3,500,000 Shares
[GRAPHIC OMITTED]
TRAVEL SERVICES INTERNATIONAL, INC.
Common Stock
($.01 par value)
------------
Of the 3,500,000 shares (the "Shares") of Common Stock, $.01 par value ("Common
Stock"), offered hereby, 1,500,000 Shares are being sold by the Company and
2,000,000 Shares are being sold by certain selling stockholders (the "Selling
Stockholders") named herein under "Principal and Selling Stockholders" (the
"Offering"). The Company will not receive any of the proceeds from the sale of
Shares by the Selling Stockholders. The Common Stock is listed on the Nasdaq
Stock Market under the symbol "TRVL." On July 15, 1998, the last reported sale
price of the Common Stock on the Nasdaq Stock Market was $35.00.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 8
HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Per Share ......... $ 34.50 $ 1.725 $ 32.775 $ 32.775
Total(2) .......... $120,750,000 $6,037,500 $49,162,500 $65,550,000
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $500,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 525,000
additional shares of Common Stock from the Company solely to cover
over-allotments of Shares. If the option is exercised in full, the total
Price to Public will be $138,862,500, Underwriting Discounts and Commissions
will be $6,943,125 and Proceeds to Company will be $66,369,375.
The Shares are offered by the several Underwriters when, as and if issued
by the Company, delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the Shares
will be ready for delivery on or about July 21, 1998, against payment therefor
in immediately available funds.
CREDIT SUISSE FIRST BOSTON
ING BARING FURMAN SELZ LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
Prospectus dated July 15, 1998
<PAGE>
The following is a list of photos which we will be using for the inside front
cover of the prospectus for the Company:
1. closeup of man's face
2. cruise ship in harbor
3. closeup of telephone operator
4. plane
5. downtown Seattle, WA
6. resort in city
7. downtown Sydney, Australia
8. car on road
9. castle in mountains
10. resort in tropics
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING
GROUP MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THE MARKET
PRICE AND PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A
DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS OTHERWISE INDICATED,
ALL REFERENCES TO COMMON STOCK INCLUDE THE COMPANY'S RESTRICTED COMMON STOCK.
SEE "DESCRIPTION OF CAPITAL STOCK--COMMON STOCK AND RESTRICTED COMMON STOCK."
ALL REFERENCES TO THE "COMPANY" REFER TO TRAVEL SERVICES INTERNATIONAL, INC. AND
ITS SUBSIDIARIES, AND ALL REFERENCES TO THE "OPERATING COMPANIES" REFER TO THE
COMPANY'S OPERATING SUBSIDIARIES.
THE COMPANY
The Company is a leading specialized distributor of cruise vacations,
domestic and international airline tickets and European auto rentals, and a
leading provider of electronic hotel reservation services, to travel agents and
travelers. The Company commenced operations in July 1997 concurrently with its
initial public offering and the acquisition of five specialized travel
distributors, and has since acquired an additional 13 operating companies and a
software development company. To date, the Company has focused its acquisitions
primarily on distributors of cruise vacations to take advantage of recognized
growth opportunities in that segment, and has emerged as the largest distributor
of cruise vacations in the world. The Company also looks for opportunities to
expand into new segments of the leisure travel industry that are complementary
to its existing lines of business. In June 1998, the Company entered the lodging
travel services segment with the acquisition of Lexington Services Associates,
Ltd. ("Lexington"), which the Company believes is the second largest electronic
hotel reservation services company in the United States. In 1997, on a pro forma
basis, the Company sold reservations for approximately 274,000 airline
passengers, 213,000 cruise passengers, 259,000 European auto rentals and
1,316,000 room nights, representing gross sales volume in excess of
approximately $600 million.
The Company offers travel agents and travelers a combination of specialized
expertise, the ability to compare travel options from multiple travel providers
and competitive prices. Unlike traditional travel agents, who often lack
extensive knowledge about the specific services being offered, specialized
distributors focus their efforts on certain segments of the travel service
industry and thus provide a greater level of expertise and service with respect
to their segments. The Company's ability to provide in-depth knowledge about
alternative services from multiple travel providers differentiates it from the
internal sales departments of travel providers, who offer only that provider's
services. The Company has preferred pricing and access to inventory through its
negotiated arrangements with major airline, cruise line and European auto rental
companies, including such travel providers as Continental Airlines, Inc., Delta
Air Lines, Inc., Carnival Cruise Lines, Royal Caribbean Cruise Lines, Avis
Europe Limited and Europcar International S.A. Recognizing the ability of
specialized distributors to sell a significant amount of travel capacity, as
well as their in-depth knowledge, travel providers are increasingly utilizing
specialized distributors as a preferred source of distribution.
The Company believes it is well positioned to take advantage of the growth
trends in the domestic and international travel industries. Domestic travel and
tourism spending by U.S. travelers was an estimated $417 billion in 1997, and is
forecasted to increase at a compound annual growth rate of 6.7% through the year
2000. The number of U.S. citizen departures to Europe increased 11.1% to 10.1
million in 1997, and is forecasted to increase 5.6% to 10.5 million in 1998. The
number of North American cruise passengers is expected to increase from 5.1
million in 1997 to 7.0 million by the year 2000, an 11.5% compound annual growth
rate.
The leisure travel services industry is highly fragmented, and includes
numerous small specialized distributors that generally have made little
investment in technology to improve their selling
3
<PAGE>
effectiveness, efficiency and access to information. Furthermore, most of these
companies lack the sales volume necessary to obtain preferential pricing from
travel providers or to create effective national marketing campaigns. The
Company believes significant growth opportunities are available to a well
capitalized company providing a broad offering of specialized travel services
with a high level of customer service and state-of-the-art technology
infrastructure.
RECENT DEVELOPMENTS
ACQUISITIONS. Since the completion of the Company's initial public offering
and acquisition of five specialized travel distributors (the "Founding
Companies") in July 1997, the Company has acquired 13 operating companies,
consisting of nine distributors of cruise vacations, one distributor of
international airline tickets, one distributor of European auto rentals, one
electronic hotel reservation services company and one provider of a hotel
directory and after hours travel services. In addition, the Company has acquired
a software development company. These acquisitions have, among other things,
enabled the Company to become the largest distributor of cruise vacations in the
world, further strengthen its presence in the airline and European auto rental
travel services segments, enter into the lodging travel services segment and
accelerate the development of its technology systems.
FINANCIAL PERFORMANCE. On a pro forma basis, in the three months ended
March 31, 1998, as compared to the same prior year period, the Company's
revenues increased 34.0% to $27.8 million from $20.8 million, and net income
increased 26.2% to $2.2 million from $1.8 million. In 1997, the Company's pro
forma net revenues were $92.9 million and pro forma net income was $7.9 million.
CREDIT FACILITY. During the first quarter of 1998, the Company increased
the amount available under its existing revolving line of credit to $30 million
from $20 million.
EXPANSION OF EXECUTIVE MANAGEMENT TEAM. The Company has expanded its
executive management team in the areas of marketing and operations through the
addition of two new executive officers, each of whom has more than 15 years
experience in either the cruise line or auto rental segment of the travel
industry.
FORMATION OF INFORMATION SYSTEMS AND TECHNOLOGY GROUP. Since its initial
public offering, the Company has formed an information systems and technology
group consisting of 26 employees and consultants as of June 8, 1998. This group
is in the process of developing state-of-the-art proprietary technology systems
for the Company.
GROWTH STRATEGY
The Company seeks to become the leading specialized distributor of leisure
travel services by continuing both its internal growth strategy and aggressive
acquisition program. While the Company intends to continue to acquire
specialized distributors of leisure travel services, strong internal revenue
growth remains the core of the Company's growth strategy. Key elements of the
Company's growth strategy include the following:
/bullet/ INVESTMENT IN TECHNOLOGY. An essential element of the
Company's growth strategy is the development of
state-of-the-art information and telecommunication
technologies for use by the Company, as well as by travel
agents and travelers through the Internet. The Company plans
to invest approximately $15 million over the next 18 months to
complete the development of its "Universal" architecture,
consisting of the Universal Agent and Universal Manager
applications. The Universal Agent is expected to allow the
Company to increase its productivity and capabilities by: (i)
allowing Company agents to process reservations more quickly;
(ii) enabling Company agents to offer customers more
comprehensive product information; (iii) providing Company
agents additional selling and cross-selling capabilities; (iv)
allowing Company agents
4
<PAGE>
real time access to a comprehensive customer database; and (v)
using the Internet to provide information and sell
reservations. The Universal Manager, which will complement the
Universal Agent application, is expected to allow the Company
to consolidate fulfillment, back office and accounting
procedures and effectively use the customer database to source
new sales opportunities. The first stage of the Universal
Agent is expected to be implemented in the summer of 1998 in
connection with the airline segment of the Company's business,
with applications for the Company's other travel segments
expected to be implemented over the next 18 to 24 months.
/bullet/ EMPHASIZE CROSS-SELLING. The Company intends to take advantage
of significant cross-selling opportunities to further enhance
revenue growth. The Company believes that the development and
implementation of its technology will allow it to offer
"one-stop shopping" for a variety of travel services while
still providing extensive expertise within each leisure travel
segment.
/bullet/ CAPITALIZE ON ECONOMIES OF SCALE AND BEST PRACTICES. The
Company believes that it can achieve significant economies of
scale and that its sales volumes and relationships with travel
providers enable it to obtain preferential pricing and access
preferred travel provider inventories. The Company believes it
can also benefit from greater purchasing power in certain key
expense areas including telecommunications and advertising, as
well as reduce total operating expenses by outsourcing,
eliminating or consolidating certain duplicative marketing,
back-office and administrative functions and by creating
shared services centers. In addition, the Company has
identified certain best practices, including marketing
techniques, operations strategies and cost efficiencies, that
can be implemented in order to generate incremental revenue
and enhance profitability.
/bullet/ EXPANSION THROUGH ACQUISITION. The Company continues to seek
acquisitions in order to gain market share, add new areas of
expertise, access new geographic markets and enter
complementary business lines. The Company may also pursue
international acquisitions that will enable the Company to
expand its business model to include leisure travel
originating in countries other than the U.S. and Canada. The
Company will seek acquisition candidates that have long
standing reputations and demonstrated growth and
profitability.
OPERATING STRATEGY
The Company seeks to provide comprehensive, quality leisure travel
services, while improving efficiencies in its operations. The components of the
Company's operating strategy include the following:
/bullet/ PROVIDE EXTENSIVE EXPERTISE IN SPECIFIC TRAVEL SEGMENTS. The
Company is a specialist in several travel services segments.
By leveraging this specialized knowledge, the Company provides
a higher level of expertise and information for a broader
array of travel services than may be available through
traditional distribution channels.
/bullet/ MAINTAIN AND ENHANCE STRONG STRATEGIC RELATIONSHIPS WITH
TRAVEL PROVIDERS. The Company believes that its strategic
relationships with travel providers are integral to its
success. The Company has negotiated with many travel providers
for pricing that is often lower than published fares and
preferred access to capacity. These strategic relationships
enable the Company to access multiple providers within each
travel segment and to offer prices that are generally lower
than would be available to travel agents and travelers.
/bullet/ MARKET THROUGH MULTIPLE DISTRIBUTION CHANNELS. The Company
believes that utilizing multiple distribution channels
provides it with additional sales opportunities, decreases its
reliance on any one channel and differentiates it from
competitors who offer their products through a single
5
<PAGE>
channel. The Company currently utilizes three distinct
channels of distribution: (i) call centers staffed with
trained sales personnel; (ii) home-based agents (including
franchisees) who service their local markets; and (iii)
traditional travel agents. The Company also intends to expand
its presence on the Internet in order to create a fourth
distribution channel for selling its services.
/bullet/ OFFER A HIGH LEVEL OF CUSTOMER SERVICE. The Company believes
that maintaining a high level of customer service is essential
to its ability to generate significant repeat business. In
addition to the Company's competitive prices, customer service
is an important differentiating factor to both the leisure
traveler who is making a significant investment in a vacation
and the travel agent who is seeking the ability to make travel
arrangements with greater ease.
/bullet/ DEVELOP A COMPREHENSIVE BRAND STRATEGY. The Company has
reviewed various strategies in connection with the brand
recognition and marketing of its services and intends to
implement a comprehensive brand and marketing plan in the
second half of 1998. This plan calls for the development of a
new, identifiable national brand, under the name The Travel
Company, while preserving existing brands that have a strong
identity and loyal customer following.
/bullet/ CAPITALIZE ON MANAGEMENT EXPERTISE. The Company's eight
executive management personnel average more than 15 years of
experience in various segments of the travel industry. In
addition, the Company believes that the experienced local
management teams at the Operating Companies have an in-depth
understanding of their respective markets and businesses and
have built strong relationships with travel providers and
customers.
----------------
The Company was incorporated under the laws of the State of Delaware in
1996. The Company's Board of Directors has approved the reincorporation of the
Company from Delaware to Florida, subject to stockholder approval at the
Company's 1998 Annual Stockholders Meeting to be held on July 28, 1998. The
Company's executive offices are located at 220 Congress Park Drive, Delray
Beach, Florida 33445, and its telephone number is (561) 266-0860.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company ..... 1,500,000 shares(1)
Common Stock Offered by the
Selling Stockholders ................... 2,000,000 shares(1)
Common Stock to be outstanding
after this Offering .................... 12,633,805 shares(2)
Use of Proceeds ......................... To repay amounts outstanding under its existing revolving
line of credit, and for technology expenditures, working
capital and potential acquisitions. See "Use of Proceeds."
Risks of Offering ....................... See "Risk Factors."
Dividend Policy ......................... The Company does not expect to pay any dividends in
the foreseeable future. See "Dividend Policy."
Nasdaq Stock Market symbol .............. TRVL
</TABLE>
- ----------------
(1) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on 11,133,805 shares outstanding on July 14, 1998. Excludes (i)
1,328,347 shares issuable upon the exercise of options outstanding as of
July 14, 1998, (ii) an aggregate of an additional 287,710 shares (after
giving effect to the Offering) reserved for issuance under the Company's
1997 Long-Term Incentive Plan and 1997 Non-Employee Directors' Stock Plan
and (iii) 878,187 shares reserved for issuance under the Company's shelf
registration statement filed with the Commission on May 4, 1998. See
"Management--Director Compensation; 1997 Non-Employee Directors' Stock
Plan," "Management--1997 Long-Term Incentive Plan" and "Shares Eligible for
Future Sale."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On July 28, 1997, the Company consummated its initial public offering and
the combinations of the Founding Companies (the "Combinations"). For accounting
purposes, Auto Europe, one of the Founding Companies, was designated as the
"accounting acquiror." The other four Founding Companies were accounted for
using the purchase method of accounting. From November 1997 through March 1998,
the Company acquired five other operating companies under transactions accounted
for using the pooling of interests method of accounting (the "Pooling
Acquisitions"). Accordingly, the historical financial data for each year
presented represent those of Auto Europe and the Pooling Acquisitions, and
include the operations of the other four Founding Companies and the Company only
since July 28, 1997. On June 1, 1998, the Company acquired Lexington Services
Associates, Ltd. (the "Lexington Acquisition") which is accounted for using the
purchase method of accounting. See "Selected Historical and Pro Forma Financial
Data."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
PRO
FORMA
1995 1996 1997 1997(1)
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues ..................... $ 30,024 $ 36,720 $ 62,076 $ 92,899
Operating expenses ............... 19,079 24,762 39,342 56,734
----------- ----------- ----------- ------------
Gross profit ..................... 10,945 11,958 22,734 36,165
General and administrative
expenses ........................ 10,534 11,478 17,864 20,316
Goodwill amortization ............ -- -- 514 2,034
----------- ----------- ----------- ------------
Income from operations ........... 411 480 4,356 13,815
Other expenses, net .............. 43 182 66 252
----------- ----------- ----------- ------------
Income before provision for
income taxes .................... 368 298 4,290 13,563
Provision for income taxes ....... 147 171 861 5,696
----------- ----------- ----------- ------------
Net income ....................... $ 221 $ 127 $ 3,429 $ 7,867
=========== =========== =========== ============
Diluted earnings per share(2)..... $ 0.09 $ 0.05 $ 0.57 $ 0.71
=========== =========== =========== ============
Shares used in computing
diluted earnings per share ...... 2,587,873 2,587,873 6,022,649 11,019,271
=========== =========== =========== ============
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
PRO PRO
FORMA FORMA
1997 1998 1997(1) 1998(1)
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues ..................... $ 11,302 $ 24,936 $ 20,760 $ 27,818
Operating expenses ............... 7,580 14,237 12,949 15,883
----------- ------------ ------------ ------------
Gross profit ..................... 3,722 10,699 7,811 11,935
General and administrative
expenses ........................ 3,046 6,977 4,104 7,404
Goodwill amortization ............ -- 407 509 607
----------- ------------ ------------ ------------
Income from operations ........... 676 3,315 3,198 3,924
Other expenses, net .............. 63 43 153 84
----------- ------------ ------------ ------------
Income before provision for
income taxes .................... 613 3,272 3,045 3,840
Provision for income taxes ....... 257 1,374 1,279 1,612
----------- ------------ ------------ ------------
Net income ....................... $ 356 $ 1,898 $ 1,766 $ 2,228
=========== ============ ============ ============
Diluted earnings per share(2)..... $ 0.14 $ 0.18 $ 0.16 $ 0.20
=========== ============ ============ ============
Shares used in computing
diluted earnings per share ...... 2,587,873 10,817,991 10,875,366 11,407,092
=========== ============ ============ ============
</TABLE>
MARCH 31, 1998
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- -------------- ---------------
BALANCE SHEET DATA:
Working capital ............. $ 411 $ (8,357) $ 21,706
Total assets ................ 100,524 121,377 151,440
Long-term debt .............. 12,699 22,699 4,099
Stockholders' equity......... 57,190 67,190 115,853
- ---------------
(1) The pro forma financial data includes: (i) the results of the Company, each
Founding Company and the Lexington Acquisition as if the Combinations and
the Lexington Acquisition had occurred at the beginning of each respective
period; (ii) amortization of goodwill resulting from the Combinations and
the Lexington Acquisition; (iii) certain adjustments to salaries, bonuses,
management fees and benefits to former owners and key management of the
Founding Companies, the Lexington Acquisition and the Pooling Acquisitions,
to which such persons have agreed prospectively ("Compensation
Differential"); (iv) reversal of acquisition costs associated with Pooling
Acquisitions; (v) provision for income taxes as if pro forma income was
subject to corporate federal and state income taxes during the periods; and
(vi) the issuance of 305,111 shares of Common Stock, the net proceeds of
which would be sufficient to repay debt incurred in connection with the
Lexington Acquisition. See Note 4 to the Company's Consolidated Financial
Statements.
(2) Diluted earnings per share has been restated to comply with Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. See
Note 2 to the Company's Consolidated Financial Statements.
(3) Gives effect to the Lexington Acquisition which occurred on June 1, 1998.
Does not include an additional $10.0 million of long-term debt incurred or
any other pro forma adjustments in connection with the acquisition of The
Cruise Line Inc. on April 1, 1998.
(4) Adjusted to give effect to the issuance and sale of the 1,500,000 shares of
Common Stock offered by the Company hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMPANY.
THE STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL
ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING
WITHOUT LIMITATION STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS,
INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON
THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS,
EXPERIENCE AND THE PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY
DIFFERENT FROM THOSE ANTICIPATED, EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING
STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, THE FOLLOWING FACTORS, IN
ADDITION TO THE RISK FACTORS SET FORTH BELOW AND OTHER INFORMATION SET FORTH
HEREIN, SHOULD BE CAREFULLY CONSIDERED: SUCCESSFUL INTEGRATION OF SYSTEMS;
FACTORS AFFECTING INTERNAL GROWTH AND MANAGEMENT OF GROWTH; DEPENDENCE ON TRAVEL
PROVIDERS; SUCCESS OF THE ACQUISITION STRATEGY AND AVAILABILITY OF ACQUISITION
FINANCING; SUCCESS IN ENTERING NEW SEGMENTS OF THE TRAVEL MARKET AND NEW
GEOGRAPHIC AREAS; DEPENDENCE ON TECHNOLOGY; LABOR AND TECHNOLOGY COSTS;
ADVERTISING AND PROMOTIONAL EFFORTS; RISKS ASSOCIATED WITH THE TRAVEL INDUSTRY
GENERALLY; SEASONALITY AND QUARTERLY FLUCTUATIONS; COMPETITION; AND GENERAL
ECONOMIC CONDITIONS. IN ADDITION, THE COMPANY'S BUSINESS STRATEGY AND GROWTH
STRATEGY INVOLVE A NUMBER OF RISKS AND CHALLENGES, AND THERE CAN BE NO ASSURANCE
THAT THESE RISKS AND OTHER FACTORS WILL NOT HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY.
LIMITED COMBINED OPERATING HISTORY; RISKS OF INTEGRATION
The Company was founded in April 1996 but conducted no operations and
generated no revenues prior to its initial public offering in July 1997, when it
acquired the Founding Companies. Since July 1997, the Company has acquired an
additional 13 operating companies and one software development company.
Currently, the Company relies on the existing reporting systems of the Operating
Companies for financial reporting. There can be no assurance that the Company
will be able to successfully integrate the operations of these businesses or
institute the necessary Company-wide systems and procedures to successfully
manage the combined enterprise on a profitable basis. The Company's executive
management group was primarily assembled in connection with its initial public
offering, and there can be no assurance that the management group will be able
to continue to effectively manage the combined entity or effectively implement
and carry out the Company's internal growth strategy and acquisition program.
The consolidated financial statements cover periods when the Operating Companies
were not under common control or management and, therefore, may not be
indicative of the Company's future financial or operating results. The inability
of the Company to successfully integrate the Operating Companies, and any future
acquisitions would have a material adverse effect on the Company's business,
financial condition and results of operations, and would make it unlikely that
the Company's acquisition program will continue to be successful.
A number of the Operating Companies offer different travel services,
utilize different capabilities and technologies and target different client
segments. While the Company believes that there are substantial opportunities to
cross-market and integrate these businesses, these differences increase the risk
inherent in successfully completing such integration. Further, there can be no
assurance that the Company's strategy to become the leading specialized
distributor of leisure travel services will be successful, or that the travelers
or travel providers will accept the Company as a distributor of a variety of
specialized travel services. See "Business--Business Strategy."
DEPENDENCE ON TRAVEL PROVIDERS
The Company is dependent upon travel providers for access to their
capacity. The Company receives from certain travel providers pricing that is
preferential to published fares which enables the
8
<PAGE>
Company to offer, for certain products, prices lower than would be generally
available to travelers and travel agents. Other distributors may have similar
arrangements with travel providers, some of which may provide better
availability or more competitive pricing than that offered by the Company. The
Company anticipates that a significant portion of its revenues will continue to
be derived from the sale of capacity for relatively few travel providers. In
1997, (i) two auto rental companies represented an aggregate of 87% of European
auto rental pro forma net revenues; (ii) six cruise lines represented an
aggregate of 74% of cruise pro forma net revenues; and (iii) two airlines
represented an aggregate of 52% of airline pro forma net revenues. The Company's
agreements with its travel providers can generally be canceled or modified by
the travel provider upon relatively short notice. The loss of a contract,
changes in the Company's pricing agreements or commission schedules or more
restricted access to travel providers' capacity could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the lodging industry recently has witnessed a period of
consolidation. Continued consolidation could reduce the Company's electronic
hotel reservation services customer base which could, in turn, have a material
adverse effect on the Company's financial condition and results of operations.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to increase its revenues, expand the markets it serves
and increase its service offerings in part through the acquisition of additional
operating companies. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional businesses or successfully
integrate acquired businesses into the Company without substantial costs, delays
or other operational or financial problems. Increased competition for
acquisition candidates may develop, in which event there may be fewer
acquisition opportunities available to the Company, as well as higher
acquisition prices. Further, acquisitions involve a number of special risks,
including possible adverse effects on the Company's operating results, diversion
of management's attention, failure to retain key personnel, risks associated
with unanticipated events or liabilities and amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Customer
dissatisfaction or performance problems at a single acquired company could also
have an adverse effect on the reputation of the Company. The Company may also
seek international acquisitions that may be subject to additional risks
associated with doing business in foreign countries. In addition, there can be
no assurance that businesses acquired will achieve anticipated revenues and
earnings. The Company continually reviews various strategic acquisition
opportunities and has held discussions with a number of such acquisition
candidates. As of the date of this Prospectus, the Company is not party to any
agreements with respect to any acquisitions. See "Business--Growth Strategy."
RISKS RELATED TO ACQUISITION FINANCING AND POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company plans to finance future acquisitions by using shares of its
Common Stock for a substantial portion of the consideration to be paid. In the
event that the Common Stock does not maintain a sufficient market value, or
potential acquisition candidates are otherwise unwilling to accept Common Stock
as part of the consideration for the sale of their businesses, the Company may
be required to utilize more of its cash resources, if available, in order to
maintain its acquisition program. If the Company has insufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. There can be no assurance that the
Company's line of credit will be sufficient or that other financing will be
available on terms the Company deems acceptable. If the Company is unable to
obtain financing sufficient for all of its desired acquisitions, it may be
unable to fully carry out its acquisition strategy. In addition, to maintain
historical levels of growth, the Company may need to seek additional funding
through public or private financing. Adequate funds for these purposes may not
be available when needed or may not be available on terms acceptable to the
Company. If funding is insufficient, the Company may be required to delay,
reduce the scope of or eliminate some or all of its expansion programs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
9
<PAGE>
DEPLOYMENT OF NEW TECHNOLOGY
Commencing in the summer of 1998 and continuing for 18 to 24 months
thereafter, the Company expects that it will replace many of the existing
computer systems at the Operating Companies and implement its new "Universal"
architecture. There can be no assurance that these new systems will be
successfully developed, installed according to the expected time frame or within
the anticipated budget, implemented without any disruption to the Company's
business or result in the intended operational benefits and cost efficiencies.
See "Business--Information Technology."
DEPENDENCE UPON TECHNOLOGY
The Company's business is currently dependent upon a number of different
information and telecommunication technologies to facilitate its access to
information and manage a high volume of inbound and outbound calls. Any failure
of this technology would have a material adverse effect on the Company's
business, financial condition and results of operations. For example, during
1996, one of the Operating Company's results of operations were adversely
affected by unanticipated shortcomings in the functionality of call center
software installed as part of a new telephone system. In addition, the Company
is dependent upon certain third party vendors, including central reservation
systems, such as SABRE Group and Amadeus and THISCO for access to certain
information. Any failure of these systems or restricted access by the Company
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The technology systems being used currently at the Company's headquarters
are Year 2000 compliant, and new systems currently under development by the
Company are working with compliant standards. An assessment of the Year 2000
readiness of the technology currently being used in the Operating Companies is
in process, and the Company cannot make any assurances with respect to such
readiness at this time. The assessment being conducted by the Company includes
inquiries of management and certification requests from hardware and software
vendors. New systems under development by the Company are expected to replace
some of the older software applications currently in use at certain Operating
Companies. There can be no assurance, however, that such replacements will be
made or will be made on time. The Company can not assess whether its travel
providers and other third parties have appropriate plans to remedy Year 2000
compliance issues where their systems interface with the Company's systems or
otherwise impact its operations. There can be no assurance that a failure of
systems of third parties on which the Company's systems and operations rely to
be Year 2000 compliant will not have a material adverse effect on the Company's
business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Information Technology."
MANAGEMENT OF GROWTH; FACTORS AFFECTING INTERNAL GROWTH
The Company expects to continue to grow internally and through
acquisitions. The Company expects to spend significant time and effort expanding
existing businesses and identifying, completing and integrating acquisitions.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations as they expand. Any future
growth also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate new senior
level managers and executives. There can be no assurance that such additional
management will be identified or retained by the Company. To the extent that the
Company is unable to manage its growth efficiently and effectively, or is unable
to attract and retain qualified management, the Company's business, financial
condition and results of operations could be materially adversely affected.
While the Company has experienced revenue and earnings growth on a pro forma
basis over the past few years, there can be no assurance that the Company will
continue to experience internal growth comparable to these levels, if at all.
From time to time, certain of the Operating Companies have been unable to hire
and train the number of qualified sales personnel needed to meet the demands of
their businesses. Factors affecting the ability of the Company to continue to
experience internal growth include, but are not limited to, the ability to
expand the travel
10
<PAGE>
services offered, the continued relationships with certain travel providers and
travel agents, the ability to recruit and retain qualified sales personnel, the
ability to cross-sell services within the Company and continued access to
capital. See "Business--Growth Strategy" and "Management."
RISKS ASSOCIATED WITH THE TRAVEL INDUSTRY; GENERAL ECONOMIC CONDITIONS
The Company's results of operations are dependent upon factors generally
affecting the travel industry. The Company's revenues and earnings are
especially sensitive to events that affect domestic and international air
travel, cruise travel, auto rentals in Europe and room nights. A number of
factors could result in an overall decline in demand for travel, including
political instability, armed hostilities, international terrorism, extreme
weather conditions, a rise in fuel prices, a decline in the value of the U.S.
dollar, labor disturbances, excessive inflation, a general weakening in economic
activity and reduced employment in the U.S. These types of events could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Industry Overview."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The domestic and international leisure travel industry is seasonal. The
results of each of the Operating Companies have been subject to quarterly
fluctuations caused primarily by the seasonal variations in the travel industry,
especially the leisure travel segment. Net revenues and net income for a
majority of the Operating Companies are generally higher in the second and third
quarters. Seasonality depends on the particular leisure travel service sold. The
Company expects seasonality to continue in the future on a combined basis. 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 as a result of acquisitions, internal growth rates among
various travel segments, fare wars by travel providers, changes in relationships
with certain travel providers, the timing of the payment of overrides by travel
providers, extreme weather conditions or other factors affecting travel.
Unexpected variations in quarterly results could also adversely affect the price
of the Common Stock, which in turn could limit the ability of the Company to
make acquisitions. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
SUBSTANTIAL AMOUNT OF GOODWILL
Approximately $84.3 million, or 69.5%, of the Company's pro forma total
assets as of March 31, 1998, is goodwill, which represents the excess of
consideration paid over the estimated fair market value of net assets acquired
in business combinations accounted for under the purchase method. The Company
generally amortizes goodwill on a straight line method over a period of 35 years
with the amount amortized in a particular period constituting a non-cash expense
that reduces the Company's net income. Amortization of goodwill resulting from
certain past acquisitions, and additional goodwill recorded in certain future
acquisitions may not be deductible for tax purposes. In addition, the Company
will be required periodically to evaluate the recoverability of goodwill by
reviewing the anticipated undiscounted future cash flows from operations and
comparing such cash flows to the carrying value of the associated goodwill. If
goodwill becomes impaired, the Company would be required to write down the
carrying value of the goodwill and incur a related charge to its income. A
reduction in net income resulting from a write down of goodwill would currently
affect financial results and could have a material and adverse impact upon the
market price of the Common Stock.
SUBSTANTIAL COMPETITION
The travel service industry is extremely competitive and has low barriers
to entry. The Company competes with other distributors of travel services,
travel providers, travel agents, tour operators and central reservation service
providers, some of which have greater experience, brand name recognition and/or
financial resources than the Company. The Company's travel providers may decide
to compete more directly with the Company and restrict the availability and/or
preferential pricing of their capacity. In addition, other distributors may have
relationships with certain travel providers providing better
11
<PAGE>
availability or more competitive pricing than that offered by the Company.
Furthermore, some travel agents have a strong presence in their geographic area
which may make it difficult for the Company to attract customers in those areas.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the efforts and relationships of
Joseph V. Vittoria and the other executive officers as well as the senior
management of the Operating Companies. Furthermore, the Company will likely be
dependent on the senior management of any businesses acquired in the future. If
any of these individuals become unable to continue in their role the Company's
business or prospects could be adversely affected. Although the Company has
entered into an employment agreement with each of the Company's executive
officers and the executive officers of each Operating Company, there can be no
assurance that such individuals will continue in their present capacity for any
particular period of time. The Company does not maintain key man life insurance
covering any of its executive officers or other members of senior management.
See "Management."
VOTING CONTROL OF EXISTING MANAGEMENT AND STOCKHOLDERS
After giving effect to the Offering, the Company's executive officers and
directors, their affiliates and executive officers of the Operating Companies
beneficially own shares of Common Stock representing 32.7% of the total voting
power of the Common Stock (38.7% if all shares of Restricted Common Stock were
converted into Common Stock). These persons, if acting in concert, will be able
to exercise control over the Company's affairs and are likely to be able to
elect the entire Board of Directors and to control the disposition of any matter
submitted to a vote of stockholders. See "Principal and Selling Stockholders"
and "Description of Capital Stock--Common Stock and Restricted Common Stock."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market during or
after the Offering, or the perception that such sales could occur, may adversely
affect prevailing market prices of the Common Stock and could impair the future
ability of the Company to raise capital through an offering of its equity
securities or to use such securities as consideration in acquisitions. Upon
completion of the Offering, the Company will have 12,633,805 shares of Common
Stock outstanding. Of these shares, 6,586,000 shares will be freely tradeable
without restriction under the Securities Act. The remaining 6,047,805 shares
represent (i) shares beneficially owned by "affiliates" of the Company (as that
term is defined in Rule 144 under the Securities Act) and other original
investors in the Company and (ii) shares issued to sellers of companies acquired
by the Company during the past year, which shares may be sold in the open market
in compliance with the applicable requirements of Rule 144 or Rule 145 under the
Securities Act or, in certain cases, pursuant to the Company's shelf
registration statement. In addition, 40,000 shares may be acquired pursuant to
outstanding currently exercisable options. The Company, its directors and
executive officers and the Selling Stockholders have agreed that they will not
offer, sell, contract to sell, pledge, grant any option for the sale of,
announce their intention to sell, or otherwise dispose of, directly or
indirectly, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 120 days after the
date of this Prospectus without the prior written consent of Credit Suisse First
Boston, except for, in the case of the Company, Common Stock issued pursuant to
any employee or director benefit plans described herein or in connection with
acquisitions.
Pursuant to a shelf registration statement filed with the Commission on May
4, 1998, the Company registered 1,506,706 shares of the Company's Common Stock
under the Securities Act for use by the Company as consideration for recent and
future acquisitions and 1,668,294 shares of the Company's Common Stock to be
sold by certain stockholders of the Company. Upon issuance, those shares will
generally be freely tradable, unless the resale thereof is contractually
restricted. When possible, the Company will seek restrictions on the shares
issued as consideration for future acquisitions that are as
12
<PAGE>
restrictive as those described in the preceding paragraph, however, such
restrictions may not be available in certain cases, such as transactions
accounted for using the pooling of interests method of accounting. See "Shares
Eligible for Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations in response to numerous factors, including variations in the annual
or quarterly financial results of the Company or its competitors, changes by
financial research analysts in their estimates of the earnings of the Company or
the failure of the Company to meet such estimates, conditions in the economy in
general or in the travel industry in particular, and unfavorable publicity or
changes in applicable laws and regulations (or judicial or administrative
interpretations thereof) affecting the Company or the travel service industry.
From time to time, the stock market experiences significant price and volume
volatility, which may affect the market price of the Common Stock for reasons
unrelated to the Company's performance.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS
The Board of Directors of the Company is authorized to issue preferred
stock in one or more series without stockholder action. The Board of Directors
of the Company serve staggered terms. The existence of this "blank-check"
preferred stock and the staggered Board of Directors could render more difficult
or discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. Certain provisions of the Delaware
General Corporation Law and, in the event that the Company's stockholders
approve the reincorporation of the Company from Delaware to Florida at the 1998
Annual Meeting of Stockholders to be held on July 28, 1998 (the "1998 Annual
Meeting"), the Florida Business Corporation Act, may also discourage takeover
attempts that have not been approved by the Board of Directors. See
"Management--Directors and Executive Officers" and "Description of Capital
Stock."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company (after deducting underwriting discounts and
commissions and estimated offering expenses) from the sale of 1,500,000 shares
of Common Stock offered by the Company are estimated to be approximately $48.7
million ($65.9 million if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any of the proceeds from the sale of
2,000,000 shares of Common Stock offered hereby by the Selling Stockholders.
The Company intends to apply a portion of the net proceeds from the
Offering to repay the amounts outstanding under the Company's $30 million
revolving line of credit (which are expected to be approximately $28.6 million
at the closing of the Offering). Indebtedness under the Company's revolving line
of credit has been used for acquisitions (including the Company's recent
acquisitions of The Cruise Line Inc. and Lexington), is payable October 15, 2000
and bears interest at an effective rate of 7.1% per year as of June 9, 1998.
Amounts repaid under the revolving line of credit may be reborrowed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company intends to use the remaining net proceeds for capital and
technology expenditures. The Company has reviewed various strategic acquisition
opportunities and has held discussions with a number of such acquisition
candidates. The Company is not a party to any agreements to acquire any
companies as of the date of this Prospectus. Pending utilization as described
above, the Company intends to invest the net proceeds in short-term, investment
grade securities, certificates of deposit or direct or guaranteed obligations of
the U.S. government, or a combination thereof.
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's Credit Facility
includes restrictions on the ability of the Company to pay dividends without the
consent of the lender.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq Stock Market under the symbol
"TRVL." The Company completed its initial public offering in July 1997 at a
price of $14.00 per share. The following table sets forth, for the Company's
fiscal periods indicated, the range of high and low reported sales prices for
the Common Stock.
1997 HIGH LOW
- ---- ----------- ---------
Third Quarter 1997 (from July 23, 1997) .......... $ 25 5/8 $ 18 7/8
Fourth Quarter ................................... $ 26 $ 19 3/8
1998
- ----
First Quarter .................................... $ 33 11/16 $ 17 7/8
Second Quarter ................................... $ 39 3/8 $ 30
Third Quarter (through July 15, 1998) ............ $ 36 1/2 $ 32 7/8
On July 15, 1998, the last reported sale price of the Common Stock on the
Nasdaq Stock Market was $35.00 per share. On July 15, 1998, there were 142
holders of record of the Company's Common Stock, although the Company believes
the number of beneficial holders is substantially greater.
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and equivalents and
capitalization of the Company (i) at March 31, 1998; (ii) on a pro forma basis
to give effect to the Lexington Acquisition; and (iii) as further adjusted to
give effect to the issuance of the 1,500,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjuntion with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------------- ------------
<S> <C> <C> <C>
Cash and equivalents .......................................... $20,619 $ 10,619 $ 40,682
======= ========= ========
Long-term debt, less current portion .......................... $12,699 $ 22,699(1) $ 4,099
------- ----------- --------
Stockholders' Equity(2):
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
none outstanding ........................................... -- -- --
Common stock, $0.01 par value, 50,000,000 shares authorized;
10,504,826 shares outstanding, 10,790,540 shares outstanding
pro forma, and 12,290,540 shares outstanding pro forma
as adjusted ................................................ 105 108 123
Additional paid-in capital ................................... 52,462 62,459 111,107
Retained earnings ............................................ 4,623 4,623 4,623
------- ----------- --------
Total stockholders' equity ................................... 57,190 67,190 115,853
------- ----------- --------
Total capitalization ........................................ $69,889 $ 89,889 $119,952
======= =========== ========
</TABLE>
- ----------------
(1) Does not include an additional $10.0 million of long-term debt incurred or
any other pro forma adjustments in connection with the acquisition of The
Cruise Line Inc. on April 1, 1998.
(2) Does not include (i) 1,328,347 shares issuable upon the exercise of options
outstanding as of July 14, 1998, (ii) an aggregate of an additional 287,710
shares (after giving effect to the Offering) reserved for issuance under the
Company's 1997 Long-Term Incentive Plan and 1997 Non-Employee Directors'
Stock Option Plan and (iii) 878,187 shares reserved for issuance under the
Company's shelf registration statement filed with the Commission on May 4,
1998. See "Management--Director Compensation; 1997 Non-Employee Directors'
Stock Plan" and "Management--1997 Long-Term Incentive Plan" and "Shares
Eligible for Future Sale."
15
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
On July 28, 1997, the Company consummated its initial public offering and
acquired the Founding Companies in transactions accounted for using the purchase
method of accounting. 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 years ended December 31, 1995, 1996 and 1997 and the three months ended
March 31, 1997 and 1998 include the operating results of five additional
specialized distributors of cruise reservation services acquired from November
1997 through March 1998 under transactions accounted for using the pooling of
interests method of accounting (the "Pooling Acquisitions"). Historical
financial statements for the three months ended March 31, 1998 also include the
operating results of three specialized distributors of reservations (one
airline, one cruise and one auto rental) acquired during the first quarter of
1998 under transactions accounted for using the purchase method of accounting
(the "Purchase Acquisitions"), from the date of acquisition through March 31,
1998. Historical financial statements do not include the operating results of
two other specialized distributors of cruise reservations acquired in April and
May 1998 (the "Second Quarter 1998 Poolings") which will be accounted for using
the pooling of interests method of accounting, as the financial results of these
acquisitions were not material to the Company's results of operations.
Historical financial statements do not include the April 1, 1998 acquisition of
The Cruise Line Inc., a specialized distributor of cruise reservation services,
accounted for under the purchase method of accounting (the "Cruise Line
Purchase") or the June 1, 1998 acquisition of Lexington Services Associates,
Ltd., an electronic hotel reservation services company, accounted for using the
purchase method of accounting (the "Lexington Acquisition").
The historical financial data of the Company as of December 31, 1996 and
1997 and for each of the five years ending December 31, 1993, 1994, 1995, 1996,
and 1997 have been derived from the audited consolidated financial statements of
the Company included elsewhere herein and from the Company's Registration
Statement dated July 22, 1997. The historical financial data of the Company for
the three months ended March 31, 1997 and 1998 have been derived from the
unaudited consolidated financial statements of the Company included elsewhere
herein, which have been prepared on the same basis as the audited financial
statements and, in the opinion of management, reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
such data. The information contained in these tables should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
Historical financial statements do not include the operating results of the
Founding Companies (other than Auto Europe, the "accounting acquiror") prior to
July 1997, and, therefore, are not meaningful when comparing historical
operating results for the years ended December 31, 1996 and 1997 and for the
three months ended March 31, 1997 and 1998. Accordingly, pro forma combined
results of operations and pro forma diluted earnings per share for the Company
are presented which give effect to the results of the Company combined with all
the Founding Companies 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
Pooling Acquistions and the Lexington Acquisition. The pro forma combined
statements do not include the operating results of the Second Quarter 1998
Poolings and the Cruise Line Purchase as operating results of these acquisitions
were not material to the Company's results of operations. The pro forma
financial data have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would have
resulted had the Founding Companies and the Lexington Acquisition been under
common control prior to the Combinations or the Lexington Acquisition, or which
may result in the future.
16
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(1)
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Net revenues .................. $ 12,208 $ 17,156 $ 30,024 $ 36,720 $ 62,076 $ 92,899
Operating expenses ............ 8,469 11,101 19,079 24,762 39,342 56,734
----------- ----------- ----------- ----------- ----------- ------------
Gross profit .................. 3,739 6,055 10,945 11,958 22,734 36,165
General and administrative
expenses ..................... 3,986 6,276 10,534 11,478 17,864 20,316
Goodwill amortization ......... -- -- -- -- 514 2,034
----------- ----------- ----------- ----------- ----------- ------------
Income from operations ........ (247) (221) 411 480 4,356 13,815
Other expenses, net ........... 19 28 43 182 66 252
----------- ----------- ----------- ----------- ----------- ------------
Income before provision for
income taxes ................. (266) (249) 368 298 4,290 13,563
Provision for income
taxes ........................ -- -- 147 171 861 5,696
----------- ----------- ----------- ----------- ----------- ------------
Net income .................... $ (266) $ (249) $ 221 $ 127 $ 3,429 $ 7,867
=========== =========== =========== =========== =========== ============
Per Share Data(2):
Basic earnings
per share ................... $ (0.10) $ (0.10) $ 0.09 $ 0.05 $ 0.58
=========== =========== =========== =========== ===========
Diluted earnings
per share ................... $ (0.10) $ (0.10) $ 0.09 $ 0.05 $ 0.57 $ 0.71
=========== =========== =========== =========== =========== ============
Shares used in computing
basic earnings per share ..... 2,587,873 2,587,873 2,587,873 2,587,873 5,883,667
=========== =========== =========== =========== ===========
Shares used in computing
diluted earnings per share 2,587,873 2,587,873 2,587,873 2,587,873 6,022,649 11,019,271
=========== =========== =========== =========== =========== ============
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
PRO PRO
FORMA FORMA
1997 1998 1997(1) 1998(1)
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Net revenues .................. $ 11,302 $ 24,936 $ 20,760 $ 27,818
Operating expenses ............ 7,580 14,237 12,949 15,883
----------- ------------ ------------ ------------
Gross profit .................. 3,722 10,699 7,811 11,935
General and administrative
expenses ..................... 3,046 6,977 4,104 7,404
Goodwill amortization ......... -- 407 509 607
----------- ------------ ------------ ------------
Income from operations ........ 676 3,315 3,198 3,924
Other expenses, net ........... 63 43 153 84
----------- ------------ ------------ ------------
Income before provision for
income taxes ................. 613 3,272 3,045 3,840
Provision for income
taxes ........................ 257 1,374 1,279 1,612
----------- ------------ ------------ ------------
Net income .................... $ 356 $ 1,898 $ 1,766 $ 2,228
=========== ============ ============ ============
Per Share Data(2):
Basic earnings
per share ................... $ 0.14 $ 0.18
=========== ============
Diluted earnings
per share ................... $ 0.14 $ 0.18 $ 0.16 $ 0.20
=========== ============ ============ ============
Shares used in computing
basic earnings per share ..... 2,587,873 10,427,197
=========== ============
Shares used in computing
diluted earnings per share 2,587,873 10,817,991 10,875,366 11,407,092
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............. $ (891) $ (2,729) $ (2,866) $ (5,357) $ 1,197
Total assets ................. 3,307 4,689 7,430 11,610 68,307
Long-term debt ............... 17 24 191 2,272 4,129
Stockholders' equity ......... (95) (535) 90 248 50,838
<CAPTION>
MARCH 31, 1998
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
----------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............. $ 411 $ (8,357) $ 21,706
Total assets ................. 100,524 121,377 151,440
Long-term debt ............... 12,699 22,699 4,099
Stockholders' equity ......... 57,190 67,190 115,853
</TABLE>
- --------------
(1) The pro forma financial data includes: (i) the results of the Company, each
Founding Company and the Lexington Acquisition as if the Combinations and
the Lexington Acquisition had occurred at the beginning of each respective
period; (ii) amortization of goodwill resulting from the Combinations and
the Lexington Acquisition; (iii) certain adjustments to salaries, bonuses,
management fees and benefits to former owners and key management of the
Founding Companies, the Lexington Acquisition and the Pooling Acquisitions,
to which such persons have agreed prospectively ("Compensation
Differential"); (iv) reversal of acquisition costs associated with Pooling
Acquisitions; (v) provision for income taxes as if pro forma income was
subject to corporate federal and state income taxes during the periods; and
(vi) the issuance of 305,111 shares of Common Stock, the net proceeds of
which would be sufficient to repay debt incurred in connection with the
Lexington Acquisition. See Note 4 to the Company's Consolidated Financial
Statements.
(2) Diluted earnings per share have been restated to comply with Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. See
Note 2 to the Company's Consolidated Financial Statements.
(3) Gives effect to the Lexington Acquisition which occurred on June 1, 1998.
Does not include an additional $10.0 million of long term debt incurred or
any other pro forma adjustments in connection with the acquisition of The
Cruise Line, Inc. on April 1, 1998.
(4) Adjusted to give effect to the issuance and sale of the 1,500,000 shares of
Common Stock offered by the Company hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical and Pro Forma Financial Data" and the Company's Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Prospectus.
INTRODUCTION
The Company's revenue is derived primarily from selling travel related
services, including cruise vacations, airline tickets and European auto rentals,
and providing electronic hotel reservation services. The Company does not record
the total 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, processing and
delivery fees, franchise fees and hotel reservation fees. The Company records
net revenues when earned which, for auto rentals and airline tickets is at the
time the reservation is booked and ticketed, for cruise bookings is when the
cruise is fully paid for 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,
and for hotel reservation services is at the time the traveler checks out of the
hotel. The Company provides an allowance for cancellations, reservation changes,
"no shows" and currency exchange guarantees which is based on historical
experience.
Operating expenses include compensation of sales and sales support
personnel, commissions, credit card merchant fees, telecommunications, mail,
courier, marketing, global distribution systems fees 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 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.
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 March 31, 1998, including the pro forma adjustment for
the Lexington Acquisition, goodwill, net was $84.3 million.
18
<PAGE>
RESULTS OF OPERATIONS--HISTORICAL
The following table sets forth for 1995, 1996 and 1997 and the three months
ended March 31, 1997 and 1998 certain items from the Company's Historical
Statement of Income Financial Data expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues ..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses ............................... 63.5 67.4 63.4 67.1 57.1
----- ----- ----- ----- -----
Gross profit ..................................... 36.5 32.6 36.6 32.9 42.9
General and administrative expenses .............. 35.1 31.3 28.8 27.0 28.0
Goodwill amortization ............................ -- -- 0.8 -- 1.6
----- ----- ----- ----- -----
Income from operations ........................... 1.4 1.3 7.0 6.0 13.3
Other expenses, net .............................. 0.2 0.5 0.1 0.6 0.2
----- ----- ----- ----- -----
Income before provision for income taxes ......... 1.2 0.8 6.9 5.4 13.1
Provision for income taxes ....................... 0.5 0.5 1.4 2.3 5.5
----- ----- ----- ----- -----
Net income ....................................... 0.7% 0.3% 5.5% 3.1% 7.6%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net revenues increased from $11.3 million in the three months ended March
31, 1997 (the "1997 Period") to $24.9 million in the three months ended March
31, 1998 (the "1998 Period"). Net revenues in the European auto rental segment
increased 19.6%, with the balance attributable to the inclusion of the net
revenues of four of the Founding Companies commencing on July 28, 1997 and the
Purchase Acquisitions in 1998.
Operating expenses increased from $7.6 million in the 1997 Period to $14.2
million in the 1998 Period. As a percentage of net revenues, total operating
expenses decreased from 67.1% in the 1997 Period to 57.1% in the 1998 Period,
primarily due to changes in the mix of business in each travel segment as a
result of acquisitions, and as a result of lower commission expenses as a
percentage of net revenues in the European auto rental segment in the 1998
Period as compared to the 1997 Period.
General and administrative expenses increased from $3.0 million in the 1997
Period to $7.0 million in the 1998 Period, and were 27.0% and 28.0% of net
revenues, respectively. This increase was primarily the result of expenses
associated with being a public company and corporate overhead which did not
exist prior to the intitial public offering, offset in part by lower general and
administrative expenses at the Operating Companies as a percentage of net
revenues.
Goodwill amortization was $407,000 in 1998. No goodwill amortization was
recorded prior to the Combinations in July 1997.
1996 COMPARED TO 1997
Net revenues increased from $36.7 million in 1996 to $62.1 million in 1997.
This increase is primarily attributable to a 27.0% increase in net revenues from
European auto rental reservations and a 19.7% increase in cruise net revenues at
the companies comprising the Pooling Acquisitions, as well as the inclusion of
the net revenues of four of the Founding Companies commencing on July 28, 1997.
Operating expenses increased from $24.8 million in 1996 to $39.3 million in
1997. As a percentage of net revenues, total operating expenses decreased from
67.4% in 1996 to 63.4% in 1997, primarily due to lower salaries and commission
expenses as a percentage of net revenues at Auto Europe, as well as
19
<PAGE>
the operating expenses at the Pooling Acquisitions and the four other Founding
Companies being lower as a percentage of net revenues than at Auto Europe.
General and administrative expenses increased from $11.5 million in 1996 to
$17.9 million in 1997, and were 31.3% and 28.8% of net revenues, respectively.
This decrease as a percentage of net revenues was the result of the Pooling
Acquisitions and the four other Founding Companies generally having lower
general and administrative expenses as a percentage of net revenues than Auto
Europe, offset in part by expenses associated with being a public company and
corporate overhead which did not exist prior to the initial public offering.
Goodwill amortization was $514,000 in 1997. No goodwill amortization was
recorded prior to the Combinations in July 1997.
1995 COMPARED TO 1996
Net revenues increased from $30.0 million in 1995 to $36.7 million in 1996.
This increase is attributable to a 17.3% and a 24.1% increase in net revenues
from European auto rental reservations and cruise reservations, respectively.
Operating expenses increased from $19.1 million in 1995 to $24.8 million in
1996. As a percentage of net revenues, total operating expenses increased from
63.5% in 1995 to 67.4% in 1996, primarily due to higher salaries and commission
expenses as a percentage of net revenues at Auto Europe.
General and administrative expenses increased from $10.5 million in 1995 to
$11.5 million in 1996, and were 35.1% and 31.3%, respectively, of net revenues.
This decrease as a percentage of net revenues was the result of spreading
overhead costs over a larger revenue base in 1996.
RESULTS OF OPERATIONS--PRO FORMA
Due to the significance of the Combinations in July 1997 and the Lexington
Acquisition in June 1998, pro forma statements of operations are presented for
1997, the 1997 Period and the 1998 Period, which 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 Pooling Acquisitions and the Lexington
Acquisition.
The pro forma results include the effects of: (i) the Combinations and the
Lexington Acquisition; (ii) amortization of goodwill resulting from the
Combinations and the Lexington Acquisition; (iii) certain adjustments to
salaries, bonuses, management fees and benefits to former owners and key
management of the Founding Companies, the Lexington Acquisition and the Pooling
Acquisitions, to which such persons have agreed prospectively ("Compensation
Differential"); (iv) reversal of acquisition costs associated with Pooling
Acquisitions; and (v) provision for income taxes as if pro forma income was
subject to corporate federal and state income taxes during the periods.
The pro forma financial data have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the Founding Companies and the Lexington been
under common control prior to the Combinations or the Lexington Acquisition, or
which may result in the future.
20
<PAGE>
The following table sets forth for 1997, the 1997 Period and the 1998
Period certain items from the Company's Selected Pro Forma Statement of Income
Financial Data expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------------
1997 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Net revenues ..................................... 100.0% 100.0% 100.0%
Operating expenses ............................... 61.1 62.4 57.1
----- ----- -----
Gross profit ..................................... 38.9 37.6 42.9
General and administrative expenses .............. 21.9 19.8 26.6
Goodwill amortization ............................ 2.2 2.5 2.2
----- ----- -----
Income from operations ........................... 14.8 15.3 14.1
Other expenses, net .............................. 0.2 0.6 --
----- ----- -----
Income before provision for income taxes ......... 14.6 14.7 14.1
Provision for taxes .............................. 6.1 6.2 5.8
----- ----- -----
Net income ....................................... 8.5% 8.5% 8.3%
===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net revenues increased $7.1 million, or 34.0%, from $20.8 million in the
1997 Period to $27.8 million in the 1998 Period. The increase in net revenues is
primarily attributable to increased sales volumes of travel services by the
Company in each segment. Net revenues for the period increased 55.2%, 21.0%,
19.6% and 34.0%, in the cruise, air, European auto rental, and hotel segments,
respectively. Cruise passengers handled increased from 71,000 to 106,000
(49.3%), airline tickets issued increased from 60,000 to 75,000 (25.0%),
European car rental reservations increased from 63,000 to 77,000 (22.2%), and
hotel room nights increased from 338,000 to 466,000 (37.9%). Of the 34.0%
increase in combined pro forma net revenues, 9.5% was attributable to the
Purchase Acquisitions and 24.5% was attributable to internal growth at the
Founding Companies, the Pooling Acquisitions and the Lexington Acquisition.
Operating expenses increased $2.9 million, or 22.7%, from $12.9 million in
the 1997 Period to $15.9 million in the 1998 Period. As a percentage of net
revenues, total operating expenses decreased from 62.4% in the 1997 Period to
57.1% in the 1998 Period, primarily as a result of a decrease in commission and
net advertising expenses as percentages of net revenues.
General and administrative expenses increased $3.3 million, or 80.4%, from
$4.1 million in the 1997 Period to $7.4 million in the 1998 Period, and were
19.8% and 26.6% of net revenues, respectively. This increase as a percentage of
net revenues was primarily the result of expenses associated with being a public
company and corporate overhead which did not exist prior to the initial public
offering, offset in part as a result of spreading overhead costs over a larger
revenue base.
Goodwill amortization expense increased $98,000, or 19.3%, from $509,000 in
the 1997 Period to $607,000 in the 1998 Period. The increase in goodwill
amortization expense in the 1998 Period was the result of amortization related
to the Purchase Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's three primary sources for liquidity and capital are cash flow
from operating activities, issuance of Common Stock and borrowings under its
Credit Facility.
In the three months ended March 31, 1997 and 1998, on a historical basis,
net cash provided by operating activities was approximately $5.9 million and
$14.2 million, respectively, capital expenditures
21
<PAGE>
were $509,000 and $897,000, respectively, and net repayment of debt was $2.4
million and $249,000, respectively. For the years ended December 31, 1996 and
1997, on a historical basis, net cash provided by operating activities was
approximately $114,000 and $3.2 million, respectively, capital expenditures were
$3.0 million in each year, and net repayment of debt was $1.1 million and $3.7
million, respectively.
On July 28, 1997, the Company issued an aggregate of 6,297,225 shares of
Common Stock, with 3,422,225 shares issued in connection with the Combinations
and 2,875,000 shares sold at a price of $14.00 per share in the Company's
initial public offering. The net proceeds to the Company from the initial public
offering (after deducting underwriting discounts, commissions and offering
expenses) were $33.2 million. Of this amount, $29.1 million represents the cash
portion of the purchase price related to the Combinations, including working
capital adjustments and estimated reimbursements to stockholders of three of the
Founding Companies that had elected S Corporation status under the Internal
Revenue Code for certain taxes incurred by them in connection with the
Combinations. The remaining $4.1 million was used for general corporate
purposes.
The Company issued 1,384,689 shares of Common Stock during 1997 in
connection with five acquisitions, excluding the Combinations, and issued
338,411 shares of Common Stock and paid $8.4 million cash consideration during
the 1998 Period in connection with the 1998 Acquisitions.
The Company has a credit facility agreement with NationsBank, N.A. with
respect to a $30.0 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 $3.0 million, and for capital expenditures (including but
not limited to investments in technology) and general corporate purposes which
in the aggregate may not exceed $5.0 million. As of March 31, 1998, outstanding
borrowings under the Credit Facility totaled $8.6 million. On April 1, 1998, an
additional $10.0 million was borrowed under the Credit Facility to finance, in
part, the Cruise Line Purchase. On June 1, 1998, an additional $10.0 million was
borrowed under the Credit Facility to finance, in part, the Lexington
Acquisition. Interest on outstanding balances of the Credit Facility are
computed based on the Eurodollar Rate plus a margin ranging from 1.25% to 2.0%,
depending on certain financial ratios. Availability fees of 25 basis points per
annum payable on the unused portion of the Credit Facility and a facility fee
are paid equal to 5/8 of one percent of the aggregate principal balance on the
Term Loan. The Credit Agreement requires the Company to secure an interest rate
hedge on fifty percent of the outstanding principal amount borrowed under the
Credit Facility and one hundred percent of the outstanding balance on the Term
Loan. As of June 5, 1998, the Company entered into interest rate swap hedge
agreements totaling $16.4 million and maturing in October 2000. 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.
The Company plans to repay the $28.6 million outstanding under the Credit
Facility as of June 1, 1998 from a portion of the net proceeds of the Offering.
All amounts repaid may be reborrowed by the Company.
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 Company expects to spend in excess of $8 million during 1998 for
capital expenditures, including $4 million for development of technology
applications. The remainder of this 1998 capital budget relates to purchases of
computer hardware and personal computers, telecommunications equipment,
leasehold and building improvements and furniture and fixtures. For the 1998
Period, $897,000 has been expended, of which $307,000 relates to development of
technology applications. The Company also expects to expend approximately $11
million in 1999 for development of technology applications, excluding computer
and telecommunications hardware and implementation costs.
22
<PAGE>
The technology systems being used currently at the Company's headquarters
are Year 2000 compliant, and new systems currently under development by the
Company are working with compliant standards. An assessment of the Year 2000
readiness of the technology currently being used in the Operating Companies is
in process, and the Company cannot make any assurances with respect to such
readiness at this time. The assessment being conducted by the Company includes
inquiries of management and certification requests from hardware and software
vendors. New systems under development by the Company are expected to replace
some of the older software applications currently in use at certain Operating
Companies. There can be no assurance, however, that such replacements will be
made or will be made on time. The Company can not assess whether its travel
providers and other third parties have appropriate plans to remedy Year 2000
compliance issues where their systems interface with the Company's systems or
otherwise impact its operations. There can be no assurance that a failure of
systems of third parties on which the Company's systems and operations rely to
be Year 2000 compliant will not have a material adverse effect on the Company's
business, financial conditionand operating results.
Depending on the methods of financing and the size of potential
acquisitions, the Company believes that the net proceeds of the Offering,
together with cash flow from operating activities and borrowings under the
Credit Facility, will be adequate to meet the Company's capital requirements
over the next 12 months.
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 and programs), changes in the
timing and payment of overrides by travel providers, extreme weather conditions
or other factors affecting travel or the economy.
The following table presents summary financial data on a pro forma basis
for each of the five most recent quarterly periods:
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED,
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
----------- ------------ --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues ....................... $ 20,760 $ 29,213 $ 23,768 $ 19,158 $ 27,818
Gross profit ....................... 7,811 12,773 8,917 6,664 11,935
Income from operations ............. 3,198 7,120 2,671 826 3,924
Net income ......................... 1,766 4,069 1,562 470 2,228
Diluted earnings per share ......... $ 0.16 $ 0.37 $ 0.14 $ 0.04 $ 0.20
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company implemented several new accounting pronouncements and standards
in 1997 and 1998. The Company adopted in 1997 Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic earnings per common share
calculations are determined by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted earnings per
23
<PAGE>
common share calculations are determined by dividing net income by the weighted
average number of common shares and dilutive common share equivalents (options)
outstanding.
Pursuant to AICPA Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" the Company has
begun to capitalize certain direct costs related to strategic systems
development projects. The Company capitalized $492,000 of such costs through
March 31, 1998.
The Company adopted in 1998 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. For the periods presented there were no differences between net
income and comprehensive net income.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
product and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No. 131 will have no impact on consolidated
results of operations, financial position or cash flow.
24
<PAGE>
BUSINESS
INDUSTRY OVERVIEW
Domestic travel and tourism spending by U.S. travelers was an estimated
$417 billion in 1997 and is forecasted to increase at a compound annual growth
rate of 6.7% through the year 2000. The market for specialized distributors of
leisure travel services is highly fragmented, and includes numerous small
specialized distributors that generally have made little investment in
technology to improve their selling effectiveness efficiency and access to
information. Many of these specialized distributors are small and generally have
made little investment in technology to improve their selling effectiveness,
efficiencies and access to information. Furthermore, most of these companies
lack the volume necessary to obtain preferential pricing from travel providers
or to create effective national marketing campaigns. The Company believes
significant growth opportunities are available to a well capitalized company
providing a broad offering of specialized travel services with a high level of
customer service and state-of-the-art technology infrastructure.
CRUISE INDUSTRY. The number of North American cruise passengers is expected
to increase from 5.1 million in 1997 to 7.0 million by the year 2000, an 11.5%
compound annual growth rate. In addition, industry analysts forecast a 10.3%
compound annual growth rate in capacity over the same period, with a total of 25
new vessels, contracted or planned, adding a net supply of approximately 40,700
berths. The character of a cruise varies significantly among the different
cruise lines and cruise ships. In addition, a cruise vacation, which consists of
lodging, entertainment, dining and travel, typically represents a large portion
of a traveler's vacation budget. As a result, cruise sales require significant
marketing time and effort in comparison with other travel services. Cruise lines
traditionally have relied primarily on third party distributors to sell
virtually all of their berth capacity. It is estimated that 6% of cruise
vacations are sold directly by the internal sales departments of the cruise
lines. While travel agents remain an important channel of distribution for
cruise lines, specialized cruise vacation distributors have become an
increasingly significant source of capacity utilization and, accordingly, are
given preferential pricing, cooperative advertising dollars and access to
preferred berth locations. In contrast to most traditional travel agents,
specialized cruise distributors offer travelers extensive knowledge of cruise
options available and are able to provide more detailed information with respect
to daily excursions and other amenities.
AIRLINE INDUSTRY. The number of passengers carried by the major U.S. based
airlines increased 2.9% to 542 million in 1997 from 526 million in 1996, with
domestic and international passenger growth of 2.8% and 4.1%, respectively.
Airlines rely heavily on travel agents and specialized distributors to
supplement their own internal marketing efforts. Given their focus on air travel
and their corresponding large volumes of reservations, specialized distributors
often receive preferential pricing from domestic airlines. In addition,
international airlines offer specialized distributors controlled access to
capacity at discounted prices and typically utilize a limited number of
specialized distributors in order to increase capacity utilization without
disrupting their overall pricing strategy. These specialized distributors are
then able to offer non-published discounted fares for domestic and international
flights to both travel agents and travelers.
EUROPEAN AUTO RENTAL INDUSTRY. U.S. citizen departures to Europe increased
11.1% to 10.1 million in 1997 from 9.0 million in 1996. In 1998, 10.5 million
U.S. citizen departures to Europe are expected. Unlike domestic auto rental
providers which, to a large extent, market directly to travelers in the U.S.,
European auto rental providers rely heavily on third party distributors to
market to U.S. customers traveling abroad. As in the U.S., European auto rental
providers focus on the business traveler segment which peaks in the spring and
fall seasons. As a result, specialized distributors in the U.S. serve an
important role to these European auto rental providers by supplementing their
sales efforts during non-peak periods. In addition, these specialized
distributors serve as a centralized and efficient source of information on
pricing and availability of reservations to travel agents in the U.S.
25
<PAGE>
LODGING INDUSTRY. Average daily room rates in the U.S. lodging industry
increased 6.2% to $75.04 in 1997 from $70.76 in 1996. Average daily room nights
sold increased 2.3% to 2.3 million in 1997 from 2.2 million in 1996. Average
daily rates and average daily rooms sold are expected to increase 5.3% and 2.2%,
respectively, in 1998.
BUSINESS OVERVIEW
The Company is a leading specialized distributor of cruise vacations,
domestic and international airline tickets and European auto rentals, and a
leading provider of electronic hotel reservation services, to travel agents and
travelers. The Company commenced operations in July 1997 concurrently with its
initial public offering and the acquisition of five specialized travel
distributors, and has since acquired an additional 13 operating companies and a
software development company. To date, the Company has focused its acquisitions
primarily on distributors of cruise vacations to take advantage of recognized
growth opportunities in that segment, and has emerged as the largest distributor
of cruise vacations in the world. The Company also looks for opportunities to
expand into new segments of the leisure travel industry that are complementary
to its existing lines of business. In June 1998, the Company entered the lodging
travel services segment with the acquisition of Lexington which the Company
believes is the second largest electronic hotel reservation services company in
the United States. In 1997, on a pro forma basis, the Company sold reservations
for approximately 274,000 airline passengers, 213,000 cruise passengers, 259,000
European auto rentals and 1,316,000 room nights, representing gross sales volume
in excess of approximately $600 million.
The Company offers travel agents and travelers a combination of specialized
expertise, the ability to compare travel options from multiple travel providers
and competitive prices. Unlike traditional travel agents who often lack
extensive knowledge about the specific services being offered, specialized
distributors focus their efforts on certain segments of the travel service
industry and thus provide a greater level of expertise and service with respect
to their segments. The Company's ability to provide in-depth knowledge about
alternative services from multiple travel providers also differentiates it from
the internal sales departments of travel providers, who offer only that
provider's services. The Company has preferred pricing and access to inventory
through its negotiated arrangements with major airline, cruise line and European
auto rental companies, including such travel providers as Continental Airlines,
Inc., Delta Air Lines, Inc., Carnival Cruise Lines, Royal Caribbean Cruise
Lines, Avis Europe Limited and Europcar International S.A. Recognizing the
ability of specialized distributors to sell a significant amount of travel
capacity, as well as their in-depth knowledge, travel providers are increasingly
utilizing specialized distributors as a preferred source of distribution.
GROWTH STRATEGY
The Company seeks to become the leading specialized distributor of leisure
travel services by continuing its internal growth strategy and aggressive
acquisition program. While the Company intends to continue to acquire
specialized distributors of leisure travel services, strong internal revenue
growth remains the core of the Company's growth strategy. Key elements of the
Company's growth strategy include the following:
/bullet/ INVESTMENT IN TECHNOLOGY. An essential element of the
Company's growth strategy is the development of
state-of-the-art information and telecommunication
technologies for use by the Company, as well as by travel
agents and travelers through the Internet. The Company plans
to invest approximately $15 million over the next 18 months to
complete the development of its "Universal" architecture,
consisting of the Universal Agent and Universal Manager
applications. The Universal Agent is expected to allow the
Company to increase its productivity and capabilities by: (i)
allowing Company agents to process reservations more quickly;
(ii) enabling Company agents to offer customers more
comprehensive product information; (iii) providing Company
agents additional selling and cross-selling capabilities; and
(iv) allowing Company agents real time access to a
comprehensive customer database; and (v) using the Internet to
provide information and sell reservations. The Universal
Manager, which will complement the
26
<PAGE>
Universal Agent application, is expected to allow the Company
to consolidate fulfillment, back office and accounting
procedures and effectively use the customer database to source
new sales opportunities. The first stage of the Universal
Agent is expected to be implemented in the summer of 1998 in
connection with the airline segment of the Company's business,
with applications for the Company's other travel segments
expected to be implemented over the next 18 to 24 months.
/bullet/ EMPHASIZE CROSS-SELLING. The Company intends to take advantage
of significant cross-selling opportunities to further enhance
revenue growth. The Company believes that the development and
implementation of its technology will allow it to offer
"one-stop shopping" for a variety of travel services while
still providing extensive expertise within each leisure travel
segment. For example, Travel 800, which currently focuses on
domestic air travel, has begun to satisfy international air
travel requests through Diplomat Tours and offer international
travelers a European auto rental option through Auto Europe.
Similarly, each of the cruise reservation companies is
expected to have the technology to be able to provide
travelers with domestic and international airline reservations
related to their cruise vacation. Most of the companies in the
Company's cruise segment are now selling Alaska land tour
packages provided by Ship `N' Shore.
/bullet/ CAPITALIZE ON ECONOMIES OF SCALE AND BEST PRACTICES. The
Company believes that it can achieve significant economies of
scale and that its sales volumes and relationships with travel
providers enable it to obtain preferential pricing and access
preferred travel provider inventories. The Company believes it
can also benefit from greater purchasing power in certain key
expense areas including telecommunications and advertising, as
well as reduce total operating expenses by outsourcing,
eliminating or consolidating certain duplicative marketing,
back-office and administrative functions and by creating
shared services centers. In addition, the Company has
identified certain best practices, including marketing
techniques, operation strategies and cost efficiencies, that
can be implemented in order to generate incremental revenue
and enhance profitability. For example, the Company has begun
to implement travel insurance and cooperative marketing
programs within its cruise business.
/bullet/ EXPANSION THROUGH ACQUISITION. The Company continues to seek
acquisitions in order to gain market share, add new areas of
expertise, access new geographic markets and enter
complementary business lines. The Company may also pursue
international acquisitions that will enable the Company to
expand its business model to include leisure travel
originating in countries other than the U.S. and Canada. The
Company will seek acquisition candidates that have long
standing reputations and demonstrated growth and
profitability.
The Company believes that it is well positioned to continue to
carry out its acquisition program. As consideration for
acquisitions, the Company uses various combinations of Common
Stock and cash and may, in the future, also use notes. The
Company believes that the experience, reputation and
relationships of the operating companies' management is of
significant value in the Company's attempts to acquire other
specialized distributors of travel services. In addition, the
Company relies on the industry experience of its senior
management, particularly Joseph Vittoria, the Chairman and
Chief Executive Officer, who is the former Chief Executive
Officer of Avis, Inc. and a founding member of the World
Travel and Tourism Council, a global organization of the chief
executive officers of companies engaged in all sectors of the
travel and tourism industry.
The Company continually reviews acquisitions of companies with
long standing reputations and demonstrated growth and
profitability and has held discussions with a number of
acquisition candidates. The Company is not a party to any
agreements to acquire any companies as of the date of this
Prospectus.
27
<PAGE>
ACQUISITIONS
The following table sets forth certain information with respect to the
Company's acquisitions:
<TABLE>
<CAPTION>
OPERATING COMPANY DATE OF ACQUISITION TRAVEL SERVICE SEGMENT PRIMARY LOCATION
- ------------------------- --------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Auto Europe July 1997 European auto rentals Portland, Maine
Cruises Inc. July 1997 Cruise vacations Syracuse, New York
Cruises Only July 1997 Cruise vacations Orlando, Florida
D-FW Tours July 1997 International air Dallas, Texas
Travel 800 July 1997 Domestic air San Diego, California
Cruise Fairs of America November 1997 Cruise vacations Los Angeles, California
CruiseOne November 1997 Cruise vacations Deerfield Beach, Florida
CruiseWorld November 1997 Cruise vacations New York Tri-State area
Ship `N' Shore(1) November 1997 Cruise vacations Englewood, Florida
Trax Software December 1997 Software development Delray Beach, Florida
Diplomat Tours(2) January 1998 International air Sacramento, California
Gold Coast Cruises February 1998 Cruise vacations North Miami, Florida
AutoNet International February 1998 European auto rentals Delray Beach, Florida
CruiseMasters March 1998 Cruise vacations Los Angeles, California
The Cruise Line Inc. April 1998 Cruise vacations North Miami, Florida
Landry & Kling May 1998 Cruise vacations Coral Gables, Florida
The Travel Company May 1998 Cruise vacations Atherton, California
Lexington Services June 1998 Lodging reservations Irving, Texas
ABC Corporate Services July 1998 Lodging reservations Oak Brook, Illinois
</TABLE>
- ----------------
(1) Includes Ship `N' Shore Cruises, Inc., SNS Coach Line, Inc., SNS Travel
Marketing, Inc., Cruise Mart, Inc. and Cruise Time, Inc.
(2) Includes Diplomat Tours, Inc. and International Airline Consolidators.
Since the completion of the Company's initial public offering in July 1997,
the Company has acquired 13 operating companies and a software development
company. To date, the Company has focused its acquisitions primarily on
distributors of cruise vacations to take advantage of recognized growth
opportunities in that segment and has emerged as the largest distributor of
cruise vacations in the world. The Company has recently entered into the lodging
segment through its purchase of Lexington. The following is a summary of the
strategy underlying the Company's acquisitions since the Company's initial
public offering:
/bullet/ Lexington Services and ABC Corporate Services--enabled the
Company to enter into the lodging travel services segment.
/bullet/ The Cruise Line Inc. and Gold Coast Cruises--significantly
bolstered the Company's presence in the cruise segment,
particularly in South Florida.
/bullet/ Ship `N' Shore--provided Alaska land tour operations and
expertise in the Alaska cruise market.
/bullet/ CruiseMasters, Cruise Fairs of America and The Travel
Company--provided a West Coast presence for the distribution
of cruise vacations and added specific marketing expertise.
/bullet/ CruiseOne--added a cruise franchise distribution system
consisting of more than 350 franchisees.
/bullet/ CruiseWorld--provided eight retail cruise distribution
locations in the New York Tri-State area.
/bullet/ Landry & Kling--provided expertise in cruise charters and
corporate incentive marketing.
/bullet/ Diplomat Tours and AutoNet International--expanded presence in
European airline tickets and auto rental markets and bolstered
relationships with travel agents.
/bullet/ Trax Software--accelerated the development of the Company's
technology systems.
28
<PAGE>
OPERATING STRATEGY
The Company seeks to provide comprehensive, quality leisure travel
services, while improving efficiencies in its operations. The components of the
Company's operating strategy include the following:
/bullet/ PROVIDE EXTENSIVE EXPERTISE IN SPECIFIC TRAVEL SEGMENTS. The
Company is a specialist in several travel services segments.
By leveraging this specialized knowledge, the Company provides
a higher level of expertise and information for a broader
array of travel services than may be available through
traditional distribution channels.
/bullet/ MAINTAIN AND ENHANCE STRONG STRATEGIC RELATIONSHIPS WITH
TRAVEL PROVIDERS. The Company believes that its strategic
relationships with travel providers are integral to its
success. The Company has negotiated with many travel providers
for pricing that is often lower than published fares and
preferred access to capacity. These strategic relationships
enable the Company to access multiple providers within each
travel segment and to offer prices that are generally lower
than would be available to travel agents and travelers.
/bullet/ MARKET THROUGH MULTIPLE DISTRIBUTION CHANNELS. The Company
believes that utilizing multiple distribution channels
provides it with additional sales opportunities, decreases its
reliance on any one channel and differentiates it from
competitors who offer their products through a single channel.
The Company currently utilizes three distinct channels of
distribution: (i) call centers staffed with trained sales
personnel; (ii) home-based agents (including franchisees) who
service their local markets; and (iii) traditional travel
agents. The Company also intends to expand its presence on the
Internet in order to create a fourth distribution channel for
booking its products and services.
/bullet/ OFFER A HIGH LEVEL OF CUSTOMER SERVICE. The Company believes
that maintaining a high level of customer service is essential
to its ability to generate significant repeat business. In
addition to the Company's competitive prices, customer service
is an important differentiating factor to both the leisure
traveler who is making a significant investment in a vacation
and the travel agent who is seeking the ability to make travel
arrangements with greater ease.
/bullet/ DEVELOP COMPREHENSIVE BRAND STRATEGY. The Company has reviewed
various strategies in connection with the brand recognition
and marketing of its services and intends to implement a
comprehensive brand and marketing plan in the second half of
1998. This plan calls for the development of a new,
identifiable national brand, under the name The Travel
Company, while preserving existing brands that have a strong
identity and loyal customer following.
/bullet/ CAPITALIZE ON MANAGEMENT EXPERTISE. The Company's eight
executive management personnel average more than 15 years of
experience in various segments of the travel industry. In
addition, the Company believes that the experienced local
management teams at the Operating Companies have an in-depth
understanding of their respective markets and businesses and
have built strong relationships with travel providers and
customers.
SERVICES
The Company distributes leisure travel services for cruise vacations,
domestic and international air travel and European auto rentals and also
provides electronic hotel reservation services. The Company currently provides
its services nationwide primarily through the use of toll-free telephone numbers
and computerized central reservation systems. Typically, potential customers
call the Company, often in response to an advertisement or other promotion. The
Company's sales personnel assist potential customers, whether travel agents or
travelers, in selecting the appropriate travel arrangement and making the
reservation.
CRUISE. The Company is the largest distributor of cruise line
reservations in the world providing reservations for cruises on all major
cruise lines. Typically, berths are booked on behalf of its customers
29
<PAGE>
at specified discounts from the published prices. In addition, the Company is
permitted to reserve more desirable berths on a number of cruises, which gives
the Company an "exclusive" right to sell these berths for a period of time. If
the Company does not sell these reserved berths, they are returned to the cruise
lines at a specified time, generally 60 or 90 days prior to sailing, at no cost
to the Company. The Company also advises large groups, such as affinity groups,
corporate groups and business seminars, in selecting the appropriate cruise and
sells Alaskan land tour packages directly to travelers and through certain
cruise line providers.
The Company advises travelers and assists them in selecting the cruise that
best fits their particular needs and desires. This requires the Company's sales
personnel to have extensive knowledge about the character of the various cruise
lines and the differences in their ships and cruises offered. The Company's
sales personnel undergo extensive in-house training, participate in frequent
seminars conducted by cruise lines and often receive complementary passes for
cruises that provide the agent direct cruise line experience. Through the
technology being developed by the Company, detailed information about ships,
itineraries, destinations and other data is expected to be available to sales
personnel at their desktops. Sales personnel endeavor to develop relationships
with travelers in order to encourage repeat business. The Company provides
extensive services to its cruise customers in the form of periodic mailings of
information, reviews of various cruises and ships, advice regarding planning for
the specific cruise and assistance in preparing the necessary travel documents.
In addition to reserving a berth on a cruise, reservation agents can give
customers information about the activities, shopping, sightseeing and
restaurants available at the various ports at which the cruise stops and can
make reservations for these activities. In 1997, the Company recognized cruise
pro forma net revenue of $34.3 million on reservations for over 213,000
passengers on over 45 cruise lines, representing gross sales volume of
approximately $270 million.
AIR TRAVEL. The Company provides reservations for both domestic and
international airline flights. Through strategic relationships with most major
airlines, the Company is generally able to offer fares below published rates.
The Company sells domestic airline reservations to travelers relying primarily
on its reputation and telephone numbers such as 1-800-FLY-CHEAP and
1-800-LOW-FARE to attract business. The Company sells reservations for
international flights primarily to travel agents utilizing multiple fax
distribution technology to advise travel agents of special fares and promotions.
In 1997, the Company recognized airline pro forma net revenues of $15.5 million
on reservations for over 274,000 passengers, representing gross sales volume of
approximately $98 million.
EUROPEAN AUTO RENTAL. The Company provides reservations in the U.S. and
Canada for auto rentals in Europe. The Company has agreements with a number of
auto rental companies that operate in Europe, such as Alamo Europe, Avis Europe
Limited, EuroDollar and Europcar International S.A., which provide automobiles
to the Company for rental. The Company's European auto rental customers are
primarily travel agents. The Company's field representatives establish and
maintain relationships with a majority of the travel agents located in the U.S.
Auto rentals in Europe pose a number of challenges for a U.S. traveler. In
addition to costs such as drop off fees and airport levies, travelers run the
risk of additional costs associated with currency fluctuations and rate changes
if they do not pre-pay in U.S. dollars. Travelers are also faced with age
restrictions, lack of flexibility in drop off and pick up and insurance
complications. Further, the difficulty obtaining air conditioned, automatic
transmission cars makes the European auto rental process difficult for
travelers. The Company is able to simplify the process and overcome many of
these challenges for travel agents and travelers. The Company maintains 24-hour
toll-free numbers connected directly to its customer service department in the
U.S. from which its customers in Europe can obtain emergency assistance. These
toll-free numbers provides the customer with an English speaking contact with
access to the appropriate emergency roadside assistance in the relevant foreign
location. In 1997, the Company recognized European auto rental pro forma net
revenues of $32.7 million from over 259,000 travelers, representing gross sales
volume of approximately $81 million.
LODGING. The Company provides electronic reservation processing services
to over 2,100 independent and chain hotels in 48 countries worldwide. The
Company's lodging service revenues are
30
<PAGE>
generally commission based and, therefore, largely depend on the volume of
reservations processed on behalf of its hotel customers. The Company generally
processes hotel reservations through the major computerized central reservation
systems, including SABRE Group and Amadeus, through Internet sites such as
TravelWeb and Expedia and through its call center. In 1997, the Company
recognized hotel pro forma net revenues of $10.5 million from 1.3 million room
nights, representing gross sales volume of approximately $150 million. The
Company also publishes a hotel directory featuring over 4,000 participating
hotels worldwide through which travel agencies obtain special rates, access to
block space and other benefits at these listed hotels.
INFORMATION TECHNOLOGY
The Company has adopted an information technology strategy that is focused
on delivering value to the Company's operations and its customers and travel
providers, while enabling efficient and effective "back-office" processes.
The core of the Company's information technology strategy is the expected
implementation of "Universal" architecture, a series of browser-based
applications currently under development for use by Company personnel, travel
agents and travelers to access and sell or purchase the Company's products and
services. The Universal architecture is expected to allow the Company to sell
better and faster, enabling real-time access to preferred fares and rates,
inventories, product information, and customer profiles and history. This
platform is also expected to be implemented on the Internet for access by travel
agents and travelers to locate travel information and make travel reservations.
The Company's information technology strategy consists of two key
components: the Universal Agent and the Universal Manager. The Universal Agent
applications are being designed to streamline and enhance the selling process
and to permit simultaneous access to multiple source systems, including the
Company's own database of preferred rates and fares and central reservation
systems that hold inventory, such as SABRE and Amadeus. The Company is also
designing systems to facilitate direct access to inventories of travel
providers. The acquisition of Trax Software, Inc. ("Trax") in December 1997
accelerated the development of the design of the Universal Agent applications by
using the logic contained within the Trax software and leveraging the in-depth
industry knowledge of the Trax developers who joined the Company. The Universal
Manager applications are expected to provide the tools necessary to allow the
Company to consolidate back-office processes, including customer service,
ticketing and fulfillment, and accounting.
The Company is also investing in database management tools and
infrastructure, including data warehousing tools to facilitate management
reporting and decision support activities. The customer information database is
at the center of this effort. The Company is investing in its customer
information database, with the goal of owning the most comprehensive collection
of customer information in the leisure travel industry.
TRAVEL PROVIDER RELATIONSHIPS
The Company receives from certain travel providers pricing that is
preferential to published fares which enables the Company to offer prices lower
than would be generally available to travelers and travel agents. The Company's
agreements with its travel providers can generally be canceled or modified by
the travel provider upon relatively short notice. Other distributors may have
similar arrangements with travel providers, some of which may provide better
availability or more competitive pricing than that offered by the Company.
The Company has negotiated arrangements with many major airline, cruise
line and European auto rental companies and certain hotel chains. In 1997, (i)
two auto rental companies represented an aggregate of 87% of European auto
rental pro forma net revenues; (ii) six cruise lines represented an aggregate of
74% of cruise pro forma net revenues; and (iii) two airlines represented an
aggregate of 52% of airline pro forma net revenues.
31
<PAGE>
The following table sets forth a list of certain of the Company's travel
providers:
<TABLE>
<CAPTION>
CRUISE LINES AIRLINES EUROPEAN AUTO RENTAL COMPANIES HOTELS
- ----------------------------- ---------------------- -------------------------------- ----------------------
<S> <C> <C> <C>
Carnival Cruise Line American Airlines Alamo Europe Extended Stay America
Celebrity Cruise Line British Airways Avis Europe Limited Harvey Hotels
Holland America Continental Airlines Budget Helmsley Hotels
Norwegian Cruise Line Delta Air Lines Europcar International S.A. Summerfield Suites
Princess Cruises Northwest Airlines
Royal Caribbean Cruise Line US Airways
United Airlines
</TABLE>
SALES AND MARKETING
The Company engages in different marketing and advertising programs
depending on the particular travel service and whether the customers are
primarily travel agents or travelers. The Company markets domestic air travel
service through the use of various toll-free numbers, such as 1-800-FLY-CHEAP
and 1-800-LOW-FARE. The Company markets its other services to travelers in
numerous ways, principally through newspaper and magazine advertisements
highlighting toll-free numbers and special travel offers. In addition, the
Company advertises on cable and satellite television and through direct mail. In
many cases, the travel providers contribute to the cost of the advertising and
marketing. To market directly to travel agents, the Company uses dedicated sales
personnel, direct mailings and fax distribution technology. The Company believes
it will be able to significantly increase its revenue base by offering travel
agents and travelers a broader range of travel services through a single
telephone call to any of the Company's locations or through the Internet. In
addition, the Company will focus on increasing its revenues from its existing
customers by cross-selling its services and broadening its service offerings.
COMPETITION
The travel service industry is extremely competitive and has low barriers
to entry. The Company competes with other distributors of travel services,
travel providers, travel agents, tour operators, group travel sponsors and
central reservation service providers, some of which have greater experience,
brand name recognition and/or financial resources than the Company. The Company
competes for customers based upon service, price and specialized in-depth
knowledge and, with respect to sales to travel agents, attractive commission
structures. The Company's travel providers may decide to compete more directly
with the Company and restrict the availability and/or preferential pricing of
their capacity. In addition, other distributors may have relationships with
certain travel providers, providing better availability or more competitive
pricing than that offered by the Company. Furthermore, some travel agents and
group travel sponsors have a strong presence in their geographic area which may
make it difficult for the Company to attract customers in those areas.
EMPLOYEES
As of June 1, 1998, the Company had 1,416 full-time employees, of whom 673
were employed in connection with cruise services, 302 were employed in
connection with air services, 281 were employed in connection with European auto
rental services, 128 were employed in connection with hotel services and 32 were
employed at the Company's corporate headquarters. In addition, the Company had
contracts with 264 independent contractors and 353 franchisees, and used
temporary employees as required to meet the needs of seasonal demand. The
Company believes that its relations with its employees, independent contractors
and franchisees are good.
FACILITIES
As of June 1, 1998, the Company had 29 office facilities, two of which it
owns and 27 of which are leased. As the Company continues to implement its
growth strategy, certain changes are expected, such as combinations of
facilities, expansion of other facilities, and the implementation of new call
centers or shared services centers.
32
<PAGE>
LEGAL PROCEEDINGS
The Company is involved in various legal claims and actions arising in the
ordinary course of business. The Company believes that none of these actions
will have a material adverse effect on its business, financial condition and
results of operations.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Joseph V. Vittoria(1)(3) .......... 63 Chairman and Chief Executive Officer, Director
Michael J. Moriarty ............... 51 President and Chief Operating Officer
Jill M. Vales ..................... 40 Senior Vice President and Chief Financial Officer
Maryann Bastnagel ................. 41 Senior Vice President and Chief Information Officer
Suzanne B. Bell ................... 31 Senior Vice President, General Counsel and Secretary
Melville W. Robinson .............. 42 Vice President, Corporate Development
John C. DeLano .................... 38 Vice President, Operations
Spencer Frazier ................... 46 Vice President, Marketing
Robert G. Falcone ................. 56 CEO-Cruises Inc.; Director
Wayne Heller(3) ................... 41 CEO-Cruises Only; Director
Imad Khalidi ...................... 46 CEO-Auto Europe; Director
John W. Przywara .................. 46 CEO-D-FW Tours; Director
Elan J. Blutinger(2) .............. 42 Director
D. Fraser Bullock(1)(3) ........... 43 Director
Tommaso Zanzotto(1)(2) ............ 55 Director
Leonard A. Potter ................. 36 Advisory Director
</TABLE>
- ----------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Acquisition Committee
JOSEPH V. VITTORIA became the Chairman and Chief Executive Officer and a
director of the Company in July 1997. From September 1987 to February 1997, Mr.
Vittoria was the Chairman and Chief Executive Officer of Avis, Inc., a
multinational auto rental company where he was employed for over 26 years. Mr.
Vittoria was responsible for the purchase of Avis, Inc. by creating one of the
world's largest Employee Stock Ownership Plans in 1987. He is a founding member
of the World Travel and Tourism Council, a global organization of the chief
executive officers of companies engaged in all sectors of the travel and tourism
industry. He has been named travel executive of the year several times by
various travel media, including BUSINESS TRAVEL NEWS, TRAVEL WEEKLY, TRAVEL
AGENT TOUR AND TRAVEL NEWS-NORTH AMERICA. Mr. Vittoria serves on the Board of
Directors of Transmedia Europe, Transmedia Asia, Carey International, Inc.,
ResortQuest International, Inc., CD Radio, Inc. and various non-profit
associations.
MICHAEL J. MORIARTY became the President and Chief Operating Officer of the
Company in July 1997. Mr. Moriarty was the President and Chief Operating Officer
of Studio Plus Hotels, Inc., a national extended stay hotel company from July
1996 until its sale in 1997. From 1981 to July 1996, Mr. Moriarty held various
senior executive positions with the Marriott Company, a hotel company, including
Brand Vice President of Marriott International (1994-1996), Vice President of
Operations for the Residence Inn by Marriott Company (1989-1994), Vice President
Finance and Development of Residence Inn (1987-1989), Vice President of Finance
and Development for the Roy Rogers Restaurants Company, a subsidiary of the
Marriott Company, and Director of Finance and Business Analysis for Marriott
Hotels and Resorts.
JILL M. VALES became Senior Vice President and Chief Financial Officer of
the Company in July 1997. From 1996 to 1997, Ms. Vales served as the Chief
Operating Officer of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A., a law firm.
From 1990 until 1996, Ms. Vales held various positions at Certified Vacations,
an affiliate of Alamo Rent-A-Car, including Senior Vice President of Operations
and Chief Financial Officer (1994-1996), Vice President of Finance and
Operations (1992-1994) and Senior
34
<PAGE>
Director of Finance and Operations and Controller (1990-1992). From 1979 to
1990, Ms. Vales held various positions at KPMG Peat Marwick, specializing in
auditing travel companies. Ms. Vales is a certified public accountant.
MARYANN BASTNAGEL became the Senior Vice President and Chief Information
Officer of the Company in July 1997. From 1989 to 1997, Ms. Bastnagel held
various positions with Marriott International, Inc. in information services and
technology, including Vice President of Business Technology, where she was
responsible for defining systems and technology strategy for the Marriott
Lodging Group. From 1990 to 1994, Ms. Bastnagel was Vice President of
Information Systems and a member of the Executive Committee for Residence Inn by
Marriott. From 1985 to 1989, she was a Senior Manager with Price Waterhouse
Management Consulting Services on large scale information systems development
projects. From 1981 to 1985, Ms. Bastnagel was a Senior Consultant with Booz,
Allen & Hamilton, Inc.
SUZANNE B. BELL became the Senior Vice President, General Counsel and
Secretary of the Company in July 1997. From July 1996 to July 1997, Ms. Bell
was an attorney at Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. From
September 1991 to July 1996, she was an attorney at Morgan, Lewis & Bockius
LLP. Ms. Bell concentrated her law practice in the areas of mergers and
acquisitions and securities laws, representing both public and private
companies.
MELVILLE W. ROBINSON became the Vice President, Corporate Development of
the Company in July 1997. From 1994 to July 1997, Mr. Robinson served as the
Chief Financial Officer of Cruises Only, one of the Founding Companies. From
1989 until 1993, Mr. Robinson was the President and Chief Financial Officer of
the Gale Group, a U.S. based consumer products manufacturing firm. From 1986 to
1989, Mr. Robinson was a Managing Director at PNC Merchant Banking Corp., where
he founded and managed the Growth Capital Group. From 1983 to 1986, Mr. Robinson
was the Chief Financial Officer of Drug Emporium Inc., a publicly-traded
discount drugstore chain.
JOHN C. DELANO became Vice President, Operations, of the Company in January
1998. Mr. DeLano spent nearly twenty years in the auto rental industry, and from
1991 to 1997 he served as Managing Director and National Operations Manager for
Avis Australia, where he coordinated the marketing, operations, human resources,
information technology, sales, fleet, accounting and field management functions.
In 1992, while under Mr. DeLano's supervision, Avis Australia was awarded the
prestigious Australian Quality Award (similar to the Malcolm Baldridge Award in
the U.S.) and the 1996 Australian Customer Service Award.
SPENCER FRAZIER became Vice President, Marketing, of the Company in April
1998. From 1996 to 1998, Mr. Frazier served as the President of Worldwide
Concepts, Inc., a consulting firm focused on the promotion of worldwide tourism.
From 1994 to 1996, he was the Executive Vice President of Kloster Cruise
Limited, overseeing marketing and sales for Royal Cruise Line and international
marketing for Norwegian Cruise Line. From August 1991 to July 1994, he was
President of Royal Viking Line.
ROBERT G. FALCONE became a director of the Company in July 1997. Mr.
Falcone has served as the Chairman and Chief Executive Officer of Cruises Inc.
since its founding in 1982. Mr. Falcone is a member of the National Association
of Cruise Only Agencies ("NACOA"), the Airline Reporting Corporation ("ARC"),
the Travel Council of the World (Environmental Group), the American Society of
Travel Agents ("ASTA"), Cruise Lines International Association ("CLIA") and is
the co-founder of the Society of Elite Agents, a trade association of leading
cruise specialists ("SEA").
WAYNE HELLER became a director of the Company in July 1997. Mr. Heller has
served as the Chief Executive Officer of Cruises Only since its founding in
1985 and was previously employed with Norwegian Caribbean Cruise Lines from
1980 to 1984. Mr. Heller is a member of ASTA, NACOA and CLIA.
IMAD KHALIDI became a director of the Company in July 1997. Mr. Khalidi
has been President of Auto Europe since 1992. In 1990, he joined Auto Europe as
Executive Vice President of Marketing and
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<PAGE>
Sales. From 1983 to 1990, Mr. Khalidi served as an International Travel Trade
Manager and an International Licensee Manager with Europcar International S.A.,
an auto rental company in France. Mr. Khalidi is a member of the Association of
Retail Travel Agencies ("ARTA"), ASTA and CLIA.
JOHN W. PRZYWARA became a director of the Company in July 1997. Mr.
Przywara has served as President of D-FW Tours since its founding in 1978. Mr.
Przywara is a member of the ARC, CLIA and IATAN.
ELAN J. BLUTINGER has been a director of the Company since October 1996.
Mr. Blutinger is a Managing Director of Alpine Consolidated LLC, a consolidator
of highly fragmented businesses. From 1987 to 1995, he was the Chief Executive
Officer of Shoppers Express, Inc., an electronic retailing service, which he
founded. From 1983 to 1986, Mr. Blutinger was the Chairman and Chief Executive
Officer of DSI, a wholesale distributor for the personal computer industry
until its acquisition in 1986 by Independent Distribution Incorporated. Mr.
Blutinger is also a director and co-founder of ResortQuest International, Inc.
D. FRASER BULLOCK has been a director of the Company since October 1996.
Mr. Bullock is a Managing Director of Alpine Consolidated LLC, and was most
recently the President and Chief Operating Officer of VISA Interactive, a
wholly-owned subsidiary of VISA International from its inception in 1994 to
1996. In 1993, Mr. Bullock became the President and Chief Operating Officer of
U.S. Order, Inc., a provider of remote electronic transaction processing, until
it was acquired by VISA International in 1994. From 1991 to 1992, Mr. Bullock
was the Senior Vice President of U.S. Order, Inc. From 1986 to 1991, he was the
Chief Financial Officer and Executive Vice President of World Corp., Inc., a
holding company with various operating subsidiaries including World Airways,
Inc. Mr. Bullock was a founding partner of Bain Capital, a Manager of Bain and
Company, and a founder of MediVision, Inc., a consolidation of eye surgery
centers. Mr. Bullock is also a director and co-founder of ResortQuest
International, Inc.
TOMMASO ZANZOTTO became a director of the Company in July 1997. Mr.
Zanzotto is the President of Toscana Ville E Castelli, a real estate development
company which owns and operates residential and commercial properties in the
lodging and hotel industry. From 1994 to 1996, he was the Chairman and Chief
Executive Officer of Hilton International. From 1969 to 1993, Mr. Zanzotto held
various positions with American Express Travel Related Services including
President International, American Express Financial and Travel Services
(1990-1993); President, American Express Corporate Card Division (1987-1990);
President, American Express Travelers Cheques (Europe, Africa, Middle East). Mr.
Zanzotto is a member of the World Travel and Tourism Council, and a Governor of
the Transportation and Travel Committee of the World Economic Summit. Mr.
Zanzotto is also a director of Compass International Services Corporation.
LEONARD A. POTTER served as a director of the Company from its formation
until May 1997. After the initial public offering in July 1997, he became an
Advisory Director to the Board. Mr. Potter is a co-founder and Managing Director
of Capstone Partners, LLC, a venture firm specializing in consolidation
transactions. Capstone Partners, LLC was a co-founder of Staffmark, Inc. and
ResortQuest International, Inc. Prior to forming Capstone Partners, LLC in April
1996, Mr. Potter was an attorney at Morgan, Lewis & Bockius LLP for more than
five years practicing in the areas of mergers and acquisitions and securities
law. While at Morgan, Lewis & Bockius he represented a number of public
companies in connection with their creation and subsequent implementation of
consolidation strategies similar to the Company's, including U.S. Office
Products, F.Y.I. Incorporated and Cotelligent Group.
BOARD OF DIRECTORS
The Board of Directors of the Company consists of nine directors divided
into three classes with each class serving for a term of three years. As of the
date of this Prospectus, there is one vacancy on the Board of Directors. At each
annual meeting of stockholders, directors will be elected by the holders
36
<PAGE>
of the Common Stock to succeed those directors whose terms are expiring.
Directors whose terms expire in 1998 are: Elan J. Blutinger, D. Fraser Bullock
and Tommaso Zanzotto; directors whose terms expire in 1999 are: Imad Khalidi,
John W. Przywara and Joseph V. Vittoria; directors whose terms expire in 2000
are: Robert G. Falcone and Wayne Heller. The Board of Directors has established
an Audit Committee, Compensation Committee and Acquisition Committee, and may
establish other committees from time to time as the Board may determine.
The Advisory Director attends meetings of the Board of Directors, consults
with officers and directors of the Company and provides guidance (but not
direction) concerning management and operation of the Company's business. The
Advisory Director is not a director of the Company and accordingly will not have
a right to vote as a director.
The Audit Committee consists of three members, two of whom are independent
directors. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans and the results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, reviews recommendations
regarding the Company's accounting methods and the adequacy of its systems of
internal accounting controls, and reviews and approves financial press releases
and reports.
The Compensation Committee consists of two members, each of whom is a
"disinterested director," as defined in the rules promulgated by the Securities
and Exchange Commission pursuant to the Exchange Act, and an "outside director"
within the meaning of Section 162(m) of the Internal Revenue Code. The
Compensation Committee determines compensation for the Company's executive
officers, administers the Company's Plan and makes recommendations to the Board
of Directors with respect to the Company's compensation policies.
The Acquisition Committee consists of three fixed members and one floating
member. The floating member changes based upon the business segment to which an
acquisition relates. The Acquisition Committee has the authority to review and
approve acquisitions with a purchase price of $10 million or less, provided that
if the acquisition relates to a new line of business for the Company, then the
acquisition must be reviewed and approved by the full Board of Directors.
The Board of Directors does not have any other committees at this time,
although additional committees may be formed in the future. All officers serve
at the discretion of the Board of Directors.
DIRECTOR COMPENSATION; 1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $2,000 for attendance at each Board of Directors' meeting and $1,000 for each
committee meeting (unless held on the same day as a Board of Directors'
meeting). Directors are also reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof incurred in
their capacity as directors.
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan") , which was adopted by the Board of Directors and approved by the
Company's stockholders in 1997, provides for: (i) the automatic grant to each
non-employee director and Advisory Director (a "Participant") serving at the
commencement of the initial public offering of an option to purchase 10,000
shares; and thereafter (ii) the automatic grant to each Participant of an option
to purchase 10,000 shares upon such person's initial election as a director or
appointment as an Advisory Director. In addition, the Directors' Plan provides
for an automatic annual grant to each Participant of an option to purchase 5,000
shares at each annual meeting of stockholders following the initial public
offering; provided, however, that if the first annual meeting of stockholders
following a person's initial election as a non-employee director or appointment
by the Board as an Advisory Director is within three months of the date of such
election
37
<PAGE>
or appointment, such person will not be granted an option to purchase 5,000
shares of Common Stock at such annual meeting. These options will have an
exercise price per share equal to the fair market value of a share at the date
of grant. Options granted under the Directors' Plan will expire at the earlier
of 10 years from the date of grant or one year after termination of service as a
director or advisor, and options will be immediately exercisable. In addition,
the Directors' Plan permits Participants to elect to receive, in lieu of cash
directors' fees, shares or credits representing "deferred shares" that may be
settled at future dates, as elected by the Participants. The number of shares or
deferred shares received will be equal to the number of shares which, at the
date the fees would otherwise be payable, will have an aggregate fair market
value equal to the amount of such fees. The Company has reserved 100,000 shares
of Common Stock for use in connection with the Directors' Plan. Upon
consummation of the initial public offering, Messrs. Blutinger, Bullock,
Zanzotto and Potter each received options to purchase 10,000 shares.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid to the
Company's Chief Executive Officer and five of the Company's other most highly
compensated executive officers whose total annualized salary and bonus was
$100,000 or more (the Chief Executive Officer and such other executive officers
are sometimes referred to herein as the "Named Executive Officers") with respect
to the year ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------- -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY(2)($) BONUS($) OPTIONS(#) COMPENSATION($)
- -------------------------------------------- --------- -------------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Joseph V. Vittoria, CEO .................... 1997 84,615 86,000 100,000 --
Michael J. Moriarty, President/COO ......... 1997 63,462 51,500 75,000 6,104 (3)
Jill M. Vales, Sr. VP/CFO .................. 1997 63,462 32,000 50,000 24,000 (4)
Maryann Bastnagel, Sr. VP/CIO .............. 1997 63,462 48,500 110,000 8,172 (3)
Suzanne B. Bell,
Sr. VP/General Counsel ................... 1997 52,885 27,000 25,000 --
Imad Khalidi,
VP European Operations(5) ................ 1997 293,231 295,000 -- --
</TABLE>
- ----------------
(1) With the exception of Mr. Khalidi, each of the Named Executive Officers
commenced employment with the Company upon consummation of the initial
public offering (July 28, 1997). Mr. Khalidi served as President of Auto
Europe prior to the initial public offering. Commencing on July 28, 1997,
Mr. Khalidi served as CEO of Auto Europe and as a director and Vice
President, European Operations, of the Company.
(2) Annual salaries are as follows: $200,000 for Mr. Vittoria; $150,000 for each
of Mr. Moriarty, Ms. Vales and Ms. Bastnagel; and $125,000 for Ms. Bell. Mr.
Khalidi's 1997 salary and bonus include amounts paid by Auto Europe prior to
the initial public offering. After the initial public offering, Mr.
Khalidi's annual salary is $140,000.
(3) Consists of relocation expenses paid during 1997.
(4) Consists of consulting fees paid prior to the consummation of the Company's
initial public offering.
(5) Effective March 1998, Mr. Khalidi no longer serves as Vice President,
European Operations, but continues in his capacities as CEO of Auto Europe
and as a director of the Company.
38
<PAGE>
The following table sets forth the stock options granted to the Named
Executive Officers during the year ended December 31, 1997:
STOCK OPTION GRANTS AND EXERCISE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE OR DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE VALUE($)(1)
- ----------------------------- ------------ -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Joseph V. Vittoria .......... 100,000 10.4 14.00 7/28/07 821,000
Michael J. Moriarty ......... 75,000 7.8 14.00 7/28/07 615,000
Jill M. Vales ............... 50,000 5.2 14.00 7/28/07 410,000
Maryann Bastnagel ........... 110,000 11.4 14.00 7/28/07 903,000
Suzanne B. Bell ............. 25,000 2.6 14.00 7/28/07 205,000
Imad Khalidi ................ -- -- -- -- --
</TABLE>
- ----------------
(1) Calculated using the Black-Scholes valuation method.
None of the Named Executive Officers exercised any stock options during
1997. Each of the options set forth in the table above will vest in equal
installments on each of the first four anniversaries of the initial public
offering.
EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE
Mr. Vittoria has entered into an employment agreement with the Company
providing for an annual base salary of $200,000. Mr. Moriarty has entered into
an employment agreement with the Company providing for an annual base salary of
$150,000 plus in the first year a guaranteed minimum bonus of $75,000. Ms.
Vales, Mr. Khalidi, Ms. Bastnagel and Ms. Bell each have entered into an
employment agreement with the Company providing for an annual base salary of
$150,000, $140,000, $150,000 and $125,000 respectively. Each of these agreements
is for a term of three years. In addition, certain executive officers of the
Operating Companies, including Messrs. Falcone, Heller and Przywara, members of
the Board of Directors, have entered into employment agreements. Effective July
28, 1997, Mr. Falcone's employment agreement is for a term of five years; Mr.
Heller's and Mr. Przywara's employment agreements are for a term of three years
(in each case, the "Initial Term"). Unless terminated or not renewed by the
Company or the employee, the term will continue thereafter on a year-to-year
basis on the same terms and conditions existing at the time of renewal. Each
employment agreement contains a covenant not to compete (the "Covenant") with
the Company for a period of two years immediately following termination of
employment or, in the case of a termination by the Company without cause in the
absence of a change in control, for a period of one year following termination
of employment. Under this Covenant, the executive officer is prohibited from:
(i) engaging in any travel service business in direct competition with the
Company within defined geographic areas in which the Company or its subsidiaries
does business; (ii) enticing a managerial employee of the Company away from the
Company; (iii) calling upon any person or entity which is, or has been, within
one year prior to the date of termination, a customer of the Company; or (iv)
calling upon a prospective acquisition candidate which the employee knew was
approached or analyzed by the Company, for the purpose of acquiring the entity.
The Covenant may be enforced by injunctions or restraining orders and shall be
construed in accordance with the changing activities, business and location of
the Company.
Each of these employment agreements provides that, in the event of a
termination of employment by the Company without cause during the Initial Term
the employee will be entitled to receive from the Company an amount equal to his
or her then current salary for the remainder of the Initial Term or for one
year, whichever is greater. In the event of a termination of employment without
cause after the Initial Term of the employment agreement, the employee will be
entitled to receive an amount equal to his or her then current salary for one
year. In either case, payment is due in one lump sum on the
39
<PAGE>
effective date of termination. In the event of a change in control of the
Company (as defined in the agreement) during the Initial Term, if the employee
is not given at least five days' notice of such change in control and the
successor's intent to be bound by such employment agreement, the employee's
employment agreement shall be deemed terminated and the employee shall receive
in one lump sum three times the amount he or she would receive pursuant to a
termination without cause during the Initial Term. In addition, in the event of
any change in control situation, the employee may elect to terminate his or her
employment agreement and receive in one lump sum two times the amount he or she
would receive pursuant to a termination without cause during the Initial Term.
The employment agreements of Messrs. Falcone, Heller, Khalidi and Przywara also
state, that in the event of a termination without cause by the Company or a
change in control, the employee may elect to waive the right to receive
severance compensation and, in such event, the non-competition provisions of the
employment agreement will not apply. In the event the employee is given at least
five days' notice of such change in control, the employee may elect to terminate
his employment agreement and receive in one lump sum two times the amount he
would receive pursuant to a termination without cause during the Initial Term.
In such an event, the non-competition provisions of the employment agreement
would apply for two years from the effective date of termination.
Each agreement with respect to the acquisition of an Operating Company
(including the Founding Companies) also contains a similar covenant prohibiting
sellers from competing with the Company for a periods following the consummation
of the respective acquisition.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with each of the
Company's directors and executive officers. The indemnification agreements
require, among other things, that the Company indemnify its directors and
executive officers to the fullest extent permitted by law, and advance to the
directors and executive officers all related expenses, subject to reimbursement
if it is subsequently determined that indemnification is not permitted. The
Company must also indemnify and advance all expenses incurred by directors and
executive officers seeking to enforce their rights under the Company's
directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Charter and Bylaws, it provides greater assurance
to directors and executive officers that indemnification will be available,
because, as a contract, it cannot be modified unilaterally in the future by the
Board of Directors or by the stockholders to eliminate the rights it provides.
1997 LONG-TERM INCENTIVE PLAN
In May 1997, the Board of Directors and the Company's stockholders approved
the Company's 1997 Long-Term Incentive Plan (the "Plan"). The purpose of the
Plan is to provide officers, employees, directors who are also employees,
consultants and independent contractors of the Company or any of its
subsidiaries, with additional incentives by increasing their ownership interests
in the Company. Individual awards under the Plan may take the form of one or
more of: (i) either incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or
deferred stock; (iv) dividend equivalents; and (v) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
the Common Stock. The Compensation Committee of the Board of Directors
administers the Plan and generally selects the individuals who will receive
awards and the terms and conditions of those awards.
The Company initially reserved 900,000 shares of Common Stock for use in
connection with the Plan. Beginning with the initial public offering and
continuing each fiscal quarter thereafter, the number of shares available for
use in connection with the Plan may not exceed the greater of 900,000 shares or
12% of the aggregate number of shares of Common Stock outstanding prior to the
date of grant. Subject to stockholder approval at the Company's 1998 Annual
Stockholders Meeting to be held in July 1998, the Compensation Committee of the
Company's Board of Directors authorized an increase in the number of shares
available for use in connection with the Plan to 15% of the aggregate number of
shares outstanding prior to the date of grant.
40
<PAGE>
As of July 14, 1998, 1,336,057 shares are reserved for use in connection
with the Plan (1,516,056 shares after giving effect to the Offering), of which
1,288,347 shares have been granted. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Compensation Committee of the Board of Directors has granted an additional
option to Mr. Vittoria to purchase 100,000 shares, effective July 1, 1998. The
vesting of these options will occur over four years and may be accelerated based
upon thresholds of $50, $75 and $100 for the share price of the Common Stock. In
addition, based upon availability of shares under the Plan and thresholds for
the price of the Common Stock of $50 and $75, additional option grants of
150,000 shares and 200,000 shares, respectively, are expected to be issued to
Mr. Vittoria. All options will be granted with exercise prices equal to the fair
market value at the time of grant.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
401(K) PLAN
The Company established a new 401(k) plan effective July 1, 1998; existing
401(k) plans and similar plans at the Operating Companies will be suspended or
rolled into the new plan. All employees of the Company, meeting certain minimum
eligibility requirements, are eligible to participate in the 401(k) Plan. The
401(k) Plan provides that each participant may contribute up to 20% of his or
her pre-tax gross compensation (but not greater than a statutorily prescribed
annual limit). The percentage elected by certain highly compensated participants
may be required to be lower. The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company. All amounts
contributed by employee participants in conformance with plan requirements and
earnings on such contributions are fully vested at all times.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Tommaso Zanzotto and Elan
Blutinger. Mr. Zanzotto has never been an officer or employee of the Company or
its subsidiaries. Mr. Blutinger was an officer of the Company prior to the
Company's initial public offering. The Company was initially capitalized by
Alpine Consolidated, LLC, a consolidator of highly fragmented businesses, of
which Mr. Blutinger is a Managing Director, and Capstone Partners, LLC. As a
result of a 5,444.45 for one stock split effective on May 14, 1997, the 300
shares of Common Stock initially issued by the Company to its founders,
including Alpine Consolidated, LLC, totaled 1,633,335 shares on the consummation
of the initial public offering. In addition, prior to consummation of the
initial public offering, TSGI Funding, LLC ("TSGI"), a Delaware limited
liability company, extended loans to the Company from time to time in amounts
equal to the legal, accounting and other transactional costs, expenses and
disbursements incurred by the Company in connection with the acquisitions of the
Founding Companies and the initial public offering. The member managers of TSGI
were Alpine Consolidated, LLC and Capstone Partners, LLC. All amounts loaned by
TSGI were repaid, without interest, by the Company on July 28, 1997, upon
consummation of the initial public offering. Such loans aggregated $950,000.
41
<PAGE>
CERTAIN TRANSACTIONS
FORMATION, INITIAL PUBLIC OFFERING AND FOUNDING COMPANY ACQUISITIONS
The Company was formed in April 1996. The Company was initially capitalized
by Alpine Consolidated, LLC, a consolidator of highly fragmented businesses, of
which Elan Blutinger and D. Fraser Bullock, Directors of the Company, are
Managing Directors, and Capstone Partners, LLC, a venture firm specializing in
consolidation transactions, of which Leonard Potter, who is an Advisory Director
to the Board, is a Managing Director. As a result of a 5,444.45 for one stock
split effective on May 14, 1997, the 300 shares of Common Stock initially issued
by the Company to its founders totaled 1,633,335 shares on the consummation of
the initial public offering.
Prior to consummation of the initial public offering, TSGI Funding, LLC
("TSGI"), a Delaware limited liability company, extended loans to Travel
Services International, Inc. from time to time in an amount equal to the legal,
accounting and other transactional costs, expenses and disbursements incurred by
the Company in connection with the acquisitions of the Founding Companies and
the initial public offering. The member managers of TSGI International, Inc.
were repaid, without interest, by the Company on July 28, 1997, upon
consummation of the initial public offering. Such loans aggregated $950,000.
The aggregate consideration paid by the Company in the acquisitions of the
Founding Companies consisted of approximately $29.1 million in cash and
3,422,225 shares of Common Stock. In addition, certain non-operating assets with
a net book value of approximately $2.2 million were excluded from the
combinations of the Founding Companies (the "Combinations") and retained by
certain stockholders of the Founding Companies. The following table sets forth
the consideration paid to each of the Founding Companies.
COMPANY CASH SHARES
- ------------------------- --------------- ------------
(IN THOUSANDS)
Auto Europe .......... $ 5,000 1,083,334
Cruises Only ......... 9,211 908,334
Travel 800 ........... 9,241 902,778
Cruises Inc. ......... 3,431 333,334
D-FW Tours ........... 2,215 194,445
------- ---------
Total .............. $29,098 3,422,225
======= =========
The consideration paid for the Founding Companies was determined through
arm's-length negotiations between the Company and representatives of each
Founding Company. The cash portion includes working capital adjustments,
reimbursements of certain legal and accounting fees incurred by stockholders and
estimated reimbursements to certain stockholders for certain taxes that will be
incurred by them in connection with the Combinations. The factors considered by
the parties in determining the consideration paid included, among others, the
historical operating results, the net worth, the levels and type of indebtedness
and the future prospects of the Founding Companies. Each Founding Company was
represented by independent counsel in the negotiation of the terms and
conditions of the Combinations.
Pursuant to the agreements entered into in connection with the acquisitions
of the Founding Companies, the stockholders of the Founding Companies agreed not
to compete with the Company for three years, commencing on the date of
consummation of the initial public offering.
Prior to the initial public offering of the Company, substantially all the
indebtedness of the Founding Companies was personally guaranteed by their
respective stockholders or by entities controlled by such stockholders. In
connection with the Combinations, the Company assumed all remaining payment
obligations of such indebtedness. Indebtedness assumed as of July 28, 1997
includes the following: (i) Auto Europe's mortgage note payable to Key Bank of
$1,181,000, bearing interest at prime plus 1%, payable in monthly principal
installments of $7,000, maturing in August 2002; (ii) Auto Europe's mortgage
note payable to the U.S. Small Business Administration of $735,000, bearing
interest at 7.25%, payable in monthly principal and interest payments of $6,000,
maturing in October 2016; (iii) Cruises Only mortgage payable of $1,947,000 to
Barnett Bank, bearing interest at 7.8% with monthly payments of $17,000 through
October 2000 and thereafter bearing interest at a rate equal to
42
<PAGE>
the five year treasury yield plus 1.9% or prime, as selected by Cruises Only
through maturity in October 2005; (iv) Cruises Only note payable to Barnett Bank
of $603,000, bearing interest at 8.5% with monthly payments of $12,000, maturing
in 2002; and (v) Cruises Only note payable to Barnett Bank of $842,000, bearing
interest at prime minus .25% with monthly payments of $20,000, maturing in 2001.
Subsequent to the Combinations, the Company repaid the mortgage to the
Small Business Administration as required upon the change in ownership, and
Cruises Only's obligations to Barnett Bank were modified to include a fixed
interest rate of 7.2% and to pledge as collateral Company funds totaling $3
million. The collateral was released in April 1998 in exchange for a guarantee
of such debt by the Company, which was then repaid.
In connection with the Combinations, as a consideration for their interests
in the Founding Companies, certain directors and holders of more than 5% of the
outstanding shares of the Company, together with their spouses or trusts for the
benefit of their immediate family members, received cash (including working
capital adjustments and reimbursements of certain costs and expenses) and shares
of Common Stock of the Company as follows:
CASH SHARES
------------- ----------
Alex Cecil ................. $5,000,000 1,083,334
Robert G. Falcone .......... $3,431,000 300,000
Wayne Heller ............... $9,211,000 908,334
Susan Parker ............... $9,241,000 902,778
John Pryzwara .............. $2,215,000 194,445
OTHER TRANSACTIONS
Since 1990, Cruises Inc. has leased office space from Pioneer Park I
Company ("Pioneer") pursuant to a lease dated August 9, 1990, as subsequently
amended and supplemented. One of the principals of Pioneer is Michael Falcone,
the brother of Robert Falcone. The rent paid by Cruises Inc. to Pioneer during
1997 was $201,000. The lease terminates on February 29, 2006.
Prior to the initial public offering, 800 Ideas, Inc., the predecessor to
Travel 800 and a company controlled by Susan Parker, a greater than 5%
stockholder of the Company, entered into a Custom Network Service Arrangement
("CNSA") with Sprint Communications Company LP for long distance telephone
services. This contract was not transferred as part of the Combinations, but was
retained by 800 Ideas, Inc. Travel 800 continues to utilize long distance
telephone services under the CNSA and pays for its portion of usage under the
CNSA.
Jacqueline Duffort Cecil, the wife of Alex Cecil, a holder of more than 5%
of the outstanding shares of the Company and the Chief Executive Officer of Auto
Europe prior to July 1997, loaned $300,000 to Auto Europe on December 31, 1995
and 1996 at an interest rate of prime plus 1%. Auto Europe repaid this in
February 1997.
During 1995, Auto Europe advanced $2.1 million to Alex Cecil who used the
advance to purchase an island off the coast of Maine. Subsequently he
contributed this island to Auto Europe in return for the cancellation of his
obligations on the advance. This island was not included in the assets of Auto
Europe acquired by the Company in July 1997.
Auto Europe has purchased computer equipment from The Series II Group,
which is owned by Imad Khalidi, a director of the Company and Chief Executive
Officer of Auto Europe, and certain other employees of Auto Europe. Auto Europe
purchases the equipment at cost to The Series II Group. Auto Europe purchased
$134,000 worth of computer supplies and equipment from The Series II Group
during 1997.
Prior to the initial public offering, Auto Europe extended a loan to Imad
Khalidi, a director of the Company and Chief Executive Officer of Auto Europe.
The indebtedness is evidenced by a note, the principal amount of which is
$326,000. The note bears interest at 6% and is payable on September 30, 1998.
COMPANY POLICY
Any future transactions with officers, directors and affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested members of the Board of Directors.
43
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock, as of July 14, 1998, and as adjusted to
reflect the sale of shares of Common Stock by the Company and the Selling
Stockholders, by: (i) each beneficial owner of more than 5% of the Company's
Common Stock; (ii) each director of the Company; (iii) each of the Named
Executive Officers; (iv) each Selling Stockholder; and (v) all executive
officers and directors as a group. Except as indicated in the footnotes below,
the persons named in this table have sole voting and investment power with
respect to the shares beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED SHARES BEING OWNED AFTER THE
PRIOR TO THE OFFERING OFFERED OFFERING
------------------------ -------------- --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------- ------------ --------- --------- --------
<S> <C> <C> <C> <C> <C>
Joseph V. Vittoria(2) ........................... 370,000 3.3% -- 370,000 2.9%
Michael J. Moriarty(2) .......................... 64,583 * -- 64,583 *
Jill M. Vales(2) ................................ 55,333 * -- 55,333 *
Maryann Bastnagel(2) ............................ 28,500 * -- 28,500 *
Suzanne B. Bell(2)(3) ........................... 35,750 * -- 35,750 *
Robert G. Falcone(4) ............................ 250,000 2.2 25,000 225,000 1.8
Wayne Heller(5) ................................. 908,334 8.2 65,000 843,334 6.7
Imad Khalidi .................................... 500,000 4.5 -- 500,000 4.0
John W. Przywara ................................ 194,445 1.7 -- 194,445 1.5
Elan J. Blutinger(6)(7) ......................... 323,693 2.9 -- 323,693 2.6
D. Fraser Bullock(6) ............................ 241,328 2.2 20,000 221,328 1.8
Tommaso Zanzotto(6) ............................. 10,242 * -- 10,242 *
J&W Heller Corp.(5) ............................. 908,334 8.2 65,000 843,334 6.7
800 Ideas, Inc.(8) .............................. 902,778 8.1 681,000 221,778 1.8
Greystones, Inc.(9) ............................. 1,083,334 9.7 704,064 379,270 3.0
William M. DeArman(10) .......................... 28,783 * 14,391 14,392 *
Craig Sakin(10) ................................. 9,035 * 9,035 -- --
Leonard A. Potter(6) ............................ 113,408 1.0 35,000 78,408 *
William J. Lynch(10) ............................ 122,572 1.1 25,000 97,572 *
George R. Begley UST, George R.
Begley, Jr.(10) ............................... 12,606 * 4,000 8,606 *
George R. Begley UST, Tracey
Chettle Begley(10) ............................ 12,606 * 4,000 8,606 *
The B&LR Investment Company(11) ................. 83,110 * 44,110 39,000 *
The Brent & Lori Robinson Charitable
Trust(11) ..................................... 25,000 * 25,000 -- --
William F. Gorog(12) ............................ 6,685 * 3,500 3,185 *
Todd Chaffee(12) ................................ 4,464 * 4,464 -- --
John C. Backus, Jr. Revocable Trust(12) ......... 32,868 * 30,000 2,868 *
Raelock Ventures, Ltd.(12) ...................... 8,929 * 8,929 -- --
Martin Culver(12) ............................... 34,860 * 27,430 7,430 *
Anthony Antonelli(12) ........................... 20,271 * 17,001 3,270 *
The Anthony Antonelli Retirement
Fund(12) ...................................... 27,555 * 27,555 -- --
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED SHARES BEING OWNED AFTER THE
PRIOR TO THE OFFERING OFFERED OFFERING
------------------------ -------------- -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------ ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Sand Finans A/S(13) ............................ 8,929 * 8,929 -- --
Meltzer Family Limited Partnership(13) ......... 25,963 * 25,963 -- --
Alexander Louis Blutinger Trust(13) ............ 13,000 * 4,290 8,710 *
Erik Jonathan Blutinger Trust(13) .............. 13,000 * 4,290 8,710 *
Jonathan David Blutinger Trust(13) ............. 13,000 * 4,290 8,710 *
Robert Rudolph(13) ............................. 31,665 * 31,665 -- --
Gordon Macklin Family Trust(13) ................ 15,618 * 15,618 -- --
Melvin Usdan(13) ............................... 32,103 * 20,000 12,103 *
Steven Garchik(13) ............................. 59,638 * 55,000 4,638 *
Douglas W. Comfort(13) ......................... 31,665 * 22,000 9,665 *
Robert Silverberg(13) .......................... 8,929 * 8,929 -- --
Sol W. Goodman(13) ............................. 8,929 * 8,929 -- --
Martin Kahn(13) ................................ 15,618 * 15,618 -- --
All Directors and Executive Officers as
a Group (15 persons)(14) ..................... 2,999,708 26.6 110,000 2,889,708 22.6
</TABLE>
- ----------------
* Less than 1.0%
(1) Unless indicated otherwise, the address of the beneficial owners is c/o
Travel Services International, Inc., 220 Congress Park Drive, Delray
Beach, Florida 33445.
(2) Includes the following shares which may be acquired upon the exercise of
options that will vest within 60 days following the date of this
Prospectus: 25,000 shares for Mr. Vittoria; 18,750 shares for Mr. Moriarty;
12,500 shares for Ms. Vales; 27,500 shares for Ms. Bastnagel; and 6,250
shares for Ms. Bell.
(3) Includes 5,000 shares owned by Ms. Bell's spouse.
(4) Includes 100,000 shares owned by Judith A. Falcone, his spouse.
(5) These shares are held of record by J&W Heller Corp., a corporation of which
Mr. Heller is a 50% stockholder. The remaining 50% of the ownership of J&W
Heller Corp. is held by Judy Heller, his spouse.
(6) Includes 10,000 shares which may be acquired upon the exercise of vested
options.
(7) Excludes 39,000 shares held by trusts for the benefit of Mr. Blutinger's
minor children. Mr. Blutinger disclaims ownership, investment and voting
power of such shares.
(8) These shares are held of record by 800 Ideas, Inc., a corporation of which
Susan Parker is the sole stockholder. Effective June 9, 1998, Ms. Parker
resigned from her position as a member of the Company's Board of Directors.
(9) The stockholder's address is 124 Pine Street, Portland, Maine 04102. Alex
Cecil, the former owner of Auto Europe, is the sole voting stockholder of
Greystones, Inc.
(10) The stockholder's address is c/o Capstone Partners, LLC, 9 East 53rd
Street, 3rd Floor, New York, New York 10022.
(11) The stockholder's address is c/o Alpine Consolidated, LLC, 100 West Canyon
Crest Road, Alpine, Utah 84004.
(12) The stockholder's address is c/o Alpine Consolidated, LLC, 1683 Box Elder
Drive, Alpine, Utah 84004.
(13) The stockholder's address is c/o Alpine Consolidated, LLC, 2927 44th Street
NW, Washington, D.C. 20016.
(14) Includes 132,500 shares that may be acquired upon the exercise of vested
options or options that will vest within 60 days following the date of this
Prospectus.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 51,000,000 shares of
capital stock, par value $.01 per share, consisting of 50,000,000 shares of
Common Stock, of which 2,484,501 shares are designated restricted common stock
(the "Restricted Common Stock") and 1,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). At July 14, 1998, the Company had
outstanding 11,133,805 shares of Common Stock held of record by 142
shareholders, of which 2,484,501 shares are shares of Restricted Common Stock,
and no shares of Preferred Stock. The Company's Board of Directors has approved
the reincorporation of the Company from Delaware to Florida, subject to
stockholder approval at the 1998 Annual Meeting.
COMMON STOCK AND RESTRICTED COMMON STOCK
All of the rights, privileges and obligations of the Common Stock and
Restricted Common Stock are the same, except for voting rights. The holders of
the Common Stock are entitled to one vote for each share held on all matters.
The holders of Restricted Common Stock are entitled to four-tenths of one vote
for each share held on all matters.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to share ratably in the
net assets of the Company upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The holders of Common Stock have no preemptive rights to purchase
shares of stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued pursuant to this Prospectus will be upon payment therefor,
fully paid and nonassessable.
The Board of Directors is classified into three classes as nearly equal in
number as possible, with the term of each class expiring on a staggered basis.
See "Management--Board of Directors." The classification of the Board of
Directors may make it more difficult to change the composition of the Board of
Directors and thereby may discourage or make more difficult an attempt by a
person or group to obtain control of the Company. Cumulative voting for the
election of directors is not permitted, enabling holders of a majority of the
outstanding Common Stock to elect all members of the class of directors whose
terms are then expiring.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share for share basis: (a) in the event of a disposition of such
share of Restricted Common Stock by the holder thereof (other than a disposition
which is a distribution by a holder to its partners or beneficial owners or a
transfer to a related party of such holder (as defined in Section 267, 707, 318,
and or 4946 of the Internal Revenue Code of 1986, as amended)), (b) in the event
any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock of the Company, (c) in the event any person offers to
acquire 15% or more of the outstanding shares of Common Stock of the Company, or
(d) in the event a majority of the aggregate number of votes which may be voted
by the holders of outstanding shares of Common Stock and Restricted Common Stock
entitled to vote and approve such conversion. After December 31, 1999, the
Company may elect to convert any outstanding shares of Restricted Common Stock
into shares of Common Stock in the event 80% or more of the outstanding shares
of Restricted Common Stock have been converted into shares of Common Stock.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations
46
<PAGE>
prescribed by law, the Board of Directors is expressly authorized to adopt
resolutions to issue the shares, to fix the number of shares and to change the
number of shares constituting any series and to provide for or change the voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, including
dividend rights (including whether dividends are cumulative), dividend rates,
terms of redemption (including sinking fund provisions), redemption prices,
conversion rights and liquidation preferences of the shares constituting any
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. The Company has no current plans to issue any shares of
Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATIONS PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 662/3% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
In the event that the Company's stockholders approve the Company's
reincorporation from Delaware to Florida at the 1998 Annual Meeting, the Company
will be subject to the "affiliated transactions" and "control share acquisition"
provisions of the Florida Business Corporation Act. These provisions require,
subject to certain exceptions, that an "affiliated transaction" be approved by
the holders of two-thirds of the voting shares other than those beneficially
owned by an "interested shareholder" or by a majority of disinterested
directors. Voting rights must also be conferred on "control shares" acquired in
specified control share acquistions, generally only to the extent conferred by
resolution approval by the shareholders, excluding holders of shares defined as
"interested shares."
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for
47
<PAGE>
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 12,633,805 shares of
Common Stock outstanding. Of these shares, 6,586,000 shares will be freely
tradeable without restriction under the Securities Act. The remaining 6,047,805
shares represent (i) shares beneficially owned by "affiliates" of the Company
(as that term is defined in Rule 144) and other original investors in the
Company and (ii) shares issued to sellers of companies acquired by the Company
during the past year, which shares may be sold in the open market in compliance
with the applicable requirements of Rule 144 or Rule 145 or, in certain cases,
pursuant to the Company's shelf registration statement.
As of July 14, 1998 there were 1,328,347 shares of Common Stock issuable
upon the exercise of outstanding options under the Plan and Directors' Plan and
an additional 107,710 shares of Common Stock reserved for future award or grant
under such plans. The Board of Directors has approved an amendment to the Plan,
subject to stockholder approval to increase the number of shares of Common Stock
that may be issued thereunder to 15% of the outstanding shares of the Company's
Common Stock. See "Management--Director Compensation; 1997 Non-Employee
Directors' Stock Plan" and "Management--1997 Long-Term Incentive Plan." The
Company has filed a registration statement on Form S-8 to register shares of
Common Stock for issuance under the Plan and Directors' Plan. Common Stock
issued pursuant to such registration statement upon exercise of outstanding
vested options granted pursuant to the Plan and Directors' Plan, other than
Common Stock issued to affiliates of the Company, is available for immediate
resale in the open market.
The Company has also filed a shelf registration statement on Form S-1 to
register shares of Common Stock for issuance by the Company in acquisitions and
for the resale of shares held by certain persons who were sellers of companies
acquired. Shares of Common Stock issued by the Company pursuant to such
registration statement are available for immediate resale in the open market,
except the resale of such shares by affiliates of acquired companies is subject
to the restrictions and limitations imposed by Rule 145 under the Securities
Act. As of July 14, 1998, 878,187 shares of Common Stock remain available for
issuance by the Company under the registration statement. An aggregate of
1,668,924 shares was registered for resale under the shelf registration
statement by the selling stockholders named therein. As of July 14, 1998,
1,457,924 shares remain available for sale by selling stockholders.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company and the date on which they were acquired from an affiliate, then the
holder of such restricted securities (including the affiliate) is entitled to
sell that number of shares within any three-month period that does not exceed
the greater of (i) one percent of the then outstanding shares of the Common
Stock or (ii) the average weekly reported volume of trading of the Common Stock
during the four calendar weeks preceding such sales. Sales under Rule 144 also
are subject to certain requirements pertaining to the manner of such sales,
notices of such sales and the availability of current public information
concerning the Company. Any shares not constituting restricted securities sold
by affiliates must be sold in accordance with the foregoing volume limitations
and other requirements but without regard to the one year holding period. Under
Rule 144(k), if a period of at least two years has elapsed from the later of the
date on which restricted securities were acquired from the Company and the date
on which they were acquired from an affiliate,
48
<PAGE>
a holder of such restricted securities who is not an affiliate at the time of
the sale and has not been an affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately and without regard to the
volume limitations and other conditions described above.
The Company, its directors and executive officers and the Selling
Stockholders have agreed that they will not offer, sell, contract to sell,
pledge, grant any option for the sale of, announce their intention to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock, for
a period of 120 days after the date of this Prospectus without the prior written
consent of Credit Suisse First Boston, except for, in the case of the Company,
Common Stock issued pursuant to any employee or director benefit plans described
herein or in connection with acquisitions.
Sales of substantial amounts of Common Stock by existing stockholders could
have an adverse impact on the prevailing market price of the Common Stock. No
predictions can be made as to the effect, if any, that market sales of shares by
existing stockholders or the availability of such shares for future sale will
have on the market price of shares of Common Stock prevailing from time to time.
49
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated July 15, 1998 (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation, ING Baring Furman Selz LLC, NationsBanc Montgomery Securities LLC
and Raymond James & Associates, Inc. are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company and the Selling Stockholders the following respective numbers of shares
of Common Stock:
NUMBER
UNDERWRITER OF SHARES
- ----------- ------------
Credit Suisse First Boston Corporation ....................... 855,000
ING Baring Furman Selz LLC ................................... 427,500
NationsBanc Montgomery Securities LLC ........................ 712,500
Raymond James & Associates, Inc. ............................. 855,000
The Buckingham Research Group Incorporated ................... 50,000
Hambrecht & Quist LLC ........................................ 100,000
Invemed Associates, Inc. ..................................... 100,000
Leerink, Swann, Garrity, Sollami, Yaffe & Wynn, Inc. ......... 50,000
Piper Jaffray Inc. ........................................... 50,000
The Robinson-Humphrey Company, LLC ........................... 50,000
Charles Schwab & Co., Inc. ................................... 100,000
Smith Barney Inc. ............................................ 100,000
Volpe Brown Whelan & Company, LLC ............................ 50,000
---------
Total ...................................................... 3,500,000
---------
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 525,000 additional shares at the public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent that such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus and, through the Representatives, to certain dealers at such price
less a concession of $1.04 per Share, and the Underwriters and such dealers may
allow a discount of $0.10 per Share on sales to certain other dealers. After the
public offering, the public offering price, concession and discount to dealers
may be changed by the Representatives.
The Company, its directors, executive officers and the Selling Stockholders
have agreed with the underwriters that they will not offer, sell, contract to
sell, pledge, grant any option for the sale of, announce their intention to
sell, or otherwise dispose of, directly or indirectly, any shares of Common
Stock, or any securities convertible into or exchangeable or exercisable for
Common Stock, for a period of 120 days after the date of this Prospectus without
the prior written consent of Credit Suisse First Boston Corporation, except for,
in the case of the Company, Common Stock issued pursuant to any employee or
director benefit plans described herein or in connection with acquisitions.
50
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
In connection with this offering, the Underwriters and selling group
members (if any) who are qualified market makers on Nasdaq may engage in passive
market making transactions in the Common Stock on Nasdaq in accordance with Rule
103 of Regulation M under the Exchange Act during the business day prior to the
pricing of the offering before the commencement of offers of sales of the Common
Stock. Passive market makers must comply with applicable volume and price
limitations and must be indentified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
The Representatives, on behalf of the Underwriters, may engage in
overallotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase shares of Common Stock so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq Stock Market or otherwise and, if commenced, may be
discontinued at any time.
NationsBank N.A. ("NationsBank"), an affiliate of NationsBanc Montgomery
Securities LLC ("NationsBanc Montgomery"), has entered into the Credit Facility
and the Term Loan which are secured by substantially all of the Company's
assets. At June 9, 1998, the Company was indebted to NationsBank in the amount
of $30.7 million. The Company is currently in compliance in all material
respects with the terms of the Credit Facility and the Term Loan. The decision
of NationsBanc Montgomery to distribute the Common Stock was made independent of
NationsBank, which had no involvement in determining whether or when to
distribute the Common Stock or the terms of the Offering. NationsBanc Montgomery
will not receive any benefit from the Offering other than its portion of the
underwriting discount and commission as set forth on the cover page of this
Prospectus. The Company intends to use more than 10% of the net proceeds from
the sale of the Common Stock to repay this indebtedness owed by it to
NationsBank, and the Company has met the requirements of Rules 2710(c)(8)(B)(i)
and 2720(c)(3) of the NASD Conduct Rules.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securitites
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
51
<PAGE>
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the Selling Stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchasers pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect to Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, P.A., Miami, Florida. Certain legal matters related to
the offering will be passed upon for the Underwriters by Fulbright & Jaworski
L.L.P., New York, New York.
EXPERTS
The audited financial statements of Travel Services International, Inc.
and its subsidiaries, Cruises Only, Inc., 800-Ideas, Inc. and Cruises Inc.
included in this Prospectus and Registration Statement have
52
<PAGE>
been audited by Arthur Andersen LLP, independent public accountants, to the
extent and for the periods indicated in their reports thereon. Such financial
statements have been included in reliance upon the authority of said firm as
experts in giving such reports.
The financial statements of Lexington Services Associates, Ltd. at December
31, 1997 and for the year then ended appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission. The address of that site is http:www.sec.gov.
The Company's Common Stock is traded on the Nasdaq Stock Market. Reports,
proxy statements and other information concerning the Company can also be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street, Washington,
D.C. 20006.
53
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
TRAVEL SERVICES INTERNATIONAL, INC.:
Report of Independent Certified Public Accountants ...................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 F-3
(unaudited)
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31, 1997 and 1998 (unaudited) .... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1996 and 1997 and the Three Months Ended March 31, 1998 (unaudited) ................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31, 1997 and 1998 (unaudited) .... F-6
Notes to Consolidated Financial Statements .............................................. F-7
LEXINGTON SERVICES ASSOCIATES, LTD.:
Report of Independent Auditors .......................................................... F-23
Balance Sheets as of December 31, 1997 and March 31, 1998 (unaudited) ................... F-24
Statements of Income for the Periods Ended December 31, 1997 and the Three Months Ended
March 31, 1998 (unaudited) ............................................................ F-25
Statements of Partners' Capital for the Periods Ended December 31, 1997 and the Three
Months Ended March 31, 1998 (unaudited) ............................................... F-26
Statements of Cash Flows for the Periods Ended December 31, 1997 and the Three Months
Ended March 31, 1998 (unaudited) ...................................................... F-27
Notes to Financial Statements ........................................................... F-28
CRUISES ONLY, INC.:
Report of Independent Public Accountants ................................................ F-34
Balance Sheet as of July 27, 1997 ....................................................... F-35
Statement of Income for the Seven-Month Period Ended July 27, 1997 ...................... F-36
Statement of Changes in Stockholders' Deficit for the Seven-Month Period
Ended July 27, 1997 ................................................................... F-37
Statement of Cash Flows for the Seven-Month Period ended July 27, 1997 .................. F-38
Notes to Financial Statements ........................................................... F-39
800-IDEAS, INC.:
Report of Independent Public Accountants ................................................ F-43
Balance Sheet as of July 27, 1997 ....................................................... F-44
Statement of Income for the Seven-Month Period Ended July 27, 1997 ...................... F-45
Statement of Changes in Stockholders' Equity for the Seven-Month Period
Ended July 27, 1997 ................................................................... F-46
Statement of Cash Flows for the Seven-Month Period ended July 27, 1997 .................. F-47
Notes to Financial Statements ........................................................... F-48
CRUISES INC.:
Report of Independent Public Accountants ................................................ F-52
Balance Sheet as of July 27, 1997 ....................................................... F-53
Statement of Income for the Seven-Month Period Ended July 27, 1997 ...................... F-54
Statement of Changes in Stockholders' Equity for the Seven-Month Period
Ended July 27, 1997 ................................................................... F-55
Statement of Cash Flows for the Seven-Month Period ended July 27, 1997 .................. F-56
Notes to Financial Statements ........................................................... F-57
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Travel Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Travel
Services International, Inc., and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Travel
Services International, Inc., and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida
March 31, 1998 (except with respect to the matters discussed
in Note 15, as to which the date is July 15, 1998).
F-2
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1996 1997 1998
-------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 867,000 $ 7,257,000 $ 20,619,000
Accounts receivables, net ............................... 1,427,000 4,819,000 6,880,000
Receivables from affiliates and employees ............... 647,000 444,000 407,000
Prepaid expenses ........................................ 718,000 899,000 1,598,000
Deferred income taxes ................................... -- 773,000 1,160,000
Other current assets .................................... 69,000 209,000 185,000
----------- ----------- ------------
Total current assets ................................... 3,728,000 14,401,000 30,849,000
Property and equipment, net .............................. 5,552,000 11,266,000 12,225,000
Goodwill, net ............................................ -- 41,701,000 56,220,000
Notes receivables from employees ......................... 86,000 214,000 176,000
Other assets ............................................. 2,244,000 725,000 1,054,000
----------- ----------- ------------
Total assets ........................................... $11,610,000 $68,307,000 $100,524,000
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ....................... $ 2,326,000 $ 433,000 $ 472,000
Due to affiliates and employees ......................... 300,000 478,000 1,433,000
Trade payables and accrued expenses ..................... 6,459,000 12,293,000 28,533,000
----------- ----------- ------------
Total current liabilities .............................. 9,085,000 13,204,000 30,438,000
Long-term debt, net of current portion ................... 2,272,000 4,129,000 12,699,000
Deferred income and other long-term liabilities .......... 5,000 136,000 197,000
Commitments and contingencies (note 14) Stockholders' Equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none outstanding .......................... -- -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 2,587,873, 10,319,250 and 10,504,826 shares
outstanding, respectively ............................. 26,000 103,000 105,000
Additional paid-in capital .............................. 457,000 48,010,000 52,462,000
Retained earnings (deficit) ............................. (235,000) 2,725,000 4,623,000
----------- ----------- ------------
Total stockholders' equity ............................. 248,000 50,838,000 57,190,000
----------- ----------- ------------
Total liabilities and stockholders' equity ............. $11,610,000 $68,307,000 $100,524,000
=========== =========== ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these financial statements.
F-3
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues ...................... $30,024,000 $36,720,000 $62,076,000 $11,302,000 $24,936,000
Operating expenses ................ 19,079,000 24,762,000 39,342,000 7,580,000 14,237,000
----------- ----------- ----------- ----------- -----------
Gross profit ..................... 10,945,000 11,958,000 22,734,000 3,722,000 10,699,000
General and administrative
expenses ......................... 10,534,000 11,478,000 17,864,000 3,046,000 6,977,000
Goodwill amortization ............. -- -- 514,000 -- 407,000
----------- ----------- ----------- ----------- -----------
Income from operations ........... 411,000 480,000 4,356,000 676,000 3,315,000
Other income (expense):
Interest income ................... 49,000 117,000 314,000 9,000 176,000
Interest expense .................. (91,000) (287,000) (428,000) (86,000) (240,000)
Other, net ........................ (1,000) (12,000) 48,000 14,000 21,000
----------- ----------- ----------- ----------- -----------
Total other income (expense) ..... (43,000) (182,000) (66,000) (63,000) (43,000)
----------- ----------- ----------- ----------- -----------
Income before provision for
income taxes ................... 368,000 298,000 4,290,000 613,000 3,272,000
Provision for income taxes ........ 147,000 171,000 861,000 257,000 1,374,000
----------- ----------- ----------- ----------- -----------
Net income ....................... $ 221,000 $ 127,000 $ 3,429,000 $ 356,000 $ 1,898,000
=========== =========== =========== =========== ===========
HISTORICAL:
Basic earnings per share .......... $ 0.09 $ 0.05 $ 0.58 $ 0.14 $ 0.18
=========== =========== =========== =========== ===========
Diluted earnings per share ........ $ 0.09 $ 0.05 $ 0.57 $ 0.14 $ 0.18
=========== =========== =========== =========== ===========
Weighted average shares
outstanding in computing
basic earnings per share ......... 2,587,873 2,587,873 5,883,657 2,587,873 10,427,197
=========== =========== =========== =========== ===========
Weighted average shares
outstanding in computing
diluted earnings per share ....... 2,587,873 2,587,873 6,022,649 2,587,873 10,817,991
=========== =========== =========== =========== ===========
PRO FORMA (NOTE 4):
Diluted pro forma earnings
per share ........................ $ 0.33 $ 0.43 $ 0.71 $ 0.16 $ 0.20
=========== =========== =========== =========== ===========
Weighted average shares
outstanding in computing
diluted pro forma earnings
per share ........................ 10,286,265 10,286,265 11,019,271 10,875,366 11,407,092
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------------ ---------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1994 ......... 2,587,873 $ 26,000 $ 457,000 $ (407,000) $ 76,000
Net income ............................... -- -- -- 221,000 221,000
Distributions ............................ -- -- -- (65,000) (65,000)
--------- -------- ------------ ---------- ------------
Balances as of December 31, 1995 ......... 2,587,873 26,000 457,000 (251,000) 232,000
Net income ............................... -- -- -- 127,000 127,000
Distributions ............................ -- -- -- (111,000) (111,000)
--------- -------- ------------ ---------- ------------
Balances as of December 31, 1996 ......... 2,587,873 26,000 457,000 (235,000) 248,000
Net income ............................... -- -- -- 3,429,000 3,429,000
Distributions ............................ -- -- (1,904,000) (469,000) (2,373,000)
Initial Public Offering and
Combinations ............................ 7,698,392 77,000 49,447,000 -- 49,524,000
Acquisition of Trax Software ............. 32,985 -- -- -- --
Amortization of unearned
compensation ............................ -- -- 10,000 -- 10,000
--------- -------- ------------ ---------- ------------
Balances as of December 31, 1997 ......... 10,319,250 103,000 48,010,000 2,725,000 50,838,000
Net income (unaudited) ................... -- -- -- 1,898,000 1,898,000
Acquisition of Goldcoast and
Diplomat (unaudited) .................... 185,576 2,000 4,449,000 -- 4,451,000
Amortization of unearned
compensation (unaudited) ................ -- -- 3,000 -- 3,000
---------- -------- ------------ ---------- ------------
Balances as of March 31, 1998
(unaudited) ............................. 10,504,826 $105,000 $ 52,462,000 $4,623,000 $ 57,190,000
========== ======== ============ ========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Cash from operating activities:
Net income ......................................... $ 221,000 $ 127,000 $ 3,429,000
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ..................... 520,000 778,000 1,736,000
Amortization of unearned compensation ............. -- -- 10,000
Changes in operating assets and liabilities:
Accounts receivables ............................. (135,000) (350,000) (971,000)
Receivables and notes from affiliates
and employees .................................. 92,000 (202,000) (115,000)
Prepaid expenses ................................. (227,000) (429,000) (18,000)
Deferred income taxes ............................ -- -- (773,000)
Other assets ..................................... (17,000) (40,000) 550,000
Trade payables and accrued expenses .............. 1,369,000 230,000 (661,000)
------------- ------------- --------------
Net cash provided by operating activities ......... 1,823,000 114,000 3,187,000
------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures ............................... (1,260,000) (2,988,000) (2,952,000)
Improvements to other assets ....................... -- (69,000) --
Proceeds from sale of property and
equipment ........................................ 14,000 74,000 54,000
Cash paid for acquisitions, net of cash
acquired ......................................... -- -- (18,208,000)
------------- ------------- --------------
Net cash used in investing activities ............. (1,246,000) (2,983,000) (21,106,000)
------------- ------------- --------------
Cash flows from financing activities:
Proceeds from long-term debt and lines
of credit ........................................ 724,000 4,104,000 --
Payments on long-term debt and lines
of credit ........................................ (683,000) (1,133,000) (3,731,000)
Stock redemption ................................... (400,000) -- --
Net proceeds from Offering ......................... -- -- 33,219,000
Consideration paid to former stockholder of
accounting acquirer .............................. -- -- (5,000,000)
Distributions to stockholders ...................... (65,000) (111,000) (179,000)
------------- ------------- --------------
Net cash provided by (used in) financing
activities ...................................... (424,000) 2,860,000 24,309,000
------------- ------------- --------------
Net increase in cash and cash equivalents ........... 153,000 (9,000) 6,390,000
Cash and cash equivalents,
beginning of period ................................ 723,000 876,000 867,000
------------- ------------- --------------
Cash and cash equivalents, end of period ............ $ 876,000 $ 867,000 $ 7,257,000
============= ============= ==============
Supplemental cash flow information:
Cash paid for interest ............................. $ 124,000 $ 262,000 $ 426,000
============= ============= ==============
Supplemental disclosure of non-cash financing
and investing activities:
Receivable from stockholder exchanged for
non-operating assets ............................ $ -- $ 2,120,000 $ --
============= ============= ==============
Assets distributed to stockholders ................ $ -- $ -- $ 2,193,000
============= ============= ==============
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Cash from operating activities:
Net income ......................................... $ 356,000 $ 1,898,000
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ..................... 269,000 852,000
Amortization of unearned compensation ............. -- 3,000
Changes in operating assets and liabilities:
Accounts receivables ............................. (314,000) (1,728,000)
Receivables and notes from affiliates
and employees .................................. 92,000 75,000
Prepaid expenses ................................. 69,000 (212,000)
Deferred income taxes ............................ -- (387,000)
Other assets ..................................... (75,000) (297,000)
Trade payables and accrued expenses .............. 5,524,000 13,953,000
------------- ------------
Net cash provided by operating activities ......... 5,921,000 14,157,000
------------- ------------
Cash flows from investing activities:
Capital expenditures ............................... (509,000) (897,000)
Improvements to other assets ....................... -- --
Proceeds from sale of property and
equipment ........................................ 30,000 --
Cash paid for acquisitions, net of cash
acquired ......................................... -- (8,249,000)
------------- ------------
Net cash used in investing activities ............. (479,000) (9,146,000)
------------- ------------
Cash flows from financing activities:
Proceeds from long-term debt and lines
of credit ........................................ -- 8,600,000
Payments on long-term debt and lines
of credit ........................................ (2,422,000) (249,000)
Stock redemption ................................... -- --
Net proceeds from Offering ......................... -- --
Consideration paid to former stockholder of
accounting acquirer .............................. -- --
Distributions to stockholders ...................... -- --
------------- ------------
Net cash provided by (used in) financing
activities ...................................... (2,422,000) 8,351,000
------------- ------------
Net increase in cash and cash equivalents ........... 3,020,000 13,362,000
Cash and cash equivalents,
beginning of period ................................ 867,000 7,257,000
------------- ------------
Cash and cash equivalents, end of period ............ $ 3,887,000 $ 20,619,000
============= ============
Supplemental cash flow information:
Cash paid for interest ............................. $ 111,000 $ 240,000
============= ============
Supplemental disclosure of non-cash financing
and investing activities:
Receivable from stockholder exchanged for
non-operating assets ............................ $ -- $ --
============= ============
Assets distributed to stockholders ................ $ -- $ --
============= ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-6
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Travel Services International, Inc. (the "Company") and subsidiaries
provide specialized distribution of leisure travel services to both travel
agents and travelers. The Company, incorporated in Delaware, was founded in
April 1996. On July 22, 1997, the Company's Registration Statement on Form S-1
was declared effective. On July 28, 1997, the Company consummated its initial
public offering (the "Offering") of common stock, and simultaneously acquired
five specialized distributors of travel services in separate combination
transactions (the "Combinations"). As a result of the Combinations, the Company
acquired the outstanding capital stock of Cruises Inc. ("Cruises Inc.") and
D-FW Tours, Inc. and D-FW Travel Arrangements, Inc. (collectively, "D-FW
Tours"), and acquired substantially all of the assets of Auto Europe, Inc.
(Maine) ("Auto Europe"), Cruises Only, Inc. ("Cruises Only") and 800-Ideas,
Inc. ("Travel 800") (each a "Founding Company" and collectively the "Founding
Companies").
On July 28, 1997, the Company issued an aggregate of 6,297,225 shares of
Common Stock in connection with the Combinations (3,422,225 shares) and the
Offering (2,875,000 shares). Shares issued in connection with the Offering were
sold to the public at $14.00 per share. The net proceeds to the Company from the
Offering (after deducting underwriting discounts, commissions and estimated
offering expenses) were approximately $33.2 million. Of this amount, $29.1
million represents the cash portion of the purchase price relating to the
Combinations (including $5 million paid to the former stockholder of Auto
Europe, the accounting acquiror, and working capital adjustments and estimated
reimbursements to stockholders of three of the Founding Companies that had
elected S Corporation status under the Internal Revenue Code for certain taxes
incurred by them in connection with the Combinations).
The consideration for the Combinations consisted of cash and common stock.
The Combinations were accounted for under the purchase method of accounting.
Auto Europe has been designated as the accounting acquiror for financial
statement presentation purposes in accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 97, which states that the
combining company which receives the largest portion of voting rights in the
combined corporation is presumed to be the acquiror for accounting purposes.
Accordingly, the historical financial statements for each year presented
represent those of Auto Europe and companies acquired in 1997 and 1998 under
transactions accounted for using the pooling of interests method of accounting
described in Note (3). The historical financial statements as of and for the
year ended December 31, 1997 also include balances and transactions of the four
other Founding Companies and the Company since July 28, 1997. Historical
financial statements as of and for the three months ended March 31, 1998 also
include the balances and operating results of companies acquired during the
first quarter of 1998 under transactions accounted for using the purchase method
of accounting, from the date of acquisition through March 31, 1998.
Historical operating results presented do not include operations of four of
the Founding Companies prior to July 28, 1997 or of Lexington Services
Associates, Ltd. acquired on June 1, 1998 (the "Lexington Acquisition"). Refer
to Note (4) for information regarding pro forma operating results and pro forma
diluted earnings per share which give effect to results of the Company combined
with all Founding Companies as if the Combinations had occurred at the beginning
of each respective year and the Lexington Acquisition as if it had occurred on
January 1, 1997 and to Note (15) for information regarding the Lexington
Acquistion.
F-7
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited and omit certain information
and footnote disclosures related to these periods, normally included in
financial statements prepared in accordance with generally accepted accounting
principles. 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 the interim
financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
REVENUE RECOGNITION
The Company records net revenues when earned, which for car rentals and
airline tickets is at the time a reservation is booked and ticketed and for
cruise bookings is when the customer is no longer entitled to a full refund of
the cost of the cruise, which is generally 45 to 90 days prior to the sail date.
Revenues primarily consist of commissions and markups on travel services, volume
bonuses from travel service providers, processing fees, franchise fees, and
delivery fees. The Company recognizes revenues from franchise fees when the
Company has fulfilled all contractual obligations required by the agreements
signed with the franchisees. The Company defers franchise renewal fees and
amortizes those fees to revenues over the applicable one-year period. The
Company provides an allowance for cancellations, reservation changes and
currency exchange guarantees, and provisions for such amounts are reflected in
net revenues based on historical experience. The allowances netted against net
revenues are not material in the three years ended December 31, 1997. However,
actual cancellations and reservation changes could vary significantly based upon
changes in economic and political conditions that may impact leisure travel
patterns. The Company has also recorded an allowance for doubtful accounts
receivables totaling $37,000, $145,000 and $135,000 (unaudited) at December 31,
1996, 1997 and March 31, 1998, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash equivalents.
Cash and cash equivalents at December 31, 1996, 1997 and March 31, 1998, include
interest bearing demand deposits and highly liquid investments of $992,000,
$6,290,000 and $19,588,000 (unaudited), respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments", requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, receivables, trade
payables, and debt are reflected in the accompanying consolidated financial
statements at cost, which approximates fair value. All long-term debt
obligations bear interest.
F-8
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
FOREIGN CURRENCY TRANSACTIONS
The Company enters into foreign currency forward purchase contracts to
hedge substantially all of its foreign currency denominated liabilities and
reservation commitments to foreign travel service. The hedging minimizes the
impact of foreign exchange rate movements on the Company's operating results
because gains and losses on these contracts generally offset losses and gains on
the liabilities being hedged. The typical maturity of these purchase contracts
is 60 days. At December 31, 1996 and 1997, respectively, the Company had
outstanding forward purchase contracts of $687,000 and $5.4 million,
respectively. The risk of loss on unhedged liabilities is not considered
significant.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
estimated useful lives of the respective assets on a straight-line basis.
Leasehold improvements are amortized on a straight-line basis over periods not
exceeding the respective terms of the leases.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the costs and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of income.
INTANGIBLE ASSETS AND AMORTIZATION
The Combinations and certain other acquisitions were accounted for using
the purchase method of accounting. The excess of consideration paid over the
estimated fair value of the net assets acquired less liabilities assumed is
recorded as goodwill. Allocations of the purchase price to assets acquired and
liabilities assumed have been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available.
Goodwill is being amortized on a straight-line basis generally over 35
years, representing the approximate remaining useful life of acquired intangible
assets. Accumulated amortization totals $514,000 at December 31, 1997 and
$921,000 (unaudited) at March 31, 1998. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed", subsequent to an
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining net book value may
warrant revision or may not be recoverable. If factors indicate that the net
book value should be evaluated for possible impairment, the Company will use an
estimate of the related business's undiscounted operating income over the
remaining life of the cost in excess of net assets of acquired businesses, in
measuring whether such cost is recoverable.
CAPITALIZED SOFTWARE COSTS
Pursuant to American Institute of Certified Public Accountants Statements
of Position No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1"), the Company capitalizes certain
direct costs related to strategic systems development
F-9
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
projects during the application development stage. Costs incurred during the
preliminary project and post implementation operation stages are expensed as
incurred. Capitalized costs are amortized using the straight line method over
the estimated useful life of five years commencing when the application is ready
for use. Capitalized software development costs are reported at the lower of
unamortized costs or net realizable value. No capitalized costs were amortized
in 1997 or 1998.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123") requires adoption of a fair value
method of accounting for stock-based compensation plans for non-employees and
permits continuation of accounting using the intrinsic value based method under
Accounting Principals Board ("APB") Opinion No. 25, "Accounting for
Stock-issued to Employees", for stock options granted to employees.
The Company has chosen to account for stock options issued to employees
using the intrinsic value based method prescribed in APB Opinion No. 25 and,
accordingly, does not recognize compensation expense for these stock option
grants made at an exercise price equal to or in excess of the fair market value
of the stock at the date of grant. Pro forma net income and earnings per share
amounts are presented in Note (10) as if the fair value method had been adopted.
INCOME TAXES
Prior to July 28, 1997, the Company consisted of Auto Europe, the
accounting acquiror, and the Pooling Acquisitions accounted for using the
pooling of interests method of accounting. Auto Europe, which elected S
Corporation status as defined by the Internal Revenue Code, was not subject to
taxation for federal purposes until the transfer of the net assets of the S
Corporation to the Company, which coincided with the Company's Offering. At that
time, Auto Europe adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Auto Europe recorded a deferred
tax asset and a corresponding reduction of income tax expense of approximately
$543,000 on July 28, 1997, representing the net deferred taxes at that date
which were not previously recorded because of Auto Europe's previous status
under Subchapter S of the Internal Revenue Code.
Under SFAS 109, deferred tax assets and liabilities are computed based upon
the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability each
period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") in 1997. Basic earnings per common share
("EPS") calculations are determined by dividing net income by the weighted
average number of shares of common stock
F-10
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
outstanding during the year. Diluted earnings per common share calculations are
determined by dividing net income by the weighted average number of common
shares and dilutive common share equivalents outstanding (all related to
outstanding stock options discussed in Note (10)). SFAS No. 128 had no impact on
the Company's reported earnings per share for 1995 and 1996 as no common share
equivalents existed during these periods.
A reconciliation of shares used in the calculation of Basic and Diluted EPS
is as follows:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------
(UNAUDITED)
Basic common shares outstanding ........... 5,883,657 10,427,197
Dilutive effect of options ................ 138,992 390,794
--------- ----------
Diluted common shares outstanding ......... 6,022,649 10,817,991
========= ==========
Diluted pro forma earnings per share is also presented to give effect to
the Offering and the Combinations as discussed in Note (4).
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting estimates include establishing allowances for
doubtful accounts, cancellations, reservation changes and currency exchange
guarantees.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. During the three months ended March 31, 1998,
the Company adopted SFAS No. 130. 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 all periods
presented herein, there were no differences between net income and
comprehensive income.
In June 1997, the FASB issued Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes standards for the way that public business
F-11
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about product and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The adoption of
SFAS No. 131 will have no impact on consolidated results of operations,
financial position or cash flow.
(3) ACQUISITIONS:
On November 19, 1997, the Company consummated the acquisitions of all of
the outstanding capital stock of CruiseOne, Inc., Cruise World, Inc., and The
Anthony Dean Corporation (d/b/a Cruise Fairs of America). The aggregate
consideration paid for these acquisitions was 880,196 shares of common stock. On
November 21, 1997, the Company consummated the acquisitions of all of the
outstanding capital stock of Ship 'N' Shore Cruises, Inc., Cruise Time, Inc.,
SNS Coachline, Inc., Cruise Mart, Inc. and SNS Travel Marketing, Inc. The
aggregate consideration paid for these acquisitions was 471,508 shares of common
stock. On March 31, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of CruiseMasters, Inc. ("CruiseMasters"). The
aggregate consideration paid for this acquisition was 152,835 shares of common
stock. These November 1997 and March 1998 acquisitions of specialized
distributors of cruise reservations (collectively, the "Pooling Acquisitions")
are accounted for using the pooling of interests method of accounting and,
accordingly, the consolidated financial statements for the periods presented
have been restated to include the Pooling Acquisitions.
Revenues and income generated by the Pooling acquisitions prior to the date
of acquisition and included in the accompanying consolidated statements of
income were as follows:
1995 1996 1997
------------- -------------- --------------
Net revenues .......... $8,105,000 $11,000,000 $15,722,000
========== =========== ===========
Net income ............ $ 365,000 $ 259,000 $ 1,167,000
========== =========== ===========
On December 2, 1997, the Company consummated the acquisition of all of the
outstanding capital stock of Trax Software, Inc. ("Trax"). The aggregate
consideration paid was 32,985 shares of common stock. Trax developed software
products designed for specialized distributors of leisure travel services. This
software is the foundation of the reservations booking functionality of the
Company's integrated selling, service, product development and customer
information systems now under development. The acquisition is accounted for
using the purchase method of accounting. Accordingly, the operations of Trax
have been included in the accompanying consolidated financial statements from
the date of acquisition. The historical operations of Trax when compared to the
historical operations of the Company are not significant.
On January 20, 1998, the Company consummated the acquisition of
substantially all of the assets and assumption of substantially all of the
liabilities of Diplomat Tours, Inc. and International Airline Consolidators
(collectively, "Diplomat"). The aggregate consideration paid for Diplomat
consisted of 21,821 shares of common stock and $2.0 million in cash. Diplomat
is a specialized distributor of international airline reservations and had 1997
net revenues of approximately $1.9 million. The
F-12
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) ACQUISITIONS:--(CONTINUED)
acquisition is accounted for using the purchase method of accounting. The
historical operations of Diplomat when compared to the historical operations of
the Company are not significant.
On February 9, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Gold Coast Travel Agency Corporation, Inc. ("Gold
Coast"). The aggregate consideration paid for Gold Coast consisted of 163,755
shares of common stock and $6.25 million in cash. In addition $500,000 in
contingent consideration is payable based upon performance in the 1998 fiscal
year. Gold Coast is a specialized distributor of cruise reservations and had
1997 net revenues of approximately $6.8 million. The acquisition is accounted
for using the purchase method of accounting. The historical operations of Gold
Coast when compared to the historical operations of the Company are not
significant.
Refer to Note (15) for information regarding subsequent events involving
acquisitions.
(4) PRO FORMA RESULTS AND EARNINGS PER SHARE:
Pro forma diluted earnings per share for the Company gives effect to
results of the Company combined with the Founding Companies as if the
Combinations had occurred at the beginning of each respective year, and as if
the Lexington Acquisition had occurred on January 1, 1997, along with certain
adjustments associated with the Pooling Acquisitions. The pro forma results
include the effects of: (i) the Combinations and the Lexington Acquisition; (ii)
amortization of goodwill resulting from the Combinations and the Lexington
Acquisition; (iii) certain adjustments to salaries, bonuses, management fees and
benefits to former owners and key management of the Founding Companies, the
Lexington Acquisition and the Pooling Acquisitions, to which such persons have
agreed prospectively ("Compensation Differential"); (iv) pro forma acquisition
costs associated with Pooling Acquisitions and Lexington; and (v) provision for
income taxes as if pro forma income was subject to corporate federal and state
income taxes during the periods; and (vi) the issuance of 305,111 shares of
Common Stock at an assumed offering price of $34.5 per share the net proceeds of
which would be sufficient to repay debt incurred in connection with the
Lexington Acquisition.
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which actually
would have resulted had the Founding Companies and the Lexington Acquisition
been under common control prior to the Combinations and the Lexington
Acquisition, or which may result in the future.
F-13
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Unaudited
pro forma operating results and diluted pro forma earnings per share follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues ................... $ 52,660,000 $ 63,017,000 $ 92,899,000 $20,760,000 $27,818,000
============ ============ ============ =========== ===========
Income before taxes, additional
goodwill and adjustments for
Compensation Differential
and acquisition costs ........ $ 368,000 $ 298,000 $ 4,290,000 $ 613,000 $ 3,272,000
Income of Founding Companies
and Lexington, prior to the
acquisition dates ............. 2,548,000 2,562,000 5,699,000 1,476,000 395,000
------------ ------------ ------------ ----------- -----------
Pro forma income before
adjustments .................. 2,916,000 2,860,000 9,989,000 2,089,000 3,667,000
Compensation Differential..... 4,153,000 5,964,000 5,105,000 1,465,000 753,000
Acquisition costs ............ -- -- 503,000 -- 27,000
Goodwill amortization ........ (1,234,000) (1,234,000) (2,034,000) (509,000) (607,000)
------------ ------------ ------------ ----------- -----------
Pro forma income
before income taxes ........ 5,835,000 7,590,000 13,563,000 3,045,000 3,840,000
Pro forma provision for
income taxes ................ 2,451,000 3,188,000 5,696,000 1,279,000 1,612,000
------------ ------------ ------------ ----------- -----------
Pro forma net income ......... $ 3,384,000 $ 4,402,000 $ 7,867,000 $ 1,766,000 $ 2,228,000
============ ============ ============ =========== ===========
Diluted pro forma earnings
per share .................... $ .33 $ .43 $ .71 $ .16 $ .20
============ ============ ============ =========== ===========
Weighted average shares used
outstanding .................. 10,286,265 10,286,265 11,019,271 10,875,366 11,407,092
============ ============ ============ =========== ===========
</TABLE>
F-14
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY AND EQUIPMENT AND OTHER ASSETS:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE --------------------------------- MARCH 31,
IN YEARS 1996 1997 1998
------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land ............................. $ 365,000 $ 835,000 $ 835,000
Buildings ........................ 27-40 2,766,000 4,904,000 4,904,000
Vehicles ......................... 5 674,000 1,257,000 1,257,000
Furniture and fixtures ........... 5-7 203,000 828,000 987,000
Computers and equipment .......... 3-5 3,020,000 5,617,000 6,540,000
Capitalized software ............. 5 -- 185,000 492,000
Leasehold improvements ........... 5-7 36,000 110,000 409,000
------------ ------------ ------------
7,064,000 13,736,000 15,424,000
Less: Accumulated depreciation and
amortization .................... (1,512,000) (2,470,000) (3,199,000)
------------ ------------ ------------
$ 5,552,000 $ 11,266,000 $ 12,225,000
============ ============ ============
</TABLE>
Other assets at December 31, 1996 include an investment in real estate not
utilized in operations with a carrying value of $2.1 million. Immediately prior
to the Offering and Combinations, the property was distributed, along with other
property and equipment with a net book value of $73,000, to a former
stockholder.
(6) TRADE PAYABLES AND ACCRUED EXPENSES:
Trade payables and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation ............................ $ 486,000 $ 2,360,000 $ 2,882,000
Accrued commissions ............................. 365,000 174,000 431,000
Due to travel providers and customers ........... 3,317,000 4,772,000 17,344,000
Due to travel agents ............................ 589,000 898,000 2,552,000
Allowance for cancellations and refunds ......... 327,000 404,000 522,000
Offering costs .................................. -- 547,000 13,000
Other ........................................... 1,375,000 3,138,000 4,789,000
---------- ----------- -----------
$6,459,000 $12,293,000 $28,533,000
========== =========== ===========
</TABLE>
F-15
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) LONG TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- MARCH 31,
1996 1997 1998
--------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings under NationsBank credit facility ......... $ -- $ -- $ 8,600,000
Borrowings under Key Bank line of credit ............. 2,000,000 -- --
Mortgage note payable to Key Bank, bearing
interest at prime plus 1%, payable in monthly
principal installments of $7,000 plus accrued
interest, matures in August 2002. Secured by
certain real estate ................................. 1,229,000 1,139,000 1,125,000
Note payable to Bank of New York, bearing interest
at prime plus 1%, payable in monthly payments of
$3,000 through October 2000. Secured by certain
property and equipment .............................. 153,000 113,000 103,000
Mortgage payable to Barnett Bank, bearing interest
at 7.2%, payable in monthly payments of $15,000
through September 2005 and a balloon payment in
October 2005. Secured by certain real estate and
by funds pledged of $3 million....................... -- 1,916,000 1,905,000
Note payable to Barnett Bank, bearing interest at
7.2%, payable in monthly principal payments of
$13,000 through April 2001 and a balloon payment
May 2001. Secured by funds pledged
of $3 million........................................ -- 750,000 710,000
Note payable to Barnett Bank, bearing interest at
7.2%, payable in monthly payments of $9,000
through September 2002 and a balloon payment
in October 2002. Secured by funds pledged of
$3 million........................................... -- 566,000 549,000
Note payable to U.S. Small Business Administration
(SBA), bearing interest at 7.25% .................... 745,000 -- --
Note payable to Textron Financial Corporation,
bearing interest at 9%, payable in monthly
principal and interest payments. Secured
by vehicles ......................................... 243,000 -- --
Notes payable to various automobile lenders,
bearing interest ranging from 7.9% to 11.9% ......... 110,000 -- --
Other notes payable .................................. 118,000 78,000 179,000
------------ ---------- -----------
Total long-term debt ................................ 4,598,000 4,562,000 13,171,000
Less-current portion ................................ (2,326,000) (433,000) (472,000)
------------ ---------- -----------
Long-term debt, net of current portion .............. $ 2,272,000 $4,129,000 $12,699,000
============ ========== ===========
</TABLE>
F-16
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) LONG TERM DEBT:--(CONTINUED)
On October 15, 1997, the Company entered into a credit agreement (the
"Credit Agreement") with NationsBank, N.A. with respect to a $20 million
revolving line of credit (the "Credit Facility") and a term loan facility of
approximately $2 million (the "Term Loan"). The Credit Facility may be used for
letters of credit not to exceed $2 million, acquisitions, and for capital
expenditures and general corporate purposes up to an aggregate amount of $5
million. The Credit Agreement requires the Company to comply with various loan
covenants, which include maintenance of certain financial ratios, restrictions
on additional indebtedness and restrictions on liens, guarantees, advances,
capital expenditures, sale of assets and dividends. At December 31, 1997, the
Company was in compliance with applicable loan covenants. Interest on
outstanding balances of the Credit Facility are computed based on the Eurodollar
Rate plus a margin ranging from 1.25% to 2.0%, depending on certain financial
ratios. Availability fees of 25 basis points per annum payable on the unused
portion of the Credit Facility and a facility fee are paid equal to 5/8 of one
percent of the aggregate principal balance on the Term Loan. The Credit Facility
has a three-year term and is secured by substantially all the assets of the
Company, including the stock and membership interests in the Founding Companies
and any future material subsidiaries, as defined. The Company, each Founding
Company and all other current and future material subsidiaries are required to
guarantee repayment of all amounts due under the Credit Facility. The Credit
Agreement requires the Company to secure an interest rate hedge on fifty percent
of the outstanding principal amount borrowed under the Credit Facility and one
hundred percent of the outstanding balance on the Term Loan. The Term Loan is to
be used to refinance the mortgage note payable to Barnett Bank.
At December 31, 1997, maturities of long-term debt were as follows:
YEAR AMOUNT
- ------------------------------ -------------
1998 ....................... $ 433,000
1999 ....................... 427,000
2000 ....................... 425,000
2001 ....................... 505,000
2002 ....................... 404,000
Thereafter ................. 2,368,000
----------
$4,562,000
==========
Refer to Note (15) for information regarding certain subsequent events
related to the Credit Agreement.
(8) STOCKHOLDERS' EQUITY:
In May 1997, the Company effected a 5,444.45-for-one stock split of its
common shares. In addition, the Company increased the number of authorized
shares of common stock to 50,000,000 and authorized 1,000,000 shares of $.01 par
value preferred stock. The effects of the common stock split and the increase in
the shares of authorized common stock have been retroactively reflected in the
accompanying consolidated financial statements for all periods presented.
In May 1997, the stockholders exchanged 2,484,501 shares of common stock
for an equal number of shares of restricted voting common stock. Common stock
and the restricted common stock are identical except that the holders of
restricted common stock are only entitled to four-tenths of one vote for each
share on all matters.
Other transactions in the Company's common stock are discussed in Notes
(1), (3) and (15).
F-17
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal .......... $123,000 $144,000 $719,000 $237,000 $1,273,000
State ............ 24,000 27,000 142,000 20,000 101,000
-------- -------- -------- -------- ----------
$147,000 $171,000 $861,000 $257,000 $1,374,000
======== ======== ======== ======== ==========
Current .......... $147,000 $171,000 $826,000 $257,000 $1,761,000
Deferred ......... -- -- 35,000 -- (387,000)
-------- -------- -------- -------- ----------
$147,000 $171,000 $861,000 $257,000 $1,374,000
======== ======== ======== ======== ==========
</TABLE>
A reconciliation of the difference between the expected provision for
income taxes using the federal tax rate and the Company's actual provision is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- ----------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income tax computed at the
Federal statutory tax rate ......... $129,000 $104,000 $1,502,000 $215,000 $1,145,000
State and local taxes (net of
federal benefit) ................... 18,000 67,000 48,000 42,000 201,000
Non-deductible goodwill ............. 112,000 -- 28,000
Tax benefit to record deferred
taxes at July 27, 1997 ............. -- -- (543,000) -- --
Other, net .......................... -- -- (258,000) -- --
-------- -------- ---------- -------- ----------
$147,000 $171,000 $ 861,000 $257,000 $1,374,000
======== ======== ========== ======== ==========
</TABLE>
The major components of the Company's net current deferred tax assets at
December 31, 1997 relate to allowances, accruals and adjustments relating to the
conversion from cash to accrual method of accounting for income tax purposes at
certain of the Founding Companies and Pooling Acquisitions.
(10) STOCK OPTION PLANS:
In May 1997, the Company adopted two stock option plans (the "Plans").
Under the The Long Term Incentive Plan (the "Incentive Plan"), the maximum
number of common shares that may be subject to outstanding awards, determined
immediately after the grant of any award, may not exceed the greater of 900,000
shares or 12% of the aggregate number of shares of Common Stock outstanding.
Options may be granted to directors, officers, employees, consultants, and
independent contractors. Individual awards under the Plan may take the form of
one or more of: (i) either incentive stock options ("ISOs") or non-qualified
stock options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii)
restricted or deferred stock; (iv) dividend equivalents; and (v) other awards
not otherwise provided for, the value of which is based in whole or in part upon
the value of the Common Stock.
F-18
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) STOCK OPTION PLANS:--(CONTINUED)
Pursuant to the Non-Employee Directors' Stock Plan (the "Directors' Plan"),
each non-employee director and advisory director is automatically granted an
option to purchase 10,000 shares upon such person's initial election as a
director. In addition, the Directors' Plan provides for an automatic annual
grant to each Participant of an option to purchase 5,000 shares at each annual
meeting of stockholders. The Directors Plan also permits participants to elect
to receive, in lieu of cash directors fees, shares or credits representing
deferred shares that may be settled at future dates as elected by the parties.
The Company has reserved 100,000 shares of Common Stock for issuance under the
Directors' Plan.
The price at which the Company's options are granted under the plans are
equal to or in excess of the fair market value of the stock at the date of
grant. Generally, options granted under the Incentive Plan may remain
outstanding and may be exercised at any time up to three months after the person
to whom such options were granted is no longer employed or retained by the
Company. Options granted under the Directors' Plan may remain outstanding and
may be exercised at any time up to one year after termination of service as a
director or advisor. Substantially all of the outstanding options under the
Incentive Plan vest at the rate of 25% per year and options under the Directors'
Plan are immediately exercisable. Options granted under the Plans have maximum
terms of not more than 10 years.
During 1997, 962,250 non-qualified stock options were granted under the
Plans at exercise prices between $14 and $24 with a weighted average exercise
price of $15.07. At December 31, 1997, substantially all of the options granted
remain outstanding as none were exercised or cancelled during the year; 40,000
options are exercisable. The weighted average remaining contractual life of the
outstanding options are nine years and seven months.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for options granted to employees and directors. Accordingly, no
compensation cost has been recognized related to such grants. Had compensation
cost been recorded for the Company's awards under the Plans based on fair value
at the grant dates consistent with the methodologies of SFAS 123, the Company's
1997 reported actual net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
Net Income: As Reported .......... $3,429,000
Pro Forma ............ $2,506,000
Basic EPS: As Reported .......... $ .58
Pro Forma ............ $ .44
Diluted EPS: As Reported .......... $ .57
Pro Forma ............ $ .43
Under SFAS 123, the fair value of each option granted is estimated on the
date of grant using the Black-Scholes model with the following assumptions:
expected volatility of 70%, risk-free interest rate of 7.5%, expected dividends
of $0 and expected term of four years.
The Company recorded expense of $10,000 in 1997 related to 10,000 options
granted to a non-employee of the Company. In determining the expense to be
recorded, the Company applied the Black-Scholes model using the same assumptions
described above, including expected term of four years.
F-19
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) CONCENTRATIONS OF RISK:
TRAVEL SERVICE PROVIDERS
The Company markets and provides reservation services for rental car
companies located in various European countries. Two auto rental companies
accounted for approximately 82%, 80%, and 87%, respectively, of the Company's
net revenues from European auto rentals in 1995, 1996 and 1997. The Company
markets and provides reservation services for a variety of cruise lines. Net
revenue from the sales of cruises on behalf of six cruise lines represented
approximately 78%, 70%, and 74%, respectively, of the Company's net cruise
revenues in 1995, 1996 and 1997.
GEOGRAPHICAL
The table below provides information on the percentage of the Company's
total auto rentals occurring in significant geographical regions for the three
years ended December 31, 1997:
1995 1996 1997
------ ------ -----
Germany ........................ 21% 19% 18%
United Kingdom ................. 19% 19% 20%
France ......................... 16% 17% 17%
Italy .......................... 13% 14% 13%
(12) RELATED PARTY TRANSACTIONS:
Notes and receivables from affiliates and employees at December 31, 1997
consist of a note from an affiliate for $326,000 which bears interest at six
percent and is due September 30, 1998 and a note from an employee for $86,000
which bears interest at the prime rate payable quarterly, and is due in annual
three principal payments commencing January 1, 1999.
Due to affiliates of $478,000 at December 31, 1997 represents amounts
payable to Founding Company stockholders for reimbursement of certain
receivables and taxes related to the Offering and Combinations. These amounts
are expected to be paid in 1998. Due to affiliates of $300,000 at December 31,
1996 represents a short-term loan from the wife of an affiliate which was repaid
in February 1997.
The Company leases office space from an employee under a lease which
expires November 2002. Total payments were approximately $48,000, $58,000,
$106,000 and $45,000 (unaudited), respectively, in 1995, 1996, 1997 and March
31, 1998.
One of the Company's subsidiaries obtains long distance telephone services
under an agreement with an unrelated owned by an affiliate of the Company. The
Company pays market rates for these services.
The Company leases office space from the brother of an affiliate under a
lease which expires February 2006. Payments were $191,000, $191,000, $201,000
and $48,000 (unaudited) in 1995, 1996, 1997 and March 31, 1998, respectively.
The Company purchased $134,000 worth of computer equipment from a company
controlled by an affiliate in 1997.
F-20
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) BENEFIT PLANS:
The Company has four 401(k) retirement plans, one profit-sharing plan, and
one simple IRA plan. The Company's annual contributions to the 401(k) and profit
sharing plans are discretionary. Contributions under the benefit plans were
approximately $104,000 in 1995, $136,000 in 1996, $38,000 in 1997 and $0
(unaudited) during the three months ended March 31, 1998. The Company
established a new 401(k) plan effective July 1, 1998 under which eligible
employees of all Company subsidiaries may participate; existing plans will be
suspended or rolled into the new plan. Company contributions under the new plan
will be determined upon the discretion of the board of directors. The board has
approved a match equal to 25% of employee contributions up to 6% of annual
compensation.
(14) COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal claims and actions arising in the
ordinary course of business. The Company believes that none of the claims and
actions currently pending will have a material adverse effect on its business,
financial condition or results of operations.
OPERATING LEASES
The Company leases office space and office equipment under operating
leases. The Company incurred approximately $1,300,000, $1,361,000, $1,532,000
and $421,000 (unaudited) in rental expense under noncancellable operating leases
in 1995, 1996, 1997 and March 31, 1998, respectively.
Minimum annual commitments under operating leases at December 31, 1997 are
as follows:
YEAR AMOUNT
---- ------------
1998 ....................... 1,220,000
1999 ....................... 867,000
2000 ....................... 740,000
2001 ....................... 667,000
2002 ....................... 568,000
Thereafter ................. 530,000
---------
$4,592,000
==========
INSURANCE
The Company carries a broad range of insurance coverage, including
directors and officers, prospectus liability, general and business liability,
commercial property, workers' compensation, and general umbrella policies. The
Company has not incurred significant claims or losses on any of its insurance
policies during the periods presented in the accompanying financial statements.
LETTERS OF CREDIT
The Company had outstanding irrevocable letters of credit totaling $650,000
at December 31, 1997. These letters of credit, which have terms of one year or
less, collateralize the Company's obligations to third parties for payment of
travel obligations. Refer to Note (15) for information regarding certain
subsequent events related to letters of credit.
F-21
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) SUBSEQUENT EVENTS:
ACQUISITIONS
Effective April 1, 1998, the Company completed the acquisition of all of
the outstanding capital stock of The Cruise Line, Inc., a specialized
distributor of cruise reservation services. The consideration paid was $12.5
million in cash. The acquisition will be accounted for using the purchase method
of accounting. The acquisition was not material to the Company's financial
position or results of operations.
On May 21, 1998, the Company completed the acquisition of all the
outstanding capital stock of Landry & Kling, Inc. ("L&K"), a specialized
distributor of corporate incentive cruise reservations. The aggregate
consideration paid was 163,078 shares of common stock. The acquisition will be
accounted for using the pooling of interests method of accounting. The
acquisition was not material to the Company's financial position or results of
operations.
On May 31, 1998, the Company completed the acquisition of all the
outstanding capital stock of The Travel Company, Inc. ("The Travel Company"), a
specialized distributor of cruise reservations. The aggregate consideration paid
was 179,727 shares of common stock. The acquisition will be accounted for using
the pooling of interests method of accounting. The acquisition was not material
to the Company's financial position or results of operations.
On June 1, 1998, the Company consummated the acquisition of all of the
outstanding capital stock Lexington Services Associates, Ltd. ("Lexington").
Lexington is an electronic hotel reservation services company. The aggregate
consideration paid consisted of 285,714 shares of common stock and $20.0 million
in cash. An additional $7.5 million in cash and common stock may be paid as
contingent consideration based upon financial performance in the twelve months
ended May 31, 1999. The acquisition will be accounted for using the purchase
method of accounting.
Effective July 1, 1998, the Company completed the acquisition of
substantially all the assets of ABC Corporate Services ("ABC") from Reed
Elsevier Inc. ABC is a leading provider of services to independent travel
agencies, including the publication of a hotel guide and after-hours travel
services for certain travel agencies' corporate accounts. The aggregate
consideration paid was $4,250,000. The acquisition will be accounted for using
the purchase method of accounting. The acquisition was not material to the
Company's financial position or results of operations.
LONG-TERM DEBT
On March 27, 1998, the Company received a commitment from NationsBank, N.A.
to increase the Credit Facility to $30 million, of which up to $3 million can be
used for letters of credit. As of June 5, 1998, outstanding borrowings under the
Credit Facility totaled $28.6 million. As discussed in Note (7), the Credit
Agreement requires the Company to secure an interest rate hedge on fifty percent
of the outstanding principal amount borrowed under the Credit Facility and 100%
of the Term Loan. As of June 5, the Company has entered into interest rate swap
hedge agreements totalling $16.4 million and maturing in October 2000, with an
average interest rate of 6.08%. As of July 15, 1998, letters of credit
outstanding under the Credit Facility total $1,157,000. On March 31, 1998, funds
pledged to Barnett Bank of $3 million were released in exchange for a guarantee
by the Company of outstanding debt of one of the Founding Companies. Such debt
totalling $3,141,241 was repaid on April 25, 1998, including $1,901,838 which
was refinanced using the proceeds of the Term Loan.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The General Partner
Lexington Services Associates, Ltd.
We have audited the accompanying balance sheet of Lexington Services
Associates, Ltd. dba Lexington Services, Ltd. (the Partnership), as of December
31, 1997, and the related statements of income, partners' capital, and cash
flows for the year then ended. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lexington Services
Associates, Ltd., dba Lexington Services, Ltd., at December 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Ernst & Young LLP
April 17, 1998,
except for Note 6, as to which
the date is July 15, 1998
F-23
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 300 $ 300
Accounts receivable, net of allowance for "no-shows" and doubtful
accounts of $594,867 and 626,672, respectively ................ 1,754,093 1,915,278
Prepaid expenses ................................................ 80,539 83,304
Notes receivable ................................................ 54,191 84,243
Other current assets ............................................ 58,577 43,081
---------- ----------
Total current assets ............................................. 1,947,700 2,126,206
Furniture, fixtures, and equipment, at cost (Note 3):
Furniture and fixtures .......................................... 223,945 259,834
Telephone system ................................................ 183,338 185,285
Computer equipment .............................................. 773,067 879,341
Leasehold improvements .......................................... 6,978 7,603
---------- ----------
1,187,328 1,332,063
Less accumulated depreciation and amortization .................. (579,939) (641,379)
---------- ----------
Net furniture, fixtures, and equipment ........................... 607,389 690,684
Due from affiliate ............................................... 1,424,006 1,643,797
---------- ----------
Total assets ..................................................... $3,979,095 $4,460,687
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt (Note 3) ...................... $ 710,574 $1,160,759
Accounts payable ................................................ 479,087 471,168
Accrued liabilities ............................................. 333,111 381,620
---------- ----------
Total current liabilities ........................................ 1,522,772 2,013,547
Long-term debt less current portion (Note 3) ..................... 1,010,940 983,655
Commitments and contingencies (Note 4)
Partners' capital:
General partner ................................................. 144,539 146,349
Limited partners ................................................ 1,300,844 1,317,136
---------- ----------
Total partners' capital .......................................... 1,445,383 1,463,485
---------- ----------
Total liabilities and partners' capital .......................... $3,979,095 $4,460,687
========== ==========
</TABLE>
See accompanying notes.
F-24
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Reservation fees .......................................... $ 8,363,156 $2,299,940
Source fees ............................................... 2,238,828 612,385
Licensing fees ............................................ 210,249 48,790
----------- ----------
10,812,233 2,961,115
Selling, general, and administrative expenses:
Costs of reservations and related expenses ................ 4,736,524 1,213,868
General and administrative (Note 5) ....................... 2,863,496 1,090,272
Selling and development costs ............................. 1,728,274 556,939
Depreciation and amortization ............................. 237,879 61,440
----------- ----------
9,566,173 2,922,519
----------- ----------
Operating income ........................................... 1,246,060 38,596
Other income (expense):
Interest expense, net including $64,448 in 1997 and $15,586
in 1998 to related parties .............................. (177,063) (46,279)
Other income .............................................. 95,572 25,785
----------- ----------
(81,491) (20,494)
----------- ----------
Net income ................................................. $ 1,164,569 $ 18,102
=========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- ------------ -------------
<S> <C> <C> <C>
Partners' capital at January 1, 1997 .................... $ 28,082 $ 252,732 $ 280,814
Net income ............................................. 116,457 1,048,112 1,164,569
-------- ---------- ----------
Partners' capital at December 31, 1997 .................. 144,539 1,300,844 1,445,383
Net income (unaudited) .................................. 1,810 16,292 18,102
-------- ---------- ----------
Partners' capital at March 31, 1998 (unaudited) ......... $146,349 $1,317,136 $1,463,485
======== ========== ==========
</TABLE>
See accompanying notes.
F-26
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 1,164,569 $ 18,102
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 237,879 61,440
Bad debt expense .......................................... 123,779 40,714
Changes in operating assets and liabilities:
Accounts receivable ...................................... (735,063) (201,899)
Prepaid expenses ......................................... (31,438) (2,765)
Notes receivable ......................................... (35,593) (30,052)
Other current assets ..................................... (36,905) 15,496
Accounts payable ......................................... 260,154 (7,919)
Accrued liabilities ...................................... 181,793 48,509
------------ ----------
Net cash provided by (used in) operating activities ......... 1,129,175 (58,374)
INVESTING ACTIVITIES
Purchases of furniture, fixtures, and equipment ............. (279,640) (144,735)
------------ ----------
Net cash used in investing activities ....................... (279,640) (144,735)
FINANCING ACTIVITIES
Net borrowings under line of credit agreements .............. 250,000 451,620
Net advances to affiliate ................................... (1,256,363) (219,791)
Borrowings on term loans .................................... 254,774 --
Payments on long-term debt .................................. (74,858) (27,285)
Payments on related party loans ............................. (23,038) (1,435)
------------ ----------
Net cash (used in) provided by financing activities ......... (849,485) 203,109
------------ ----------
Net increase (decrease) in cash ............................. 50 --
Cash at beginning of period ................................. 250 300
------------ ----------
Cash at end of period ....................................... $ 300 $ 300
============ ==========
SUPPLEMENTAL INFORMATION
Cash paid for interest ...................................... $ 177,063 $ 46,279
============ ==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
1. ORGANIZATION
Lexington Services Associates, Ltd. dba Lexington Services, Ltd. (the
Partnership), a Texas limited partnership, was formed March 9, 1992, to provide
Centralized Reservation Services (CRS) and Global Distribution Systems (GDS)
connectivity to subscribers in the hotel industry and to license hotels within
the extended stay hotel industry with the Lexington Hotel Suites and Inns
tradename and associated service marks. The Partnership serves hotels, primarily
independent and small chain hotels, in 48 countries. At March 31, 1998, the
Partnership consisted of one general partner, Lexington Services Corporation,
and three limited partners. The term of the Partnership, unless extended,
expires December 31, 2040.
Net earnings and losses of the Partnership are allocated 10% to the general
partner and 90% to the limited partners. The general partner receives
compensation for services rendered to the Partnership in an amount equal to 2%
of the net cash flow of the Partnership, as defined in the partnership
agreement.
Distribution of Partnership assets, other than upon Partnership
dissolution, will be made at the discretion of the general partner.
Distributions will be allocated to the partners based on their respective
ownership interests in the Partnership at the date of distribution declaration.
As discussed in Note 5, the Partnership has significant transactions with
related parties.
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1998, and for the three months
then ended are unaudited, however, in the opinion of management of the Company,
such financial statements include all adjustments, consisting of normal
recurring accruals necessary for a fair presentation of the financial position
as of March 31, 1998, and the results of operations and cash flows for the three
months then ended. Operating results for the three months ended March 31, 1998,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
REVENUE RECOGNITION
The Partnership recognizes revenues primarily from reservation fees, source
fees, and licensing fees. Reservation fees comprise approximately 77% and 78% of
the Partnership's revenue in 1997 and 1998, respectively, and are recognized
upon check-out from the member hotel by travelers who booked their reservation
through the Partnership's CRS. The fees are based on a negotiated percent of the
average daily room revenue earned by the member hotel. Source fees are generated
from transaction charges for the booking of reservations by the Partnership for
the member hotel and are recognized upon check-out from the member hotel by
travelers. Licensing fees are generated from the licensing of independently
owned hotels that utilize the Lexington Hotel Suites and Inns trade name. These
fees are recognized monthly based on reported revenues of the licensed,
independently owned hotels and affiliates.
CREDIT AND FOREIGN CURRENCY RISK
The Partnership provides credit to customers in the normal course of
business and maintains an allowance for "no-shows" and doubtful accounts based
upon expected collectibility. Losses from "no-shows" and bad debts have
historically been within management's expectations. Accounts receivable at
F-28
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
December 31, 1997 and March 31, 1998, include approximately $300,000 and
$438,000, respectively, due from customers in other countries who can settle
their account in foreign currencies. The Partnership recorded losses of
approximately $7,000 and $360 on foreign currency exchanges during the year
ended December 31, 1997 and the three months ended March 31, 1998, respectively.
During 1997, the Partnership's member hotels were geographically dispersed as
follows: United States--58%, Australia--14%, Europe--10%, Mexico--10%,
Canada--5%, and Other--3%.
DUE FROM AFFILIATE
Due from affiliate represents net cash collected and disbursed by the
Partnership through a central disbursement account maintained by Lexington
Management Corp. (LMC), an affiliate, for the Partnership and certain other
related entities. During January 1996, approximately $700,000 due to LMC was
converted into a note payable, described in Note 3.
FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment are stated at cost. Provisions for
depreciation and amortization of furniture, fixtures, and equipment are computed
using accelerated methods over estimated useful lives of five to seven years.
TRADEMARKS
Trademarks with a carrying value of approximately $345,000 and $290,000 at
December 31, 1997 and March 31, 1998, respectively, were purchased from LMC when
the Partnership was formed in 1992 in exchange for $9,000 cash and a $441,000
note payable, payable in monthly installments of $2,000 plus interest at 6%.
Accumulated amortization was $105,000 and $95,100 as of December 31, 1997 and
March 31, 1998, respectively. The trademarks relate to the logo and format used
by the Lexington Hotel Suites and Inns. The value assigned to the trademarks is
being amortized over 18 years. The asset, net of amortization, and related
$290,000 note payable have been excluded from the balance sheets at December 31,
1997 and March 31, 1998; however, the Partnership is obligated for the remaining
amounts due under the obligation. During the period ended March 31, 1998, the
Partnership sold certain trademarks for approximately $75,000, resulting in a
gain of $26,600 which has been included in other income.
INCOME TAXES
The Partnership is not subject to state and federal income taxes.
Accordingly, no provision for income taxes has been made on the Partnership's
books because all income or losses are allocable to the partners for inclusion
in their respective income tax returns.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-29
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Partnership incurred
approximately $73,000 and $16,000 in advertising costs in the year ended 1997
and the three months ended March 31, 1998, respectively.
SOFTWARE DEVELOPMENT COSTS
The costs of developing and maintaining the Partnership's CRS software and
other internal-use software is expensed as incurred.
3. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Borrowings from a bank under a $1,500,000 revolving line of
credit bearing interest at the bank's prime rate plus .25%
(8.75% at December 31, 1997). Interest on borrowings is
payable monthly with a .25% fee on the unused portion of
the revolver, which matures in August 1998. The revolver
is secured by accounts receivable, and furniture, fixtures,
and equipment. ............................................ $ 600,000 $1,051,620
Borrowings from a bank under five term loans bearing
interest at the bank's prime rate plus .25% (8.75% at
December 31, 1997). Principal payments of $9,095, plus
accrued interest, are due monthly, with maturities varying
from September 2001 to December 2002. The loans are
secured by furniture, fixtures, and equipment. ............ 420,079 392,794
Borrowings from LMC, an affiliate, bearing interest at 6%,
with interest payable monthly and principal due January
2000 (See Note 2). ........................................ 700,000 700,000
Others at rates ranging from 8% to 12%, with principal and
interest payable monthly in varying amounts through
January 1998. ............................................. 1,435 --
---------- ----------
1,721,514 2,144,414
Less current portion of long-term debt ..................... 710,574 1,160,759
---------- ----------
$1,010,940 $ 983,655
========== ==========
</TABLE>
F-30
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
3. LONG-TERM DEBT--(CONTINUED)
Maturities of long-term debt as of December 31, 1997, are as follows:
1998 ................ $ 710,574
1999 ................ 109,139
2000 ................ 800,615
2001 ................ 78,843
2002 ................ 22,343
----------
$1,721,514
==========
Amounts available under the $1,500,000 revolver and the term facilities
agreements are limited in the aggregate to $2,203,700. Amounts available under
the $1,500,000 revolver are limited to the amount available based on the level
of Tangible Net Worth, as defined, and to 60% of Eligible Domestic Accounts
Receivable plus 40% of Eligible Foreign Accounts Receivable, as defined
($1,150,000 and $1,164,000 at December 31, 1997 and March 31, 1998,
respectively). The facilities agreements contain various restrictive covenants
including, but not limited to, net worth requirements, liquidity ratios, and
limitations on capital expenditures and additional indebtedness. In January
1998, the Company renegotiated its loan agreement, extending the revolver's
maturity date until February 1999, increasing the revolver to $2,000,000, and
allowing for aggregate borrowings of $2,985,566.
4. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
Certain key employees are covered by employment contracts that, in certain
circumstances, provide severance compensation of up to six months salary in the
event of a change of control of the Partnership. Substantially all other
employees are covered by thirty day employment agreements that renew
automatically.
LEASES
An affiliate of the Partnership, Glade Properties, Inc. (Glade), leases
certain office facilities under noncancelable operating leases which are
occupied by the Partnership. The cost of the lease agreement for the office
space is allocated by Glade among the affiliated entities occupying the
facilities based primarily on each entity's relative square foot usage. Total
rent expense of approximately $131,400 and $45,000 was recognized by the
Partnership for the year ended December 31, 1997 and the three-months ended
March 31, 1998, respectively, for their portion of the rent under Glade's lease
agreement.
F-31
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Based on the Partnership's current rent allocation, its share of the future
minimum lease payments as of December 31, 1997, are as follows:
1998 ................ $228,000
1999 ................ 252,000
2000 ................ 147,000
--------
$627,000
========
CONTINGENCIES
The Partnership is involved in certain disputes arising in the ordinary
course of business which involve or may involve litigation. Although the
ultimate resolution of these matters cannot be reasonably estimated at this
time, Management does not believe they will have a material adverse effect on
the financial position of the Partnership.
5. RELATED PARTY TRANSACTIONS
In addition to Notes Payable and Lease transactions described in Notes 3
and 4, the Partnership has arrangements with related parties for certain
services as follows.
MANAGEMENT AGREEMENTS
Two affiliates, LMC and Woodstone International, Inc., provide various
management services for the Partnership, including treasury, risk management,
tax, and other administrative services necessary for the operation of the
Partnership. Included in general and administrative expenses are management fees
of $1,923,000 and $812,000 for the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively.
EMPLOYEE BENEFIT PLANS
The Partnership participates in the LMC 401(k) defined contribution plan
for all employees who meet certain eligibility requirements. The Partnership
makes matching contributions up to certain limits to the plan based on employee
contributions. The Partnership made contributions to the plan of approximately
$29,200 and $7,400 for the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively.
6. SUBSEQUENT EVENTS
On June 1, 1998, the Company sold the partnership interests in the Company
to Travel Services International, Inc. for $20,000,000 in cash and 285,714
shares of Travel Services International's common stock. An additional $7,500,000
in cash and common stock may be paid as contingent consideration based upon
financial performance of the former Company for the twelve months ended May 31,
1999. These financial statements do not reflect the effects, if any, of the
sale.
F-32
<PAGE>
LEXINGTON SERVICES ASSOCIATES, LTD.
DBA LEXINGTON SERVICES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total remaining Year
2000 project cost is estimated at approximately $100,000, which includes the
salaries of individuals as well as software and hardware replacements.
The project is estimated to be completed not later than January 31, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
effect on the operations of the Company.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cruises Only, Inc.:
We have audited the accompanying balance sheet of Cruises Only, Inc. (a
Florida corporation) as of July 27, 1997, and the related statements of income,
changes in stockholders' deficit and cash flows for the seven-month period ended
July 27, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cruises Only, Inc. as of
July 27, 1997, and the results of its operations and its cash flows for the
seven-month period then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas,
September 26, 1997.
F-34
<PAGE>
CRUISES ONLY, INC.
BALANCE SHEET
JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 442
Receivables from cruise lines ........................................... 1,037
Due from TSII ........................................................... 226
Prepaid expenses and other current assets ............................... 11
------
Total current assets ............................................... 1,716
PROPERTY AND EQUIPMENT, net .............................................. 3,665
OTHER ASSETS ............................................................. 28
------
Total assets ....................................................... $5,409
======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt .................................... $ 382
Accounts payable and accrued liabilities ................................ 860
Customer deposits and deferred income ................................... 980
Other current liabilities ............................................... 285
------
Total current liabilities .......................................... 2,507
------
LONG-TERM DEBT, net of current maturities ................................ 3,010
------
DEFERRED INCOME .......................................................... 156
------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock $1 par value; 7,500 shares authorized and outstanding ...... 7
Deficit ................................................................. (271)
------
Total stockholders' deficit ........................................ (264)
------
Total liabilities and stockholders' deficit ........................ $5,409
======
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-35
<PAGE>
CRUISES ONLY, INC.
STATEMENT OF INCOME
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
NET REVENUES ................................ $6,658
OPERATING EXPENSES .......................... 2,631
------
Gross profit .......................... 4,027
GENERAL AND ADMINISTRATIVE EXPENSES ......... 2,018
------
Income from operations ................ 2,009
INTEREST EXPENSE ............................ (166)
OTHER INCOME, net ........................... 54
------
Net income ............................ $1,897
======
The accompanying notes to financial statements
are an integral part of this financial statement.
F-36
<PAGE>
CRUISES ONLY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES STOCK DEFICIT TOTAL
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 ............. 7,500 $ 7 $ (808) $ (801)
Net income ............................ -- -- 1,897 1,897
Distributions to stockholders ......... -- -- (1,360) (1,360)
----- --- -------- --------
BALANCE, July 27, 1997 ................. 7,500 $ 7 $ (271) $ (264)
===== === ======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-37
<PAGE>
CRUISES ONLY, INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................................... $ 1,897
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation ................................................................... 169
Deferred income ................................................................ (34)
Loss on retirement of assets ................................................... 39
Changes in operating assets and liabilities--
Receivables from cruise lines ................................................. (125)
Due from TSII ................................................................. (226)
Prepaid expenses and other current assets ..................................... 13
Other assets .................................................................. 16
Accounts payable and accrued liabilities ...................................... 131
Customer deposits and deferred income ......................................... (64)
Other current liabilities ..................................................... (23)
--------
Net cash provided by operating activities ................................... 1,793
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................................... (7)
----------
Net cash used in investing activities ....................................... (7)
----------
CASH FLOWS FROM FINANCING ACTIVITIES: .............................................
Payments on long-term debt ....................................................... (219)
Distributions to stockholders .................................................... (1,360)
---------
Net cash used in financing activities ....................................... (1,579)
---------
Net increase in cash and cash equivalents ................................... 207
CASH AND CASH EQUIVALENTS, beginning of period .................................... 235
---------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 442
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................... $ 166
=========
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-38
<PAGE>
CRUISES ONLY, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 27, 1997
1. BUSINESS AND ORGANIZATION
Cruises Only, Inc. (the "Company"), a Florida corporation, is a specialized
distributor of reservations for cruise vacations to travelers located in the
United States. It offers cruises to its clients on over 45 cruise lines
traveling to the Caribbean and other destinations around the world. The
Company's operations are seasonal, with a peak during the second and third
quarter of the year.
On July 28, 1997, all of the operating assets and related liabilities of
the Company related to its travel services (substantially all of the assets and
liabilities of the Company) were contributed to a newly established subsidiary
limited liability corporation of the Company and subsequently, purchased by
Travel Services International, Inc. (TSII) concurrent with the consummation of
the initial public offering of the common stock of TSII. In connection with this
transaction, the Company received cash and shares of TSII common stock. The net
assets retained by the Company and subsequently distributed to the Company's
previous owners were approximately $170,700.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including the net amount of
interest cost associated with significant capital additions. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the life of the
related asset or life of the lease.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of income.
CUSTOMER DEPOSITS AND DEFERRED INCOME
Customer deposits represents the cost of cruises for cash sales which have
not yet been remitted to the cruise lines. Deferred income generally includes
commissions collected more than 60 days prior to the sail date. Deferred income
also includes the unearned portion of a $300,000 promotion support payment
received by the Company during 1996 from a supplier. In the event the Company
breaches the agreement during the 60-month term, the promotion support payment
must be refunded. The promotional support payment is being amortized to income
using the straight-line method over the 60-month agreement term. Approximately
$34,000 of this amount has been included in other income for the seven-month
period ended July 27, 1997.
F-39
<PAGE>
CRUISES ONLY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
The Company had elected S Corporation status, as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the stockholder reports the Company's
taxable earnings or losses in her personal tax return.
REVENUE RECOGNITION
The Company recognizes revenue when the customer is no longer entitled to a
full refund of the cost of the cruise, which is generally 45 to 90 days prior to
the sail date. Net revenues primarily consist of commissions and year-end volume
bonuses from cruise lines.
OPERATING EXPENSES
Operating expenses include sales persons' commissions, salaries,
communication, advertising, credit card fees and other costs associated with the
selling and processing of cruise reservations.
ADVERTISING COSTS
All advertising and promotion costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK
CRUISE LINES--Net revenues from the sales of cruises on behalf of four
cruise lines represented approximately 42.4%, 14%, 11% and 11%, of net
commission revenues for the seven-month period ended July 27, 1997.
F-40
<PAGE>
CRUISES ONLY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Property and equipment as of July 27,1997, consist of the following (in
thousands):
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
------------- ---------
Land ................................... -- $ 470
Buildings and improvements ............. 40 2,154
Office equipment ....................... 5-7 390
Furniture and fixtures ................. 7 1,214
------
4,228
Less--Accumulated depreciation ......... (563)
------
Property and equipment, net .......... $3,665
======
Accounts payable and accrued liabilities as of July 27, 1997, consist of
the following (in thousands):
Accounts payable .......................... $134
Accrued compensation and benefits ......... 313
Other accrued liabilities ................. 413
----
$860
====
4. DEBT
Long-term debt as of July 27, 1997, consists of the following (in
thousands):
<TABLE>
<S> <C>
Notes payable to a bank, bearing interest at 8.5% and monthly payments of $12
through maturity in October 2002. Secured by substantially all assets of the
Company and personally guaranteed by the stockholders .......................... $ 603
Note payable to a bank, bearing interest at 7.8% and monthly payments of $17
through October 2000. Thereafter, note bears interest at a rate equal to the
five-year treasury yield plus 1.9% or prime, as selected by the Company, through
maturity in October 2005. Secured by land, building, improvements and personal
property of the Company and personally guaranteed by the stockholders .......... 1,947
Note payable to a bank, bearing interest at prime minus .25% (8.25% at July 27,
1997), payable in monthly principal payments of $20 through May 2001. Secured
by furniture, fixtures and equipment of the Company and personally guaranteed
by the stockholders ............................................................ 842
------
3,392
Less--Current maturities ........................................................ 382
------
$3,010
======
</TABLE>
F-41
<PAGE>
CRUISES ONLY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
4. DEBT--(CONTINUED)
Future maturities of long-term debt obligations as of July 27, 1997, are as
follows (in thousands):
Period from July 28 - December 31, 1997 ......... $ 158
Year ending December 31,
1998 .......................................... 387
1999 .......................................... 400
2000 .......................................... 414
2001 .......................................... 212
Thereafter .................................... 1,821
------
$3,392
======
Since October 1995, the Company has had a line of credit available in the
amount of $500,000, with a stated interest rate of prime, as defined, secured by
the Company's receivables and payable on demand. As of July 27, 1997, the
Company had not drawn any funds under this credit arrangement.
5. RELATED-PARTY TRANSACTIONS
The Company employs a small number of individuals related to the
stockholders at wages commensurate with their experience and level of
responsibility.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, workers' compensation
and a general umbrella policy. The Company has not incurred significant claims
or losses on any of its insurance policies during the period presented in the
accompanying financial statements.
401(K) PLAN
The Company adopted a defined contribution 401(k) savings and retirement
plan effective August 1, 1994. Employees are eligible to participate after
completing one year of service and attaining age 21. Participants may contribute
1% to 15% of their gross compensation subject to certain limitations. The
Company may make discretionary contributions as a percentage of each
participant's elective deferral. No contributions were made by the Company
during the seven-month period ended July 27, 1997.
7. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
and SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments," require the disclosure of the fair value of
financial instruments for both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. The carrying value of the Company's financial instruments approximates
fair value.
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 800-Ideas, Inc.:
We have audited the accompanying balance sheet of 800-Ideas, Inc. (a Nevada
corporation) as of July 27, 1997, and the related statements of income, changes
in stockholder's equity and cash flows for the seven-month period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 800-Ideas, Inc. as of July
27, 1997, the results of its operations and its cash flows for the seven-month
period then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas,
September 26, 1997.
F-43
<PAGE>
800-IDEAS, INC.
BALANCE SHEET
JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................... $1,718
Accounts receivable, net of $109 allowance for doubtful accounts ........ 727
Prepaid expenses and other current assets ............................... 478
------
Total current assets ............................................... 2,923
FURNITURE AND EQUIPMENT, net ............................................. 255
OTHER ASSETS ............................................................. 63
------
Total assets ....................................................... $3,241
======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ................................ $ 729
Deferred income ......................................................... 136
------
Total current liabilities .......................................... 865
------
DEFERRED INCOME .......................................................... 169
------
STOCKHOLDER'S EQUITY:
Common stock, no par value; 1,000 shares authorized and outstanding ..... 71
Retained earnings ....................................................... 2,136
------
Total stockholder's equity ......................................... 2,207
------
Total liabilities and shareholder's equity ......................... $3,241
======
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-44
<PAGE>
800-IDEAS, INC.
STATEMENT OF INCOME
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
NET REVENUES ................................ $5,812
OPERATING EXPENSES .......................... 3,533
------
Gross profit .......................... 2,279
GENERAL AND ADMINISTRATIVE EXPENSES ......... 896
------
Income from operations ................ 1,383
OTHER INCOME, net ........................... 48
------
Net income ............................ $1,431
======
The accompanying notes to financial statements
are an integral part of this financial statement.
F-45
<PAGE>
800-IDEAS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 ......... 1,000 $71 $ 2,285 $ 2,356
Net income ........................ -- -- 1,431 1,431
Distributions ..................... -- -- (1,580) (1,580)
----- --- -------- --------
BALANCE, July 27, 1997 ............. 1,000 $71 $ 2,136 $ 2,207
===== === ======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-46
<PAGE>
800-IDEAS, INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................................... $ 1,431
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation ................................................................... 69
Changes in operating assets and liabilities:
Accounts receivable ........................................................... 383
Prepaid expenses and other current assets ..................................... (289)
Other assets .................................................................. (46)
Accounts payable and accrued liabilities ...................................... 433
Deferred income ............................................................... 305
--------
Net cash provided by operating activities ................................... 2,286
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment .............................................. (26)
--------
Net cash used in investing activities ....................................... (26)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations ............................................ (24)
Distributions to stockholder ..................................................... (1,580)
--------
Net cash used in financing activities ....................................... (1,604)
--------
Net increase in cash and cash equivalents ................................... 656
CASH AND CASH EQUIVALENTS, beginning of period .................................... 1,062
--------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 1,718
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................... $ 3
========
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-47
<PAGE>
800-IDEAS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 27, 1997
1. BUSINESS AND ORGANIZATION 800-IDEAS, INC.
800-Ideas, Inc. (the "Company"), a Nevada corporation, which operates under
the trade name "Travel 800", is a specialized distributor of domestic airline
reservations. The Company's operations are seasonal, with a peak during the
second and third quarters of the year.
On July 28, 1997, all of the operating assets and related liabilities of
the Company related to its travel services (substantially all of the assets and
liabilities of the Company) were contributed to a newly established subsidiary
limited liability corporation of the Company and subsequently, purchased by
Travel Services International, Inc. (TSII). This exchange was concurrent with
the consummation of the initial public offering of the common stock of TSII. In
connection with this transaction, the Company received cash and shares of TSII
common stock. The net assets retained by the Company and subsequently
distributed to the Company's previous owner were approximately $320,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Equipment under capital lease is amortized over the shorter of the life of the
related asset or the life of the lease.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of income.
DEFERRED INCOME
Deferred income includes the unamortized amount of signing bonuses received
by the Company in connection with its custom Network Service Arrangement and its
automated reservation service contract. The signing bonus amounts are being
amortized using the straight-line method over the respective contract term.
Income of $75,000 attributable to the signing bonuses for the seven-month period
ended July 27, 1997 is included in other income, net, in the accompanying
financial statements.
INCOME TAXES
The Company had elected S Corporation status, as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the stockholder reports the Company's
taxable earnings or losses in her personal tax return.
REVENUE RECOGNITION
The Company recognizes net revenue when earned, which is at the time the
reservation is booked and ticketed. Net revenues primarily include commissions
on travel services, volume bonuses, ticket
F-48
<PAGE>
800-IDEAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
processing fees and delivery fees. The Company provides a reserve for
cancellations, reservation changes and lost ticket charges, and provisions for
such amounts are reflected in net revenues.
OPERATING EXPENSES
Operating expenses include travel agent commissions, salaries,
communication, advertising, credit card fees and other costs associated with
selling and processing air travel reservations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK
TRAVEL SERVICE PROVIDERS--The Company primarily markets and sells the
services of various United States domestic airlines. Two airlines accounted for
44% and 11%, respectively, of net revenues for the seven-month period ended July
27, 1997.
CREDIT--Substantially all of the tickets sold by the Company and the
related processing and delivery fees are paid for by credit card; the cost of
the airline ticket is billed directly to the customer by Airline Reporting
Corporation (ARC), and the Company's net commission is subsequently remitted by
ARC. Generally, credit card payments are processed and collection is assured
prior to the final delivery of the airline ticket to the customer.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Furniture and equipment as of July 27, 1997, consist of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
------------- -------
<S> <C> <C>
Computer and office equipment ........................... 7 $439
Furniture and fixtures .................................. 5-7 81
Leasehold improvements .................................. 7 21
----
541
Less--Accumulated depreciation and amortization ......... 286
----
Property and equipment, net ........................... $255
====
</TABLE>
F-49
<PAGE>
800-IDEAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS--(CONTINUED)
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
Balance at beginning of period ..................... $ 125
Deductions for uncollectible receivables written off
and recoveries, net ............................... (16)
-----
$ 109
=====
Accounts payable and accrued expenses as of July 27, 1997, consist of the
following (in thousands):
Accounts payable .......................... $562
Accrued compensation and benefits ......... 167
----
$729
====
4. LEASES
CAPITAL LEASES
The Company leases hardware and software under noncancelable capital
leases, which expire in October 1997, at which time there is a combined bargain
purchase option of $1.
OPERATING LEASE AGREEMENTS
The Company conducts a portion of its operations in a leased facility
classified as an operating lease. Minimum future rental payments under the
noncancelable operating lease as of July 27, 1997, are as follows (in
thousands):
Period from July 28, 1997 to December 31, 1997 ......... $ 15
Year ending December 31, 1998 .......................... 141
----
$156
====
The lease provides for the payment of taxes and other expenses by the
Company. Rent expense for the operating lease was approximately $80,000 for the
seven-month period ended July 27, 1997.
5. RELATED PARTY TRANSACTIONS
The Company has entered into a custom Net Service Arrangement ("CSNA") with
Sprint Communications Company L.P. for long distance telephone service which
provides for a minimum monthly commitment of $120,000 and certain minimum
monthly usages. This agreement will not be transferred to TSII. The Company has
agreed to provide long distance telephone services under the CSNA to TSII for a
period of four to six months subsequent to the transfer to TSII and TSII agreed
to pay for its portion of usage under the CSNA.
6. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, workers' compensation
and a general umbrella policy. The
F-50
<PAGE>
800-IDEAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Company has not incurred significant claims or losses on any of its insurance
policies during the seven-month period presented in the accompanying financial
statements.
SERVICE CONTRACT
On October 3, 1995, the Company entered into a five-year service contract
for the use of an automated reservations system. According to the contract, the
Company must pay a monthly rental fee of approximately $42,000, unless waived
based upon a minimum monthly volume of reservation transactions. Historically,
the Company has met this requirement, and the monthly rental fee has been
waived.
Under this service contract, the Company receives volume bonuses based on
the number of flown segments sold by the Company. During the seven-month period
ended July 27, 1997, the Company earned volume bonuses totaling approximately
$407,000.
7. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," and
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value
of Financial Instruments," require the disclosure of the fair value of financial
instruments for both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cruises Inc.:
We have audited the accompanying balance sheet of Cruises Inc. (a New York
corporation) as of July 27, 1997, and the related statements of income, changes
in stockholders' equity and cash flows for the seven-month period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cruises Inc., as of July 27,
1997, the results of its operations and its cash flows for the seven-month
period then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas,
October 3, 1997.
F-52
<PAGE>
CRUISES INC.
BALANCE SHEET
JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................ $1,098
Receivables from cruise lines ............................................ 177
Prepaid expenses and other current assets ................................ 193
------
Total current assets ................................................... 1,468
PROPERTY AND EQUIPMENT, net ............................................... 277
OTHER ASSETS .............................................................. 17
------
Total assets ........................................................... $1,762
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ..................................... $ 52
Accounts payable and accrued liabilities ................................. 773
------
Total current liabilities .............................................. 825
------
DEFERRED INCOME TAXES ..................................................... 56
------
COMMITMENTS AND CONTINGENCIES .............................................
STOCKHOLDERS' EQUITY:
Common stock, no par value; 200 shares authorized, 100 shares outstanding --
Retained earnings ......................................................... 881
------
881
------
Total liabilities and shareholders' equity ............................. $1,762
======
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-53
<PAGE>
CRUISES INC.
STATEMENT OF INCOME
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
NET REVENUES ................................. $4,089
OPERATING EXPENSES ........................... 2,408
------
Gross profit ............................... 1,681
GENERAL AND ADMINISTRATIVE EXPENSES .......... 1,266
------
Income from operations ..................... 415
INTEREST INCOME, net ......................... 4
OTHER INCOME, net ............................ 3
------
Income before income tax provision ......... 422
INCOME TAX PROVISION ......................... 350
------
Net income ................................. $ 72
======
The accompanying notes to financial statements
are an integral part of this financial statement.
F-54
<PAGE>
CRUISES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
SHARES EARNINGS
-------- ---------
BALANCE, December 31, 1996 ......... 100 $809
Net income ......................... -- 72
--- ----
BALANCE, July 27, 1997 ............. 100 $881
The accompanying notes to financial statements
are an integral part of this financial statement.
F-55
<PAGE>
CRUISES INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 27, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 72
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation ....................................................... 54
Changes in operating assets and liabilities:
Receivables from cruise lines ..................................... 242
Prepaid expenses and other current assets ......................... 13
Other assets ...................................................... 17
Accounts payable and accrued liabilities .......................... (226)
Deferred income taxes ............................................. 34
-------
Net cash provided by operating activities ....................... 206
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and capitalized interest ......... (38)
-------
Net cash used in investing activities ........................... (38)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt .......................................... (7)
--------
Net cash used in financing activities ........................... (7)
--------
Net increase in cash and cash equivalents ....................... 161
CASH AND CASH EQUIVALENTS, beginning of period ....................... 937
-------
CASH AND CASH EQUIVALENTS, end of period ............................. $1,098
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 3
=======
</TABLE>
The accompanying notes to financial statements
are an integral part of this financial statement.
F-56
<PAGE>
CRUISES INC.
NOTES TO FINANCIAL STATEMENTS
JULY 27, 1997
1. BUSINESS AND ORGANIZATION
Cruises Inc. (the "Company"), a New York corporation, is a specialized
distributor of reservations for cruise vacations to travelers located throughout
the United States. It offers cruises to its clients on over 25 cruise lines
traveling to the Caribbean and other destinations around the world.
On July 28, 1997, the Company was purchased by Travel Services
International, Inc. (TSII). Pursuant to this transaction, all of the outstanding
stock of the Company was exchanged for cash and shares of TSII common stock
concurrent with the consummation of the initial public offering of the common
stock of TSII.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including the net amount of
interest cost associated with significant capital additions. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the life of the
related asset or life of the lease.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of income.
CUSTOMER DEPOSITS AND DEFERRED INCOME
Customer deposits represents the cost of cruises for cash sales which have
not yet been remitted to the cruise lines. Deferred income generally includes
commissions collected more than 60 days prior to the sail date.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates and laws in effect in the years in which the differences are
expected to reverse.
F-57
<PAGE>
CRUISES INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when the customer is no longer entitled to a
full refund of the cost of the cruise, which is generally 45 to 90 days prior to
the sail date. Net revenues primarily consist of commissions and year-end volume
bonuses from cruise lines.
OPERATING EXPENSES
Operating expenses include sales persons' commissions, salaries,
communication, advertising, credit card fees and other costs associated with the
selling and processing of cruise reservations.
ADVERTISING COSTS
All advertising and promotion costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK
CRUISE LINES--Net revenues from the sales of cruises on behalf of two
cruise lines represented approximately 27% and 19%, respectively, of net
revenues for the seven-month period ended July 27, 1997.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Property and equipment as of July 27,1997, consist of the following (in
thousands):
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
------------- ---------
Leasehold improvements ................. 7 $ 8
Office equipment ....................... 5-7 492
Furniture and fixtures ................. 7 101
------
601
Less--Accumulated depreciation ......... (324)
------
Property and equipment, net .......... $ 277
======
F-58
<PAGE>
CRUISES INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
4. INCOME TAXES
The income tax expense consisted of the following components for the year
ended July 27, 1997 (in thousands):
Current ............................ $316
Deferred ........................... 34
----
Total income tax expense ......... $350
====
For the seven-month period ended July 27, 1997, the primary difference
between the Company's effective tax rate and the statutory rate is due to state
income taxes and an adjustment to convert from cash basis to accrual basis for
income tax purposes.
Deferred tax assets and liabilities include the following as of July 27,
1997 (in thousands):
Tax assets--
Accrued expenses ....................... $ 35
-----
Tax liability--
Accounts receivable .................... (28)
Depreciation and amortization .......... (28)
-----
(56)
-----
Net deferred tax (liability) ......... $ (21)
=====
5. DEBT
Current maturities of debt as of July 27, 1997, consist of a note payable
to a bank, bearing interest at the bank's base rate plus 1% (9.25% at July 27,
1997). The principal and interest on this note were paid in full by TSII on July
28, 1997.
The Company has a bank line-of-credit agreement with a $100,000 credit
line. Borrowings on the line of credit bear interest at the bank's base rate
plus 1% (9.25% at July 27, 1997) and are personally guaranteed by certain
stockholders. There were no borrowings outstanding on the line of credit as of
July 27, 1997.
6. RELATED-PARTY TRANSACTIONS
Since 1990, Cruises Inc. has leased office space from Pioneer Park I
Company ("Pioneer") pursuant to a lease dated August 9, 1990, as subsequently
amended and supplemented. One of the principals of Pioneer is Michael Falcone,
the brother of Robert Falcone. The rent paid by Cruises Inc. to Pioneer was
$92,000 for the seven-month period ended July 27, 1997. The lease terminates on
February 28, 2006.
The Company employs a small number of individuals related to the
stockholders at wages commensurate with their experience and level of
responsibility.
7. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, workers' compensation
and a general umbrella policy. The
F-59
<PAGE>
CRUISES INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1997
7. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Company has not incurred significant claims or losses on any of its insurance
policies during the period presented in the accompanying financial statements.
401(K) PLAN
The Company adopted a defined contribution 401(k) savings and retirement
plan effective January 1, 1994. Employees are eligible to participate after
completing one year of service and attaining age 21. Participants may contribute
1% to 20% of their gross compensation. The Company matches 25%, to a maximum of
4% of an employee's gross compensation. Employees vest in the Company's
contribution over a five-year period. For the seven-month period ended July 27,
1997, the Company made contributions of approximately $5,000.
OPERATING LEASES
The Company leases a building under an operating lease agreement expiring
in February 2006. Additionally, the Company leases office equipment under
various operating lease agreements expiring between 1997 and 2001.
Minimum future lease payments under noncancelable operating leases having
remaining terms in excess of one year as of July 27, 1997, are summarized as
follows:
Period from July 28--
December 31, 1997 ......... $ 143,098
Year ending December 31,
1998 ..................... 215,432
1999 ..................... 211,943
2000 ..................... 180,000
2001 ..................... 168,315
2002 ..................... 156,630
Thereafter ............... 544,690
----------
$1,620,108
==========
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," and
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value
of Financial Instruments," require the disclosure of the fair value of financial
instruments for both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
F-60
<PAGE>
The following is a list of photos which we will be using for the inside back
cover of the prospectus for the Company:
1. building
2. boat on water
3. Golden Gate Bridge
4. tropics
5. Eiffle Tower
6. mountains
7. pyramids
3
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
--------------------------
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary .......................... 3
Risk Factors ................................ 8
Use of Proceeds ............................. 14
Dividend Policy ............................. 14
Price Range of Common Stock ................. 14
Capitalization .............................. 15
Selected Historical and Pro Forma
Financial Data ........................... 16
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations ............................ 18
Business .................................... 25
Management .................................. 34
Certain Transactions ........................ 42
Principal and Selling Stockholders .......... 44
Description of Capital Stock ................ 46
Shares Eligible for Future Sale ............. 48
Underwriting ................................ 50
Notice to Canadian Residents ................ 51
Legal Matters ............................... 52
Experts ..................................... 52
Additional Information ...................... 53
Index to Financial Statements ............... F-1
[GRAPHIC OMITTED]
TRAVEL SERVICES
INTERNATIONAL, INC.
3,500,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
ING BARING FURMAN SELZ LLC
NATIONSBANC MONTGOMERY
SECURITIES LLC
RAYMOND JAMES
& ASSOCIATES, INC.
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