UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 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 No.)
220 Congress Park Drive
Delray Beach, Florida 33445
(Address of principal executive offices)
(Zip Code)
(561) 266-0860
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
The number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of May 11, 1998, was 10,504,826.
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION...........................................................................3
Item 1. Financial Statements............................................................................3
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 .........................3
Consolidated Statements of Income -- Historical for the Three Months Ended
March 31, 1997 and 1998.........................................................................4
Consolidated Statements of Income -- Pro Forma for the Three Months Ended
March 31, 1997 and 1998.........................................................................5
Consolidated Statements of Cash Flows -- Historical for the Three Months
Ended March 31, 1997 and 1998...................................................................6
Notes to Consolidated Financial Statements......................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................11
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................16
Item 2. Changes in Securities and Use of Proceeds......................................................16
Item 5. Other Information..............................................................................16
Item 6. Exhibits and Reports on Form 8-K...............................................................17
SIGNATURES................................................................................................18
</TABLE>
2
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PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,257 $ 20,619
Accounts receivable, net of
allowance of $144 and $134, respectively 4,819 6,880
Receivables from affiliates and employees 444 407
Prepaid expenses 899 1,598
Deferred income taxes 773 1,160
Other current assets 208 185
----------------- -----------------
Total current assets 14,400 30,849
Property and equipment, net 11,266 12,225
Goodwill, net 41,701 56,220
Notes Receivables from employees 214 176
Other assets 726 1,054
----------------- -----------------
Total assets $ 68,307 $ 100,524
================= =================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current maturities of long-term debt $ 433 $ 472
Due to affiliates and employees 478 1,433
Trade payables and accrued expenses 12,293 28,533
----------------- -----------------
Total current liabilities 13,204 30,438
Borrowings under line of credit - 8,600
Long-term debt, net of current portion 4,129 4,099
Deferred income and other long-term liabilities 136 197
Commitments and contingencies
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;
10,319,250 and 10,504,826 shares outstanding, respectively 103 105
Additional paid-in capital 48,000 52,452
Retained earnings 2,735 4,633
----------------- -----------------
Total stockholders' equity 50,838 57,190
----------------- -----------------
Total liabilities and stockholders' equity $ 68,307 $ 100,524
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - HISTORICAL
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
Net revenues $ 11,302 $ 24,936
Operating expenses 7,580 14,237
----------------- -----------------
Gross profit 3,722 10,699
General and administrative expenses 3,046 6,977
Goodwill amortization - 407
----------------- -----------------
Income from operations 676 3,315
Interest expense and other, net 63 43
----------------- -----------------
Income before income taxes 613 3,272
Provision for income taxes 257 1,374
----------------- -----------------
Net income $ 356 $ 1,898
================= =================
Basic earnings per share $ 0.14 $ 0.18
================= =================
Diluted earnings per share $ 0.14 $ 0.18
================= =================
Shares used in computing basic earnings per share 2,587,873 10,427,197
================= =================
Shares used in computing diluted earnings per share 2,587,873 10,817,991
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - PROFORMA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
Net revenues $ 18,609 $ 24,936
Operating expenses 11,734 14,237
----------------- -----------------
Gross profit 6,875 10,699
General and administrative expenses 3,719 6,936
Goodwill amortization 309 407
----------------- -----------------
Income from operations 2,847 3,356
Interest expense and other, net 104 43
----------------- -----------------
Income before income taxes 2,743 3,313
Provision for income taxes 1,152 1,391
----------------- -----------------
Net income $ 1,591 $ 1,922
================= =================
Diluted pro forma earnings per share $ 0.15 $ 0.18
================= =================
Shares used in computing diluted pro forma earnings per share 10,286,265 10,817,991
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
Cash from operating activities:
Net income $ 356 $ 1,898
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and Amortization 269 852
Amortization of unearned compensation - 3
Changes in operating assets and liabilities:
Accounts receivables (314) (1,728)
Receivables andd notes from affiliates and employees 92 75
Prepaid expenses 69 (212)
Deferred income taxes - (387)
Other assets (75) (297)
Trade payables and accrued expenses 5,524 13,953
----------------- -----------------
Net case provided by operating activities 5,921 14,157
Cash flows from investing activities:
Capital expenditures (509) (897)
Proceeds from sale of property and equipment 30 -
Cash paid for acquisitions, net of cash acquired - (8,249)
----------------- -----------------
Net cash used in investing activities (479) (9,146)
Cash flows from financing activities:
Proceeds from long-term debt and lines of credit - 8,600
Payments on long-term debt and lines of credit (2,422) (249)
----------------- -----------------
Net cash provided by (used in) financing activities (2,422) 8,351
Net increase in cash and cash equivalents 3,020 13,362
Cash and cash equivalents, beginning of period 1,548 7,257
----------------- -----------------
Cash and cash equivalents, end of period $ 4,568 $ 20,619
================= =================
Supplemental cash flow information:
cash paid for interest $ 111 $ 240
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim Consolidated Financial Statements as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to fairly present the financial position,
results of operations, and cash flows with respect to interim financial
statements, have been included. Operating results for interim periods are not
necessarily indicative of the results for full years as a result of seasonality
and other factors.
The financial statements included herein should be read in conjunction with the
Company's Consolidated Financial Statements and related Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations related thereto, all of which are included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission ("SEC") on March 31, 1998.
On July 28, 1997, Travel Services International, Inc. consummated its initial
public offering (the "Offering") and acquired five specialized distributors of
travel services (the "Founding Companies") in separate combination transactions
accounted for using the purchase method of accounting (the "Combinations").
Historical financial statements do not include the operating results of the
Founding Companies (other than Auto Europe, the "accounting acquiror") prior to
July 1997 and, therefore, are not meaningful when comparing historical operating
results for the period. Historical financial statements for the three months
ended March 31, 1997 and 1998 include the operating results of five additional
specialized distributors of cruise reservation services acquired from November
1997 through March 1998 under transactions accounted for using the pooling of
interests method of accounting (the "Pooling Acquisitions"). Historical
financial statements for the three months ended March 31, 1998 also include the
operating results of three operating companies acquired during the first quarter
of 1998 under transactions accounted for using the purchase method of accounting
(the "Purchase Acquisitions"), from the date of acquisition through March 31,
1998. The historical financial statements for the three months ended March 31,
1997 do not include the operating results of the Purchase Acquisitions. The
Founding Companies, the Pooling Acquisitions and the Purchase Acquisitions are
collectively referred to as Operating Companies.
Because of the Combinations in July 1997, pro forma combined statements of
income for the three months ended March 31, 1997 and 1998 have been prepared and
diluted pro forma earnings per share has been computed. The pro forma financial
information for the quarters ended March 31, 1997 and 1998 include the results
of Travel Services International, Inc., the Founding Companies, the Pooling
Acquisitions and, for the three months ended March 31, 1998, the Purchase
Acquisitions, as if the Offering and the Combinations had occurred at the
beginning of each respective period, 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.
7
<PAGE>
Prior to the Combinations, the Founding Companies were not under common control
or management; accordingly, the pro forma combined financial information may not
be indicative of or comparable to the Company's post-Combination results of
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as described below, there have been no significant changes in the
accounting policies of the Company during the periods presented. For a
description of these policies, refer to Note 2 to the Consolidated Financial
Statements and related Notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
During the three months ended March 31, 1998, the Company adopted Financial
Standards Board 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. The following types of items are to be considered in computing
comprehensive income: foreign currency translation adjustments, pension
liability adjustments, unearned stock plan awards and unrealized gain/loss on
securities available for sale. For the three months ended March 31, 1997 and
1998, there were no differences between net income and comprehensive income.
3. LONG-TERM DEBT AND CREDIT FACILITY
The Company has entered into a credit agreement (as amended, the "Credit
Agreement") with NationsBank, N.A. ("NationsBank"), with respect to a $30
million revolving line of credit (the "Credit Facility") and a term loan
facility of $2.1 million (the "Term Loan"). Borrowings under the Credit Facility
and Term Loan are due October 15, 2000 and October 5, 2000, respectively. The
Credit Facility may be used for letters of credit not to exceed $3 million,
acquisitions, capital expenditures, refinancing of subsidiaries' debt and for
general corporate purposes. As of March 31, 1998, outstanding borrowings under
the Credit Facility totaled $8.6 million. On April 1, 1998, $10 million was
borrowed under the Credit Facility to finance an acquisition described in Note 4
herein. For a full description of the Credit Facility refer to Note 7 to the
Consolidated Financial Statements and related Notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
On March 30, 1998, $3 million previously pledged to Barnett Bank was released in
exchange for a guarantee by the Company of outstanding debt of one of the
Founding Companies. Such debt, totaling $3,141,241, was repaid on April 28,
1998, including $1,901,838 which was refinanced using the proceeds of the Term
Loan.
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. As
of May 11, 1998, the Company has entered into the following interest rate swap
hedge agreements with NationsBank:
AMOUNT INTEREST RATE MATURITY DATE
------ ------------- -------------
$ 4,300,000 5.98% October 15, 2000
$ 5,000,000 6.12% October 15, 2000
$ 2,100,000 6.25% October 5, 2000
The Credit Agreement requires the Company to comply with various loan covenants,
which include maintenance of certain financial ratios and restrictions on
additional indebtedness, liens, guarantees, advances, capital expenditures, sale
of assets and dividends. At March 31, 1998, the Company was in compliance with
applicable loan covenants.
4. ACQUISITIONS AND CAPITAL STOCK
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,
8
<PAGE>
"Diplomat"). Diplomat is a specialized distributor of international airline
reservations. The aggregate consideration paid consisted of 21,821 shares of
common stock and $2.0 million in cash. 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"). Gold Coast is a specialized distributor of cruise reservations. The
aggregate consideration paid consisted of 163,755 shares of common stock and
$6.25 million in cash. An additional $500,000 in cash may be paid as contingent
consideration based upon financial performance in the 1998 fiscal year. The
acquisition was 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.
On March 31, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of CruiseMasters, Inc. ("CruiseMasters").
CruiseMasters is a specialized distributor of cruise reservations. The aggregate
consideration paid for this acquisition was 152,835 shares of common stock. The
acquisition was accounted for using the pooling of interests method of
accounting. Revenues and income generated by CruiseMasters prior to the date of
acquisition and included in the accompanying consolidated statements of income
before taxes for the three months ended March 31, 1997 and 1998 were as follows:
net revenues of $443,000 and $347,000, respectively, and income before taxes of
$158,000 and $630, respectively.
Effective April 1, 1998, the Company completed the acquisition of all of the
outstanding capital stock of The Cruise Line, Inc. ("Cruise Line"). Cruise Line
is a specialized distributor of cruise reservations. The aggregate consideration
paid consisted of $12.5 million in cash. The acquisition will be accounted for
using the purchase method of accounting. The historical operations of Cruise
Line when compared to the historical operations of the Company are not
significant.
5. 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. SFAS 128 had no impact on the Company's reported earnings per share
for 1997 as no common share equivalents existed during this period.
A reconciliation of weighted average shares used in the calculation of
historical basic and diluted earnings per share for the three months ended March
31, 1998 is as follows:
Basic common shares outstanding 10,427,197
Dilutive effects of stock options 390,794
----------
Dilutive shares outstanding 10,817,991
----------
Dilutive pro forma earnings per share is also presented to give effect to the
Offering and the Combinations as discussed in Note 1 herein.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the ordinary course
of business. The Company believes that none of the actions currently pending
will have a material adverse effect on its business, financial condition and
results of operations.
The Company had outstanding irrevocable letters of credit totaling $1,210,000 at
March 31, 1998, of which $820,000 were issued under the Credit Facility. The
letters of credit have terms of one year or less and collateralize the Company's
obligations to third parties for payment of travel obligations.
9
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On April 22, 1998, the Company entered into an operating lease for two tour
buses. The lease has a 60-month term with minimum monthly lease payments of
$11,412. At the end of the lease term, if sales proceeds exceed the estimated
fair market value stated in the lease, the Company shall receive such excess.
Conversely, if the sales proceeds are less than the minimum sales proceeds
guaranteed by the Company (which is less than the estimated fair market value),
the Company shall pay the lessor an amount equal to such deficiency.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with (i) the Company's
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report and (ii) the Company's Consolidated Financial Statements and
related Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations related thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. Statements
contained in this discussion regarding future financial performance and results
and other statements that are not historical facts are forward-looking
statements. The forward looking statements are subject to numerous risks and
uncertainties to the Company. See Part II, Item 5, Risk Factors and
Qualification of Forward Looking Statements.
INTRODUCTION
The Company was established to create a leading specialized distributor of
leisure travel services to both travel agents and travelers. The Company
conducts its operations through specialized distributors of travel services (the
"Operating Companies") providing airline, cruise or European auto rental
reservations.
On July 28, 1997, Travel Services International, Inc. consummated its initial
public offering (the "Offering") and acquired five specialized distributors of
travel services (the "Founding Companies") in separate combination transactions
accounted for using the purchase method of accounting (the "Combinations").
Historical financial statements do not include the operating results of the
Founding Companies (other than Auto Europe, the "accounting acquiror") prior to
July 1997 and, therefore, are not meaningful when comparing historical operating
results for the three months ended March 31, 1997 and 1998. Historical financial
statements for the three months ended March 31, 1997 and 1998 include the
operating results of five additional specialized distributors of cruise
reservation services acquired from November 1997 through March 1998 under
transactions accounted for using the pooling of interests method of accounting
(the "Pooling Acquisitions"). Historical financial statements for the three
months ended March 31, 1998 also include the operating results of three
operating companies acquired during the first quarter of 1998 under transactions
accounted for using the purchase method of accounting (the "Purchase
Acquisitions"), from the date of acquisition through March 31, 1998. The
historical financial statements for the three months ended March 31, 1997 do not
include the operating results of the Purchase Acquisitions.
Because of the Combinations in July 1997, pro forma combined statements of
income for the three months ended March 31, 1997 and 1998 have been prepared and
diluted pro forma earnings per share has been computed. The pro forma financial
information for the quarters ended March 31, 1998 and 1997 include the results
of Travel Services International, Inc., the Founding Companies, the Pooling
Acquisitions and, for the three months ended March 31, 1998, the Purchase
Acquisitions, as if the Offering and the Combinations had occurred at the
beginning of each respective period, along with certain adjustments associated
with the Pooling Acquisitions.
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.
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
11
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acquisition program, and implementing state-of-the-art technology
infrastructure. The Company believes there are 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 - HISTORICAL
The Combinations are accounted for under the purchase method of accounting, and
Auto Europe has been designated as the accounting acquiror in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 97.
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 and
the operations of the Purchase Acquisitions since their respective consummation
dates in 1998.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
- - HISTORICAL
The following table sets forth certain selected historical financial data as a
percentage of net revenues for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues $ 11,302 100.0% $24,936 100.0%
Operating expenses 7,580 67.1 14,237 57.1
-------- ----- -------- -----
Gross profit 3,722 32.9 10,699 42.9
General and administrative expenses, 3,046 27.0 6,977 28.0
excluding goodwill
</TABLE>
Net revenues increased $13.6 million, or 120.4%, from $11.3 million in 1997 to
$24.9 million in 1998. Of this increase, 19.6% is attributable to an increase in
net revenues in the European auto rental segment, with the balance attributable
to the Combinations on July 28, 1997 and the Purchase Acquisitions in 1998.
Operating expenses increased $6.7 million, or 88.2%, from $7.6 million in 1997
to $14.2 million in 1998. As a percentage of net revenues, total operating
expenses decreased from 67.1% in 1997 to 57.1% in 1998, primarily due to the
change in the mix of business by segment and as a result of lower commission
expenses as a percentage of net revenues in the European auto rental segment in
1998 as compared to 1997.
General and administrative expenses increased $3.9 million, or 130%, from $3.0
million in 1997 to $7.0 million in 1998. This increase was primarily the result
of expenses associated with being a public company and corporate overhead which
did not exist prior to the Offering, offset somewhat by lower general and
administrative expenses at Operating Companies, primarily due to the change in
the mix of business by segment.
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.
12
<PAGE>
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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
- - PRO FORMA COMBINED
The following table sets forth certain selected combined pro forma financial
data as a percentage of pro forma combined net revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
1997 1998
------------------------ ---------------------------
<S> <C> <C> <C> <C>
Net revenues $18,609 100.0% $24,936 100.0%
Operating expenses 11,734 63.1 14,237 57.1
----------- ----- ------ -----
Gross profit 6,875 36.9 10,699 42.9
General and administrative expenses, 3,719 20.0 6,936 27.8
excluding goodwill
</TABLE>
Combined net revenues increased $6.3 million, or 33.9%, from $18.6 million in
1997 to $24.9 million in 1998. The increase in net revenue is primarily
attributable to increased sales of travel services by the Company in each
segment. Net revenues for the period increased 55.2%, 21.0% and 19.6%, in
cruise, air and European auto rental segments, respectively. Cruise passengers
handled increased from 71,000 to 106,000 (49.3%), airline tickets issued
increased from 60,000 to 75,000 (25.0%) and European car rental reservations
increased from 63,000 to 77,000 (22.2%). Of the 33.9% increase in combined pro
forma net revenues, 9.4% was attributable to the Purchase Acquisitions and 24.5%
was attributable to internal growth at the Founding Companies and the Pooling
Acquisitions.
Combined operating expenses increased $2.5 million, or 21.4%, from $11.7 million
in 1997 to $14.2 million in 1998. As a percentage of net revenues, total
operating expenses decreased from 63.1% in the 1997 period to 57.1% in the 1998
period, primarily as a result of a decrease in commission and net advertising
expenses as percentages of net revenues.
Combined general and administrative expenses increased $3.2 million, or 86.5%,
from $3.7 million in 1997 to $6.9 million in 1998, and were 20.0% and 27.8%,
respectively, of net revenues. This increase as a percentage of net revenues was
the result of expenses associated with being a public company and corporate
overhead which did not exist prior to the Offering.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS
In the three months ended March 31, 1997 and 1998, on a historical basis, net
cash provided by operating activities was approximately $5,921,000 and
$14,157,000, respectively, capital expenditures were $509,000 and $897,000,
respectively, and net repayment of debt was $2,422,000 and $249,000,
respectively.
The Company expects to spend in excess of $8 million during 1998 for capital
expenditures, including, among other things, development of technology
applications, computer hardware and personal computers, telecommunications
equipment, leasehold and building improvements and furniture and fixtures.
The Company issued 338,411 shares of common stock and paid $8.4 million cash
consideration during the three months ended March 31, 1998 in connection with
the several acquisitions described herein.
13
<PAGE>
The Company believes that its capital resources are adequate in the short term.
In the future, the Company may need to increase its capital resources by
obtaining additional credit or by initiating additional offerings of its capital
stock.
LONG-TERM DEBT AND CREDIT FACILITY
The Company has entered into a credit agreement (the "Credit Agreement") with
NationsBank, N.A. with respect to a $30 million revolving line of credit (the
"Credit Facility") and a term loan facility of $2.1 million (the "Term Loan").
Borrowings under the Credit Facility and Term Loan are due October 15, 2000 and
October 5, 2000, respectively. The Credit Facility may be used for letters of
credit not to exceed $3 million, acquisitions, capital expenditures, refinancing
of subsidiaries' debt and for general corporate purposes. As of March 31, 1998,
outstanding borrowings under the Credit Facility totaled $8.6 million. On April
1, 1998, an additional $10 million was borrowed under the Credit Facility to
finance, in part, the acquisition of The Cruise Line, Inc.
On March 30, 1998, $3 million previously pledged to Barnett Bank was released in
exchange for a guarantee by the Company of outstanding debt of one of the
Founding Companies. Such debt, totaling $3,141,241, was repaid on April 28,
1998, including $1,901,838 which was refinanced using the proceeds of the Term
Loan.
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. As
of May 11, 1998, the Company entered into three interest rate swap hedge
agreements totaling $11.4 million and maturing in October 2000, with a weighted
average fixed interest rate of 6.2%.
ACQUISITIONS
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"). Diplomat is a specialized distributor of international airline
reservations. The aggregate consideration paid consisted of 21,821 shares of
common stock and $2.0 million in cash.
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"). Gold Coast is a specialized distributor of cruise reservations. The
aggregate consideration paid consisted of 163,755 shares of common stock and
$6.25 million in cash. An additional $500,000 in cash may be paid as contingent
consideration based upon financial performance in the 1998 fiscal year.
On March 31, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of CruiseMasters, Inc. ("CruiseMasters").
CruiseMasters is a specialized distributor of cruise reservations. The aggregate
consideration paid for this acquisition was 152,835 shares of common stock.
Effective April 1, 1998, the Company completed the acquisition of all of the
outstanding capital stock of The Cruise Line, Inc. ("Cruise Line"). Cruise Line
is a specialized distributor of cruise reservations. The aggregate consideration
paid consisted of $12.5 million in cash.
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 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,
14
<PAGE>
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.
The Company believes that aggregate costs to develop the Universal Agent and the
Universal Manager will be approximately $12 to $15 million over the next three
years. The Company adopted in 1997 and is in compliance with the 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".
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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 the actions
currently known to the Company will have a material adverse effect on its
business, financial condition or operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Offering, the Company's Registration Statement on Form
S-1 (File No. 333-27125) was declared effective on July 17, 1997. The managing
underwriters of the Offering were Montgomery Securities and Furman Selz. The
Offering commenced on July 22, 1997, all securities offered thereby were sold
and the Offering has terminated. The securities registered and sold in the
Offering consisted of 2,875,000 shares (the "Offered Shares") of common stock,
$.01 par value per share, all of which were sold for the account of the Company.
The Offered Shares were sold at a price to the public of $14.00 per share, for
aggregate gross proceeds of $40,250,000. Net proceeds to the Company from the
Offering (after deducting underwriting discounts, commissions and estimated
offering expenses totaling $7 million, which did not include any direct or
indirect payments to directors, officers, 10% stockholders or affiliates of the
Company) 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 for 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). The
remaining $4.1 million has been used for acquisitions and general corporate
purposes.
During the three months ended March 31, 1998, the Company issued shares in
connection with the acquisitions of the following three Operating Companies:
21,821 shares in connection with the acquisition of Diplomat; 163,755 shares in
connection with the acquisition of Gold Coast; and 152,835 shares in connection
with the acquisition of CruiseMasters. The offers and sales of such shares were
not registered under the Securities Act of 1933, as amended, in reliance on the
exemption provided by Section 4(2) of such Act.
The Company's ability to pay dividends is restricted by the terms of the Credit
Facility.
ITEM 5. OTHER INFORMATION
SHELF REGISTRATION
On May 4, 1998, the Company's Registration Statement on Form S-1 (File No.
333-50533, the "Shelf Registration") was declared effective. The Shelf
Registration registers an aggregate of 3,175,000 shares of the Company's common
stock, including 1,506,706 shares available for issuances by the Company in
connection with future acquisitions and 1,668,294 shares that may be sold by
certain stockholders of the Company.
RISK FACTORS AND QUALIFICATION OF FORWARD LOOKING STATEMENTS
The Company is subject to various risks associated with its operations,
strategies, management and industry, including the risk factors discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. In
addition, 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
16
<PAGE>
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 in the Company's Annual
Report on Form 10-K, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT DESCRIPTION OF EXHIBIT
NO. ----------------------
--
11 Schedule of Computations of Earnings Per Share
21 List of Subsidiaries
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following Reports on Form 8-K during
the Quarter ended March 31, 1998:
Report on Form 8-K, dated February 9, 1998
Report on Form 8-K, dated March 31, 1998
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVEL SERVICES INTERNATIONAL, INC.
Date: May 15, 1998 By: /S/ JILL M. VALES
-----------------
Jill M. Vales
Senior Vice President and Chief Financial
Officer (as both a duly authorized officer
of the registrant and the principal
financial officer or chief accounting
officer of the registrant)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Schedule of Computation of Earnings Per Share
21 List of Subsidiaries
27 Financial Data Schedule
TRAVEL SERVICES INTERNATIONAL, INC.
SCHEDULE OF COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
BASIC DILUTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES SHARES SHARES
----------- ------------- --------------
<S> <C> <C> <C>
HISTORICAL:
Quarter ended March 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of period 1,083,334 1,083,334 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,504,539 1,504,539 1,504,539
------------- ------------- -------------
Shares used in computing earnings per share for quarter ended March 31, 1997 2,587,873 2,587,873 2,587,873
============= ============= =============
Quarter ended March 31, 1998
Shares attributable to Auto Europe, accounting acquiror, at beginning of period 1,083,334 1,083,334 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,504,539 1,504,539 1,504,539
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891 2,338,891 2,338,891
Shares issued to founders and management of TSI 2,484,501 2,484,501 2,484,501
Sold pursuant to the Offering 2,875,000 2,875,000 2,875,000
Shares issued in consideration for acquisition of Trax Software 32,985 32,985 32,985
Shares issued in consideration for acquisition of Goldcoast 21,821 16,972 16,972
Shares issued in consideration for acquisition of Diplomat 163,755 90,975 90,975
Options granted 1,018,675 - 390,794
============= ============= =============
Shares used in computing earnings per share for the quarter ended March 31, 1998 11,523,501 10,427,197 10,817,991
============= ============= =============
PRO FORMA:
Quarter ended March 31, 1997
Shares attributable to Auto Europe, accounting acquiror, at beginning of year 1,083,334 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,504,539 1,504,539
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891 2,338,891
Shares issued to founders and management of TSI 2,484,501 2,484,501
Sold pursuant to the Offering 2,875,000 2,875,000
------------- -------------
Shares used in computing earnings per share for quarter ended March 31, 1997 10,286,265 10,286,265
============= =============
Quarter ended March 31, 1998
Shares attributable to Auto Europe, accounting acquiror, at beginning of period 1,083,334 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,504,539 1,504,539
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891 2,338,891
Shares issued to founders and management of TSI 2,484,501 2,484,501
Sold pursuant to the Offering 2,875,000 2,875,000
Shares issued in consideration for acquisition of Trax Software 32,985 32,985
Shares issued in consideration for acquisition of Goldcoast 21,821 16,972
Shares issued in consideration for acquisition of Diplomat 163,755 90,975
Options granted 1,018,675 390,794
============= =============
Shares used in computing earnings per share for the quarter ended March 31, 1998 11,523,501 10,817,991
============= =============
</TABLE>
EXHIBIT 21
LIST OF SUBSIDIARIES
AutoEurope, LLC
AutoNet International, Inc.
Cruise Mart, Inc.
Cruise Masters, Inc.
Cruise Time, Inc.
CruiseOne, Inc.
Cruises Inc.
Cruises Only, LLC
CruiseWorld, Inc.
D-FW Tours, Inc., d/b/a D-FW Travel Arrangements
Diplomat Tours, Inc., d/b/a International Airline Consolidators
Gold Coast Travel Agency Corporation, Inc. d/b/a Gold Coast Cruise Center
Ship 'N' Shore Cruises, Inc.
SNS Coachline, Inc.
SNS Travel Marketing, Inc.
The Anthony Dean Corporation, d/b/a Cruise Fairs of America
The Cruise Line, Inc.
Travel 800, LLC, d/b/a 1-800-FLY CHEAP
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-Q FOR THE THREE
MONTHS ENDED MARCH 31, 1998 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 AND 1998 UNDER TRANSACTIONS
ACCOUNTED FOR USING THE POOLING METHOD OF ACCOUNTING, COMPANIES ACQUIRED IN 1998
UNDER PURCHASE TRANSACTIONS AND THE FOUR OTHER FOUNDING COMPANIES ACQUIRED ON
JULY 28, 1997. SEE NOTE 1, BASIS OF PRESENTATION, TO THE FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 20,619
<SECURITIES> 0
<RECEIVABLES> 7,014
<ALLOWANCES> 134
<INVENTORY> 0
<CURRENT-ASSETS> 30,849
<PP&E> 15,424
<DEPRECIATION> 3,199
<TOTAL-ASSETS> 100,524
<CURRENT-LIABILITIES> 30,438
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 57,085
<TOTAL-LIABILITY-AND-EQUITY> 100,524
<SALES> 0
<TOTAL-REVENUES> 29,936
<CGS> 14,237
<TOTAL-COSTS> 14,237
<OTHER-EXPENSES> 7,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 3,272
<INCOME-TAX> 1,374
<INCOME-CONTINUING> 1,898
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,898
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
