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 September 30, 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 November 9, 1998, was 13,359,695.
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TRAVEL SERVICES INTERNATIONAL, INC.
FORM 10-Q
INDEX
PAGE
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PART I FINANCIAL INFORMATION...................................................................3
Item 1. Consolidated Financial Statements.......................................................3
Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998 .............3
Consolidated Statements of Income -- Historical for the Three Months Ended
September 30, 1997 and 1998 and the Nine Months Ended September 30, 1997 and 1998.......4
Consolidated Statements of Income -- Pro Forma for the Three Months Ended
September 30, 1997 and 1998 and Nine Months Ended September 30, 1997 and 1998...........5
Consolidated Statements of Cash Flows -- Historical for the Nine Months
Ended September 30, 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......................................................................20
Item 2. Changes in Securities and Use of Proceeds..............................................20
Item 4. Submission of Matters to a Vote of Security Holders....................................20
Item 5. Other Information......................................................................20
Item 6. Exhibits and Reports on Form 8-K.......................................................22
SIGNATURES............................................................................................23
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2
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PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
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TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1998
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ASSETS
Current Assets:
Cash and cash equivalents $ 8,451 $ 37,361
Accounts receivable, net of
allowance of $141 and $803, respectively 5,035 12,251
Receivables from affiliates and employees 640 486
Prepaid expenses 899 1,655
Deferred income taxes 773 1,087
Other current assets 208 674
-------- --------
Total current assets 16,006 53,514
Property and equipment, net 11,469 18,183
Goodwill, net 41,701 106,673
Notes receivables from employees 255 403
Other assets 735 1,080
-------- --------
Total assets $70,166 $179,853
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current maturities of long-term debt $ 433 $ 350
Due to affiliates and employees 478 --
Trade payables and accrued expenses 13,696 32,087
-------- --------
Total current liabilities 14,607 32,437
Long-term debt, net of current portion 4,140 3,276
Deferred income taxes 0 1,307
Other long-term liabilities 162 217
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;
10,997,631 and 13,359,695 shares
outstanding, respectively 110 134
Additional paid-in capital 48,026 129,426
Retained earnings 3,121 13,056
-------- --------
Total stockholders' equity 51,257 142,616
-------- --------
Total liabilities and stockholders' equity $ 70,166 $179,853
======== ========
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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)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1997 1998 1997 1998
---------- ----------- ---------- -----------
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Net revenues $ 18,447 $ 33,992 $ 47,145 $ 97,548
Operating expenses 11,098 19,373 28,716 53,259
---------- ----------- ---------- -----------
Gross profit 7,349 14,619 18,429 44,289
General and administrative expenses 5,117 8,503 13,531 24,886
Goodwill amortization 201 782 201 1,804
---------- ----------- ---------- -----------
Income from operations 2,031 5,334 4,697 17,599
Interest income (expense) and other, net 63 91 (3) (258)
---------- ----------- ---------- -----------
Income before provision for income taxes 2,094 5,425 4,694 17,341
Provision for income taxes 879 2,279 1,972 7,283
---------- ----------- ---------- -----------
Net income $ 1,215 $ 3,146 $ 2,722 $ 10,058
========== =========== ========== ===========
Basic earnings per share $ 0.39 $ 0.24 $ 0.88 $ 0.86
========== =========== ========== ===========
Diluted earnings per share $ 0.39 $ 0.23 $ 0.88 $ 0.83
========== =========== ========== ===========
Shares used in computing basic earnings per share 3,080,678 12,914,920 3,080,678 11,658,102
========== =========== ========== ===========
Shares used in computing diluted earnings per share 3,080,678 13,388,011 3,080,678 12,149,908
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - PRO FORMA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
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Net revenues $ 23,861 $ 33,992 $ 75,111 $ 102,789
Operating expenses 14,585 19,373 44,522 56,233
----------- ----------- ----------- -----------
Gross profit 9,276 14,619 30,589 46,556
General and administrative expenses 5,921 8,466 16,108 25,573
Goodwill amortization 503 782 1,521 2,136
----------- ----------- ----------- -----------
Income from operations 2,852 5,371 12,960 18,847
Interest income (expense) and other, net 41 91 6 (336)
----------- ----------- ----------- -----------
Income before provision for income taxes 2,893 5,462 12,966 18,511
Provision for income taxes 1,215 2,294 5,445 7,775
----------- ----------- ----------- -----------
Net income $ 1,678 $ 3,168 $ 7,521 $ 10,736
=========== =========== =========== ===========
Diluted pro forma earnings per share $ 0.15 $ 0.24 $ 0.66 $ 0.86
=========== =========== =========== ===========
Shares used in computing diluted
pro forma earnings per share 11,368,171 13,388,011 11,368,171 12,477,186
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - HISTORICAL
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
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Cash from operating activities:
Net income $ 2,722 $ 9,566
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,083 3,465
Amortization of unearned compensation 5 23
Changes in operating assets and liabilities:
Accounts receivables (2,487) (6,474)
Receivables and notes from affiliates
and employees (183) 3
Prepaid expenses 61 (756)
Deferred income taxes (1,097) (314)
Other assets 1,188 (782)
Trade payables and accrued expenses 13,698 17,649
-------- --------
Net cash provided by operating activities 14,990 22,380
Cash flows from investing activities:
Capital expenditures (5,983) (5,779)
Proceeds from sale of property and equipment 54 --
Cash paid for acquisitions, net of cash acquired (17,348) (51,919)
-------- --------
Net cash used in investing activities (23,277) (57,698)
Cash flows from financing activities:
Proceeds from long-term debt and lines of credit 991 30,700
Payments on long-term debt and lines of credit (3,560) (32,841)
Net Proceeds from Offerings 33,219 66,369
Distributions to stockholders (5,179) --
-------- --------
Net cash provided by financing activities 25,471 64,228
Net increase in cash and cash equivalents 17,184 28,910
Cash and cash equivalents, beginning of period 1,649 8,451
-------- --------
Cash and cash equivalents, end of period $ 18,833 $ 37,361
======== ========
Supplemental cash flow information:
Cash paid for interest $ 276 $ 548
======== ========
Supplemental disclosure of non-cash financing and investing activities:
Assets distributed to founding companies
stockholders $ 2,193 $ --
======== ========
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The accompanying notes are an integral part of these financial statements.
6
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TRAVEL SERVICES INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim Consolidated Financial Statements as of September 30, 1998 and for
the three and nine month periods ended September 30, 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, for the year ended December 31, 1997, all of which
are included in the Company's Registration Statement on Form S-1 (File No.
333-56567) (the "Registration Statement") which was declared effective on July
15, 1998 by the Securities and Exchange Commission (the "SEC"). The Registration
Statement was filed in connection with an offering of the Company's common
stock, which was consummated on July 21, 1998 (the "Secondary Offering").
On July 28, 1997, Travel Services International, Inc. consummated its initial
public 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. Historical financial statements for the three and nine month periods ended
September 30, 1997 and 1998 include the operating results of eight additional
specialized distributors of cruise reservation services acquired from November
1997 through August 1998 under transactions accounted for using the pooling of
interests method of accounting (the "Pooling Acquisitions"). Historical
financial statements for the three and nine months ended September 30, 1998 also
include the operating results of the following companies acquired during the
first nine months of 1998 under transactions accounted for using the purchase
method of accounting: five specialized distributors of reservations (one
airline, three cruise and one auto rental), a provider of services to
independent travel agencies (the "Purchase Acquisitions") and Lexington Services
Associates, Ltd., an electronic hotel reservation services company (the
"Lexington Acquisition"). Results of the Purchase Acquisitions and the Lexington
Acquisition are included from the date of the acquisitions through September 30,
1998. The historical financial statements for the three and nine month periods
ended September 30, 1997 do not include the operating results of the Purchase
Acquisitions or the Lexington Acquisition.
Because of the significance of the Combinations in July 1997 and the Lexington
Acquisition in June 1998, pro forma combined statements of income for the three
and nine month periods ended September 30, 1997 and 1998 have been prepared and
diluted pro forma earnings per share has been computed. The pro forma financial
information gives effect to the results of the Company combined with all the
Founding Companies and the Lexington Acquisition as if the Combinations and the
Lexington Acquisition had occurred at the beginning of each respective period,
along with certain adjustments associated with the Combinations, the Lexington
Acquisition and the Pooling Acquisitions. These adjustments include amortization
of goodwill resulting from the Combinations and the Lexington Acquisition,
certain adjustments to salaries, bonuses and management fees to former owners
and key management of the acquired companies, to which to which such persons
have agreed prospectively, reversal of merger and acquisition costs associated
with the Pooling Acquisitions and provision for income taxes as if pro forma
income was subject to corporate and federal income taxes during the periods.
The pro forma combined statements of income 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
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Companies and the Lexington Acquisition been under common control prior to the
Combinations and the Lexington Acquisition, or which may result in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 for the
year ended December 31, 1997, included in the Company's Registration Statement.
During 1998, the Company adopted Financial Standards Board Statement of
Financial Accounting Standard No. 130, Reporting Comprehensive Income which
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 and nine
month periods ended September 30, 1997 and 1998, there were no differences
between net income and comprehensive income.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report information about operating segments and for related disclosures about
products and services, geographic areas and major customers. The Company will
implement disclosure provisions of SFAS No. 131 effective December 31, 1998.
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after September 15, 1999. Management
believes that adopting this statement will not have a material impact upon the
Company's results of operations or financial position.
3. LONG-TERM DEBT AND CREDIT FACILITY
The Company has a credit facility agreement with NationsBank, N.A.
("NationsBank") with respect to a $30 million revolving line of credit (the
"Credit Facility") and a term loan 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 acquisitions, letters of
credit not to exceed $3 million in the aggregate, and for capital expenditures
(including but not limited to investments in technology) and general corporate
purposes, not to exceed $5 million in the aggregate. As of September 30, 1998,
there were no outstanding borrowings under the Credit Facility, as $28.6 million
was repaid on July 21, 1998 using a portion of the net proceeds of the Secondary
Offering. All amounts repaid under the Credit Facility may be reborrowed.
Interest on outstanding balances of the Credit Facility and Term Loan are
computed based on the Eurodollar Rate plus a margin ranging from 1.25% to 2.0%,
depending on certain financial ratios. For a full description of the Credit
Facility, refer to Note 7 and 15 to the Consolidated Financial Statements and
related Notes thereto for the year ended December 31, 1997 included in the
Company's Registration Statement.
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 Facility 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 September 30, 1998, the Company entered into interest rate swap hedge
agreements totaling $16.4 million and maturing in October 2000, of which $14.3
million relates to the Credit Facility. These interest rate swap hedge
agreements were not liquidated when borrowings under the Credit Facility were
repaid and an unrealized loss of approximately $275,00 and $415,000 was recorded
in the three and nine month periods ended September 30, 1998, respectively.
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The Credit Facility is secured by substantially all the assets of the Company
and 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 September 30, 1998 the Company was in compliance with
the loan covenants or obtained waivers for any instances of non-compliance.
4. ACQUISITIONS AND CAPITAL STOCK
On July 21, 1998, the Company consummated the Secondary Offering. An aggregate
of 4,025,000 shares of Common Stock were registered and sold, including
2,025,000 shares sold by the Company and 2,000,000 shares sold by certain
selling stockholders. All of the shares were sold to the public at a price of
$34.50 per share. Net proceeds to the Company from the Secondary Offering (after
deducting underwriting discounts and commissions and estimated offering
expenses) were approximately $66.4 million, of which $28.6 million was used to
repay borrowings under the Credit Facility. The Company did not receive any
proceeds from shares sold by selling stockholders.
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. 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 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.
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 is accounted for using the pooling of interests method of
accounting.
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 is 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.
On May 21, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Landry & Kling, Inc. ("L&K"). L&K is a specialized
distributor of corporate incentive cruise reservations. The aggregate
consideration paid for this acquisition was 163,078 shares of common stock. The
acquisition is accounted for using the pooling of interests method of
accounting.
On May 31, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Goodfellow Enterprises, Inc., ("The Travel
Company"). The Travel Company is a specialized distributor of cruise
reservations. The aggregate consideration paid for this acquisition was 179,727
shares of common stock. The acquisition is accounted for using the pooling of
interests method of accounting.
Effective June 1, 1998, the Company consummated the acquisition of all of the
outstanding equity interests of the Lexington Services Associates, Ltd.
("Lexington"). Lexington is an electronic hotel reservation services company.
The aggregate consideration paid for this acquisition was 283,990 shares of
common stock and $24.0 million in cash, including $4 million of contingent
consideration paid in August 1998. The acquisition is accounted for using the
purchase method of accounting. The historical operations of Lexington when
compared to the historical
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operations of the Company are significant and, accordingly, net revenues and
income before taxes generated by Lexington prior to the date of acquisition are
included in the accompanying pro forma consolidated statements of net income for
the three and nine month periods ended September 30, 1997 and 1998.
Effective July 1, 1998 the Company completed the acquisition of substantially
all the assets of ABC Corporate Services ("ABC"). ABC provides services to
independent travel agencies, including publication of a hotel guide and
after-hours travel services for certain travel agencies' corporate accounts. The
aggregate consideration paid was $4,250,000, as adjusted for certain changes in
working capital. The acquisition is accounted for using the purchase method of
accounting. The historical operations of ABC when compared to the historical
operations of the Company are not significant.
On August 31, 1998, the Company consummated the acquisition of all the
outstanding stock of Cruise Outlets of the Carolinas, Inc. ("Cruise Outlet").
Cruise Outlet is a specialized distributor of cruise reservation by using the
Internet as a prime source of sales leads. The aggregate consideration paid for
this acquisition was 150,000 shares of common stock. The acquisition is
accounted for using the pooling of interests method of accounting.
Aggregate revenues and income before taxes included in the accompanying
consolidated statements of income for the three and nine month periods ended
September 30, 1997 and 1998 that were generated prior to the date of the
acquisitions by the four acquisitions noted above as being accounted for using
the pooling of interests method of accounting (the "1998 Poolings"), were as
follows: net revenues of $1.2 million and $3.5 million in the three and nine
month periods ended September 30, 1997, respectively; income before taxes of
$227,000 and $720,000 in the three and nine month periods ended September 30,
1997, respectively; net revenues of $318,000 and $2.4 million in the three and
nine month periods ended September 30, 1998, respectively; and income before
taxes of $350,000 and $1.1 million in the three and nine month periods ended
September 30, 1998, respectively.
On August 7, 1998, the Company consummated the acquisition of the outstanding
capital stock of 1-800-CRUISES, Inc. and Jubilee Enterprises, Inc.,
(collectively "1-800-Cruises"). Among the assets acquired were toll free
telephone numbers 1-800-CRUISES and 1-800-CRUISING and the www.1-800-CRUISES.com
web-site address. In addition, the entities operate a small cruise reservation
call center. The aggregate consideration paid for this acquisition was 36,546
shares of common stock and $500,000 in cash. The acquisition is accounted for
using the purchase method of accounting. The historical operations of
1-800-Cruises 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 in 1997. Basic earnings per common share calculations are
determined by dividing net income by the weighted average number of shares of
common stock outstanding during the period. 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.
A reconciliation of weighted average shares used in the calculation of
historical basic and diluted earnings per share for the three and nine month
periods ended September 30 1997 and 1998 is as follows:
NINE MONTHS THREE MONTHS
SEPTEMBER SEPTEMBER
30, 1998 30, 1998
Basic common shares outstanding 11,658,102 12,914,920
Dilutive effects of stock options 491,806 473,091
---------- ------------
Dilutive shares outstanding 12,149,908 13,388,011
========== ==========
Dilutive pro forma earnings per share for the periods, which reflects the
dilutive effects of stock options, is also presented related to the pro forma
combined statements of income as discussed in Note 1 herein.
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6. 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 or
results of operations.
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, for the year ended December
31, 1997 included in the Company's Registration Statement. 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 as a leading specialized distributor of cruise
vacations, domestic and international airline tickets and European auto rentals,
and a leading provider of electronic reservation services, through various
subsidiaries (the "Operating Companies").
Because of the significance of the Combinations in July 1997 and the Lexington
Acquisition in September 1998, pro forma combined statements of income for the
three and nine month periods ended September 30, 1997 and 1998 have been
prepared in addition to historical statements of operations. The pro forma
combined statements of income 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 and the Lexington Acquisition
been under common control prior to the Combinations or the Lexington
Acquisition, or which may result in the future.
The Company's revenue is derived primarily from selling travel related services,
including cruise vacations, airline tickets and European auto rentals, by
providing electronic hotel reservations and by providing various services to
independent travel agencies. The Company does not record the gross amount of the
travel services sold to travelers or travel agents. Net revenues recorded by the
Company include commissions and markups on travel services, volume bonuses and
override commissions and fees for services including processing and delivering
tickets, franchisee support, hotel reservations, after hours reservation
services and hotel guide publication.
The Company records net revenues when earned, which for cruise bookings is when
the cruise is fully paid and the customer is no longer entitled to a full refund
of the cost of the cruise, generally 45 to 90 days prior to the sailing date,
for airline tickets and auto rentals is at the time the reservation is booked
and ticketed, for hotel reservation services is at the time the traveler checks
out of the hotel and for other services when the services are provided. The
Company provides allowances for bad debts, cancellations, reservation changes,
"no shows" and currency exchange guarantees, based on historical experience.
Operating expenses include compensation of sales and sales support personnel,
commissions, credit card merchant fees, telecommunications, mail, courier,
marketing, global distribution systems fees, hotel guide production costs 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. The Company receives a portion of commissions
earned by its franchisees selling cruises.
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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,
amortization of capitalized internally developed software and other overhead
costs. Internally developed software is amortized over five years.
The Company records as goodwill the excess of consideration paid over the
estimated fair market value of net assets acquired in business combinations
accounted for under the purchase method. Goodwill is amortized over 35 years for
the travel service companies acquired and over five years for an acquired
software company. As of September 30, 1998, goodwill, net, was $106.7 million.
RESULTS OF OPERATIONS - HISTORICAL
Historical financial results for each period presented represent those of Auto
Europe and the Pooling Acquisitions and include the operations of the other four
Founding Companies and Travel Services International, Inc., only since July 28,
1997, and the operations of the Purchase Acquisitions and the Lexington
Acquisition only since their respective acquisition dates in 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998 - HISTORICAL
The following table sets forth certain selected historical financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 18,447 100.0% $33,992 100.0%
Operating expenses 11,098 60.2 19,373 57.0
------- ----- ------- -----
Gross profit 7,349 39.8 14,619 43.0
General and administrative expenses 5,117 27.7 8,503 25.0
Goodwill amortization 201 1.1 782 2.3
------- ----- ------- -----
Income from operations 2,031 11.0 5,334 15.7
Interest income (expense) and other, net 63 .4 91 .3
------- ----- ------- -----
Income before provision for income taxes 2,094 11.4 5,425 16.0
Provision for income taxes 879 4.8 2,279 6.7
------- ----- ------- -----
Net income $ 1,215 6.6% $ 3,146 9.3%
====== ===== ======= =====
</TABLE>
Net revenues increased from $18.4 million in 1997 to $34.0 million in 1998. Net
revenues in the European auto rental segment increased 15.5% and net revenues of
the Pooling Acquisitions increased 47.8%, with the balance of the net increase
in net revenues attributable to the inclusion of the net revenues of four of the
Founding Companies commencing on July 28, 1997 and the Purchase Acquisitions and
the Lexington Acquisition commencing from the date of acquisitions in 1998.
Operating expenses increased from $11.1 million in 1997 to $19.4 million in
1998. As a percentage of net revenues, total operating expenses decreased from
60.2% in 1997 to 57.0% in 1998, primarily due to the change in the mix of
business in each travel segment as a result of acquisitions.
General and administrative expenses increased from $5.1 million in 1997 to $8.5
million in 1998 and were 27.7% and 25.0% of net revenues, respectively. The
increase in expenses was primarily the result of expenses associated with being
a public company and costs of maintaining a corporate headquarters, which did
not exist at any significant level in the three months ended September 30, 1997
just following the initial public offering, and expenses of the Lexington
Acquisition and Purchase Acquisitions in 1998, all of which is offset somewhat
by lower general and administrative expenses at other Operating Companies as a
percentage of net revenues.
Goodwill amortization increased from $201,000 in 1997 to $782,000 in 1998. The
increase in goodwill amortization in 1998 was the result of amortization related
to the Lexington Acquisition and Purchase Acquisitions.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998 - HISTORICAL
The following table sets forth certain selected historical financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 47,145 100.0% $97,548 100.0%
Operating expenses 28,716 60.9 53,259 54.6
------ ----- ------- -----
Gross profit 18,429 39.1 44,289 45.4
General and administrative expenses 13,531 28.7 24,886 25.5
Goodwill amortization 201 .4 1,804 1.8
------ ----- ------- -----
Income from operations 4,697 10.0 17,599 18.1
Interest income (expense) and other, net (3) 0 (258) (.3)
------ ----- ------- -----
Income before provision for income taxes 4,694 10.0 17,341 17.8
Provision for income taxes 1,972 4.2 7,283 7.5
------ ----- ------- -----
Net income $ 2,722 5.8% $10,058 10.3%
====== ===== ======= =====
</TABLE>
Net revenues increased from $47.1 million in 1997 to $97.5 million in 1998. Net
revenues in the European auto rental segment increased 13.4% and net revenues of
the Pooling Acquisitions increased 39.6%, with the balance of the net increase
in net revenues attributable to the inclusion of the net revenues of four of the
Founding Companies commencing on July 28, 1997 and the Purchase Acquisitions and
the Lexington Acquisition commencing from the date of acquisitions in 1998.
Operating expenses increased from $28.7 million in 1997 to $53.3 million in
1998. As a percentage of net revenues, total operating expenses decreased from
60.9% in 1997 to 54.6% in 1998, primarily due to the change in the mix of
business in each travel segment as a result of acquisitions.
General and administrative expenses increased $11.4 million, or 83.9%, from
$13.5 million in 1997 to $24.9 million in 1998 and were 28.7% and 25.5% of net
revenues, respectively. The increase in expenses was primarily the result of
expenses associated with being a public company and costs of maintaining a
corporate headquarters which did not exist prior to the initial public offering
and expenses of the Lexington Acquisition and Purchase Acquisitions in 1998,
offset somewhat by lower general and administrative expenses at other Operating
Companies as a percentage of net revenues.
Goodwill amortization increased from $201,000 in 1997 to $1.8 million in 1998.
The increase in goodwill amortization in 1998 was the result of amortization
related to the Lexington Acquisition and Purchase Acquisitions.
RESULTS OF OPERATIONS - PRO FORMA
Pro forma combined financial results for each period presented give effect to
the results of the Company combined with all the Founding Companies and the
Lexington Acquisition as if the Combinations and the Lexington Acquisition had
occurred at the beginning of each respective period, along with certain
adjustments associated with the Combinations, the Lexington Acquisition and the
Pooling Acquisitions described elsewhere herein.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998 - PRO FORMA
The following table sets forth certain selected pro forma financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 23,861 100.0% $33,992 100.0%
Operating expenses 14,585 61.1 19,373 57.0
------- ----- ------- -----
Gross profit 9,276 38.9 14,619 43.0
General and administrative expenses 5,921 24.8 8,446 24.9
Goodwill amortization 503 2.1 782 2.3
------- ----- ------- -----
Income from operations 2,852 12.0 5,371 15.8
Interest income (expense) and other, net 44 .1 91 .3
------- ----- ------- -----
Income before provision for income taxes 2,893 12.1 5,462 16.1
Provision for income taxes 1,215 5.1 2,294 6.8
------- ----- ------- -----
Net income $ 1,678 7.0% $ 3,169 9.3%
======== ====== ======= ======
</TABLE>
Net revenues increased $10.1 million, or 42.5%, from $23.9 million in 1997 to
$34.0 million in 1998. The increase in net revenues is primarily attributable to
acquisitions and increased transaction volumes of travel services by the Company
in each segment. In addition, net revenue per transaction increased in European
auto rental, cruise and hotel segments. Net revenues for the period increased
79.9%, 13.5%, 15.5% and 62.0% in the cruise, air, European auto rental, and
hotel segments, respectively. Of the 42.5% increase in combined pro forma net
revenues, 23.8% was attributable to internal growth at the Founding Companies,
the Pooling Acquisitions and the Lexington Acquisition, and 18.7% was
attributable to net revenues recorded for the Purchase Acquisitions in 1998. The
Company did not record net revenues for 1997 for the Purchase Acquisitions.
Operating expenses increased $4.8 million, or 32.8%, from $14.6 million in 1997
to $19.4 million in 1998. As a percentage of net revenues, total operating
expenses decreased from 61.1% in 1997 to 57.0% in 1998, primarily due to a
change in the mix of business by segment as a result of acquisitions.
General and administrative expenses increased $2.5 million, or 42.6%, from $5.9
million in 1997 to $8.4 million in 1998, and were 24.8% and 24.9% of net
revenues, respectively. The increase in expenses was primarily the result of
expenses associated with being a public company and costs of maintaining a
corporate headquarters, which did not exist at any significant level in the
three months ended September 30, 1997 just following the initial public
offering, and expenses of the Purchase Acquisitions in 1998, offset somewhat by
lower general and administrative expenses at other Operating Companies as a
percentage of net revenues.
Goodwill amortization increased $279,000, or 55.5%, from $503,000 in 1997 to
$782,000 in 1998. The increase in goodwill amortization in 1998 was the result
of amortization related to the Purchase Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998 - PRO FORMA
The following table sets forth certain selected pro forma financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 75,111 100.0% $102,789 100.0%
Operating expenses 44,522 59.3 56,233 54.7
-------- ----- -------- -----
Gross profit 30,589 40.7 46,556 45.3
General and administrative expenses 16,108 21.4 25,573 24.9
Goodwill amortization 1,521 2.0 2,136 2.1
-------- ----- -------- -----
Income from operations 12,960 17.3 18,847 18.3
Interest income (expense) and other, net 6 0 (336) (.3)
-------- ----- -------- -----
Income before provision for income taxes 12,966 17.3 18,511 18.0
Provision for income taxes 5,445 7.3 7,775 7.6
-------- ----- -------- -----
Net income $ 7,521 10.0% $ 10,736 10.4%
======== ===== ======== =======
</TABLE>
14
<PAGE>
Net revenues increased $27.7 million, or 36.8%, from $75.1 million in 1997 to
$102.8 million in 1998. The increase in net revenues is primarily attributable
to acquisitions and increased transaction volumes of travel services by the
Company in each segment. Net revenues for the period increased 70.1%, 15.5%,
13.4% and 47.6%, in the cruise, air, European auto rental, and hotel segments,
respectively. Net revenue per transaction increased in the cruise, European auto
rental and hotel segments. Of the 36.8% increase in combined pro forma net
revenues, 15.3% was attributable to the Purchase Acquisitions and 21.5% was
attributable to internal growth at the Founding Companies, the Pooling
Acquisitions and the Lexington Acquisition. Net revenues for 1997 were not
recorded for the Purchase Acquisitions.
Operating expenses increased $11.7 million, or 26.3%, from $44.5 million in 1997
to $56.2 million in 1998. As a percentage of net revenues, total operating
expenses decreased from 59.3% in 1997 to 54.7% in 1998, primarily due a change
in the mix of business by segment.
General and administrative expenses increased $9.5 million, or 58.8%, from $16.1
million in 1997 to $25.6 million in 1998. The increase in expenses was primarily
the result of expenses associated with being a public company and costs of
maintaining a corporate headquarters which did not exist prior to the initial
public offering and expenses of the Purchase Acquisitions in 1998, offset
somewhat by lower general and administrative expenses at other Operating
Companies as a percentage of net revenues.
Goodwill amortization increased $615,000, or 40.4%, from $1.5 million in 1997 to
$2.1 million in 1998. The increase in goodwill amortization in 1998 was the
result of amortization related to the Purchase Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS, INCLUDING ACQUISITIONS
The Company's three primary sources of liquidity and capital resources are cash
flow from operating activities, issuance of Common Stock and borrowings under
its Credit Facility.
In the nine months ended September 30, 1997 and 1998, on a historical basis, net
cash provided by operating activities was approximately $15.0 million and $22.4
million, respectively, capital expenditures were $6.0 million and $5.8 million,
respectively, borrowing under the Term Loan and other borrowings were $1.0
million and $2.1 million, respectively, and repayment of debt was $3.6 million
and $4.2 million, respectively. In addition, borrowings under line of credit
(established in October 1997) were $28.6 million in the nine months ended
September 30, 1998. All outstanding borrowings under the line of credit
consisting of $28.6 million were repaid in July 1998 using a portion of the net
proceeds from the Secondary Offering.
Effective June 1, 1998, the Company consummated the acquisition of all of the
outstanding equity interests of Lexington Services Associates, Ltd.
("Lexington"). Lexington is an electronic hotel reservation services company.
The aggregate consideration paid for this acquisition was 283,990 shares of
common stock and $24 million in cash. The acquisition is accounted for using the
purchase method of accounting. The historical operations of Lexington when
compared to the historical operations of the Company are significant and,
accordingly, net revenues and income before taxes generated by Lexington prior
to the date of acquisition are included in the accompanying pro forma
consolidated statements of net income for the three and nine month periods ended
September 30, 1997 and 1998.
The Company issued 186,546 shares of common stock and paid $4.8 million cash
consideration during the three months ended September 30, 1998 in connection
with three acquisitions described herein. In addition, the Company paid $4
million of contingent consideration related to the Lexington Acquisition. One of
the acquisitions was accounted for using the pooling of interests method of
accounting and two of the acquisitions were accounted for using the purchase
method of accounting.
The Company issued 1,151,752 shares of common stock and paid $49.5 million cash
consideration during the nine months ended September 30, 1998 in connection with
eleven acquisitions consummated during the period. Four of the acquisitions were
accounted for using the pooling of interests method of accounting, and seven of
the
15
<PAGE>
acquisitions, including the Lexington Acquisition, were accounted for using
the purchase method of accounting.
On July 21, 1998, the Company consummated its Secondary Offering. An aggregate
of 4,025,000 shares of Common Stock were offered and sold, including 2,025,000
shares sold by the Company and 2,000,000 shares sold by certain selling
stockholders. All of the shares were sold at a price to the public of $34.50 per
share. Net proceeds to the Company from the Secondary Offering (after deducting
underwriting discounts and commissions and estimated offering expenses) were
approximately $66.4 million, of which $28.6 million was used to repay borrowings
under the Credit Facility. The Company did not receive any proceeds from shares
sold by selling stockholders.
The Company expects to spend an aggregate of $10 million during 1998 for capital
expenditures, including approximately $5 million for development of software
applications for internal use. The remainder of the 1998 capital budget relates
to purchases of computer hardware and personal computers, telecommunications
equipment, leasehold and building improvements and furniture and fixtures.
Capital expenditures during the nine months ended September 30, 1998 totaled
$5.8 million, of which $3.4 million relates to development of software
applications for internal use. In addition, the Company expects to spend
approximately $17 million for all capital expenditures in 1999, including $9
million for development of software applications for internal use. An assessment
of the Company's Year 2000 preparedness is discussed below.
The Company believes that the net proceeds of the Secondary Offering, together
with cash flow from operating activities and borrowings under its Credit
Facility, should be adequate to meet the Company's capital requirements over the
next 12 months. However, changes in the method of financing or expected size of
future acquisitions may affect the Company's liquidity and capital requirements
during that time. The Company has engaged in preliminary discussions with its
lender regarding the possibility of increasing its borrowing base to between $60
and $75 million through issuance of a new credit facility in which other banks
would participate.
LONG-TERM DEBT AND CREDIT FACILITY
The Company has a credit facility 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 acquisitions,
letters of credit not to exceed $3 million in the aggregate, and for capital
expenditures (including but not limited to investments in technology) and for
general corporate purposes, which in the aggregate may not exceed $5 million. As
of September 30, 1998, there were no outstanding borrowings under the Credit
Facility. All amounts repaid may be reborrowed. Interest on outstanding balances
of the Credit Facility and Term Loan are computed based on the Eurodollar Rate
plus a margin ranging from 1.25% to 2.0%, depending on certain financial ratios.
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 Facility 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 September 30, 1998, the Company entered into interest rate swap hedge
agreements totaling $16.4 million and maturing in October 2000, of which $14.3
million relates to the Credit Facility. These interest rate swap hedge
agreements were not liquidated when borrowings under the Credit Facility were
repaid and an unrealized loss of approximately $275,000 and $415,000 was
recorded in the three and nine month periods ended September 30, 1998,
respectively.
The Credit Facility is secured by substantially all the assets of the Company
and 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 September 30, 1998 the Company was in compliance with
the loan covenants or obtained waivers for any instances of non-compliance.
16
<PAGE>
YEAR 2000 PREPAREDNESS
STATE OF READINESS
The Company recognizes that computer systems and all forms of electronic
technology, information technologies ("IT") and non-information technologies
("Non- IT"), could be adversely affected by the year 2000 date. This is because
many systems and technology components use a two-digit field to represent the
year in dates (e.g., "98" rather than "1998"). With the advent of the year 2000,
systems and programs may fail or produce incorrect data believing it is the year
1900, causing not just IT problems but also business and operations problems.
To help ensure that the Company's systems can survive the turn of the century,
any use of dates in technology or systems are being identified, assessed,
corrected and tested where necessary. To support this effort, the Company has
developed an overall project approach, a project reporting and accountability
structure and process methodology.
The project approach has been developed to address the following: (1) IT
(applications and computing environment), (2) Non-IT systems (embedded
technology and systems), and (3) Business Partner Management (vendors,
suppliers, banks, leasing companies). Internal and external compliance factors
that may have an impact on the Company's business operations are being addressed
and monitored using this approach.
The Company's project reporting and accountability structure encompasses every
level of the organization, including: (1) an Executive Committee (senior level
management of the Company), (2) an Executive Sponsor (the Chief Information
Officer) who is responsible for reviewing and advising on Year 2000 project
progress and processes, (3) the Year 2000 Project Office that is responsible for
overall coordination, maintenance, collection and dissemination of all Year 2000
project information as well as the centralized systems and processes, and (4)
subsidiary operating company management and assigned points of contact
responsible for those systems developed, purchased, operated and supported
within an operating company.
The Year 2000 Project Office has developed a reporting schedule and will require
monthly updates from the Operating Companies and others throughout the life of
the project. These updates include inventory updates and status and associated
detail (i.e., budget, risks, timeline and schedule, contingency plans, testing
plans and updates, issues and concerns, and Company awareness activities). The
Year 2000 Project Office is responsible for reporting on the Company's state of
compliance.
The Company employs a seven phase process methodology for the project: Phase 1,
Organization of the project; Phase 2, Assessment of conducting an inventory and
identifying areas of exposure; Phase 3, Planning to correct exposure areas
(i.e., developing project and contingency plans, establishing priorities, and
developing strategies for correcting problems); Phase 4, Correction of the
exposed systems; Phase 5, Testing of the corrections; Phase 6, Implementation of
the corrections; and Phase 7, Maintenance of Year 2000 compliance over time.
The Company has substantially completed the Organization and Assessment phases,
and has made progress in the remaining phases. The degree to which Operating
Companies have addressed the Year 2000 issue for their locations prior to
acquisition by the Company varies. The Company believes the preliminary
inventory gathered has identified all significant systems and processes, and
Operating Companies have been asked to prioritize "business critical" and
"important" systems and assign status to the systems identified. External and
internal resources have been used for this effort and will continue to be used
to correct, test and implement these items for Year 2000 readiness and
compliance.
As part of the Company's overall technology strategy, the Company has been
developing new common applications (already Year 2000 compliant) that are
expected to be implemented in 1998 and 1999 across the air, auto and cruise
segments, replacing many, although not all, of the existing systems currently in
place at Operating Companies in these segments. New hardware and software
required to support these applications are expected to be in place by the end of
1999 and will be Year 2000 compliant.
17
<PAGE>
The Company has developed a corporate compliance statement and survey to address
and determine Year 2000 issues and readiness of its business partners. These
documents have been distributed to all business partners and a schedule has been
developed for follow-up and review of responses. An action plan has been
developed to closely work with and monitor progress of the Company's critical
and important business partners that could impact business operations if such
partners are not compliant.
COSTS
The total cost of Year 2000 remediation activities has not been to date, and is
not anticipated to be, material to the financial position or results of
operations of the Company in any given year. This is attributed in large part to
the Company's strategy for the development and implementation of new common
applications that will replace a significant portion of the Company's legacy
systems. However, there can be no assurance the new systems will be fully
implemented or implemented on the time schedule anticipated. The Company expects
to spend an aggregate of $18 to $20 million for the development of these systems
during 1998, 1999 and 2000 and expects the operating costs associated with these
systems to generally be in excess of current operating costs for applications in
use at the Operating Companies.
RISKS
The Company utilizes IT and Non-IT systems in many aspects of its business and
is dependent on a multitude of business partners. Risks associated with the Year
2000 include, but are not limited to, the following:
/bullet/ Business partners that experience Year 2000 issues may be unable to
provide goods or services to the Company, including those suppliers
providing goods and services sold by the Company. Disruption of other
services, such as utilities, could also potentially impact the
Company's operations.
/bullet/ Packaged software vendors that provide inadequate solutions,
corrections and testing.
/bullet/ Project delays for the technology applications currently under
development that could impact overall Year 2000 compliance efforts
and associated costs.
CONTINGENCY PLANS
While the Company believes it is pursuing the appropriate courses of action to
ensure Year 2000 readiness, there can be no assurance that the objectives will
be achieved internally or with business partners. Those areas will be addressed
by contingency plans. These contingency plans will include the identification,
acquisition and/or preparation of backup systems and processes in case of
non-compliance. Completion of contingency plans for all business critical and
important systems, including worst case scenarios, is expected in early 1999.
ONGOING PLANS AND ACTIVITIES
Based on its efforts and plans to date, the Company does not believe the Year
2000 issue will have a material effect on its financial condition. The Company
is completing the assessment and planning phases and is in the process of
determining the likelihood of successfully completing and addressing the full
range of issues in a timely manner. Upon completion of these phases, estimates
for the project timeline and schedule, budget, risks, issues and contingency
plans will be refined.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The results of the Company are subject to quarterly fluctuations caused
primarily by the seasonal variations in the travel industry, especially the
leisure travel segment. Seasonality also varies depending on the travel segment.
Net revenues and operating income of the European auto rental segment are
generally higher in the first and second quarters, net revenues and operating
income of the airline and cruise reservation companies are generally higher in
the second and third quarters, and net revenues and operating income of the
lodging segment are generally higher in the third and fourth quarters. The
Company expects this seasonality and quarterly fluctuations to continue.
The Company's quarterly results of operations may also be subject to
fluctuations as a result of the timing and cost of acquisitions, changes in the
mix of services offered by the Company, fare wars by travel providers, net daily
rates charged to travelers by hotels, changes in relationships with certain
travel providers (including commission rates
18
<PAGE>
and programs), changes in the timing and payment of overrides by travel
providers, extreme weather conditions or other factors affecting travel or the
economy.
19
<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
The Company's ability to pay dividends is restricted by the terms of the Credit
Facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of the Company was held on Tuesday, July
28, 1998. At such meeting, the stockholders considered and voted upon three
proposals: (1) the election of three members to the Board of Directors; (2) the
reincorporation of the Company from Delaware to Florida; and (3) the approval of
an Amended and Restated Long-Term Incentive Plan, providing for, among other
things, an amendment to the Company's prior plan to authorize an increase in the
total number of share that may be subject to awards under the plan to 15% of the
aggregate number of shares of common stock outstanding.
The stockholders approved each of the proposals. The votes cast for such
proposals were as follows:
<TABLE>
<S> <C> <C>
PROPOSAL #1 PROPOSAL #2 PROPOSAL #3
------------------ ------------------ ------------------
8,316,785 For 7,234,659 For 7,300,382 For
0 Against 257,230 Against 1,072,580 Against
57,800 Withheld 0 Withheld 0 Withheld
Abstentions and
0 Abstentions and 1,523 Abstentions and 1,623 broker non-votes
broker non-votes broker non-votes
</TABLE>
With respect to the directors nominated for office, each nominee received the
same number of votes for, against or withheld, as well as the same number of
abstentions and broker non-votes.
ITEM 5. OTHER INFORMATION
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 and its
Registration Statement (File No. 333-56567) and the Prospectus contained
therein. 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 future financial and
operating performance and results, sales, revenue, marketing plans and
initiatives, acquisitions, operational initiatives, technology, the economy and
other statements. 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. Past performance is not
necessarily indicative of future results, and actual results could differ
significantly from any results anticipated in any forward-looking statement. In
evaluating the Company's business, the following factors, in addition to the
Risk Factors set forth in the Company's Prospectus referred to above, should be
carefully considered: successful deployment and integration of systems; factors
affecting internal
20
<PAGE>
growth and management of growth; dependence on travel providers; the Company's
acquisition strategy and availability of acquisition financing; success in
entering new segments of the travel market and new geographic areas; the
Company's ability to implement its strategic technology, marketing and
operational initiatives dependence on technology; labor and technology costs;
cost, availability and success of 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.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
10.17 Employment Agreement, dated as of July 25, 1998, between the
Company and George Del Pino
11 Schedule of Computations of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
22
<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.
<TABLE>
<S> <C>
Date: November 13, 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)
</TABLE>
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.17 Employment Agreement, dated as of July 25, 1998, between the
Company and George Del Pino
11 Schedule of Computations of Earnings Per Share
27 Financial Data Schedule
EXHIBIT 10.17
EXECUTION COPY
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), by and between Travel
Services International, Inc., a Delaware corporation ("TSI"), and George DelPino
("Employee"), is hereby entered into as of the 25th day of July, 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; this 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 and Corporate
Controller of TSI. As such, Employee shall have responsibilities, duties and
authority reasonably accorded to and expected of a Vice President and Corporate
Controller and will report directly to the Chief Financial Officer 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.
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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
$115,000 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) 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.
The maximum bonus for which Employee may be eligible will be 50%
of Employee's base salary.
(c) 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 this 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. 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
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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 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
3, and in any event such new business, activities or location are not in
violation of this paragraph 3 or of employee's obligations under this paragraph
3, if any, Employee shall not be chargeable with a violation of this paragraph 3
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.
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(d) The covenants in this paragraph 3 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 3, during which the agreements and covenants of Employee made in
this paragraph 3 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 3.
4. 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 5(c).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
The term of this Agreement shall begin on the Effective Date and
continue for two years (until July 28, 2000), and, unless terminated sooner as
herein provided, shall continue thereafter on a year-to-year basis on the same
terms and conditions contained herein in effect as of the time of renewal. As
used herein, the word "Term" shall mean (i) during the two-year period referred
to in the preceding sentence, such two-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
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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 3(a) and during which the terms of paragraph 3
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 5(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 12 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 12 hereof. All other rights and obligations of TSI and Employee under
this Agreement shall cease as of the effective date
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of termination, except that TSI's obligations under paragraphs 9 and 16 hereof
and Employee's obligations under paragraphs 3, 6, 7, 8, 10 and 16 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 16 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 5(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 3 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 5 are
in the nature of severance payments, or liquidated damages, or both, and are not
in the nature of a penalty.
6. 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.
7. 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 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.
8. 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.
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9. 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 9.
10. 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.
11. ASSIGNMENT; BINDING EFFECT.
Employee understands that he 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 Employee's performance under
this Agreement. Subject to the preceding two (2) sentences and the express
provisions of paragraph 12 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.
12. 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 12 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
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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 5(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 5(d) and the noncompetition provisions of paragraph 3
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 5(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 5(d) and the noncompetition provisions of paragraph 3 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 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
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(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.
13. 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 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.
14. 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
Delray Beach, FL 33445
Attention: Chief Financial Officer
To Employee: George DelPino
___________________________________
___________________________________
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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 14.
15. 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.
16. 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 5(b) and 5(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.
17. 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.
18. 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/ JILL M. VALES
--------------------------------------
10
<PAGE>
Name: Jill M. Vales
Title: Senior Vice President and Chief Financial Officer
/S/ GEORGE DELPINO
-------------------------------------
George DelPino
11
EXHIBIT 11
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
SCHEDULE OF COMPUTATIONS OF EARNINGS PER SHARE
BASIC DILUTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES SHARES SHARES
---------- ---------------- ----------------
<S> <C> <C> <C>
HISTORICAL:
Quarter ended September 30, 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 1,997,344 1,997,344 1,997,344
---------- ---------- ----------
Shares used in computing earnings per share
for quarter ended September 30, 1997 3,080,678 3,080,678 3,080,678
========== ========== ==========
Quarter ended September 30, 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 1,997,344 1,997,344 1,997,344
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 Diplomat 21,821 21,821 21,821
Shares issued in consideration for acquisition of Goldcoast 163,755 163,755 163,755
Shares issued in consideration for acquisition of AutoNet 2,183 2,183 2,183
Shares issued in consideration for acquisition of Lexington 283,990 283,990 283,990
Shares issued in consideration for acquisition of 1-800-CRUISES 36,546 19,897 19,897
Shares issued in connection with the secondary stock offering 2,025,000 1,597,500 1,597,500
Exercised options 13,719 13,719 13,719
Options granted 1,649,903 -- 473,091
---------- ---------- ----------
Shares used in computing earnings per share for the
quarter ended September 30, 1998 15,008,972 12,914,920 13,388,011
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
PRO FORMA:
Quarter ended September 30, 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 1,997,344 1,997,344
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 Lexington 283,990 283,990
Shares related to Lexington 305,111 305,111
---------- ----------
Shares used in computing earnings per share for
quarter ended September 30, 1997 11,368,171 11,368,171
========== ==========
Quarter ended September 30, 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 1,997,344 1,997,344
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 Diplomat 21,821 21,821
Shares issued in consideration for acquisition of Goldcoast 163,755 163,755
Shares issued in consideration for acquisition of Lexington 283,990 283,990
Shares issued in consideration for acquisition of AutoNet 2,183 2,183
Shares issued in consideration for acquisition of 1-800-CRUISES 36,546 19,897
Shares issued in connection with the secondary stock offering 2,025,000 1,597,500
Exercised options 14,345 13,719
Options granted 1,649,903 473,091
---------- ----------
Shares used in computing earnings per share for the
quarter ended September 30, 1998 15,009,598 13,388,011
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
DATA IS FOR CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS AS OF SEPTEMBER
30, 1998; SEE FOOTNOTE 1 BASIS OF PRESENTATION
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-01-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-01-1994
<CASH> 37,361
<SECURITIES> 0
<RECEIVABLES> 12,737
<ALLOWANCES> 803
<INVENTORY> 0
<CURRENT-ASSETS> 53,514
<PP&E> 18,183
<DEPRECIATION> 0
<TOTAL-ASSETS> 179,853
<CURRENT-LIABILITIES> 32,437
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 142,482
<TOTAL-LIABILITY-AND-EQUITY> 142,616
<SALES> 97,548
<TOTAL-REVENUES> 97,548
<CGS> 53,259
<TOTAL-COSTS> 53,259
<OTHER-EXPENSES> 26,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258
<INCOME-PRETAX> 17,341
<INCOME-TAX> 7,775
<INCOME-CONTINUING> 9,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,566
<EPS-PRIMARY> .82
<EPS-DILUTED> .79
</TABLE>
