U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10/A
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
TRAVEL SERVICES INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0871073
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
220 CONGRESS PARK DRIVE
DELRAY BEACH, FLORIDA 33445
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (561) 266-0860
Securities to be registered under Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
_____________________________________ _______________________________________
_____________________________________ _______________________________________
Securities to be registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
1
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REINCORPORATION OF TRAVEL SERVICES INTERNATIONAL, INC. FROM DELAWARE TO FLORIDA
INTRODUCTION. This registration statement on Form 10 (the "Registration
Statement") is filed by the Registrant (also referred to herein as "TSI Florida"
and the "Corporation") in connection with the reincorporation (the
"Reincorporation") of Travel Services International, Inc., a Delaware
corporation ("TSI Delaware"), from Delaware to Florida. The Registrant is a
wholly owned subsidiary of TSI Delaware. TSI Delaware and TSI Florida will cause
the Reincorporation to occur, as further described below, on or about the time
that this Registration Statement becomes effective under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (the date of the Reincorporation
shall be referred to herein as the "Effective Date").
MERGER AND REINCORPORATION. On the Effective Date, TSI Delaware and TSI
Florida will file, as applicable, a certificate of merger with the State of
Delaware and articles of merger with the State of Florida in order to consummate
the Reincorporation in accordance with the terms of an Agreement and Plan of
Merger, dated as of October 29, 1998 (the "Plan of Merger"), among TSI Delaware
and the Registrant. Pursuant to the Plan of Merger, TSI Delaware will be merged
with and into TSI Florida (the "Merger") with TSI Florida being the surviving
corporation and the separate corporate existence of TSI Delaware shall cease.
Pursuant to the Merger, TSI Florida will change its name to "Travel Services
International, Inc."
As a result of the Merger, TSI Florida will succeed by operation of law
to all of the assets, rights, powers and property of TSI Delaware and will
assume all of the debts, liabilities and obligations of TSI Delaware. Upon
completion of the Merger, the Board of Directors of TSI Florida will be
comprised of the directors of TSI Delaware with identical terms of office, and
the persons who are currently serving as executive officers of TSI Delaware will
continue to serve in the same capacities for TSI Florida.
On the Effective Date of the Merger, each outstanding share of
restricted voting common stock, par value $0.01 par value per share, of TSI
Delaware (the "TSI Delaware Restricted Stock"), will be automatically converted
into one fully-paid and nonassessable share of the restricted voting common
stock, par value $0.01 per share, of TSI Florida (the "TSI Florida Restricted
Stock"), and each outstanding share of non-restricted common stock, par value
$0.01 per share, of TSI Delaware (the "TSI Delaware Non-restricted Stock" and
together with TSI Delaware Restricted Stock, the "TSI Delaware Common Stock)
will be automatically converted into one fully-paid and nonassessable share of
the non-restricted common stock, par value $0.01 per share, of TSI Florida (the
"TSI Florida Non-restricted Stock" and together with the TSI Florida Restricted
Stock, the "TSI Florida Common Stock").
After the Merger, each outstanding certificate representing shares of
TSI Delaware Common Stock will continue to represent the same respective number
of shares of TSI Florida Common Stock and such certificates will be deemed for
all corporate purposes to evidence ownership of shares of TSI Florida Common
Stock. The TSI Florida Common Stock will be substituted for TSI Delaware Common
Stock on The Nasdaq Stock Market ("Nasdaq") and will continue to trade under the
symbol "TRVL" without interruption, and Nasdaq will consider the delivery of
existing stock certificates of TSI Delaware as constituting "good delivery" of
shares of TSI Florida in stock transactions effected after the Merger. TSI
Delaware stockholders will not
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be required to undertake a mandatory exchange of their certificates for shares
of TSI Delaware Common Stock for certificates of TSI Florida Common Stock.
The Registrant's predecessor corporation, TSI Delaware, will have
securities registered pursuant to Section 12(g) of the Exchange Act at the
effective time of the Merger. The Registrant is filing this Form 10 for the
purpose of accomplishing such registration pursuant to Section 12(g) of the Act
with respect to the TSI Florida Common Stock.
REASONS FOR THE REINCORPORATION. The principal reason for the
Reincorporation is to reduce expenses. Under the Delaware General Corporation
Law (the "Delaware Act"), TSI Delaware is currently required to pay Delaware an
annual franchise tax of approximately $150,000. By contrast, a corporation
organized under the laws of the State of Florida is currently required to pay an
annual fee of $150, but is not required to pay any franchise tax as required by
Delaware. An additional reason for the Reincorporation is to conform TSI
Delaware's legal residence to its principal place of business.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions "Proposal to Approve the
Reincorporation of the Company from Delaware to Florida" on pages 20 through 29
contained in TSI Delaware's Proxy Statement, filed with the SEC on July 6, 1998
relating to TSI Delaware's 1998 Annual Meeting of Shareholders.
ITEM 1. BUSINESS.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions "Risk Factors" (on pages 8
through 13) and "Business" (on pages 25 through 33) contained in TSI Delaware's
Registration Statement on Form S-1 (SEC File No. 333-56567). See also "Item 13
- -- Financial Statement and Supplementary Data" of this Registration Statement
for related financial information.
The language and materials incorporated by reference into this Item 1
is supplemented and qualified by the following information:
1. BUSINESS OVERVIEW.
A. The following paragraph is an addition to the
information under the caption "Business --Business
Overview":
Currently, the Company does not have any material
portion of its assets, operations or customers located
outside of the United States. Substantially all of the
Company's revenues are from customers based within the
United States, where all of the Company's services are
provided. Any revenue generated outside of the United
States is currently not material to the Company's
consolidated net revenues and results of operations.
B. The first paragraph under "Business -- Business
Overview" is hereby supplemented with the following
paragraph which replaces such first paragraph:
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.
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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 15 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 the Company believes that it has emerged
as the largest distributor of cruise vacations in the
world, based on sales volume during 1998. 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, based on Consortia 25 (an
annual article published by Hotels, an industry
publication), is the second largest electronic hotel
reservation services company in the United States,
based on the number of rooms booked during 1997. 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.
2. TRAVEL PROVIDER RELATIONSHIPS.
The following paragraphs are in addition to the information
under the caption "Business -- Travel Provider Relationships":
Each of Carnival Cruise Line, Royal Caribbean Cruise
Line, Avis Europe Limited, and Europcar International,
S.A. were responsible for approximately 10% of the
Company's consolidated net revenues for the nine months
ended September 30, 1998.
The Company's agreements with travel providers are
generally short-term agreements that are cancelable on
relatively short notice and, therefore, travel providers
can, and often do, modify the terms of contracts as
industry conditions change, including terms relating to
commissions, access to inventory and pricing. Such
agreements generally permit the Company to sell the
travel products at either preferred prices or with
preferred commission structures because of the Company's
reputation, historical relationships, expertise, and
substantial volume of business it conducts with the
travel providers, however, such contracts generally do
not create commitments by the travel providers for fixed
capacity or inventory. The Company, through its
subsidiaries, currently operates with more than one
agreement with many of its travel providers. Although
the Company's agreements with its travel providers in
the aggregate are important to the Company's success,
the Company does not believe that cancellation of any
one of these agreements would have a material adverse
effect on the Company's business or results of
operations,
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however, there can be no assurance that cancellation of
one or more of such agreements would not result in such
a material adverse effect.
ITEM 2. FINANCIAL INFORMATION.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions (i) "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 11 through 19 contained in TSI Delaware's Form 10-Q for the quarter ended
September 30, 1998, which was filed with the SEC on November 16, 1998; and (ii)
"Selected Historical and Pro Forma Financial Data" on pages 16 through 17 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18 through 24 contained in TSI Delaware's Registration
Statement on Form S-1 (SEC File No. 333-56567).
ITEM 3. PROPERTIES.
As of December 15, 1998, the Company had 37 office facilities, 2 of
which it owns and 35 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, including the Company's corporate
headquarters in Delray Beach, Florida, and the implementation of new call
centers or shared services centers. The Company's facilities are set forth in
the table below.
<TABLE>
<CAPTION>
OWNED/ EXPIRATION SQUARE ANNUAL
COMPANY LOCATION LEASED DATE FEET RENT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ABC Corporate Services Chicago, IL Leased 3/31/99 2,600 $ 77,000
ABC Corporate Services Omaha, NE Leased 12/31/99 4,050 112,000
Auto Europe (3) Portland, ME Owned -- 38,000 --
AutoNet International Delray Beach, FL Leased (1) -- -- --
Cruise Fairs of America Los Angeles, CA Leased 1/31/99 4,758 123,000
Cruises Inc. Syracuse, NY Leased 2/28/06 10,600 168,000
Cruisemasters Los Angeles, CA Leased 7/31/02 5,500 86,000
CruiseOne Deerfield Beach, FL Leased 9/30/00 4,316 70,500
Cruises Only Jacksonville, FL Leased 11/30/99 4,750 50,000
Cruises Only (3) Orlando, FL Owned -- 37,600 --
Cruises Only Syossett, NY Leased 4/30/04 16,312 180,000
Cruise Outlets of the Carolinas Charlotte, NC Leased 3/1/00 2,620 70,000
Cruise World Wilton, CT Leased 10/31/02 2,600 36,000
Cruise World Fresh Meadows, NY Leased 9/30/07 1,000 17,000
Cruise World Rockville Center, NY Leased 4/30/07 1,500 20,000
Cruise World Huntington, NY Leased 9/30/00 1,000 22,000
Cruise World Westbury, NY Leased 1/31/99 1,135 22,000
Cruise World Briarcliff Manor, NJ Leased 3/31/02 2,300 29,000
Cruise World Morristown, NJ Leased 11/30/00 1,404 18,000
Cruise World Ridgewood, NJ Leased 12/31/97(2) 900 16,000
D-FW Tours Dallas, TX Leased 1/31/00 12,443 182,000
Diplomat Tours Sacramento, CA Leased 8/31/99 6,000 107,000
Gold Coast Cruises North Miami, FL Leased 8/31/12 13,000 150,000
Landry & Kling Coral Gables, FL Leased 6/30/01 3,680 77,000
Lexington Services Arlington, TX Leased 7/31/00 20,371 359,000
Ship `N' Shore Englewood, FL Leased 11/20/02 7,214 90,000
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Ship `N' Shore Anchorage, Alaska Leased 5/30/97(2) 900 16,000
Ship `N' Shore Williamsville, NY Leased 7/31/01 1,000 15,000
Ship `N' Shore Fort Myers, FL Leased 2/28/00 1,500 13,500
Ship `N' Shore Longboat Key, FL Leased 8/31/00 964 12,000
Ship `N' Shore Anchorage, Alaska Leased 5/8/98 1,250 16,000
The Cruise Line Inc. Miami, FL Leased 5/15/02 10,250 213,000
The Travel Company Atherton, CA Leased 7/31/00 2,300 70,000
Travel 800 San Diego, CA Leased 11/30/03 15,605 241,000
Travel Services International Delray Beach, FL Leased 10/20/04 16,900 290,000
Travel Services International Delray Beach, FL Leased 11/1/00 2,800 51,000
1-800-Cruises Boca Raton, FL Leased 10/1/00 2,102 46,000
<FN>
- -------------------
(1) Contained within the Company's corporate headquarters.
(2) Location continues to be occupied on a month-to-month basis, with the
consent of the landlord.
(3) Subject to a mortgage.
</FN>
</TABLE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Registrant incorporates herein by reference the information,
discussion and related matters under the caption "Principal and Selling
Stockholders" on pages 12 through 13 contained in TSI Delaware's Registration
Statement on Form S-3 (SEC File No. 333-61337).
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions "Management -- Directors and
Executive Officers" on pages 34 through 36 and "Management -- Board of
Directors" on pages 36 through 37 contained in TSI Delaware's Registration
Statement on Form S-1 (SEC File No. 333-56567).
The language and materials incorporated by reference into this Item 5
is supplemented and qualified by the following information:
Effective October 31, 1998, Michael Moriarty resigned
from his position as President and Chief Operating
Officer of the Company due to the serious illness of a
member of his immediate family. Joseph Vittoria, the
Company's Chairman and Chief Executive Officer, has
assumed additional responsibilities concerning the
Company's operations. Along with the Company's other
senior management staff, John DeLano, who was recently
promoted to Senior Vice President of Operations, and
Spencer Frazier, the Company's Chief Marketing Officer,
assist Mr. Vittoria with his added responsibilities. In
addition, Mr. DeLano has assumed direct responsibility
for providing direction to senior management of the
operating companies. The Company believes it is well
positioned to manage the transition following Mr.
Moriarty's resignation.
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ITEM 6. EXECUTIVE COMPENSATION.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions "Management -- Director
Compensation; 1997 Non-employee Directors' Stock Plan" on pages 37 through 38;
"Management -- Executive Compensation" on pages 38 through 39; "Management --
Employment Agreement; Covenants Not to Compete" on pages 39 through 40; and
"Management -- Compensation Committee Interlocks and Insider Participation" on
page 41 contained in TSI Delaware's Registration Statement on Form S-1 (SEC File
No. 333-56567).
The language and materials incorporated by reference into this Item 6
is supplemented and qualified by the following information:
Although Mr. Moriarty has resigned from his position as
President and Chief Executive Officer as described in
Item 5 of this Registration Statement above, he will
continue to assist the Company and be paid his salary
for such efforts through the end of 1998. Effective
January 1, 1999, Mr. Moriarty's employment with the
Company will be terminated. No severance compensation
will be paid to Mr. Moriarty. Mr. Vittoria's
compensation will continue according to his existing
employment agreement without modification due to the
additional duties being assumed. The Company does not
anticipate any material impact on executive compensation
due to Mr. Moriarty's retirement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant incorporates herein by reference the information,
discussion and related matters under the caption "Certain Transactions" on pages
42 through 43 contained in TSI Delaware's Registration Statement on Form S-1
(SEC File No. 333-56567).
ITEM 8. LEGAL PROCEEDINGS.
As of the date of this Registration Statement, TSI Florida is not
involved in any legal claims or actions.
TSI Delaware is involved in various legal claims and actions arising in
the ordinary course of business. The Registrant believes that none of these
actions will have a material adverse effect on its business, financial condition
and results of operations.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The TSI Delaware Common Stock is traded on Nasdaq under the symbol
"TRVL." The following table sets forth the high and low reported sales prices
for each quarter (or partial quarter) in 1997 and 1998, as quoted on Nasdaq:
HIGH LOW
---- ---
1997
Third Quarter (from July 22, 1997) $25 5/8 $18 7/8
Fourth Quarter 26 19 3/8
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1998
First Quarter 33 11/16 17 7/8
Second Quarter 39 3/8 30
Third Quarter 36 9/16 13
Fourth Quarter (through December 21, 1998) 26 5/8 8 3/8
The closing price of TSI Delaware Common Stock, as reported by Nasdaq,
on December 21, 1998 was $24.875. The approximate number of record holders of
TSI Delaware Common Stock as of December 21, 1998 was 142. The Registrant
believes that a larger number of beneficial owners hold such shares in
depository or nominee form.
The Registrant 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 TSI Florida Common Stock for the foreseeable future. In addition, TSI
Delaware's line of credit (which upon consummation of the Reincorporation and
the Merger will be assumed by TSI Florida) includes restrictions on the ability
of the Registrant to pay cash dividends without the consent of the lender.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant incorporates herein by reference the information,
discussion and related matters under the caption "Item 15. Recent Sales of
Unregistered Securities" on pages II-2 through II-3 contained in Part II of TSI
Delaware's Registration Statement on Form S-1 (SEC File No. 333-56567). Since
the last sale of unregistered securities in March 1998 disclosed therein, the
Company has not sold any unregistered securities during 1998 through the date of
this Registration Statement.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions (i) "Proposal to Approve the
Reincorporation of the Company from Delaware to Florida" on pages 20 through 29
contained in TSI Delaware's Proxy Statement, filed with the SEC on July 6, 1998
relating to TSI Delaware's 1998 Annual Meeting of Shareholders and Exhibit B
(pages B-1 through B-5) to such Proxy Statement; and (ii) "Description of
Capital Stock -- Common Stock and Restricted Common Stock" on page 46 and
"Description of Capital Stock -- Preferred Stock" on pages 46 through 47
contained in TSI Delaware's Registration Statement on Form S-1 (SEC File No.
333-56567).
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant incorporates herein by reference the information,
discussion and related matters under the caption "Management -- Indemnification
Agreements" on page 40 contained in TSI Delaware's Registration Statement on
Form S-1 (SEC File No. 333-56567).
The Registrant has authority under Section 607.0850 of the Florida
Business Corporation Act to indemnify its directors and officers to the extent
provided in such statute. In general, Florida law permits a Florida corporation
to indemnify its directors, officers, employees and agents, and persons serving
at the corporation's request in such capacities for another enterprise, against
liabilities arising from conduct that such persons reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
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The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful; (b)
deriving an improper personal benefit from a transaction; (c) voting for or
assenting to an unlawful distribution; and (d) willful misconduct or a conscious
disregard for the best interests of the Registrant in a proceeding by or in the
right of the Registrant to procure a judgment in its favor or in a proceeding by
or in the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws
Article Seven of the Registrant's articles of incorporation (the
"Florida Articles") states that: "A director shall not be personally liable to
the Corporation or the holders of shares of capital stock or any other person
for monetary damages for any statement, vote, decision, act or failure to act,
for which such liability is precluded or otherwise eliminated under Section
607.0831 or otherwise under the Florida Business Corporation Act. If the Florida
Business Corporation Act is hereafter amended to authorize the further or
broader elimination or limitation of the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Florida Business Corporation Act, as so
amended. No repeal or modification of this Article VII shall adversely affect
any right of or protection afforded to a director of the Corporation existing
immediately prior to such repeal or modification. Article Eight of the
Registrant's Florida Articles states that: "The Corporation shall indemnify and
may advance expenses to, and may purchase and maintain insurance on behalf of,
its officers and directors to the fullest extent permitted by law as now or
hereafter in effect. Without limiting the generality of the foregoing, the
Bylaws may provide for indemnification and advancement of expenses to officers,
directors, employees and agents on such terms and conditions as the Board may
from time to time deem appropriate or advisable." In addition, the Registrant's
Bylaws further provide that the Registrant shall indemnify its officers,
directors, advisory directors and employees to the fullest extent permitted by
law.
The Registrant will enter into indemnification agreements with each of
its executive officers, its advisory director and directors which indemnifies
such person to the fullest extent permitted by its Florida Articles, its Bylaws
and under the Florida Business Corporation Act. The Registrant also maintains
directors and officers liability insurance.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant incorporates herein by reference the information,
discussion and related matters under the captions (i) "Item 1. Financial
Statements" on pages 3 through 10 contained in TSI Delaware's Form 10-Q for the
quarter ended September 30, 1998, which was filed with the SEC on November 16,
1998; and (ii) the "Index to Financial Statements" and all items referenced
therein contained on pages F-1 through F-60 in TSI Delaware's Registration
Statement on Form S-1 (SEC File No. 333-56567).
1. INTANGIBLE ASSETS AND AMORTIZATION.
The disclosures under the caption "Intangible Assets and
Amortization" contained in "Note (2) Summary of Significant
Accounting Policies" to TSI Delaware's
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financial statements on page F-8 of TSI Delaware's
Registration Statement on Form S-1 (SEC File No. 333-56567),
is supplemented with the following paragraphs:
The Combinations and certain other acquisitions were
accounted for using the purchase method of accounting.
The cost of the acquisition is first allocated to all
identifiable assets acquired and to the liabilities
assumed, at their estimated fair values at the date of
acquisition. The excess of the cost of the acquired
business over the sum of the amounts assigned to
identifiable assets acquired less liabilities assumed is
recorded as goodwill.
In most cases, because of the nature of the operations
of the business acquired, including its customers base,
and because of the short-term duration of the
businesses' contracts, intangible assets such as
customer lists, distribution agreements, employee
workforce, computer systems, franchisee agreements and
trademarks are not separately identified as allocated
costs.
At the time of an acquisition accounted for using the
purchase method of accounting, allocations of purchase
price are initially assigned and recorded based on
preliminary estimates of fair value and may be revised
as additional information concerning valuation of such
assets and liabilities become available normally within
one year of the date of the acquisition. Additional
information necessary for certain acquisitions may
include final determinations of such matters as the
amount of income taxes reimbursable to sellers, the
amount of contingent consideration related to the
acquisition, and total legal and accounting costs
associated with the acquisitions. The Company does not
believe there will be any material change to allocations
of purchase prices as of December 31, 1997.
Goodwill is being amortized on a straight-line basis
generally over 35 years (5 years for goodwill related to
an acquired software development business), 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 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 of any acquisitions should be evaluated for
possible impairment, the Company in measuring whether
such cost is recoverable will use an estimate of the
acquired business's undiscounted operating income in
excess of net assets of the acquired businesses.
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2. INCOME TAXES.
The disclosures under the caption "Note (9) Income Taxes" in TSI
Delaware's financial statements on page F-18 of TSI Delaware's
Registration Statement on Form S-1 (SEC File No. 333-56567), is
supplemented with the following information:
Net deferred income tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ --------------
<S> <C> <C>
Current net deferred income taxes
Conversion from cash to accrual method of accounting for income taxes $347,000 $-
Accrued liabilities and deferred income 354,000 -
Provision of doubtful accounts 150,000 -
Other (78,000) (17,000)
------------ --------------
Current net deferred tax assets (liability) $773,000 ($17,000)
============ ==============
Non-current net deferred income taxes
Goodwill basis ($63,000) $-
Other 80,000 -
------------ --------------
Non-current net deferred tax asset $17,000 $-
============ ==============
</TABLE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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ITEM 15. FINANCIAL STATEMENT AND EXHIBITS.
(a) Financial Statements
The Registrant incorporates herein by reference the information,
discussion and related matters disclosed in Item 13 hereof.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.1 Agreement and Plan of Organization, dated as of May 9, 1997, among
TSI Delaware, Auto-Europe, Inc. (Maine), Imad Khalidi, Alex Cecil
and Wilfred Diller, as trustee for Thurston Cecil and Lila Cecil.(1)
2.2 Agreement and Plan of Organization, dated as of May 9, 1997, among TSI
Delaware, Cruises Only, Inc., Wayne Heller and Judy Heller.(1)
2.3 Agreement and Plan of Organization, dated as of May 9, 1997, among
TSI Delaware, 800-Ideas, Inc. and Susan Parker.(1)
2.4 Agreement and Plan of Organization, dated as of May 9, 1997, among
TSI Delaware, Cruises, Inc., Robert G. Falcone, Judith A. Falcone
and Pamela C. Cole.(1)
2.5 Agreement and Plan of Organization, dated as of May 9, 1997, among
TSI Delaware, D-FW Tours, Inc., D-FW Travel Arrangements, Inc.,
John W. Przywara and Sharon S. Przywara.(1)
2.6 First Amendment to Agreement and Plan of Organization among TSI
Delaware, Auto-Europe, Inc. (Maine), Imad Khalidi Alex Cecil and
Wilfred Diller, as trustee for Thurston Cecil and Lila Cecil.(2)
2.7 First Amendment to Agreement and Plan of Merger, dated as of June
30, 1997, by and among TSI Delaware, Cruises, Inc., Robert G.
Falcone, Judith A. Falcone, and Pamela C. Cole.(2)
2.8 First Amendment to Agreement and Plan of Merger, dated as of June
30, 1997, by and among TSI Delaware, Cruises Only, Inc., Wayne
Heller and Judy Heller.(2)
2.9 First Amendment to Agreement and Plan of Merger, dated as of June
30, 1997, by and among TSI Delaware, D-FW Travel Arrangements,
Inc., John W. Przywara and Sharon Scott Przywara.(2)
12
<PAGE>
2.10 First Amendment to Agreement and Plan of Merger, dated as of June
30, 1997, by and among TSI Delaware, 800-Ideas, Inc. and Susan
Parker.(2)
2.11 Agreement and Plan of Merger, dated as of October 29, 1998, by and
between TSI Delaware and the Registrant.(10)
3.1 Articles of Incorporation of the Registrant.(10)
3.2 Bylaws of the Registrant.(10)
4.2 Form of Restriction and Registration Rights Agreement, dated as of
July 28, 1997, between TSI Delaware and the each of the persons
listed on the schedule thereto.(4)
10.1 Amended and Restated Employment Agreement, dated as of July 22, 1997,
between TSI Delaware and Joseph V. Vittoria.(4)
Amended and Restated Employment Agreement, dated as of May 12, 1997,
between TSI Delaware and Jill M. Vales.(4)
Amended and Restated Employment Agreement, dated as of June 6, 1997,
between TSI Delaware and Michael J. Moriarty.(4)
Employment Agreement, dated July 22, 1997, between TSI Delaware and
Mel Robinson.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Auto
Europe, LLC and Imad Khalidi.(4)
Employment Agreement, dated July 18, 1997, among TSI Delaware, Auto
Europe, LLC and Alex Cecil.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Cruises,
Inc. and Robert Falcone.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Cruises,
Inc. and Judith Falcone.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Cruises,
Inc. and Holley Christen.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Cruises
Only, LLC and Wayne Heller.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Cruises
Only, LLC and Judy Heller.(4)
Employment Agreement, dated July 22, 1997, among TSI Delaware, Travel
800, LLC and Susan Parker.(4)
10.2 Form of Indemnification Agreement, dated July 28, 1997, between TSI
Delaware and each of the persons set forth on the schedule
thereto.(4)
10.3 1997 Long Term Incentive Plan.(3)
10.4 Non-Employee Directors' Stock Plan.(3)
10.6 Employment Agreement, dated July 25, 1997, between TSI Delaware and
Suzanne B. Bell.(4)
10.7 Employment Agreement, dated as of July 25, 1997, between TSI
Delaware and Maryann Bastnagel.(4)
13
<PAGE>
10.8 Credit Agreement, dated as of October 15, 1997, by and between TSI
Delaware and NationsBank, N.A.(4)
10.9 Stock Purchase Agreement, dated as of October 28, 1997, among TSI
Delaware, CruiseOne, Inc., Anthony J. Persico and Charlotte Luna,
as amended.(5)
10.10 Stock Purchase Agreement, dated as of October 28, 1997, among TSI
Delaware, Cruise World, Inc., and the sellers named therein, as
amended.(5)
10.11 Stock Purchase Agreement, dated as of October 28, 1996, among TSI
Delaware, Ship `N' Shore Cruises, Inc., Cruise Time, Inc., SNS
Coachline, Inc., Cruise Mart, Inc., SNS Travel Marketing, Inc. and
Natalee Stutzman, as amended.(5)
10.12 Asset Purchase Agreement, dated as of February 9, 1998, among TSI
Delaware, Gold Coast Travel Agency Corporation, Inc. and Rhea
Sherota.(6)
10.13 Employment Agreement, dated as of January 19, 1998, between TSI
Delaware and John C. De Lano.(7)
10.14 Stock Purchase Agreement, dated March 31, 1998, among TSI Delaware,
The Cruise Line, Inc. and the shareholders named therein.(8)
10.15 Employment Agreement, dated as of April 1, 1998, among TSI Delaware
and Spencer Frazier.(9)
10.16 Purchase Agreement by and among TSI Delaware and Lexington Services
Associates, Ltd., a Texas limited partnership (the "Partnership"), and
the Partnership's partners dated as of June 1, 1998.(9)
10.17 Employment Agreement, dated as of July 25, 1998, between
TSI Delaware and George Del Pino(10)
11 Schedule of Computations of Earnings Per Share.(7)
21 Subsidiaries of TSI Delaware.(11)
23.1 Consent of Arthur Andersen LLP.(12)
23.2 Consent of Ernst & Young LLP.(12)
99.1 TSI Delaware's Registration Statement on Form S-1 (File No.
333-56567).(12)
99.2 TSI Delaware's Proxy Statement for the 1998 Annual meeting of Stockholders
of TSI Delaware held on July 28, 1998.(12)
99.3 TSI Delaware's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.(12)
99.4 TSI Delaware's Registration Statement on Form S-3 (File No.
333-61337).(12)
<FN>
------------
14
<PAGE>
(1) Incorporated by reference to the same Exhibit number
filed on May 14, 1997, with TSI Delaware's
Registration Statement on Form S-1 (File no.
333-27125).
(2) Incorporated by reference to the same Exhibit number
filed on July 1, 1997 with TSI Delaware's
Registration Statement on Form S-1 (File no.
333-27125).
(3) Incorporated by reference to the exhibit filed with
TSI Delaware's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4) Incorporated by reference to the exhibit filed with
TSI Delaware's Quarterly Report for the quarter ended
September 30, 1997.
(5) Incorporated by reference to the exhibit filed on
November 19, 1997 with TSI Delaware's Form 8-K.
(6) Incorporated by reference to the exhibit filed on
February 9, 1998 with TSI Delaware's Form 8-K.
(7) Incorporated by reference to the exhibit filed with
TSI Delaware's Annual Report on Form 10-K for the
year ended December 31, 1997.
(8) Incorporated by reference to the exhibit filed on
March 31, 1998 with TSI Delaware's Form 8-K.
(9) Incorporated by reference to the same exhibit number
filed with TSI Delaware's Registration Statement on
Form S-1 (File No. 333-56567).
(10) Incorporated by reference to the exhibit filed with
TSI Delaware's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(11) Previously filed.
(12) Filed herewith.
</FN>
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
TRAVEL SERVICES GROUP, INC. (TO BE RENAMED
"TRAVEL SERVICES INTERNATIONAL, INC." UPON
CONSUMMATION OF THE REINCORPORATION AND
MERGER DESCRIBED ABOVE)
Date: December 21, 1998 By: /s/ JILL M. VALES
-----------------------------------------
Name: Jill M. Vales
Title: Senior Vice President and
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
99.1 TSI Delaware's Registration Statement on Form S-1 (File No.
333-56567).
99.2 TSI Delaware's Proxy Statement for the 1998 Annual meeting of
Stockholders of TSI Delaware held on July 28, 1998.
99.3 TSI Delaware's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
99.4 TSI Delaware's Registration Statement on Form S-3 (File No.
333-61337).
EXHIBIT 23.1
[ARTHUR ANDERSEN LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
use of our reports and to all references to our firm included in or made a part
of this Form 10.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
December 17, 1998.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 10 of Travel
Services International, Inc. of our report dated April 17, 1998 (except Note 6,
as to which the date is June 1, 1998), with respect to the financial statements
of Lexington Services Associates, Ltd, included in the Registration Statement
(Form S-1 No.333-56567) of Travel Services International, Inc. filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
December 17, 1998
EXHIBIT 99.1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1998
REGISTRATION STATEMENT NO. 333-56567
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TRAVEL SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4724 52-2030324
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
<TABLE>
<S> <C>
JOSEPH V. VITTORIA
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TRAVEL SERVICES INTERNATIONAL, INC. TRAVEL SERVICES INTERNATIONAL, INC.
220 CONGRESS PARK DRIVE 220 CONGRESS PARK DRIVE
DELRAY BEACH, FLORIDA 33445 DELRAY BEACH, FLORIDA 33445
(561) 266-0860 (561) 266-0860
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
---------------
COPIES OF COMMUNICATIONS TO:
DANIEL H. ARONSON, ESQ. NEIL GOLD, ESQ.
GREENBERG TRAURIG HOFFMAN FULBRIGHT & JAWORSKI L.L.P.
LIPOFF ROSEN & QUENTEL, P.A. 666 FIFTH AVENUE, 31ST FLOOR
515 EAST LAS OLAS BOULEVARD, SUITE 1500 NEW YORK, NEW YORK 10103
FT. LAUDERDALE, FLORIDA 33301 (212) 318-3000
(954) 765-0500 (FACSIMILE) (212) 752-5958
(FACSIMILE) (954) 765-1477
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [x]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 15, 1998
3,500,000 Shares
[TRAVEL SERVICES LOGO]
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 June 16, 1998, the last reported sale
price of the Common Stock on the Nasdaq Stock Market was $33.375.
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 ......... $ $ $ $
Total(2) .......... $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $350,000.
(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 $ , Underwriting Discounts and Commissions
will be $ and Proceeds to Company will be $ .
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 , 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 , 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.
SEE "UNDERWRITING."
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 ITS 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."
<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, 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 in July 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 .................... 12,635,528 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 11,135,528 shares outstanding on June 9, 1998. Excludes (i)
1,207,663 shares issuable upon the exercise of options outstanding as of
June 9, 1998, (ii) an aggregate of an additional 408,600 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 11,031,279
=========== =========== =========== ============
<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 10,887,375 11,419,101
=========== ============ ============ ============
</TABLE>
MARCH 31, 1998
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- -------------- ---------------
BALANCE SHEET DATA:
Working capital ............. $ 411 $ (8,357) $ 20,252
Total assets ................ 100,524 121,377 149,986
Long-term debt .............. 12,699 22,699 4,099
Stockholders' equity......... 57,190 67,190 114,399
- ---------------
(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 315,395 shares of Common
Stock at an assumed offering price of $33.375 per share 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 (at an assumed public offering
price of $33.375 per share based on the last reported sales price of the
Common Stock on the Nasdaq Stock Market on June 16, 1998) 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 12 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 12,635,528 shares of
Common Stock outstanding. Of these shares, 6,586,000 shares will be freely
tradeable without restriction under the Securities Act. The remaining 6,049,528
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 in July 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
$47.2 million ($63.9 million if the Underwriters' over-allotment option is
exercised in full) at an assumed public offering price of $33.375 per share,
based on the last reported sale price of the Common Stock on the Nasdaq Stock
Market on June 16, 1998. 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 regarding any
acquisitions 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 (through June 16, 1998) ........... $39 3/8 $30
On June 16, 1998, the last reported sale price of the Common Stock on the
Nasdaq Stock Market was $33.375 per share. On June 16, 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 (at as assumed public offering price of $33.375 based on the last
reported sales price of the Common Stock on the Nasdaq Stock Market on June 16,
1998) 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 $ 39,228
======= ========= ========
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 62,459 109,653
Retained earnings ............................................ 4,623 4,623 4,623
------- --------- --------
Total stockholders' equity ................................... 57,190 67,190 114,399
------- --------- --------
Total capitalization ........................................ $69,889 $ 89,889 $118,498
======= ========= ========
</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) 1,207,633 shares issuable upon the exercise of options
outstanding as of June 9, 1998, (ii) an aggregate of an additional 408,600
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 11,031,279
=========== =========== =========== =========== =========== ============
<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 10,887,375 11,419,101
=========== ============ ============ =============
</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) $ 20,252
Total assets ................. 100,524 121,377 149,986
Long-term debt ............... 12,699 22,699 4,099
Stockholders' equity ......... 57,190 67,190 114,399
</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 315,395 shares of Common
Stock at an assumed offering price of $33.375 per share, 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 (at an assumed public offering
price of $33.375 per share based on the last reported sales price of the
Common Stock on the Nasdaq Stock Market on June 16, 1998) 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 Operating 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 regarding any acquisitions 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 12 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, 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.
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
35
<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 on the last
day of the preceding calendar quarter. 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 on the last day of the
preceding calendar quarter.
40
<PAGE>
As of June 8, 1998, 1,260,579 shares are reserved for use in connection
with the Plan (1,440,579 shares after giving effect to the Offering), of which
1,167,663 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.
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<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.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock, as of June 8, 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. Bachus, 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 -- --
Educational Trust for Alex Blutinger(13) ......... 13,000 * 4,290 8,710 *
Educational Trust for Erik Blutinger(13) ......... 13,000 * 4,290 8,710 *
Educational Trust for Jonathan
Blutinger(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.
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<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 June 8, 1998, the Company had
outstanding 11,135,528 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 12,635,528 shares
of Common Stock outstanding. Of these shares, 6,586,000 shares will be freely
tradeable without restriction under the Securities Act. The remaining 6,049,528
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 June 8, 1998 there were 1,207,663 shares of Common Stock issuable
upon the exercise of outstanding options under the Plan and Directors' Plan and
an additional 152,916 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 June 8, 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 June 8, 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 , 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 .........
ING Baring Furman Selz LLC .....................
NationsBanc Montgomery Securities LLC ..........
Raymond James & Associates, Inc. ...............
---------
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 $ per Share, and the Underwriters and such dealers
may allow a discount of $ per Share on sales to certain other dealers.
After the initial 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.
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
50
<PAGE>
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.
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
51
<PAGE>
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 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 &
52
<PAGE>
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
(unaudited) ........................................................................... F-3
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 June 16, 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 11,031,279 10,887,375 11,419,101
=========== =========== =========== =========== ===========
</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 315,395 shares of Common Stock at an assumed offering
price of $33.375 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 11,031,279 10,887,375 11,419,101
============ ============ ============ =========== ===========
</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 in 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.
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 June 5, 1998, letters of
credit outstanding under the Credit Facility total $1,007,000. 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 June 1, 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>
<S> <C>
ASSETS
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
<PAGE>
- --------------------------------------------------------------------------------
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
Legal Matters ............................... 51
Experts ..................................... 51
Additional Information ...................... 51
Index to Financial Statements ............... F-1
[TRAVEL SERVICES LOGO]
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.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee ............................... $ 41,262
NASD Filing Fee .................................... 14,487
Blue Sky Fees and Expenses ......................... 10,000
Nasdaq Stock Market Additional Listing Fee ......... 17,500
Accounting Fees and Expenses ....................... 85,000
Legal Fees and Expenses ............................ 75,000
Printing Expenses .................................. 85,000
Other .............................................. 21,751
--------
Total ............................................ $350,000
========
- ----------------
(1) The amounts set forth above, except for the SEC fee, the NASD Filing Fee
and the Nasdaq Stock Market Additional Listing Fee, are in each case
estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall
have been made to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided for by Section 145 shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; that indemnification provided
for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of such person's heirs,
executors and administrators; and empowers the corporation to purchase and
maintain insurance
II-1
<PAGE>
on behalf of a director or officer of the corporation against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not
eliminate or limit the liability of a director: (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.
Article Seventh of the Company's Certificate of Incorporation, as amended,
states that:
"No director shall be liable to the corporation or any of its stockholders
for monetary damages for breach of fiduciary duty as a director, except with
respect to: (1) a breach of the director's duty of loyalty to the corporation
or its stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (3) liability under
Section 174 of the DGCL; or (4) a transaction from which the director derived
an improper personal benefit, it being the intention of the foregoing provision
to eliminate the liability of the corporation's directors to the corporation or
its stockholders to the fullest extent permitted by Section 102(b)(7) of the
DGCL, as amended from time to time. The corporation shall indemnify to the
fullest extent permitted by Sections 102(b)(7) and 145 of the DGCL, as amended
from time to time, each person that such Sections grant the corporation the
power to indemnify."
In addition, Article VII of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors, advisory directors and
employees to the fullest extent permitted by law.
The Company has entered into indemnification agreements with each of its
executive officers, its advisory director and directors which indemnifies such
person to the fullest extent permitted by its Amended and Restated Certificate
of Incorporation, its Bylaws and the DGCL. In the event that the Company's
stockholders approve the Company's reincorporation from Delaware to Florida at
the Company's 1998 Annual Meeting, the Company intends to amend said
indemnification agreements to provide indemnification to the fullest extent
permitted under the Florida Business Corporation Act. The Company also
maintains obtain directors and officers liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act.
The following is certain information concerning all sales of securities by
the Company during the year ended December 31, 1997 that were not registered
under the Securities Act:
(a) Travel Services International, Inc. was organized in April 1996 and
issued 100 and 200 shares of its Common Stock to its Founders, Capstone
Partners LLC and Alpine Consolidated, LLC, respectively, at a per share
price of $.01. On May 14, 1997, the number of these shares were
increased by a 5,444.45 to one stock split.
(b) During the first quarter of 1997, 851,166 shares of Common Stock were
issued to persons who were to become officers, directors, key employees,
or holders of more than 5% of the stock of the Company at a per share
price of $.01.
(c) In July 1997, the Company issued the following shares in connection
with the acquisition of the five Founding Companies: 333,334 shares in
connection with the acquisition of Cruises, Inc.;
II-2
<PAGE>
908,334 shares in connection with the acquisition of Cruises Only;
1,083,334 shares in connection with the acquisition of Auto Europe;
902,778 shares in connection with the acquisition of Travel 800; and
194,445 shares in connection with the acquisition of D-FW Tours.
(d) In November 1997, the Company issued the following shares in connection
with the acquisitions of the following four Operating Companies and Trax
Software, Inc.: 328,492 shares in connection with the acquisition of
CruiseOne; 326,704 shares in connection with the acquisition of
CruiseWorld; 471,508 shares in connection with the acquisition of Ship
`N' Shore; 225,000 shares in connection with the acquisition of Cruise
Fairs; and 32,985 shares in connection with the acquisition of Trax.
(e) In January 1998, the Company issued the following shares in connection
with the acquisition of the following Operating Company: 21,822 shares
in connection with the acquisition of Diplomat Tours.
(f) In February 1998, the Company issued the following shares in connection
with the acquisition of the following Operating Companies: 163,755
shares in connection with the acquisition of Gold Coast and 2,183 shares
in connection with the acquisition of AutoNet International.
(g) In March 1998, the Company issued the following shares in connection
with the acquisition of the following Operating Company: 152,835 shares
in connection with the acquisition of Cruise Masters.
The offers and sales of these shares were exempt from registration under
the Securities Act of 1933 in reliance on Section 4(2) thereof because, among
other things, the offers and sales were made to a small number of sophisticated
investors, or directors and executive officers, of the Company who had access
to the information about the Company and were able to bear the risk of loss of
their investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, Auto-
Europe, Inc. (Maine), Imad Khalidi, Alex Cecil and Wilfred Diller, as trustee for Thurston
Cecil and Lila Cecil.(1)
2.2 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, Cruises
Only, Inc., Wayne Heller and Judy Heller.(1)
2.3 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, 800-
Ideas, Inc. and Susan Parker.(1)
2.4 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, Cruises,
Inc., Robert G. Falcone, Judith A. Falcone and Pamela C. Cole.(1)
2.5 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, D-FW
Tours, Inc., D-FW Travel Arrangements, Inc., John W. Przywara and Sharon S. Przywara.(1)
2.6 First Amendment to Agreement and Plan of Organization among the Registrant, Auto-
Europe, Inc. (Maine), Imad Khalidi Alex Cecil and Wilfred Diller, as trustee for Thurston
Cecil and Lila Cecil.(2)
2.7 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among
the Registrant, Cruises, Inc., Robert G. Falcone, Judith A. Falcone, and Pamela C. Cole.(2)
2.8 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among
the Registrant, Cruises Only, Inc., Wayne Heller and Judy Heller.(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.9 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among
the Registrant, D-FW Travel Arrangements, Inc., John W. Przywara and Sharon Scott
Przywara.(2)
2.10 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among
the Registrant, 800-Ideas, Inc. and Susan Parker.(2)
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Specimen Common Stock Certificate(2)
4.2 Form of Restriction and Registration Rights Agreement, dated as of July 28, 1997, between the
Registrant and the each of the persons listed on the schedule thereto.(4)
5 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
10.1 Amended and Restated Employment Agreement, dated as of July 22, 1997, between the
Registrant and Joseph V. Vittoria.(4)
-- Amended and Restated Employment Agreement, dated as of May 12, 1997, between the
Registrant and Jill M. Vales.(4)
-- Amended and Restated Employment Agreement, dated as of June 6, 1997, between the
Registrant and Michael J. Moriarty.(4)
-- Employment Agreement, dated July 22, 1997, between the Registrant and Mel Robinson.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Auto Europe, LLC and
Imad Khalidi.(4)
-- Employment Agreement, dated July 18, 1997, among the Registrant, Auto Europe, LLC and
Alex Cecil.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Cruises, Inc. and Robert
Falcone.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Cruises, Inc. and Judith
Falcone.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Cruises, Inc. and Holley
Christen.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Cruises Only, LLC and
Wayne Heller.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Cruises Only, LLC and
Judy Heller.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Travel 800, LLC and
Susan Parker.(4)
10.2 Form of Indemnification Agreement, dated July 28, 1997, between the Registrant and each of
the persons set forth on the schedule thereto.(4)
10.3 1997 Long Term Incentive Plan(3)
10.4 Non-Employee Directors' Stock Plan(3)
10.6 Employment Agreement, dated July 25, 1997, between the Registrant and Suzanne B. Bell.(4)
10.7 Employment Agreement, dated as of July 25, 1997, between the Registrant and Maryann
Bastnagel.(4)
10.8 Credit Agreement, dated as of October 15, 1997, by and between the Registrant and
NationsBank, N.A.(4)
10.9 Stock Purchase Agreement, dated as of October 28, 1997, among the Registrant, CruiseOne,
Inc., Anthony J. Persico and Charlotte Luna, as amended.(5)
10.10 Stock Purchase Agreement, dated as of October 28, 1997, among the Registrant, Cruise World,
Inc., and the sellers named therein, as amended.(5)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<S> <C>
10.11 Stock Purchase Agreement, dated as of October 28, 1996, among the Registrant, Ship `N'
Shore Cruises, Inc., Cruise Time, Inc., SNS Coachline, Inc., Cruise Mart, Inc., SNS Travel
Marketing, Inc. and Natalee Stutzman, as amended.(5)
10.12 Asset Purchase Agreement, dated as of February 9, 1998, among the Registrant, Gold Coast
Travel Agency Corporation, Inc. and Rhea Sherota.(6)
10.13 Employment Agreement, dated as of January 19, 1998, between the Registrant and John C. De
Lano.(7)
10.14 Stock Purchase Agreement, dated March 31, 1998, among the Registrant, The Cruise Line, Inc.
and the shareholders named therein(8)
10.15 Employment Agreement, dated as of April 1, 1998, among the Registrant and Spencer Frazier.(9)
10.16 Purchase Agreement by and among the Registrant and Lexington Services Associates, Ltd., a
Texas limited partnership (the "Partnership"), and the Partnership's partners dated as of
June 1, 1998.(9)
11 Schedule of Computations of Earnings Per Share(7)
21 Subsidiaries of the Registrant
23.1 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. (included in Exhibit 5)
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
24 Reference is made to the Signatures section of this Registration Statement for the Power of
Attorney contained therein(9)
</TABLE>
- ----------------
(1) Previously filed as the same Exhibit number on May 14, 1997, under a
Registration Statement on Form S-1 (File no. 333-27125).
(2) Previously filed as the same Exhibit number on July 1, 1997 under a
Registration Statement on Form S-1 (File no. 333-27125).
(3) Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(4) Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended September 30, 1997.
(5) Previously filed as an exhibit to the Company's Form 8-K dated November 19,
1997.
(6) Previously filed as an exhibit to the Company's Form 8-K dated February 9,
1998.
(7) Previously filed as an exhibit to the Company's Form 10-K for the year
ended December 31, 1997.
(8) Previously filed as an exhibit to the Company's Form 8-K dated March 31,
1998.
(9) Previously filed.
(b) Financial Statement Schedules
Report of Independent Certified Public Accountants ......... S-1
Schedule II--Valuation and Qualifying Accounts ............. S-2
All other schedules have been omitted either because they are not
applicable or because the information has been disclosed in the financial
statements and related notes included in the prospectus.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Delray
Beach, State of Florida, on the 14th day of July, 1998.
TRAVEL SERVICES INTERNATIONAL, INC.
BY: /s/ Joseph V. Vittoria
-------------------------------------------
Joseph V. Vittoria
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------------------- ---------------------------------- --------------
<S> <C> <C>
/s/ Joseph V. Vittoria Chairman of the Board, July 14, 1998
- ------------------------------- Chief Executive Officer, Director
Joseph V. Vittoria (Principal Executive Officer)
/s/ Jill M. Vales Senior Vice President, Chief July 14, 1998
- ------------------------------- Financial and Principal
Jill M. Vales Accounting Officer
/s/ * Director July 14, 1998
- -------------------------------
Wayne Heller
/s/ * Director July 14, 1998
- -------------------------------
Robert G. Falcone
/s/ * Director July 14, 1998
- -------------------------------
Imad Khalidi
/s/ * Director July 14, 1998
- -------------------------------
John W. Przywara
/s/ * Director July 14, 1998
- -------------------------------
Elan J. Blutinger
/s/ * Director July 14, 1998
- -------------------------------
D. Fraser Bullock
Director
- -------------------------------
Tommaso Zanzotto
- ----------------
*By: /s/ Jill M. Vales
--------------------------
Jill M. Vales
Attorney-in-fact
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Travel Services International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Travel Services International, Inc.
and subsidiaries, included in this registration statement and have issued our
report thereon dated March 31, l998 (except with respect to the matters
discussed in Note 15, as to which date is June 16, 1998). Our audits were made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The schedule listed in the index above is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
March 31, 1998.
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION YEAR EXPENSES END OF YEAR
- ----------- -------------- ----------- ------------
<S> <C> <C> <C>
Reserves and allowances deducted from assets accounts:
Allowance for uncollectible accounts recievable
Year ended December 31, 1995 ....................... $37,000 -- $ 37,000
Year ended December 31, 1996 ....................... $37,000 -- $ 37,000
Year ended December 31, 1997 ....................... $37,000 108,000 $145,000
</TABLE>
S-2
EXHIBIT 99.2
TRAVEL SERVICES INTERNATIONAL, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 28, 1998
To the Stockholders of Travel Services International, Inc.:
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders
(the "Annual Meeting") of Travel Services International, Inc., a Delaware
corporation (the "Company"), will be held at 9:00 a.m., local time, on Tuesday,
July 28, 1998, at the Boca Raton Marriott at Boca Center, 5150 Town Center
Circle, Boca Raton, Florida 33486, for the following purposes:
(1) To elect two members to the Company's Board of Directors
to hold office until the Company's 2001 Annual Meeting or until their
successors are duly elected and qualified;
(2) To consider and vote upon a proposal to approve the
reincorporation of the Company from Delaware to Florida;
(3) To consider and vote upon a proposal to approve the
Company's Amended and Restated Long-Term Incentive Plan; and
(4) To transact such other business as may properly come
before the Annual Meeting and any adjournments or postponements
thereof.
The Board of Directors has fixed the close of business on June 19, 1998
as the record date for determining those stockholders entitled to notice of, and
to vote at, the Annual Meeting and any adjournments or postponements thereof.
Whether or not you expect to be present, please sign, date and return
the enclosed proxy card in the enclosed pre-addressed envelope as promptly as
possible. No postage is required if mailed in the United States.
By Order of the Board of Directors,
SUZANNE B. BELL
Secretary
Delray Beach, Florida
July 6, 1998
THIS IS AN IMPORTANT MEETING AND ALL STOCKHOLDERS ARE ENCOURAGED TO ATTEND THE
MEETING IN PERSON. THOSE STOCKHOLDERS WHO ARE UNABLE TO ATTEND ARE RESPECTFULLY
URGED TO EXECUTE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE.
STOCKHOLDERS WHO EXECUTE A PROXY CARD MAY NEVERTHELESS ATTEND THE MEETING,
REVOKE THEIR PROXY AND VOTE THEIR SHARES IN PERSON AT THE MEETING.
<PAGE>
1998 ANNUAL MEETING OF STOCKHOLDERS
OF
TRAVEL SERVICES INTERNATIONAL, INC.
PROXY STATEMENT
TIME, DATE AND PLACE OF ANNUAL MEETING
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Travel Services International, Inc., a Delaware
corporation (the "Company"), of proxies from the holders of the Company's Common
Stock, par value $.01 per share (the "Common Stock"), for use at the 1998 Annual
Meeting of Stockholders of the Company to be held at 9:00 a.m., local time, on
Tuesday, July 28, 1998, at the Boca Raton Marriott at Boca Center, 5150 Town
Center Circle, Boca Raton, Florida 33486, and at any adjournments or
postponements thereof (the "Annual Meeting"), pursuant to the enclosed Notice of
Annual Meeting.
The approximate date that this Proxy Statement and the enclosed form of
proxy are first being sent to stockholders is July 6, 1998. The Company's
principal executive offices are located at 220 Congress Park Drive, Delray
Beach, Florida 33445, and its telephone number is (561) 266-0860.
INFORMATION CONCERNING PROXY
The enclosed proxy is solicited on behalf of the Company's Board of
Directors. The giving of a proxy does not preclude the right to vote in person
should any stockholder giving the proxy so desire. Stockholders have an
unconditional right to revoke their proxy at any time prior to the exercise
thereof, either in person at the Annual Meeting or by filing with the Company's
Secretary at the Company's headquarters a written revocation or duly executed
proxy bearing a later date; however, no such revocation will be effective until
written notice of the revocation is received by the Company at or prior to the
Annual Meeting.
The cost of preparing, assembling and mailing this Proxy Statement, the
Notice of Annual Meeting of Stockholders and the enclosed proxy is to be borne
by the Company. In addition to the use of mail, employees of the Company may
solicit proxies personally and by telephone. The Company's employees will
receive no compensation for soliciting proxies other than their regular
salaries. The Company may request banks, brokers and other custodians, nominees
and fiduciaries to forward copies of the proxy material to their principals and
to request authority for the execution of proxies. The Company may reimburse
such persons for their expenses in doing so.
<PAGE>
PURPOSES OF THE ANNUAL MEETING
At the Annual Meeting, the Company's stockholders will consider and
vote upon the following matters:
(1) The election of two members to the Company's Board of
Directors to hold office until the Company's 2001 Annual Meeting or
until their successors are duly elected and qualified;
(2) A proposal to approve the reincorporation of the Company
from Delaware to Florida;
(3) A proposal to approve the Company's Amended and Restated
Long-Term Incentive Plan (the "Plan"); and
(4) The transaction of such other business as may properly
come before the Annual Meeting and any adjournments or postponements
thereof.
Unless contrary instructions are indicated on the enclosed proxy, all
shares represented by valid proxies received pursuant to this solicitation (and
which have not been revoked in accordance with the procedures set forth herein)
will be voted (a) for the election of the respective nominees for director named
below, and (b) in favor of all other proposals described in the Notice of Annual
Meeting. In the event a stockholder specifies a different choice by means of the
enclosed proxy, such shares will be voted in accordance with the
specification(s) so made.
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has set the close of business on June 19, 1998
as the record date (the "Record Date") for determining stockholders of the
Company entitled to notice of and to vote at the Annual Meeting. The outstanding
securities of the Company consist of Restricted Voting Common Stock entitled to
four-tenths of a vote on each matter submitted to stockholders for approval at
the Annual Meeting ("Restricted Common Stock"), and non-restricted Common Stock
entitled to one vote on each matter submitted to stockholders for approval at
the Annual Meeting ("non-restricted Common Stock" and, together with the
Restricted Common Stock, the "Common Stock"). As of the Record Date, there were
11,135,528 shares of Common Stock issued and outstanding, all of which are
entitled to be voted at the Annual Meeting, and of which 2,484,501 shares were
shares of Restricted Voting Common Stock and 8,651,027 shares were
non-restricted Common Stock. Stockholders do not have the right to cumulate
their votes for directors.
The attendance, in person or by proxy, of stockholders holding of
record a number of shares entitling them to exercise a majority of the voting
power of the outstanding shares of Common Stock entitled to vote at the Annual
Meeting is necessary to constitute a quorum. Directors will be elected by a
plurality of the votes cast by the shares of Common Stock represented in person
or by proxy at the Annual Meeting. The affirmative vote of stockholders holding
of record a number of shares entitling them to exercise a majority of the voting
power of the outstanding shares of Common Stock of the Company will be required
for approval of the proposal to reincorporate the Company from Delaware to
Florida. The affirmative vote of stockholders holding of record a number of
shares entitling them to exercise a majority of the voting power of the shares
of Common Stock represented in person or by
2
<PAGE>
proxy at the Annual Meeting will be required for approval of (i) the proposal to
adopt the Plan, and (ii) any other matter that may be submitted to a vote of the
stockholders. If less than a majority of the voting power of the outstanding
shares entitled to vote are represented at the Annual Meeting, the holders of a
majority of the voting power of the shares so represented may adjourn the Annual
Meeting to another date, time or place, and notice need not be given of the new
date, time or place if the new date, time or place is announced at the meeting
before an adjournment is taken.
Prior to the Annual Meeting, the Company will select one or more
inspectors of election for the meeting. Such inspector(s) shall determine the
number of shares of Common Stock represented at the meeting, the existence of a
quorum and the validity and effect of proxies, and shall receive, count and
tabulate ballots and votes and determine the results thereof.
Pursuant to Delaware law, abstentions and broker non-votes are counted
as present for purposes of determining the presence of a quorum. Abstentions are
treated as present and entitled to vote and will be counted as votes cast at the
Annual Meeting, but will not be counted as votes cast for or against any given
matter. However, a broker non-vote on a matter is considered as not present and
not entitled to vote on that matter and thus is not counted as a vote cast or as
present in determining whether a matter has been approved. Accordingly, (i)
abstentions and broker non-votes will not have the same effect as a vote against
the election of any director, (ii) abstentions will have the same effect as a
vote against the proposal to approve the Plan, but broker non-votes will not
have such effect, and (iii) abstentions and broker non-votes will have the same
effect as a vote against the proposal to approve the reincorporation of the
Company from Delaware to Florida.
A list of stockholders entitled to vote at the Annual Meeting will be
available at the Company's principal executive offices, 220 Congress Park Drive,
Delray Beach, Florida 33445, for a period of ten days prior to the Annual
Meeting and at the Annual Meeting itself for examination by any stockholder.
3
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of June 19, 1998 by:
(i) each person known to beneficially own more than 5% of the outstanding shares
of Common Stock; (ii) each of the Company's directors; (iii) the Company's Chief
Executive Officer and the five other most highly compensated executive officers
whose total 1997 annualized salary and bonus was $100,000 or more (the Chief
Executive Officer and such other executive officers of the Company are sometimes
referred to herein as the "Named Executive Officers"); and (iv) all executive
officers and directors as a group. All persons listed have sole voting and
investment power with respect to their shares, unless otherwise indicated.
NAME AND ADDRESS PERCENTAGE
OF BENEFICIAL OWNER(1) SHARES OWNED
---------------------- ------ -----
Joseph V. Vittoria (2) 370,000 3.3%
Michael J. Moriarty (2) 64,583 *
Jill M. Vales (2) 55,333 *
Maryann Bastnagel (2) 28,500 *
Suzanne B. Bell (2)(3) 35,750 *
Robert G. Falcone (4) 250,000 2.2%
Wayne Heller (5) 908,334 8.2%
Imad Khalidi 500,000 4.5%
John W. Przywara 194,445 1.7%
Elan J. Blutinger (6)(7) 323,693 2.9%
D. Fraser Bullock (6) 241,328 2.2%
Tommaso Zanzotto (6) 10,242 *
J&W Heller Corp.(5) 908,334 8.2%
800 Ideas, Inc. (8) 902,778 8.1%
Greystones, Inc. (9) 1,083,334 9.7%
All Directors and Executive 2,994,708 26.6%
Officers as a Group
(15 persons) (10)
- ------------------
* 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 Proxy
Statement: 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, Mr. Heller's 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) The 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) 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
Proxy Statement.
4
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
ELECTION OF DIRECTORS; NOMINEES
The number of directors constituting the Board of Directors is
determined by the Board as provided in the Company's Bylaws. The size of the
Board is currently fixed at nine directors, of which there are currently eight
incumbent directors. The Board of Directors of the Company is divided into three
classes with each class of directors serving staggered three year terms or until
their successors are elected and qualified. At each annual meeting of
stockholders, directors will be elected by the holders of the Common Stock to
succeed those directors whose terms are expiring.
The current classes of the Board of Directors and their terms of office
are as follows:
CLASS DIRECTORS TERM EXPIRES IN:
----- --------- ----------------
I Elan J. Blutinger 1998
I D. Fraser Bullock 1998
I Tommaso Zanzotto 1998
II Imad Khalidi 1999
II John W. Przywara 1999
II Joseph V. Vittoria 1999
III Robert G. Falcone 2000
III Wayne Heller 2000
Messrs. Elan J. Blutinger, D. Fraser Bullock and Tommaso Zanzotto have
been nominated by the Company to be reelected as Class I directors at the Annual
Meeting, to hold office until the 2001 annual meeting, and proxies will be voted
for Messrs. Blutinger, Bullock and Zanzotto absent contrary instructions. Each
of the nominees for election as a director of the Company is a current member of
the Board of Directors.
The Board of Directors has no reason to believe that any of the
nominees will refuse or be unable to accept election; however, in the event that
a nominee is unwilling or unable to accept election or if any other unforeseen
contingencies should arise, each proxy that does not specifically direct
otherwise will be voted for the remaining nominees, if any, and for such other
person(s) as may be designated by the Board of Directors.
One vacancy currently exists on the Board of Directors for a Class III
director due to the resignation of Susan Parker, which was effective June 9,
1998. The Board has no current plans to fill the vacancy created by Ms. Parker's
resignation but may do so in the future when appropriate candidates are
identified. The Board has authority to fill the vacancy under applicable law and
the Company's Bylaws.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES AS DIRECTORS OF THE COMPANY.
5
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
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.................. 43 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 the Avis, Inc. by creating one of
the world's largest Employee Stock Ownership Plans in 1987. He was a founding
member of the World Travel and Tourism Council, a global organization of the
chief executive officers of companies engaged in all sectors of the travel and
tourism industry. He has been named travel executive of the year several times
by various travel media, including BUSINESS TRAVEL NEWS, TRAVEL WEEKLY, TRAVEL
AGENT TOUR AND TRAVEL NEWS-NORTH AMERICA. Mr. Vittoria serves on the Board of
Directors of Transmedia Europe, Transmedia Asia, 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.
6
<PAGE>
JILL M. VALES became Senior Vice President and Chief Financial Officer of
the Company in July 1997. From 1996 to 1997, Ms. Vales served as the Chief
Operating Officer of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A., a law firm.
From 1990 until 1996, Ms. Vales held various positions at Certified Vacations,
an affiliate of Alamo Rent-A-Car, including Senior Vice President of Operations
and Chief Financial Officer (1994-1996), Vice President of Finance and
Operations (1992-1994) and Senior Director of Finance and Operations and
Controller (1990-1992). From 1979 to 1990, Ms. Vales held various positions at
KPMG Peat Marwick, 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
7
<PAGE>
member of the National Association of Cruise Only Agencies ("NACOA"), the
Airline Reporting Corporation ("ARC"), the Travel Council of the World
(Environmental Group), the American Society of Travel Agents ("ASTA"), Cruise
Lines International Association ("CLIA") and is the co-founder of the Society of
Elite Agents, a trade association of leading cruise specialists ("SEA").
WAYNE HELLER became a director of the Company in July 1997. Mr. Heller has
served as the Chief Executive Officer of Cruises Only since its founding in 1985
and was previously employed with Norwegian Caribbean Cruise Lines from 1980 to
1984. Mr. Heller is a member of ASTA, NACOA and CLIA.
IMAD KHALIDI became a director of the Company in July 1997. Mr. Khalidi has
been President of Auto Europe since 1992. In 1990, he joined Auto Europe as
Executive Vice President of Marketing and Sales. From 1983 to 1990, Mr. Khalidi
served as an International Travel Trade Manager and an International Licensee
Manager with Europcar International S.A., an auto rental company in France. Mr.
Khalidi is a member of the Association of Retail Travel Agencies ("ARTA"), ASTA
and CLIA.
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.
8
<PAGE>
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 has established an Audit Committee, a
Compensation Committee and an Acquisition Committee, and may establish other
committees from time to time as the Board may determine.
Leonard A. Potter, the Company's 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 reviews and determines compensation for the Company's
executive officers, administers the Company's 1997 Long-Term Incentive Plan (the
"Incentive 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, subject to the terms and conditions
of such officers' employment agreements with the Company.
During 1997, the Company's Board of Directors held three meetings and
took a number of other actions by written consent. During 1997, with the
exception of Imad Khalidi, each director attended at least 75 percent of the
aggregate of (i) the number of meetings of the Board of Directors held during
the
9
<PAGE>
period he served on the Board, and (ii) the number of meetings of committees
of the Board of Directors held during the period he served on such committees.
Mr. Khalidi attended two of the three Board of Directors meetings held during
1997. Mr. Khalidi does not serve on any committees of the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and owners of more than 10% of the
Company's common stock to file reports of ownership on Form 3 and changes of
ownership on Form 4 or Form 5 with the Securities and Exchange Commission and
The Nasdaq Stock Market. Such persons are also required to furnish the Company
with a copy of all such forms filed.
Based solely on its review of copies of such reports or written
representations from or on behalf of certain reporting persons, the Company
believes that, during the year ended December 31, 1997, all Section 16(a) filing
requirements applicable to such persons were timely satisfied.
10
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid to the
Company's Chief Executive Officer and the five other most highly compensated
executive officers whose total 1997 annualized salary and bonus was $100,000 or
more (the Chief Executive Officer and such other executive officers of the
Company are sometimes referred to herein as the "Named Executive Officers") with
respect to the year ended December 31, 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ----------------
OTHER ANNUAL SECURITIES
COMPEN- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR (1) SALARY (2) BONUS SATION OPTIONS COMPENSATION
($) ($) ($) (#) ($)
- ----------------------------- ----------- ------------ ------------ --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph V. Vittoria 1997 84,615 86,000 -- 100,000 --
CEO
Michael J. Moriarty 1997 63,462 51,500 -- 75,000 6,104 (3)
President/COO
Jill M. Vales 1997 63,462 32,000 -- 50,000 24,000 (4)
Sr. VP/CFO
Maryann Bastnagel 1997 63,462 48,500 -- 110,000 8,172 (3)
Sr. VP/CIO
Suzanne B. Bell 1997 52,885 27,000 -- 25,000 --
Sr. VP/General Counsel
Imad Khalidi (5) 1997 293,231 295,000 -- -- --
VP European Operations
</TABLE>
- -------------------
(1) With the exception of Mr. Khalidi, each of the Named Executive Officers
commenced employment with the Company upon consummation of the initial
public offering (July 28, 1997). Mr. Khalidi served as President of Auto
Europe prior to the initial public offering. Commencing on July 28, 1997,
Mr. Khalidi served as CEO of Auto Europe and as a director and Vice
President, European Operations, of the Company.
(2) Annual salaries are as follows: $200,000 for Mr. Vittoria; $150,000 for
each of Mr. Moriarty, Ms. Vales and Ms. Bastnagel; and $125,000 for Ms.
Bell. Mr. Khalidi's 1997 salary and bonus include amounts paid by Auto
Europe prior to the initial public offering. After the offering, Mr.
Khalidi's annual salary is $140,000.
(3) Consists of relocation expenses paid during 1997.
(4) Consists of consulting fees paid prior to the consummation of the Company's
initial public offering.
(5) Effective March 1998, Mr. Khalidi no longer serves as Vice President,
European Operations, but continues in his capacities as CEO of Auto Europe
and as a director of the Company.
11
<PAGE>
The following table sets forth the stock options granted to the Named
Executive Officers during the year ended December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTION GRANTS AND EXERCISES
INDIVIDUAL GRANTS GRANT DATE
VALUE(1)
-------------------------------------------------------------- -------------------
NUMBER OF
SECURITIES %OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR GRANT DATE
GRANTED EMPLOYEES IN BASE PRICE PRESENT VALUE
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE ($)
---------------------- -------------- -------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <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. All of the options disclosed in the table above vest at the rate of 25%
per year.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its
subsidiaries do not receive additional compensation for serving as directors.
Each director who is not an employee of the Company or one of its subsidiaries
receives a fee of $2,000 for attendance at each Board of Directors' meeting and
$1,000 for each committee meeting (unless held on the same day as a Board of
Directors' meeting). Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof
incurred in their capacity as directors.
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders in 1997, provides for: (i) the automatic grant to each
non-employee director and Advisory Director (a "Participant") serving at the
commencement of the initial public offering of an option to purchase 10,000
shares; and thereafter (ii) the automatic grant to each Participant of an option
to purchase 10,000 shares upon such person's initial election as a director or
appointment as an Advisory Director. In addition, the Directors' Plan provides
for an automatic annual grant to each Participant of an option to purchase 5,000
shares at each annual meeting of stockholders following the Offering; provided,
however, that if the first annual meeting of stockholders following a person's
initial election as a non-employee director or appointment by the Board as an
Advisory Director is within three months of the date of such election or
appointment, such person will not be granted an option to purchase 5,000 shares
of Common Stock at such annual meeting. These options will have an exercise
price per share equal to the fair market value of a share at the date of grant.
Options granted under the Directors' Plan will expire at the earlier of 10 years
from the date of grant or one year after termination of service as a director or
advisor, and options will be immediately exercisable. In addition, the
Directors' Plan permits Participants to elect to receive, in lieu of cash
directors' fees, shares or credits representing "deferred shares" that may be
settled at future dates, as elected by the Participants. The number of shares or
deferred shares received will be equal to the number of shares which, at the
date the fees would otherwise be payable, will have an aggregate fair market
12
<PAGE>
value equal to the amount of such fees. The Company has reserved 100,000 shares
of Common Stock for use in connection with the Directors' Plan. Upon
consummation of the initial public offering, Messrs. Blutinger, Bullock,
Zanzotto and Potter each received options to purchase 10,000 shares.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was incorporated in April 1996, however, the Company did not
conduct operations or generate revenue and did not pay any of its executive
officers compensation as employees until July 1997. During 1997, its most highly
compensated executive officers were Messrs. Vittoria, Moriarty and Khalidi and
Ms. Bastnagel, Ms. Vales and Ms. Bell. The Company granted Messrs. Vittoria and
Moriarty and Ms. Bastnagel, Ms. Vales and Ms. Bell options to purchase 100,000,
75,000, 110,000, 50,000 and 25,000 shares of Common Stock, respectively, at
$14.00 per share, the initial public offering price. These options will vest in
equal installments on each of the first four anniversaries of the initial
offering.
Mr. Vittoria has entered into an employment agreement with the Company
providing for an annual base salary of $200,000. Mr. Moriarty has entered into
an employment agreement with the Company providing for an annual base salary of
$150,000 plus in the first year a guaranteed minimum bonus of $75,000. Ms.
Vales, Mr. Khalidi, Ms. Bastnagel and Ms. Bell each have entered into an
employment agreement with the Company providing for an annual base salary of
$150,000, $140,000, $150,000 and $125,000, respectively. Each of these
agreements is for a term of three years. In addition, certain executive officers
of the Operating Companies, including Messrs. Falcone, Heller and Przywara,
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 effective date of
termination. In the event of a change in control of the Company (as defined in
the agreement) during the Initial Term, if the employee is not given at least
five days' notice of such change in control and the successor's intent to be
bound by such employment agreement, the employee may elect to terminate his or
her employment and receive in one lump sum three times the amount he or she
would receive pursuant to a termination without cause during the Initial Term.
The employment
13
<PAGE>
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 noncompetition provisions of the employment agreement will
not apply. In the event the employee is given at least five days' notice of such
change in control, the employee may elect to terminate his or her employment
agreement and receive in one lump sum two times the amount he or she would
receive pursuant to a termination without cause during the Initial Term. In such
an event, the noncompetition provisions of the employment agreement would apply
for two years from the effective date of termination.
Each agreement with respect to the acquisition of an Operating Company
also contains a similar covenant prohibiting sellers from competing with the
Company for a periods following the consummation of the respective acquisition.
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.
The Company expects that the indemnification agreements will be amended or
replaced, as appropriate, to conform to Florida law in the event that the
Company's reincorporation from Delaware to Florida is approved by the Company's
stockholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Tommaso Zanzotto and Elan
Blutinger. Mr. Zanzotto has never been an officer or employee of the Company or
its subsidiaries. Mr. Blutinger was an officer of the Company prior to the
Company's initial public offering. The Company was initially capitalized by
Alpine Consolidated, LLC, a consolidator of highly fragmented businesses, of
which Elan Blutinger is a Managing Director, and Capstone Partners, LLC. As a
result of a 5,444.45 for one stock split effective on May 14, 1997, the 300
shares of Common Stock initially issued by the Company to its founders,
including Alpine Consolidated, LLC, totaled 1,633,335 shares on the consummation
of the initial public offering. In addition, prior to consummation of the
initial public offering, TSGI Funding, LLC ("TSGI"), a Delaware limited
liability company, extended loans to the Company from time to time in amounts
equal to the legal, accounting and other transactional costs, expenses and
disbursements incurred by the Company in connection with the acquisitions of the
Founding Companies and the initial public offering. The member managers of TSGI
were Alpine Consolidated, LLC and Capstone Partners, LLC. All amounts loaned by
TSGI were repaid, without interest, by the Company on July 28, 1997, upon
consummation of the initial public offering. Such loans aggregated $950,000.
14
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee has the authority to determine the
compensation of the Company's executive officers and the executive officers of
the Company's subsidiaries, and to administer the Company's 1997 Long-Term
Incentive Plan (the "Incentive Plan"). The Compensation Committee was
constituted on August 11, 1997, and currently consists of two outside directors
who are not officers or employees of the Company. In general, the goals of the
Compensation Committee are to enable the Company to (1) recruit, develop and
retain highly motivated and qualified managers; (2) maximize financial
performance, balancing appropriately the short and long term goals of the
Company; and (3) align the interests of Company management with those of its
stockholders through the use of stock options and incentives tied to increases
in stockholder value.
During 1997, the executive officers were compensated pursuant to
employment agreements entered into in connection with the Company's initial
public offering and prior to the appointment of the Compensation Committee.
Accordingly, the Compensation Committee did not determine the 1997 salaries of
the executive officers.
In addition to compensation through base salaries, the Compensation
Committee has the authority to issue performance-based bonuses. Bonus payments
made in connection with performance in 1997 were made in cash. In the future,
such bonus payments may, in the discretion of the Compensation Committee, be
made in cash or stock options. The Compensation Committee is responsible for the
selection of the employees to whom options will be granted, the number of shares
subject to each such option and the terms and conditions of such options,
consistent with the Incentive Plan. The Compensation Committee seeks to use the
Incentive Plan as a means to motivate the Company's management and key
personnel. In addition to year-end performance bonuses, determinations of option
grants may be made during the year, either in connection with new acquisitions,
additional equity offerings by the Company, or the addition of new key
personnel, as appropriate in furtherance of the Company's objectives. Such
objectives may include recognition of past qualitative performance and
incentives to continue the growth and profits of the Company's business. To
facilitate the Compensation Committee's achievement of its goals, the committee
has engaged an outside consulting firm to evaluate the compensation structure
and make recommendations to the committee.
Section 162(m) of the Internal Revenue Code generally limits the tax
deduction to public companies for compensation over $1 million paid to a
corporation's chief executive officer and the four next most highly compensated
executive officers, except to the extent that any such excess compensation is
paid pursuant to a performance-based or stock option plan that has been approved
by stockholders. The Compensation Committee will study the potential impact of
Section 162(m) and will, to the extent it deems appropriate, take reasonable
steps to minimize or eliminate any potential impact of Section 162(m) on the
Company, while at the same time preserving the objective of providing
appropriate incentive awards. The Compensation Committee believes that there are
no current executive compensation programs or outstanding awards that would be
impacted by Section 162(m).
COMPENSATION COMMITTEE
ELAN J. BLUTINGER
TOMMASO ZANZOTTO
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PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
stockholder return for the period from July 22, 1997 (the date on which the
Company's common stock commenced trading on the Nasdaq Stock Market) to December
31, 1997 (assuming reinvestment of dividends, if any) among the Company, the
Standard & Poor's 500 Index and the Russell 2000 Index. The Company does not
believe that it can reasonably identify a peer group or published industry or
line-of-business index for comparison to the Company. Therefore, the Russell
2000 Index has been used by the Company for comparison purposes because it
represents growth companies with market capitalizations similar to the Company.
<TABLE>
<CAPTION>
COMPARISON OF FIVE MONTH CUMULATIVE TOTAL RETURN*
AMONG TRAVEL SERVICES INTERNATIONAL, INC., THE STANDARD
& POOR'S 500 INDEX AND THE RUSSELL 2000 INDEX
7/24/97 7/97 8/97 9/97 10/97 11/97 12/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TRAVEL SERVICES
INTERNATIONAL, INC. $100 $146 $174 $148 $160 $154 $170
- ---------------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 $100 $108 $102 $107 $104 $109 $111
- ---------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 $100 $105 $107 $115 $110 $109 $111
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Assumes $100 invested on 7/24/97 in stock or on 6/30/97 in index -
including reinvestment of dividends. Fiscal year ending December 31.
16
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION, INITIAL PUBLIC OFFERING AND FOUNDING COMPANY ACQUISITIONS
The Company was formed in April 1996. The Company was initially
capitalized by Alpine Consolidated, LLC, a consolidator of highly fragmented
businesses, of which Elan Blutinger and D. Fraser Bullock, Directors of the
Company, are Managing Directors, and Capstone Partners, LLC, a venture firm
specializing in consolidation transactions, of which Leonard Potter, who is an
Advisory Director to the Board, is a Managing Director. As a result of a
5,444.45 for one stock split effective on May 14, 1997, the 300 shares of Common
Stock initially issued by the Company to its founders totaled 1,633,335 shares
on the consummation of the initial public offering.
Prior to consummation of the initial public offering, TSGI Funding, LLC
("TSGI"), a Delaware limited liability company, extended loans to Travel
Services International, Inc. from time to time an amount equal to the legal,
accounting and other transactional costs, expenses and disbursements incurred by
the Company in connection with the acquisitions of the Founding Companies and
the initial public offering. The member managers of TSGI were Alpine
Consolidated, LLC and Capstone Partners, LLC. All amounts loaned by TSGI to
Travel Services International, Inc. were repaid, without interest, by the
Company on July 28, 1997, upon consummation of the initial public offering. Such
loans aggregated $950,000.
The aggregate consideration paid by the Company in the acquisitions of
the Founding Companies consisted of approximately $29.1 million in cash and
3,422,225 shares of Common Stock. In addition, certain non-operating assets with
a net book value of approximately $2.2 million were excluded from the
Combinations and retained by certain stockholders of the Founding Companies. The
following table sets forth the consideration paid to each of the Founding
Companies.
COMPANY CASH SHARES
------- ---- ------
(IN THOUSANDS)
Auto Europe................... $5,000 1,083,334
Cruises Only.................. 9,211 908,334
Travel 800.................... 9,241 902,778
Cruises Inc................... 3,431 333,334
D-FW Tours.................... 2,215 194,445
----- -------
Total...................... $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 Offering.
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<PAGE>
Prior to the initial public offering, substantially all the
indebtedness of the Founding Companies was personally guaranteed by their
respective stockholders or by entities controlled by such stockholders. In
connection with the Combinations, the Company assumed all remaining payment
obligations of such indebtedness. Indebtedness assumed as of July 28, 1997
includes the following: (i) Auto Europe's mortgage note payable to Key Bank of
$1,181,000, bearing interest at prime plus 1%, payable in monthly principal
installments of $7,000, maturing in August 2002; (ii) Auto Europe's mortgage
note payable to U.S. Small Business Administration of $735,000, bearing interest
at 7.25%, payable in monthly principal and interest payments of $6,000, maturing
in October 2016; (iii) Cruises Only mortgage payable of $1,947,000 to Barnett
Bank, bearing interest at 7.8% with monthly payments of $17,000 through October
2000 and thereafter bearing interest at a rate equal to the five year treasury
yield plus 1.9% or prime, as selected by Cruises Only through maturity in
October 2005; (iv) Cruises Only note payable to Barnett Bank of $603,000,
bearing interest at 8.5% with monthly payments of $12,000, maturing in 2002; and
(v) Cruises Only note payable to Barnett Bank of $842,000, bearing interest at
prime minus .25% with monthly payments of $20,000, maturing in 2001.
Subsequently to the Combinations, the Company repaid the mortgage to
the Small Business Administration as required upon the change in ownership, and
Cruises Only's obligations to Barnett Bank were modified to include a fixed
interest rate of 7.2% and to pledge as collateral Company funds totaling $3
million.
In connection with the Combinations, as a consideration for their
interests in the Founding Companies, certain directors and holders of more than
5% of the outstanding shares of the Company, together with their spouses or
trusts for the benefit of their immediate family members, received cash and
shares of Common Stock of the Company as follows:
CASH SHARES
---- ------
Alex Cecil................... $5,000,000 1,083,334
Robert G. Falcone............ $3,431,000 300,000
Wayne Heller................. $9,211,000 908,334
Susan Parker................. $9,241,000 902,778
John Pryzwara................ $2,215,000 194,445
OTHER TRANSACTIONS
Since 1990, Cruises Inc. has leased office space from Pioneer Park I
Company ("Pioneer") pursuant to a lease dated August 9, 1990, as subsequently
amended and supplemented. One of the principals of Pioneer is Michael Falcone,
the brother of Robert Falcone. The rent paid by Cruises Inc. to Pioneer during
1997 was $201,000. The lease terminates on February 28, 2006.
Prior to the initial public offering, 800 Ideas, Inc., the predecessor
to Travel 800 and a company controlled by Susan Parker, a former director and 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
18
<PAGE>
$300,000 to Auto Europe on December 31, 1995 and 1996 at an interest rate of
prime plus 1%. Auto Europe repaid this in February 1997.
During 1995, Auto Europe advanced $2.1 million to Alex Cecil who used
the advance to purchase an island off the coast of Maine. Subsequently he
contributed this island to Auto Europe in return for the cancellation of his
obligations on the advance. This island was not included in the assets of Auto
Europe acquired by the Company in July 1997.
Auto Europe has purchased computer equipment from The Seris II Group,
which is owned by Imad Khalidi, a director of the Company and Chief Executive
Officer of Auto Europe, and certain other employees of Auto Europe. Auto Europe
purchases the equipment at cost to The Seris II Group. Auto Europe purchased
$134,000 worth of computer supplies and equipment from The Seris II Group during
1997.
Prior to the initial public offering, Auto Europe extended a loan to
Imad Khalidi, a director of the Company and Chief Executive Officer of Auto
Europe. The indebtedness is evidenced by a note, the principal amount of which
is $326,000. The note bears interest at 6% and is payable on September 30, 1998.
19
<PAGE>
PROPOSAL TO APPROVE THE REINCORPORATION
OF THE COMPANY FROM DELAWARE TO FLORIDA
(PROPOSAL NO. 2)
INTRODUCTION
In April 1998, the Board of Directors approved a plan to change the
Company's state of incorporation from Delaware to Florida (the
"Reincorporation"). The Reincorporation will be effected by merging the Company
into a Florida corporation to be called TSI Florida, Inc. (or other similar name
based on availability at the time the Company incorporates such entity) ("TSI
Florida"), pursuant to an Agreement and Plan of Merger to be entered into
between the Company and TSI Florida (the "Merger Agreement"). A copy of the form
of Merger Agreement is set forth as Exhibit A to this Proxy Statement. At the
time of the Reincorporation, TSI Florida will be a wholly owned subsidiary of
the Company recently incorporated in Florida for purposes of effecting the
Reincorporation. Upon consummation of the Reincorporation, TSI Florida will
continue to exist as the surviving corporation of the merger and its name will
be changed to "Travel Services International, Inc." and it will register to
conduct business under the name "The Travel Company".
REASONS FOR THE REINCORPORATION
The principal reason for the Reincorporation is to reduce the Company's
expenses. Under the Delaware General Corporation Law (the "Delaware Act"), the
Company is currently required to pay Delaware an annual franchise tax of
approximately $150,000. By contrast, a corporation organized under the laws of
the State of Florida is currently required to pay an annual fee of $150, but is
not required to pay any franchise tax as required by Delaware. If the
Reincorporation is approved by the Company's stockholders and subsequently
effected, the Company will be required to pay a pro rata portion of the 1998
Delaware franchise tax based on the portion of the year during which the Company
was incorporated in Delaware.
While franchise tax savings is the principal reason for the proposed
Reincorporation, an additional reason for the Reincorporation is to conform the
Company's legal residence to its principal place of business. The Board of
Directors believes that having the Company's legal residence in Florida may have
certain advantages. For example, it could enable the Company to have a more
significant voice in the legislative process with respect to corporate and other
Florida laws directly affecting it. This opportunity can be important, as
corporations are substantially affected by changes in the legal and financial
environment in which they operate and by the variety of legislative and other
governmental actions which may be taken in response to such changes. In
addition, a corporation's state of incorporation is likely to be a litigation
forum from time to time, and litigation at a distance from the Company's
principal offices can result in significant inconveniences and added expense to
the Company.
With respect to matters of corporate law, the Board of Directors
believes that the Florida Business Corporation Act (the "Florida Act") will meet
the Company's business needs, and that the Delaware Act does not offer corporate
law advantages sufficient to warrant payment of the franchise tax burden that
results from maintaining a legal residence in Delaware. The Florida Act is a
comprehensive, modern and flexible statute based on the Revised Model Business
Corporation Act. It generally provides the flexibility in management of a
corporation and in the conduct of various business transactions that is
characteristic of the Delaware Act. See "Material Differences between Delaware
and Florida Corporate Laws."
20
<PAGE>
THE MERGER
The Reincorporation will be effected by a merger (the "Merger") of the
Company with and into TSI Florida, with TSI Florida being the surviving
corporation. The terms and conditions of the Merger are set forth in the form of
Merger Agreement included as Exhibit A to this Proxy Statement. The summary of
the terms and conditions of the Merger set forth below is qualified by reference
to the full text of the Merger Agreement. Upon consummation of the Merger, TSI
Florida will continue to exist and its name will be changed to Travel Services
International, Inc., and the Company will cease to exist. The Reincorporation
will change the legal domicile of the Company, but will not result in a change
in the principal offices, business, management, capitalization, assets or
liabilities of the Company. By operation of law, TSI Florida will succeed to all
of the assets and assume all of the liabilities of the Company. The Board of
Directors of TSI Florida will be comprised of the directors of the Company at
the time of the Merger, and the persons who are currently serving as executive
officers of the Company will continue to serve in the same capacities for TSI
Florida.
After the Merger, the rights of stockholders and the Company's
corporate affairs will be governed by the Florida Act and by the articles of
incorporation and bylaws of TSI Florida, instead of the Delaware Act and the
certificate of incorporation and bylaws of the Company. The material differences
are discussed below under "Material Differences between Delaware and Florida
Corporate Laws." A copy of the articles of incorporation of TSI Florida (the
"Florida Articles") is set forth as Exhibit B to this Proxy Statement. The
certificate of incorporation and bylaws of the Company and the proposed bylaws
of TSI Florida are available for inspection by stockholders of the Company at
the principal offices of the Company located at 220 Congress Park Drive, Delray
Beach, Florida 33445.
Upon the effectiveness of the Merger, each outstanding share of
Restricted Voting Common Stock will be automatically converted into one share of
the restricted voting common stock, par value $0.01 per share, of TSI Florida
(the "Florida Restricted Stock"), and each outstanding share of non-restricted
Common Stock will be automatically converted into one share of the
non-restricted common stock, par value $0.01 per share, of TSI Florida (the
"Florida non-restricted Stock" and together with the Florida Restricted Stock,
the "Florida Common Stock"). The number of shares to be designated as Florida
Restricted Stock in Article III of the Florida Articles will equal that number
of shares of Restricted Voting Common Stock that are outstanding as of the date
of the filing of the Florida Articles (which will be immediately prior to the
Merger). Further, the percentage (currently left blank) in Article III,
Paragraph 5 of the Florida Articles will be completed in such a manner to allow,
after December 31, 1999, TSI Florida to elect, by resolution of its Board of
Directors, to convert any outstanding shares of Florida Restricted Stock into
shares of Florida non-restricted Stock in the event that the aggregate number of
shares of (i) Florida Restricted Stock converted after the Merger and (ii)
Restricted Voting Common Stock converted prior to the Merger, equals or exceeds
80% of the original number of shares of Restricted Voting Common Stock issued by
the Company. This provision preserves the original conversion rights with
respect to the Restricted Voting Common Stock that were in existence prior to
the Reincorporation.
Each outstanding certificate representing shares of Common Stock will
continue to represent the same number of shares of Florida Common Stock and such
certificates will be deemed for all corporate purposes to evidence ownership of
shares of Florida Common Stock. IT WILL NOT BE NECESSARY FOR STOCKHOLDERS TO
EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR STOCK CERTIFICATES OF TSI
FLORIDA. The Florida Common Stock will continue to be listed on The Nasdaq Stock
Market, without interruption, and The Nasdaq Stock
21
<PAGE>
Market will consider the delivery of existing stock certificates of the Company
as constituting "good delivery" of shares of TSI Florida in stock transactions
effected after the Merger.
Following the Merger, the Company's compensation plans, including the
Plan described in Proposal No. 3 in this Proxy Statement, will be continued by
TSI Florida, and the options granted pursuant to such plans will automatically
be converted into options to purchase the same number of shares of Florida
Common Stock at the same exercise price and upon the same terms and conditions
as set forth in the options. The Company's other employee benefit plans and
arrangements will also be continued by TSI Florida upon the same terms and
conditions.
Consummation of the Merger is subject to the approval of the Company's
stockholders. The Merger is expected to become effective as soon as practicable
after stockholder approval is obtained and all other conditions to the Merger
have been satisfied, including the receipt of all consents, orders and approvals
necessary for consummation of the Merger and the listing of the shares of the
Florida Common Stock on The Nasdaq Stock Market. Prior to its effectiveness,
however, the Merger may be abandoned by the Board of Directors if, for any
reason, the Board of Directors determines that consummation of the Merger is no
longer advisable.
Appraisal rights are not available to stockholders of the Company with
respect to the proposed Merger.
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
A holder of Common Stock will not recognize gain or loss in respect of
the Common Stock as a result of the Reincorporation. The basis in a share of TSI
Florida will be the same as the basis in the corresponding share of the Company
immediately prior to the Reincorporation. The holding period in a share of TSI
Florida will include the period during which the corresponding share of the
Company was held, provided the corresponding share was held as a capital asset
at the time of the Reincorporation.
In addition, neither the Company nor TSI Florida will recognize gain or
loss as a result of the Reincorporation, and TSI Florida generally will succeed,
without adjustment, to the tax attributes of the Company. Because the Company is
based in Florida, it is already qualified to transact business in Florida and
pays Florida corporate income tax. Accordingly, changing the state of
incorporation of the Company is not expected to affect the amount of corporate
income and other taxes payable, other than eliminating liability for the
Delaware franchise tax.
Although the Company does not anticipate that state or local income tax
consequences to stockholders will vary from the federal income tax consequences
described above, stockholders should consult their own tax advisors as to the
effect of the Reincorporation under applicable state and local tax laws.
DESCRIPTION OF CAPITAL STOCK AND VOTING RIGHTS
The following statements are brief summaries of certain provisions
relating to the capital stock of TSI Florida that will be contained in its
articles of incorporation. The provisions relating to the capital stock of TSI
Florida described below, including voting rights with respect thereto, shall be
substantially the same as the provisions relating to the capital stock of the
Company contained in its current certificate of incorporation. The summary below
is qualified in its entirety by reference to the full text of the articles of
incorporation of TSI Florida included as Exhibit B to this Proxy Statement.
22
<PAGE>
COMMON STOCK. Holders of Florida Restricted Stock will be entitled to
four-tenths of a vote per share on each matter that is submitted to shareholders
for approval and holders of the TSI Florida non-restricted Stock will be
entitled to one vote per share on each matter that is submitted to shareholders
for approval. Shareholders of TSI Florida will not have cumulative voting
rights.
Holders of Florida Common Stock are entitled to receive dividends and
other distributions when, as and if declared by the Board of Directors of TSI
Florida out of funds legally available therefor, subject to the preferential
rights of the holders of Shares of preferred stock, par value $.01 per share
(the "Preferred Stock"), if any, of TSI Florida.
Shareholders of TSI Florida will have no preemptive or other rights to
subscribe for additional shares of Florida Common Stock or other securities of
TSI Florida.
PREFERRED STOCK. TSI Florida will be authorized to issue up to
1,000,000 shares of Preferred Stock. Although TSI Florida has no present plans
to issue any shares of Preferred Stock, shares of Preferred Stock may be issued
from time to time in one or more classes or series with such designations,
powers, preferences, rights, qualifications, limitations and restrictions as may
be fixed by the Board of Directors. The Board of Directors, without obtaining
stockholder approval, could issue the Preferred Stock with voting and/or
conversion rights and thereby dilute the voting power and equity of the holders
of Florida Common Stock and adversely affect the market price of such stock. The
issuance of Preferred Stock could also be used as an anti-takeover measure by
TSI Florida without any further action by the shareholders.
MATERIAL DIFFERENCES BETWEEN DELAWARE AND FLORIDA CORPORATE LAWS
The material differences between the Florida Act and the articles of
incorporation and bylaws of TSI Florida on the one hand, and the Delaware Act
and the certificate of incorporation and bylaws of the Company on the other, are
summarized below.
LIABILITIES OF DIRECTORS. The Florida Act generally provides that a
director is not personally liable for monetary damages to the corporation or any
other person for any act or omission as a director unless the director breached
or failed to perform his duties as a director and such breach or failure (1)
constitutes a violation of criminal law, unless the director had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful, (2) constitutes a transaction from which the director
derived an improper personal benefit, (3) results in an unlawful distribution,
(4) in a derivative action or an action by a shareholder, constitutes conscious
disregard for the best interests of the corporation or willful misconduct or (5)
in a proceeding other than a derivative action or an action by a shareholder,
constitutes recklessness or an act or omission which was committed in bad faith
or with malicious purpose or in a manner exhibiting wanton and willful disregard
of human rights, safety or property. The Delaware Act provides that a
corporation's certificate of incorporation may contain a provision which
eliminates or limits the personal liability of a director to the corporation or
its stockholders for monetary damages for a breach of fiduciary duty as a
director, except for a breach which (a) constitutes a breach of the director's
duty of loyalty to the corporation or its stockholders, (b) constitutes an act
or omission not in good faith or which involves intentional misconduct or a
knowing violation of law, (c) results in an unlawful distribution or (d) relates
to a transaction from which the director derived an improper personal benefit.
The Company's certificate of incorporation currently includes such a provision.
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<PAGE>
INDEMNIFICATION. Under both the Florida Act and the Delaware Act, a
corporation may generally indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement of any proceedings (other than derivative actions),
if they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in derivative actions, except
that indemnification may be made only for (1) expenses (including attorneys'
fees) and certain amounts paid in settlement, and (2) in the event the person
seeking indemnification has been adjudicated liable, amounts deemed proper, fair
and reasonable by the appropriate court upon application thereto. The Delaware
Act and the Florida Act both provide that to the extent that such persons have
been successful in defense of any proceeding, they must be indemnified by the
corporation against expenses actually and reasonably incurred in connection
therewith. Additionally, the Florida Act provides that, unless a corporation's
articles of incorporation provide otherwise, if a corporation does not so
indemnify such persons, they may seek, and a court may order, indemnification
under certain circumstances even if the board of directors or shareholders of
the corporation have determined that the persons are not entitled to
indemnification. The certificate of incorporation and bylaws of the Company and
the articles of incorporation and bylaws of TSI Florida generally provide that
directors and officers will be indemnified to the fullest extent permitted by
law.
The Company currently has indemnification agreements with each of its
directors and executive officers. These indemnification agreements will be
amended or replaced with similar indemnification agreements, as appropriate, to
conform the indemnification agreements to the provisions of the Florida Act.
DERIVATIVE ACTIONS. The Delaware Act provides that (1) a person may not
bring a derivative action unless the person was a stockholder of the corporation
at the time of the challenged transaction or unless the stock thereafter
devolved on such person by operation of law, (2) a complaint in a derivative
proceeding must allege with particularity the efforts made by a person, if any,
to obtain the desired action from the directors or comparable authority and the
reason for the failure to obtain such action or for not making the effort, (3) a
derivative proceeding may be settled or discontinued only with court approval
and (4) the court may dismiss a derivative proceeding if it finds that a
committee of independent directors have acted independently and in good faith
and have demonstrated a reasonable basis for its determination that the action
should be dismissed. The Florida Act provides for similar requirements, except
that (a) a complaint in a derivative proceeding must be verified and must allege
with particularity that a demand was made to obtain action by the board of
directors and that the demand was refused or ignored, (b) the court may dismiss
a derivative proceeding if the court finds that certain independent directors
(or a committee of independent persons appointed by such directors) have
determined in good faith after conducting a reasonable investigation that the
maintenance of the action is not in the best interests of the corporation and
(c) if an action was brought without reasonable cause, the court may require the
plaintiff to pay the corporation's reasonable expenses.
DISTRIBUTIONS AND REDEMPTIONS. A Florida corporation may make
distributions to shareholders as long as, after giving effect to such
distribution, (1) the corporation would be able to pay its debts as they become
due in the usual course of business, and (2) the corporation's total assets
would not be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise, which TSI Florida's articles of
incorporation do not) the amount that would be needed if the corporation were to
be dissolved at the time of the distribution to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Under the Florida Act, a corporation's redemption of
its own capital stock is deemed to be a distribution. A Delaware corporation
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<PAGE>
may pay dividends out of surplus or, if there is no surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. A Delaware corporation is generally prohibited from
redeeming any of its capital stock if the redemption would result in an
impairment of the corporation's capital.
SHAREHOLDER INSPECTION OF BOOKS AND RECORDS. Under the Florida Act, a
shareholder is entitled to inspect and copy the articles of incorporation,
bylaws, certain board and shareholder resolutions, certain written
communications to shareholders, a list of the names and business addresses of
the corporation's directors and officers, and the corporation's most recent
annual report, during regular business hours if the shareholder gives at least
five business days' prior written demand to the corporation. In addition, a
shareholder of a Florida corporation is entitled to inspect and copy certain
other books and records of the corporation during regular business hours if the
shareholder gives at least five business days' prior written demand to the
corporation and (1) the shareholder's demand is made in good faith and for a
proper purpose, (2) the demand describes with particularity its purpose and
records to be inspected or copied and (3) the requested records are directly
connected with such purpose. The Florida Act also provides that a corporation
may deny certain demands for inspection if such demand was made for an improper
purpose or if the demanding shareholder has, within two years preceding such
demand, sold or offered for sale any list of shareholders of the corporation or
any other corporation, has aided or abetted any person in procuring a list of
shareholders for such purpose or has improperly used any information secured
through any prior examination of the records of the corporation or any other
corporation. The provisions of the Delaware Act governing the inspection and
copying of a corporation's books and records are generally less restrictive than
those of the Florida Act. Specifically, the Delaware Act permits any stockholder
the right, during usual business hours, to inspect and copy the corporation's
stock ledger, shareholders list and other books and records for any proper
purpose upon written demand under oath stating the purpose thereof.
DISSENTERS' OR APPRAISAL RIGHTS. A shareholder of a Florida
corporation, with certain exceptions, has the right to dissent from, and obtain
payment of the fair value of his shares in the event of (1) a merger or
consolidation to which the corporation is a party, (2) a sale or exchange of all
or substantially all of the corporation's property other than in the usual and
ordinary course of business, (3) the approval of a control share acquisition,
(4) a statutory share exchange to which the corporation is a party as the
corporation whose shares will be acquired, (5) an amendment to the articles of
incorporation if the shareholder is entitled to vote on the amendment and the
amendment would adversely affect the shareholder and (6) any corporate action
taken to the extent that the articles of incorporation provide for dissenters'
rights with respect to such action. The Florida Act provides that unless a
corporation's articles of incorporation provide otherwise, which TSI Florida's
articles of incorporation do not, a shareholder does not have dissenters' rights
with respect to a plan of merger, share exchange or proposed sale or exchange of
property if the corporation's shares are either registered on a national
securities exchange, designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. (the "NASD"), or held of record by 2,000 or more shareholders.
A stockholder of a Delaware corporation generally is entitled to
certain appraisal rights in the event that the corporation is a party to certain
mergers or consolidations to which the stockholder did not consent. A Delaware
corporation's certificate of incorporation may also provide that dissenters'
rights are available with respect to any amendment to the certificate of
incorporation or any sale of all or substantially all of the corporation's
assets. The Company's certificate of incorporation does not contain such a
provision. Similar (but not identical) to the Florida Act, dissenters' rights do
not apply to a stockholder of a Delaware corporation if his shares were (1)
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the NASD, or (2)
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<PAGE>
held of record by more than 2,000 stockholders. Notwithstanding the foregoing,
however, under the Delaware Act, a stockholder does have dissenters' rights with
respect to such shares if the stockholder is required by the terms of the
agreement of merger or consolidation to accept anything for his shares other
than (a) shares of stock of the corporation surviving or resulting from the
merger or consolidation, (b) shares of stock of any other corporation which is
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the NASD or held of record
by more than 2,000 stockholders, (c) cash in lieu of fractional shares or (d)
any combination of the foregoing.
STAGGERED BOARD OF DIRECTORS. Both the Florida Act and the Delaware Act
permit a corporation to have a staggered board of directors divided into not
more than three classes. The certificate of incorporation of the Company and the
articles of incorporation of TSI Florida provide for a staggered board of
directors. The number of directors constituting the board of directors of the
Company and TSI Florida is determined by their respective boards of directors.
QUORUM FOR STOCKHOLDER MEETINGS. Under the Florida Act, unless
otherwise provided in a corporation's articles of incorporation, a majority of
shares entitled to vote on a matter constitutes a quorum at a meeting of
shareholders, but in no event may a quorum consist of less than one-third of the
shares entitled to vote on such matter. TSI Florida's articles of incorporation
do not include a provision altering the shareholder quorum requirement. The
Delaware Act is similar to the Florida Act, except that under the Delaware Act a
corporation's certificate of incorporation or bylaws may specify the number of
shares which constitutes a quorum at a meeting of stockholders, but in no event
may a quorum consist of less than one-third of the shares entitled to vote. The
Company's Bylaws provide that a quorum exists if a majority of the shares
entitled to vote is present at a meeting. Thus, the applicable quorum
requirements will not be changed by the Reincorporation.
STOCKHOLDER VOTING REQUIREMENTS. Under both the Florida Act and the
Delaware Act, directors are generally elected by a plurality of the votes cast
by the stockholders entitled to vote at a stockholders' meeting at which a
quorum is present, unless a greater number of affirmative votes is required by
the articles of incorporation (in the case of a Florida corporation) or the
certificate of incorporation or bylaws (in the case of Delaware corporation).
With respect to matters other than the election of directors, unless a greater
number of affirmative votes is required by the Florida Act or a Florida
corporation's articles of incorporation, if a quorum exists, action on any
matter generally is approved by the shareholders if the votes cast by the
holders of the shares represented at the meeting and entitled to vote on the
matter favoring the action exceed the votes cast opposing the action.
Accordingly, under the Florida Act, abstentions generally do not have the same
effect as a vote against a matter. Under the Delaware Act, unless otherwise
provided by the Delaware Act or a Delaware corporation's certificate of
incorporation or bylaws, if a quorum exists, action on a matter generally is
approved by the affirmative vote of a majority of the shares represented at a
meeting and entitled to vote on the matter. Accordingly, under the Delaware Act,
abstentions generally have the same effect as votes against a matter. Neither
the Company's certificate of incorporation nor its bylaws nor TSI Florida's
articles of incorporation contains a provision requiring a greater vote than
otherwise required by applicable law other than provisions requiring the
affirmative vote of at least 66 2/3% of the outstanding shares with respect to
actions relating to certain amendments to the Company's certificate of
incorporation or TSI Florida's articles of incorporation, as further described
below.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS. The Florida Act provides
that, unless otherwise provided in the articles of incorporation, actions which
would be required or permitted to be taken at an annual or special meeting of
shareholders may be taken by the written consent of the holders of shares
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<PAGE>
constituting not less than the minimum number of shares that would be necessary
to take such action at a meeting of shareholders at which all shares entitled to
vote thereon were present and voted. The Delaware Act contains a similar
provision. The bylaws of the Company and TSI Florida permit action by written
consent of stockholders consistent with the foregoing provisions of the Delaware
Act and the Florida Act, respectively.
TREASURY STOCK. A Delaware corporation may reacquire its own issued and
outstanding capital stock, and such capital stock is deemed treasury stock which
is authorized and issued but not outstanding. A Florida corporation may also
reacquire its own issued and outstanding capital stock; however, such capital
stock is deemed stock authorized but not issued or outstanding.
BOARD VACANCIES. The Florida Act provides that a vacancy on the board
of directors generally may be filled by an affirmative vote of a majority of the
remaining directors or by the shareholders, unless the articles of incorporation
provide otherwise. TSI Florida's articles of incorporation provide that only the
board of directors (and not the shareholders) may fill a vacancy on the board
(except that those vacancies resulting from removal from office by a vote of the
shareholders may be filled by a vote of shareholders at the same meeting at
which such removal occurs). Under the Delaware Act, a vacancy on the board of
directors generally may be filled by a majority of the remaining directors or in
the manner specified in a corporation's certificate of incorporation or bylaws.
The Company's certificate of incorporation and bylaws provide that a vacancy on
the board may be filled by a majority of directors in office (except that those
vacancies resulting from removal from office by a vote of the stockholders may
be filled by a vote of stockholders at the same meeting at which such removal
occurs).
REMOVAL OF DIRECTORS. The Florida Act provides that shareholders may
remove one or more directors with or without cause unless the articles of
incorporation provide that directors may be removed only for cause. The Florida
Act further provides that a director generally may be removed only if the number
of votes cast to remove him exceed the number of votes cast not to remove him.
TSI Florida's articles of incorporation provide that a director may be removed
by the shareholders only for cause. The Delaware Act provides that, except with
respect to corporations with classified boards or cumulative voting, a director
may be removed, with or without cause, by the holders of the majority of the
shares entitled to vote at an election of directors. For a corporation with a
board of directors that is classified, stockholders may effect such removal only
for cause. The Company's certificate of incorporation provides for a classified
board of directors and provides that directors may be removed by the
stockholders only for cause. Such removal provisions in both TSI Florida's
articles of incorporation and the Company's certificate of incorporation may
have certain anti-takeover effects.
AMENDMENTS TO CHARTER. An amendment to a Florida corporation's articles
of incorporation must be approved by the corporation's shareholders, except that
certain immaterial amendments specified in the Florida Act may be made by the
board of directors. Unless a specific section of the Florida Act or a Florida
corporation's articles of incorporation require a greater vote, an amendment to
a Florida corporation's articles of incorporation generally must be approved by
a majority of the votes entitled to be cast on the amendment. TSI Florida's
articles of incorporation do not include any provision requiring greater than a
majority of votes to amend its articles of incorporation, except that (unless
approved by a majority of the full board of directors) the vote of at least 66
2/3% of the outstanding shares is required to approve amendments to the
provisions relating to: (1) the existence of a staggered board, (2) director
vacancies and removals and (3) the power of the board of directors to make,
alter and repeal the bylaws. A Delaware corporation's certificate of
incorporation generally may be amended only if approved by a majority of the
outstanding stock entitled to vote thereon, however, the Company's certificate
of
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<PAGE>
incorporation has 66 2/3% approval requirements for such amendments to
provisions that are similar to TSI Florida's provisions which require 66 2/3%
approval.
SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of a Florida
corporation's shareholders may be called by its board of directors, by the
persons authorized to do so in its articles of incorporation or bylaws or by the
holders of not less than 10% of all votes entitled to be cast on any issue
proposed to be considered at the special meeting, unless a greater percentage
not to exceed 50% is required by the articles of incorporation. TSI Florida's
articles of incorporation contain a 50% requirement for the calling of special
meetings by the shareholders. TSI Florida's articles of incorporation also
provide that a special meeting may be called by the Chairman of the Board, or if
the Chairman is not present (or if there is none), by the President, by
resolution of a majority of the Board of Directors, or at the request in writing
of holders of shares having not less than 50% of all the votes entitled to vote
at such meeting. Special meetings of the stockholders of a Delaware corporation
may be called by the board of directors or by the persons authorized in the
corporation's certificate of incorporation or bylaws. The Company's bylaws
provide that a special meeting may be called by the Chairman of the Board or if
the Chairman is not present (or, if there is none), by the President and shall
be called by the President or Secretary at the request in writing of a majority
of the Board of Directors or at the request in writing of stockholders owning a
majority of the shares of capital stock of the Company entitled to vote at such
meeting.
AFFILIATED TRANSACTIONS. The Florida Act contains an affiliated
transactions statute which provides that certain transactions involving a
corporation and a shareholder owning 10% or more of the corporation's
outstanding voting shares (an "affiliated shareholder") must generally be
approved by the affirmative vote of the holders of two-thirds of the voting
shares other than those owned by the affiliated shareholder. The transactions
covered by the statute include, with certain exceptions, (1) mergers and
consolidations to which the corporation and the affiliated shareholder are
parties, (2) sales or other dispositions of substantial amounts of the
corporation's assets to the affiliated shareholder, (3) issuances by the
corporation of substantial amounts of its securities to the affiliated
shareholder, (4) the adoption of any plan for the liquidation or dissolution of
the corporation proposed by or pursuant to an arrangement with the affiliated
shareholder, (5) any reclassification of the corporation securities which has
the effect of substantially increasing the percentage of the outstanding voting
shares of the corporation beneficially owned by the affiliated shareholder and
(6) the receipt by the affiliated shareholder of certain loans or other
financial assistance from the corporation. These special shareholder approval
requirements do not apply in any of the following circumstances: (a) if the
transaction was approved by a majority of the corporation's disinterested
directors, (b) if the corporation did not have more than 300 shareholders of
record at any time during the preceding three years, (c) if the affiliated
shareholder has been the beneficial owner of at least 80% of the corporation's
outstanding voting shares for the past five years, (d) if the affiliated
shareholder is the beneficial owner of at least 90% of the corporation's
outstanding voting shares, exclusive of those acquired in a transaction not
approved by a majority of disinterested directors or (e) if the consideration
received by each shareholder in connection with the transaction satisfies the
"fair price" provisions of the statute. This statute applies to any Florida
corporation unless the original articles of incorporation or an amendment to the
articles of incorporation or bylaws contain a provision expressly electing not
to be governed by this statute. Such an amendment to the articles of
incorporation or bylaws must be approved by the affirmative vote of a majority
of disinterested shareholders and is not effective until 18 months after
approval. TSI Florida's articles of incorporation do not contain a provision
electing not to be governed by the statute and, accordingly, TSI Florida will be
governed by the statute.
The Delaware Act generally prohibits a stockholder owning 15% of more
of a Delaware corporation's outstanding voting stock (an "interested
stockholder") from engaging in certain business
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<PAGE>
combinations involving the corporation during the three years after the date the
person became an interested stockholder unless, among other things, (1) prior to
such date, the board of directors approved either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder, (2) upon the consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the stockholder owned at least
85% of the voting stock outstanding at the time the transaction commenced, (3)
on or subsequent to such date, the transaction is approved by the board of
directors and by the stockholders by a vote of two-thirds of the disinterested
outstanding voting stock, (4) the corporation's original certificate of
incorporation provides that the corporation shall not be governed by such
statute, (5) a majority of shares entitled to vote approve an amendment to the
corporation's certificate of incorporation or bylaws expressly electing not to
be governed by the statute (but such amendment will not be effective until one
year after it was adopted and will not apply to any business combination between
the corporation and any person who became an interested stockholder on or prior
to such adoption, (6) a stockholder becomes an interested stockholder
inadvertently and as soon as practicable divests itself of ownership of
sufficient shares so that the stockholder ceases to be an interested stockholder
or (7) the corporation does not have a class of voting stock that is (a) listed
on a national securities exchange, (b) authorized for quotation on an
inter-dealer quotation system of a national securities association, or (c) held
of record by more than 2,000 stockholders. The business combinations subject to
such restriction include, with certain exceptions, mergers, consolidations,
sales of assets and transactions benefiting the interested stockholder. The
Company's certificate of incorporation and bylaws do not contain provisions
electing not to be governed by this statute.
CONTROL SHARE ACQUISITIONS. The Florida Act also contains a control
share acquisition statute which provides that a person who acquires shares in an
issuing public corporation in excess of certain specified thresholds will
generally not have any voting rights with respect to such shares unless the
voting rights are approved by a majority of the shares entitled to vote,
excluding interested shares. This statute does not apply to acquisitions of
shares of a corporation if, prior to the pertinent acquisition of shares, the
acquisition is approved by the board of directors or the corporation's articles
of incorporation or bylaws provide that the corporation shall not be governed by
the statute. This statute also permits a corporation to adopt a provision in its
articles of incorporation or bylaws providing for the redemption by the
corporation of such acquired shares in certain circumstances. Unless otherwise
provided in the corporation's articles of incorporation or bylaws prior to the
pertinent acquisition of shares, in the event that such shares are accorded full
voting rights by the shareholders of the corporation and the acquiring
shareholder acquires a majority of the voting power of the corporation, all
shareholders who did not vote in favor of according voting rights to such
acquired shares are entitled to dissenters' rights to receive the fair value of
their shares as provided in the Florida Act. TSI Florida's articles of
incorporation and bylaws do not contain any provisions with respect to this
statute other than a provision in the bylaws allowing TSI Florida to redeem
control shares in its discretion as provided in the statute. Delaware does not
have any provision comparable to Florida's control share acquisition statute.
OTHER CONSTITUENCIES. The Florida Act provides that directors of a
Florida corporation, in discharging their duties to the corporation, may, in
addition to considering the effects of any corporate action on the shareholders
and the corporation, consider the social, economic, legal or other effects of
the corporate action on employees, suppliers and customers of the corporation or
its subsidiaries and the communities in which the corporation and its
subsidiaries and the communities in which the corporation and its subsidiaries
operate. Delaware does not have a comparable statutory provision.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL
TO APPROVE THE REINCORPORATION OF THE COMPANY FROM DELAWARE TO FLORIDA.
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PROPOSAL TO ADOPT AN AMENDED AND RESTATED
LONG-TERM INCENTIVE PLAN
(PROPOSAL NO. 3)
GENERAL
On May 9, 1997, the Board of Directors of the Company adopted the 1997
Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan was also
approved by the stockholders of the Company on May 9, 1997. Individual awards
under the Incentive Plan may take the form of one or more of: (i) either
incentive stock options ("ISO's") or non-qualified stock options ("NQSOs"); (ii)
stock appreciation rights ("SARSs"); (iii) restricted or deferred stock; (iv)
dividend equivalents; and (v) other awards not otherwise provided for, the value
of which is based in whole or in part upon the value of the Common Stock. Such
awards, together with any other right or interest granted to a participant under
the Incentive Plan, are termed "Awards." Awards may be granted to officers and
employees of the Company or any of its subsidiaries, including any director who
is also an employee, consultants and independent contractors of the Company or
any of its subsidiaries. The Compensation Committee of the Board of Directors
administers the Incentive Plan and generally selects the individuals who will
receive Awards and the terms and conditions of those Awards.
Under the Incentive Plan, as originally adopted, the maximum number of
common shares that could be subject to outstanding Awards, determined
immediately after the grant of any Award, could not exceed the greater of
900,000 shares or 12% of the aggregate number of shares of Common Stock
outstanding. On April 27, 1998, the Compensation Committee of the Company's
Board of Directors authorized an increase in the total number of shares that may
be subject to Awards to 15% of the aggregate number of shares of Common Stock
outstanding. The Compensation Committee believes that such increase is necessary
to have sufficient shares available for Awards as the Company continues to grow
through acquisitions and internally. As of June 19, 1998, 1,260,579 shares were
available for Awards under the Plan, of which Awards for 1,167,663 shares had
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.
At the same time, the Compensation Committee further authorized the
following amendments: (i) increasing the maximum annual per-participant
limitation under the Incentive Plan for Awards that may be settled by delivery
of shares, from 100,000 shares of Common Stock to a maximum of 250,000 shares of
Common Stock, and (ii) including share price appreciation as a criteria which
the Compensation Committee can use to establish performance objectives for
performance-based Awards under the Incentive Plan. There have been no other
modifications to the Incentive Plan. All of these amendments, including the
increase in the number of shares available for Awards under the Plan, are
subject to stockholder approval. The Incentive Plan, as so amended, is referred
to as the Amended and Restated Long-Term Incentive Plan or the "Plan."
Stockholder approval of the Plan is required (i) for purposes of
compliance with certain exclusions from the limitations of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") (which can limit the
deductibility of compensation expense over $1.0 million with respect to
compensation of certain top executives in certain circumstances), (ii) in order
for the Plan to be eligible under the "plan lender" exemption from the margin
requirements of Regulation G promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and (iii) by the rules of the Nasdaq
Stock Market.
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The price at which the Company's options are granted under the Plan is
equal to or in excess of the fair market value of the stock at the date of
grant. Generally, options granted under the Plan may remain outstanding and
vested options 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 Plan have maximum terms of not more than 10
years.
AWARDS GRANTED UNDER THE PLAN
During 1997, 922,250 non-qualified stock options were granted under the
Plan at exercise prices between $14 and $24 with a weighted average exercise
price of $15.12. At December 31, 1997, all of the options granted remained
outstanding as none were exercised or cancelled during the year. The weighted
average remaining contractual life of the outstanding options is nine years and
seven months. Substantially all of the options outstanding under the Plan vest
at the rate of 25% per year. In addition, an aggregate of 10,500 shares of
restricted stock have been awarded under the Plan to two individuals. None of
such shares of restricted stock have vested as of the date of this Proxy
Statement. No Awards other than options and restricted stock have been granted
under the Plan.
The Compensation Committee of the Board of Directors has granted an
additional option to Mr. Vittoria of 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 achievement of
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 Company's management believes that Awards granted under the Plan
will be awarded primarily to those persons who possess a capacity to contribute
significantly to the successful performance of the Company, including its
subsidiaries. Because persons to whom discretionary grants of Awards are to be
made are to be determined from time to time by the Compensation Committee or the
Board in their discretion, it is impossible at this time to indicate the precise
number, name or position of persons who will hereafter receive such Awards or
the number of shares for which Awards will be granted.
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<PAGE>
<TABLE>
<CAPTION>
The table below indicates, as of June 19, 1998, with respect to Awards
granted under the Incentive Plan (i) the number of options held by the persons
and groups indicated, and (ii) the value of such options as of such date (using
the closing price per share of Common Stock on June 19, 1998 of $34.00, as
reported on the Nasdaq Stock Market):
VALUE OF OPTIONS AT
JUNE 19, 1998 (1)
EXERCISABLE (E)
OPTION GRANTEES NUMBER OF OPTIONS UNEXERCISABLE (U)
- ------------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Joseph V. Vittoria 100,000 $500,000 (E)
Chairman and Chief Executive Officer $1,500,000 (U)
Michael J. Moriarty 75,000 $375,000 (E)
President and Chief Operating Officer $1,125,000 (U)
Jill M. Vales 50,000 $250,000 (E)
Senior Vice President and Chief Financial $750,000 (U)
Officer
Maryann Bastnagel 110,000 $550,000 (E)
Senior Vice President and Chief $1,650,000 (U)
Information Officer
Suzanne B. Bell 25,000 $125,000 (E)
Senior Vice President, General Counsel and $375,000 (U)
Secretary
Imad Khalidi 0 $0 (E)
CEO-Auto Europe $0 (U)
All current executive officers as a 560,000 $2,050,000 (E)
group (9 persons) $7,162,500 (U)
All current directors who are not executive 0 $0 (E)
officers as a group (7 persons) $0 (U)
All employees as a group, other than executive 628,847 $1,960,740 (E)
officers (366 persons) $7,399,160 (U)
</TABLE>
- ----------
(1) For purposes of this table, the value of each option equals the amount,
if any, by which the closing market price of a share of Common Stock on
June 19, 1998 ($34.00) exceeds the option's exercise price. The value is
determined without regard to whether the option is currently exercisable
or not.
DESCRIPTION OF PLAN
Set forth below is a brief description of the material terms of the
Plan. Reference is made to the complete text of the Plan attached as Exhibit C
and the description contained herein is qualified in its entirety by such
reference.
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The Plan authorizes the grant of options to purchase shares of the
Company's Common Stock and grants of certain other awards relating to Common
Stock, to employees, employee-directors and consultants of the Company and any
subsidiary corporation. In addition to options, stock appreciation rights
("SARs"), including limited SARs, restricted stock, deferred stock, Common Stock
granted as a bonus or in lieu of other awards, and other stock-based awards may
be granted under the Plan (collectively "Awards"). The Plan is neither subject
to the provisions of the Employee Retirement Income Security Act of 1974, as
amended, nor qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code").
ELIGIBILITY. Executive officers and other key employees of the Company
and its subsidiaries, including any director or officer who is also an employee,
and persons who provide consulting or other services to the Company or its
subsidiaries, are eligible to be granted Awards under the Plan. In addition,
persons who have been offered employment by the Company or its subsidiaries, and
persons employed by an entity that the Compensation Committee of the Board (the
"Committee") expects to become a subsidiary of the Company are eligible to be
granted Awards under the Plan. No member of the Committee may receive Awards
under the Plan. The Company estimates that, currently, approximately 500
individuals are eligible to receive Awards under the Plan.
PURPOSE. The purpose of the Plan is to advance the interests of the
Company and its stockholders by providing a means to attract, retain, and reward
eligible employees and consultants of the Company and its subsidiaries and to
enable such persons to acquire or increase a proprietary interest in the
Company, thereby promoting a closer identity of interests between such persons
and the Company's stockholders.
ADMINISTRATION. The Board has designated the Committee or such other
committee as may be designated by the Board to administer the Plan provided,
however, that, to the extent necessary to comply with Rule 16b-3 (as promulgated
by the SEC under Section 16 of the Securities Exchange Act of 1934 (the
"Exchange Act")), the Committee will consist of two or more directors, each of
whom is a "non-employee director" within the meaning of Rule 16b-3. Subject to
the express provisions of the Plan, the Committee has full authority, among
other things, (i) to select participants to whom Awards will be granted, and
(ii) to determine the type and number of Awards to be granted to each
participant, the number of shares of Stock to which an Award will relate, and
all other terms and conditions of Awards and matters relating to Awards
(including forfeiture conditions and terms of any mandatory or elective
deferral). In addition, the Committee may prescribe the form of Award
agreements, adopt rules and regulations under the Plan, interpret the Plan and
Award agreements, and make all other decisions under the Plan.
LIMITATION ON AWARDS. The number of shares of Common Stock that may be
subject to outstanding Awards granted under the Plan, determined immediately
after the grant of any Award, may not exceed 15% of the total number of shares
of outstanding Common Stock on the date of the grant. Subject to the adjustment
due to certain events (see "Changes in Common Stock" below), the number of
shares that may be delivered on upon the exercise of ISOs (as defined in
"Options" below) may not exceed 100,000 shares, and the number of shares that
may be delivered as restricted stock and deferred stock may not exceed 100,000
shares. In addition, subject to adjustment as noted above, (i) Awards relating
to no more than 250,000 shares of Common Stock may be granted to any one
individual in any calendar year, and (ii) with respect to Awards that may be
settled in cash (in whole or in part), no participant may be paid during any
calendar year cash amounts relating to such Awards that exceed the greater of
the fair market value of 250,000 shares of Common Stock at the date of grant or
the date of settlement of Award.
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OPTIONS. Options granted under the Plan are either incentive stock
options ("ISOs") intended to meet the requirements of Section 422 of the Code,
or Non-Qualified Stock Options ("NQSOs"), which are not intended to meet such
requirements. ISOs may be subject to certain special tax treatment (see "Federal
Income Tax Consequences" below). The terms of each option are determined by the
Committee, not inconsistent with the terms of the Plan, and are set forth in a
grant certificate or agreement which evidences the grant of an option. In
general, options are subject to the following terms and conditions:
/bullet/ With respect to a grant of ISOs and NQSOs, the exercise price
of such option is determined by the Committee in its discretion at the time of
the grant, provided, however, the exercise price of such options must not be
less than the fair market value of the Common Stock on the date of grant.
/bullet/ The time or times at which an option shall become exercisable
are determined by the Committee.
/bullet/ The Committee will determine the option term. Options are
generally exercisable for a period of three months following a participant's
termination of employment, but only to the extent such options were exercisable
as of the date of such termination. If, however, the Committee determines that
such termination is for cause, then all outstanding options will immediately
terminate.
/bullet/ Options that are ISOs will be subject to such additional terms
as may be necessary in order to qualify as ISOs.
/bullet/ The Committee will determine the methods by which the exercise
price for an option may be paid or deemed to be paid, the form of such payment,
including, without limitation, cash, stock, other Awards or awards granted under
other Company plans or other property (including notes or other contractual
obligations of participants to make payment on a deferred basis, such as through
"cashless exercise" arrangements, to the extent permitted by applicable law),
and the methods by which stock will be delivered or deemed to be delivered to
participants.
OTHER AWARDS. The following briefly describes the general terms of other
types of Awards that may be granted under the Plan:
/bullet/ SARS. SARs entitle the participant to receive the excess of
the fair market value of a share on the date of exercise or other specified date
over the grant price of the SAR. The grant price of an SAR is determined by the
Committee; such prices generally may not be less than 100% of the fair market
value of the stock at the date of grant. The maximum term, methods of exercise
and settlement and other terms of SARs will be determined by the Committee. In
addition, "Limited SARs" may also be granted, which are exercisable only in the
event of a "change in control", on such terms as the Committee may determine.
/bullet/ RESTRICTED STOCK. Restricted stock is an Award of shares which
may not be transferred and which may be forfeited in the event of certain
terminations of employment prior to the end of a restriction period. The
restriction period is established by the Committee. Such an Award would entitle
the participant to all of the rights of a stockholder of the issuer, including
the right to vote the shares and the right to receive any dividends thereon,
unless otherwise determined by the Committee.
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/bullet/ DEFERRED STOCK. An Award of deferred stock confers upon a
participant the right to receive shares at the end of a specified deferral
period, subject to possible forfeiture of the Award in the event of certain
terminations of employment prior to the end of a specified restriction period
(which need not be the same as the deferral period). Deferred stock Awards carry
no voting or dividend rights or other rights associated with stock ownership,
although dividend equivalents may be granted to provide for payments equivalent
to dividends.
/bullet/ OTHER STOCK-BASED AWARDS, BONUS STOCK, AND AWARDS IN LIEU OF
CASH OBLIGATIONS. The Plan authorizes the Committee to grant Awards that are
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to Common Stock. The Committee determines the
terms and conditions of such Awards, including consideration to be paid to
exercise Awards in the nature of purchase rights, the period during which Awards
will be outstanding, and forfeiture conditions and restrictions on Awards. In
addition, the Committee is authorized to grant shares as a bonus free of
restrictions, or to grant shares or other Awards in lieu of issuer obligations
to pay cash or deliver other property under other plans or compensatory
arrangements, subject to such terms as the Committee may specify.
FAIR MARKET VALUE. For purposes of the Plan, fair market value means,
generally, the fair market value of stock, Awards, or other property determined
by such methods or procedures as are established from time to time by the
Committee, provided that (i) if the Common Stock is listed on a national
securities exchange or quoted in an interdealer quotation system, the fair
market value of the stock on a given date will be based upon the last sales
price or, if unavailable, the average of the closing bid and asked prices per
share of the stock on such date (or, if there was no trading or quotation in the
Stock on such date, on the next preceding date on which there was trading or
quotation) as reported in the Wall Street Journal (or other reporting service
approved by the Committee), (ii) the fair market value of Common Stock subject
to options granted effective upon commencement of an initial public offering of
the Common Stock is the initial public offering price of the shares so issued
and sold in the initial public offering, as set forth in the first final
prospectus used in such offering (the provisions of clause (i) notwithstanding),
and (iii) the fair market value of Common Stock prior to the date of the initial
public offering will be as determined by the Board.
CHANGE IN CONTROL. The Committee may, in its sole discretion, grant
Awards which provide that all conditions and restrictions relating to the
continued performance of services or the achievement of performance objectives
with respect to the exercisability or full enjoyment of an Award immediately
lapse upon a "change in control" (as such term may be defined by the Committee
in its sole discretion).
NON-TRANSFERABILITY. Awards granted under the Plan are generally
nontransferable, except by will or the laws of descent and distribution or to a
beneficiary in the event of a participant's death and, if the Award carries a
right to exercise, such right may be exercised only by the participant or his
guardian or legal representative. Notwithstanding the foregoing, the Committee
may, in its discretion, authorize all or a portion of the Award (other than an
ISO) to be granted to a participant to be on terms which permit transfer by such
participant to (i) the spouse, children or grandchildren of such participant
("Immediate Family Members"), (ii) a trust or trusts for exclusive benefit of
such Immediate Family Members, or (iii) a partnership in which such Immediate
Family Members are the only partners, provided that (x) there may be no
consideration for any such transfer, (y) the Award agreement pursuant to which
such Awards are granted must be approved by the Committee and must expressly
provide for such transferability and (z) subsequent transfers of transferred
Awards shall be prohibited except those occurring by laws of descent and
distribution. Following transfer, any such
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Awards shall generally continue to be subject to the same terms and conditions
as were applicable immediately prior to transfer.
WITHHOLDING TAXES. The Company may withhold from any remuneration
otherwise payable to a participant, or require as a condition to delivery of any
shares of Common Stock pursuant to an Award that the participant remit to the
Company, an amount sufficient to satisfy any applicable tax withholding
requirements. The Committee may permit any withholding obligation to be
satisfied through the withholding of shares that would otherwise be issued in
connection with a grant or Award, or delivery of previously acquired shares of
Common Stock.
CHANGES IN COMMON STOCK. The Committee is authorized to adjust the
number and kind of shares (i) available under the Plan, (ii) subject to the
annual per-person limitation under the Plan, and (iii) subject to outstanding
Awards (including adjustments to exercise prices of options and other affected
terms of Awards) in the event that a dividend or other distribution (whether in
cash, Common Stock, or other property), recapitalization, forward or reverse
split, reorganization, merger, consolidation, spin-off, combination, repurchase,
or share exchange, or other similar corporate transaction or event affects the
Common Stock such that an adjustment is appropriate in order to prevent dilution
or enlargement of the rights of participants under the Plan. The Committee is
also authorized to adjust performance conditions and other terms of Awards in
response to these kinds of events or to changes in applicable laws, regulations,
or accounting principles.
AMENDMENTS TO THE PLAN AND OUTSTANDING AWARDS. The Board may amend or
terminate the Plan or the Committee's authority to grant Awards without the
consent of stockholders or participants, except stockholder approval must be
obtained if required by law or regulation or under the rules of any stock
exchange or automated quotation system on which the Common Stock is then listed
or quoted, and the Board may, in its discretion, seek stockholder approval in
any circumstance in which it deems such approval advisable. In a similar manner,
the Committee may waive any conditions or rights under, or amend or terminate,
any Award previously granted and any Award agreement. In either case, however,
no amendment or termination of the Plan or an Award may materially impair the
rights of a participant under an outstanding Award without the consent of such
participant.
OTHER PLAN PROVISIONS. No participant will have any rights of a
stockholder with respect to any shares of Common Stock covered by an option
until such participant has exercised the option, paid the option exercise price
and been issued such shares. The grant of an Award under the Plan shall not be
construed as conferring upon any participant a right to remain in the employ of
the Company or restrict the right of the Company to terminate the employee.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of the federal income tax
consequences of options granted under the Plan. It does not purport to be
complete. In particular, this general description does not discuss the
applicability of the income tax laws of any state or foreign country. The
following tax analysis is intended to summarize certain relevant income tax
consequences of the Plans in effect as of the date of this Proxy Statement.
Legislation may be enacted and regulations may be issued in the future which
create different tax consequences. In view of the individual nature of tax
consequences, individuals are urged to consult their own tax advisors regarding
the application of the tax laws to their particular situations.
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OPTIONS. There are no federal income tax consequences to participants
or the Company upon the grant of an option under the Plan. Generally, upon the
exercise of an NQSO, a participant will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the Common Stock at
the time of exercise over the exercise price of the option, and the Company
generally will be entitled to a corresponding federal income tax deduction. Upon
the sale of shares acquired by exercise of an option, the participant generally
will realize a capital gain or loss, but the Company is not entitled to any tax
deduction in connection with such sale. At present, capital gain on the sale of
property held for over 18 months is taxable at a maximum rate of 20%, capital
gain on the sale of property held for over one year but not for over 18 months
is taxable at a maximum rate of 28%, and capital gain on the sale of a property
held for one year or less is taxable at ordinary income rates.
Participants will not be subject to federal income taxation upon the
exercise of ISOs granted under the Plans, and the Company will not be entitled
to a federal income tax deduction by reason of such exercise. However, the
amount by which the fair market value of the shares at the time of exercise
exceeds the exercise price is a tax adjustment item for purposes of calculating
the participant's alternative minimum taxable income. A sale of shares acquired
by exercise of an ISO that does not occur within one year after the exercise or
within two years after the date of grant generally will result in the
recognition of capital gain or loss in the amount of the difference between the
amount realized on the sale and the exercise price, and the Company will not be
entitled to any tax deduction in connection with such sale.
If such sale occurs within one year from the date of exercise of the
ISO or within two years from the date of the ISO grant (a "disqualifying
disposition"), the participant generally will recognize ordinary compensation
income equal to the lesser of (i) the excess of the fair market value of the
shares on the date of exercise of the options over the exercise price, or (ii)
the excess of the amount realized on the sale of the shares over the exercise
price. In the case of a disqualifying disposition where a loss, if sustained,
would not be recognized (i.e., a gift), the participant will recognize ordinary
income equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price. Any amount realized on a disqualifying
disposition in excess of the amount treated as ordinary compensation income (or
any loss realized) will be a capital gain (or loss). The Company generally will
be entitled to a tax deduction on a disqualifying disposition corresponding to
the ordinary compensation income recognized by the participant.
If a participant were to pay the exercise price of either an NQSO or an
ISO by surrender of shares, the participant would not realize additional gain or
loss because of the surrender, but (i) the number of new shares received equal
to the number of shares surrendered will retain the existing tax basis and
holding period of the surrendered shares; (ii) if the option so exercised is an
NQSO, the amount of both the ordinary compensation income to be recognized by
the participant and the deduction to be taken by the Company will be equal to
the fair market value of the additional shares received (less any cash paid upon
such exercise), and the participant's tax basis in these additional shares will
be equal to their fair market value; (iii) if the option so exercised is an ISO,
the additional shares received will have a tax basis of zero unless cash was
paid to complete such exercise, in which case the participant's tax basis in the
additional shares received will be equal to the cash paid by the participant
upon such exercise; and (iv) the participant's holding period for the additional
shares received will begin on the day after the date of exercise for capital
gain purposes (regardless of the type of option being exercised) and will begin
upon the date of transfer of the additional shares to the participant for
purposes of the ISO period requirements. If, in exercising an ISO, a participant
were to surrender shares received upon exercise of an ISO before the applicable
incentive stock option holding
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period for such shares has been satisfied, the surrender of such shares will be
treated as a disqualifying disposition, and the rules governing such
dispositions, as described above, will apply to determine the amount of the
participant's income and the Company's deduction.
TAX CONSEQUENCES OF OTHER AWARDS. With respect to Awards other than
options, the tax consequences are as follows: The tax treatment of SARs
generally is the same as that of NQSOs (with the participant treated as paying
no exercise price). With respect to Awards that may be settled either in cash or
Common Stock or other property that is not restricted as to transferability or
not subject to a substantial risk of forfeiture, the participant must generally
recognize ordinary income equal to the cash or the fair market value of stock or
other property actually received. The Company will be entitled to a deduction
for the same amount. With respect to Awards involving Common Stock or other
property that is restricted as to transferability and subject to a substantial
risk of forfeiture, the participant must generally recognize ordinary income
equal to the fair market value of the shares or other property received at the
first time the shares or other property become transferable or not subject to a
substantial risk of forfeiture, whichever occurs earlier. The Company will be
entitled to a deduction in an amount equal to the ordinary income recognized by
the participant. A participant may elect to be taxed at the time of receipt of
shares or other property rather than upon lapse of restrictions on
transferability or the substantial risk of forfeiture by making an "83(b)
election" within 30 days of receipt, but if the participant subsequently
forfeits such shares or property he would not be entitled to any tax deduction,
including as a capital loss, for the value of the shares or property on which he
previously paid tax.
IMPORTANCE OF CONSULTING TAX ADVISER. The information set forth above
is a summary only and does not purport to be complete. In addition, the
information is based upon current federal income tax rules and therefore is
subject to change when those rules change. Moreover, because the tax
consequences to any optionee may depend on his or her particular situation, each
optionee should consult his or her tax adviser as to the Federal, state, local
and other tax consequences of the grant or exercise of an option or the
disposition of Common Stock acquired on exercise of an option.
SECURITIES ACT REGISTRATION; RESTRICTIONS ON RESALE
The Company has registered 1,650,000 shares of Common Stock available
for issuance under the Plan pursuant to a Registration Statement on Form S-8
filed with the Securities and Exchange Commission.
The federal securities laws prohibit sales of shares of Common Stock by
persons who possess material, non-public, adverse information about the Company.
Therefore, shares acquired under the Plan should not be resold by a participant
or other person who possesses such information. The Company from time to time
notifies employees who may have access to material, non-public information that
such persons should refrain from transactions involving Company stock for a
specified period. During such a period, a participant may be required to not
sell Common Stock or otherwise engage in transactions under the Plan, even if he
or she does not in fact possess material, non-public information regarding the
Company.
In addition, affiliates (as such term is defined in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act")) may resell the shares
acquired by them to the public only pursuant to Rule 144 or other applicable
exemptions from the registration requirements of the Securities Act, or pursuant
to a registration statement under the Securities Act (if any). Compliance with
Rule 144 for an affiliate's resales requires, among other things, that, at the
time of any offer or sale, certain information
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regarding the Company be on file with the SEC and up to date; that the
affiliate's shares be sold only through a broker or to a market maker; that the
amount of sales by the affiliate in any three-month period under Rule 144 be
limited as prescribed in the Rule; and that sales in excess of certain minimum
amounts be reported through the filing of a Form 144 with the SEC. Because
shares acquired under the Plan will generally not be considered to be
"restricted securities" for purposes of Rule 144, the one-year holding period
imposed by Rule 144(d) will generally not apply to resales of shares acquired
under the Plan.
Directors and officers of the Company are also subject to potential
short-swing profits liability under Section 16(b) of the Exchange Act with
respect to purchases and sales of shares of Common Stock. The Company intends
that grants of Awards under the Plans will be exempt from Section 16(b) by
virtue of Rule 16b-3 under the Exchange Act, and an exercise of an Award at a
time that the exercise price is not greater than the fair market value of Common
Stock will be exempt under Rule 16b-6(b). Under current SEC rules, sales of
shares in the open market will in most cases not be exempt, although the grant
and exercise of an option under the Plan in most cases will be exempt.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDED AND
RESTATED LONG-TERM INCENTIVE PLAN.
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RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Arthur Andersen LLP, independent public accountants, served
as the Company's independent public accountants for the calendar year ended
December 31, 1997. The Board of Directors, on the recommendation of the
Company's Audit Committee, has selected Arthur Andersen LLP as the Company's
independent public accountants for the 1998 calendar year. One or more
representatives of Arthur Andersen LLP are expected to be present at the Annual
Meeting. Such representatives will have the opportunity to make a statement if
they desire to do so and are expected to be available to respond to appropriate
questions from stockholders.
OTHER BUSINESS
The Board knows of no other business to be brought before the Annual
Meeting. If, however, any other business should properly come before the Annual
Meeting, the persons named in the accompanying proxy will vote proxies as in
their discretion they may deem appropriate, unless they are directed by a proxy
to do otherwise.
INFORMATION CONCERNING STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 of the Securities and Exchange Commission
promulgated under the Securities and Exchange Act of 1934, as amended, a
stockholder intending to present a proposal to be included in the Company's
proxy statement for the Company's 1999 Annual Meeting of Stockholders must
deliver a proposal in writing to the Company's principal executive offices no
later then February 28, 1999.
AVAILABILITY OF FORM 10-K ANNUAL REPORT
A copy of the Company's Annual Report, including its report on Form
10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission, is being mailed to stockholders simultaneously with this
Proxy Statement.
By Order of the Board of Directors,
JOSEPH V. VITTORIA
Chairman of the Board and
Chief Executive Officer
Delray Beach, Florida
July 6, 1998
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EXHIBIT A
FORM OF
AGREEMENT AND PLAN OF MERGER
THIS PLAN AND AGREEMENT OF MERGER, dated as of __________, 1998 (the
"Agreement"), is entered into between TSI FLORIDA, INC., a Florida corporation
("FLORIDA"), and TRAVEL SERVICES INTERNATIONAL, INC., a Delaware corporation
("DELAWARE").
A. DELAWARE has an aggregate authorized capital of 51,000,000 shares
of capital stock, consisting of (i) 50,000,000 shares of common stock, $0.01 par
value (the "Delaware Common Stock") of which 2,484,501 shares have been
designated as Restricted Voting Common Stock (the "Delaware Restricted Common
Stock") and 47,515,499 remain undesignated (the "Delaware Non-restricted Common
Stock"), and (ii) 1,000,000 shares of preferred stock, par value $0.01 per share
(the "Delaware Preferred Stock").
B. FLORIDA has an aggregate authorized capital of 51,000,000 shares
of capital stock, consisting of (i) 50,000,000 shares of common stock, $0.01 par
value (the "Florida Common Stock") of which ________ shares have been designated
as Restricted Voting Common Stock (the "Florida Restricted Common Stock") and
47,515,499 remain undesignated (the "Florida Non-restricted Common Stock"), and
(ii) 1,000,000 shares of preferred stock, par value $0.01 per share (the
"Florida Preferred Stock").
C. The respective Boards of Directors of FLORIDA and DELAWARE believe
that it is in the best interests of FLORIDA and DELAWARE and their respective
shareholders to merge DELAWARE with and into FLORIDA under and pursuant to the
provisions of this Agreement, the Delaware General Corporation Law and the
Florida Business Corporation Act.
AGREEMENT
In consideration of the Recitals and of the mutual agreements contained
in this Agreement, the parties hereto agree as set forth below.
1. MERGER. DELAWARE shall be merged with and into FLORIDA
(the "Merger").
2. EFFECTIVE DATE. The Merger shall become effective immediately upon
the later of the filing of this Agreement or a certificate of merger with the
Secretary of State of Delaware in accordance with the Delaware General
Corporation Law and the filing of articles of merger with the Secretary of State
of Florida in accordance with the Florida Business Corporation Act (the
"Articles of Merger"). The time of such effectiveness is hereinafter called the
"Effective Date."
3. SURVIVING CORPORATION. FLORIDA shall be the surviving corporation
of the Merger and shall continue to be governed by the laws of the State of
Florida. On the Effective Date, the separate corporate existence of DELAWARE
shall cease.
4. ARTICLES OF INCORPORATION. The Articles of Incorporation of
FLORIDA as it exists on the Effective Date shall be the Articles of
Incorporation of FLORIDA following the Effective Date, unless and until the same
shall thereafter be amended or repealed in accordance with the laws of
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the State of Florida; provided, however, that pursuant to and upon the filing of
the Articles of Merger the name of FLORIDA shall be changed to "Travel Services
International, Inc."
5. BYLAWS. The Bylaws of FLORIDA as they exist on the Effective Date
shall be the Bylaws of FLORIDA following the Effective Date, unless and until
the same shall be amended or repealed in accordance with the provisions thereof
and the laws of the State of Florida.
6. BOARD OF DIRECTORS AND OFFICERS. The members of the Board of
Directors and the officers of DELAWARE immediately prior to the Effective Date
shall be the members of the Board of Directors and the officers of FLORIDA
following the Effective Date, and such persons shall serve in such offices for
the terms provided by law or in Florida's Articles of Incorporation and Bylaws,
or until their respective successors are elected and qualified.
7. RETIREMENT OF OUTSTANDING FLORIDA STOCK. Upon the Effective Date,
each of the 100 shares of the FLORIDA Common Stock presently issued and
outstanding shall be retired, and no shares of FLORIDA Common Stock or other
securities of FLORIDA shall be issued in respect thereof.
8. CONVERSION OF OUTSTANDING DELAWARE STOCK. Upon the Effective Date,
each issued and outstanding share of Delaware Restricted Common Stock and all
rights in respect thereof shall be converted into one fully-paid and
nonassessable share of Florida Restricted Common Stock, and each certificate
representing shares of Delaware Restricted Common Stock shall for all purposes
be deemed to evidence the ownership of the same number of shares of Florida
Restricted Common Stock as are set forth in such certificate. After the
Effective Date, each holder of an outstanding certificate representing shares of
Delaware Restricted Common Stock may, at such shareholder's option, surrender
the same to FLORIDA's registrar and transfer agent for cancellation, and each
such holder shall be entitled to receive in exchange therefor a certificate
evidencing the ownership of the same number of shares of Florida Restricted
Common Stock as are represented by the DELAWARE certificate surrendered to
FLORIDA's registrar and transfer agent.
Upon the Effective Date, each issued and outstanding share of Delaware
Non-restricted Common Stock and all rights in respect thereof shall be converted
into one fully-paid and nonassessable share of Florida Non-restricted Common
Stock, and each certificate representing shares of Delaware Non-restricted
Common Stock shall for all purposes be deemed to evidence the ownership of the
same number of shares of Florida Non-restricted Common Stock as are set forth in
such certificate. After the Effective Date, each holder of an outstanding
certificate representing shares of Delaware Non-restricted Common Stock may, at
such shareholder's option, surrender the same to FLORIDA's registrar and
transfer agent for cancellation, and each such holder shall be entitled to
receive in exchange therefor a certificate evidencing the ownership of the same
number of shares of Florida Non-restricted Common Stock as are represented by
the DELAWARE certificate surrendered to FLORIDA's registrar and transfer agent.
9. CONDITIONS TO CONSUMMATION OF THE MERGER. Consummation of the
Merger is subject to the satisfaction prior to the Effective Date of the
following conditions: (a) This Agreement and the Merger shall have been adopted
and approved by the affirmative vote of the holders of a majority of the votes
represented by the shares of Delaware Common Stock outstanding on the record
date fixed for determining the shareholders of DELAWARE entitled to vote
thereon; (b) DELAWARE and FLORIDA shall have received all consents, orders and
approvals and satisfaction of all other requirements prescribed by law that are
necessary for the consummation of the Merger; and
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(c) The Nasdaq Stock Market shall have authorized the listing, upon official
notice of issuance, of the shares of Florida Common Stock to be issued or
delivered in connection with the Merger and such authorization shall be in full
force and effect on such date.
10. STOCK OPTIONS. Upon the Effective Date, each stock option and
other right to subscribe for or purchase shares of Delaware Common Stock shall
be converted into a stock option or other right to subscribe for or purchase the
same number of shares of Florida Common Stock and each certificate, agreement,
note or other document representing such stock option or other right to
subscribe for or purchase shares of Delaware Common Stock shall for all purposes
be deemed to evidence the ownership of a stock option or other right to
subscribe for or purchase shares of Florida Common Stock.
11. RIGHTS AND LIABILITIES OF FLORIDA. At and after the Effective
Date, and all in the manner of and as more fully set forth in Section 607.1106
of the Florida Business Corporation Act and Section 259 of the Delaware General
Corporation Law, the title to all real estate and other property, or any
interest therein, owned by each of DELAWARE and FLORIDA shall be vested in
FLORIDA without reversion or impairment; FLORIDA shall succeed to and possess,
without further act or deed, all estates, rights, privileges, powers and
franchises, both public and private, and all of the property, real, personal and
mixed, of each of DELAWARE and FLORIDA without reversion or impairment; FLORIDA
shall thenceforth be responsible and liable for all the liabilities and
obligations of each of DELAWARE and FLORIDA; any claim existing or action or
proceeding pending by or against DELAWARE or FLORIDA may be continued as if the
Merger did not occur or FLORIDA may be substituted for DELAWARE in the
proceeding; neither the rights of creditors nor any liens upon the property of
DELAWARE or FLORIDA shall be impaired by the Merger, and FLORIDA shall indemnify
and hold harmless the officers and directors of each of the parties hereto
against all such debts, liabilities and duties and against all claims and
demands arising out of the Merger.
12. TERMINATION. This Agreement may be terminated and abandoned by
action of the respective Board of Directors of DELAWARE or FLORIDA at any time
prior to the Effective Date, whether before or after approval by the
shareholders of either or both of the parties hereto.
13. AMENDMENT. The Boards of Directors of the parties hereto may
amend this Agreement at any time prior to the Effective Date; provided, that an
amendment made subsequent to the approval of this Agreement by the shareholders
of either of the parties hereto shall not: (a) change the amount or kind of
shares, securities, cash, property or rights to be received in exchange for or
on conversion of all or any of the shares of the parties hereto, (b) change any
term of the Articles of Incorporation of FLORIDA or (c) change any other terms
or conditions of this Agreement if such change would adversely affect the
holders of any capital stock of either party hereto.
14. INSPECTION OF AGREEMENT. Executed copies of this Agreement will
be on file at the principal place of business of FLORIDA at 220 Congress Park
Drive, Delray Beach, Florida 33445. A copy of this Agreement shall be furnished
by FLORIDA, on request and without cost, to any shareholder of either DELAWARE
or FLORIDA.
15. GOVERNING LAW. This Agreement shall in all respects be
construed, interpreted and enforced in accordance with and governed by the laws
of the State of Florida.
16. SERVICE OF PROCESS. On and after the Effective Date, FLORIDA
agrees that it may be served with process in Delaware in any proceeding for
enforcement of any obligation of DELAWARE or FLORIDA arising from the Merger.
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17. DESIGNATION OF DELAWARE SECRETARY OF STATE AS AGENT FOR SERVICE
OF PROCESS. On and after the Effective Date, FLORIDA irrevocably appoints the
Secretary of State of Delaware as its agent to accept service of process in any
suit or other proceeding to enforce the rights of any shareholders of DELAWARE
or FLORIDA arising from the Merger. The Delaware Secretary of State is requested
to mail a copy of any such process to FLORIDA at 220 Congress Park Drive, Delray
Beach, Florida 33445, Attention: President.
18. REMEDIES. Any rights and remedies belonging to DELAWARE or
FLORIDA and arising in connection with the actions contemplated by this
Agreement shall be pursued solely against DELAWARE or FLORIDA, and not against
their respective officers, directors or employees. In the event that any
officer, director or employee of DELAWARE or FLORIDA becomes involved in any
capacity in any action, proceeding or investigation in connection with the
Merger or this Agreement, DELAWARE and/or FLORIDA may advance to such person(s)
all reasonable legal and other expenses incurred in connection therewith and
shall also indemnify such person(s) against any losses, claims, damages or
liabilities to which such person(s) may become subject in connection with the
Merger or this Agreement, except to the extent that such indemnification is
prohibited by law.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement and Plan of Merger to be executed on its behalf by its officers duly
authorized, all as of the date first above written.
TSI FLORIDA, INC., a Florida corporation
By:
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
TRAVEL SERVICES INTERNATIONAL,
INC., a Delaware corporation
By:
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
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EXHIBIT B
FORM OF
ARTICLES OF INCORPORATION
OF
TSI FLORIDA, INC.
ARTICLE I- NAME
The name of the Corporation is TSI FLORIDA, INC. (hereinafter called
the "Corporation").
ARTICLE II - PURPOSES; DURATION
The purpose for which the Corporation is organized is to engage in the
transaction of any lawful business for which corporations may be incorporated
under the laws of the State of Florida. The Corporation shall exist perpetually
unless sooner dissolved according to law.
ARTICLE III - CAPITAL STOCK
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 51,000,000 shares of stock,
consisting of (i) 1,000,000 shares, designated as preferred stock, par value of
One Cent ($.01) per share (the "Preferred Stock"), and (ii) 50,000,000 shares,
designated as common stock, par value of One Cent ($.01) per share (the "Common
Stock"), _______ shares of which Common Stock is designated as restricted voting
common stock (the "Restricted Voting Common Stock"), subject to paragraph 5 of
this Article III.
A statement of the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of each class of
stock of the Corporation, is as follows:
PREFERRED STOCK. The Preferred Stock may be issued from time to time by
the Board of Directors as shares of one or more classes or series. Subject to
the provisions of these Articles of Incorporation and the limitations prescribed
by law, the Board of Directors is expressly authorized by adopting resolutions
to issue, fix or change the number of shares constituting any series or class
of, 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 (and whether
dividends are cumulative), dividend rates, terms of redemption (including
sinking fund provisions), a redemption price or prices, conversion rights and
liquidation preferences of, the shares constituting any class or series of the
Preferred Stock, without any further action or vote by the shareholders.
COMMON STOCK; RESTRICTED VOTING COMMON STOCK.
1. RIGHTS OF COMMON STOCK AND RESTRICTED VOTING COMMON STOCK. Except as
to differences in voting power as expressly provided in this Article III or as
otherwise required under the Florida Business Corporation Act, all shares of
Common Stock and Restricted Voting Common Stock shall have identical rights and
limitations, and the Common Stock and Restricted Voting Common Stock shall
otherwise be deemed for all purposes to constitute one class of stock of the
Corporation, including, without limitation, with respect to rights to receive
and share in dividends and other distributions by the Corporation.
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2. DIVIDENDS. Subject to the preferred rights of the holders of shares
of any class or series of Preferred Stock as provided by the Board of Directors
with respect to any such class or series of Preferred Stock, the holders of the
Common Stock and Restricted Voting Common Stock shall be entitled to receive, as
and when declared by the Board of Directors out of the funds of Corporation
legally available therefor, such dividends (payable in cash, stock or otherwise)
as the Board of Directors may from time to time determine, payable to
shareholders of record on such date or dates as shall be fixed for such purpose
by the Board of Directors in accordance with the Florida Business Corporation
Act. All dividends on Common Stock shall be paid pari passu with dividends on
Restricted Voting Common Stock.
3. LIQUIDATION. In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, after the distribution
or payment to the holders of shares of any class or series of Preferred Stock as
provided by the Board of Directors with respect to any such class or series of
Preferred Stock, the remaining assets of the Corporation available for
distribution to shareholders shall be distributed among and paid to the holders
of Common Stock and Restricted Voting Common Stock ratably in proportion to the
number of shares of Common Stock and Restricted Voting Common Stock held by them
respectively.
4. VOTING RIGHTS. Except as otherwise required by law, each holder of
shares of Common Stock shall be entitled to one vote for each share of Common
Stock standing in such holder's name on the books of the Corporation. Except as
otherwise required by law, each holder of shares of Restricted Voting Common
Stock shall be entitled to four-tenths of a vote for each share of Restricted
Voting Common Stock standing in such holder's name on the books of the
Corporation. The holders of Common Stock and Restricted Voting Common Stock
shall vote as a single class on all matters subject to a vote of such shares,
and the holders of shares of Restricted Voting Common Stock shall have no right
to vote separately as a class, except as specifically required otherwise by the
Florida Business Corporation Act.
5. CONVERSION OF THE RESTRICTED VOTING COMMON STOCK. Each share of
Restricted Voting Common Stock will automatically convert into Common Stock on a
share for share basis (a) in the event of any transfer or other disposition of
such share of Restricted Voting 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), (b) in the
event any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock of the Corporation, (c) in the event any person offers to
acquire 15% or more of the outstanding shares of Common Stock of the
Corporation, or (d) in the event that such a conversion is approved by a
majority of the aggregate number of votes which may be voted by the holders of
outstanding shares of Common Stock and Restricted Voting Common Stock entitled
to vote to approve such conversion. After December 31, 1999, the Corporation may
elect, by resolution of the Board of Directors, to convert any outstanding
shares of Restricted Voting Common Stock into shares of Common Stock in the
event ___% or more of the aggregate number of shares of Restricted Voting Common
Stock first issued by the Corporation have been converted into shares of Common
Stock. Upon such time, after the first issuance of shares of Restricted Voting
Common Stock, as all outstanding shares of Restricted Voting Common Stock shall
have been converted into shares of Common Stock or shall otherwise cease to be
outstanding, (i) the Corporation shall cease to have any authorized shares of
Restricted Voting Common Stock (but such occurrence shall in no event reduce or
change the aggregate total number of shares of the Corporation's authorized
Common Stock) and (ii) the Board of Directors may amend these Articles of
Incorporation as permitted under the Florida Business Corporation Act to delete
references and provisions relating to the Restricted Voting Common Stock.
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6. CALL OF SPECIAL MEETING OF SHAREHOLDERS. Except as otherwise
required by law, special meetings of shareholders of the Corporation may be
called only by (i) the Board pursuant to a resolution approved by a majority of
the entire Board, (ii) the Company's Chairman of the Board or, if the Chairman
is not present (or if there is no Chairman), by the Company's President or (iii)
the holders of not less than fifty (50) percent of all the votes entitled to be
cast on any issue proposed to be considered at the proposed special meeting, but
only if such holders first deliver to the Corporation's secretary one or more
written demands (which shall be signed and dated) describing the purpose or
purposes for which the special meeting is to be held, in accordance with all
requirements of applicable law.
ARTICLE IV - BOARD OF DIRECTORS
1. BOARD OF DIRECTORS. The Corporation's Board of Directors shall be
classified with respect to the time for which they shall severally hold office
into three classes, Class I, Class II and Class III, as nearly equal in number
as possible. The Class I Directors shall be elected to hold office for an
initial term expiring at the 2001 annual meeting of shareholders, the Class II
Directors shall be elected to hold office for an initial term expiring at the
1999 annual meeting of shareholders, and the Class III Directors shall be
elected to hold office for an initial term expiring at the 2000 annual meeting
of shareholders, with the members of each class of directors to hold office
until their successors have been duly elected and qualified. At each annual
meeting of shareholders, the successors to the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of shareholders held in the third year following the year of
their election and until their successors have been duly elected and qualified.
No director or class of directors may be removed from office by a vote of the
shareholders at any time except for cause.
2. VACANCIES. Any vacancy on the Board of Directors resulting from
death, retirement, resignation, disqualification or removal from office or other
cause, as well as any vacancy resulting from an increase in the number of
directors which occurs between annual meetings of the shareholders at which
directors are elected, shall be filled only by a majority vote of the remaining
directors then in office, though less than a quorum, except that those vacancies
resulting from removal from office by a vote of the shareholders may be filled
by a vote of the shareholders at the same meeting at which such removal occurs.
The directors chosen to fill vacancies shall hold office for a term expiring at
the end of the next annual meeting of shareholders at which the term of the
class to which they have been elected expires. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Notwithstanding the foregoing, whenever the holders of one or more
classes or series of Preferred Stock shall have the right, voting separately as
a class or series, to elect directors, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to Article III applicable thereto, and each director so elected shall
not be subject to the provisions of this Article IV unless otherwise provided
therein.
3. POWER TO MAKE, ALTER AND REPEAL BYLAWS. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, alter and repeal the Bylaws of the Corporation.
4. AMENDMENT AND REPEAL OF ARTICLE IV. Notwithstanding any provision of
these Articles of Incorporation and of the Bylaws, and notwithstanding the fact
that a lesser percentage may be permitted by Florida law, unless such action has
been approved by a majority vote of the full Board of
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Directors, the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of
the outstanding shares of the Corporation's capital stock entitled to vote
thereon, voting together as a single class, shall be required to amend or repeal
any provisions of this Article IV or to adopt any provision inconsistent with
this Article IV. In the event such action has been previously approved by a
majority vote of the full Board of Directors, the affirmative vote of a majority
of the outstanding shares entitled to vote thereon shall be sufficient to amend
or repeal any provision of this Article IV or adopt any provision inconsistent
with this Article IV.
ARTICLE V - INITIAL REGISTERED AGENT; CORPORATION ADDRESS
The street address of the initial registered office of the Corporation
is 1201 Hays Street, Tallahassee, Florida 32301. The name of the initial
registered agent of the Corporation at that address is Corporation Service
Company. The current mailing address of the principal place of business of the
Corporation is 220 Congress Park Drive, Suite 300, Delray Beach, Florida 33445.
ARTICLE VI - INCORPORATOR
The name and address of the incorporator of the Corporation is Suzanne
B. Bell, 220 Congress Park Drive, Suite 300, Delray Beach, Florida 33445.
ARTICLE VII - LIMITATION ON DIRECTOR LIABILITY
A director shall not be personally liable to the Corporation or the
holders of shares of capital stock or any other person for monetary damages for
any statement, vote, decision, act or failure to act, for which such liability
is precluded or otherwise eliminated under Section 607.0831 or otherwise under
the Florida Business Corporation Act. If the Florida Business Corporation Act is
hereafter amended to authorize the further or broader elimination or limitation
of the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Florida Business Corporation Act, as so amended. No repeal or modification
of this Article VII shall adversely affect any right of or protection afforded
to a director of the Corporation existing immediately prior to such repeal or
modification.
ARTICLE VIII - INDEMNIFICATION
The Corporation shall indemnify and may advance expenses to, and may
purchase and maintain insurance on behalf of, its officers and directors to the
fullest extent permitted by law as now or hereafter in effect. Without limiting
the generality of the foregoing, the Bylaws may provide for indemnification and
advancement of expenses to officers, directors, employees and agents on such
terms and conditions as the Board may from time to time deem appropriate or
advisable.
IN WITNESS WHEREOF, the incorporator has executed these Articles of
Incorporation of TSI FLORIDA, INC. this __________ day of ______________, 1998.
------------------------------
Suzanne B. Bell, Incorporator
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CONSENT OF REGISTERED AGENT
OF
TSI FLORIDA, INC.
The undersigned, Corporation Service Company, whose business address is
1201 Hays Street, Tallahassee, Florida 32301, hereby accepts appointment as the
initial registered agent of TSI FLORIDA, INC., a Florida corporation, and
accepts the obligations provided for in Section 607.0505, Florida Statutes.
CORPORATION SERVICE COMPANY
Registered Agent
By:
-----------------------------------
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EXHIBIT C
TRAVEL SERVICES INTERNATIONAL, INC.
AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN
1. PURPOSE. The purpose of the Amended and Restated Long Term Incentive
Plan (the "Plan") of Travel Services International, Inc., a Delaware corporation
(the "Company"), is to advance the interests of the Company and its stockholders
by providing a means to attract, retain and reward executive officers, employee
directors and other key employees and consultants of and service providers to
the Company and its subsidiaries (including consultants and others providing
services of substantial value) and to enable such persons to acquire or increase
a proprietary interest in the Company, thereby promoting a closer identity of
interests between such persons and the Company's stockholders.
2. DEFINITIONS. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together
with any other right or interest granted to a Participant under the Plan, are
termed "Awards." For purposes of the Plan, the following additional terms shall
be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract,
notice or other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or
trusts which have been designated by a Participant in his or her most recent
written beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended
from time to time. References to any provision of the Code shall be deemed to
include regulations thereunder and successor provisions and regulations thereto.
(e) "Committee" means the Compensation Committee of the Board,
or such other Board committee as may be designated by the Board to administer
the Plan; PROVIDED, HOWEVER, that, to the extent necessary to comply with Rule
16b-3, the Committee shall consist of two or more directors, each of whom is a
"non-employee director" within the meaning of Rule 16b-3.
(f) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time. References to any provision of the Exchange Act
shall be deemed to include rules thereunder and successor provisions and rules
thereto.
(g) "Fair Market Value" means, with respect to Stock, Awards,
or other property, the fair market value of such Stock, Awards, or other
property determined by such methods or procedures as shall be established from
time to time by the Committee, PROVIDED, HOWEVER, that (i) if the Stock is
listed on a national securities exchange or quoted in an interdealer quotation
system, the Fair Market Value of such Stock on a given date shall be based upon
the last sales price or, if unavailable, the average of the closing bid and
asked prices per share of the Stock on such date (or, if there was no
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trading or quotation in the Stock on such date, on the next preceding date on
which there was trading or quotation) as reported in the WALL STREET JOURNAL (or
other reporting service approved by the Committee), (ii) the "Fair Market Value"
of Stock subject to Options granted effective upon commencement of the Initial
Public Offering shall be the Initial Public Offering price of the shares so
issued and sold in the Initial Public Offering, as set forth in the first final
prospectus used in such offering (the provisions of clause (i) notwithstanding)
and (iii) the "Fair Market Value" of Stock prior to the date of the Initial
Public Offering shall be as determined by the Board of Directors.
(h) "Initial Public Offering" shall mean an initial public
offering of shares of Stock in a firm commitment underwriting registered with
the Securities and Exchange Commission in compliance with the provisions of the
Securities Act of 1933, as amended.
(i) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(j) "Participant" means a person who, at a time when eligible
under Section 5 hereof, has been granted an Award under the Plan.
(k) "Rule 16b-3" means Rule 16b-3, as from time to time in
effect and applicable to the Plan and Participants, promulgated by the
Securities and Exchange Commission under Section 16 of the Exchange Act.
(l) "Stock" means the Common Stock, $.01 par value, of the
Company and such other securities as may be substituted for Stock or such other
securities pursuant to Section 4.
3. ADMINISTRATION
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered
by the Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be
granted to each such person;
(iii) to determine the number of Awards to be
granted, the number of shares of Stock to which an Award will
relate, the terms and conditions of any Award granted under
the Plan (including, but not limited to, any exercise price,
grant price or purchase price, any restriction or condition,
any schedule for lapse of restrictions or conditions relating
to transferability or forfeiture, vesting, exercisability or
settlement of an Award, and waivers or accelerations thereof,
performance conditions relating to an Award (including
performance conditions relating to Awards not intended to be
governed by Section 7(f) and waivers and modifications
thereof), based in each case on such considerations as the
Committee shall determine), and all other matters to be
determined in connection with an Award;
(iv) to determine whether, to what extent and under
what circumstances an Award may be settled, or the exercise
price of an Award may be paid, in cash, Stock,
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other Awards, or other property, or an Award may be cancelled,
forfeited, or surrendered;
(v) to determine whether, to what extent and under
what circumstances cash, Stock, other Awards or other property
payable with respect to an Award will be deferred either
automatically, at the election of the Committee or at the
election of the Participant;
(vi) to prescribe the form of each Award Agreement,
which need not be identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind
such rules and regulations and appoint such agents as the
Committee may deem necessary or advisable to administer the
Plan;
(viii) to correct any defect or supply any omission
or reconcile any inconsistency in the Plan and to construe and
interpret the Plan and any Award, rules and regulations, Award
Agreement or other instrument hereunder; and
(ix) to make all other decisions and determinations
as may be required under the terms of the Plan or as the
Committee may deem necessary or advisable for the
administration of the Plan.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Unless
authority is specifically reserved to the Board under the terms of the Plan, the
Company's Certificate of Incorporation or Bylaws, or applicable law, the
Committee shall have sole discretion in exercising authority under the Plan. Any
action of the Committee with respect to the Plan shall be final, conclusive and
binding on all persons, including the Company, subsidiaries of the Company,
Participants, any person claiming any rights under the Plan from or through any
Participant and stockholders, except to the extent the Committee may
subsequently modify, or take further action not consistent with, its prior
action. If not specified in the Plan, the time at which the Committee must or
may make any determination shall be determined by the Committee, and any such
determination may thereafter by modified by the Committee (subject to Section
8(e)). The express grant of any specific power to the Committee, and the taking
of any action by the Committee, shall not be construed as limiting any power or
authority of the Committee. The Committee may delegate to officers or managers
of the Company or any subsidiary of the Company the authority, subject to such
terms as the Committee shall determine, to perform administrative functions and,
with respect to Participants not subject to Section 16 of the Exchange Act, to
perform such other functions as the Committee may determine, to the extent
permitted under Rule 16b-3, if applicable, and other applicable law.
(c) LIMITATION OF LIABILITY. Each member of the Committee
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him by any officer or other employee of the Company or
any subsidiary, the Company's independent certified public accountants or any
executive compensation consultant, legal counsel or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
its behalf shall, to the extent permitted by law, be
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fully indemnified and protected by the Company with respect to any such action,
determination or interpretation.
4. STOCK SUBJECT TO PLAN.
(a) AMOUNT OF STOCK RESERVED. The total amount of Stock that
may be subject to outstanding awards, determined immediately after the grant of
any Award, shall not exceed 15% of the total number of shares of Stock
outstanding at the time of such grant. Notwithstanding the foregoing, the number
of shares that may be delivered upon the exercise of ISOs shall not exceed
100,000, subject in each case to adjustment as provided in Section 4(c), and the
number of shares that may be delivered as Restricted Stock and Deferred Stock
(other than pursuant to an Award granted under Section 7(f)) shall not in the
aggregate exceed 100,000, PROVIDED, HOWEVER, that shares subject to ISOs,
Restricted Stock or Deferred Stock Awards shall not be deemed delivered if such
Awards are forfeited, expire or otherwise terminate without delivery of shares
to the Participant. If an Award valued by reference to Stock may only be settled
in cash, the number of shares to which such Award relates shall be deemed to be
Stock subject to such Award for purposes of this Section 4(a). Any shares of
Stock delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued shares, treasury shares or shares acquired in the market
for a Participant's Account.
(b) ANNUAL PER-PARTICIPANT LIMITATIONS. During any calendar
year, no Participant may be granted Awards that may be settled by delivery of
more than 250,000 shares of Stock, subject to adjustment as provided in Section
4(c). In addition, with respect to Awards that may be settled in cash (in whole
or in part), no Participant may be paid during any calendar year cash amounts
relating to such Awards that exceed the greater of the Fair Market Value of the
number of shares of Stock set forth in the preceding sentence at the date of
grant or the date of settlement of Award. This provision sets forth two separate
limitations, so that Awards that may be settled solely by delivery of Stock will
not operate to reduce the amount of cash-only Awards, and vice versa;
nevertheless, Awards that may be settled in Stock or cash must not exceed either
limitation.
(c) ADJUSTMENTS. In the event that the Committee shall
determine that any dividend or other distribution (whether in the form of cash,
Stock or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase or
exchange of Stock or other securities, liquidation, dissolution, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and kind of shares
of Stock reserved and available for Awards under Section 4(a), including shares
reserved for the ISOs and Restricted and Deferred Stock, (ii) the number and
kind of shares of Stock specified in the Annual Per-Participant Limitations
under Section 4(b), (iii) the number and kind of shares of outstanding
Restricted Stock or other outstanding Award in connection with which shares have
been issued, (iv) the number and kind of shares that may be issued in respect of
other outstanding Awards and (v) the exercise price, grant price or purchase
price relating to any Award (or, if deemed appropriate, the Committee may make
provision for a cash payment with respect to any outstanding Award). In
addition, the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, events described in the
preceding sentence) affecting the Company or any subsidiary or the financial
statements of the Company or any subsidiary, or in response to changes in
applicable laws, regulations, or accounting principles. The foregoing
notwithstanding, no adjustments shall be authorized under this Section 4(c) with
respect to ISOs or SARs in tandem therewith to the extent that such authority
would cause the Plan to fail to comply with Section 422(b)(1) of the Code, and
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no such adjustment shall be authorized with respect to Options, SARs or other
Awards subject to Section 7(f) to the extent that such authority would cause
such Awards to fail to qualify as "qualified performance-based compensation"
under Section 162(m)(4)(C) of the Code.
5. ELIGIBILITY. Executive officers and other key employees of the
Company and its subsidiaries, including any director or officer who is also such
an employee, and persons who provide consulting or other services to the Company
deemed by the Committee to be of substantial value to the Company, are eligible
to be granted Awards under the Plan. In addition, a person who has been offered
employment by the Company or its subsidiaries is eligible to be granted an Award
under the Plan, provided that such Award shall be cancelled if such person fails
to commence such employment, and no payment of value may be made in connection
with such Award until such person has commenced such employment. The foregoing
notwithstanding, no member of the Committee shall be eligible to be granted
Awards under the Plan.
6. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and conditions
set forth in this Section 6. In addition, the Committee may impose on any Award
or the exercise thereof such additional terms and conditions, not inconsistent
with the provisions of the Plan, as the Committee shall determine, including
terms requiring forfeiture of Awards in the event of termination of employment
or service of the Participant. Except as provided in Section 6(f), 6(h), or
7(a), or to the extent required to comply with requirements of the Delaware
General Corporation Law that lawful consideration be paid for Stock, only
services may be required as consideration for the grant (but not the exercise)
of any Award.
(b) OPTIONS. The Committee is authorized to grant Options
(including "reload" options automatically granted to offset specified exercises
of Options) on the following terms and conditions ("Options"):
(i) EXERCISE PRICE. The exercise price per share of
Stock purchasable under an Option shall be determined by the
Committee; PROVIDED, HOWEVER, that, except as provided in
Section 7(a), such exercise price shall be not less than the
Fair Market Value of a share on the date of grant of such
Option.
(ii) TIME AND METHOD OF EXERCISE. The Committee shall
determine the time or times at which an Option may be
exercised in whole or in part, the methods by which such
exercise price may be paid or deemed to be paid, the form of
such payment, including, without limitation, cash, Stock,
other Awards or awards granted under other Company plans or
other property (including notes or other contractual
obligations of Participants to make payment on a deferred
basis, such as through "cashless exercise" arrangements, to
the extent permitted by applicable law), and the methods by
which Stock will be delivered or deemed to be delivered to
Participants.
(iii) ISOS. The terms of any ISO granted under the
Plan shall comply in all respects with the provisions of
Section 422 of the Code, including but not limited to the
requirement that no ISO shall be granted more than ten years
after the effective date of the Plan. Anything in the Plan to
the contrary notwithstanding, no term of the Plan relating to
ISOs shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be exercised,
so as to disqualify either the Plan or any ISO under Section
422 of the Code, unless requested by the affected Participant.
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(iv) TERMINATION OF EMPLOYMENT. Unless otherwise
determined by the Committee, upon termination of a
Participant's employment with the Company and its
subsidiaries, such Participant may exercise any Options during
the three-month period following such termination of
employment, but only to the extent such Option was exercisable
immediately prior to such termination of employment.
Notwithstanding the foregoing, if the Committee determines
that such termination is for cause, all Options held by the
Participant shall terminate as of the termination of
employment.
(c) STOCK APPRECIATION RIGHTS. The Committee is authorized to
grant SARs on the following terms and conditions ("SARs"):
(i) RIGHT TO PAYMENT. An SAR shall confer on the
Participant to whom it is granted a right to receive, upon
exercise thereof, the excess of (A) the Fair Market Value of
one share of Stock on the date of exercise (or, if the
Committee shall so determine in the case of any such right
other than one related to an ISO, the Fair Market Value of one
share at any time during a specified period before or after
the date of exercise), over (B) the grant price of the SAR as
determined by the Committee as of the date of grant of the
SAR, which, except as provided in Section 7(a), shall be not
less than the Fair Market Value of one share of Stock on the
date of grant.
(ii) OTHER TERMS. The Committee shall determine the
time or times at which an SAR may be exercised in whole or in
part, the method of exercise, method of settlement, form of
consideration payable in settlement, method by which Stock
will be delivered or deemed to be delivered to Participants,
whether or not an SAR shall be in tandem with any other Award,
and any other terms and conditions of any SAR. Limited SARs
that may only be exercised upon the occurrence of a Change in
Control may be granted on such terms, not inconsistent with
this Section 6(c), as the Committee may determine. Limited
SARs may be either freestanding or in tandem with other
Awards.
(d) RESTRICTED STOCK. The Committee is authorized to grant
Restricted Stock on the following terms and conditions ("Restricted Stock"):
(i) GRANT AND RESTRICTIONS. Restricted Stock shall be
subject to such restrictions on transferability and other
restrictions, if any, as the Committee may impose, which
restrictions may lapse separately or in combination at such
times, under such circumstances, in such installments, or
otherwise, as the Committee may determine. Except to the
extent restricted under the terms of the Plan and any Award
Agreement relating to the Restricted Stock, a Participant
granted Restricted Stock shall have all of the rights of a
stockholder including, without limitation, the right to vote
Restricted Stock or the right to receive dividends thereon.
(ii) FORFEITURE. Except as otherwise determined by
the Committee, upon termination of employment or service (as
determined under criteria established by the Committee) during
the applicable restriction period, Restricted Stock that is at
that time subject to restrictions shall be forfeited and
reacquired by the Company; PROVIDED, HOWEVER, that the
Committee may provide, by rule or regulation or in any Award
Agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Restricted
Stock will be waived in whole or in part in the event of
termination resulting from specified causes.
C-6
<PAGE>
(iii) CERTIFICATES FOR STOCK. Restricted Stock
granted under the Plan may be evidenced in such manner as the
Committee shall determine. If certificates representing
Restricted Stock are registered in the name of the
Participant, such certificates may bear an appropriate legend
referring to the terms, conditions, and restrictions
applicable to such Restricted Stock, the Company may retain
physical possession of the certificate, and the Participant
shall have delivered a stock power to the Company, endorsed in
blank, relating to the Restricted Stock.
(iv) DIVIDENDS. Dividends paid on Restricted Stock
shall be either paid at the dividend payment date in cash or
in shares of unrestricted Stock having a Fair Market Value
equal to the amount of such dividends, or the payment of such
dividends shall be deferred and/or the amount or value thereof
automatically reinvested in additional Restricted Stock, other
Awards, or other investment vehicles, as the Committee shall
determine or permit the Participant to elect. Stock
distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall
be subject to restrictions and a risk of forfeiture to the
same extent as the Restricted Stock with respect to which such
Stock or other property has been distributed, unless otherwise
determined by the Committee.
(e) DEFERRED STOCK. The Committee is authorized to grant
Deferred Stock subject to the following terms and conditions ("Deferred Stock"):
(i) AWARD AND RESTRICTIONS. Delivery of Stock will
occur upon expiration of the deferral period specified for an
Award of Deferred Stock by the Committee (or, if permitted by
the Committee, as elected by the Participant). In addition,
Deferred Stock shall be subject to such restrictions as the
Committee may impose, if any, which restrictions may lapse at
the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments or
otherwise, as the Committee may determine.
(ii) FORFEITURE. Except as otherwise determined by
the Committee, upon termination of employment or service (as
determined under criteria established by the Committee) during
the applicable deferral period or portion thereof to which
forfeiture conditions apply (as provided in the Award
Agreement evidencing the Deferred Stock), all Deferred Stock
that is at that time subject to such forfeiture conditions
shall be forfeited; PROVIDED, HOWEVER, that the Committee may
provide, by rule or regulation or in any Award Agreement, or
may determine in any individual case, that restrictions or
forfeiture conditions relating to Deferred Stock will be
waived in whole or in part in the event of termination
resulting from specified causes.
(f) BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS. The
Committee is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of Company obligations to pay cash under other plans or
compensatory arrangements. Stock or Awards granted hereunder shall be subject to
such other terms as shall be determined by the Committee.
(g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant
Dividend Equivalents entitling the Participant to receive cash, Stock, other
Awards or other property equal in value to dividends paid with respect to a
specified number of shares of Stock ("Dividend Equivalents"). Dividend
Equivalents may be awarded on a free-standing basis or in connection with
another Award.
C-7
<PAGE>
The Committee may provide that Dividend Equivalents shall be paid
or distributed when accrued or shall be deemed to have been reinvested in
additional Stock, Awards or other investment vehicles, and subject to such
restrictions on transferability and risks of forfeiture, as the Committee may
specify.
(h) OTHER STOCK-BASED AWARDS. The Committee is authorized,
subject to limitations under applicable law, to grant such other Awards that may
be denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries ("Other Stock Based Awards"). The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS.
Awards granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with or in substitution for
any other Award granted under the Plan or any award granted under any other plan
of the Company, any subsidiary or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive payment
from the Company or any subsidiary. Awards granted in addition to or in tandem
with other Awards or awards may be granted either as of the same time as or a
different time from the grant of such other Awards or awards.
(b) TERM OF AWARDS. The term of each Award shall be for such
period as may be determined by the Committee; PROVIDED, HOWEVER, that in no
event shall the term of any ISO or an SAR granted in tandem therewith exceed a
period of ten years from the date of its grant (or such shorter period as may be
applicable under Section 422 of the Code).
(c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the
Plan and any applicable Award Agreement, payments to be made by the Company or a
subsidiary upon the grant, exercise or settlement of an Award may be made in
such forms as the Committee shall determine, including, without limitation,
cash, Stock, other Awards or other property, and may be made in a single payment
or transfer, in installments or on a deferred basis. Such payments may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments denominated
in Stock.
(d) LOAN PROVISIONS. With the consent of the Committee, and
subject at all times to, and only to the extent, if any, permitted under and in
accordance with, laws and regulations and other binding obligations or
provisions applicable to the Company, the Company may make, guarantee or arrange
for a loan or loans to a Participant with respect to the exercise of any Option
or other payment in connection with any Award, including the payment by a
Participant of any or all federal, state or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee
C-8
<PAGE>
shall have full authority to decide whether to make a loan or loans hereunder
and to determine the amount, terms and provisions of any such loan or loans,
including the interest rate to be charged in respect of any such loan or loans,
whether the loan or loans are to be with or without recourse against the
borrower, the terms on which the loan is to be repaid and conditions, if any,
under which the loan or loans may be forgiven.
(e) PERFORMANCE-BASED AWARDS. The Committee may, in its
discretion, designate any Award the exercisability or settlement of which is
subject to the achievement of performance conditions as a performance-based
Award subject to this Section 7(e), in order to qualify such Award as "qualified
performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder. The performance objectives for an Award subject to this
Section 7(e) shall consist of one or more business criteria and a targeted level
or levels of performance with respect to such criteria, as specified by the
Committee but subject to this Section 7(e). Performance objectives shall be
objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of
the Code. Business criteria used by the Committee in establishing performance
objectives for Awards subject to this Section 7(e) shall be selected exclusively
from among the following:
(1) Annual return on capital;
(2) Annual earnings per share or share price
appreciation;
(3) Annual cash flow provided by operations;
(4) Changes in annual revenues; and/or
(5) Strategic business criteria, consisting of
one or more objectives based on meeting
specified revenue, market penetration,
geographic business expansion goals, cost
targets, and goals relating to acquisitions
or divestitures.
The levels of performance required with respect to such business criteria may be
expressed in absolute or relative levels. Achievement of performance objectives
with respect to such Awards shall be measured over a period of not less than one
year nor more than five years, as the Committee may specify. Performance
objectives may differ for such Awards to different Participants. The Committee
shall specify the weighting to be given to each performance objective for
purposes of determining the final amount payable with respect to any such Award.
The Committee may, in its discretion, reduce the amount of a payout otherwise to
be made in connection with an Award subject to this Section 7(e), but may not
exercise discretion to increase such amount, and the Committee may consider
other performance criteria in exercising such discretion. All determinations by
the Committee as to the achievement of performance objectives shall be in
writing. The Committee may not delegate any responsibility with respect to an
Award subject to this Section 7(e).
(f) ACCELERATION UPON A CHANGE OF CONTROL. Pursuant to the
terms of an individual Award Agreement, the Committee, may in its sole
discretion, grant Awards which provide for adjustment (as determined by the
Committee, in its sole discretion) in the event of a "change of control" (as
such term may be defined by the Committee, in its sole discretion).
C-9
<PAGE>
8. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall
not be obligated to issue or deliver Stock in connection with any Award or take
any other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system or
any other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
(b) LIMITATIONS ON TRANSFERABILITY. Awards and other rights
under the Plan will not be transferable by a Participant except by will or the
laws of descent and distribution or to a Beneficiary in the event of the
Participant's death, and, if exercisable, shall be exercisable during the
lifetime of a Participant only by such Participant or his guardian or legal
representative. Notwithstanding the foregoing, the Committee may, in its
discretion, authorize all or a portion of the Award (other than an ISO) to be
granted to a Participant to be on terms which permit transfer by such
Participant to (i) the spouse, children or grandchildren of such Participant
("Immediate Family Members"), (ii) a trust or trusts for exclusive benefit of
such Immediate Family Members, or (iii) a partnership in which such Immediate
Family Members are the only partners, provided that (x) there may be no
consideration for any such transfer, (y) the Award agreement pursuant to which
such Awards are granted must be approved by the Committee and must expressly
provide for transferability in a manner consistent with this Section, and (z)
subsequent transfers of transferred Awards shall be prohibited except those
occurring by laws of descent and distribution. Following transfer, any such
Awards shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that for purposes of the
Plan, the term Participant shall be deemed to refer to the transferee. The
events of termination of employment set forth in Section 6 hereof shall continue
to be applied with respect to the original Participant, following which the
options shall be exercisable by the transferee only to the extent and for the
periods specified in Section 6. Awards and other rights under the Plan may not
be pledged, mortgaged, hypothecated or otherwise encumbered, and shall not be
subject to the claims of creditors.
(c) NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the
Plan nor any action taken hereunder shall be construed as giving any employee or
other person the right to be retained in the employ or service of the Company or
any of its subsidiaries, nor shall it interfere in any way with the right of the
Company or any of its subsidiaries to terminate any employee's employment or
other person's service at any time.
(d) TAXES. The Company and any subsidiary is authorized to
withhold from any Award granted or to be settled, any delivery of Stock in
connection with an Award, any other payment relating to an Award or any payroll
or other payment to a Participant amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and
to take such other action as the Committee may deem advisable to enable the
Company and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other property and to make
cash payments in respect thereof in satisfaction of a Participant's tax
obligations.
C-10
<PAGE>
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend,
alter, suspend, discontinue or terminate the Plan or the Committee's authority
to grant Awards under the Plan without the consent of stockholders or
Participants, except that any such action shall be subject to the approval of
the Company's stockholders at or before the next annual meeting of stockholders
for which the record date is after such Board action if such stockholder
approval is required by any federal or state law or regulation or the rules of
any stock exchange or automated quotation system on which the Stock may then be
listed or quoted, and the Board may otherwise, in its discretion, determine to
submit other such changes to the Plan to stockholders for approval; PROVIDED,
HOWEVER, that, without the consent of an affected Participant, no such action
may materially impair the rights of such Participant under any Award theretofore
granted to him. The Committee may waive any conditions or rights under, or
amend, alter, suspend, discontinue, or terminate, any Award theretofore granted
and any Award Agreement relating thereto; PROVIDED, HOWEVER, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant under such Award.
(f) NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant
or employee shall have any claim to be granted any Award under the Plan, and
there is no obligation for uniformity of treatment of Participants and
employees. No Award shall confer on any Participant any of the rights of a
stockholder of the Company unless and until Stock is duly issued or transferred
and delivered to the Participant in accordance with the terms of the Award or,
in the case of an Option, the Option is duly exercised.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award shall give any
such Participant any rights that are greater than those of a general creditor of
the Company; PROVIDED, HOWEVER, that the Committee may authorize the creation of
trusts or make other arrangements to meet the Company's obligations under the
Plan to deliver cash, Stock, other Awards, or other property pursuant to any
Award, which trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the
Plan by the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other compensatory arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
(i) NO FRACTIONAL SHARES. No fractional shares of Stock shall
be issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards, or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(j) COMPLIANCE WITH CODE SECTION 162(M). It is the intent of
the Company that employee Options, SARs and other Awards designated as Awards
subject to Section 7(e) shall constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m). Accordingly, if any
provision of the Plan or any Award Agreement relating to such an Award does not
comply or is inconsistent with the requirements of Code Section 162(m), such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements, and no provision shall be deemed to confer upon
the Committee or any other person discretion to increase the amount of
compensation otherwise payable in connection with any such Award upon attainment
of the performance objectives.
C-11
<PAGE>
(k) GOVERNING LAW. The validity, construction and effect of
the Plan, any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of laws, and applicable federal
law.
(l) EFFECTIVE DATE; PLAN TERMINATION. The Travel Services
International Long-Term Incentive Plan initially shall became effective as of
May 9, 1997. As amended and restated hereby, the Plan shall become effective as
of April 29, 1998, the date of its adoption by the Board, subject to stockholder
approval, and shall continue in effect until terminated by the Board.
C-12
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned, a stockholder of TRAVEL SERVICES INTERNATIONAL, INC.,
a Delaware corporation (the "Company"), hereby appoints Joseph V. Vittoria and
Suzanne B. Bell, and each of them, as proxies for the undersigned, each with
full power of substitution, and hereby authorizes them to represent and to vote,
as designated below, all of the shares of Common Stock of the Company that the
undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Company to be held at the Boca Raton Marriott of Boca Center, 5150 Town Center
Circle, Boca Raton, Florida 33486, on July 28, 1998 at 9:00 a.m., local time,
and at any adjournments or postponements thereof.
The Board of Directors unanimously recommends a vote FOR the election
of all the director nominees listed in proposal 1 and FOR the approval of each
of proposals 2 and 3.
1. ELECTION OF DIRECTORS
NOMINEES: ELAN J. BLUTINGER D. FRASER BULLOCK TOMMASO ZANZOTTO
VOTE FOR all nominees listed, WITHHOLD AUTHORITY TO
except authority to vote VOTE for all nominees
withheld for the following
nominees (if any)__________.
2. Vote for the proposal to approve the reincorporation of the Company from
Delaware to Florida.
VOTE FOR VOTE AGAINST ABSTAIN
3. Vote for the proposal to approve the Amended and Restated Long-Term Incentive
Plan.
VOTE FOR VOTE AGAINST ABSTAIN
4. Upon such other matters as may properly come before such Annual Meeting
or any adjournments or postponements thereof. In their discretion, the
proxies are authorized to vote upon such other business as may properly
come before the Annual Meeting and any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" ALL OF THE PROPOSALS.
(SEE REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
The undersigned hereby acknowledges receipt of (1) the Notice of Annual
Meeting for the 1998 Annual Meeting and related Proxy Statement, and (2) the
Company's 1997 Annual Report to Stockholders.
Dated: _____________________ , 1998
----------------------------------
(Signature)
----------------------------------
(Signature, if held jointly)
IMPORTANT: Please sign exactly as your name appears hereon and mail it
promptly even though you now plan to attend the meeting. When signing
as attorney, executor, administrator, trustee or guardian, please give
full title as such. When shares are held by joint tenants, both should
sign. If a corporation, please sign in full corporate name by president
or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY PROMPTLY USING THE ENVELOPE
PROVIDED. NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
EXHIBIT 99.3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-29296
TRAVEL SERVICES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2030324
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Congress Park Drive
Delray Beach, Florida 33445
(Address of principal executive offices)
(Zip Code)
(561) 266-0860
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
The number of shares outstanding of the issuer's Common Stock, par value
$.01 per share, as of November 9, 1998, was 13,359,695.
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
FORM 10-Q
INDEX
PAGE
<S> <C>
PART I FINANCIAL INFORMATION...................................................................3
Item 1. Consolidated Financial Statements.......................................................3
Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998 .............3
Consolidated Statements of Income -- Historical for the Three Months Ended
September 30, 1997 and 1998 and the Nine Months Ended September 30, 1997 and 1998.......4
Consolidated Statements of Income -- Pro Forma for the Three Months Ended
September 30, 1997 and 1998 and Nine Months Ended September 30, 1997 and 1998...........5
Consolidated Statements of Cash Flows -- Historical for the Nine Months
Ended September 30, 1997 and 1998.......................................................6
Notes to Consolidated Financial Statements..............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................11
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................................20
Item 2. Changes in Securities and Use of Proceeds..............................................20
Item 4. Submission of Matters to a Vote of Security Holders....................................20
Item 5. Other Information......................................................................20
Item 6. Exhibits and Reports on Form 8-K.......................................................22
SIGNATURES............................................................................................23
</TABLE>
2
<PAGE>
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,451 $ 37,361
Accounts receivable, net of
allowance of $141 and $803, respectively 5,035 12,251
Receivables from affiliates and employees 640 486
Prepaid expenses 899 1,655
Deferred income taxes 773 1,087
Other current assets 208 674
-------- --------
Total current assets 16,006 53,514
Property and equipment, net 11,469 18,183
Goodwill, net 41,701 106,673
Notes receivables from employees 255 403
Other assets 735 1,080
-------- --------
Total assets $70,166 $179,853
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current maturities of long-term debt $ 433 $ 350
Due to affiliates and employees 478 --
Trade payables and accrued expenses 13,696 32,087
-------- --------
Total current liabilities 14,607 32,437
Long-term debt, net of current portion 4,140 3,276
Deferred income taxes 0 1,307
Other long-term liabilities 162 217
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value;
1,000,000 shares authorized;
none outstanding -- --
Common stock, $0.01 par value;
50,000,000 shares authorized;
10,997,631 and 13,359,695 shares
outstanding, respectively 110 134
Additional paid-in capital 48,026 129,426
Retained earnings 3,121 13,056
-------- --------
Total stockholders' equity 51,257 142,616
-------- --------
Total liabilities and stockholders' equity $ 70,166 $179,853
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - HISTORICAL
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1997 1998 1997 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 18,447 $ 33,992 $ 47,145 $ 97,548
Operating expenses 11,098 19,373 28,716 53,259
---------- ----------- ---------- -----------
Gross profit 7,349 14,619 18,429 44,289
General and administrative expenses 5,117 8,503 13,531 24,886
Goodwill amortization 201 782 201 1,804
---------- ----------- ---------- -----------
Income from operations 2,031 5,334 4,697 17,599
Interest income (expense) and other, net 63 91 (3) (258)
---------- ----------- ---------- -----------
Income before provision for income taxes 2,094 5,425 4,694 17,341
Provision for income taxes 879 2,279 1,972 7,283
---------- ----------- ---------- -----------
Net income $ 1,215 $ 3,146 $ 2,722 $ 10,058
========== =========== ========== ===========
Basic earnings per share $ 0.39 $ 0.24 $ 0.88 $ 0.86
========== =========== ========== ===========
Diluted earnings per share $ 0.39 $ 0.23 $ 0.88 $ 0.83
========== =========== ========== ===========
Shares used in computing basic earnings per share 3,080,678 12,914,920 3,080,678 11,658,102
========== =========== ========== ===========
Shares used in computing diluted earnings per share 3,080,678 13,388,011 3,080,678 12,149,908
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - PRO FORMA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 23,861 $ 33,992 $ 75,111 $ 102,789
Operating expenses 14,585 19,373 44,522 56,233
----------- ----------- ----------- -----------
Gross profit 9,276 14,619 30,589 46,556
General and administrative expenses 5,921 8,466 16,108 25,573
Goodwill amortization 503 782 1,521 2,136
----------- ----------- ----------- -----------
Income from operations 2,852 5,371 12,960 18,847
Interest income (expense) and other, net 41 91 6 (336)
----------- ----------- ----------- -----------
Income before provision for income taxes 2,893 5,462 12,966 18,511
Provision for income taxes 1,215 2,294 5,445 7,775
----------- ----------- ----------- -----------
Net income $ 1,678 $ 3,168 $ 7,521 $ 10,736
=========== =========== =========== ===========
Diluted pro forma earnings per share $ 0.15 $ 0.24 $ 0.66 $ 0.86
=========== =========== =========== ===========
Shares used in computing diluted
pro forma earnings per share 11,368,171 13,388,011 11,368,171 12,477,186
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - HISTORICAL
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
-------- --------
<S> <C> <C>
Cash from operating activities:
Net income $ 2,722 $ 9,566
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,083 3,465
Amortization of unearned compensation 5 23
Changes in operating assets and liabilities:
Accounts receivables (2,487) (6,474)
Receivables and notes from affiliates
and employees (183) 3
Prepaid expenses 61 (756)
Deferred income taxes (1,097) (314)
Other assets 1,188 (782)
Trade payables and accrued expenses 13,698 17,649
-------- --------
Net cash provided by operating activities 14,990 22,380
Cash flows from investing activities:
Capital expenditures (5,983) (5,779)
Proceeds from sale of property and equipment 54 --
Cash paid for acquisitions, net of cash acquired (17,348) (51,919)
-------- --------
Net cash used in investing activities (23,277) (57,698)
Cash flows from financing activities:
Proceeds from long-term debt and lines of credit 991 30,700
Payments on long-term debt and lines of credit (3,560) (32,841)
Net Proceeds from Offerings 33,219 66,369
Distributions to stockholders (5,179) --
-------- --------
Net cash provided by financing activities 25,471 64,228
Net increase in cash and cash equivalents 17,184 28,910
Cash and cash equivalents, beginning of period 1,649 8,451
-------- --------
Cash and cash equivalents, end of period $ 18,833 $ 37,361
======== ========
Supplemental cash flow information:
Cash paid for interest $ 276 $ 548
======== ========
Supplemental disclosure of non-cash financing and investing activities:
Assets distributed to founding companies
stockholders $ 2,193 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim Consolidated Financial Statements as of September 30, 1998 and for
the three and nine month periods ended September 30, 1997 and 1998 are
unaudited, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to fairly present the
financial position, results of operations, and cash flows with respect to
interim financial statements, have been included. Operating results for interim
periods are not necessarily indicative of the results for full years as a result
of seasonality and other factors.
The financial statements included herein should be read in conjunction with the
Company's Consolidated Financial Statements and related Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations related thereto, for the year ended December 31, 1997, all of which
are included in the Company's Registration Statement on Form S-1 (File No.
333-56567) (the "Registration Statement") which was declared effective on July
15, 1998 by the Securities and Exchange Commission (the "SEC"). The Registration
Statement was filed in connection with an offering of the Company's common
stock, which was consummated on July 21, 1998 (the "Secondary Offering").
On July 28, 1997, Travel Services International, Inc. consummated its initial
public offering and acquired five specialized distributors of travel services
(the "Founding Companies") in separate combination transactions accounted for
using the purchase method of accounting (the "Combinations"). Historical
financial statements do not include the operating results of the Founding
Companies (other than Auto Europe, the "accounting acquiror") prior to July
1997. Historical financial statements for the three and nine month periods ended
September 30, 1997 and 1998 include the operating results of eight additional
specialized distributors of cruise reservation services acquired from November
1997 through August 1998 under transactions accounted for using the pooling of
interests method of accounting (the "Pooling Acquisitions"). Historical
financial statements for the three and nine months ended September 30, 1998 also
include the operating results of the following companies acquired during the
first nine months of 1998 under transactions accounted for using the purchase
method of accounting: five specialized distributors of reservations (one
airline, three cruise and one auto rental), a provider of services to
independent travel agencies (the "Purchase Acquisitions") and Lexington Services
Associates, Ltd., an electronic hotel reservation services company (the
"Lexington Acquisition"). Results of the Purchase Acquisitions and the Lexington
Acquisition are included from the date of the acquisitions through September 30,
1998. The historical financial statements for the three and nine month periods
ended September 30, 1997 do not include the operating results of the Purchase
Acquisitions or the Lexington Acquisition.
Because of the significance of the Combinations in July 1997 and the Lexington
Acquisition in June 1998, pro forma combined statements of income for the three
and nine month periods ended September 30, 1997 and 1998 have been prepared and
diluted pro forma earnings per share has been computed. The pro forma financial
information gives effect to the results of the Company combined with all the
Founding Companies and the Lexington Acquisition as if the Combinations and the
Lexington Acquisition had occurred at the beginning of each respective period,
along with certain adjustments associated with the Combinations, the Lexington
Acquisition and the Pooling Acquisitions. These adjustments include amortization
of goodwill resulting from the Combinations and the Lexington Acquisition,
certain adjustments to salaries, bonuses and management fees to former owners
and key management of the acquired companies, to which to which such persons
have agreed prospectively, reversal of merger and acquisition costs associated
with the Pooling Acquisitions and provision for income taxes as if pro forma
income was subject to corporate and federal income taxes during the periods.
The pro forma combined statements of income have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the Founding
7
<PAGE>
Companies and the Lexington Acquisition been under common control prior to the
Combinations and the Lexington Acquisition, or which may result in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 to the Consolidated Financial Statements and related Notes thereto for the
year ended December 31, 1997, included in the Company's Registration Statement.
During 1998, the Company adopted Financial Standards Board Statement of
Financial Accounting Standard No. 130, Reporting Comprehensive Income which
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. The following types of items are to be
considered in computing comprehensive income: foreign currency translation
adjustments, pension liability adjustments, unearned stock plan awards and
unrealized gain/loss on securities available for sale. For the three and nine
month periods ended September 30, 1997 and 1998, there were no differences
between net income and comprehensive income.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report information about operating segments and for related disclosures about
products and services, geographic areas and major customers. The Company will
implement disclosure provisions of SFAS No. 131 effective December 31, 1998.
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after September 15, 1999. Management
believes that adopting this statement will not have a material impact upon the
Company's results of operations or financial position.
3. LONG-TERM DEBT AND CREDIT FACILITY
The Company has a credit facility agreement with NationsBank, N.A.
("NationsBank") with respect to a $30 million revolving line of credit (the
"Credit Facility") and a term loan of $2.1 million (the "Term Loan"). Borrowings
under the Credit Facility and Term Loan are due October 15, 2000 and October 5,
2000, respectively. The Credit Facility may be used for acquisitions, letters of
credit not to exceed $3 million in the aggregate, and for capital expenditures
(including but not limited to investments in technology) and general corporate
purposes, not to exceed $5 million in the aggregate. As of September 30, 1998,
there were no outstanding borrowings under the Credit Facility, as $28.6 million
was repaid on July 21, 1998 using a portion of the net proceeds of the Secondary
Offering. All amounts repaid under the Credit Facility may be reborrowed.
Interest on outstanding balances of the Credit Facility and Term Loan are
computed based on the Eurodollar Rate plus a margin ranging from 1.25% to 2.0%,
depending on certain financial ratios. For a full description of the Credit
Facility, refer to Note 7 and 15 to the Consolidated Financial Statements and
related Notes thereto for the year ended December 31, 1997 included in the
Company's Registration Statement.
On March 30, 1998, $3 million previously pledged to Barnett Bank was released in
exchange for a guarantee by the Company of outstanding debt of one of the
Founding Companies. Such debt, totaling $3,141,241, was repaid on April 28,
1998, including $1,901,838 which was refinanced using the proceeds of the Term
Loan.
The Credit Facility requires the Company to secure an interest rate hedge on
fifty percent of the outstanding principal amount borrowed under the Credit
Facility and one hundred percent of the outstanding balance on the Term Loan. As
of September 30, 1998, the Company entered into interest rate swap hedge
agreements totaling $16.4 million and maturing in October 2000, of which $14.3
million relates to the Credit Facility. These interest rate swap hedge
agreements were not liquidated when borrowings under the Credit Facility were
repaid and an unrealized loss of approximately $275,00 and $415,000 was recorded
in the three and nine month periods ended September 30, 1998, respectively.
8
<PAGE>
The Credit Facility is secured by substantially all the assets of the Company
and requires the Company to comply with various loan covenants, which include
maintenance of certain financial ratios, restrictions on additional indebtedness
and restrictions on liens, guarantees, advances, capital expenditures, sale of
assets and dividends. At September 30, 1998 the Company was in compliance with
the loan covenants or obtained waivers for any instances of non-compliance.
4. ACQUISITIONS AND CAPITAL STOCK
On July 21, 1998, the Company consummated the Secondary Offering. An aggregate
of 4,025,000 shares of Common Stock were registered and sold, including
2,025,000 shares sold by the Company and 2,000,000 shares sold by certain
selling stockholders. All of the shares were sold to the public at a price of
$34.50 per share. Net proceeds to the Company from the Secondary Offering (after
deducting underwriting discounts and commissions and estimated offering
expenses) were approximately $66.4 million, of which $28.6 million was used to
repay borrowings under the Credit Facility. The Company did not receive any
proceeds from shares sold by selling stockholders.
On January 20, 1998, the Company consummated the acquisition of substantially
all of the assets and assumption of substantially all of the liabilities of
Diplomat Tours, Inc. and International Airline Consolidators (collectively,
"Diplomat"). Diplomat is a specialized distributor of international airline
reservations. The aggregate consideration paid consisted of 21,821 shares of
common stock and $2.0 million in cash. The acquisition is accounted for using
the purchase method of accounting. The historical operations of Diplomat when
compared to the historical operations of the Company are not significant.
On February 9, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Gold Coast Travel Agency Corporation, Inc. ("Gold
Coast"). Gold Coast is a specialized distributor of cruise reservations. The
aggregate consideration paid consisted of 163,755 shares of common stock and
$6.25 million in cash. An additional $500,000 in cash may be paid as contingent
consideration based upon financial performance in the 1998 fiscal year. The
acquisition is accounted for using the purchase method of accounting. The
historical operations of Gold Coast when compared to the historical operations
of the Company are not significant.
On March 31, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of CruiseMasters, Inc. ("CruiseMasters").
CruiseMasters is a specialized distributor of cruise reservations. The aggregate
consideration paid for this acquisition was 152,835 shares of common stock. The
acquisition is accounted for using the pooling of interests method of
accounting.
Effective April 1, 1998, the Company completed the acquisition of all of the
outstanding capital stock of The Cruise Line, Inc. ("Cruise Line"). Cruise Line
is a specialized distributor of cruise reservations. The aggregate consideration
paid consisted of $12.5 million in cash. The acquisition is accounted for using
the purchase method of accounting. The historical operations of Cruise Line when
compared to the historical operations of the Company are not significant.
On May 21, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Landry & Kling, Inc. ("L&K"). L&K is a specialized
distributor of corporate incentive cruise reservations. The aggregate
consideration paid for this acquisition was 163,078 shares of common stock. The
acquisition is accounted for using the pooling of interests method of
accounting.
On May 31, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of Goodfellow Enterprises, Inc., ("The Travel
Company"). The Travel Company is a specialized distributor of cruise
reservations. The aggregate consideration paid for this acquisition was 179,727
shares of common stock. The acquisition is accounted for using the pooling of
interests method of accounting.
Effective June 1, 1998, the Company consummated the acquisition of all of the
outstanding equity interests of the Lexington Services Associates, Ltd.
("Lexington"). Lexington is an electronic hotel reservation services company.
The aggregate consideration paid for this acquisition was 283,990 shares of
common stock and $24.0 million in cash, including $4 million of contingent
consideration paid in August 1998. The acquisition is accounted for using the
purchase method of accounting. The historical operations of Lexington when
compared to the historical
9
<PAGE>
operations of the Company are significant and, accordingly, net revenues and
income before taxes generated by Lexington prior to the date of acquisition are
included in the accompanying pro forma consolidated statements of net income for
the three and nine month periods ended September 30, 1997 and 1998.
Effective July 1, 1998 the Company completed the acquisition of substantially
all the assets of ABC Corporate Services ("ABC"). ABC provides services to
independent travel agencies, including publication of a hotel guide and
after-hours travel services for certain travel agencies' corporate accounts. The
aggregate consideration paid was $4,250,000, as adjusted for certain changes in
working capital. The acquisition is accounted for using the purchase method of
accounting. The historical operations of ABC when compared to the historical
operations of the Company are not significant.
On August 31, 1998, the Company consummated the acquisition of all the
outstanding stock of Cruise Outlets of the Carolinas, Inc. ("Cruise Outlet").
Cruise Outlet is a specialized distributor of cruise reservation by using the
Internet as a prime source of sales leads. The aggregate consideration paid for
this acquisition was 150,000 shares of common stock. The acquisition is
accounted for using the pooling of interests method of accounting.
Aggregate revenues and income before taxes included in the accompanying
consolidated statements of income for the three and nine month periods ended
September 30, 1997 and 1998 that were generated prior to the date of the
acquisitions by the four acquisitions noted above as being accounted for using
the pooling of interests method of accounting (the "1998 Poolings"), were as
follows: net revenues of $1.2 million and $3.5 million in the three and nine
month periods ended September 30, 1997, respectively; income before taxes of
$227,000 and $720,000 in the three and nine month periods ended September 30,
1997, respectively; net revenues of $318,000 and $2.4 million in the three and
nine month periods ended September 30, 1998, respectively; and income before
taxes of $350,000 and $1.1 million in the three and nine month periods ended
September 30, 1998, respectively.
On August 7, 1998, the Company consummated the acquisition of the outstanding
capital stock of 1-800-CRUISES, Inc. and Jubilee Enterprises, Inc.,
(collectively "1-800-Cruises"). Among the assets acquired were toll free
telephone numbers 1-800-CRUISES and 1-800-CRUISING and the www.1-800-CRUISES.com
web-site address. In addition, the entities operate a small cruise reservation
call center. The aggregate consideration paid for this acquisition was 36,546
shares of common stock and $500,000 in cash. The acquisition is accounted for
using the purchase method of accounting. The historical operations of
1-800-Cruises when compared to the historical operations of the Company are not
significant.
5. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share in 1997. Basic earnings per common share calculations are
determined by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per common share
calculations are determined by dividing net income by the weighted average
number of common shares and dilutive common share equivalents.
A reconciliation of weighted average shares used in the calculation of
historical basic and diluted earnings per share for the three and nine month
periods ended September 30 1997 and 1998 is as follows:
NINE MONTHS THREE MONTHS
SEPTEMBER SEPTEMBER
30, 1998 30, 1998
Basic common shares outstanding 11,658,102 12,914,920
Dilutive effects of stock options 491,806 473,091
---------- ------------
Dilutive shares outstanding 12,149,908 13,388,011
========== ==========
Dilutive pro forma earnings per share for the periods, which reflects the
dilutive effects of stock options, is also presented related to the pro forma
combined statements of income as discussed in Note 1 herein.
10
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the ordinary course
of business. The Company believes that none of the actions currently pending
will have a material adverse effect on its business, financial condition or
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with (i) the Company's
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report and (ii) the Company's Consolidated Financial Statements and
related Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations related thereto, for the year ended December
31, 1997 included in the Company's Registration Statement. Statements contained
in this discussion regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements. The
forward looking statements are subject to numerous risks and uncertainties to
the Company. See Part II, Item 5, Risk Factors and Qualification of Forward
Looking Statements.
INTRODUCTION
The Company was established to create a leading specialized distributor of
leisure travel services to both travel agents and travelers. The Company
conducts its operations as a leading specialized distributor of cruise
vacations, domestic and international airline tickets and European auto rentals,
and a leading provider of electronic reservation services, through various
subsidiaries (the "Operating Companies").
Because of the significance of the Combinations in July 1997 and the Lexington
Acquisition in September 1998, pro forma combined statements of income for the
three and nine month periods ended September 30, 1997 and 1998 have been
prepared in addition to historical statements of operations. The pro forma
combined statements of income have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which actually
would have resulted had the Founding Companies and the Lexington Acquisition
been under common control prior to the Combinations or the Lexington
Acquisition, or which may result in the future.
The Company's revenue is derived primarily from selling travel related services,
including cruise vacations, airline tickets and European auto rentals, by
providing electronic hotel reservations and by providing various services to
independent travel agencies. The Company does not record the gross amount of the
travel services sold to travelers or travel agents. Net revenues recorded by the
Company include commissions and markups on travel services, volume bonuses and
override commissions and fees for services including processing and delivering
tickets, franchisee support, hotel reservations, after hours reservation
services and hotel guide publication.
The Company records net revenues when earned, which for cruise bookings is when
the cruise is fully paid and the customer is no longer entitled to a full refund
of the cost of the cruise, generally 45 to 90 days prior to the sailing date,
for airline tickets and auto rentals is at the time the reservation is booked
and ticketed, for hotel reservation services is at the time the traveler checks
out of the hotel and for other services when the services are provided. The
Company provides allowances for bad debts, cancellations, reservation changes,
"no shows" and currency exchange guarantees, based on historical experience.
Operating expenses include compensation of sales and sales support personnel,
commissions, credit card merchant fees, telecommunications, mail, courier,
marketing, global distribution systems fees, hotel guide production costs and
other expenses that vary with revenues. Commissions to travel agents are
typically based on a percentage of the gross amount of the travel services sold.
The Company's sales personnel are compensated either on an hourly basis, a
commission basis or a combination of the two, with the vast majority of agents
receiving a substantial portion of their compensation based on sales generated.
The Company's independent contractors selling cruises receive a portion of the
commissions earned by the Company. The Company receives a portion of commissions
earned by its franchisees selling cruises.
11
<PAGE>
General and administrative expenses include compensation and benefits to
management and administrative employees, fees for professional services, rent,
information services, depreciation, travel and entertainment, office services,
amortization of capitalized internally developed software and other overhead
costs. Internally developed software is amortized over five years.
The Company records as goodwill the excess of consideration paid over the
estimated fair market value of net assets acquired in business combinations
accounted for under the purchase method. Goodwill is amortized over 35 years for
the travel service companies acquired and over five years for an acquired
software company. As of September 30, 1998, goodwill, net, was $106.7 million.
RESULTS OF OPERATIONS - HISTORICAL
Historical financial results for each period presented represent those of Auto
Europe and the Pooling Acquisitions and include the operations of the other four
Founding Companies and Travel Services International, Inc., only since July 28,
1997, and the operations of the Purchase Acquisitions and the Lexington
Acquisition only since their respective acquisition dates in 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998 - HISTORICAL
The following table sets forth certain selected historical financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 18,447 100.0% $33,992 100.0%
Operating expenses 11,098 60.2 19,373 57.0
------- ----- ------- -----
Gross profit 7,349 39.8 14,619 43.0
General and administrative expenses 5,117 27.7 8,503 25.0
Goodwill amortization 201 1.1 782 2.3
------- ----- ------- -----
Income from operations 2,031 11.0 5,334 15.7
Interest income (expense) and other, net 63 .4 91 .3
------- ----- ------- -----
Income before provision for income taxes 2,094 11.4 5,425 16.0
Provision for income taxes 879 4.8 2,279 6.7
------- ----- ------- -----
Net income $ 1,215 6.6% $ 3,146 9.3%
====== ===== ======= =====
</TABLE>
Net revenues increased from $18.4 million in 1997 to $34.0 million in 1998. Net
revenues in the European auto rental segment increased 15.5% and net revenues of
the Pooling Acquisitions increased 47.8%, with the balance of the net increase
in net revenues attributable to the inclusion of the net revenues of four of the
Founding Companies commencing on July 28, 1997 and the Purchase Acquisitions and
the Lexington Acquisition commencing from the date of acquisitions in 1998.
Operating expenses increased from $11.1 million in 1997 to $19.4 million in
1998. As a percentage of net revenues, total operating expenses decreased from
60.2% in 1997 to 57.0% in 1998, primarily due to the change in the mix of
business in each travel segment as a result of acquisitions.
General and administrative expenses increased from $5.1 million in 1997 to $8.5
million in 1998 and were 27.7% and 25.0% of net revenues, respectively. The
increase in expenses was primarily the result of expenses associated with being
a public company and costs of maintaining a corporate headquarters, which did
not exist at any significant level in the three months ended September 30, 1997
just following the initial public offering, and expenses of the Lexington
Acquisition and Purchase Acquisitions in 1998, all of which is offset somewhat
by lower general and administrative expenses at other Operating Companies as a
percentage of net revenues.
Goodwill amortization increased from $201,000 in 1997 to $782,000 in 1998. The
increase in goodwill amortization in 1998 was the result of amortization related
to the Lexington Acquisition and Purchase Acquisitions.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998 - HISTORICAL
The following table sets forth certain selected historical financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 47,145 100.0% $97,548 100.0%
Operating expenses 28,716 60.9 53,259 54.6
------ ----- ------- -----
Gross profit 18,429 39.1 44,289 45.4
General and administrative expenses 13,531 28.7 24,886 25.5
Goodwill amortization 201 .4 1,804 1.8
------ ----- ------- -----
Income from operations 4,697 10.0 17,599 18.1
Interest income (expense) and other, net (3) 0 (258) (.3)
------ ----- ------- -----
Income before provision for income taxes 4,694 10.0 17,341 17.8
Provision for income taxes 1,972 4.2 7,283 7.5
------ ----- ------- -----
Net income $ 2,722 5.8% $10,058 10.3%
====== ===== ======= =====
</TABLE>
Net revenues increased from $47.1 million in 1997 to $97.5 million in 1998. Net
revenues in the European auto rental segment increased 13.4% and net revenues of
the Pooling Acquisitions increased 39.6%, with the balance of the net increase
in net revenues attributable to the inclusion of the net revenues of four of the
Founding Companies commencing on July 28, 1997 and the Purchase Acquisitions and
the Lexington Acquisition commencing from the date of acquisitions in 1998.
Operating expenses increased from $28.7 million in 1997 to $53.3 million in
1998. As a percentage of net revenues, total operating expenses decreased from
60.9% in 1997 to 54.6% in 1998, primarily due to the change in the mix of
business in each travel segment as a result of acquisitions.
General and administrative expenses increased $11.4 million, or 83.9%, from
$13.5 million in 1997 to $24.9 million in 1998 and were 28.7% and 25.5% of net
revenues, respectively. The increase in expenses was primarily the result of
expenses associated with being a public company and costs of maintaining a
corporate headquarters which did not exist prior to the initial public offering
and expenses of the Lexington Acquisition and Purchase Acquisitions in 1998,
offset somewhat by lower general and administrative expenses at other Operating
Companies as a percentage of net revenues.
Goodwill amortization increased from $201,000 in 1997 to $1.8 million in 1998.
The increase in goodwill amortization in 1998 was the result of amortization
related to the Lexington Acquisition and Purchase Acquisitions.
RESULTS OF OPERATIONS - PRO FORMA
Pro forma combined financial results for each period presented give effect to
the results of the Company combined with all the Founding Companies and the
Lexington Acquisition as if the Combinations and the Lexington Acquisition had
occurred at the beginning of each respective period, along with certain
adjustments associated with the Combinations, the Lexington Acquisition and the
Pooling Acquisitions described elsewhere herein.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998 - PRO FORMA
The following table sets forth certain selected pro forma financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 23,861 100.0% $33,992 100.0%
Operating expenses 14,585 61.1 19,373 57.0
------- ----- ------- -----
Gross profit 9,276 38.9 14,619 43.0
General and administrative expenses 5,921 24.8 8,446 24.9
Goodwill amortization 503 2.1 782 2.3
------- ----- ------- -----
Income from operations 2,852 12.0 5,371 15.8
Interest income (expense) and other, net 44 .1 91 .3
------- ----- ------- -----
Income before provision for income taxes 2,893 12.1 5,462 16.1
Provision for income taxes 1,215 5.1 2,294 6.8
------- ----- ------- -----
Net income $ 1,678 7.0% $ 3,169 9.3%
======== ====== ======= ======
</TABLE>
Net revenues increased $10.1 million, or 42.5%, from $23.9 million in 1997 to
$34.0 million in 1998. The increase in net revenues is primarily attributable to
acquisitions and increased transaction volumes of travel services by the Company
in each segment. In addition, net revenue per transaction increased in European
auto rental, cruise and hotel segments. Net revenues for the period increased
79.9%, 13.5%, 15.5% and 62.0% in the cruise, air, European auto rental, and
hotel segments, respectively. Of the 42.5% increase in combined pro forma net
revenues, 23.8% was attributable to internal growth at the Founding Companies,
the Pooling Acquisitions and the Lexington Acquisition, and 18.7% was
attributable to net revenues recorded for the Purchase Acquisitions in 1998. The
Company did not record net revenues for 1997 for the Purchase Acquisitions.
Operating expenses increased $4.8 million, or 32.8%, from $14.6 million in 1997
to $19.4 million in 1998. As a percentage of net revenues, total operating
expenses decreased from 61.1% in 1997 to 57.0% in 1998, primarily due to a
change in the mix of business by segment as a result of acquisitions.
General and administrative expenses increased $2.5 million, or 42.6%, from $5.9
million in 1997 to $8.4 million in 1998, and were 24.8% and 24.9% of net
revenues, respectively. The increase in expenses was primarily the result of
expenses associated with being a public company and costs of maintaining a
corporate headquarters, which did not exist at any significant level in the
three months ended September 30, 1997 just following the initial public
offering, and expenses of the Purchase Acquisitions in 1998, offset somewhat by
lower general and administrative expenses at other Operating Companies as a
percentage of net revenues.
Goodwill amortization increased $279,000, or 55.5%, from $503,000 in 1997 to
$782,000 in 1998. The increase in goodwill amortization in 1998 was the result
of amortization related to the Purchase Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998 - PRO FORMA
The following table sets forth certain selected pro forma financial data, also
stated as a percentage of net revenues, for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 75,111 100.0% $102,789 100.0%
Operating expenses 44,522 59.3 56,233 54.7
-------- ----- -------- -----
Gross profit 30,589 40.7 46,556 45.3
General and administrative expenses 16,108 21.4 25,573 24.9
Goodwill amortization 1,521 2.0 2,136 2.1
-------- ----- -------- -----
Income from operations 12,960 17.3 18,847 18.3
Interest income (expense) and other, net 6 0 (336) (.3)
-------- ----- -------- -----
Income before provision for income taxes 12,966 17.3 18,511 18.0
Provision for income taxes 5,445 7.3 7,775 7.6
-------- ----- -------- -----
Net income $ 7,521 10.0% $ 10,736 10.4%
======== ===== ======== =======
</TABLE>
14
<PAGE>
Net revenues increased $27.7 million, or 36.8%, from $75.1 million in 1997 to
$102.8 million in 1998. The increase in net revenues is primarily attributable
to acquisitions and increased transaction volumes of travel services by the
Company in each segment. Net revenues for the period increased 70.1%, 15.5%,
13.4% and 47.6%, in the cruise, air, European auto rental, and hotel segments,
respectively. Net revenue per transaction increased in the cruise, European auto
rental and hotel segments. Of the 36.8% increase in combined pro forma net
revenues, 15.3% was attributable to the Purchase Acquisitions and 21.5% was
attributable to internal growth at the Founding Companies, the Pooling
Acquisitions and the Lexington Acquisition. Net revenues for 1997 were not
recorded for the Purchase Acquisitions.
Operating expenses increased $11.7 million, or 26.3%, from $44.5 million in 1997
to $56.2 million in 1998. As a percentage of net revenues, total operating
expenses decreased from 59.3% in 1997 to 54.7% in 1998, primarily due a change
in the mix of business by segment.
General and administrative expenses increased $9.5 million, or 58.8%, from $16.1
million in 1997 to $25.6 million in 1998. The increase in expenses was primarily
the result of expenses associated with being a public company and costs of
maintaining a corporate headquarters which did not exist prior to the initial
public offering and expenses of the Purchase Acquisitions in 1998, offset
somewhat by lower general and administrative expenses at other Operating
Companies as a percentage of net revenues.
Goodwill amortization increased $615,000, or 40.4%, from $1.5 million in 1997 to
$2.1 million in 1998. The increase in goodwill amortization in 1998 was the
result of amortization related to the Purchase Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS, INCLUDING ACQUISITIONS
The Company's three primary sources of liquidity and capital resources are cash
flow from operating activities, issuance of Common Stock and borrowings under
its Credit Facility.
In the nine months ended September 30, 1997 and 1998, on a historical basis, net
cash provided by operating activities was approximately $15.0 million and $22.4
million, respectively, capital expenditures were $6.0 million and $5.8 million,
respectively, borrowing under the Term Loan and other borrowings were $1.0
million and $2.1 million, respectively, and repayment of debt was $3.6 million
and $4.2 million, respectively. In addition, borrowings under line of credit
(established in October 1997) were $28.6 million in the nine months ended
September 30, 1998. All outstanding borrowings under the line of credit
consisting of $28.6 million were repaid in July 1998 using a portion of the net
proceeds from the Secondary Offering.
Effective June 1, 1998, the Company consummated the acquisition of all of the
outstanding equity interests of Lexington Services Associates, Ltd.
("Lexington"). Lexington is an electronic hotel reservation services company.
The aggregate consideration paid for this acquisition was 283,990 shares of
common stock and $24 million in cash. The acquisition is accounted for using the
purchase method of accounting. The historical operations of Lexington when
compared to the historical operations of the Company are significant and,
accordingly, net revenues and income before taxes generated by Lexington prior
to the date of acquisition are included in the accompanying pro forma
consolidated statements of net income for the three and nine month periods ended
September 30, 1997 and 1998.
The Company issued 186,546 shares of common stock and paid $4.8 million cash
consideration during the three months ended September 30, 1998 in connection
with three acquisitions described herein. In addition, the Company paid $4
million of contingent consideration related to the Lexington Acquisition. One of
the acquisitions was accounted for using the pooling of interests method of
accounting and two of the acquisitions were accounted for using the purchase
method of accounting.
The Company issued 1,151,752 shares of common stock and paid $49.5 million cash
consideration during the nine months ended September 30, 1998 in connection with
eleven acquisitions consummated during the period. Four of the acquisitions were
accounted for using the pooling of interests method of accounting, and seven of
the
15
<PAGE>
acquisitions, including the Lexington Acquisition, were accounted for using
the purchase method of accounting.
On July 21, 1998, the Company consummated its Secondary Offering. An aggregate
of 4,025,000 shares of Common Stock were offered and sold, including 2,025,000
shares sold by the Company and 2,000,000 shares sold by certain selling
stockholders. All of the shares were sold at a price to the public of $34.50 per
share. Net proceeds to the Company from the Secondary Offering (after deducting
underwriting discounts and commissions and estimated offering expenses) were
approximately $66.4 million, of which $28.6 million was used to repay borrowings
under the Credit Facility. The Company did not receive any proceeds from shares
sold by selling stockholders.
The Company expects to spend an aggregate of $10 million during 1998 for capital
expenditures, including approximately $5 million for development of software
applications for internal use. The remainder of the 1998 capital budget relates
to purchases of computer hardware and personal computers, telecommunications
equipment, leasehold and building improvements and furniture and fixtures.
Capital expenditures during the nine months ended September 30, 1998 totaled
$5.8 million, of which $3.4 million relates to development of software
applications for internal use. In addition, the Company expects to spend
approximately $17 million for all capital expenditures in 1999, including $9
million for development of software applications for internal use. An assessment
of the Company's Year 2000 preparedness is discussed below.
The Company believes that the net proceeds of the Secondary Offering, together
with cash flow from operating activities and borrowings under its Credit
Facility, should be adequate to meet the Company's capital requirements over the
next 12 months. However, changes in the method of financing or expected size of
future acquisitions may affect the Company's liquidity and capital requirements
during that time. The Company has engaged in preliminary discussions with its
lender regarding the possibility of increasing its borrowing base to between $60
and $75 million through issuance of a new credit facility in which other banks
would participate.
LONG-TERM DEBT AND CREDIT FACILITY
The Company has a credit facility agreement with NationsBank, N.A.
("NationsBank") with respect to a $30 million revolving line of credit (the
"Credit Facility") and a term loan facility of $2.1 million (the "Term Loan").
Borrowings under the Credit Facility and Term Loan are due October 15, 2000 and
October 5, 2000, respectively. The Credit Facility may be used for acquisitions,
letters of credit not to exceed $3 million in the aggregate, and for capital
expenditures (including but not limited to investments in technology) and for
general corporate purposes, which in the aggregate may not exceed $5 million. As
of September 30, 1998, there were no outstanding borrowings under the Credit
Facility. All amounts repaid may be reborrowed. Interest on outstanding balances
of the Credit Facility and Term Loan are computed based on the Eurodollar Rate
plus a margin ranging from 1.25% to 2.0%, depending on certain financial ratios.
On March 30, 1998, $3 million previously pledged to Barnett Bank was released in
exchange for a guarantee by the Company of outstanding debt of one of the
Founding Companies. Such debt, totaling $3,141,241, was repaid on April 28,
1998, including $1,901,838 which was refinanced using the proceeds of the Term
Loan.
The Credit Facility requires the Company to secure an interest rate hedge on
fifty percent of the outstanding principal amount borrowed under the Credit
Facility and one hundred percent of the outstanding balance on the Term Loan. As
of September 30, 1998, the Company entered into interest rate swap hedge
agreements totaling $16.4 million and maturing in October 2000, of which $14.3
million relates to the Credit Facility. These interest rate swap hedge
agreements were not liquidated when borrowings under the Credit Facility were
repaid and an unrealized loss of approximately $275,000 and $415,000 was
recorded in the three and nine month periods ended September 30, 1998,
respectively.
The Credit Facility is secured by substantially all the assets of the Company
and requires the Company to comply with various loan covenants, which include
maintenance of certain financial ratios, restrictions on additional indebtedness
and restrictions on liens, guarantees, advances, capital expenditures, sale of
assets and dividends. At September 30, 1998 the Company was in compliance with
the loan covenants or obtained waivers for any instances of non-compliance.
16
<PAGE>
YEAR 2000 PREPAREDNESS
STATE OF READINESS
The Company recognizes that computer systems and all forms of electronic
technology, information technologies ("IT") and non-information technologies
("Non- IT"), could be adversely affected by the year 2000 date. This is because
many systems and technology components use a two-digit field to represent the
year in dates (e.g., "98" rather than "1998"). With the advent of the year 2000,
systems and programs may fail or produce incorrect data believing it is the year
1900, causing not just IT problems but also business and operations problems.
To help ensure that the Company's systems can survive the turn of the century,
any use of dates in technology or systems are being identified, assessed,
corrected and tested where necessary. To support this effort, the Company has
developed an overall project approach, a project reporting and accountability
structure and process methodology.
The project approach has been developed to address the following: (1) IT
(applications and computing environment), (2) Non-IT systems (embedded
technology and systems), and (3) Business Partner Management (vendors,
suppliers, banks, leasing companies). Internal and external compliance factors
that may have an impact on the Company's business operations are being addressed
and monitored using this approach.
The Company's project reporting and accountability structure encompasses every
level of the organization, including: (1) an Executive Committee (senior level
management of the Company), (2) an Executive Sponsor (the Chief Information
Officer) who is responsible for reviewing and advising on Year 2000 project
progress and processes, (3) the Year 2000 Project Office that is responsible for
overall coordination, maintenance, collection and dissemination of all Year 2000
project information as well as the centralized systems and processes, and (4)
subsidiary operating company management and assigned points of contact
responsible for those systems developed, purchased, operated and supported
within an operating company.
The Year 2000 Project Office has developed a reporting schedule and will require
monthly updates from the Operating Companies and others throughout the life of
the project. These updates include inventory updates and status and associated
detail (i.e., budget, risks, timeline and schedule, contingency plans, testing
plans and updates, issues and concerns, and Company awareness activities). The
Year 2000 Project Office is responsible for reporting on the Company's state of
compliance.
The Company employs a seven phase process methodology for the project: Phase 1,
Organization of the project; Phase 2, Assessment of conducting an inventory and
identifying areas of exposure; Phase 3, Planning to correct exposure areas
(i.e., developing project and contingency plans, establishing priorities, and
developing strategies for correcting problems); Phase 4, Correction of the
exposed systems; Phase 5, Testing of the corrections; Phase 6, Implementation of
the corrections; and Phase 7, Maintenance of Year 2000 compliance over time.
The Company has substantially completed the Organization and Assessment phases,
and has made progress in the remaining phases. The degree to which Operating
Companies have addressed the Year 2000 issue for their locations prior to
acquisition by the Company varies. The Company believes the preliminary
inventory gathered has identified all significant systems and processes, and
Operating Companies have been asked to prioritize "business critical" and
"important" systems and assign status to the systems identified. External and
internal resources have been used for this effort and will continue to be used
to correct, test and implement these items for Year 2000 readiness and
compliance.
As part of the Company's overall technology strategy, the Company has been
developing new common applications (already Year 2000 compliant) that are
expected to be implemented in 1998 and 1999 across the air, auto and cruise
segments, replacing many, although not all, of the existing systems currently in
place at Operating Companies in these segments. New hardware and software
required to support these applications are expected to be in place by the end of
1999 and will be Year 2000 compliant.
17
<PAGE>
The Company has developed a corporate compliance statement and survey to address
and determine Year 2000 issues and readiness of its business partners. These
documents have been distributed to all business partners and a schedule has been
developed for follow-up and review of responses. An action plan has been
developed to closely work with and monitor progress of the Company's critical
and important business partners that could impact business operations if such
partners are not compliant.
COSTS
The total cost of Year 2000 remediation activities has not been to date, and is
not anticipated to be, material to the financial position or results of
operations of the Company in any given year. This is attributed in large part to
the Company's strategy for the development and implementation of new common
applications that will replace a significant portion of the Company's legacy
systems. However, there can be no assurance the new systems will be fully
implemented or implemented on the time schedule anticipated. The Company expects
to spend an aggregate of $18 to $20 million for the development of these systems
during 1998, 1999 and 2000 and expects the operating costs associated with these
systems to generally be in excess of current operating costs for applications in
use at the Operating Companies.
RISKS
The Company utilizes IT and Non-IT systems in many aspects of its business and
is dependent on a multitude of business partners. Risks associated with the Year
2000 include, but are not limited to, the following:
/bullet/ Business partners that experience Year 2000 issues may be unable to
provide goods or services to the Company, including those suppliers
providing goods and services sold by the Company. Disruption of other
services, such as utilities, could also potentially impact the
Company's operations.
/bullet/ Packaged software vendors that provide inadequate solutions,
corrections and testing.
/bullet/ Project delays for the technology applications currently under
development that could impact overall Year 2000 compliance efforts
and associated costs.
CONTINGENCY PLANS
While the Company believes it is pursuing the appropriate courses of action to
ensure Year 2000 readiness, there can be no assurance that the objectives will
be achieved internally or with business partners. Those areas will be addressed
by contingency plans. These contingency plans will include the identification,
acquisition and/or preparation of backup systems and processes in case of
non-compliance. Completion of contingency plans for all business critical and
important systems, including worst case scenarios, is expected in early 1999.
ONGOING PLANS AND ACTIVITIES
Based on its efforts and plans to date, the Company does not believe the Year
2000 issue will have a material effect on its financial condition. The Company
is completing the assessment and planning phases and is in the process of
determining the likelihood of successfully completing and addressing the full
range of issues in a timely manner. Upon completion of these phases, estimates
for the project timeline and schedule, budget, risks, issues and contingency
plans will be refined.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The results of the Company are subject to quarterly fluctuations caused
primarily by the seasonal variations in the travel industry, especially the
leisure travel segment. Seasonality also varies depending on the travel segment.
Net revenues and operating income of the European auto rental segment are
generally higher in the first and second quarters, net revenues and operating
income of the airline and cruise reservation companies are generally higher in
the second and third quarters, and net revenues and operating income of the
lodging segment are generally higher in the third and fourth quarters. The
Company expects this seasonality and quarterly fluctuations to continue.
The Company's quarterly results of operations may also be subject to
fluctuations as a result of the timing and cost of acquisitions, changes in the
mix of services offered by the Company, fare wars by travel providers, net daily
rates charged to travelers by hotels, changes in relationships with certain
travel providers (including commission rates
18
<PAGE>
and programs), changes in the timing and payment of overrides by travel
providers, extreme weather conditions or other factors affecting travel or the
economy.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal claims and actions arising in the
ordinary course of business. The Company believes that none of the actions
currently known to the Company will have a material adverse effect on its
business, financial condition or operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's ability to pay dividends is restricted by the terms of the Credit
Facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of the Company was held on Tuesday, July
28, 1998. At such meeting, the stockholders considered and voted upon three
proposals: (1) the election of three members to the Board of Directors; (2) the
reincorporation of the Company from Delaware to Florida; and (3) the approval of
an Amended and Restated Long-Term Incentive Plan, providing for, among other
things, an amendment to the Company's prior plan to authorize an increase in the
total number of share that may be subject to awards under the plan to 15% of the
aggregate number of shares of common stock outstanding.
The stockholders approved each of the proposals. The votes cast for such
proposals were as follows:
<TABLE>
<S> <C> <C>
PROPOSAL #1 PROPOSAL #2 PROPOSAL #3
------------------ ------------------ ------------------
8,316,785 For 7,234,659 For 7,300,382 For
0 Against 257,230 Against 1,072,580 Against
57,800 Withheld 0 Withheld 0 Withheld
Abstentions and
0 Abstentions and 1,523 Abstentions and 1,623 broker non-votes
broker non-votes broker non-votes
</TABLE>
With respect to the directors nominated for office, each nominee received the
same number of votes for, against or withheld, as well as the same number of
abstentions and broker non-votes.
ITEM 5. OTHER INFORMATION
RISK FACTORS AND QUALIFICATION OF FORWARD LOOKING STATEMENTS
The Company is subject to various risks associated with its operations,
strategies, management and industry, including the risk factors discussed in the
Company's Annual Report on form 10-k for the year ended December 31,1997 and its
Registration Statement (File No. 333-56567) and the Prospectus contained
therein. In addition, the statements contained in this Report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding future financial and
operating performance and results, sales, revenue, marketing plans and
initiatives, acquisitions, operational initiatives, technology, the economy and
other statements. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause actual results, experience and the performance or
achievements of the Company to be materially different from those anticipated,
expressed or implied by the forward-looking statements. Past performance is not
necessarily indicative of future results, and actual results could differ
significantly from any results anticipated in any forward-looking statement. In
evaluating the Company's business, the following factors, in addition to the
Risk Factors set forth in the Company's Prospectus referred to above, should be
carefully considered: successful deployment and integration of systems; factors
affecting internal
20
<PAGE>
growth and management of growth; dependence on travel providers; the Company's
acquisition strategy and availability of acquisition financing; success in
entering new segments of the travel market and new geographic areas; the
Company's ability to implement its strategic technology, marketing and
operational initiatives dependence on technology; labor and technology costs;
cost, availability and success of advertising and promotional efforts; risks
associated with the travel industry generally; seasonality and quarterly
fluctuations; competition; and general economic conditions. In addition, the
Company's business strategy and growth strategy involve a number of risks and
challenges, and there can be no assurance that these risks and other factors
will not have a material adverse effect on the Company.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
10.17 Employment Agreement, dated as of July 25, 1998, between the
Company and George Del Pino
11 Schedule of Computations of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVEL SERVICES INTERNATIONAL, INC.
<TABLE>
<S> <C>
Date: November 13, 1998 By: /S/ JILL M. VALES
---------------------
Jill M. Vales
Senior Vice President and Chief Financial Officer
(as both a duly authorized officer of the registrant
and the principal financial officer or chief accounting
officer of the registrant)
</TABLE>
23
EXHIBIT 99.4
As filed with the Securities and Exchange Commission on August 13, 1998
Registration Statement No. 333-61337
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------
TRAVEL SERVICES INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4724 52-2030324
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number Identification Number)
JOSEPH V. VITTORIA
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TRAVEL SERVICES INTERNATIONAL, INC. TRAVEL SERVICES INTERNATIONAL, INC.
220 CONGRESS PARK DRIVE 220 CONGRESS PARK DRIVE
DELRAY BEACH, FLORIDA 33445 DELRAY BEACH, FLORIDA 33445
(561) 266-0860 (561) 266-0860
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices) Including Area Code, of Agent for Service)
</TABLE>
--------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
SUZANNE B. BELL, ESQ. ROBERT G. ROBISON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL MORGAN, LEWIS & BOCKIUS LLP
TRAVEL SERVICES INTERNATIONAL, INC. 101 PARK AVENUE
220 CONGRESS PARK DRIVE NEW YORK, NEW YORK 10178
DELRAY BEACH, FLORIDA 33445 (212) 309-6126
(561) 266-0860 (FACSIMILE) (212) 309-6273
(FACSIMILE) (561) 266-0872
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box:|_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE REGISTRATION FEE
PER SHARE(1) OFFERING PRICE(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $ 0.01 per share 1,452,294 Shares $30.69 $44,570,902.86 $13,149
==========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act and based upon the
average high and low prices for the Common Stock on the Nasdaq Stock
Market for August 12, 1998.
<PAGE>
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. The securities offered hereby may not be
sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of the
securities offered hereby in any state in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such state.
SUBJECT TO COMPLETION, DATED AUGUST 13, 1998
PROSPECTUS
1,452,294 Shares
[LOGO]
TRAVEL SERVICES INTERNATIONAL, INC.
Common Stock
-----------------------
This Prospectus relates to the registration of 1,452,294 shares (the
"Shares") of Common Stock, $.01 par value per share (the "Common Stock"), of
Travel Services International, Inc. d/b/a The Travel Company (the "Company").
The shares may be offered and sold from time to time for the account of certain
stockholders of the Company (each, a "Selling Stockholder"). See "Principal and
Selling Stockholders." The shares of Common Stock covered by this Prospectus
were issued to the Selling Stockholder in a private placement made in connection
with certain acquisitions by the Company of certain Operating Subsidiaries (as
defined below) pursuant to the terms of Stock Purchase Agreements among the
Company, the Operating Company, and the Selling Stockholder. The Shares may be
offered and sold in transactions quoted on the Nasdaq Stock Market, in
negotiated transactions, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices or
a negotiated prices. See "Plan of Distribution." The Selling Stockholder and any
agents or broker-dealers that participated with the Selling Stockholder in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"), and any
commissions received by the Selling Stockholder and any profit on the resale of
the Shares may be deemed to be underwriting commissions or discounts under the
Securities Act. See "Principal and Selling Stockholders" and "Plan of
Distribution."
The Company's Common Stock is listed on the Nasdaq Stock Market and
trades under the symbol "TRVL." On August 11, 1998, the closing price of the
Common Stock on the Nasdaq Stock Market was $31.375 per share.
The Company will not receive any of the proceeds from the sale of the
Shares but will bear all expenses incurred in effecting the registration of the
Shares, including all registration and filing fees, printing expenses, and the
legal fees of counsel to the Company. The Selling Stockholder will bear all
brokerage or underwriting expenses or commissions, if any, applicable to the
Shares. The Company is a Delaware corporation and all references herein to the
"Company" refer to Travel Services International, Inc. and its subsidiaries. All
references herein to the "Operating Companies" refer to the Company's operating
subsidiaries. All references herein to "TSII" mean the parent company, Travel
Services International, Inc. The executive offices of the Company are located at
220 Congress Park Drive, Delray Beach, FL 33445, and its telephone number is
(561) 266-0860.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
--------------------------------
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.
-------------------------------
The date of this Prospectus is August 13, 1998
<PAGE>
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM TRAVEL SERVICES INTERNATIONAL, INC., 220 CONGRESS PARK DRIVE,
DELRAY BEACH, FL 33445 (TELEPHONE NUMBER (561) 266-0860). ATTENTION: SECRETARY.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BY A DATE WHICH IS FIVE DAYS PRIOR TO THE DATE ON WHICH THE FINAL INVESTMENT
DECISION MUST BE MADE. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
---------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 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, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies
of such material can be obtained at prescribed rates from the Public Reference
Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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, as does the
Company. The address of that site is http://www.sec.gov. In addition, 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference:
1. The Annual Report of the Company on Form 10-K for its fiscal
year ended December 31, 1997 (filed March 31, 1998);
2. The Quarterly Report of the Company on Form 10-Q for its
fiscal period ended March 31, 1998 (filed May 15, 1998);
3. Registration Statement on Form S-1 (Registration No.
333-56567), as amended (as initially filed on June 19, 1998);
and
4. All other reports filed by the Company since the end of the
fiscal year covered by the Annual Report referred to above.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of the Securities
shall be deemed to be incorporated herein by reference. Any statement contained
herein or in a document all or a portion of which is incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein or in the Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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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 that 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 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.
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
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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
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 channel.
The
4
<PAGE>
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 reviewed
various strategies in connection with the brand recognition
and marketing of its services and has started the
implementation of a comprehensive brand and marketing plan.
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.
5
<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.
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 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
6
<PAGE>
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.
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.
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.
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<PAGE>
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.
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 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.
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.
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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.
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 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.
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VOTING CONTROL OF EXISTING MANAGEMENT AND STOCKHOLDERS
As of July 22, 1998, 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.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market, 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. As of July 22, 1998, the
Company had 13,158,805 shares of Common Stock outstanding. Of these shares,
7,111,000 shares are freely tradeable without restriction under the Securities
Act. The remaining 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 a registration statement. In addition, 1,328,347 shares may
be acquired pursuant to outstanding options as of July 15, 1998. 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 until November 15, 1998 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.
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, after the reincorporation of the Company from
Delaware to Florida, which has been approved by the Company's Board of Directors
and stockholders and which the Company intends to undertake in the third quarter
of 1998, the Florida Business Corporation Act, may discourage takeover attempts
that have not been approved by the Board of Directors.
10
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Stockholders.
THE ACQUISITIONS
On November 19, 1997, the Company completed the acquisitions of all of
the outstanding capital stock of CruiseOne, Inc., Cruise World, Inc., and The
Anthony Dean Corporation (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 completed the acquisitions of all of
the outstanding capital stock of Ship `N' Shore Cruises, Inc. The aggregate
consideration paid was 471,508 shares of Common Stock.
On February 9, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Gold Coast Travel Agency Corporation, Inc
("Gold Coast"). The aggregate consideration paid for Gold Coast consisted of
163,755 shares of Common Stock, $6.25 million in cash, and $500,000 in
contingent consideration (based upon performance in the 1998 fiscal year).
On March 31, 1998, the Company completed the acquisitions of all of
the outstanding capital stock of CruiseMasters, Inc., a California corporation
("CruiseMasters"). The consideration paid for CruiseMasters was 152,835 shares
of Common Stock.
11
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of June 22, 1998, as adjusted to
reflect the assumed sale of all of the shares registered hereby by the Selling
Stockholders, by: (i) each person known to beneficially own more than 5% of the
outstanding shares of Common stock; (ii) each of the Company's directors; (iii)
certain of the Company's executive officers; (iv) each Selling Stockholder; and
(v) all executive officers and directors as a group. All persons listed have
sole voting and investment power with respect to their shares, unless otherwise
indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BEING SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING OFFERED AFTER THE OFFERING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
--------------------------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Joseph V. Vittoria(2)........................... 370,000 2.8% -- 370,000 2.8%
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)............................ 225,000 1.7% -- 300,000 1.7%
Wayne Heller(5)................................. 843,334 6.4% -- 843,384 6.4%
Imad Khalidi.................................... 500,000 3.8% -- 500,000 3.8%
John W. Przywara................................ 194,445 1.5% -- 194,445 1.5%
Elan J. Blutinger(6)(7)......................... 323,693 2.4% -- 323,693 2.4%
D. Fraser Bullock(6)............................ 221,328 1.7% -- 221,328 1.7%
Tommaso Zanzotto(6)............................. 10,242 * -- 10,242 *
J&W Heller Corp................................. 843,334 6.4% -- 843,334 6.4%
Anthony J. Persico(8)........................... 470,218 3.6% 470,218 -- --
Marc W. Persico(9).............................. 50,088 * 50,088 -- --
Jo Ann Persico(10).............................. 32,402 * 32,402 -- --
Anthony R. Persico(10).......................... 1,485 * 1,485 -- --
Christopher P. Persico(10)...................... 1,485 * 1,485 -- --
Vincent D. Farrell(10).......................... 12,820 * 12,820 -- --
Charlotte Luna(8)............................... 65,698 * 65,698 -- --
The Adler Family Living Trust(10)............... 210,000 1.6% 210,000 -- --
Natalee Stutzman(11)............................ 291,508 2.2% 291,508 -- --
Richard Kaplan(12).............................. 152,835 1.2% 152,835 -- --
Rhea Sherota(13)................................ 163,755 1.2% 163,755 -- --
All Directors and Executive Officers as a
Group (15 persons)(14)....................... 2,889,708 22.0% -- 2,889,708 22.0%
</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, Mr. Falcone's
spouse.
12
<PAGE>
(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, Mr. Heller's
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) The stockholder's address is c/o CruiseOne, Inc., 10 Fairway Drive,
Deerfield Beach, Florida 33441.
(9) The stockholder's address is c/o CruiseWorld, Inc., 1872 Pleasantville
Road, Briarcliff Manor, New York 10510.
(10) The stockholder's address is c/o Cruise Fairs of America, 2029 Century
Park East, Suite 950, Los Angeles, California 90067.
(11) The stockholder's address is c/o Ship 'N' Shore Cruises, 1160 South
McCall Road, Englewood, Florida 34223.
(12) The stockholder's address is c/o CruiseMasters, Inc., 300 Corporate
Pointe, Suite 100, Culver City, California 90230.
(13) The stockholder's address is c/o Gold Coast Cruises, Concorde Plaza,
19056 N.E. 29th Avenue, North Miami Beach, Florida 33180.
(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.
13
<PAGE>
PLAN OF DISTRIBUTION
The shares covered hereby may be offered and sold from time to time by the
Selling Stockholders or pledgees, donees, transferees, and other successors in
interest. The Selling Stockholders will act independently in making decisions
with respect to the timing, manner and size of each sale. To the Company's
knowledge, no Selling Stockholder has entered into any agreement, arrangement,
or understanding with any particular brokers or market makers with respect to
the shares registered hereby.
The Selling Stockholders may sell Common Stock registered hereunder in any
of the following transactions: (i) through broker-dealers; (ii) through agents;
or (iii) directly to one or more purchasers. The distribution of the Common
Stock by the Selling Stockholders may be effected from time to time in one or
more transactions in the over-the-counter market, in the Nasdaq Stock Market, or
in privately negotiated transactions at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. In addition, any Common Stock covered by this Prospectus which qualifies
for sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144
rather than pursuant to this Prospectus.
In connection with the distribution of the Common Stock, the Selling
Stockholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Common Stock registered hereunder in the course of hedging the positions
they assume with the Selling Stockholders. The Selling Stockholders may also
sell shares short and redeliver the Common Stock to close out such short
positions. The Selling Stockholders may also enter into option or other
transactions with broker-dealers which require the delivery to the broker-dealer
of the Common Stock registered hereunder, which the broker-dealer may resell or
otherwise transfer pursuant to this Prospectus. The Selling Stockholders may
also loan or pledge the Common Stock registered hereunder to a broker-dealer and
the broker-dealer may sell the Common Stock so loaned or upon a default the
broker-dealer may effect sales of the pledged Common Stock pursuant to this
Prospectus.
Underwriters, broker-dealers, or agents may receive compensation in the form
of commissions, discounts, or concessions from the Selling Stockholders in
amounts to be negotiated in connection with each sale of the Common Stock. Such
underwriter, broker-dealers, or agents that participate in the distribution of
the Common Stock may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any profit on the sale of the Common
Stock by them and any commissions, discounts, or concessions received by any
such underwriters, broker-dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act.
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 Morgan, Lewis & Bockius LLP,
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.,
incorporated by reference in this Prospectus and Registration Statement, have
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 firms as
experts in giving such reports.
The financial statements of Lexington Services Associates, Ltd. at December
31, 1997 and for the year then ended, incorporated by reference in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon, and are included in
reliance upon such report given upon the authority of such firm given upon their
authority as experts in accounting and auditing.
14
<PAGE>
================================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON
STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
PAGE
Available Information............................................... 2
Incorporation of Certain Documents
by Reference.................................................... 2
The Company......................................................... 3
Risk Factors........................................................ 6
Use of Proceeds..................................................... 11
The Acquisitions.................................................... 11
Principal and Selling Stockholders.................................. 12
Plan of Distribution................................................ 14
Legal Matters....................................................... 14
Experts............................................................. 14
1,452,294 Shares
[LOGO]
TRAVEL SERVICES
INTERNATIONAL, INC.
Common Stock
------------------
PROSPECTUS
------------------
AUGUST 13, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been made to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from
which the director derived an improper personal benefit.
Article VII of the Company's Certificate of Incorporation, as amended,
states that:
"No director shall be liable to the corporation or any of its stockholders
for monetary damages for breach of fiduciary duty as a director, except with
respect to: (1) a breach of the director's duty of loyalty to the corporation or
its stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (3) liability under
Section 174 of the DGCL; or (4) a transaction from which the director derived an
improper personal benefit, it being the intention of the foregoing provision to
eliminate the liability of the corporation's directors
II-1
<PAGE>
to the corporation or its stockholders to the fullest extent permitted by
Section 102(b)(7) of the DGCL, as amended from time to time. The corporation
shall indemnify to the fullest extent permitted by Sections 102(b)(7) and 145 of
the DGCL, as amended from time to time, each person that such Sections grant the
corporation the power to indemnify."
In addition, Article VII of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors, advisory directors and
employees to the fullest extent permitted by law.
The Company has entered into indemnification agreements with each of its
executive officers, its advisory director and directors which indemnifies such
person to the fullest extent permitted by its Amended and Restated Certificate
of Incorporation, its Bylaws and the DGCL. The Company's stockholders approved
the Company's reincorporation from Delaware to Florida and, accordingly, the
Company intends to amend said indemnification agreements to provide
indemnification to the fullest extent permitted under the Florida Business
Corporation Act. The Company also maintains obtain directors and officers
liability insurance.
ITEM 16. EXHIBITS
EXHIBIT
NO. DESCRIPTION
- -------- -----------
2.1 Agreement and Plan of Organization, dated as of May 9, 1997, among the
Registrant, Auto-Europe, Inc. (Maine), Imad Khalidi, Alex Cecil and
Wilfred Diller, as trustee for Thurston Cecil and Lila Cecil.(1)
2.2 Agreement and Plan of Organization, dated as of May 9, 1997, among the
Registrant, Cruises Only, Inc., Wayne Heller and Judy Heller.(1)
2.3 Agreement and Plan of Organization, dated as of May 9, 1997, among the
Registrant, 800-Ideas, Inc. and Susan Parker.(1)
2.4 Agreement and Plan of Organization, dated as of May 9, 1997, among the
Registrant, Cruises, Inc., Robert G. Falcone, Judith A. Falcone and
Pamela C. Cole.(1)
2.5 Agreement and Plan of Organization, dated as of May 9, 1997, among the
Registrant, D-FW Tours, Inc., D-FW Travel Arrangements, Inc., John W.
Przywara and Sharon S. Przywara.(1)
2.6 First Amendment to Agreement and Plan of Organization among the
Registrant, Auto-Europe, Inc. (Maine), Imad Khalidi Alex Cecil and
Wilfred Diller, as trustee for Thurston Cecil and Lila Cecil.(2)
2.7 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among the Registrant, Cruises, Inc., Robert G. Falcone,
Judith A. Falcone, and Pamela C. Cole.(2)
2.8 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among the Registrant, Cruises Only, Inc., Wayne Heller and
Judy Heller.(2)
2.9 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among the Registrant, D-FW Travel Arrangements, Inc., John
W. Przywara and Sharon Scott Przywara.(2)
2.10 First Amendment to Agreement and Plan of Merger, dated as of June 30,
1997, by and among the Registrant, 800-Ideas, Inc. and Susan Parker.(2)
3.1 Amended and Restated Certificate of Incorporation(l)
3.2 Bylaws(l)
4.1 Specimen Common Stock Certificate(2)
4.2 Form of Restriction and Registration Rights Agreement, dated as of July
28, 1997, between the Registrant and the each of the persons listed on
the schedule thereto.(4)
5 Opinion of Morgan, Lewis & Bockius LLP.
10.1 Amended and Restated Employment Agreement, dated as of July 22, 1997,
between the Registrant and Joseph V. Vittoria.(4)
-- Amended and Restated Employment Agreement, dated as of May 12, 1997,
between the Registrant and Jill M. Vales.(4)
II-2
<PAGE>
-- Amended and Restated Employment Agreement, dated as of June 6, 1997,
between the Registrant and Michael J. Moriarty.(4)
-- Employment Agreement, dated July 22, 1997, between the Registrant
and Mel Robinson.(4) -- Employment Agreement, dated July 22, 1997,
among the Registrant, Auto Europe, LLC and Imad Khalidi.(4)
-- Employment Agreement, dated July 18, 1997, among the Registrant,
Auto Europe, LLC and Alex Cecil.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant,
Cruises, Inc. and Robert Falcone.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant,
Cruises, Inc. and Judith Falcone.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant,
Cruises, Inc. and Holley Christen.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant,
Cruises Only, LLC and Wayne Heller.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant,
Cruises Only, LLC and Judy Heller.(4)
-- Employment Agreement, dated July 22, 1997, among the Registrant, Travel
800, LLC and Susan Parker.(4)
10.2 Form of Indemnification Agreement, dated July 28, 1997, between the
Registrant and each of the persons set forth on the schedule
thereto.(4)
10.3 1997 Long Term Incentive Plan(3)
10.4 Non-Employee Directors' Stock Plan(3)
10.6 Employment Agreement, dated July 25, 1997, between the Registrant and
Suzanne B. Bell.(4) 10.7 Employment Agreement, dated as of July 25,
1997, between the Registrant and Maryann Bastnagel.(4)
10.8 Credit Agreement, dated as of October 15, 1997, by and between the
Registrant and NationsBank, N.A.(4)
10.9 Stock Purchase Agreement, dated as of October 28, 1997, among the
Registrant, CruiseOne, Inc., Anthony J. Persico and Charlotte Luna, as
amended.(5)
10.10 Stock Purchase Agreement, dated as of October 28, 1997, among the
Registrant, Cruise World, Inc., and the sellers named therein, as
amended.(5)
10.11 Stock Purchase Agreement, dated as of October 28, 1996, among the
Registrant, Ship 'N' Shore Cruises, Inc., Cruise Time, Inc., SNS
Coachline, Inc., Cruise Mart, Inc., SNS Travel Marketing, Inc. and
Natalee Stutzman, as amended.(5)
10.12 Asset Purchase Agreement, dated as of February 9, 1998, among the
Registrant, Gold Coast Travel Agency Corporation, Inc. and Rhea
Sherota.(6)
10.13 Employment Agreement, dated as of January 19, 1998, between the
Registrant and John C. DeLano.(7)
10.14 Stock Purchase Agreement, dated March 31, 1998, among the Registrant,
The Cruise Line, Inc. and the shareholders named therein.(8)
10.15 Employment Agreement, dated as of April 1, 1998, among the Registrant
and Spencer Frazier.(9) 10.16 Purchase Agreement by and among the
Registrant and Lexington Services Associates, Ltd., a Texas limited
partnership (the "Partnership"), and the Partnership's partners dated
as of June 1, 1998.(9)
11 Schedule of Computations of Earnings Per Share.(7)
21 Subsidiaries of the Registrant.(10)
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
II-3
<PAGE>
23.3 Consent of Ernst & Young LLP.
24 Reference is made to the Signatures section of this Registration
Statement.
(1) Previously filed as the same Exhibit number on May 14, 1997, under a
Registration Statement on Form S-1 (File No. 333-27125).
(2) Previously filed as the same Exhibit number on July 1, 1997 under a
Registration Statement on Form S-1 (File No. 333-27125).
(3) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended June 30, 1997.
(4) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 1997.
(5) Previously filed as an exhibit to the Company's Form 8-K dated November
19, 1997.
(6) Previously filed as an exhibit to the Company's Form 8-K dated February
9, 1998.
(7) Previously filed as an exhibit to the Company's Form 10-K for the year
ended December 31, 1997.
(8) Previously filed as an exhibit to the Company's Form 8-K dated March
31, 1998.
(9) Previously filed as the same Exhibit number on June 19, 1998, under a
Registration Statement on Form S-1 (File No. 333-56567).
(10) Previously filed as the same Exhibit number on July 15, 1998, under a
Registration Statement on Form S-1 (File No. 333-56567).
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing this Registration Statement on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Delray Beach, State of
Florida, on the 12 day of August, 1998.
TRAVEL SERVICES INTERNATIONAL, INC.
BY: /S/ JILL M. VALES
-------------------------------
Jill M. Vales
Senior Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph V. Vittoria and Jill M. Vales, and
each of them, his true and lawful attorney-in-fact and agents, with full power
of substitution and resubstituion for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, including a Registration Statement
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the dated indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<S> <C> <C>
/S/ JOSEPH V. VITTORIA Chairman of the Board
- ------------------------- Chief Executive Officer, Director August 12, 1998
Joseph V. Vittoria (Principal Executive Officer)
/S/ JILL M. VALES Senior Vice President, Chief
- ------------------------- Financial and Principal August 12, 1998
Jill M. Vales Accounting Officer
/S/ WAYNE HELLER Director
- -------------------------
Wayne Heller August 12, 1998
Director
- -------------------------
Robert G. Falcone August 12, 1998
/S/ IMAD KHALIDI Director
- -------------------------
Imad Khalidi August 12, 1998
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
/S/ JOHN W. PRZYWARA Director
- -------------------------
John W. Przywara August 12, 1998
/S/ ELAN J. BLUTINGER Director
- -------------------------
Elan J. Blutinger August 12, 1998
Director
- -------------------------
D. Fraser Bullock August 12, 1998
/S/ TOMMASO ZANZOTTO Director
- -----------------------
Tommaso Zanzotto August 12, 1998
</TABLE>
II-6
