485,000
----------------- ------------------
Total stockholders' equity 290,000 50,579,000
----------------- ------------------
Total liabilities and stockholders' equity $ 11,093,000 $ 67,609,000
================= ==================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net revenues $ 30,024,000 $ 35,776,000 $ 58,387,000
Operating expenses 19,079,000 24,034,000 36,969,000
----------------- ----------------- ------------------
Gross profit 10,945,000 11,742,000 21,418,000
General and administrative expenses 10,534,000 11,139,000 16,842,000
Goodwill amortization - - 514,000
----------------- ----------------- ------------------
Income from operations 411,000 603,000 4,062,000
Other income (expense):
Interest income 49,000 113,000 295,000
Interest expense (91,000) (287,000) (426,000)
Other, net (1,000) (12,000) 48,000
----------------- ----------------- ------------------
Total other income (expense) (43,000) (186,000) (83,000)
----------------- ----------------- ------------------
Income before provision for income taxes 368,000 417,000 3,979,000
Provision for income taxes 147,000 167,000 852,000
----------------- ----------------- ------------------
Net income $ 221,000 $ 250,000 $ 3,127,000
================= ================= ==================
HISTORICAL:
Basic earnings per share $ 0.09 $ 0.10 $ 0.55
================= ================= ==================
Diluted earnings per share $ 0.09 $ 0.10 $ 0.53
================= ================= ==================
Weighted average shares outstanding in
computing basic earnings per share 2,435,038 2,435,038 5,730,822
================= ================= ==================
Weighted average shares outstanding in
computing diluted earnings per share 2,435,038 2,435,038 5,869,814
================= ================= ==================
PRO FORMA (note 4):
Diluted pro forma earnings per share $ 0.33 $ 0.44 $ 0.66
================= ================= ==================
Weighted average shares outstanding in
computing diluted pro forma earnings per share 10,133,430 10,133,430 10,277,335
================= ================= ==================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
28
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ADDITIONAL PAID- RETAINED
COMMON SHARES COMMON STOCK IN CAPITAL EARNINGS TOTAL
------------- ------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1994 2,435,038 $ 24,000 $ 440,000 $ (469,000) $ (5,000)
Net income - - - 221,000 221,000
Distributions - - - (65,000) (65,000)
------------- ------------ ----------------- ------------ -------------
Balances as of December 31, 1995 2,435,038 24,000 440,000 (313,000) 151,000
Net income - - - 250,000 250,000
Distributions - - - (111,000) (111,000)
------------- ------------ ----------------- ------------ -------------
Balances as of December 31, 1996 2,435,038 24,000 440,000 (174,000) 290,000
Net income - - - 3,127,000 3,127,000
Distributions - - (1,904,000) (468,000) (2,372,000)
Initial Public Offering and Combinations 7,698,392 77,000 49,447,000 - 49,524,000
Acquisition of Trax Software 32,985 - - - -
Amortization of unearned compensation - - 10,000 - 10,000
------------- ------------ ----------------- ------------ -------------
Balances as of December 31, 1997 10,166,415 $ 101,000 $ 47,993,000 $ 2,485,000 $ 50,579,000
============= ============ ================= ============ =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash from operating activities:
Net income $ 221,000 $ 250,000 $ 3,127,000
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 520,000 763,000 1,698,000
Amortization of unearned compensation - - 10,000
Changes in operating assets and liabilities:
Accounts receivables (135,000) (342,000) (987,000)
Receivables and notes from affiliates and employees 92,000 (248,000) (68,000)
Prepaid expenses (227,000) (437,000) 48,000
Deferred income taxes - - (773,000)
Other assets (17,000) (61,000) 605,000
Trade payables and accrued expenses 1,369,000 147,000 (557,000)
----------- ------------ -------------
Net cash provided by operating activities 1,823,000 72,000 3,103,000
Cash flows from investing activities:
Capital expenditures (1,260,000) (2,904,000) (2,926,000)
Improvements to other assets - (69,000) -
Proceeds from sale of property and equipment 14,000 74,000 54,000
Cash paid for acquisitions, net of cash acquired - - (18,208,000)
----------- ------------ -------------
Net cash used in investing activities (1,246,000) (2,899,000) (21,080,000)
Cash flows from financing activities:
Proceeds from long-term debt and lines of credit 724,000 4,104,000 -
Payments on long-term debt and lines of credit (683,000) (1,121,000) (3,714,000)
Stock redemption (400,000) - -
Net proceeds from Offering - - 33,219,000
Consideration paid to former stockholder of accounting acquirer - - (5,000,000)
Distributions to stockholders (65,000) (111,000) (179,000)
----------- ------------ -------------
Net cash provided by (used in) financing activities (424,000) 2,872,000 24,326,000
Net increase in cash and cash equivalents 153,000 45,000 6,349,000
Cash and cash equivalents, beginning of year 723,000 876,000 921,000
----------- ------------ -------------
Cash and cash equivalents, end of year $ 876,000 $ 921,000 $ 7,270,000
=========== ============ =============
Supplemental cash flow information:
Cash paid for interest $ 124,000 $ 262,000 $ 426,000
=========== ============ =============
Supplemental disclosure of non-cash financing and
investing activities:
Receivable from stockholder exchanged for
non-operating assets $ - $ 2,120,000 $ -
=========== =========== ============
Assets distributed to stockholders $ - $ - $ 2,193,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Travel Services International, Inc. (the "Company") and subsidiaries provide
specialized distribution of leisure travel services to both travel agents and
travelers. The Company, incorporated in Delaware, was founded in April 1996. On
July 22, 1997, the Company's Registration Statement on Form S-1 was declared
effective. On July 28, 1997, the Company consummated its initial public offering
(the "Offering") of common stock, and simultaneously acquired five specialized
distributors of travel services in separate combination transactions (the
"Combinations"). As a result of the Combinations, the Company acquired the
outstanding capital stock of Cruises Inc. ("Cruises Inc.") and D-FW Tours, Inc.
and D-FW Travel Arrangements, Inc. (collectively, "D-FW Tours"), and acquired
substantially all of the assets of Auto Europe, Inc. (Maine) ("Auto Europe"),
Cruises Only, Inc. ("Cruises Only") and 800-Ideas, Inc. ("Travel 800") (each a
"Founding Company" and collectively the "Founding Companies").
On July 28, 1997, the Company issued an aggregate of 6,297,225 shares of Common
Stock in connection with the Combinations (3,422,225 shares) and the Offering
(2,875,000 shares). Shares issued in connection with the Offering were sold to
the public at $14.00 per share. The net proceeds to the Company from the
Offering (after deducting underwriting discounts, commissions and estimated
offering expenses) were approximately $33.2 million. Of this amount, $29.1
million represents the cash portion of the purchase price relating to the
Combinations (including $5 million paid to the former stockholder of Auto
Europe, the accounting acquiror, and working capital adjustments and estimated
reimbursements to stockholders of three of the Founding Companies that had
elected S Corporation status under the Internal Revenue Code for certain taxes
that will be incurred by them in connection with the Combinations). Of the
remaining $4.1 million, $1.6 million has been used for general corporate
purposes.
The consideration for the Combinations consisted of cash and common stock. The
Combinations were accounted for under the purchase method of accounting. Auto
Europe has been designated as the accounting acquiror for financial statement
presentation purposes in accordance with Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 97, which states that the combining
company which receives the largest portion of voting rights in the combined
corporation is presumed to be the acquiror for accounting purposes. Accordingly,
the historical financial statements for each year presented represent those of
Auto Europe and companies acquired in 1997 under transactions accounted for
using the pooling of interests method of accounting described in Note (3). The
historical financial statements also include balances and transactions of the
four other Founding Companies and the Company since July 28, 1997.
As a result of the Combinations, actual operating results presented do not
include historical operations of four of the Founding Companies prior to July
28, 1997. Refer to Note (4) for information regarding pro forma operating
results and pro forma diluted earnings per share which give effect to results of
the Company combined with all Founding Companies as if the Combinations had
occurred at the beginning of each respective year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
REVENUE RECOGNITION
The Company records net revenues when earned, which for car rentals and airline
tickets is at the time a reservation is booked and ticketed and for cruise
bookings is when the customer is no longer entitled to a full refund of the cost
of the cruise, which is generally 45 to 90 days prior to the sail date. Revenues
primarily consist of commissions and markups on travel services, volume bonuses
from travel service providers, processing fees, franchise fees, and delivery
fees. The Company recognizes revenues from franchise fees when the Company has
fulfilled all
31
<PAGE>
contractual obligations required by the agreements signed with the franchisees.
The Company defers franchise renewal fees and amortizes those fees to revenues
over the applicable one-year period. The Company provides an allowance for
cancellations, reservation changes and currency exchange guarantees, and
provisions for such amounts are reflected in net revenues based on historical
experience. The allowances netted against net revenues are not material in the
three years ended December 31, 1997. However, actual cancellations and
reservation changes could vary significantly based upon changes in economic and
political conditions that may impact leisure travel patterns. The Company has
also recorded an allowance for doubtful accounts receivables totaling $37,000
and $131,000 at December 31, 1996 and 1997, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less at the date of purchase to be cash equivalents. Cash and
cash equivalents at December 31, 1996 and 1997, include interest bearing demand
deposits and highly liquid investments of $992,000 and 6,290,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, receivables, trade
payables, and debt are reflected in the accompanying consolidated financial
statements at cost, which approximates fair value. All long-term debt
obligations bear interest.
FOREIGN CURRENCY TRANSACTIONS
The Company enters into foreign currency forward purchase contracts to hedge
substantially all of its foreign currency denominated liabilities and
reservation commitments to foreign travel service. The hedging minimizes the
impact of foreign exchange rate movements on the Company's operating results
because gains and losses on these contracts generally offset losses and gains on
the liabilities being hedged. The typical maturity of these purchase contracts
is 60 days. At December 31, 1996 and 1997, respectively, the Company had
outstanding forward purchase contracts of $687,000 and $5.4 million,
respectively. The risk of loss on unhedged liabilities is not considered
significant.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
estimated useful lives of the respective assets on a straight-line basis.
Leasehold improvements are amortized on a straight-line basis over periods not
exceeding the respective terms of the leases.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the costs and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of income.
INTANGIBLE ASSETS AND AMORTIZATION
The Combinations and certain other acquisitions were accounted for using the
purchase method of accounting. The excess of consideration paid over the
estimated fair value of the net assets acquired less liabilities assumed is
recorded as goodwill. Allocations of the purchase price to assets acquired and
liabilities assumed have been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available.
Goodwill is being amortized on a straight-line basis over 5 to 35 years,
representing the approximate remaining useful life of acquired intangible
assets. Accumulated amortization totals $514,000 at December 31, 1997. In
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed", subsequent to an acquisition, the Company continually evaluates
whether later events and circumstances have occurred that indicate the remaining
net book value may
32
<PAGE>
warrant revision or may not be recoverable. When factors indicate that the net
book value should be evaluated for possible impairment, the Company uses an
estimate of the related business's undiscounted operating income over the
remaining life of the cost in excess of net assets of acquired businesses, in
measuring whether such cost is recoverable.
CAPITALIZED SOFTWARE COSTS
Pursuant to American Institute of Certified Public Accountants Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), the Company capitalizes certain direct
costs related to strategic systems development projects during the application
development stage once technological feasibility has been reached. Software
development costs incurred prior to achieving technological feasibility are
charged to expense as incurred.
Capitalized software development costs are reported at the lower of unamortized
costs or net realized value. Commencing upon the initial product release of a
module, applicable costs are amortized based on the straight-line method over
the estimated useful life. No capitalized costs were amortized in 1997.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") requires adoption of a fair value method of
accounting for stock-based compensation plans for non-employees and permits
continuation of accounting using the intrinsic value based method under
Accounting Principals Board ("APB") Opinion No. 25, "Accounting for Stock-issued
to Employees", for stock options granted to employees.
The Company has chosen to account for stock options issued to employees using
the intrinsic value based method prescribed in APB Opinion No. 25 and,
accordingly, does not recognize compensation expense for these stock option
grants made at an exercise price equal to or in excess of the fair market value
of the stock at the date of grant. Pro forma net income and earnings per share
amounts are presented in Note (10) as if the fair value method had been adopted.
INCOME TAXES
Prior to July 28, 1997, the Company consisted of Auto Europe, the accounting
acquiror, and the Pooling Acquisitions accounted for using the pooling of
interests method of accounting. Auto Europe, which elected S Corporation status
as defined by the Internal Revenue Code, was not subject to taxation for federal
purposes until the transfer of the net assets of the S Corporation to the
Company, which coincided with the Company's Offering. At that time, Auto Europe
adopted Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes ("SFAS 109"). Auto Europe recorded a deferred tax asset and a
corresponding reduction of income tax expense of approximately $543,000 on July
28, 1997, representing the net deferred taxes at that date which were not
previously recorded because of Auto Europe's previous status under Subchapter S
of the Internal Revenue Code.
Under SFAS 109, deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability each
period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
33
<PAGE>
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") in 1997. Basic earnings per common share
("EPS") calculations are determined by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share calculations are determined by dividing net income by
the weighted average number of common shares and dilutive common share
equivalents outstanding (all related to outstanding stock options discussed in
Note (10)). SFAS 128 had no impact on the Company's reported earnings per share
for 1995 and 1996 as no common share equivalents existed during these periods.
A reconciliation of shares used in the calculation of Basic and Diluted EPS for
1997 is as follows:
Basic common shares outstanding 5,730,822
Dilutive effect of options 158,992
---------
Diluted common shares outstanding 5,869,814
=========
Diluted pro forma earnings per share is also presented to give effect to the
Offering and the Combinations as discussed in Note (4).
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting estimates include establishing allowances for doubtful
accounts, cancellations, reservation changes and currency exchange guarantees.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company is in the process of determining its preferred format. The adoption
of SFAS No. 130 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1997, the FASB issued Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about product and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS 131 will have no impact on
consolidated results of operations, financial position or cash flow.
34
<PAGE>
(3) ACQUISITIONS:
On November 19, 1997, the Company consummated the acquisitions of all of the
outstanding capital stock of CruiseOne, Inc., Cruise World, Inc., and The
Anthony Dean Corporation (d/b/a Cruise Fairs of America). The aggregate
consideration paid for these acquisitions was 880,196 shares of common stock. On
November 21, 1997, the Company consummated the acquisitions of all of the
outstanding capital stock of Ship `N' Shore Cruises, Inc., Cruise Time, Inc.,
SNS Coachline, Inc., Cruise Mart, Inc. and SNS Travel Marketing, Inc. The
aggregate consideration paid for these acquisitions was 471,508 shares of common
stock. These November 1997 acquisitions (collectively, the "Pooling
Acquisitions") are accounted for using the pooling of interests method of
accounting and, accordingly, the consolidated financial statements for the
periods presented have been restated to include the Pooling Acquisitions.
Revenues and income generated by the Pooling acquisitions prior to the date of
acquisition and included in the accompanying consolidated statements of income
were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 8,105,000 $ 10,056,000 $ 12,033,000
=========== ============ =============
Net income $ 365,000 $ 383,000 $ 865,000
=========== ============ =============
</TABLE>
On December 2, 1997, the Company consummated the acquisition of all of the
outstanding capital stock of Trax Software, Inc. ("Trax"). The aggregate
consideration paid was 32,985 shares of common stock. Trax developed software
products designed for specialized distributors of leisure travel services. This
software is the foundation of the reservations booking functionality of the
Company's integrated selling, service, product development and customer
information systems now under development. The acquisition is accounted for
using the purchase method of accounting. Accordingly, the operations of Trax
have been included in the accompanying consolidated financial statements from
the date of acquisition. The historical operations of Trax when compared to the
historical operations of the Company are not significant.
On January 20, 1998, the Company consummated the acquisition of substantially
all of the assets and assumption of substantially all of the liabilities of
Diplomat Tours, Inc. and International Airline Consolidators (collectively,
"Diplomat"). The aggregate consideration paid for Diplomat consisted of 21,821
shares of common stock and $2.0 million in cash. Diplomat is a specialized
distributor of international airline reservations and had 1997 net revenues of
approximately $1.9 million. The acquisition is accounted for using the purchase
method of accounting. The historical operations of Diplomat when compared to the
historical operations of the Company are not significant.
On February 9, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Gold Coast Travel Agency Corporation, Inc. ("Gold
Coast"). The aggregate consideration paid for Gold Coast consisted of 163,755
shares of common stock and $6.25 million in cash and $500,000 in contingent
consideration (based upon performance in the 1998 fiscal year). Gold Coast is a
specialized distributor of cruise reservations and had 1997 net revenues of
approximately $6.8 million. The acquisition is accounted for using the purchase
method of accounting. The historical operations of Gold Coast when compared to
the historical operations of the Company are not significant.
Refer to Note (15) for information regarding subsequent events involving
acquisitions.
35
<PAGE>
(4) PRO FORMA RESULTS AND EARNINGS PER SHARE:
Pro forma diluted earnings per share for the Company gives effect to results of
the Company combined with the Founding Companies as if the Combinations had
occurred at the beginning of each respective year along with certain adjustments
associated with the Pooling Acquisitions. The pro forma results include the
effects of: (i) the Combinations; (ii) non-recognition of the non-recurring,
non-cash compensation charge of $7.1 million recorded by the Company related to
Common Stock issued to founders and management of the Company in February 1997;
(iii) amortization of goodwill resulting from the Combinations; (iv) certain
adjustments to salaries, bonuses, and benefits to former owners and key
management of the Founding Companies and the Pooling Acquisitions, to which such
persons have agreed prospectively ("Compensation Differential"); (v) pro forma
acquisition costs associated with Pooling Acquisitions; and (vi) provision for
income taxes as if pro forma income was subject to corporate federal and state
income taxes during the periods.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which actually would
have resulted had the Founding Companies been under common control prior to the
Combinations, or which may result in the future.
Pro forma operating results and diluted pro forma earnings per share follow:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues $52,660,000 $62,073,000 $78,734,000
=========== =========== ===========
Income before goodwill, taxes and
adjustments for Compensation
Differential and acquisition costs $ 2,916,000 $ 2,984,000 $ 8,797,000
Compensation Differential 4,153,000 5,964,000 3,565,000
Acquisition costs - - 503,000
Goodwill amortization 1,234,000 1,234,000 1,234,000
------------ ----------- -----------
Pro forma income before taxes 5,835,000 7,714,000 11,631,000
Pro forma provision for income taxes 2,451,000 3,240,000 4,885,000
------------ ----------- -----------
Pro forma net income $ 3,384,000 $ 4,474,000 $ 6,746,000
============ =========== ===========
Diluted pro forma earnings per share $ .33 $ .44 $ .66
============ =========== ===========
Weighted average shares used outstanding 10,133,430 10,133,430 10,277,335
============ ============ ===========
</TABLE>
36
<PAGE>
(5) PROPERTY AND EQUIPMENT AND OTHER ASSETS:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE ---------------------------
IN YEARS 1996 1997
---------- ---- ----
<S> <C> <C> <C>
Land $ 365,000 $ 835,000
Buildings 27-40 2,766,000 4,904,000
Vehicles 5 674,000 1,257,000
Furniture and fixtures 5-7 151,000 766,000
Computers and equipment 3-5 2,950,000 5,530,000
Capitalized software 5 0 185,000
Leasehold improvements 5-7 29,000 103,000
------------- ------------
6,935,000 13,580,000
Less: Accumulated depreciation
and amortization (1,467,000) (2,386,000)
------------ ------------
$ 5,468,000 $ 11,194,000
============ ============
</TABLE>
Other assets at December 31, 1996 include an investment in real estate not
utilized in operations with a carrying value of $2.1 million. Immediately prior
to the Offering and Combinations, the property was distributed, along with other
property and equipment with a net book value of $73,000, to a former
stockholder.
(6) TRADE PAYABLES AND ACCRUED EXPENSES:
Trade payables and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
---- ----
<S> <C> <C>
Accrued compensation $ 478,000 $ 2,353,000
Accrued commissions 365,000 174,000
Due to travel providers and customers 2,863,000 4,380,000
Due to travel agents 589,000 898,000
Allowance for cancellations and refunds 327,000 404,000
Offering costs - 547,000
Other 1,295,000 3,098,000
------------ ------------
$ 5,917,000 $ 11,854,000
============ ============
</TABLE>
37
<PAGE>
(7) LONG TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
---- ----
<S> <C> <C>
Borrowings under NationsBank credit facility $ - $ -
Borrowings under Key Bank line of credit 2,000,000
,000 -
Mortgage note payable to Key Bank, bearing interest at prime plus 1%, payable in
monthly principal installments of $7,000 plus accrued interest, matures in
August 2002, secured by certain real estate 1,229,000 1,139,000
Note payable to Bank of New York, bearing interest at prime plus 1% payable in
monthly payments of $3,000 through October
2000. Secured by certain property and equipment 153,000 113,000
Mortgage payable to Barnett Bank, bearing interest at 7.2%,
payable in monthly payments of $15,000 through September
2005 and a balloon payment in October 2005. Secured by
certain real estate and by funds pledged of $3 million - 1,916,000
Note payable to Barnett Bank, bearing interest at 7.2%, payable in monthly
principal payments of $13,000 through April 2001 and a balloon payment in
May 2001. Secured by funds pledged of $3 million - 750,000
Note payable to Barnett Bank, bearing interest at 7.2%, payable in monthly
payments of $9,000 through September 2002 and a balloon payment
in October 2002. Secured by funds pledged of $3 million - 566,000
Note payable to U.S. Small Business Administration (SBA),
bearing interest at 7.25% 745,000 -
Note payable to Textron Financial Corporation, bearing interest at 9%, payable
in monthly principal and interest payments, secured by vehicles 243,000 -
Notes payable to various automobile lenders, bearing interest ranging
from 7.9% to 11.9% 110,000 -
Other notes payable 101,000 78,000
---------- ----------
Total long-term debt 4,581,000 4,562,000
Less-current portion (2,309,000) (433,000)
---------- ----------
Long-term debt, net of current portion $2,272,000 $4,129,000
========== ==========
</TABLE>
38
<PAGE>
On October 15, 1997, the Company entered into a credit agreement (the "Credit
Agreement") with NationsBank, N.A. with respect to a $20 million revolving line
of credit (the "Credit Facility") and a term loan facility of approximately $2
million (the "Term Loan"). The Credit Facility may be used for letters of credit
not to exceed $2 million, acquisitions, capital expenditures, refinancing of
subsidiaries' debt and for general corporate purposes. The Credit Agreement
requires the Company to comply with various loan covenants, which include
maintenance of certain financial ratios, restrictions on additional indebtedness
and restrictions on liens, guarantees, advances, capital expenditures, sale of
assets and dividends. At December 31, 1997, the Company was in compliance with
applicable loan covenants. Interest on outstanding balances of the Credit
Facility are computed based on the Eurodollar Rate plus a margin ranging from
1.25% to 2.0%, depending on certain financial ratios. Availability fees of 25
basis points per annum payable on the unused portion of the Credit Facility and
a facility fee are paid equal to 5/8 of one percent of the aggregate principal
balance on the Term Loan. The Credit Facility has a three-year term and is
secured by substantially all the assets of the Company, including the stock and
membership interests in the Founding Companies and any future material
subsidiaries, as defined. The Company, each Founding Company and all other
current and future material subsidiaries are required to guarantee repayment of
all amounts due under the Credit Facility. The Credit Agreement requires the
Company to secure an interest rate hedge on fifty percent of the outstanding
principal amount borrowed under the Credit Facility and one hundred percent of
the outstanding balance on the Term Loan. The Term Loan is to be used to
refinance the mortgage note payable to Barnett Bank.
At December 31, 1997, maturities of long-term debt were as follows:
YEAR AMOUNT
---- ------
1998 $ 433,000
1999 427,000
2000 425,000
2001 505,000
2002 404,000
Thereafter 2,368,000
-----------
$ 4,562,000
===========
Refer to Note (15) for information regarding certain subsequent events related
to the Credit Agreement.
(8) STOCKHOLDERS' EQUITY:
In May 1997, the Company effected a 5,444.45 -for-one stock split of its common
shares. In addition, the Company increased the number of authorized shares of
common stock to 50,000,000 and authorized 1,000,000 shares of $.01 par value
preferred stock. The effects of the common stock split and the increase in the
shares of authorized common stock have been retroactively reflected in the
accompanying consolidated financial statements for all periods presented.
In May 1997, the stockholders exchanged 2,484,501 shares of common stock for an
equal number of shares of restricted voting common stock. Common stock and the
restricted common stock are identical except that the holders of restricted
common stock are only entitled to four-tenths of one vote for each share on all
matters.
Other transactions in the Company's common stock are discussed in Notes (1), (3)
and (15).
39
<PAGE>
(9) INCOME TAXES:
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---- ---- ----
Federal $ 123,000 $ 140,000 $ 710,000
State 24,000 27,000 142,000
--------- --------- ---------
$ 147,000 $ 167,000 $ 852,000
========= ========= =========
Current $ 147,000 $ 167,000 $ 817,000
Deferred - - 35,000
--------- --------- ---------
$ 147,000 $ 167,000 $ 852,000
========= ========= =========
A reconciliation of the difference between the expected provision for income
taxes using the federal tax rate and the Company's actual provision is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income tax computed at the Federal
statutory tax rate $ 129,000 $ 146,000 $ 1,393,000
State and local taxes (net of federal
benefit) 18,000 21,000 148,000
Non-deductible goodwill - - 112,000
Tax benefit to record deferred
taxes at July 27, 1997 - - (543,000)
Other, net - - (258,000)
--------- --------- -----------
$ 147,000 $ 167,000 $ 852,000
========= ========= ===========
</TABLE>
The major components of the Company's net current deferred tax assets at
December 31, 1997 relate to allowances, accruals and adjustments relating to the
conversion from cash to accrual method of accounting for income tax purposes at
certain of the Founding Companies and Pooling Acquisitions.
(10) STOCK OPTION PLANS:
In May 1997, the Company adopted two stock option plans (the "Plans"). Under the
The Long Term Incentive Plan (the "Incentive Plan"), the maximum number of
common shares that may be subject to outstanding awards, determined immediately
after the grant of any award, may not exceed the greater of 900,000 shares or
12% of the aggregate number of shares of Common Stock outstanding. Options may
be granted to directors, officers, employees, consultants, and independent
contractors. Individual awards under the Plan may take the form of one or more
of: (i) either incentive stock options ("ISO's") or non-qualified stock options
("NQSOs"); (ii) stock appreciation rights ("SARSs"); (iii) restricted or
deferred stock; (iv) dividend equivalents; and (v) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
the Common Stock.
40
<PAGE>
Pursuant to the Non-Employee Directors' Stock Plan (the "Directors' Plan"), each
non-employee director and advisory director is automatically granted an option
to purchase 10,000 shares upon such person's initial election as a director. In
addition, the Directors' Plan provides for an automatic annual grant to each
Participant of an option to purchase 5,000 shares at each annual meeting of
stockholders. The Directors Plan also permits participants to elect to receive,
in lieu of cash directors fees, shares or credits representing deferred shares
that may be settled at future dates as elected by the parties. The Company has
reserved 100,000 shares of Common Stock for issuance under the Directors' Plan.
The price at which the Company's options are granted under the plans are equal
to or in excess of the fair market value of the stock at the date of grant.
Generally, options granted under the Incentive Plan may remain outstanding and
may be exercised at any time up to three months after the person to whom such
options were granted is no longer employed or retained by the Company. Options
granted under the Directors' Plan may remain outstanding and may be exercised at
any time up to one year after termination of service as a director or advisor.
Substantially all of the options outstanding under the Incentive Plan vest at
the rate of 25% per year and options under the Directors' Plan are immediately
exercisable. Options granted under the Plans have maximum terms of not more than
10 years.
During 1997, 962,250 non-qualified stock options were granted under the Plans at
exercise prices between $14 and $24 with a weighted average exercise price of
$15.07. At December 31, 1997, substantially all of the options granted remain
outstanding as none were exercised or cancelled during the year; 40,000 options
are exercisable. The weighted average remaining contractual life of the
outstanding options are nine years and seven months.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for options granted to employees and directors. Accordingly, no compensation
cost has been recognized related to such grants. Had compensation cost been
recorded for the Company's awards under the Plans based on fair value at the
grant dates consistent with the methodologies of SFAS 123, the Company's 1997
reported actual net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
Net Income: As Reported $ 3,127,000
Pro Forma $ 2,506,000
Basic EPS: As Reported $ .55
Pro Forma $ .44
Diluted EPS: As Reported $ .53
Pro Forma $ .43
Under SFAS 123, the fair value of each option granted is estimated on the date
of grant using the Black-Scholes model with the following assumptions: expected
volatility of 70%, risk-free interest rate of 7.5%, expected dividends of $0 and
expected term of four years.
The Company recorded expense of $10,000 in 1997 related to 10,000 options
granted to a non-employee of the Company. In determining the expense to be
recorded, the Company applied the Black-Scholes model using the same assumptions
described above, including expected term of four years.
(11) CONCENTRATIONS OF RISK:
TRAVEL SERVICE PROVIDERS
The Company markets and provides reservation services for rental car companies
located in various European countries. Two auto rental companies accounted for
approximately 82%, 80%, and 87%, respectively, of the Company's net revenues
from European auto rentals in 1995, 1996 and 1997. The Company markets and
provides reservation services for a variety of cruise lines. Net revenue from
the sales of cruises on behalf of six cruise lines represented approximately
78%, 70%, and 74%, respectively, of the Company's net cruise revenues in 1995,
1996 and 1997.
41
<PAGE>
GEOGRAPHICAL
The table below provides information on the percentage of the Company's total
auto rentals occurring in significant geographical regions for the three years
ended December 31, 1997:
1995 1996 1997
---- ---- ----
Germany 21% 19% 18%
United Kingdom 19% 19% 20%
France 16% 17% 17%
Italy 13% 14% 13%
(12) RELATED PARTY TRANSACTIONS:
Included in receivables and notes from affiliates and employees at December 31,
1997 are the following two notes: a note from an affiliate for $326,000 bears
interest at six percent and is due September 30, 1998 and a note from an
employee for $86,000 bears interest at the prime rate payable quarterly, and is
due in annual three principal payments commencing January 1, 1999.
Due to affiliates of $478,000 at December 31, 1997 represents amounts payable to
Founding Company stockholders for reimbursement of certain receivables and taxes
related to the Offering and Combinations. These amounts are expected to be paid
in 1998. Due to affiliate of $300,000 at December 31, 1996 represents a short
term loan from the wife of an affiliate which was repaid in February 1997.
The Company leases office space from an employee under a lease which expires
November 2002. Total payments were approximately $48,000, $58,000 and $106,000,
respectively, in 1995, 1996 and 1997.
One of the Company's subsidiaries obtains long distance telephone services under
an agreement with an unrelated owned by an affiliate of the Company. The Company
pays market rates for these services.
The Company leases office space from the brother of an affiliate under a lease
which expires February 2006, payments were $191,000, $191,000, and $201,000 in
1995, 1996, and 1997, respectively.
The Company purchsed $134,000 worth of computer equipment from a company
controlled by an affiliate in 1997.
42
<PAGE>
(13) BENEFIT PLANS:
The Company has four 401(k) retirement plans, one profit-sharing plan, and one
simple IRA plan. The Company's annual contributions to the 401(k) and profit
sharing plans are discretionary. Contributions under the benefit plans were
approximately $104,000 in 1995, $136,000 in 1996, and $38,000 in 1997. The
Company plans to establish a new 401(k) plan in 1998 under which eligible
employees of all Company subsidiaries may participate; existing plans will be
suspended or rolled into the new plan. Company contributions under the new plan
will be determined upon the discretion of the board of directors.
(14) COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal claims and actions arising in the
ordinary course of business. The Company believes that none of the claims and
actions currently pending will have a material adverse effect on its business,
financial condition or results of operations.
OPERATING LEASES
The Company leases office space and office equipment under operating leases. The
Company incurred approximately $1,300,000, $1,355,000 and $1,522,000 in rental
expense under noncancellable operating leases in 1995, 1996 and 1997,
respectively.
Minimum annual commitments under operating leases at December 31, 1997 are as
follows:
YEAR AMOUNT
---- ------
1998 1,210,000
1999 860,000
2000 740,000
2001 667,000
2002 568,000
Thereafter 530,000
----------
$ 4,575,000
===========
INSURANCE
The Company carries a broad range of insurance coverage, including directors and
officers, prospectus liability, general and business liability, commercial
property, workers' compensation, and general umbrella policies. The Company has
not incurred significant claims or losses on any of its insurance policies
during the periods presented in the accompanying financial statements.
LETTERS OF CREDIT
The Company had outstanding irrevocable letters of credit totaling $650,000 at
December 31, 1997. These letters of credit, which have terms of one year or
less, collateralize the Company's obligations to third parties for payment of
travel obligations. Refer to Note (15) for information regarding certain
subsequent events related to letters of credit.
43
<PAGE>
(15) SUBSEQUENT EVENTS:
ACQUISITIONS
The Company has agreed to acquire all the outstanding capital stock of
CruiseMasters, Inc., a California corporation, pursuant to a Stock Purchase
Agreement dated as of March 25, 1998. The aggregate consideration is
approximately $4.3 million, all of which will be paid in shares of common stock
of the Company. The acquisition is expected to be accounted for using the
pooling of interests method of accounting.
LONG-TERM DEBT
On March 27, 1998, the Company received a commitment from NationsBank, N.A. to
increase the Credit Facility to $30 million, of which up to $3 million can be
used for letters of credit. As of March 27, 1998, outstanding borrowings under
the Credit Facility totaled $8.6 million. As discussed in Note (7), the Credit
Agreement requires the Company to secure an interest rate hedge on fifty percent
of the outstanding principal amount borrowed under the Credit Facility. On March
17, 1998, the Company entered into an interest rate swap hedge agreement with
NationsBank, N.A. with a fixed rate of 5.98% and a maturity date of October 15,
2001, covering $4.3 million of outstanding debt under the Credit Facility. In
1998, additional letters of credit totaling $755,000 were issued under the
Credit Facility.
44
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSICIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION YEAR EXPENSES END OF YEAR
- ----------- --------------------------------------------------------
<S> <C> <C> <C>
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts receivable
Year ended December 31, 1995 $ (37,000) - $ (37,000)
Year ended December 31, 1996 $ (37,000) - $ (37,000)
Year ended December 31, 1997 $ (37,000) (94,000) $(131,000)
</TABLE>
45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cruises Only, Inc.:
We have audited the accompanying balance sheet of Cruises Only, Inc. (a Florida
corporation) as of July 27, 1997, and the related statements of income, changes
in stockholders' deficit and cash flows for the seven-month period ended July
27, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cruises Only, Inc. as of July
27, 1997, and the results of its operations and its cash flows for the
seven-month period then ended in conformity with generally accepted accounting
principles.
Houston, Texas,
September 26, 1997
46
<PAGE>
CRUISES ONLY, INC.
BALANCE SHEET
JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 442
Receivables from cruise lines 1,037
Due from TSII 226
Prepaid expenses and other current assets 11
--------
Total current assets 1,716
PROPERTY AND EQUIPMENT, net 3,665
OTHER ASSETS 28
--------
Total assets $ 5,409
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 382
Accounts payable and accrued liabilities 860
Customer deposits and deferred income 980
Other current liabilities 285
--------
Total current liabilities 2,507
LONG-TERM DEBT, net of current maturities 3,010
--------
DEFERRED INCOME 156
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock $1 par value; 7,500 shares authorized
and outstanding 7
Deficit (271)
--------
Total stockholders' deficit (264)
--------
Total liabilities and stockholders' deficit $ 5,409
========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT.
47
<PAGE>
CRUISES ONLY, INC.
STATEMENT OF INCOME
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
NET REVENUES $ 6,658
OPERATING EXPENSES 2,631
--------
Gross profit 4,027
GENERAL AND ADMINISTRATIVE EXPENSES 2,018
--------
Income from operations 2,009
INTEREST EXPENSE (166)
OTHER INCOME, net 54
--------
Net income $ 1,897
========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
48
<PAGE>
<TABLE>
<CAPTION>
CRUISES ONLY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON RETAINED
SHARES STOCK DEFICIT TOTAL
------ ----- ------- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 7,500 $ 7 $ (808) $ (801)
Net income - - 1,897 1,897
Distributions to stockholders - - (1,360) (1,360)
----- ----- ------- -------
BALANCE, July 27, 1997 7,500 $ 7 $ (271) $ (264)
===== ===== ======= =======
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
49
<PAGE>
CRUISES ONLY, INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,897
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 169
Deferred income (34)
Loss on retirement of assets 39
Changes in operating assets and liabilities-
Receivables from cruise lines (125)
Due from TSII (226)
Prepaid expenses and other current assets 13
Other assets 16
Accounts payable and accrued liabilities 131
Customer deposits and deferred income (64)
Other current liabilities (23)
--------
Net cash provided by operating activities 1,793
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7)
Net cash used in investing activities (7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (219)
Distributions to stockholders (1,360)
Net cash used in financing activities (1,579)
--------
Net increase in cash and cash equivalents 207
CASH AND CASH EQUIVALENTS, beginning of period 235
--------
CASH AND CASH EQUIVALENTS, end of period $ 442
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 166
========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
50
<PAGE>
CRUISES ONLY, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 27, 1997
1. BUSINESS AND ORGANIZATION
Cruises Only, Inc. (the "Company"), a Florida corporation, is a specialized
distributor of reservations for cruise vacations to travelers located in the
United States. It offers cruises to its clients on over 45 cruise lines
traveling to the Caribbean and other destinations around the world. The
Company's operations are seasonal, with a peak during the second and third
quarter of the year.
On July 28, 1997, all of the operating assets and related liabilities of the
Company related to its travel services (substantially all of the assets and
liabilities of the Company) were contributed to a newly established subsidiary
limited liability corporation of the Company and subsequently, purchased by
Travel Services International, Inc. (TSII) concurrent with the consummation of
the initial public offering of the common stock of TSII. In connection with this
transaction, the Company received cash and shares of TSII common stock. The net
assets retained by the Company and subsequently distributed to the Company's
previous owners were approximately $170,700.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including the net amount of interest
cost associated with significant capital additions. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the life of the related
asset or life of the lease.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of income.
CUSTOMER DEPOSITS AND DEFERRED INCOME
Customer deposits represents the cost of cruises for cash sales which have not
yet been remitted to the cruise lines. Deferred income generally includes
commissions collected more than 60 days prior to the sail date. Deferred income
also includes the unearned portion of a
$300,000 promotion support payment received by the Company during 1996 from a
supplier. In the event the Company breaches the agreement during the 60-month
term, the promotion support payment must be refunded. The promotional support
payment is being amortized to income using the straight-line method over the
60-month agreement term. Approximately $34,000 of this amount has been included
in other income for the seven-month period ended July 27, 1997.
51
<PAGE>
INCOME TAXES
The Company had elected S Corporation status, as defined by the Internal Revenue
Code, whereby the Company is not subject to taxation for federal purposes. Under
S Corporation status, the stockholder reports the Company's taxable earnings or
losses in her personal tax return.
REVENUE RECOGNITION
The Company recognizes revenue when the customer is no longer entitled to a full
refund of the cost of the cruise, which is generally 45 to 90 days prior to the
sail date. Net revenues primarily consist of commissions and year-end volume
bonuses from cruise lines.
OPERATING EXPENSES
Operating expenses include sales persons' commissions, salaries, communication,
advertising, credit card fees and other costs associated with the selling and
processing of cruise reservations.
ADVERTISING COSTS
All advertising and promotion costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK
CRUISE LINES - Net revenues from the sales of cruises on behalf of four cruise
lines represented approximately 42.4%, 14%, 11% and 11%, of net commission
revenues for the seven-month period ended July 27, 1997.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Property and equipment as of July 27,1997, consist of the following (in
thousands):
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
-------- ------
Land - $ 470
Buildings and improvements 40 2,154
Office equipment 5-7 390
Furniture and fixtures 7 1,214
--------
4,228
Less- Accumulated depreciation (563)
--------
Property and equipment, net $ 3,665
========
Accounts payable and accrued liabilities as of July 27, 1997, consist of the
following (in thousands):
Accounts payable $ 134
Accrued compensation and benefits 313
Other accrued liabilities 413
------
$ 860
======
52
<PAGE>
4. DEBT
Long-term debt as of July 27, 1997, consists of the following (in thousands):
<TABLE>
<S> <C>
Notes payable to a bank, bearing interest at 8.5% and monthly payments of $12
through maturity in October 2002. Secured by substantially all assets of the
Company and personally guaranteed by the stockholders $ 603
Note payable to a bank, bearing interest at 7.8% and monthly payments of $17
through October 2000. Thereafter, note bears interest at a rate equal to the
five-year treasury yield plus 1.9% or prime, as selected by the Company, through
maturity in October 2005. Secured by land, building, improvements and personal
property of the Company and personally guaranteed by the stockholders 1,947
Note payable to a bank, bearing interest at prime minus .25% (8.25% at July 27,
1997), payable in monthly principal payments of $20 through May 2001. Secured by
furniture, fixtures and equipment of the Company and personally guaranteed by
the stockholders 842
---------
3,392
Less- Current maturities 382
---------
$ 3,010
=========
</TABLE>
Future maturities of long-term debt obligations as of July 27, 1997, are as
follows (in thousands):
Period from July 28 -
December 31, 1997 $ 158
Year ending December 31,
1998 387
1999 400
2000 414
2001 212
Thereafter 1,821
--------
$ 3,392
========
Since October 1995, the Company has had a line of credit available in the amount
of $500,000, with a stated interest rate of prime, as defined, secured by the
Company's receivables and payable on demand. As of July 27, 1997, the Company
had not drawn any funds under this credit arrangement.
5. RELATED-PARTY TRANSACTIONS
The Company employs a small number of individuals related to the stockholders at
wages commensurate with their experience and level of responsibility.
53
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various legal actions arising in the ordinary course
of business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general and
business automobile liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the period presented in the
accompanying financial statements.
401(K) PLAN
The Company adopted a defined contribution 401(k) savings and retirement plan
effective August 1, 1994. Employees are eligible to participate after completing
one year of service and attaining age 21. Participants may contribute 1% to 15%
of their gross compensation subject to certain limitations. The Company may make
discretionary contributions as a percentage of each participant's elective
deferral. No contributions were made by the Company during the seven-month
period ended July 27, 1997.
7. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," and SFAS
No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of
Financial Instruments," require the disclosure of the fair value of financial
instruments for both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 800-Ideas, Inc.:
We have audited the accompanying balance sheet of 800-Ideas, Inc. (a Nevada
corporation) as of July 27, 1997, and the related statements of income, changes
in stockholder's equity and cash flows for the seven-month period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 800-Ideas, Inc. as of July 27,
1997, the results of its operations and its cash flows for the seven-month
period then ended in conformity with generally accepted accounting principles.
Houston, Texas,
September 26, 1997
55
<PAGE>
<TABLE>
<CAPTION>
800-IDEAS, INC.
BALANCE SHEET
JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,718
Accounts receivable, net of $109 allowance for doubtful accounts 727
Prepaid expenses and other current assets 478
--------
Total current assets 2,923
FURNITURE AND EQUIPMENT, net 255
OTHER ASSETS 63
--------
Total assets $ 3,241
========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 729
Deferred income 136
--------
Total current liabilities 865
DEFERRED INCOME 169
STOCKHOLDER'S EQUITY:
Common stock, no par value; 1,000 shares authorized and outstanding 71
Retained earnings 2,136
--------
Total stockholder's equity 2,207
--------
Total liabilities and shareholder's equity $ 3,241
========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
56
<PAGE>
800-IDEAS, INC.
STATEMENT OF INCOME
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
NET REVENUES $ 5,812
OPERATING EXPENSES 3,533
--------
Gross profit 2,279
GENERAL AND ADMINISTRATIVE EXPENSES 896
--------
Income from operations 1,383
OTHER INCOME, net 48
--------
Net income $ 1,431
========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
57
<PAGE>
<TABLE>
<CAPTION>
800-IDEAS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ ----- -------- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,000 $ 71 $ 2,285 $ 2,356
Net income - - 1,431 1,431
Distributions - - (1,580) (1,580)
------ ----- --------- ---------
BALANCE, July 27, 1997 1,000 $ 71 $ 2,136 $ 2,207
====== ===== ========= =========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
58
<PAGE>
800-IDEAS, INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,431
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 69
Changes in operating assets and liabilities:
Accounts receivable 383
Prepaid expenses and other current assets (289)
Other assets (46)
Accounts payable and accrued liabilities 433
Deferred income 305
----------
Net cash provided by operating activities 2,286
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (26)
Net cash used in investing activities (26)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (24)
Distributions to stockholder (1,580)
Net cash used in financing activities (1,604)
----------
Net increase in cash and cash equivalents 656
CASH AND CASH EQUIVALENTS, beginning of period 1,062
----------
CASH AND CASH EQUIVALENTS, end of period $ 1,718
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3
==========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT
59
<PAGE>
800-IDEAS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 27, 1997
1. BUSINESS AND ORGANIZATION
800-Ideas, Inc. (the "Company"), a Nevada corporation, which operates under the
trade name "Travel 800", is a specialized distributor of domestic airline
reservations. The Company's operations are seasonal, with a peak during the
second and third quarters of the year.
On July 28, 1997, all of the operating assets and related liabilities of the
Company related to its travel services (substantially all of the assets and
liabilities of the Company) were contributed to a newly established subsidiary
limited liability corporation of the Company and subsequently, purchased by
Travel Services International, Inc. (TSII). This exchange was concurrent with
the consummation of the initial public offering of the common stock of TSII. In
connection with this transaction, the Company received cash and shares of TSII
common stock. The net assets retained by the Company and subsequently
distributed to the Company's previous owner were approximately $320,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Equipment under capital lease is amortized over the shorter of the life of the
related asset or the life of the lease.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of income.
DEFERRED INCOME
Deferred income includes the unamortized amount of signing bonuses received by
the Company in connection with its custom Network Service Arrangement and its
automated reservation service contract. The signing bonus amounts are being
amortized using the straight-line method over the respective contract term.
Income of $75,000 attributable to the signing bonuses for the seven-month period
ended July 27, 1997 is included in other income, net, in the accompanying
financial statements.
INCOME TAXES
The Company had elected S Corporation status, as defined by the Internal Revenue
Code, whereby the Company is not subject to taxation for federal purposes. Under
S Corporation status, the stockholder reports the Company's taxable earnings or
losses in her personal tax return.
60
<PAGE>
REVENUE RECOGNITION
The Company recognizes net revenue when earned, which is at the time the
reservation is booked and ticketed. Net revenues primarily include commissions
on travel services, volume bonuses, ticket processing fees and delivery fees.
The Company provides a reserve for cancellations, reservation changes and lost
ticket charges, and provisions for such amounts are reflected in net revenues.
OPERATING EXPENSES
Operating expenses include travel agent commissions, salaries, communication,
advertising, credit card fees and other costs associated with selling and
processing air travel reservations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK
TRAVEL SERVICE PROVIDERS -- The Company primarily markets and sells the services
of various United States domestic airlines. Two airlines accounted for 44% and
11%, respectively, of net revenues for the seven-month period ended July 27,
1997.
CREDIT -- Substantially all of the tickets sold by the Company and the related
processing and delivery fees are paid for by credit card; the cost of the
airline ticket is billed directly to the customer by Airline Reporting
Corporation (ARC), and the Company's net commission is subsequently remitted by
ARC. Generally, credit card payments are processed and collection is assured
prior to the final delivery of the airline ticket to the customer.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Furniture and equipment as of July 27, 1997, consist of the following (in
thousands):
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
-------- ------
Computer and office equipment 7 $ 439
Furniture and fixtures 5-7 81
Leasehold improvements 7 21
-----
541
Less- Accumulated depreciation
and amortization 286
-----
Property and equipment, net $ 255
=====
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
Balance at beginning of period $ 125
Deductions for uncollectible receivables written off
and recoveries, net (16)
-----
$ 109
=====
Accounts payable and accrued expenses as of July 27, 1997, consist of the
following (in thousands):
Accounts payable $ 562
Accrued compensation and benefits 167
-----
$ 729
=====
61
<PAGE>
4. LEASES
CAPITAL LEASES
The Company leases hardware and software under noncancelable capital leases,
which expire in October 1997, at which time there is a combined bargain purchase
option of $1.
OPERATING LEASE AGREEMENTS
The Company conducts a portion of its operations in a leased facility classified
as an operating lease. Minimum future rental payments under the noncancelable
operating lease as of July 27, 1997, are as follows (in thousands):
Period from July 28, 1997
to December 31, 1997 $ 15
Year ending December 31, 1998 141
-----
$ 156
=====
The lease provides for the payment of taxes and other expenses by the Company.
Rent expense for the operating lease was approximately $80,000 for the
seven-month period ended July 27, 1997.
5. RELATED PARTY TRANSACTIONS
The Company has entered into a custom Net Service Arrangement ("CSNA") with
Sprint Communications Company L.P. for long distance telephone service which
provides for a minimum monthly commitment of $120,000 and certain minimum
monthly usages. This agreement will not be transferred to TSII. The Company has
agreed to provide long distance telephone services under the CSNA to TSII for a
period of four to six months subsequent to the transfer to TSII and TSII agreed
to pay for its portion of usage under the CSNA.
6. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company carries a broad range of insurance coverage, including general and
business automobile liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the seven-month period presented
in the accompanying financial statements.
SERVICE CONTRACT
On October 3, 1995, the Company entered into a five-year service contract for
the use of an automated reservations system. According to the contract, the
Company must pay a monthly rental fee of approximately $42,000, unless waived
based upon a minimum monthly volume of reservation transactions. Historically,
the Company has met this requirement, and the monthly rental fee has been
waived.
Under this service contract, the Company receives volume bonuses based on the
number of flown segments sold by the Company. During the seven-month period
ended July 27, 1997, the Company earned volume bonuses totaling approximately
$407,000.
7. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," and SFAS
No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of
Financial Instruments," require the disclosure of the fair value of financial
instruments for both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cruises Inc.:
We have audited the accompanying balance sheet of Cruises Inc. (a New York
corporation) as of July 27, 1997, and the related statements of income, changes
in stockholders' equity and cash flows for the seven-month period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cruises Inc., as of July 27,
1997, the results of its operations and its cash flows for the seven-month
period then ended in conformity with generally accepted accounting principles.
Houston, Texas,
October 3, 1997
63
<PAGE>
CRUISES INC.
BALANCE SHEET
JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,098
Receivables from cruise lines 177
Prepaid expenses and other current assets 193
--------
Total current assets 1,468
PROPERTY AND EQUIPMENT, net 277
OTHER ASSETS 17
--------
Total assets $ 1,762
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 52
Accounts payable and accrued liabilities 773
--------
Total current liabilities 825
--------
DEFERRED INCOME TAXES 56
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 200 shares authorized,
100 shares outstanding -
Retained earnings 881
--------
881
--------
Total liabilities and shareholders' equity $ 1,762
========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT.
64
<PAGE>
CRUISES INC.
STATEMENT OF INCOME
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
NET REVENUES $ 4,089
OPERATING EXPENSES 2,408
--------
Gross profit 1,681
GENERAL AND ADMINISTRATIVE EXPENSES 1,266
--------
Income from operations 415
INTEREST INCOME, net 4
OTHER INCOME, net 3
--------
Income before income tax provision 422
INCOME TAX PROVISION 350
--------
Net income $ 72
========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT.
65
<PAGE>
CRUISES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
SHARES EARNINGS
------ --------
BALANCE, December 31, 1996 100 $ 809
Net income - 72
----- ------
BALANCE, July 27, 1997 100 $ 881
===== ======
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT.
66
<PAGE>
CRUISES INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 72
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 54
Changes in operating assets and liabilities:
Receivables from cruise lines 242
Prepaid expenses and other current assets 13
Other assets 17
Accounts payable and accrued liabilities (226)
Deferred income taxes 34
----------
Net cash provided by operating activities 206
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and capitalized interest (38)
Net cash used in investing activities (38)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (7)
----------
Net cash used in financing activities (7)
----------
Net increase in cash and cash equivalents 161
CASH AND CASH EQUIVALENTS, beginning of period 937
----------
CASH AND CASH EQUIVALENTS, end of period $ 1,098
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3
==========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
FINANCIAL STATEMENT.
67
<PAGE>
CRUISES INC.
NOTES TO FINANCIAL STATEMENTS
JULY 27, 1997
1. BUSINESS AND ORGANIZATION
Cruises Inc. (the "Company"), a New York corporation, is a specialized
distributor of reservations for cruise vacations to travelers located throughout
the United States. It offers cruises to its clients on over 25 cruise lines
traveling to the Caribbean and other destinations around the world.
On July 28, 1997, the Company was purchased by Travel Services International,
Inc. (TSII). Pursuant to this transaction, all of the outstanding stock of the
Company was exchanged for cash and shares of TSII common stock concurrent with
the consummation of the initial public offering of the common stock of TSII.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including the net amount of interest
cost associated with significant capital additions. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the life of the related
asset or life of the lease.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of income.
CUSTOMER DEPOSITS AND DEFERRED INCOME
Customer deposits represents the cost of cruises for cash sales which have not
yet been remitted to the cruise lines. Deferred income generally includes
commissions collected more than 60 days prior to the sail date.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates and
laws in effect in the years in which the differences are expected to reverse.
68
<PAGE>
REVENUE RECOGNITION
The Company recognizes revenue when the customer is no longer entitled to a full
refund of the cost of the cruise, which is generally 45 to 90 days prior to the
sail date. Net revenues primarily consist of commissions and year-end volume
bonuses from cruise lines.
OPERATING EXPENSES
Operating expenses include sales persons' commissions, salaries, communication,
advertising, credit card fees and other costs associated with the selling and
processing of cruise reservations.
ADVERTISING COSTS
All advertising and promotion costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK
CRUISE LINES - Net revenues from the sales of cruises on behalf of two cruise
lines represented approximately 27% and 19%, respectively, of net revenues for
the seven-month period ended July 27, 1997.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Property and equipment as of July 27,1997, consist of the following (in
thousands):
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
-------- -------
Leasehold improvements 7 $ 8
Office equipment 5-7 492
Furniture and fixtures 7 101
------
601
Less- Accumulated depreciation (324)
------
Property and equipment, net $ 277
======
69
<PAGE>
4. INCOME TAXES
The income tax expense consisted of the following components for the year ended
July 27, 1997 (in thousands):
Current $ 316
Deferred 34
-------
Total income tax expense $ 350
=======
For the seven-month period ended July 27, 1997, the primary difference between
the Company's effective tax rate and the statutory rate is due to state income
taxes and an adjustment to convert from cash basis to accrual basis for income
tax purposes.
Deferred tax assets and liabilities include the following as of July 27, 1997
(in thousands):
Tax assets-
Accrued expenses $ 35
-----
Tax liability-
Accounts receivable (28)
Depreciation and amortization (28)
-----
(56)
-----
Net deferred tax (liability) $ (21)
=====
5. DEBT
Current maturities of debt as of July 27, 1997, consist of a note payable to a
bank, bearing interest at the bank's base rate plus 1% (9.25% at July 27, 1997).
The principal and interest on this note were paid in full by TSII on July 28,
1997.
The Company has a bank line-of-credit agreement with a $100,000 credit line.
Borrowings on the line of credit bear interest at the bank's base rate plus 1%
(9.25% at July 27, 1997) and are personally guaranteed by certain stockholders.
There were no borrowings outstanding on the line of credit as of July 27, 1997.
6. RELATED-PARTY TRANSACTIONS
Since 1990, Cruises Inc. has leased office space from Pioneer Park I Company
("Pioneer") pursuant to a lease dated August 9, 1990, as subsequently amended
and supplemented. One of the principals of Pioneer is Michael Falcone, the
brother of Robert Falcone. The rent paid by Cruises Inc. to Pioneer was $92,000
for the seven-month period ended July 27, 1997. The lease terminates on February
28, 2006.
The Company employs a small number of individuals related to the stockholders at
wages commensurate with their experience and level of responsibility.
7. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company carries a broad range of insurance coverage, including general and
business automobile liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the period presented in the
accompanying financial statements.
401(K) PLAN
The Company adopted a defined contribution 401(k) savings and retirement plan
effective January 1, 1994. Employees are eligible to participate after
completing one year of service and attaining age 21. Participants may contribute
1% to 20% of their gross compensation. The Company matches 25%, to a maximum of
4% of an employee's gross compensation. Employees vest in the Company's
contribution over a five-year period. For the seven-month period ended July 27,
1997, the Company made contributions of approximately $5,000.
70
<PAGE>
OPERATING LEASES
The Company leases a building under an operating lease agreement expiring in
February 2006. Additionally, the Company leases office equipment under various
operating lease agreements expiring between 1997 and 2001.
Minimum future lease payments under noncancelable operating leases having
remaining terms in excess of one year as of July 27, 1997, are summarized as
follows:
Period from July 28 -
December 31, 1997 $ 143,098
Year ending December 31,
1998 215,432
1999 211,943
2000 180,000
2001 168,315
2002 156,630
Thereafter 544,690
--------------
$ 1,620,108
==============
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," and SFAS
No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of
Financial Instruments," require the disclosure of the fair value of financial
instruments for both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
The following table sets forth information concerning the Company's
directors and executive officers.
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph V. Vittoria (1)................ 62 Chairman and Chief Executive Officer, Director
Michael J. Moriarty................... 51 President and Chief Operating Officer
Jill M. Vales......................... 40 Senior Vice President and Chief Financial Officer
Maryann Bastnagel..................... 40 Senior Vice President and Chief Information Officer
Suzanne B. Bell....................... 31 Senior Vice President, General Counsel and Secretary
Melville W. Robinson.................. 42 Vice President, Corporate Development
John C. DeLano........................ 38 Vice President, Operations
Robert G. Falcone..................... 56 CEO-Cruises Inc.; Director
Wayne Heller.......................... 40 CEO-Cruises Only; Director
Imad Khalidi.......................... 46 CEO-Auto Europe, Director
Susan Parker.......................... 49 CEO-Travel 800; Director
John W. Przywara...................... 46 CEO-D-FW Tours; Director
Elan J. Blutinger (2)................. 42 Director
D. Fraser Bullock (1)................. 42 Director
Tommaso Zanzotto (1) (2).............. 55 Director
LEONARD A. POTTER..................... 35 Advisory Director
</TABLE>
- -----------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
JOSEPH V. VITTORIA became the Chairman and Chief Executive Officer and a
director of the Company in July 1997. From September 1987 to February 1997 Mr.
Vittoria was the Chairman and Chief Executive Officer of Avis, Inc., a
multinational auto rental company where he was employed for over 26 years. Mr.
Vittoria was responsible for the purchase of the Avis company by creating one of
the world's largest Employee Stock Ownership Plans in 1987. He was a founding
member of the World Travel and Tourism Council, a global organization of the
chief executive officers of companies engaged in all sectors of the travel and
tourism industry. He has been named travel executive of the year several times
by various travel media, including BUSINESS TRAVEL NEWS, TRAVEL WEEKLY, TRAVEL
AGENT TOUR AND TRAVEL NEWS-NORTH AMERICA. Mr. Vittoria serves on the Board of
Directors of Transmedia Europe, Transmedia Asia and various non-profit
associations.
MICHAEL J. MORIARTY became the President and Chief Operating Officer of the
Company in July 1997. Mr. Moriarty was the President and Chief Operating Officer
of Studio Plus Hotels, Inc., a national extended stay hotel company from July
1996 until its sale in 1997. From 1981 to July 1996, Mr. Moriarty held various
senior executive positions with the Marriott Company, a hotel company, including
Brand Vice President of Marriott International (1994-1996), Vice President of
Operations for the Residence Inn by Marriott Company (1989-1994), Vice President
Finance and Development of Residence Inn (1987-1989), Vice President of Finance
and Development for the Roy Rogers Restaurants Company, a subsidiary of the
Marriott Company, and Director of Finance and Business Analysis for Marriott
Hotels and Resorts.
72
<PAGE>
JILL M. VALES became Senior Vice President and Chief Financial Officer of
the Company in July 1997. From 1996 to 1997, Ms. Vales served as the Chief
Operating Officer of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A., a law firm.
From 1990 until 1996, Ms. Vales held various positions at Certified Vacations,
an affiliate of Alamo Rent-A-Car, including Senior Vice President and Chief
Financial Officer (1994-1996), Vice President of Finance and Operations
(1992-1994) and Senior Director of Finance and Operations and Controller
(1990-1992). From 1979 to 1990, Ms. Vales held various positions at KPMG Peat
Marwick. Ms. Vales is a certified public accountant.
MARYANN BASTNAGEL became the Senior Vice President and Chief Information
Officer of the Company in July 1997. From 1989 to 1997, Ms. Bastnagel held
various positions with Marriott International, Inc. in information services and
technology, including Vice President of Business Technology, where she was
responsible for defining systems and technology strategy for the Marriott
Lodging Group. From 1990 to 1994, Ms. Bastnagel was Vice President of
Information Systems and a member of the Executive Committee for Residence Inn by
Marriott. From 1985 to 1989, she was a Senior Manager with Price Waterhouse
Management Consulting Services on large scale information systems development
projects. From 1981 to 1985, Ms. Bastnagel was a Senior Consultant with Booz,
Allen & Hamilton, Inc.
SUZANNE B. BELL became the Senior Vice President, General Counsel and
Secretary of the Company in July 1997. From July 1996 to July 1997, Ms. Bell was
an attorney at Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. From
September 1991 to July 1996, she was an attorney at Morgan, Lewis & Bockius LLP.
Ms. Bell concentrated her law practice in the areas of mergers and acquisitions
and securities laws, representing both public and private companies.
MELVILLE W. ROBINSON became the Vice President, Corporate Development of
the Company in July 1997. From 1994 to July 1997, Mr. Robinson served as the
Chief Financial Officer of Cruises Only, one of the Founding Companies. From
1989 until 1993, Mr. Robinson was the President and Chief Financial Officer of
the Gale Group, a U.S. based consumer products manufacturing firm. From 1986 to
1989, Mr. Robinson was a Managing Director at PNC Merchant Banking Corp., where
he founded and managed the Growth Capital Group. From 1983 to 1986, Mr. Robinson
was the Chief Financial Officer of Drug Emporium Inc., a publicly-traded
discount drugstore chain.
JOHN C. DELANO became Vice President, Operations, of the Company in January
1998. Mr DeLano spent nearly twenty years in the auto rental industry, with the
past seven years being in Australia as Managing Director and National Operations
Manager for Avis Australia. At Avis Australia, he coordinated the marketing,
operations, human resources, information technology, sales, fleet, accounting
and field management functions. In 1992, while under Mr. DeLano's supervision,
Avis Australia was awarded the prestigious Australian Quality Award (similar to
the Malcolm Baldridge Award in the U.S.) and the 1996 Australian Customer
Service Award.
ROBERT G. FALCONE became a director of the Company in July 1997. Mr.
Falcone has served as the Chairman and Chief Executive Officer of Cruises Inc.
since its founding in 1982. Mr. Falcone is a member of the National Association
of Cruise Only Agencies ("NACOA"), the Airline Reporting Corporation ("ARC"),
the Travel Council of the World (Environmental Group), the American Society of
Travel Agents ("ASTA"), Cruise Lines International Association ("CLIA") and is
the co-founder of the Society of Elite Agents, a trade association of leading
cruise specialists ("SEA").
WAYNE HELLER became a director of the Company in July 1997. Mr. Heller has
served as the Chief Executive Officer of Cruises Only since its founding in 1985
and was previously employed with Norwegian Caribbean Cruise Lines from 1980 to
1984. Mr. Heller is a member of ASTA, NACOA and CLIA.
IMAD KHALIDI became a director of the Company in July 1997. Mr. Khalidi has
been President of Auto Europe since 1992. In 1990, he joined Auto Europe as
Executive Vice President of Marketing and Sales. From 1983 to 1990, Mr. Khalidi
served as an International Travel Trade Manager and an International Licensee
Manager with Europcar International S.A., an auto rental company in France. Mr.
Khalidi is a member of the Association of Retail Travel Agencies ("ARTA"), ASTA
and CLIA.
SUSAN PARKER became a director of the Company in July 1997. Ms. Parker has
served as the President of Travel 800 since its founding in 1989. From 1984 to
1989, Ms. Parker was President of Continental Travel, an incentive travel
company. Ms. Parker is a member of ASTA, CLIA and the International Airlines
Travel Agent Network ("IATAN").
73
<PAGE>
JOHN W. PRZYWARA became a director of the Company in July 1997. Mr.
Przywara has served as President of D-FW Tours since its founding in 1978. Mr.
Przywara is a member of the ARC, CLIA and IATAN.
ELAN J. BLUTINGER has been a director of the Company since October 1996.
Mr. Blutinger is a Managing Director of Alpine Consolidated LLC, a consolidator
of highly fragmented businesses. From 1987 to 1995, he was the Chief Executive
Officer of Shoppers Express, Inc., an electronic retailing service, which he
founded. Mr. Blutinger is currently the Vice Chairman of Shoppers Express, Inc.
From 1983 to 1986, Mr. Blutinger was the Chairman and Chief Executive Officer of
DSI, a wholesale distributor for the personal computer industry until its
acquisition in 1986 by Independent Distribution Incorporated.
D. FRASER BULLOCK has been a director of the Company since October 1996.
Mr. Bullock is a Managing Director of Alpine Consolidated LLC, and was most
recently the President and Chief Operating Officer of VISA Interactive, a
wholly-owned subsidiary of VISA International from its inception in 1994 to
1996. In 1993, Mr. Bullock became the President and Chief Operating Officer of
U.S. Order, Inc., a provider of remote electronic transaction processing, until
it was acquired by VISA International in 1994. From 1991 to 1992, Mr. Bullock
was the Senior Vice President of U.S. Order, Inc. From 1986 to 1991, he was the
Chief Financial Officer and Executive Vice President of World Corp., Inc., a
holding company with various operating subsidiaries including World Airways,
Inc. Mr. Bullock was a founding partner of Bain Capital, a Manager of Bain and
Company, and a founder of MediVision, Inc., a consolidation of eye surgery
centers.
TOMMASO ZANZOTTO became a director of the Company in July 1997. Mr.
Zanzotto is the President of Toscana Ville E Castelli, a real estate development
company which owns and operates residential and commercial properties in the
lodging and hotel industry. From 1994 to 1996, he was the Chairman and Chief
Executive Officer of Hilton International. From 1969 to 1993, Mr. Zanzotto held
various positions with American Express Travel Related Services including
President International, American Express Financial and Travel Services
(1990-1993); President, American Express Corporate Card Division (1987-1990);
President, American Express Travelers Cheques (Europe, Africa, Middle East). Mr.
Zanzotto is a member of the World Travel and Tourism Council, and a Governor of
the Transportation and Travel Committee of the World Economic Summit.
LEONARD A. POTTER served as a director of the Company from its formation
until May 1997. After the initial public offering in July 1997, he became an
Advisory Director to the Board. Mr. Potter is a co-founder and Managing Director
of Capstone Partners, LLC, a venture firm specializing in consolidation
transactions. Capstone Partners, LLC was a co-sponsor of Staffmark, Inc., a
consolidation of six staffing services companies in September 1996 with a
simultaneous initial public offering. Prior to forming Capstone Partners, LLC in
April 1996, Mr. Potter was an attorney at Morgan, Lewis & Bockius LLP for more
than five years practicing in the areas of mergers and acquisitions and
securities law. While at Morgan, Lewis & Bockius he represented a number of
public companies in connection with their creation and subsequent implementation
of consolidation strategies similar to the Company's, including U.S. Office
Products, F.Y.I. Incorporated and Cotelligent Group.
BOARD OF DIRECTORS
The Board of Directors of the Company consists of nine directors
divided into three classes with each class serving for a term of three years. At
each annual meeting of stockholders, directors will be elected by the holders of
the Common Stock to succeed those directors whose terms are expiring. Directors
whose terms expire in 1998 are: Elan J. Blutinger, D. Fraser Bullock and Tommaso
Zanzotto; directors whose terms expire in 1999 are: Imad Khalidi, John W.
Przywara and Joseph V. Vittoria; directors whose terms expire in 2000 are:
Robert G. Falcone, Wayne Heller and Susan Parker. The Board of Directors has
established an Audit Committee and a Compensation Committee, and may establish
other committees from time to time as the Board may determine.
The Advisory Director attends meetings of the Board of Directors,
consults with officers and directors of the Company and provides guidance (but
not direction) concerning management and operation of the Company's business.
The Advisory Director is not a director of the Company and accordingly will not
have a right to vote as a director.
The Audit Committee consists of three members, two of whom are
independent directors. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and the results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, reviews recommendations
regarding the Company's accounting methods and the adequacy of its systems of
internal accounting controls, and reviews and approves financial press releases
and reports.
74
<PAGE>
The Compensation Committee consists of two members, each of whom is a
"disinterested director," as defined in the rules promulgated by the Securities
and Exchange Commission pursuant to the Exchange Act, and an "outside director"
within the meaning of Section 162(m) of the Internal Revenue Code. The
Compensation Committee determines compensation for the Company's executive
officers, administers the Company's Plan and makes recommendations to the Board
of Directors with respect to the Company's compensation policies.
The Board of Directors does not have any other committees at this time,
although additional committees may be formed in the future. All officers serve
at the discretion of the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE`
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and owners of more than 10% of the
Company's common stock to file reports of ownership on Form 3 and changes of
ownership on Form 4 or Form 5 with the Securities and Exchange Commission and
The Nasdaq Stock Market. Such persons are also required to furnish the Company
with a copy of all such forms filed.
Based solely on its review of copies of such reports or written
representations from or on behalf of certain reporting persons, the Company
believes that, during the year ended December 31, 1997, all Section 16(a) filing
requirements applicable to such persons were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid to the
Company's Chief Executive Officer and five of the Company's other most highly
compensated executive officers whose total annualized salary and bonus was
$100,000 or more (the Chief Executive Officer and such other executive officers
are sometimes referred to herein as the "Named Executive Officers") with respect
to the year ended December 31, 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
----------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------------- ----------------
OTHER ANNUAL SECURITIES
COMPEN- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR (1) SALARY (2) BONUS SATION OPTIONS COMPENSATION
($) ($) ($) (#) ($)
- ----------------------------- ----------- ------------ ------------ --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph V. Vittoria 1997 84,615 86,000 -- 100,000 --
CEO
Michael J. Moriarty 1997 63,462 51,500 -- 75,000 6,104 (3)
President/COO
Jill M. Vales 1997 63,462 32,000 -- 50,000 24,000 (4)
Sr. VP/CFO
Maryann Bastnagel Sr.VP/CIO 1997 63,462 48,500 -- 110,000 8,172 (3)
Imad Khalidi (5) 1997 293,231 295,000 -- -- --
VP European Operations
Suzanne B. Bell 1997 52,885 27,000 -- 25,000 --
Sr.VP/General Counsel
</TABLE>
- -------------------
(1) With the exception of Mr. Khalidi, each of the Named Executive Officers
commenced employment with the Company upon consummation of the initial
public offering (July 28, 1997). Mr. Khalidi served as President of
Auto Europe prior to the initial public offering. Commencing on July 28,
1997, Mr. Khalidi served as CEO of Auto Europe and as a director and Vice
President, European Operations, of the Company.
(2) Annual salaries are as follows: $200,000 for Mr.Vittoria; $150,000 for
each of Mr. Moriarty, Ms. Vales and Ms. Bastnagel; and $125,000 for Ms.
Bell. Mr. Khalidi's 1997 salary and bonus include amounts paid by
Auto Europe prior to the initial public offering. After the offering, Mr.
Khalidi's annual salary is $140,000.
(3) Consists of relocation expenses paid during 1997.
(4) Consists of consulting fees paid prior to the consummation of the Company's
initial public offering.
75
<PAGE>
(5) Effective March 1998, Mr. Khalidi no longer serves as Vice President,
European Operations, but continues in his capacities as CEO of Auto Europe
and as a director of the Company.
The following table sets forth the stock options granted to the Named
Executive Officers during the year ended December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTION GRANTS AND EXERCISES
INDIVIDUAL GRANTS GRANT DATE
VALUE(1)
-------------------------------------------------------------- -------------------
NUMBER OF
SECURITIES %OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR GRANT DATE
GRANTED EMPLOYEES IN BASE PRICE PRESENT VALUE
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE ($)
---------------------- -------------- -------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Joseph V.Vittoria 100,000 10.4 14.00 7/28/07 821,000
Michael J. Moriarty 75,000 7.8 14.00 7/28/07 615,000
Jill M. Vales 50,000 5.2 14.00 7/28/07 410,000
Maryann Bastnagel 110,000 11.4 14.00 7/28/07 903,000
Imad Khalidi -- -- -- -- --
Suzanne B. Bell 25,000 2.6 14.00 7/28/07 205,000
</TABLE>
---------------
(1) Calculated using the Black-Scholes valuation method.
None of the Named Executive Officers exercised any stock options during
1997.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its
subsidiaries do not receive additional compensation for serving as directors.
Each director who is not an employee of the Company or one of its subsidiaries
receives a fee of $2,000 for attendance at each Board of Directors' meeting and
$1,000 for each committee meeting (unless held on the same day as a Board of
Directors' meeting). Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof
incurred in their capacity as directors.
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan") , which was adopted by the Board of Directors and approved by the
Company's stockholders in 1997, provides for: (i) the automatic grant to each
non-employee director and Advisory Director (a "Participant") serving at the
commencement of the initial public offering of an option to purchase 10,000
shares; and thereafter (ii) the automatic grant to each Participant of an option
to purchase 10,000 shares upon such person's initial election as a director or
appointment as an Advisory Director. In addition, the Directors' Plan provides
for an automatic annual grant to each Participant of an option to purchase 5,000
shares at each annual meeting of stockholders following the Offering; provided,
however, that if the first annual meeting of stockholders following a person's
initial election as a non-employee director or appointment by the Board as an
Advisory Director is within three months of the date of such election or
appointment, such person will not be granted an option to purchase 5,000 shares
of Common Stock at such annual meeting. These options will have an exercise
price per share equal to the fair market value of a share at the date of grant.
Options granted under the Directors' Plan will expire at the earlier of 10 years
from the date of grant or one year after termination of service as a director or
advisor, and options will be immediately exercisable. In addition, the
Directors' Plan permits Participants to elect to receive, in lieu of cash
directors' fees, shares or credits representing "deferred shares" that may be
settled at future dates, as elected by the Participants. The number of shares or
deferred shares received will be equal to the number of shares which, at the
date the fees would otherwise be payable, will have an aggregate fair market
value equal to the amount of such fees. The Company has reserved 100,000 shares
of Common Stock for use in connection with the Directors' Plan. Upon
consummation of the initial public offering, Messrs. Blutinger, Bullock,
Zanzotto and Potter each received options to purchase 10,000 shares.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was incorporated in April 1996, however, the Company did
not conduct operations or generate revenue and did not pay any of its executive
officers compensation as employees until July 1997. During 1997, its most
76
<PAGE>
highly compensated executive officers were Messrs. Vittoria, Moriarty and
Khalidi and Ms. Bastnagel, Ms. Vales and Ms. Bell. The Company granted Messrs.
Vittoria and Moriarty and Ms. Bastnagel, Ms. Vales and Ms. Bell options to
purchase 100,000, 75,000, 110,000, 50,000 and 25,000 shares of Common Stock,
respectively, at $14.00 per share, the initial public offering price. These
options will vest in equal installments on each of the first four anniversaries
of the initial offering.
Mr. Vittoria has entered into an employment agreement with the Company
providing for an annual base salary of $200,000. Mr. Moriarty has entered into
an employment agreement with the Company providing for an annual base salary of
$150,000 plus in the first year a guaranteed minimum bonus of $75,000. Ms.
Vales, Mr. Khalidi, Ms. Bastnagel and Ms. Bell each have entered into an
employment agreement with the Company providing for an annual base salary of
$150,000, $140,000, $150,000 and $125,000, respectively. Each of these
agreements is for a term of three years. In addition, certain executive officers
of the Operating Companies, including Messrs. Falcone, Heller and Przywara and
Ms. Parker, members of the Board of Directors, have entered into employment
agreements. Effective July 28, 1997, Mr. Falcone's and Ms. Parker's employment
agreements are for a term of five years; Mr. Heller's and Mr. Przywara's
employment agreements are for a term of three years (in each case, the "Initial
Term"). Unless terminated or not renewed by the Company or the employee, the
term will continue thereafter on a year-to-year basis on the same terms and
conditions existing at the time of renewal. Each employment agreement contains a
covenant not to compete (the "Covenant") with the Company for a period of two
years immediately following termination of employment or, in the case of a
termination by the Company without cause in the absence of a change in control,
for a period of one year following termination of employment. Under this
Covenant, the executive officer is prohibited from: (i) engaging in any travel
service business in direct competition with the Company within defined
geographic areas in which the Company or its subsidiaries does business; (ii)
enticing a managerial employee of the Company away from the Company; (iii)
calling upon any person or entity which is, or has been, within one year prior
to the date of termination, a customer of the Company; or (iv) calling upon a
prospective acquisition candidate which the employee knew was approached or
analyzed by the Company, for the purpose of acquiring the entity. The Covenant
may be enforced by injunctions or restraining orders and shall be construed in
accordance with the changing activities, business and location of the Company.
Each of these employment agreements provides that, in the event of a
termination of employment by the Company without cause during the Initial Term
the employee will be entitled to receive from the Company an amount equal to his
or her then current salary for the remainder of the Initial Term or for one
year, whichever is greater. In the event of a termination of employment without
cause after the Initial Term of the employment agreement, the employee will be
entitled to receive an amount equal to his or her then current salary for one
year. In either case, payment is due in one lump sum on the effective date of
termination. In the event of a change in control of the Company (as defined in
the agreement) during the Initial Term, if the employee is not given at least
five days' notice of such change in control and the successor's intent to be
bound by such employment agreement, the employee may elect to terminate his or
her employment and receive in one lump sum three times the amount he or she
would receive pursuant to a termination without cause during the Initial Term.
The employment agreements of Messrs. Falcone, Heller, Khalidi and Przywara and
Ms. Parker also state, that in the event of a termination without cause by the
Company or a change in control, the employee may elect to waive the right to
receive severance compensation and, in such event, the noncompetition provisions
of the employment agreement will not apply. In the event the employee is given
at least five days' notice of such change in control, the employee may elect to
terminate his or her employment agreement and receive in one lump sum two times
the amount he or she would receive pursuant to a termination without cause
during the Initial Term. In such an event, the noncompetition provisions of the
employment agreement would apply for two years from the effective date of
termination.
Each agreement with respect to the acquisition of an Operating Company
also contains a similar covenant prohibiting sellers from competing with the
Company for a periods following the consummation of the respective acquisition.
1997 LONG-TERM INCENTIVE PLAN
In May 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide directors, officers, employees, consultants and
independent contractors with additional incentives by increasing their ownership
interests in the Company. Individual awards under the Plan may take the form of
one or more of: (i) either incentive stock options ("ISOs") or non-qualified
stock options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii)
restricted or deferred stock; (iv) dividend equivalents; and (v) other awards
not otherwise provided for, the value of which is based in whole or in part upon
the value of the Common Stock. The Compensation Committee of the Board of
Directors administers the Plan and generally selects the individuals who will
receive awards and the terms and conditions of those awards.
77
<PAGE>
The Company initially reserved 900,000 shares of Common Stock for use
in connection with the Plan. Beginning with the initial public offering and
continuing each fiscal quarter thereafter, the number of shares available for
use in connection with the Plan is the greater of 900,000 shares or 12% of the
aggregate number of shares of Common Stock outstanding on the last day of the
preceding calendar quarter. As of January 1, 1998, 1,219,969 shares are reserved
for use in connection with the Plan, of which 922,250 shares have been granted.
Shares of Common Stock which are attributable to awards which have expired,
terminated or been canceled or forfeited are available for issuance or use in
connection with future awards.
The Plan will remain in effect until terminated by the Board of
Directors. The Plan may be amended by the Board of Directors without the consent
of the stockholders of the Company, except that any amendment, although
effective when made, will be subject to stockholder approval if required by any
Federal or state law or regulation or by the rules of any stock exchange or
automated quotation system on which the Common Stock may then be listed or
quoted.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with each of
the Company's directors and executive officers. The indemnification agreements
require, among other things, that the Company indemnify its directors and
executive officers to the fullest extent permitted by law, and advance to the
directors and executive officers all related expenses, subject to reimbursement
if it is subsequently determined that indemnification is not permitted. The
Company must also indemnify and advance all expenses incurred by directors and
executive officers seeking to enforce their rights under the Company's
directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Charter and Bylaws, it provides greater assurance
to directors and executive officers that indemnification will be available,
because, as a contract, it cannot be modified unilaterally in the future by the
Board of Directors or by the stockholders to eliminate the rights it provides.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Tommaso Zanzotto and Elan
Blutinger. Mr. Zanzotto has never been an officer or employee of the Company or
its subsidiaries. Mr. Blutinger was an officer of the Company prior to the
Company's initial public offering. The Company was initially capitalized by
Alpine Consolidated, LLC, a consolidator of highly fragmented businesses, of
which Elan Blutinger is a Managing Director, and Capstone Partners, LLC. As a
result of a 5,444.45 for one stock split effective on May 14, 1997, the 300
shares of Common Stock initially issued by the Company to its founders,
including Alpine Consolidated, LLC, totaled 1,633,335 shares on the consummation
of the initial public offering. In addition, prior to consummation of the
initial public offering, TSGI Funding, LLC ("TSGI"), a Delaware limited
liability company, extended loans to the Company from time to time in amounts
equal to the legal, accounting and other transactional costs, expenses and
disbursements incurred by the Company in connection with the acquisitions of the
Founding Companies and the initial public offering. The member managers of TSGI
were Alpine Consolidated, LLC and Capstone Partners, LLC. All amounts loaned by
TSGI were repaid, without interest, by the Company on July 28, 1997, upon
consummation of the initial public offering. Such loans aggregated $950,000.
78
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee has the authority to determine the
compensation of the Company's executive officers and the executive officers of
the Company's subsidiaries, and to administer the Company's Plan. The
Compensation Committee was constituted on August 11, 1997, and currently
consists of two outside directors who are not officers or employees of the
Company. In general, the goals of the Compensation Committee are to enable the
Company to (1) recruit, develop and retain highly motivated and qualified
managers; (2) maximize financial performance, balancing appropriately the short
and long term goals of the Company; and (3) align the interests of Company
management with those of its stockholders through the use of stock options and
incentives tied to increases in stockholder value.
During 1997, the executive officers were compensated pursuant to
employment agreements entered into in connection with the Company's initial
public offering and prior to the appointment of the Compensation Committee.
Accordingly, the Compensation Committee did not determine the basis for the
compensation paid.
In addition to compensation through base salaries, the Compensation
Committee has the authority to issue performance-based bonuses. Bonus payments
made in connection with performance in 1997 were made in cash. In the future,
such bonus payments may, in the discretion of the Compensation Committee, be
made in cash or stock options. The Compensation Committee is responsible for the
selection of the employees to whom options will be granted, the number of shares
subject to each such option and the terms and conditions of such options,
consistent with the Plan. The Compensation Committee seeks to use the Plan as a
means to motivate the Company's management and key personnel. In addition to
year-end performance bonuses, determinations of option grants may be made during
the year, either in connection with new acquisitions, additional equity
offerings by the Company, or the addition of new key personnel, as appropriate
in furtherance of the Company's objectives. Such objectives may include
recognition of past qualitative performance and incentives to continue the
growth and profits of the Company's business. To facilitate the Compensation
Committee's achievement of its goals, the committee has engaged an outside
consulting firm to evaluate the compensation structure and make recommendations
to the committee.
Section 162(m) of the Internal Revenue Code generally limits the tax
deduction to public companies for compensation over $1 million paid to a
corporation's chief executive officer and the four next most highly compensated
executive officers, except to the extent that any such excess compensation is
paid pursuant to a performance-based or stock option plan that has been approved
by stockholders. The Compensation Committee will study the potential impact of
Section 162(m) and will, to the extent it deems appropriate, take reasonable
steps to minimize or eliminate any potential impact of Section 162(m) on the
Company, while at the same time preserving the objective of providing
appropriate incentive awards. The Compensation Committee believes that there are
no current executive compensation programs or outstanding awards that would be
impacted by Section 162(m).
COMPENSATION COMMITTEE
Elan J. Blutinger
Tommaso Zanzotto
79
<PAGE>
PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
stockholder return for the period from July 22, 1997 (the date on which the
Company's common stock commenced trading on the Nasdaq Stock Market) to December
31, 1997 (assuming reinvestment of dividends, if any) among the Company, the
Standard & Poor 500 Index and the Russell 2000 Index. The Company does not
believe that it can reasonably identify a peer group or published industry or
line-of-business index for comparison to the Company. Therefore, the Russell
2000 Index has been used by the Company for comparison purposes because it
represents growth companies with market capitalizations similar to the Company.
<TABLE>
<CAPTION>
TOTAL RETURN - DATA SUMMARY
CUMULATIVE TOTAL RETURN
----------------------------------------------------
7/24/97 7/97 8/97 9/97 10/97 11/97 12/97
<S> <C> <C> <C> <C> <C> <C> <C>
TRAVEL SERVICES INTERNATIONAL, INC. 100 146 174 148 160 154 170
STANDARD & POOR'S 500 100 108 102 107 104 109 111
RUSSELL 2000 100 105 107 115 110 109 111
</TABLE>
80
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of March 25, 1998 by:
(i) each person known to beneficially own more than 5% of the outstanding shares
of Common Stock; (ii) each of the Company's directors; (iii) each Named
Executive Officer; and (iv) all executive officers and directors as a group. All
persons listed have sole voting and investment power with respect to their
shares, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE
OF BENEFICIAL OWNER (1) SHARES OWNED
----------------------- ------ -----
<S> <C> <C>
Joseph V. Vittoria .................................... 345,000 3.3%
Michael J. Moriarty.................................... 45,833 *
Jill M. Vales.......................................... 42,833 *
Maryann Bastnagel...................................... 1,000 *
Suzanne B. Bell (2).................................... 29,500 *
Robert G. Falcone (3).................................. 300,000 2.9%
Wayne Heller (4)....................................... 908,334 8.9%
Imad Khalidi........................................... 500,000 4.8%
Susan Parker(5)........................................ 902,778 8.7%
John W. Przywara....................................... 194,445 1.9%
Elan J. Blutinger (6)(7)............................... 323,693 3.0%
D. Fraser Bullock (6).................................. 241,328 2.2%
Tommaso Zanzotto (6)................................... 10,242 *
Alex Cecil (8)......................................... 1,083,334 10.5%
All Directors and Executive Officers
as a Group (15 persons) (9)............................ 3,849,986 37.1%
</TABLE>
- ------------------
* Less than 1.0%
(1) Unless indicated otherwise, the address of the beneficial owners is, c/o
Travel Services International, Inc., 220 Congress Park Drive, Delray Beach,
Florida 33445.
(2) Includes 5,000 shares owned by Ms. Bell's spouse.
(3) Includes 100,000 shares owned by Judith A. Falcone, his spouse, and 50,000
shares owned by a trust for the benefit of Mr. Falcone's'children. Mr.
Falcone is a trustee of such trust.
(4) These shares are held of record by J&W Heller Corp., a corporation of
which Mr. Heller is a 50% stockholder. The remaining 50% of the
ownership of J&W Heller Corp. is held by Judy Heller, Mr. Heller's
spouse.
(5) These shares are held of record by 800 Ideas, Inc., a corporation of
which Ms. Parker is the sole stockholder.
(6) Includes 10,000 shares which may be acquired upon the exercise of options.
(7) Excludes 39,000 shares held by trusts for the benefit of Mr. Blutinger's
minor children. Mr. Blutinger disclaims ownership of such shares.
(8) These shares are held of record by Greystones, Inc., a corporation of which
Mr. Cecil is the sole voting stockholder. Mr. Cecil's address is c/o Auto
Europe, 39 Commercial Street, Portland, ME 04112.
(9) Includes 30,000 shares that may be acquired upon the exercise of options.
81
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION, INITIAL PUBLIC OFFERING AND FOUNDING COMPANY ACQUISITIONS
The Company was formed in April 1996. The Company was initially
capitalized by Alpine Consolidated, LLC, a consolidator of highly fragmented
businesses, of which Elan Blutinger and D. Fraser Bullock, Directors of the
Company, are Managing Directors, and Capstone Partners, LLC, a venture firm
specializing in consolidation transactions, of which Leonard Potter, who is an
Advisory Director to the Board, is a Managing Director. As a result of a
5,444.45 for one stock split effective on May 14, 1997, the 300 shares of Common
Stock initially issued by the Company to its founders totaled 1,633,335 shares
on the consummation of the initial public offering.
Prior to consummation of the initial public offering, TSGI Funding, LLC
("TSGI"), a Delaware limited liability company, extended loans to Travel
Services International, Inc. from time to time an amount equal to the legal,
accounting and other transactional costs, expenses and disbursements incurred by
the Company in connection with the acquisitions of the Founding Companies and
the initial public offering. The member managers of TSGI were Alpine
Consolidated, LLC and Capstone Partners, LLC. All amounts loaned by TSGI to
Travel Services International, Inc. were repaid, without interest, by the
Company on July 28, 1997, upon consummation of the initial public offering. Such
loans aggregated $950,000.
The aggregate consideration paid by the Company in the acquisitions of
the Founding Companies consisted of approximately $29.1 million in cash and
3,422,225 shares of Common Stock. In addition, certain non-operating assets with
a net book value of approximately $2.2 million were excluded from the
Combinations and retained by certain stockholders of the Founding Companies. The
following table sets forth the consideration paid to each of the Founding
Companies.
COMPANY CASH SHARES
------- ---- ------
(IN THOUSANDS)
Auto Europe................... $5,000 1,083,334
Cruises Only.................. 9,211 908,334
Travel 800.................... 9,241 902,778
Cruises Inc................... 3,431 333,334
D-FW Tours.................... 2,215 194,445
------- ---------
Total...................... $28,098 3,422,225
======= =========
The consideration paid for the Founding Companies was determined
through arm's-length negotiations between the Company and representatives of
each Founding Company. The cash portion includes working capital adjustments,
reimbursements of certain legal and accounting fees incurred by stockholders and
estimated reimbursements to certain stockholders for certain taxes that will be
incurred by them in connection with the Combinations. The factors considered by
the parties in determining the consideration paid included, among others, the
historical operating results, the net worth, the levels and type of indebtedness
and the future prospects of the Founding Companies. Each Founding Company was
represented by independent counsel in the negotiation of the terms and
conditions of the Combinations.
Pursuant to the agreements entered into in connection with the
acquisitions of the Founding Companies, the stockholders of the Founding
Companies agreed not to compete with the Company for three years, commencing on
the date of consummation of the Offering.
Prior to the initial public offering, substantially all the
indebtedness of the Founding Companies was personally guaranteed by their
respective stockholders or by entities controlled by such stockholders. In
connection with the Combinations, the Company assumed all remaining payment
obligations of such indebtedness. Indebtedness assumed as of July 28, 1997
includes the following: (i) Auto Europe's mortgage note payable to Key Bank of
$1,181,000, bearing interest at prime plus 1%, payable in monthly principal
installments of $7,000, maturing in August 2002; (ii) Auto Europe's mortgage
note payable to U.S. Small Business Administration of $735,000, bearing interest
at 7.25%, payable in monthly principal and interest payments of $6,000, maturing
in October 2016; (iii) Cruises Only mortgage payable of $1,947,000 to Barnett
Bank, bearing interest at 7.8% with monthly payments of $17,000 through October
2000 and thereafter bearing interest at a rate equal to the five year treasury
yield plus 1.9% or prime, as selected by Cruises Only through maturity in
October 2005; (iv) Cruises Only note payable to Barnett
82
<PAGE>
Bank of $603,000, bearing interest at 8.5% with monthly payments of $12,000,
maturing in 2002; and (v) Cruises Only note payable to Barnett Bank of $842,000,
bearing interest at prime minus .25% with monthly payments of $20,000, maturing
in 2001.
Subsequently to the Combinations, the Company repaid the mortgage to
the Small Business Administration as required upon the change in ownership, and
Cruises Only's obligations to Barnett Bank were modified to include a fixed
interest rate of 7.2% and to pledge as collateral Company funds totaling $3
million.
In connection with the Combinations, as a consideration for their
interests in the Founding Companies, certain directors and holders of more than
5% of the outstanding shares of the Company, together with their spouses or
trusts for the benefit of their immediate family members, received cash and
shares of Common Stock of the Company as follows:
CASH SHARES
---- ------
Alex Cecil................... $5,000,000 1,083,334
Robert G. Falcone............ $3,431,000 300,000
Wayne Heller................. $9,211,000 908,334
Susan Parker................. $9,241,000 902,778
John Pryzwara................ $2,215,000 194,445
OTHER TRANSACTIONS
Since 1990, Cruises Inc. has leased office space from Pioneer Park I
Company ("Pioneer") pursuant to a lease dated August 9, 1990, as subsequently
amended and supplemented. One of the principals of Pioneer is Michael Falcone,
the brother of Robert Falcone. The rent paid by Cruises Inc. to Pioneer during
1997 was $201,000. The lease terminates on February 28, 2006.
Prior to the initial public offering, 800 Ideas, Inc., the predecessor
to Travel 800 and a company controlled by Susan Parker, a director and greater
than 5% stockholder of the Company, entered into a Custom Network Service
Arrangement ("CNSA") with Sprint Communications Company LP for long distance
telephone services. This contract was not transferred as part of the
Combinations, but was retained by 800 Ideas, Inc. Travel 800 continues to
utilize long distance telephone services under the CNSA and pays for its portion
of usage under the CNSA.
Jacqueline Duffort Cecil, the wife of Alex Cecil, a holder of more than
5% of the outstanding shares of the Company and the Chief Executive Officer of
Auto Europe prior to July 1997, loaned $300,000 to Auto Europe on December 31,
1995 and 1996 at an interest rate of prime plus 1%. Auto Europe repaid this in
February 1997.
During 1995, Auto Europe advanced $2.1 million to Alex Cecil who used
the advance to purchase an island off the coast of Maine. Subsequently he
contributed this island to Auto Europe in return for the cancellation of his
obligations on the advance. This island was not included in the assets of Auto
Europe acquired by the Company in July 1997.
Auto Europe has purchased computer equipment from The Seris II Group,
which is owned by Imad Khalidi, a director of the Company and Chief Executive
Officer of Auto Europe, and certain other employees of Auto Europe. Auto Europe
purchases the equipment at cost to The Seris II Group. Auto Europe purchased
$134,000 worth of computer supplies and equipment from The Seris II Group during
1997.
Prior to the initial public offering, Auto Europe extended a loan to
Imad Khalidi, a director of the Company and Chief Executive Officer of
Auto Europe. The indebtedness is evidenced by a note, the principal amount of
which is $326,000. The note bears interest at 6% and is payable on September 30,
1998.
COMPANY POLICY
Following the initial public offering in July 1997, any transactions
with officers, directors and affiliates will be approved by a majority of the
Board of Directors, including a majority of the disinterested members of the
Board of Directors.
83
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
Reference is made to the index set forth on page F-1 of this Report.
2. FINANCIAL STATEMENT SCHEDULES:
Reference is made to the index set forth on page F-1 of this Report.
3. EXHIBITS:
EXHIBIT DESCRIPTION OF EXHIBIT
NO.
2.1 Agreement and Plan of Organization, dated as of May 9, 1997, among
Travel Services International, Inc., Auto-Europe, Inc. (Maine), Imad
Khalidi, Alex Cecil and Wilfred Diller, as trustee for Thurston Cecil
and Lila Cecil. (1)
2.2 Agreement and Plan of Organization, dated as of May 9, 1997, among
Travel Services International, Inc., Cruises Only, Inc., Wayne Heller
and Judy Heller. (1)
2.3 Agreement and Plan of Organization, dated as of May 9, 1997, among
Travel Services International, Inc., 800-Ideas, Inc. and Susan Parker.
(1)
2.4 Agreement and Plan of Organization, dated as of May 9, 1997, among
Travel Services International, Inc., Cruises, Inc., Robert G. Falcone,
Judith A. Falcone and Pamela C. Cole. (1)
2.5 AmendednandnRestatedfCertificateoof Incorporationa(2), 1997, among
Travel Services International, Inc., D-FW Tours, Inc., D-FW Travel
Arrangements, Inc., John W. Przywara and Sharon S. Przywara. (1)
2.6 First Amendment to Agreement and Plan of Organization among Travel
Services International, Inc., Auto-Europe, Inc. (Maine), Imad Khalidi
Alex Cecil and Wilfred Diller, as trustee for Thurston Cecil and Lila
Cecil. (2)
2.7 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among Travel Services International, Inc., Cruises, Inc.,
Robert G. Falcone, Judith A. Falcone, and Pamela C. Cole. (2)
2.8 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among Travel Services International, Inc., Cruises Only,
Inc., Wayne Heller and Judy Heller. (2)
2.9 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among Travel Services International, Inc., D-FW Travel
Arrangements, Inc., John W. Przywara and Sharon Scott Przywara. (2)
2.10 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among Travel Services International, Inc., 800-Ideas, Inc.
and Susan Parker. (2)
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws (1)
4.1 Specimen Common Stock Certificate (2)
4.2 Form of Restriction and Registration Rights Agreement, dated as of July
28, 1997, between Travel Services International, Inc. and the each of
the persons listed on the schedule thereto. (4)
10.1 Amended and Restated Employment Agreement, dated as of July 22, 1997,
between Travel Services International, Inc. and Joseph V. Vittoria. (4)
- -- Amended and Restated Employment Agreement, dated as of May 12, 1997,
between Travel Services, International, Inc. and Jill M. Vales. (4)
- -- Amended and Restated Employment Agreement, dated as of June 6, 1997,
between Travel Services International, Inc. and Michael J. Moriarty.
(4)
- -- Employment Agreement, dated July 22, 1997, between Travel Services
International, Inc. and Mel Robinson. (4)
84
<PAGE>
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Auto Europe, LLC and Imad Khalidi. (4)
- -- Employment Agreement, dated July 18, 1997, among Travel Services
International, Inc., Auto Europe, LLC and Alex Cecil. (4)
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Cruises, Inc. and Robert Falcone. (4)
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Cruises, Inc. and Judith Falcone. (4)
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Cruises, Inc. and Holley Christen. (4)
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Cruises Only, LLC and Wayne Heller. (4)
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Cruises Only, LLC and Judy Heller. (4)
- -- Employment Agreement, dated July 22, 1997, among Travel Services
International, Inc., Travel 800, LLC and Susan Parker (4)
10.2 Form of Indemnification Agreement, dated July 28, 1997, between Travel
Services International, Inc. and each of the persons set forth on the
schedule thereto. (4)
10.3 1997 Long Term Incentive Plan (3)
10.4 Non-Employee Directors' Stock Plan (3)
10.6 Employment Agreement, dated July 25, 1997, between Travel Services,
International, Inc. and Suzanne B. Bell. (4)
10.7 Employment Agreement, dated as of July 25, 1997, between Travel
Services International, Inc. and Maryann Bastnagel. (4)
10.8 Credit Agreement, dated as of October 15, 1997, by and between Travel
Services International, Inc. and NationsBank, N.A. (4)
10.9 Stock Purchase Agreement, dated as of October 28, 1997, among Travel
Services International, Inc., CruiseOne, Inc., Anthony J. Persico and
Charlotte Luna, as amended. (5)
10.10 Stock Purchase Agreement, dated as of October 28, 1997, among Travel
Services International, Inc., Cruise World, Inc., and the sellers named
therein, as amended. (5)
10.11 Stock Purchase Agreement, dated as of October 28, 1996, among Travel
Services International, Inc., Ship `N' Shore Cruises, Inc., Cruise
Time, Inc., SNS Coachline, Inc., Cruise Mart, Inc., SNS Travel
Marketing, Inc. and Natalee Stutzman, as amended. (5)
10.12 Asset Purchase Agreement, dated as of February 9, 1998, among Travel
Services International, Inc., Gold Coast Travel Agency Corporation,
Inc. and Rhea Sherota. (6)
10.13 Employment Agreement, dated as of January 19, 1998, between Travel
Services International, Inc. and John C. De Lano.
11 Schedule of Computations of Earnings Per Share
21 Subsidiaries of the registrant
27 Financial Data Schedule
- --------------------------
(1) Previously filed as the same Exhibit number on May 14, 1997, under a
Registration Statement on Form S-1 (file no. 333-27125).
85
<PAGE>
(2) Previously filed as the same Exhibit number on July 1, 1997 under a
Registration Statement on Form S-1 (file no. 333-27125).
(3) Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(4) Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended September 30, 1997.
(5) Previously filed as an exhibit to the Company's Form 8-K dated November
19, 1997.
(6) Previously filed as an exhibit to the Company's Form 8-K dated February 9,
1998.
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the year
ended December 31, 1997:
Report on Form 8-K, dated November 19, 1997
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Delray Beach, State of Florida, on the 30th day of March, 1998.
TRAVEL SERVICES INTERNATIONAL, INC.
By: /s/ Joseph V. Vittoria
--------------------------------
Joseph V. Vittoria
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph V. Vittoria
----------------------
Joseph V. Vittoria Chairman of the Board, Chief Executive Officer, Director March 30, 1998
(Principal Executive Officer)
/s/ Jill M. Vales
----------------------
Jill M. Vales Senior Vice President, Chief Financial Officer March 30, 1998
(Principal Financial Officer and Principal Accounting Officer)
/s/ Robert G. Falcone
----------------------
Robert G. Falcone Director March 30, 1998
/s/ Wayne Heller
----------------------
Wayne Heller Director March 30, 1998
/s/ Imad Khalidi
----------------------
Imad Khalidi Director March 30, 1998
----------------------
Susan Parker Director March , 1998
/s/ John Przywara
----------------------
John Przywara Director March 30, 1998
/s/ Elan Blutinger
----------------------
Elan Blutinger Director March 30, 1998
/s/ Fraser Bullock
----------------------
Fraser Bullock Director March 30, 1998
/s/ Tommaso Zanzotto
----------------------
Tommaso Zanzotto Director March 30, 1998
</TABLE>
87
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10.13 Employment Agreement, dated as of January 19, 1998, between Travel
Services International, Inc. and John C. De Lano.
11 Schedule of Computations of Earnings Per Share
21 Subsidiaries of the registrant
27 Financial Data Schedule
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), by and between Travel
Services International, Inc., a Delaware corporation ("TSI"), and John C. DeLano
("Employee"), is hereby entered into as of the 19th day of January, 1998 (the
"Effective Date").
R E C I T A L S
A. As of the date of this Agreement, TSI is engaged primarily in the business of
providing travel services.
B. Employee is employed hereunder by TSI in a confidential relationship wherein
Employee, in the course of Employee's employment with TSI, has and will continue
to become familiar with and aware of information as to TSI's customers, specific
manner of doing business, including the processes, techniques and trade secrets
utilized by TSI, and future plans with respect thereto, all of which has been
and will be established and maintained at great expense to TSI; ther information
is a trade secret and constitutes the valuable goodwill of TSI.
A G R E E M E N T S
In consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, the parties hereto
hereby agree as follows:
1. EMPLOYMENT AND DUTIES.
(a) TSI hereby employs Employee as Vice President, Operations of TSI.
As such, Employee shall have responsibilities, duties and authority reasonably
accorded to and expected of a Vice President, Operations, of TSI and will report
directly to the President of TSI. Employee hereby accepts this employment upon
the terms and conditions herein contained and, subject to paragraph 1(c) hereof,
agrees to devote Employee's full business time, attention and efforts to promote
and further the business of TSI.
(b) Employee shall faithfully adhere to, execute and fulfill all
policies established by the Board of Directors of TSI (the "Board").
(c) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require Employee's services in the operation or affairs of the
companies or enterprises in which such investments are made nor violate the
terms of paragraph 4 hereof.
<PAGE>
2. COMPENSATION.
For all services rendered by Employee, TSI shall compensate Employee as
follows:
(a) Base Salary. The base salary payable to Employee shall be $120,000
per year, payable on a regular basis in accordance with TSI's standard payroll
procedures but not less than monthly. On at least an annual basis, the Board
will review Employee's performance and may make increases to such base salary
if, in its discretion, any such increase is warranted. Such recommended increase
would, in all likelihood, require approval by the Board or a duly constituted
committee thereof. In no event shall Employee's base salary be reduced.
(b) Signing Bonus. Upon commencement of employment hereunder, employee
shall be entitled to a signing bonus of $30,000. Such signing bonus may be used,
in Employee's discretion, for relocation and moving expenses associated with the
commencement of employment. Additional relocation expenses, if any, shall not be
reimbursed by TSI.
(c) Incentive Bonus Plan. For 1998 and subsequent years, TSI shall
develop, as soon as practicable after the Effective Date, a written Incentive
Bonus Plan setting forth the criteria and performance standards under which
Employee and other officers and key employees will be eligible to receive
year-end bonus awards. TSI contemplates that the maximum bonus for which
Employee may be eligible will be 50% of Employee's base salary.
(d) Executive Perquisites, Benefits, and Other Compensation. Employee
shall be entitled to receive additional benefits and compensation from TSI in
such form and to such extent as specified below:
(i) Payment of all premiums for coverage for Employee and
Employee's dependent family members under health, hospitalization,
disability, dental, life and other insurance plans that TSI may have in
effect from time to time. Reimbursement for COBRA payments for coverage
for Employee and Employee's dependent family members in the event that
TSI is unable to provide insurance coverage at the Effective Date.
(ii) Reimbursement for all business travel and other
out-of-pocket expenses reasonably incurred by Employee in the
performance of Employee's services pursuant to ther Agreement. All
reimbursable expenses shall be appropriately documented in reasonable
detail by Employee upon submission of any request for reimbursement,
and in a format and manner consistent with TSI's expense reporting
policy.
(iii) TSI shall provide Employee with other executive
perquisites as may be available to senior management of TSI and
participation in all other TSI-wide employee benefits as available from
time to time, including vacation benefits in accordance with TSI's
established policies.
3. OPTIONS.
At the Effective Date, TSI shall grant to Employee options to acquire
75,000 shares of TSI common stock at the price per share equal to the fair
market value on the Effective Date. Such options shall vest in installments of
18,750 shares on each of the first, second, third and fourth anniversaries of
the Effective Date.
2
<PAGE>
4. NON-COMPETITION.
(a) Employee will not, during the period of Employee's employment with
TSI, and for a period of two (2) years immediately following the termination of
Employee's employment under this Agreement, for any reason whatsoever, directly
or indirectly, for himself or on behalf of or in conjunction with any other
person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer or in a managerial capacity, whether as an
employee, independent contractor, consultant or advisor or as a sales
representative, in any travel service business in direct competition
with TSI or any subsidiary of TSI, within the United States or within
100 miles of any other geographic area in which TSI or any of TSI's
subsidiaries conducts business, including any territory serviced by TSI
or any of its subsidiaries (the "Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of TSI (including the subsidiaries thereof) in a
managerial capacity for the purpose or with the intent of enticing such
employee away from or out of the employ of TSI (including the
subsidiaries thereof);
(iii) call upon any person or entity which is, at that time,
or which has been, within one (1) year prior to that time, a customer
of TSI (including the respective subsidiaries thereof) within the
Territory for the purpose of soliciting or selling products or services
in direct competition with TSI or any subsidiary of TSI within the
Territory; or
(iv) call upon any prospective acquisition candidate, on
Employee's own behalf or on behalf of any competitor, which candidate
was, to Employee's actual knowledge after due inquiry, either called
upon by TSI (including the respective subsidiaries thereof) or for
which TSI made an acquisition analysis, for the purpose of acquiring
such entity.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit Employee from acquiring as an investment not more than two percent
(2%) of the capital stock of a competing business, whose stock is traded on a
national securities exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to TSI as a
result of a breach of the foregoing covenant, and because of the immediate and
irreparable damage that could be caused to TSI for which it would have no other
adequate remedy, Employee agrees that the foregoing covenant may be enforced by
TSI in the event of breach by him, by injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 4 impose a reasonable restraint on Employee in light of the activities
and business of TSI (including TSI's subsidiaries) on the date of the execution
of this Agreement and the current plans of TSI (including TSI's subsidiaries);
but it is also the intent of TSI and Employee that such covenants be construed
and enforced in accordance with the changing activities, business and locations
of TSI (including TSI's subsidiaries) throughout the term of this Agreement. For
example, if, during the term of this Agreement, TSI (including TSI's
subsidiaries) engages in new and different activities, enters a new business or
establishes new locations for its current activities or business in addition to
or other than the activities or business enumerated under the Recitals above or
the locations currently established therefor, then Employee will
3
<PAGE>
be precluded from soliciting the customers or employees of such new activities
or business or from such new location and from directly competing with such new
business within 100 miles of its then-established operating location(s) through
the term of this Agreement.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with TSI (including TSI's
subsidiaries), or similar activities, or business in locations the operation of
which, under such circumstances, does not violate clause (i) of this paragraph
4, and in any event such new business, activities or location are not in
violation of this paragraph 4 or of employee's obligations under this paragraph
4, if any, Employee shall not be chargeable with a violation of this paragraph 4
if TSI (including TSI's subsidiaries) shall thereafter enter the same, similar
or a competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
(d) The covenants in this paragraph 4 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and the
Agreement shall be reformed in accordance therewith.
(e) All of the covenants in this paragraph 4 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against TSI, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by TSI of such covenants. It is specifically agreed that the period
of two (2) years following termination of employment stated at the beginning of
this paragraph 4, during which the agreements and covenants of Employee made in
this paragraph 4 shall be effective, shall be computed by excluding from such
computation any time during which Employee is in violation of any provision of
this paragraph 4.
5. PLACE OF PERFORMANCE.
(a) Employee understands that he may be requested by the Board to
relocate from Employee's present residence to another geographic location in
order to more efficiently carry out Employee's duties and responsibilities under
this Agreement. In such event, TSI will pay all actual reasonable relocation
costs to move Employee, Employee's immediate family and their personal property
and effects. Such costs may include, but are not limited to, moving expenses,
temporary lodging expenses prior to moving into a new permanent residence; all
closing costs on the purchase of a residence (comparable to Employee's present
residence) in the new location. The general intent of the foregoing is that
Employee shall not personally bear any out-of-pocket cost as a result of the
relocation, with an understanding that Employee will use Employee's best efforts
to incur only those costs which are reasonable and necessary to effect a smooth,
efficient and orderly relocation with minimal disruption to the business affairs
of TSI and the personal life of Employee and Employee's family.
(b) Notwithstanding the above, if Employee is requested by the Board to
relocate and Employee refuses, such refusal shall not constitute "cause" for
termination of this Agreement under the terms of paragraph 6(c).
6. TERM; TERMINATION; RIGHTS ON TERMINATION.
The term of this Agreement shall begin on the date hereof and continue
for three (3) years, and, unless terminated sooner as herein provided, shall
continue thereafter on a year-to-year basis on the same
4
<PAGE>
terms and conditions contained herein in effect as of the time of renewal. As
used herein, the word "Term" shall mean (i) during the three-year period
referred to in the preceding sentence, such three-year period, and (ii) during
any one year renewal pursuant to the terms hereof, such one-year period. This
Agreement and Employee's employment may be terminated in any one of the
following ways:
(a) DEATH. The death of Employee shall immediately terminate this
Agreement with no severance compensation due to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, as reasonably determined by Employee's physician, Employee
shall have been absent from Employee's full-time duties hereunder for four (4)
consecutive months, then thirty (30) days after receiving written notice (which
notice may occur before or after the end of such four (4) month period, but
which shall not be effective earlier than the last day of such four (4) month
period), TSI may terminate Employee's employment hereunder provided Employee is
unable to resume Employee's full-time duties at the conclusion of such notice
period. Also, Employee may terminate Employee's employment hereunder if his
health should become impaired to an extent that makes the continued performance
of Employee's duties hereunder hazardous to Employee's physical or mental health
or life, provided that Employee shall have furnished TSI with a written
statement from a qualified doctor to such effect and provided, further, that, at
TSI's request made within thirty (30) days of the date of such written
statement, Employee shall submit to an examination by a doctor selected by TSI
who is reasonably acceptable to Employee or Employee's doctor and such doctor
shall have concurred in the conclusion of Employee's doctor. In the event this
Agreement is terminated by either party as a result of Employee's disability,
Employee shall receive from TSI, in a lump-sum payment due within ten (10) days
of the effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Term of this Agreement or for
one (1) year, whichever amount is greater.
(c) GOOD CAUSE. TSI may terminate the Agreement ten (10) days after
delivery of written notice to Employee for good cause, which shall be: (1)
Employee's willful, material and irreparable breach of this Agreement; (2)
Employee's gross negligence in the performance or intentional nonperformance
continuing for ten (10) days after receipt of written notice of need to cure of
any of Employee's material duties and responsibilities hereunder; (3) Employee's
willful dishonesty, fraud or misconduct with respect to the business or affairs
of TSI which materially and adversely affects the operations or reputation of
TSI; (4) Employee's conviction of a felony crime; or (5) chronic alcohol abuse
or illegal drug abuse by Employee. In the event of a termination for good cause,
as enumerated above, Employee shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment,
Employee may, without cause, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to TSI. Employee may
only be terminated without cause by TSI during the Term hereof if such
termination is approved by at least two-thirds of the members of the Board.
Should Employee's employment be terminated by TSI without cause during the Term,
Employee shall receive from TSI, in a lump-sum payment due on the effective date
of termination, the base salary at the rate then in effect for whatever time
period is remaining under the Term of this Agreement or for one (1) year,
whichever amount is greater, plus any accrued salary and declared but unpaid
bonus and reimbursement of expenses. Should Employee's employment be terminated
by TSI without cause at any time after the Term, Employee shall receive from
TSI, in a lump-sum payment due on the effective date of termination, the base
salary rate then in effect equivalent to one (1) year of salary, plus any
accrued salary and declared but unpaid bonus and reimbursement of expenses.
Further, any termination without cause by TSI shall operate to shorten the
period set forth in paragraph 4(a) and during which the terms of
5
<PAGE>
paragraph 4 apply to one (1) year from the date of termination of employment. If
Employee resigns or otherwise terminates Employee's employment without cause
pursuant to this paragraph 6(d), Employee shall receive no severance
compensation.
(e) CHANGE IN CONTROL OF TSI. In the event of a "Change in Control of
TSI" (as defined below) during the Term, refer to paragraph 13 below.
Upon termination of this Agreement for any reason provided above,
Employee shall be entitled to receive all compensation earned and all benefits
and reimbursements due through the effective date of termination. Additional
compensation subsequent to termination, if any, will be due and payable to
Employee only to the extent and in the manner expressly provided above or in
paragraph 13 hereof. All other rights and obligations of TSI and Employee under
this Agreement shall cease as of the effective date of termination, except that
TSI's obligations under paragraphs 10 and 17 hereof and Employee's obligations
under paragraphs 4, 7, 8, 9, 11 and 17 hereof shall survive such termination in
accordance with their terms.
If termination of Employee's employment arises out of TSI's failure to
pay Employee on a timely basis the amounts to which she is entitled under this
Agreement or as a result of any other material breach of this Agreement by TSI
(including but not limited to a material reduction in Employee's
responsibilities hereunder), as determined by a court of competent jurisdiction
or pursuant to the provisions of paragraph 17 below, such termination shall be
deemed a termination without cause, and TSI shall pay to Employee severance
compensation pursuant to the applicable provisions of paragraph 6(d) and all
amounts and damages to which Employee may be entitled as a result of such
breach, including interest thereon and all reasonable legal fees and expenses
and other costs incurred by Employee to enforce Employee's rights hereunder.
Further, none of the provisions of paragraph 4 hereof shall apply in the event
this Agreement is terminated as a result of a breach by TSI.
In the event of any termination of Employee's employment for any reason
provided above, Employee shall be under no obligation to seek other employment
and there shall be no offset against any amounts due to Employee under this
Agreement on account of any remuneration attributable to any subsequent
employment that Employee may obtain. Any amounts due under this paragraph 6 are
in the nature of severance payments, or liquidated damages, or both, and are not
in the nature of a penalty.
7. RETURN OF COMPANY PROPERTY.
All records, designs, patents, business plans, financial statements,
manuals, memoranda, lists and other property delivered to or compiled by
Employee by or on behalf of TSI, or its representatives, vendors or customers
which pertain to the business of TSI shall be and remain the property of TSI,
and be subject at all times to its discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials, and other
similar data pertaining to the business, activities or future plans of TSI which
is collected by Employee shall be delivered promptly to TSI without request by
it upon termination of Employee's employment.
8. INVENTIONS.
Employee shall disclose promptly to TSI any and all significant
conceptions and ideas for inventions, improvements and valuable discoveries,
whether patentable or not, which are conceived or made by Employee, solely or
jointly with another, during the period of employment, and which are directly
related to the business or activities of TSI and which Employee conceives as a
result of
6
<PAGE>
Employee's employment by TSI. Employee hereby assigns and agrees to assign all
of Employee's interests therein to TSI or its nominee. Whenever requested to do
so by TSI, Employee shall execute any and all applications, assignments or other
instruments that TSI shall deem necessary to apply for and obtain Letters Patent
of the United States or any foreign country or to otherwise protect TSI's
interest therein.
9. TRADE SECRETS.
Employee agrees that she will not, other than as required by court
order, during or after the Term of this Agreement with TSI, disclose the
confidential terms of TSI's or its subsidiaries' relationships or agreements
with its significant vendors or customers or any other significant and material
trade secret of TSI or its subsidiaries, whether in existence or proposed, to
any person, firm, partnership, corporation or business for any reason or purpose
whatsoever.
10. INDEMNIFICATION.
In connection with any threatened, pending or completed claim, demand,
liability, action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by TSI against Employee), by reason of
the fact that Employee is or was performing services (including an act, omission
or failure to act) under this Agreement, then TSI shall indemnify and hold
harmless, to the maximum extent permitted by law, Employee against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by Employee in connection therewith. In the
event that both Employee and TSI are made a party to the same third-party
action, complaint, suit or proceeding, TSI agrees to engage competent legal
representation reasonably acceptable to Employee, and Employee agrees to use the
same representation, provided that if counsel selected by TSI shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and TSI shall pay all attorneys' fees of
such separate counsel. Further, while Employee is expected at all times to use
Employee's best efforts to faithfully discharge her or her duties under this
Agreement, Employee cannot be held liable to TSI for errors or omissions made in
good faith where Employee has not exhibited gross, willful or wanton negligence
or misconduct or performed criminal and fraudulent acts which materially damage
the business of TSI. TSI shall pay, on behalf of Employee upon presentation of
proper invoices, all fees, costs and expenses (including attorneys' fees)
incurred in connection with any matter referenced in this paragraph 10.
11. NO PRIOR AGREEMENTS.
Employee hereby represents and warrants to TSI that the execution of
this Agreement by Employee and his employment by TSI and the performance of
Employee's duties hereunder will not violate or be a breach of any agreement
with a former employer, client or any other person or entity. Further, Employee
agrees to indemnify TSI for any claim, including but not limited to attorneys'
fees and expenses of investigation, by any such third party that such third
party may now have or may hereafter come to have against TSI based upon or
arising out of any noncompetition agreement, invention or secrecy agreement
between Employee and such third party which was in existence as of the date of
this Agreement.
12. ASSIGNMENT; BINDING EFFECT.
Employee understands that she has been selected for employment by TSI
on the basis of his personal qualifications, experience and skills. Employee,
therefore, shall not assign all or any portion of
7
<PAGE>
Employee's performance under this Agreement. Subject to the preceding two (2)
sentences and the express provisions of paragraph 13 below, this Agreement shall
be binding upon, inure to the benefit of and be enforceable by the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
13. CHANGE IN CONTROL.
(a) Unless Employee elects to terminate this Agreement pursuant to (c)
below, Employee understands and acknowledges that TSI may be merged or
consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of TSI hereunder or that TSI
may undergo another type of Change in Control. In the event such a merger or
consolidation or other Change in Control is initiated prior to the end of the
Term, then the provisions of this paragraph 13 shall be applicable.
(b) In the event of a pending Change in Control wherein TSI and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the Change in
Control from the successor to all or a substantial portion of TSI's business
and/or assets that such successor is willing as of the closing to assume and
agree to perform TSI's obligations under this Agreement in the same manner and
to the same extent that TSI is hereby required to perform, then such Change in
Control shall be deemed to be a termination of this Agreement by TSI without
cause during the Term and the applicable portions of paragraph 6(d) will apply;
however, under such circumstances, the amount of the lump-sum severance payment
due to Employee shall be triple the amount calculated under the terms of
paragraph 6(d) and the noncompetition provisions of paragraph 4 shall not apply.
(c) In any Change in Control situation, Employee may elect to terminate
this Agreement by providing written notice to TSI at least five (5) business
days prior to the anticipated closing of the transaction giving rise to the
Change in Control. In such case, the applicable provisions of paragraph 6(d)
will apply as though TSI had terminated the Agreement without cause during the
Term; however, under such circumstances, the amount of the lump-sum severance
payment due to Employee shall be double the amount calculated under the terms of
paragraph 6(d) and the noncompetition provisions of paragraph 4 shall all apply
for a period of two (2) years from the effective date of termination.
(d) For purposes of applying paragraph 6 hereof under the circumstances
described in (b) and (c) above, the effective date of termination will be the
closing date of the transaction giving rise to the Change in Control and all
compensation, reimbursements and lump-sum payments due Employee must be paid in
full by TSI at or prior to such closing. Further, Employee will be given
sufficient time and opportunity to elect whether to exercise all or any of
Employee's vested options to purchase TSI Common Stock, including any options
with accelerated vesting under the provisions of TSI's 1997 Long-Term Incentive
Plan, such that Employee may convert the options to shares of TSI Common Stock
at or prior to the closing of the transaction giving rise to the Change in
Control, if Employee so desires.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person or entity, or group of persons or entities
acting together, other than TSI or an employee benefit plan of TSI,
acquires directly or indirectly the Beneficial Ownership (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as amended) of
any voting security of TSI and immediately after such acquisition such
person, entity or group is, directly or indirectly, the Beneficial
Owner of voting securities representing 33% or more of the total voting
8
<PAGE>
power of all of the then-outstanding voting securities of TSI and has a
larger percentage of voting securities of TSI than any other person,
entity or group holding voting securities of TSI, unless the
transaction pursuant to which such acquisition is made is approved by
at least two-thirds (2/3) of the Board; or
(ii) the following individuals no longer constitute a majority
of the members of the Board: (A) the individuals who, as of the closing
date of TSI's initial public offering, constitute the Board (the
"Original Directors"); (B) the individuals who thereafter are elected
to the Board and whose election, or nomination for election, to the
Board was approved by a vote of at least two-thirds (2/3) of the
Original Directors then still in office (such directors becoming
"Additional Original Directors" immediately following their election);
and (C) the individuals who are elected to the Board and whose
election, or nomination for election, to the Board was approved by a
vote of at least two-thirds (2/3) of the Original Directors and
Additional Original Directors then still in office (such directors also
becoming "Additional Original Directors" immediately following their
election); or
(iii) the stockholders of TSI shall approve a merger,
consolidation, recapitalization or reorganization of TSI, a reverse
stock split of outstanding voting securities, or consummation of any
such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75% of the total
voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being
Beneficially Owned by at least 75% of the holders of outstanding voting
securities of TSI immediately prior to the transaction, with the voting
power of each such continuing holder relative to other such continuing
holders not substantially altered in the transaction; or
(iv) the stockholders of TSI shall approve a plan of complete
liquidation of TSI or an agreement for the sale or disposition by TSI
of all or a substantial portion of TSI's assets (i.e., 50% or more of
the total assets of TSI).
(f) Employee must be notified in writing by TSI at any time that TSI or
any member of its Board anticipates that a Change in Control may take place.
(g) Employee shall be reimbursed by TSI or its successor, on a grossed
up basis, for any excise taxes that Employee incurs under Section 4999 of the
Internal Revenue Code of 1986, as a result of any Change in Control. Such amount
will be due and payable by TSI or its successor within ten (10) days after
Employee delivers a written request for reimbursement accompanied by a copy of
Employee's tax return(s) showing the excise tax actually incurred by Employee.
14. COMPLETE AGREEMENT.
This Agreement supersedes any other agreements or understandings,
written or oral, between TSI and Employee, and Employee has no oral
representations, understandings or agreements with TSI or any of its officers,
directors or representatives covering the same subject matter as this Agreement.
This written Agreement is the final, complete and exclusive statement
and expression of the agreement between TSI and Employee and of all the terms of
this Agreement, and it cannot be varied, contradicted or supplemented by
evidence of any prior or contemporaneous oral or written agreements. This
written Agreement may not be later modified except by a written instrument
signed by a duly
9
<PAGE>
authorized officer of TSI and Employee, and no term of this Agreement may be
waived except by a written instrument signed by the party waiving the benefit of
such term.
15. NOTICE.
Whenever any notice is required hereunder, it shall be given in writing
addressed as follows:
To TSI: Travel Services International, Inc.
220 Congress Park Drive, Suite 300
Delray Beach, FL 33445
To Employee: John C. DeLano
--------------------------
--------------------------
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 15.
16. SEVERABILITY; HEADINGS.
If any portion of this Agreement is held invalid or inoperative, the
other portions of this Agreement shall be deemed valid and operative and, so far
as is reasonable and possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
17. ARBITRATION.
Any unresolved dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators in the community where the corporate
headquarters of TSI is located on the Effective Date, in accordance with the
rules of the American Arbitration Association then in effect. The arbitrators
shall not have the authority to add to, detract from or modify any provision
hereof nor to award punitive damages to any injured party. The arbitrators shall
have the authority to order back-pay, severance compensation, vesting of options
(or cash compensation in lieu of vesting of options), reimbursement of costs,
including those incurred to enforce this Agreement, and interest thereon in the
event the arbitrators determine that Employee was terminated without disability
or good cause, as defined in paragraphs 6(b) and 6(c) hereof, respectively, or
that TSI has otherwise materially breached this Agreement. A decision by a
majority of the arbitration panel shall be final and binding. Judgment may be
entered on the arbitrators' award in any court having jurisdiction. The direct
expense of any arbitration proceeding shall be borne by TSI.
18. GOVERNING LAW.
This Agreement shall in all respects be construed according to the laws
of the State of Delaware without regard to the conflicts of laws principles of
such state.
10
<PAGE>
19. COUNTERPARTS.
This Agreement may be executed simultaneously in two (2) or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TRAVEL SERVICES INTERNATIONAL, INC.
By: /s/ Michael J. Moriarty
------------------------------------------
Name: Michael J. Moriarty
Title: President and Chief Operating Officer
/s/ John C. De Lano
------------------------------------------
John C. DeLano
11
EXHIBIT 11
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
SCHEDULE OF COMPUTATIONS OF EARNINGS PER SHARE
SHARES
----------------------
HISTORICAL:
Years ended December 31, 1995 and 1996
<S> <C>
Shares attributable to Auto Europe, accounting acquiror, at beginning of period (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
----------------------
Shares used in computing earnings per share for years ended December 31, 1995 and 1996 2,435,038
======================
Year ended December 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of period (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891
Shares issued to founders and management of TSI 2,484,501
Sold pursuant to the Offering 2,875,000
Shares issued in consideration for acquisition of Trax Software 32,985
Options granted during the year 962,250
======================
Shares used in computing earnings per share for the year ended December 31, 1997 11,128,665
======================
PRO FORMA:
Years ended December 31, 1995 and 1996
Shares attributable to Auto Europe, accounting acquiror, at beginning of year (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891
Shares issued to founders and management of TSI 2,484,501
Sold pursuant to the Offering 2,875,000
----------------------
Shares used in computing earnings per share for years ended December 31, 1995 and 1996 10,133,430
======================
Year ended December 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of year (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891
Shares issued to founders and management of TSI 2,484,501
Sold pursuant to the Offering 2,875,000
Shares issued in consideration for acquisition of Trax Software 32,985
Options granted during the year 962,250
----------------------
Shares used in computing earnings per share for year ended December 31, 1997 11,128,665
======================
BASIC
WEIGHTED AVERAGE
SHARES
---------------------
HISTORICAL:
Years ended December 31, 1995 and 1996
Shares attributable to Auto Europe, accounting acquiror, at beginning of period (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
---------------------
Shares used in computing earnings per share for years ended December 31, 1995 and 1996 2,435,038
=====================
Year ended December 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of period (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 999,636
Shares issued to founders and management of TSI 1,061,869
Sold pursuant to the Offering 1,228,767
Shares issued in consideration for acquisition of Trax Software 5,513
Options granted during the year -
=====================
Shares used in computing earnings per share for the year ended December 31, 1997 5,730,822
=====================
PRO FORMA:
Years ended December 31, 1995 and 1996
Shares attributable to Auto Europe, accounting acquiror, at beginning of year (1)
Shares issued in consideration for acquisition of the Pooling Acquisitions
Shares issued in consideration for acquisition of Other Founding Companies
Shares issued to founders and management of TSI
Sold pursuant to the Offering
Shares used in computing earnings per share for years ended December 31, 1995 and 1996
Year ended December 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of year (1)
Shares issued in consideration for acquisition of the Pooling Acquisitions
Shares issued in consideration for acquisition of Other Founding Companies
Shares issued to founders and management of TSI
Sold pursuant to the Offering
Shares issued in consideration for acquisition of Trax Software
Options granted during the year
Shares used in computing earnings per share for year ended December 31, 1997
DILUTED
WEIGHTED AVERAGE
SHARES
HISTORICAL: ---------------------
Years ended December 31, 1995 and 1996
Shares attributable to Auto Europe, accounting acquiror, at beginning of period (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
---------------------
Shares used in computing earnings per share for years ended December 31, 1995 and 1996 2,435,038
=====================
Year ended December 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of period (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 999,636
Shares issued to founders and management of TSI 1,061,869
Sold pursuant to the Offering 1,229,367
Shares issued in consideration for acquisition of Trax Software 5,513
Options granted during the year 138,392
=====================
Shares used in computing earnings per share for the year ended December 31, 1997 5,869,814
=====================
PRO FORMA:
Years ended December 31, 1995 and 1996
Shares attributable to Auto Europe, accounting acquiror, at beginning of year (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891
Shares issued to founders and management of TSI 2,484,501
Sold pursuant to the Offering 2,875,000
---------------------
Shares used in computing earnings per share for years ended December 31, 1995 and 1996 10,133,430
=====================
Year ended December 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of year (1) 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,351,704
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891
Shares issued to founders and management of TSI 2,484,501
Sold pursuant to the Offering 2,875,000
Shares issued in consideration for acquisition of Trax Software 5,513
Options granted during the year 138,392
---------------------
Shares used in computing earnings per share for year ended December 31, 1997 10,277,335
=====================
Note:
(1) Shares issued to former stockholders of Auto Europe, accounting acquiror, in connection with combination.
</TABLE>
EXHIBIT 21
EXHIBIT 21
LIST OF SUBSIDIARIES
Travel 800, LLC, d/b/a 1-800-FLY CHEAP
D-FW Tours, Inc., d/b/a D-FW Travel Arrangements
Cruises Only, LLC
Cruises Inc.
Auto Europe, LLC
The Anthony Dean Corporation, d/b/a Cruise Fairs of America
Ship `N' Shore Cruises, Inc.
SNS Coachline, Inc.
Cruise Time, Inc.
Cruise Mart, Inc.
SNS Travel Marketing, Inc.
CruiseOne, Inc.
CruiseWorld, Inc.
Diplomat Tours, Inc., d/b/a International Airline Consolidators
Gold Coast Travel Agency Corporation, Inc. d/b/a Gold Coast Cruise Center
Trax Software, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and statement of income included in the Company's Form 10-K for the year
ended December 31, 1997 and is qualified in its entirety by reference to such
financial statements including notes thereto. Financial information is for Auto
Europe, companies acquired in 1997 under transactions accounted for using the
pooling method of accounting and the four other Founding Companies acquired on
July 28, 1997. See Note 1, Organization, to the Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,270
<SECURITIES> 0
<RECEIVABLES> 4,361
<ALLOWANCES> 131
<INVENTORY> 0
<CURRENT-ASSETS> 14,051
<PP&E> 11,194
<DEPRECIATION> 1,184
<TOTAL-ASSETS> 67,609
<CURRENT-LIABILITIES> 12,765
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 50,478
<TOTAL-LIABILITY-AND-EQUITY> 67,609
<SALES> 0
<TOTAL-REVENUES> 58,387
<CGS> 36,969
<TOTAL-COSTS> 36,969
<OTHER-EXPENSES> 17,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 426
<INCOME-PRETAX> 3,979
<INCOME-TAX> 852
<INCOME-CONTINUING> 3,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,127
<EPS-PRIMARY> .55
<EPS-DILUTED> .53
</TABLE>
