AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1998
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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:
<TABLE>
<S> <C>
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
</TABLE>
---------------
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]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value per share....... 4,025,000 $ 34.75 $139,868,750 $41,262
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes 525,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Calculated pursuant to Rule 457(c) based on the average high and low sales
price of the Common Stock as reported on the Nasdaq Stock Market on June
8, 1998.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 11, 1998
3,500,000 Shares
[LOGO]
TRAVEL SERVICES INTERNATIONAL, INC.
Common Stock ($.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 9, 1998, the last reported sale
price of the Common Stock on the Nasdaq Stock Market was $34 13/16.
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
FURMAN SELZ
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. resort in country
3. closeup of woman's face
4. plane
5. deck of cruise ship w/lounge chairs
6. closeup of child's face
7. resort in city
8. closeup of senior man
9. closeup of senior woman
10. car on road
11. closeup of child's face
12. 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 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 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 hotel 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 hotel room nights, representing gross sales
volume in excess of approximately $600 million.
The Company offers travel agents and travelers a unique 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. The number of U.S.
citizen departures to Europe increased 11.1% to 9.9 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 5.1 million in 1997 to 7.0
million by the year 2000, an 11.5% compound annual growth rate. Industry
analysts forecast a 10.3% compound annual growth rate in cruise capacity over
the same period. 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 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 12 operating companies,
consisting of nine distributors of cruise vacations, one distributor of
international airline tickets, one distributor of European auto rentals and one
electronic hotel reservation services company. 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 hotel 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 on a pro forma
basis, the Company's net revenues were $92.9 million and 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) providing
information and selling reservations using the Internet. 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 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 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 $ 0.72
=========== =========== =========== ============
Shares used in computing
diluted earnings per share ...... 2,587,873 2,587,873 6,022,649 11,001,599
=========== =========== =========== ============
<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 10,857,694 11,406,077
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ............. $ 411 $ (8,397) $ 22,261
Total assets ................ 100,524 121,377 152,035
Long-term debt .............. 12,699 22,699 4,099
Stockholders' equity......... 57,190 67,190 116,448
</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 302,372 shares of Common
Stock at an assumed offering price of $34.8125 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 $34.8125 per share based on the last reported sales price of the
Common Stock on The Nasdaq Stock Market on June 9, 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 hotel 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 hotel stays. 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 34.5% of the total voting
power of the Common Stock (38.0% 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
$49.3 million ($66.6 million if the Underwriters' over-allotment option is
exercised in full) at an assumed public offering price of $34.8125 per share,
based on the last reported sale price of the Common Stock on the Nasdaq Stock
Market on June 9, 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 preliminary 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.
<TABLE>
<CAPTION>
1997 HIGH LOW
- -------------------------------------------------- ----------- ---------
<S> <C> <C>
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 9, 1998) ............ $ 39 3/8 $ 30
</TABLE>
On June 9, 1998, the last reported sale price of the Common Stock on the
Nasdaq Stock Market was $34 13/16 per share. On June 9, 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 $34 13/16 based on the last
reported sales price of the Common Stock on the Nasdaq Stock Market on June 9,
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 $ 41,277
======= ========= ========
Long-term debt, less current portion .......................... $12,699 $ 22,699(1) $ 4,099
------- ----------- --------
Stockholders' Equity(2):
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
none outstanding ........................................... -- -- --
Common stock, $0.01 par value, 50,000,000 shares authorized;
10,504,826 shares outstanding, 10,790,540 shares outstanding
pro forma, and 12,290,540 shares outstanding pro forma
as adjusted ................................................ 105 108 123
Additional paid-in capital ................................... 52,462 62,459 111,702
Retained earnings ............................................ 4,623 4,623 4,623
------- ----------- --------
Total stockholders' equity ................................... 57,190 67,190 116,448
------- ----------- --------
Total capitalization ........................................ $69,889 $ 89,889 $120,547
======= =========== ========
</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 $ 0.72
=========== =========== =========== =========== =========== ============
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 11,001,599
=========== =========== =========== =========== =========== ============
<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 10,857,694 11,406,077
=========== ============ ============ =============
</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 $ (8,397) $ 22,261
Total assets ................. 100,524 121,377 152,035
Long-term debt ............... 12,699 22,699 4,099
Stockholders' equity ......... 57,190 67,190 116,448
</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 302,372 shares of Common
Stock at an assumed offering price of $34.8125 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 $34.8125 per share based on the last reported sales price of the
Common Stock on the Nasdaq Stock Market on June 9, 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 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 hotel 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 $ 0.38 $ 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 9.9 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>
HOTEL INDUSTRY. Average daily rates in the U.S. hotel 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 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 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 hotel 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 hotel room
nights, representing gross sales volume in excess of approximately $600
million.
The Company offers travel agents and travelers a unique 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) providing information
and selling reservations using the Internet. 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 preliminary 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 Hotel reservations Irving, Texas
</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
hotel 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--enabled the Company to enter into the hotel
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 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.
HOTEL. The Company provides electronic reservation processing services to
over 2,100 independent and chain hotels in 48 countries worldwide. The
Company's hotel 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.
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 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.
35
<PAGE>
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
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
36
<PAGE>
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 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
37
<PAGE>
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 $140,000.
(3) Consists of relocation expenses paid during 1997.
(4) Consists of consulting fees paid prior to the consummation of the Company's
initial public offering.
(5) Effective March 1998, Mr. Khalidi no longer serves as Vice President,
European Operations, but continues in his capacities as CEO of Auto Europe
and as a director of the Company.
The following table sets forth the stock options granted to the Named
Executive Officers during the year ended December 31, 1997:
STOCK OPTION GRANTS AND EXERCISE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE OR DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#) FISCAL YEAR ($/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.
38
<PAGE>
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 effective date of
termination. In the event of a change in control of the Company (as defined in
the agreement) during the Initial Term, if the employee is not given at least
five days' notice of such change in control and the successor's intent to be
bound by such employment agreement, the employee may elect to terminate his or
her employment and receive in one lump sum three times the amount he or she
would receive pursuant to a termination without cause during the Initial Term.
The employment agreements of Messrs. Falcone, Heller, Khalidi and Przywara 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.
39
<PAGE>
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.
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 approved an additional
option grant to Mr. Vittoria of 100,000 shares subject to the availability of
sufficient shares under the Plan. This grant is expected to be effective as of
July 1, 1998 and will have an exercise price equal to the fair market value on
the effective date. 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.
40
<PAGE>
401(K) PLAN
The Company established a new 401(k) plan effective July 1, 1998; existing
401(k) plans and similar plans at the Operating Companies will be suspended or
rolled into the new plan. All employees of the Company, meeting certain minimum
eligibility requirements, are eligible to participate in the 401(k) Plan. The
401(k) Plan provides that each participant may contribute up to 20% of his or
her pre-tax gross compensation (but not greater than a statutorily prescribed
annual limit). The percentage elected by certain highly compensated
participants may be required to be lower. The 401(k) Plan permits, but does not
require, additional contributions to the 401(k) Plan by the Company. All
amounts contributed by employee participants in conformance with plan
requirements and earnings on such contributions are fully vested at all times.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Tommaso Zanzotto and Elan
Blutinger. Mr. Zanzotto has never been an officer or employee of the Company or
its subsidiaries. Mr. Blutinger was an officer of the Company prior to the
Company's initial public offering. The Company was initially capitalized by
Alpine Consolidated, LLC, a consolidator of highly fragmented businesses, of
which Mr. Blutinger is a Managing Director, and Capstone Partners, LLC. As a
result of a 5,444.45 for one stock split effective on May 14, 1997, the 300
shares of Common Stock initially issued by the Company to its founders,
including Alpine Consolidated, LLC, totaled 1,633,335 shares on the
consummation of the initial public offering. In addition, prior to consummation
of the initial public offering, TSGI Funding, LLC ("TSGI"), a Delaware limited
liability company, extended loans to the Company from time to time in amounts
equal to the legal, accounting and other transactional costs, expenses and
disbursements incurred by the Company in connection with the acquisitions of
the Founding Companies and the initial public offering. The member managers of
TSGI were Alpine Consolidated, LLC and Capstone Partners, LLC. All amounts
loaned by TSGI were repaid, without interest, by the Company on July 28, 1997,
upon consummation of the initial public offering. Such loans aggregated
$950,000.
41
<PAGE>
CERTAIN TRANSACTIONS
FORMATION, INITIAL PUBLIC OFFERING AND FOUNDING COMPANY ACQUISITIONS
The Company was formed in April 1996. The Company was initially
capitalized by Alpine Consolidated, LLC, a consolidator of highly fragmented
businesses, of which Elan Blutinger and D. Fraser Bullock, Directors of the
Company, are Managing Directors, and Capstone Partners, LLC, a venture firm
specializing in consolidation transactions, of which Leonard Potter, who is an
Advisory Director to the Board, is a Managing Director. As a result of a
5,444.45 for one stock split effective on May 14, 1997, the 300 shares of
Common Stock initially issued by the Company to its founders totaled 1,633,335
shares on the consummation of the initial public offering.
Prior to consummation of the initial public offering, TSGI Funding, LLC
("TSGI"), a Delaware limited liability company, extended loans to Travel
Services International, Inc. from time to time in an amount equal to the legal,
accounting and other transactional costs, expenses and disbursements incurred
by the Company in connection with the acquisitions of the Founding Companies
and the initial public offering. The member managers of TSGI International,
Inc. were repaid, without interest, by the Company on July 28, 1997, upon
consummation of the initial public offering. Such loans aggregated $950,000.
The aggregate consideration paid by the Company in the acquisitions of the
Founding Companies consisted of approximately $29.1 million in cash and
3,422,225 shares of Common Stock. In addition, certain non-operating assets
with a net book value of approximately $2.2 million were excluded from the
combinations of the Founding Companies (the "Combinations") and retained by
certain stockholders of the Founding Companies. The following table sets forth
the consideration paid to each of the Founding Companies.
<TABLE>
<CAPTION>
COMPANY CASH SHARES
- ------------------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C>
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
======= =========
</TABLE>
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:
<TABLE>
<CAPTION>
CASH SHARES
------------- ----------
<S> <C> <C>
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
</TABLE>
OTHER TRANSACTIONS
Since 1990, Cruises Inc. has leased office space from Pioneer Park I
Company ("Pioneer") pursuant to a lease dated August 9, 1990, as subsequently
amended and supplemented. One of the principals of Pioneer is Michael Falcone,
the brother of Robert Falcone. The rent paid by Cruises Inc. to Pioneer during
1997 was $201,000. The lease terminates on February 29, 2006.
Prior to the initial public offering, 800 Ideas, Inc., the predecessor to
Travel 800 and a company controlled by Susan Parker, a greater than 5%
stockholder of the Company, entered into a Custom Network Service Arrangement
("CNSA") with Sprint Communications Company LP for long distance telephone
services. This contract was not transferred as part of the Combinations, but
was retained by 800 Ideas, Inc. Travel 800 continues to utilize long distance
telephone services under the CNSA and pays for its portion of usage under the
CNSA.
Jacqueline Duffort Cecil, the wife of Alex Cecil, a holder of more than 5%
of the outstanding shares of the Company and the Chief Executive Officer of
Auto Europe prior to July 1997, loaned $300,000 to Auto Europe on December 31,
1995 and 1996 at an interest rate of prime plus 1%. Auto Europe repaid this in
February 1997.
During 1995, Auto Europe advanced $2.1 million to Alex Cecil who used the
advance to purchase an island off the coast of Maine. Subsequently he
contributed this island to Auto Europe in return for the cancellation of his
obligations on the advance. This island was not included in the assets of Auto
Europe acquired by the Company in July 1997.
Auto Europe has purchased computer equipment from The Series II Group,
which is owned by Imad Khalidi, a director of the Company and Chief Executive
Officer of Auto Europe, and certain other employees of Auto Europe. Auto Europe
purchases the equipment at cost to The Series II Group. Auto Europe purchased
$134,000 worth of computer supplies and equipment from The Series II Group
during 1997.
Prior to the initial public offering, Auto Europe extended a loan to Imad
Khalidi, a director of the Company and Chief Executive Officer of Auto Europe.
The indebtedness is evidenced by a note, the principal amount of which is
$326,000. The note bears interest at 6% and is payable on September 30, 1998.
COMPANY POLICY
Any future transactions with officers, directors and affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested members of the Board of Directors.
43
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock, as of 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) ............................ 300,000 2.7 20,000 280,000 2.2
Wayne Heller(5) ................................. 908,334 8.2 20,000 888,334 7.0
Imad Khalidi .................................... 500,000 4.5 50,000 450,000 3.6
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 20,000 888,334 7.0
800 Ideas, Inc.(8) .............................. 902,778 8.1 681,000 221,778 1.8
Greystones, Inc.(9) ............................. 1,083,334 9.7 704,063 379,271 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 * 17,430 17,430 *
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) ........... 27,035 * 27,035 -- --
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 *
Prudent Investments, L.L.C.(13) .................. 8,929 * 8,929 -- --
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) ....................... 3,049,708 27.1 110,000 2,939,708 23.0
</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, his spouse, and 50,000
shares owned by a trust for the benefit of Mr. Falcone's minor children.
Mr. Falcone disclaims beneficial ownership of the 50,000 shares of Common
Stock held by his minor children; however, Mr. Falcone claims investment
and voting power with respect to these shares.
(5) These shares are held of record by J&W Heller Corp., a corporation of
which Mr. Heller is a 50% stockholder. The remaining 50% of the ownership
of J&W Heller Corp. is held by Judy Heller, his spouse.
(6) Includes 10,000 shares which may be acquired upon the exercise of vested
options.
(7) Excludes 39,000 shares held by trusts for the benefit of Mr. Blutinger's
minor children. Mr. Blutinger disclaims ownership, investment and voting
power of such shares.
(8) These shares are held of record by 800 Ideas, Inc., a corporation of which
Susan Parker is the sole stockholder. Effective June 9, 1998, Ms. Parker
resigned from her position as a member of the Company's Board of
Directors.
(9) The stockholder's address is 124 Pine Street, Portland, Maine 04102. Alex
Cecil, the former owner of Auto Europe, is the sole voting stockholder of
Greystones, Inc.
(10) The stockholder's address is c/o Capstone Partners, LLC, 9 East 53rd
Street, 3rd Floor, New York, New York 10022.
(11) The stockholder's address is c/o Alpine Consolidated, LLC, 100 West Canyon
Crest Road, Alpine, Utah 84004.
(12) The stockholder's address is c/o Alpine Consolidated, LLC, 1683 Box Elder
Drive, Alpine, Utah 84004.
(13) The stockholder's address is c/o Alpine Consolidated, LLC, 2927 44th
Street NW, Washington, D.C. 20016.
(14) Includes 132,500 shares that may be acquired upon the exercise of vested
options or options that will vest within 60 days following the date of
this Prospectus.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 51,000,000 shares of
capital stock, par value $.01 per share, consisting of 50,000,000 shares of
Common Stock, of which 2,484,501 shares are designated restricted common stock
(the "Restricted Common Stock") and 1,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). At 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, 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:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------ ------------
<S> <C>
Credit Suisse First Boston Corporation .........
Furman Selz LLC ................................
NationsBanc Montgomery Securities LLC ..........
Raymond James & Associates, Inc. ...............
Total ........................................ 3,500,000
=========
</TABLE>
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 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.
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 & 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,
51
<PAGE>
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.
52
<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 5, 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 $ 0.72 $ 0.16 $ 0.20
=========== =========== =========== =========== ===========
Weighted average shares
outstanding in computing
diluted pro forma earnings
per share ........................ 10,286,265 10,286,265 11,001,599 10,857,694 11,406,077
=========== =========== =========== =========== ===========
</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:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
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
========= ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Net revenues .......... $8,105,000 $11,000,000 $15,722,000
========== =========== ===========
Net income ............ $ 365,000 $ 259,000 $ 1,167,000
========== =========== ===========
</TABLE>
On December 2, 1997, the Company consummated the acquisition of all of the
outstanding capital stock of Trax Software, Inc. ("Trax"). The aggregate
consideration paid was 32,985 shares of common stock. Trax developed software
products designed for specialized distributors of leisure travel services. This
software is the foundation of the reservations booking functionality of the
Company's integrated selling, service, product development and customer
information systems now under development. The acquisition is accounted for
using the purchase method of accounting. Accordingly, the operations of Trax
have been included in the accompanying consolidated financial statements from
the date of acquisition. The historical operations of Trax when compared to the
historical operations of the Company are not significant.
On January 20, 1998, the Company consummated the acquisition of
substantially all of the assets and assumption of substantially all of the
liabilities of Diplomat Tours, Inc. and International Airline Consolidators
(collectively, "Diplomat"). The aggregate consideration paid for Diplomat
consisted of 21,821 shares of common stock and $2.0 million in cash. Diplomat
is a specialized distributor of international airline reservations and had 1997
net revenues of approximately $1.9 million. The
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 302,372 shares of Common Stock at an assumed offering
price of $34.8125 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 $ .72 $ .16 $ .20
============ ============ ============ =========== ===========
Weighted average shares used
outstanding .................. 10,286,265 10,286,265 11,001,599 10,857,694 11,406,077
============ ============ ============ =========== ===========
</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:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------ -------------
<S> <C>
1998 ................ $ 433,000
1999 ................ 427,000
2000 ................ 425,000
2001 ................ 505,000
2002 ................ 404,000
Thereafter .......... 2,368,000
----------
$4,562,000
==========
</TABLE>
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:
<TABLE>
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
Germany ................. 21% 19% 18%
United Kingdom .......... 19% 19% 20%
France .................. 16% 17% 17%
Italy ................... 13% 14% 13%
</TABLE>
(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:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------ ------------
<S> <C>
1998 ................ 1,220,000
1999 ................ 867,000
2000 ................ 740,000
2001 ................ 667,000
2002 ................ 568,000
Thereafter .......... 530,000
---------
$4,592,000
==========
</TABLE>
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:
<TABLE>
<S> <C>
1998 ................ $710,574
1999 ................ 109,139
2000 ................ 800,615
2001 ................ 78,843
2002 ................ 22,343
--------
$1,721,514
==========
</TABLE>
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:
<TABLE>
<S> <C>
1998 ................ $228,000
1999 ................ 252,000
2000 ................ 147,000
--------
$627,000
========
</TABLE>
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)
<TABLE>
<S> <C>
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
======
</TABLE>
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):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
------------- ---------
<S> <C> <C>
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
======
</TABLE>
Accounts payable and accrued liabilities as of July 27, 1997, consist of
the following (in thousands):
<TABLE>
<S> <C>
Accounts payable .......................... $134
Accrued compensation and benefits ......... 313
Other accrued liabilities ................. 413
----
$860
====
</TABLE>
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):
<TABLE>
<S> <C>
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
======
</TABLE>
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)
<TABLE>
<S> <C>
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
======
</TABLE>
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):
<TABLE>
<CAPTION>
Balance at beginning of period $125
<S> <C>
Deductions for uncollectible receivables written off
and recoveries, net ............................... (16)
---
$ 109
=====
</TABLE>
Accounts payable and accrued expenses as of July 27, 1997, consist of the
following (in thousands):
<TABLE>
<CAPTION>
Accounts payable $562
<S> <C>
Accrued compensation and benefits ......... 167
---
$729
====
</TABLE>
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):
<TABLE>
<S> <C>
Period from July 28, 1997 to December 31, 1997 ......... $ 15
Year ending December 31, 1998 .......................... 141
----
$156
====
</TABLE>
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)
<TABLE>
<S> <C>
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
======
</TABLE>
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)
<TABLE>
<CAPTION>
RETAINED
SHARES EARNINGS
-------- ---------
<S> <C> <C>
BALANCE, December 31, 1996 ......... 100 $809
Net income ......................... -- 72
--- ----
BALANCE, July 27, 1997 ............. 100 $881
</TABLE>
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 ONLY, 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 ONLY, 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):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
------------- ---------
<S> <C> <C>
Leasehold improvements ................. 7 $ 8
Office equipment ....................... 5-7 492
Furniture and fixtures ................. 7 101
------
601
Less--Accumulated depreciation ......... (324)
------
Property and equipment, net .......... $ 277
======
</TABLE>
F-58
<PAGE>
CRUISES ONLY, 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):
<TABLE>
<S> <C>
Current ............................ $316
Deferred ........................... 34
----
Total income tax expense ......... $350
====
</TABLE>
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):
<TABLE>
<S> <C>
Tax assets--
Accrued expenses ....................... $ 35
-----
Tax liability--
Accounts receivable .................... (28)
Depreciation and amortization .......... (28)
-----
(56)
-----
Net deferred tax (liability) ......... $ (21)
=====
</TABLE>
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 ONLY, 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:
<TABLE>
<S> <C>
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
==========
</TABLE>
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>
<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. closeup of man's face
2. closeup of child's face
3. castle in the country
4. closeup of telephone operator
5. church steeple
6. cruise ship
7. family in harbor
8. row boats
9. group of cruise ship passengers
10. couple at beach
11. couple with snorkeling equipment
<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
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
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
</TABLE>
[LOGO]
TRAVEL SERVICES
INTERNATIONAL, INC.
Shares
Common Stock
($.01 Par Value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
FURMAN SELZ
NATIONSBANC MONTGOMERY
SECURITIES LLC
RAYMOND JAMES
& ASSOCIATES, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
<TABLE>
<S> <C>
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
========
</TABLE>
- ----------------
(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.*
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.
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.
</TABLE>
- ----------------
* To be filed by amendment.
(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.
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ......... S-1
Schedule II--Valuation and Qualifying Accounts ............. S-2
</TABLE>
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. 1 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 11th day of June, 1998.
TRAVEL SERVICES INTERNATIONAL, INC.
BY: /s/ Joseph V. Vittoria
Joseph V. Vittoria
Chairman and Chief Executive 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 resubstitution 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 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, June 11, 1998
- ------------------------ Chief Executive Officer, Director
Joseph V. Vittoria (Principal Executive Officer)
/s/ Jill M. Vales Senior Vice President, Chief June 1, 1998
- ------------------------ Financial and Principal
Jill M. Vales Accounting Officer
/s/ Wayne Heller Director June 11, 1998
- ------------------------
Wayne Heller
/s/ Robert G. Falcone Director June 11, 1998
- ------------------------
Robert G. Falcone
/s/ Imad Khalidi Director June 11, 1998
- ------------------------
Imad Khalidi
/s/ John W. Przywara Director June 11, 1998
- ------------------------
John W. Przywara
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ----------------------------- ---------- --------------
<S> <C> <C>
/s/ Elan J. Blutinger Director June 11, 1998
- ------------------------
Elan J. Blutinger
Director June , 1998
D. Fraser Bullock
Director June , 1998
Tommaso Zanzotto
</TABLE>
II-8
<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 5, 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
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- --------- --------------------------------------------------------------------------- -----------
<S> <C> <C>
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.
21 Subsidiaries of the Registrant
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
</TABLE>
EXHIBIT 10.16
- --------------------------------------------------------------------------------
PURCHASE AGREEMENT
BY AND AMONG
TRAVEL SERVICES INTERNATIONAL, INC.,
LEXINGTON SERVICES ASSOCIATES, LTD.,
LEXINGTON SERVICES CORPORATION,
1997-1 IRREVOCABLE TRUST,
R. A. WILKINS 1998 IRREVOCABLE TRUST
AND
SS-1998 IRREVOCABLE TRUST
DATED AS OF JUNE 1, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ARTICLE I - PURCHASE OF PARTNERSHIP INTERESTS, PURCHASE PRICE...........................1
1.1 Purchase and Sale of Partnership Interests; Purchase Price.................1
1.2 TSI Stock..................................................................4
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND
THE COMPANY............................................................5
2.1 Organization, Qualification, etc...........................................5
2.2 Subsidiaries...............................................................6
2.3 Partnership Interests......................................................6
2.4 Partnership Record Books...................................................6
2.5 Title to Partnership Interests.............................................6
2.6 Options and Rights.........................................................6
2.7 Financial Condition at Closing.............................................7
2.8 Authorization, Etc.........................................................7
2.9 No Violation...............................................................7
2.10 Financial Statements......................................................8
2.11 Accounts Payable; Accounts Receivable; Customer Deposits..................8
2.12 Employees.................................................................8
2.13 Absence of Certain Changes................................................9
2.14 Contracts.................................................................9
2.15 Disclosure...............................................................12
2.16 Title and Related Matters................................................12
2.17 Litigation...............................................................12
2.18 Tax Matters..............................................................13
2.19 Compliance with Law and Applicable Government and other Regulations......14
2.20 ERISA and Related Matters................................................14
2.21 Intellectual Property....................................................16
2.22 Environmental Matters....................................................17
2.23 Dealings with Affiliates; Management Fees................................18
2.24 Banking Arrangements; Credit Facilities..................................18
2.25 Insurance................................................................18
2.26 Investment Representations...............................................19
2.27 Brokerage; Company Liability.............................................19
2.28 Improper and Other Payments..............................................19
2.29 Significant Suppliers and Customers; Material Plans and Commitments......19
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER..........................20
3.1 Corporate Organization, etc...............................................20
3.2 Authorization, Etc........................................................20
3.3 No Violation..............................................................20
3.4 Governmental Authorities..................................................21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.5 Issuance of TSI Stock.....................................................21
3.6 Shelf Registration Statement..............................................21
3.7 Commission Reports........................................................21
3.8 No Material Adverse Change................................................22
3.9 Securities Act............................................................22
3.10 No Brokers...............................................................22
ARTICLE IV - OTHER AGREEMENTS..........................................................22
4.1 Further Assurances........................................................22
4.2 Consent of Partners.......................................................23
4.3 Consents..................................................................23
4.4 No Termination of Sellers' Obligations by Subsequent Incapacity, Etc......23
4.5 Employment Agreements; Termination of Related Party Agreements............23
4.6 Public Announcements......................................................23
4.7 Non-Competition Covenant..................................................24
4.8 Non-disclosure; Confidentiality...........................................26
4.9 Stock Options.............................................................27
4.10 No Hart-Scott-Rodino Filing..............................................27
4.11 Settlement of Certain Obligations........................................28
4.12 Transferred Trademarks...................................................28
4.13 Use of Names.............................................................29
4.14 Consent of Ernst & Young.................................................29
4.15 Earn-Out Budget; Working Capital; Etc....................................29
4.16 Sales Under Securities Laws..............................................30
ARTICLE V - CLOSING....................................................................30
5.1 Closing...................................................................30
5.2 Closing Deliveries........................................................30
ARTICLE VI - SURVIVAL OF TERMS; INDEMNIFICATION........................................31
6.1 Survival..................................................................31
6.2 Indemnification by the Sellers............................................31
6.3 Indemnification by the Purchaser..........................................32
6.4 Third-Party Claims........................................................32
6.5 Limitation on Indemnification.............................................33
6.6 Business Records..........................................................35
ARTICLE VII - MISCELLANEOUS PROVISIONS.................................................35
7.1 Amendment and Modification................................................35
7.2 Entire Agreement..........................................................35
7.3 Certain Definitions.......................................................35
7.4 Exhibits and Schedules....................................................39
7.5 Waiver of Compliance; Consents............................................39
7.6 Assignment................................................................39
7.7 Governing Law.............................................................39
7.8 Consent to Jurisdiction; Service of Process...............................39
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.9 Injunctive Relief.........................................................40
7.10 Headings.................................................................40
7.11 Pronouns and Plurals.....................................................40
7.12 Construction.............................................................40
7.13 Binding Effect...........................................................40
7.14 Delays or Omissions......................................................40
7.15 Severability.............................................................40
7.16 Expenses.................................................................40
7.17 Attorneys' Fees..........................................................41
7.18 Counterparts.............................................................41
</TABLE>
iii
<PAGE>
SCHEDULES
---------
1.1 Sellers; Partnership Interests; Proportionate Shares
1.1(b)(i) Payment of Cash at Closing
1.1(b)(ii) Stock Certificate Holders
2.1 Jurisdictions of Qualification
2.9 Violations; Third Party Consents
2.10(a) Additional Liabilities
2.10(b) Liabilities covered by Insurance
2.11(a) Accounts Payable
2.11(b) Accounts Receivable
2.11(c) Customer Deposits
2.12 Employee Matters
2.13 Certain Changes
2.14 Contracts
2.16 Liens; List of Property
2.17 Litigation
2.19(b) Permits and Licenses
2.20 ERISA, Benefit Plans and Other Matters
2.21 Intellectual Property
2.21(d) Software
2.22 Environmental Matters
2.23 Affiliated Transactions
2.24 Banking Arrangements
2.25 Insurance
2.27 Brokerage
2.29 Significant Suppliers and Customers; Material Plans and Commitments
4.5(a) Employment Agreements to be Terminated
4.5(b) Related Party Agreements to be Terminated
4.12 Transferred Trademarks
EXHIBITS
--------
2.1 Partnership Organizational Documents
2.10 Financial Statements
iv
<PAGE>
PURCHASE AGREEMENT (the "AGREEMENT"), dated as of June 1, 1998 by and
among TRAVEL SERVICES INTERNATIONAL, INC., a Delaware corporation, or its
permitted assigns ("TSI" or the "PURCHASER"), LEXINGTON SERVICES ASSOCIATES,
LTD., a Texas limited partnership (the "COMPANY" or the "PARTNERSHIP"),
LEXINGTON SERVICES CORPORATION, a Texas corporation and the general partner of
the Company ("GP"), and 1997-1 IRREVOCABLE TRUST, R. A. WILKINS 1998 IRREVOCABLE
TRUST and SS-1998 IRREVOCABLE TRUST, each of which is a trust created under the
laws of Texas and a limited partner of the Company (each, an "LP", and together
with the GP, the "PARTNERS"). The Partners are also sometimes referred to herein
as the "SELLERS".
WHEREAS, the Sellers own all of the issued and outstanding partnership
interests in the Company;
WHEREAS, TSI desires to purchase and acquire from the Sellers, and the
Sellers desire to sell, transfer and deliver to TSI, all of the issued and
outstanding partnership interests in the Company, upon the terms and subject to
the conditions set forth herein (the "ACQUISITION"), which acquisition shall be
consummated by the assignment of such partnership interests by the Sellers to
two wholly-owned subsidiaries of Purchaser as provided in Section 1.1 below;
WHEREAS, upon the closing of the transactions contemplated by this
Agreement, the Company shall be and become a limited partnership whose interests
are owned only by subsidiaries of TSI, and the existence of the Company as a
Texas limited partnership shall continue thereafter until otherwise terminated;
NOW, THEREFORE, for and in consideration of the mutual benefits to be
derived hereby and the premises, representations, warranties, covenants and
agreements herein contained, TSI, the Sellers and the Company hereby agree,
intending to be legally bound, as follows:
ARTICLE I
PURCHASE OF PARTNERSHIP INTERESTS; PURCHASE PRICE
1.1 PURCHASE AND SALE OF PARTNERSHIP INTERESTS; PURCHASE PRICE.
(a) PURCHASE AND SALE OF PARTNERSHIP INTERESTS. Subject to the
terms and conditions of this Agreement, the Sellers agree to sell, transfer and
deliver to the Purchaser, and the Purchaser agrees to purchase, acquire and
accept delivery from the Sellers, all of the issued and outstanding partnership
interests in the Company, including all general and limited partnership
interests in the Company (collectively, the "COMPANY INTERESTS"), owned or held
by the Sellers, which Company Interests to be sold by each Seller and purchased
hereunder are set forth opposite each such Seller's name on SCHEDULE 1.1
attached hereto. Notwithstanding anything to the contrary in this Agreement, the
Acquisition shall be consummated by the transfer of the Company Interests as
follows: (i) all Company Interests constituting general partnership interests
shall be assigned by the Sellers at Closing to Lexington Services, Inc., a
Delaware corporation and wholly-owned subsidiary of Purchaser (the "NEW GP"),
and (ii) all Company Interests constituting limited partnership interests shall
be assigned by the Sellers at Closing to Lexington Services
<PAGE>
Limited, Inc., a Delaware corporation and a wholly-owned subsidiary of Purchaser
(the "NEW LP") (the New GP and New LP are referred to herein as the "NEW
PARTNERS").
(b ) PURCHASE PRICE. Upon the sale, transfer and delivery to
the Purchaser by the Sellers of the Company Interests at the Closing (as such
term is defined in SECTION 5.1 hereof), and in consideration therefor, TSI shall
deliver to the Sellers the following consideration in the aggregate, to be
allocated among and delivered to each of the Sellers in the respective amounts
set forth on SCHEDULE 1.1 hereto (except that the consideration under paragraph
(iii) below shall be delivered if and when as provided therein);
(i ) TWENTY MILLION DOLLARS ($20,000,000) by wire
transfer of immediately available Funds, all of which funds
shall be delivered to the respective accounts and in the
respective amounts set forth on SCHEDULE 1.1(B)(I).
(ii) Certificates evidencing an aggregate of 283,990
shares of common stock, par value $.01 per share, of TSI (the
"TSI STOCK"), valued in the aggregate at $10,000,000 (based
upon a per share price of $35.2125, which is the average
closing price of TSI's common stock on the NASDAQ National
Market for the 20 trading days prior to and including the date
hereof), which stock certificates shall be issued and
registered in the names of the respective persons and in the
respective amounts listed in SCHEDULE 1.1(B)(II). The issuance
of TSI Stock shall be registered under the Securities Act of
1933, as amended (the "SECURITIES ACT") pursuant to the Shelf
Registration Statement (as defined in Section 2.26(a)).
(iii) Upon completion of the Company's income
statement and other financial statements (the "Contingent
Financials") for the twelve full calendar months following the
Closing (the "Accounting Period") in accordance with GAAP (as
defined in Section 7.3), and the determination of the amount
of the Company EBIT for the Accounting Period in accordance
with the procedures in paragraph (c) below; an amount (the
"CONTINGENT PAYMENT") equal to the excess, if any, of (1) the
product of 7.0 times the Company EBIT (as defined in Section
7.3) reflected in the Contingent Financials for the Accounting
Period, less (2) $30,000,000; provided, HOWEVER, that the
Contingent Payment is limited to a maximum of, and shall not
exceed, SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS
($7,500,000). Two-thirds (2/3) of the Contingent Payment shall
be payable in immediately available funds, and one-third (1/3)
of the Contingent Payment shall be payable in registered
shares of TSI's common stock (the "ADDITIONAL TSI Shares")
subject to TSI's receipt of such agreements and
representations from the recipient's of such shares as the
Sellers have made in Section 2.26 of this Agreement regarding
the TSI Stock; PROVIDED, HOWEVER, that at TSI's option in its
sole discretion TSI may pay the entire Contingent Payment in
cash. Subject to the previous sentence, the issuance of the
Additional TSI Shares shall be registered under the Securities
Act pursuant to an applicable and appropriate registration
statement filed by TSI under the Securities Act and which is
effective at such time (the "Other Registration Statement").
The number of Additional TSI Shares will be determined based
upon the average closing price of
2
<PAGE>
TSI's common stock on the NASDAQ National Market, as published
in the Wall Street Journal for the twenty (20) trading days
following the end of the Accounting Period. During the
Accounting Period, TSI will maintain the separate existence of
the Company as a limited partnership owned by subsidiaries of
TSI (or cause the Company's business and assets to be held and
operated by a separate entity wholly-owned by TSI, in which
case TSI shall bear the cost of any such reorganization) and
allow the business of the Company to be managed by or under
the supervision of the Executives (as defined below in SECTION
4.5) in accordance with and subject to their respective
employment agreements, in a manner which is intended to
maximize the EBIT of the Company during such period, but also
in a reasonable and prudent manner in accordance with sound
business principles and TSI's operating policies (including
without limitation TSI's approval of expenditures and
contracts for technology and telecommunications as
contemplated by Section 4.15 hereof) and TSI's covenants under
its credit facilities, subject to the reasonable direction of
TSI's Board of Directors in good faith with due regard for the
intent of this paragraph.
(c) PROCEDURES; DISPUTES.
(1) Within 60 days after the end of the Accounting
Period, TSI shall furnish to the Sellers a statement (the "EARN-OUT
STATEMENT") setting forth the Company EBIT for such period, together
with a reasonably detailed calculation thereof and a copy of the
Contingent Financials. TSI shall permit the Executives to participate
in the preparation of the Earn-out Statement and shall consult with
them in calculating Company EBIT for the Accounting Period in
accordance with the terms of this Agreement, but the final contents of
the Earn-out Statement shall be determined by TSI.
(2) After delivery of the Earn-out Statement, TSI
shall afford to the Sellers and their authorized representatives
reasonable access to the relevant books and records of account of the
Company in order to permit them to determine whether the calculation of
Company EBIT for the Accounting Period is correct. If the Sellers
disagree with the determination of Company EBIT set forth in the
Earn-out Statement, the Sellers shall deliver a written notice (the
"DISPUTE NOTICE") to TSI within 30 days after the receipt of the
Earn-out Statement identifying each matter in dispute and a description
of the basis for the dispute.
(3) If the Sellers timely deliver a Dispute Notice to
TSI, TSI and the Sellers shall attempt in good faith to resolve such
dispute by agreement between the parties. If Purchaser and the Sellers
are unable to resolve any such dispute within 30 days after receipt by
TSI of the Dispute Notice, all items in dispute shall be submitted to
Arthur Andersen LLP (or, if such firm declines to act as Accounting
Arbiter (as defined below) pursuant to this paragraph (c), another
accounting firm of national standing and reputation jointly selected by
the parties), who shall act as an independent and impartial arbiter
(the "ACCOUNTING ARBITER") for purposes of resolving such dispute. The
determination of the Accounting Arbiter shall be limited to the matters
in dispute and shall be final, conclusive and binding on the parties.
The parties shall cooperate with each other and with the
3
<PAGE>
Accounting Arbiter and shall provide the Accounting Arbiter with such
information as it may reasonably require. The fees and expenses of the
Accounting Arbiter shall be borne equally by TSI and the Sellers.
1.2 TSI STOCK. The Purchaser shall issue the TSI Stock to the Sellers
subject to the conditions and restrictions set forth in this SECTION 1.2 (and
the Additional TSI Shares shall be subject to the same restrictions other than
paragraph (a)(1) below as if such shares were TSI Stock).
(a) RESTRICTIONS ON TRANSFER
(1) Except for transfers to immediate family members
of (i) the stockholders of the GP (who hold stock of the GP either
directly or through one or more corporations) or (ii) the trustees of
the LPs, who agree to be bound by the restrictions set forth in this
SECTION 1.2 (or trusts for the benefit of such family members, the
trustees of which so agree), during the one-year period (the
"RESTRICTION PERIOD") beginning on the Closing Date, the Sellers shall
not sell, assign, exchange, transfer, distribute or otherwise dispose
of (in each case, a "TRANSFER") any shares of TSI Stock received by the
Sellers hereunder. Following the Restriction Period, the Sellers may
transfer their shares of TSI Stock so long as such transfer is in
accordance with the Future Sale Procedures set forth in SECTION
1.2(A)(2) and other applicable provisions of this Section 1.2.
(2) The certificates evidencing the TSI Stock
delivered to the Sellers pursuant to this Agreement shall bear a legend
substantially in the form set forth below:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, DISTRIBUTED
OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE
REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, DISTRIBUTION, OR
OTHER DISPOSITION, OTHER THAN IN ACCORDANCE WITH
SECTION 1.2 OF THAT CERTAIN PURCHASE AGREEMENT DATED
AS OF JUNE 1, 1998, BY AND AMONG ISSUER, LEXINGTON
SERVICES ASSOCIATES, LTD. AND THE SELLERS NAMED
THEREIN.
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE
ISSUED IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
APPLIES. THESE SHARES MAY ONLY BE TRANSFERRED
PURSUANT TO A REGISTRATION STATEMENT COVERING THE
TRANSFER OF SUCH SHARES OR A VALID EXEMPTION FROM
REGISTRATION.
At the request of any Seller, the foregoing legend
shall be removed from certificates for such Seller's TSI Stock by TSI
(or by any transfer agent appointed by TSI)
4
<PAGE>
at any time after the second anniversary of the Closing Date. In
addition, at the request of any Seller, the "Rule 145" legend will be
removed upon receipt by TSI of an opinion (reasonably acceptable to
TSI) of counsel (reasonably acceptable to TSI) that such legend may
appropriately be removed in the circumstances under applicable
securities laws, and the cost of one such opinion shall be paid by TSI
up to a maximum of $3,000.
(3) Except for transfers to family members of (i) the
stockholders of the GP (who hold stock of the GP either directly or
through one or more corporations) or (ii) the trustees of the LPs, who
agree to bound by the restrictions set forth in this SECTION 1.2 (or
trusts for the benefit of such family members, the trustees of which so
agree), during the one-year period following the Restriction Period, no
Seller shall transfer, in any transaction or series of transactions
occurring within any four-week period, more than 5,000 shares of TSI
Stock (in either case, a "FUTURE SALE"), unless the following
procedures (the "FUTURE SALE PROCEDURES") are complied with: (i) the
shares of TSI Stock are sold in private transactions not involving
sales on any securities exchange or NASDAQ market that are exempt from
the registration requirements of the Securities Act, and the purchasers
thereof agree to be bound by the restrictions in this Section 1.2 to
the same extent as the Seller and TSI is notified of such transaction;
or (ii) the Sellers notify TSI of a proposed Future Sale to be effected
in a public transaction in advance of the trade and the trade is
effected through one or more market makers who make a market in TSI's
stock.
(4) For purposes of this Agreement (and the
restrictions set forth in this SECTION 1.2), the term "TSI Stock" shall
mean and include (i) the shares of TSI Stock issued, granted, conveyed
and delivered to the Sellers pursuant to SECTION 1.1 hereof, and (ii)
any and all other or additional shares of capital stock of TSI issued
or delivered by TSI with respect to the shares of TSI Stock described
in clause (i) hereof, including without limitation any shares of
capital stock of TSI issued or delivered with respect to such shares as
a result of any stock split, stock dividend, stock distribution,
recapitalization or similar transaction.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE SELLERS AND THE COMPANY
The Sellers and the Company, jointly and severally, make the following
representations and warranties to the Purchaser (but such representations and
warranties, to the extent they relate to actions on the part of the Company are
limited to actions taken prior to or on the Closing Date):
2.1 ORGANIZATION, QUALIFICATION, ETC.
(a) The Company is a limited partnership duly formed, validly
existing and in good standing under the laws of the State of Texas with the
partnership power and authority to
5
<PAGE>
carry on its business as it is now being conducted, and to own, operate and
lease its properties and assets.
(b) The Company is duly qualified or licensed to do business
in good standing in the jurisdictions set forth on SCHEDULE 2.1 attached hereto,
those being every jurisdiction in which the conduct of the Company's business,
the ownership or lease of its properties, or the transactions contemplated by
this Agreement, require it to be so qualified, registered or licensed, except
where the failure to be so qualified or in good standing would not have a
Material Adverse Effect.
(c) True, complete and correct copies of the Company's
certificate of limited partnership and partnership agreement (the "PARTNERSHIP
AGREEMENT"), as amended to date and as presently in effect, are attached hereto
as EXHIBIT 2.1. The Company has no other organizational documents.
2.2 SUBSIDIARIES. The Company has no Subsidiaries (as defined in
SECTION 12.3) nor any investment or other equity interest in any Person (as
defined in SECTION 7.3).
2.3 PARTNERSHIP INTERESTS. As of the date hereof, the Company Interests
constitute all of the authorized and outstanding partnership interests of the
Company; and all of the Company Interests are owned legally, beneficially and of
record only by the respective Sellers (or by their respective trustees or
beneficiaries, as applicable) as set forth on SCHEDULE 1.1 attached hereto,
which Schedule also indicates the nature of each Seller's Company Interest
(general or limited), all as indicated in SCHEDULE 1.1. The Company has no
partners (general, limited, or otherwise) other than the Sellers.
2.4 PARTNERSHIP RECORD BOOKS. The partnership record book of the
Company has been made available to the Purchaser, is complete and correct in all
material respects and contains all of the material proceedings of the partners
and the Company, and all requisite Federal and State documentary stamps, if any,
have been affixed thereon and canceled.
2.5 TITLE TO PARTNERSHIP INTERESTS. All of the issued and outstanding
partnership interests in the Company are owned only by the Sellers or by their
respective trustees or beneficiaries, as applicable, in the respective amounts
and as set forth on SCHEDULE 1.1 hereto, are duly authorized and validly issued,
and are free of all Liens (as defined in SECTION 7.3) other than restrictions on
transfer imposed under applicable securities law and restrictions arising under
the terms of the partnership agreement of the Company ("PERMITTED PARTNERSHIP
INTEREST RESTRICTIONS"). Upon delivery by the Sellers of the Company Interests
to the New Partners at the Closing against payment of the purchase price
thereof, the Sellers will convey, and the New Partners will receive, good and
valid title to all the Company Interests (including, without limitation, all
legal and beneficial title, rights and interests therein), free and clear of all
Liens or contractual restrictions or limitations whatsoever other than Permitted
Partnership Interest Restrictions and Liens arising from the contracts or
actions of TSI.
2.6 OPTIONS AND RIGHTS. There are no outstanding subscriptions,
options, warrants, rights, securities, contracts, commitments, understandings or
other rights or arrangements under
6
<PAGE>
which the Company is bound or obligated to issue any additional partnership
interests. There are no agreements, arrangements or understandings between any
Sellers and/or the Company and any other Person (as defined in SECTION 7.3)
giving any Person any right or interest in any Company Interest. The Sellers do
not have, or hereby waive, any preemptive or other right to acquire partnership
interests of the Company that such Sellers have or may have had on the date
hereof.
2.7 FINANCIAL CONDITION AT CLOSING. At and as of Closing, (i) the
Company shall be current in all material respects on all bills and payables
according to standard trade terms, and will have paid all expenses in connection
with this transaction and (ii) the Company and Sellers shall have complied with
their respective obligations to be performed prior to or on the Closing Date
under Sections 4.11 and 2.23.
2.8 AUTHORIZATION, ETC. The Company has the full partnership power and
authority and each of the Sellers has all requisite corporate or trust power and
authority to enter into this Agreement and the agreements and documents
contemplated hereby to which they are or will become a party and perform their
respective obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and all other agreements and transactions
contemplated hereby to which the Company or any Seller is or will become a party
have been duly authorized by each of the Sellers and the Company (including, if
and to the extent required or necessary, with the approval of all trustees and
beneficiaries of the LPs and the Board of Directors and shareholders of the GP)
and no other corporate, partnership or trust proceedings or approvals on the
part of the Sellers and the Company are necessary to authorize this Agreement
and the transactions contemplated hereby. Upon execution and delivery of this
Agreement and all other agreements contemplated hereby by the parties hereto and
thereto, this Agreement and such other agreements shall constitute the legal,
valid and binding obligation of each of the Company and the Sellers party hereto
and thereto, enforceable against each such party in accordance with their
respective terms, except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization and similar laws
which effect creditors' rights generally and by general equitable principles.
2.9 NO VIOLATION. The execution, delivery and performance by the
Company and the Sellers of this Agreement, and any and all other agreements
contemplated hereby, and the fulfillment of and compliance with the respective
terms hereof and thereof by the Company and the Sellers do not and will not,
except as set forth on SCHEDULE 2.9 attached hereto, (a) conflict with or result
in a breach of the terms, conditions or provisions of, (b) constitute a default
or event of default under (with due notice, lapse of time or both), (c) result
in the creation of any Lien upon the partnership interests or assets of the
Company pursuant to, (d) give any third party the right to accelerate any
obligation under, (e) result in a violation of, or (f) require any
authorization, consent, approval, exemption or other action by or notice to any
Authority (as defined in SECTION 7.3) or other Person pursuant to: the
partnership agreement and certificate of limited partnership of the Company, or
any Regulation (as defined in SECTION 7.3) to which the Company or the Sellers
are subject, Order (as defined in SECTION 7.3) or Contract (as defined in
SECTION 7.3) to which the Company or any Seller is subject, other than, in the
case of such Contracts, any such breaches or defaults that will not result in a
Material Adverse Effect. The Company and the Sellers will comply with all
applicable Regulations and Orders in connection
7
<PAGE>
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby.
2.10 FINANCIAL STATEMENTS. Attached as EXHIBIT 2.10 hereto are the
following financial statements of the Company applied on a consistent basis: (i)
balance sheets for the fiscal years ended December 31, 1995, December 31, 1996
and December 31, 1997 (the "BALANCE SHEETS"), (ii) statements of income,
partners' equity and cash flows for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997 (the "STATEMENTS OF REVENUES AND
EXPENSES"), and (iii) balance sheet and statement of operations for the three
months ended March 31, 1998 (collectively, together with the Balance Sheets and
the Statements of Revenues and Expenses, the "FINANCIAL STATEMENTS"). The
Financial Statements at and for the years ended December 31, 1996 and 1997 were
audited by Ernst & Young LLP as indicated in such firm's audit reports included
in the Financial Statements. The balance sheets (and the notes thereto) included
in the Financial Statements fairly present in all material respects the
financial position of the Company at the respective dates thereof, and the
statements of income, partners' equity and cash flows included in the Financial
Statements fairly present the results of operations for the periods therein
referred to (except as stated therein or in the notes or schedules thereto)
applied in conformity with GAAP (subject, in the case of, statements referred to
in clause (iii) above, to the absence of footnotes and normal year-end
adjustments). Except as set forth on SCHEDULE 2.10(A) attached hereto, the
Company has no liability, whether accrued, absolute or contingent, of a type
required to be reflected on a balance sheet or described in the notes thereto in
accordance with GAAP, other than (i) liabilities which have been reflected or
reserved against in the Financial Statements, (ii) liabilities incurred in the
ordinary course of business since March 31, 1998, and (iii) liabilities covered
by insurance or reinsurance (a complete and detailed description of which
liabilities and insurance coverage is provided in SCHEDULE 2.10(B)).
2.11 ACCOUNTS PAYABLE; ACCOUNTS RECEIVABLE; CUSTOMER DEPOSITS. Schedule
2.11(a) sets forth a complete list of the Company's accounts payable and accrued
expenses as of March 31, 1998. Schedule 2.11(b) attached hereto sets forth a
true and complete list of the aged accounts receivable of the Company as of May
29, 1998, all of which arose out of bona fide sales and deliveries of goods,
performance of services or other business transactions (and also including all
loans or advances to officers, directors or Company Employees as of April 30,
1998). The allowances reflected in Schedule 2.11(b) as of April 30, 1998 were
determined in good faith and consistent with the Company's historical practices
and collection experience, and to the knowledge of Company and Sellers there is
no reason to change or adjust the methodology for determining such allowances.
The customer deposits of the Company, if any, are held as set forth on Schedule
2.11(c).
2.12 EMPLOYEES. An accurate list is set forth on SCHEDULE 2.12 showing
all employees of the Company or any of its Affiliates (including, but not
limited to, Lexington Management Corporation) who render services partially (20%
or more of work time) or exclusively in connection with business of the Company
as of May 15, 1998 (the "COMPANY EMPLOYEES") and indicating the Person that is
the employer of each Company Employee, and listing all employment agreements
with such employees and the rate of compensation (and the portions thereof
attributable to salary, bonus and other compensation, respectively) of each of
such persons. The Company has provided or made available to TSI true, complete
and correct copies of any
8
<PAGE>
employment agreements for persons listed on SCHEDULE 2.12. Since December 31,
1997, there have been no increases in the compensation payable or any special
bonuses to any Company Employee or consultant to the Company, except ordinary
salary and bonus increases implemented on a basis consistent with past
practices, except as set forth on SCHEDULE 2.12. Except as set forth on SCHEDULE
2.12, neither Seller is related by blood or marriage to, or otherwise affiliated
with, any person listed on SCHEDULE 2.12.
The Company has been for the past four years, and currently is, in
compliance in all material respects with all Federal, State and local
Regulations and Orders affecting employment and employment practices of the
Company (including those Regulations promulgated by the Equal Employment
Opportunity Commission), including terms and conditions of employment and wages
and hours. Except as set forth on SCHEDULE 2.12, (i) the Company is not bound by
or subject to (and none of its assets or properties is bound by or subject to)
any arrangement with any labor union, (ii) no Company Employees are represented
by any labor union or covered by any collective bargaining agreement, (iii) to
the Company's and Sellers' knowledge, no campaign to establish such
representation is in progress and (iv) there is no pending or, to the Company's
and Sellers' knowledge, threatened labor dispute involving the Company and any
Company Employees nor has the Company experienced any labor interruptions over
the past three years. The Company believes its relationship with Company
Employees to be generally good.
2.13 ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE 2.13,
since March 31, 1998, there has not been (a) any Material Adverse Change (as
defined in SECTION 7.3) to the Company; (b) any damage, destruction or loss,
whether covered by insurance or not, having a Material Adverse Effect on the
Company; (c) any declaration, setting aside or payment of any dividend or
distribution (whether in cash, stock or property) in respect of the Company's
partnership interests, or any redemption or other acquisition of such
partnership interests by the Company (and no such item has occurred during the
period from December 31, 1997 through the date hereof); (d) any amendment,
modification or termination of any existing, or entering into any new, Contract
or plan relating to any salary, bonus, insurance, pension, health or other
employee welfare or benefit plan for or with any Company Employees or
consultants of the Company; (e) any entry into any material Contract not in the
ordinary course of business, including without limitation relating to any
borrowing or capital expenditure; (f) any disposition by the Company of any
material asset other than in the ordinary course of business and consistent with
prior practices; (g) any write-off, as uncorrectable, of any notes, trade
accounts or other receivables having an aggregate value in excess of $10,000;
(h) any change by the Company in accounting methods or principles; or (i) any
adverse changes to the terms of, or any termination of, any contracts of the
nature described in paragraphs (a)(xiv) and (a)(xv) of Section 2.14 below.
2.14 CONTRACTS.
(a) The Company has listed on SCHEDULE 2.14(A) all material
(as defined in the following sentence) written and oral contracts, commitments
and similar agreements to which the Company is a party or by which it or any of
its properties are bound (including, but not limited to, contracts with
significant suppliers, customers, joint venture or partnership agreements,
contracts with any labor organizations and strategic alliances), in existence as
of the date hereof, and in each case has delivered or made available true,
complete and correct copies of such agreements to TSI.
9
<PAGE>
The Company's written or oral material contracts, commitments and similar
agreements required to be listed in SCHEDULE 2.14(A) include (but are not
limited to) all of the material Contracts of the following types (if any) to
which the Company is a party (it being understood that a Contract shall be
deemed material for purposes of this Section 2.14 only if (i) in the case of
Contracts other than those described in the following clause (ii), the aggregate
liability of the Company thereunder, or the aggregate consideration payable by
or to the Company thereunder during the twelve-month period commencing on the
date hereof, exceed $25,000, or (ii) the Contract is for the Company's hotel
reservation services and pursuant to such contract the Company is expected to
receive five percent or more of its revenues during the 12 month period
commencing on the Closing Date, and further agreed that SCHEDULE 2.14(A) shall
nevertheless include a list of all of Company's customers with which the Company
currently has a Contract for hotel reservation services);
(i) pension, profit sharing, bonus, retirement, stock
option, stock purchase or other plan providing for deferred or
other compensation to employees or any other employee benefit
plan (other than as set forth in SCHEDULE 2.20 hereto), or any
Contract with any labor union;
(ii) employment, consultation or other compensation
Contracts to which any Company Employees are parties which are
not terminable on notice of 30 days' or less by the Company
without penalty or other financial obligation or which provide
for total salary, bonus and other compensation from the
Company of $35,000.00 or more per annum.
(iii) Contract containing covenants or agreements
limiting the freedom of the Company or any of its Company
Employees to compete in any line of business presently
conducted by the Company or to compete with any Person in any
such line of business in any area;
(iv) Contract with any Seller or with any affiliate
or relative of any Seller;
(v) Contract relating to or providing for loans to
Company Employees or Affiliates or any Sellers or employees,
officers or directors thereof;
(vi) Contract under which the Company has advanced or
loaned, or is obligated to advance or loan, funds to any
Person;
(vii) Contract relating to the incurrence, assumption
or guarantee of any indebtedness, obligation or liability (in
respect of money or funds borrowed), including letters of
credit, or otherwise pledging, granting a security interest in
or placing a Lien on any asset of the Company;
(viii) guarantee or endorsement of any obligation;
(ix) Contract under which the Company is lessee or
licensee of or holds, uses or operates any property, real or
personal, intangible, intellectual (trademarks,
10
<PAGE>
patents, copyrights, other Proprietary Rights, etc.) or
otherwise, owned by any other party;
(x) Contract pursuant to which the Company is lessor
of or permits any third party to hold or operate any property,
real or personal, owned or controlled by the Company;
(xi) assignment, license, indemnification or Contract
with respect to any Proprietary Rights (as defined in SECTION
7.3 hereto));
(xii) warranty Contract with respect to its services
rendered (or to be rendered);
(xiii) Contract or lease for, or with, any telephone
switch, long distance or toll-free telephone providers;
(xiv) Contract with Global Distribution System
("GDS") or Central Reservation Systems ("CRS") (i.e., SABRE,
THISCO, GALILEO, AMADEUS, WORLDSPAN, etc.), or any Internet
service providers or Internet-based reservation systems;
(xv) Contracts for any telecommunications equipment
or services, and any computer-based information systems
(including hardware and software);
(xvi) Override agreements with travel agencies, other
customers or suppliers;
(xvii) Contract which prohibits, restricts or limits
in any way the payment of dividends or distributions by the
Company;
(xviii) Contract under which it has granted any
Person any registration rights (including piggyback rights)
with respect to any securities;
(xix) Contract for the purchase or acquisition of
property and assets;
(xx) Contracts with independent agents, brokers,
dealers or distributors;
(xxi) Sales, commissions, advertising or marketing
Contracts;
(xxii) Governmental Contracts subject to
redetermination or renegotiation; or
(xxiii) any other Contract which is material to the
Company's operations or business prospects, except those which
(x) were made in the ordinary course of business, and (y) are
terminable on 30 days' or less notice by the Company without
penalty or other financial obligation.
11
<PAGE>
(b) The Company has performed in all material respects all
obligations required to be performed by it and is not in default or breach in
any material respect under any Contract listed on SCHEDULE 2.14(A); no event has
occurred which with the passage of time or the giving of notice or both would
result in a default, breach or event of non-compliance in any material respect
by the Company, or to the knowledge of the Company and Sellers, by any other
party under any Contract listed on SCHEDULE 2.14(A).
2.15 DISCLOSURE. Neither this Agreement nor any of the exhibits,
schedules, certificates or other documents delivered by Sellers or the Company
pursuant to this Agreement at Closing contains any untrue statement of a
material fact or omits a material fact necessary to make each statement
contained herein or therein in light of the circumstances under which it was
made not misleading (it being agreed that any item not disclosed on a Schedule
hereto because it is not required to be disclosed thereon by the express terms
of the applicable representation shall not constitute a violation of this
Section 2.15).
2.16 TITLE AND RELATED MATTERS.
(a) The Company has good and valid title to all of the
property and assets reflected in the balance sheets included in the Financial
Statements or acquired after the date thereof except for properties sold or
otherwise disposed of since the date thereof in the ordinary course of business,
free and clear of all Liens, except (i) tax and other statutory Liens not yet
delinquent, (ii) Liens of a Lessor under any lease disclosed in the Schedules to
this Agreement, (iii) such imperfections or irregularities of title, Liens,
easements, charges or encumbrances as do not detract from or interfere with the
present use of the properties or assets subject thereto or affected thereby,
otherwise impair present business operations at such properties; or do not
materially detract from the value of such properties and assets, taken as a
whole, (iv) as reflected in the balance sheets included in Financial Statements
or the notes thereto, or (v) as expressly disclosed on SCHEDULE 2.16 hereto
(collectively "Permitted Liens"). Except for normal breakdowns and servicing
requirements, all machinery and equipment regularly used by the Company in the
conduct of its business is in good operating condition and repair, ordinary wear
and tear excepted.
(b) The Company does not own any real Property. SCHEDULE 2.16
attached hereto sets forth a description of all real property leased and all
material personal property owned or leased by the Company.
2.17 LITIGATION. Except as set forth on SCHEDULE 2.17, there is no
Claim (as defined in SECTION 7.3) pending or, to the knowledge of the Sellers
and the Company, any material Claim threatened, against any of the Sellers or
the Company, nor is there any Order outstanding against any of the Sellers or
the Company; and the matters disclosed on Schedule 2.17, both individually and
in the aggregate, are reasonably expected to not have a Material Adverse Effect
on the Company.
12
<PAGE>
2.18 TAX MATTERS.
(a) The Partnership has from the date of its formation
qualified as, and on the Closing date shall qualify as, a partnership for
federal and state income tax purposes in accordance with subchapter K of the
Internal Revenue Code of 1986 as amended (the "CODE") and corresponding state
statutes and any regulations and rules promulgated thereunder. The Company has
filed all federal, state, local and franchise tax reports and returns, and all
other material reports, returns and other documents (collectively, the "TAX
RETURNS") required to be filed with any federal, state, local or other taxing
authorities (each a "TAXING AUTHORITY", collectively, the "TAXING AUTHORITIES")
in respect of all relevant taxes, including without limitation income, premium,
gross receipts, net proceeds, alternative or add-on minimum, ad valorem, value
added, turnover, sales, use, property, personal property (tangible and
intangible), stamp, leasing, lease, user, excise, duty, franchise, transfer,
license, withholding, payroll, employment, fuel, excess profits, occupational
and interest equalization, windfall profits, severance, and other charges
(including interest and penalties) (collectively, the "TAXES") and in accordance
with all tax sharing agreements to which any Seller or the Company may be a
party. All Taxes required or anticipated to be paid by the Company for all
periods prior to and including March 31, 1998 have been paid or accrued or
otherwise provided for by the Company and all such Company Taxes for periods
prior to and including the Closing Date shall be paid or accrued or otherwise
provided for (to the extent required to be accrued or provided for in accordance
with the Company's prior practice and in the ordinary course of business) by the
Company prior to Closing, including any of the Company's Taxes that may be due
or claimed to be due as a result of the consummation of the transactions
contemplated by this Agreement. All Taxes which are required to be withheld or
collected by the Company have been duly withheld or collected and, to the extent
required, have been paid to the proper Taxing Authority or properly segregated
or deposited as required by applicable laws. There are no Liens for Taxes upon
any property or assets of the Company except for liens for Taxes not yet due and
payable.
(b) No audit of the Company or the Company's Tax Returns by
any Taxing Authority is currently pending or threatened, and no issues have been
raised by any Taxing Authority in connection with the examination of any Tax
Returns, and there are no unresolved issues or unpaid deficiencies relating to
any such examinations, if any. The items relating to the business, properties or
operations of the Company on the Tax Returns filed by or on behalf of the
Company for all taxable years (including the supporting schedules filed
therewith), state accurately in all material respects the information requested
with respect to the Company and such information was derived from the books and
records of the Company.
(c) The Sellers shall cause the Company to file all income Tax
Returns and reports with respect to income Taxes which are required to be filed
for Tax periods ending on or before the Closing Date and to file all other Tax
Returns and reports with respect to Taxes (other than income Tax Returns and
reports with respect to income Taxes) which are due on or before the Closing
Date (collectively, "PRE-CLOSING TAX RETURNS"). The Sellers shall pay all income
Taxes due in respect of such Pre-Closing Tax Returns to the appropriate Taxing
Authority, including any income Taxes of the Sellers, in their capacity as
partners of the Company, that may be due as a result of the consummation of the
transactions contemplated by this Agreement. The Sellers shall (i) cause the
Company to prepare a statement of election under Treasury Regulation
13
<PAGE>
Section 1.754-1(b), (ii) submit a copy of such statement of election to TSI at
least thirty (30) days prior to the due date (determined with regard to any
applicable extensions; provided, however, that the foregoing election shall be
made on a timely basis so that it may be reflected in the tax returns of TSI) of
the Company's U.S. federal partnership return for the Company's tax year that
ends on the Closing Date, and (iii) timely file the final version of such
statement of election with such partnership return.
2.19 COMPLIANCE WITH LAW AND APPLICABLE GOVERNMENT AND OTHER
REGULATIONS.
(a) The Company is presently complying in respect of its
operations, equipment, practices, real property, structures, and other property,
and all other aspects of its business and operations, with all applicable
Regulations and Orders, including all Regulations relating to the safe conduct
of business, environmental protection, quality and labeling, antitrust, Taxes,
consumer protection, equal opportunity, discrimination, health, sanitation,
fire, zoning, building and occupational safety except where such failure or
failures to comply therewith would not individually or in the aggregate have a
Material Adverse Effect. There are no Claims pending, nor to the knowledge of
the Company and the Sellers are there any material Claims threatened, nor has
the Company or any Seller received any written notice, regarding any violations
of any Regulations and Orders enforced by any Authority claiming jurisdiction
over the Company, including any requirement of OSHA or any pollution and
environmental control agency (including air and water).
(b) SCHEDULE 2.19(B) attached hereto sets forth all material
permits, licenses, provider numbers, orders, franchises, registrations and
approvals (collectively, "PERMITS") from all Authorities held by the Company.
The Permits listed on SCHEDULE 2.19(B) are the only Permits that are required
for the Company to conduct its business as presently conducted, except for those
the absence of which would not have a Material Adverse Effect on the Company.
Each such Permit is in full force and effect and, to the knowledge of the
Company and Sellers, no suspension or cancellation of any such Permit is
threatened and there is no basis for believing that such Permit will not be
renewable upon expiration.
(c) The Company is not subject to any Regulation, rule or
requirement of any industry groups with which it is a member or affiliated.
2.20 ERISA AND RELATED MATTERS.
(a) BENEFIT PLANS; OBLIGATIONS TO EMPLOYEES. Except as set
forth in SCHEDULE 2.20 hereto, the Company is neither a party to nor
participates in or has any liability or contingent liability with respect to:
(i) any "employee welfare benefit plan" or "employee
pension benefit plan" or "multiemployer plan" (as those terms
are respectively defined in Sections 3(1), 3(2) and 3(37) of
the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"));
14
<PAGE>
(ii) any retirement or deferred compensation plan,
incentive compensation plan, stock plan, unemployment
compensation plan, vacation pay, severance pay, bonus or
benefit arrangement, insurance or hospitalization program or
any other fringe benefit arrangements for any employee,
director, consultant or agent, whether pursuant to contract,
arrangement, custom or informal understanding, which does not
constitute an "employee benefit plan" (as defined in Section
3(3) of ERISA); or
(iii) any employment agreement not terminable on 30
days' or less written notice, without further liability.
Any plan, arrangement or agreement required to be listed on
SCHEDULE 2.20 is sometimes hereinafter referred to as a "BENEFIT PLAN".
(b) PLAN DOCUMENTS AND REPORTS. A true and correct copy of
each of the Benefit Plans required to be listed on SCHEDULE 2.20, and all
contracts relating thereto, or to the funding thereof, including, without
limitation, all trust agreements, insurance contracts, investment management
agreements, subscription and participation agreements and record keeping
agreements, each as in effect on the date hereof, has been supplied or made
available to the Purchaser. In the case of any Benefit Plan that is not in
written form, the Purchaser has been supplied with an accurate description of
such Benefit Plan as in effect on the date hereof. A true and correct copy of
the three most recent annual reports and accompanying schedules, the three most
recent actuarial reports, and the most recent summary plan description and
Internal Revenue Service determination letter with respect to each such Benefit
Plan, to the extent applicable, and a current schedule of assets (and the fair
market value thereof assuming liquidation of any asset which is not readily
tradable) held with respect to any funded Benefit Plan has been supplied to or
made available the Purchaser by the Company, and there have been no material
changes in the financial condition in the respective Benefit Plans from that
stated in the annual reports and actuarial reports supplied.
(c) COMPLIANCE WITH LAWS; LIABILITIES. As to all Benefit
Plans, except as otherwise specified on SCHEDULE 2.20, the Company is in
compliance in all material respects with the terms of all Benefit Plans and
every Benefit Plan is in compliance in all material respects with all of the
requirements and provisions of ERISA and all other laws and regulations
applicable thereto, including without limitation the timely filing of all annual
reports or other filings required with respect to such Benefit Plans. None of
the assets of any Benefit Plan are invested in employer securities or employer
real property, as those terms are defined in Section 407(d) of ERISA. There have
been no "prohibited transactions" (as described in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Benefit Plan and the Company has
not otherwise engaged in any prohibited transaction.
(d) With respect to any Benefit Plan or any other employee
benefit plan (as defined in Section 3(3) of ERISA) subject to Title IV of ERISA
to which the Company or any ERISA Affiliate contributes or has contributed or is
or has been under an obligation to contribute in the last six years
(collectively, the "Plans"), there is no (i) liability to the Pension Benefit
Guaranty Corporation, other than for the payment of premiums, all of which have
been paid when
15
<PAGE>
due; (ii) liability under sections 4062, 4063, 4064, or 4068 of ERISA; (iii)
withdrawal liability (including contingent withdrawal liability) within the
meaning of sections 4201, 4202, or 4204 of ERISA to any "multiemployer plan," as
such term is defined in section 4001 of ERISA; nor (iv) any "accumulated funding
deficiency" as such term is defined in section 302 of ERISA and section 412 of
the Code or any lien attributable thereto under section 412(f) and (m) of the
Code. There would not be any such liability if the Company, or any ERISA
Affiliate terminated or withdrew from any Plan on the Closing Date or were
deemed to terminate or withdraw from any such Plan in connection with the
transition of certain employees from Lexington Management Corporation
("Manager") to the Company pursuant to the Services Agreement dated as of the
Closing Date between Manager and the Company. No "reportable event" under
section 4043 of ERISA has occurred with respect to any Plan. For purposes of
this section, the term ERISA AFFILIATE shall mean any trade or business, whether
or not incorporated, that together with the Company would be deemed to be a
single employer within the meaning of section 4001(b)(1) of ERISA.
2.21 INTELLECTUAL PROPERTY.
(a) SCHEDULE 2.21 and SCHEDULE 2.21(D) sets forth a true and
correct list of all (i) registered Proprietary Rights owned by the Company, (ii)
applications for registrations of Proprietary Rights filed by the Company and
(iii) unregistered trademarks and service marks and certain other Proprietary
Rights owned or used by the Company which are material to the Company. SCHEDULE
2.21 also contains a complete and accurate list of all licenses (other than
software licenses with respect to software that is commercially available from
third parties) with respect to any material Proprietary Rights. The Company has
complied in all material respects with all federal and international trademark
laws and has made all necessary filings and has registered its material
Proprietary Rights in all jurisdictions necessary to protect each of its
Proprietary Rights set forth on SCHEDULE 2.21. The consummation of the Closing
will not impair in any material respect any Proprietary Rights of the Company.
(b) The Company has the right to use all of its Proprietary
Rights, including those listed in SCHEDULE 2.21 and SCHEDULE 2.21(D), without
infringing the rights of any third party, except where such infringement would
not have a Material Adverse Effect on the Company. Each of such Proprietary
Rights is free and clear of all royalty obligations and Liens other than
Permitted Liens. There are no Claims pending, or to the best knowledge of the
Company and the Sellers, any Claims threatened, against the Company or any
Seller that its use of any Proprietary Rights infringes the rights of any
Person. The Company and the Sellers have no knowledge of any third-party's
conflicting use of any of such Proprietary Rights that conflicts in any material
respect with the Company's Proprietary Rights, and any such conflicting uses
will not have a Material Adverse Effect.
(c) Except as set forth in SCHEDULE 2.21 or SCHEDULE 2.21(D),
the Company is not a party in any capacity to any franchise, license or royalty
agreement respecting any Proprietary Right and there is no conflict with the
rights of others in respect to any Proprietary Right now used in the conduct of
its business.
16
<PAGE>
(d) SOFTWARE PROGRAMS
(i) DEFINITION. As used herein, the term "Software"
shall mean the proprietary hotel reservation software program
and data developed by the Company, and used by the Company in
the operation of its business, which Software includes the
"Proprietary Software" indicated on SCHEDULE 2.21(D) and a
product known as "LexLink." The Software does not include any
off-the-shelf software or operating system not developed by
the Company.
(ii) OWNERSHIP. The Company is the sole owner of the
Software. The Company has not sold, assigned, licensed,
distributed or in any other way disposed of or encumbered the
Software. The Company possesses or has access to the source
code for the Software for the purposes of recreating and
future maintenance and updates. The use by the Company of the
Software in the normal course of business (as conducted prior
to the date hereof) does not infringe any valid and subsisting
copyright, patent or trade secret owned by third persons
except for any infringement which would not have a Material
Adverse Effect.
(iii) SUFFICIENCY AND OPERATION. The Software is
sufficient for use by the Company in the normal course of its
business operations (as conducted prior to the date hereof for
the volume of hotel reservation information processed thereby)
as of the date hereof, without material defects or programming
or documentation errors. The Company warrants that the
Software will function without material defect in view of the
year 2000 problem.
(iv) LICENSED SOFTWARE. Any software used by the
Company which is licensed from third parties or off-the-shelf
is held and used by the Company legitimately. The material
licensed software used by the Company is set forth in SCHEDULE
2.21(D). The licensed software which performs general ledger
and related accounting functions can be modified (without
significant expense beyond the expenditures contemplated by
the 1998 Annual Budget) so as to operate without material
defect in light of the year 2000 problem.
2.22 ENVIRONMENTAL MATTERS. Except as disclosed in SCHEDULE 2.22: (a)
neither the Company's business or assets nor the operation thereof violates in
any material respect any applicable Environmental Law (as defined in SECTION
7.3), and no condition, occurrence, accident, happening or event has occurred at
any time prior to the Closing Date, which has resulted or will result in a claim
against the Company or the Purchaser or has created or will create a liability
or loss for the Company or the Purchaser and which, with notice or the passage
of time or both, would constitute a violation in any material respect of any
Environmental Law; (b) the Company is in possession of all material
Environmental Permits (as defined in SECTION 7.3) required under any applicable
Environmental Law for the conduct or operation of the Company's business (or any
part thereof), and the Company is in compliance in all material respects with
all of the requirements and limitations included in such Environmental Permits;
(c) the Company has not stored or used any pollutants, contaminants or hazardous
or toxic wastes, substances or materials on or at any property or facility now
or previously owned, leased or operated by the Company in
17
<PAGE>
violation in any material respect of any Environmental Law; (d) neither the
Company nor any Seller has received any notice from any Authority or any private
Person that the Company's business or the operation of any of its facilities is
in violation of any Environmental Law or any Environmental Permit or that it is
responsible (or potentially responsible) for the cleanup of any pollutants,
contaminants, or hazardous or toxic wastes, substances or materials at, on or
beneath any property or facility now or previously owned, leased or operated by
the Company, or at, on or beneath any land adjacent thereto or in connection
with any waste or contamination site; (e) to the knowledge of the Company and
Sellers, the Company is not the subject of any Federal, state, local, or private
Claim involving a demand for damages or other potential liability with respect
to a violation of Environmental Laws or under any common law theories relating
to operations or the condition of any facilities or property (including
underlying groundwater) owned, leased, or operated by the Company; (f) no
property or facility now or previously owned, leased or operated by the Company,
is listed or proposed for listing on the National Priorities List pursuant to
CERCLA, on the CERCLIS or on any other federal or state list of sites requiring
investigation or clean-up; and (g) to the knowledge of the Company and Sellers,
there are no polychlorinated biphenyls, radioactive materials or friable
asbestos present at any property or facility now or previously owned or leased
by the Company. The Company has timely filed all reports required to be filed
with respect to all of its property and facilities and has generated and
maintained all required data, documentation and records under all applicable
Environmental Laws.
2.23 DEALINGS WITH AFFILIATES; MANAGEMENT FEES. Except as set forth on
SCHEDULE 2.23, as of the Closing the Company is not a party to any oral or
written agreement or arrangement with any one or more Affiliates of the Company
or any Seller, other than the agreements to be signed at Closing as expressly
contemplated by this Agreement, and all such affiliated agreements and
arrangements in effect during 1997 are reflected in the Company's audited
financial statements for such year included in the Financial Statements. Since
December 31, 1997, the Company has not paid any management fee or other fees or
compensation to any Affiliate of the Company other than (i) management fees paid
to Woodstone International, Inc., which fees did not exceed $1,350,000 for the
period from January 1, 1998 through May 31, 1998, (ii) compensation to Company
Employees, or (iii) other fees, if any, at levels not materially greater than
the fees reflected in the Company's audited Financial Statements for 1997.
2.24 BANKING ARRANGEMENTS; CREDIT FACILITIES. The Company has no bank
account(s), or safety deposit box. Except as set forth on SCHEDULE 2.24, the
Company has no liability or obligation relating to funds or money borrowed by or
loaned to the Company (whether under any credit facility, line of credit, loan,
indenture, advance, pledge or otherwise).
2.25 INSURANCE. The Company is insured under various insurance
coverages as indicated in the certificate(s) of insurance attached to SCHEDULE
2.25 attached hereto, and as of the Closing Date TSI's principal lender,
NationsBank, is named as a loss payee on such policies. The Company has no
unresolved claims filed with any insurance providers, and has no unfiled
insurance claims that the Company has determined to file, in the aggregate
amount of $10,000 or more. Such policies are valid, outstanding and enforceable
policies, as to which premiums have been paid currently. Neither the Company nor
any Seller has received any notice of the occurrence of (a) a material claim
against the Company not fully covered by insurance for liability on account of
any express or implied warranty or tortious omission or commission, or (b) a
18
<PAGE>
material increase in aggregate insurance premiums of the Company (other than any
increase resulting from the establishment of separate insurance policies for the
Company as a result of the consummation of the transactions contemplated by this
Agreement).
2.26 INVESTMENT REPRESENTATIONS. In connection with this Agreement or
any agreement or transaction contemplated hereby, each Seller hereby represents
and warrants to TSI as follows:
(a) Each Seller acknowledges receipt of a copy of TSI's
Prospectus contained in TSI's shelf registration statement on Form S-1 (File No.
333-50533) dated May 4, 1998 (the "SHELF REGISTRATION Statement"), pursuant to
which TSI proposes to issue the TSI Stock to Sellers.
(b) Each Seller has been offered, the opportunity to ask
questions of, and receive answers from, TSI and its Subsidiaries, and the
Sellers have been given full and complete access to all available information
and data relating to the business and assets of TSI and its Subsidiaries, has
obtained to such Seller's satisfaction all such additional information about TSI
and its Subsidiaries which the Sellers have deemed necessary in order to
evaluate the opportunities, both financial and otherwise, with respect to TSI
and, except as set forth herein, has not relied on any representation, warranty
or other statement concerning the Purchaser and its Subsidiaries in such
Seller's evaluation of the decision to consummate the transactions contemplated
herein. On the basis of the foregoing, each Seller is familiar with the
operations, business plans and financial condition of TSI.
2.27 BROKERAGE; COMPANY LIABILITY. Except as set forth in SCHEDULE
2.27, neither the Company nor any Seller has employed any broker, finder,
advisor, consultant or other intermediary in connection with this Agreement or
the transactions contemplated by this Agreement who is or might be entitled to
any fee, commission or other compensation from the Company or any Seller, or
from the Purchaser or its Affiliates, upon or as a result of the execution of
this Agreement or the consummation of the transactions contemplated hereby; and
the Company does not and will not have any liability to any Person in respect of
any matter disclosed on Schedule 2.27.
2.28 IMPROPER AND OTHER PAYMENTS. (a) neither the Company, any
director, officer, thereof, nor, to the Company's or any Seller's knowledge, any
employee, agent or representative of the Company nor any Person acting on behalf
of any of them, has made, paid or received any unlawful bribes, kickbacks or
other similar payments to or from any Person or Authority, (b) no unlawful
contributions have been made, directly or indirectly, to a domestic or foreign
political party or candidate by or, to the knowledge of Sellers and the Company,
on behalf of, the Company, and (c) no improper foreign payment (as defined in
the Foreign Corrupt Practices Act) has been made by or, to the knowledge of
Sellers and the Company, on behalf of, the Company.
2.29 SIGNIFICANT SUPPLIERS AND CUSTOMERS; MATERIAL PLANS AND
COMMITMENTS. The Company has delivered to TSI an accurate list (which is set
forth on Schedule 2.29) of (i) all significant suppliers and customers of the
Company, it being understood and agreed that a "significant" supplier or
customer, for purposes of this Section 2.29, means a supplier or customer
representing 5% or more of the Company's annual revenues or expenses as of the
Balance Sheet
19
<PAGE>
Date. Since December 31, 1997, except to the extent set forth on Schedule 2.29,
none of the Company's significant customers (or persons or entities that are
sources of a significant number of customers) have canceled a contract or
substantially reduced utilization of the services of the Company, and the
Company has not received any written notice that any significant customer is
currently attempting or threatening to cancel a contract or substantially reduce
utilization of the services provided by the Company. Schedule 2.29 sets forth
the Company's budgets for 1998 and its preliminary estimated budget for 1999 for
capital expenditures for all plans or projects involving the opening of new
operations, expansion of existing operations, the acquisition of any personal
property, business or assets requiring, in any event, the payment of more than
$25,000 by the Company, including without limitation any development
expenditures, purchases or leases of information systems, telecommunications
equipment, computer hardware and software, etc., which budgets also specify the
items recommended by the Company to be acquired during the Accounting Period.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Sellers as follows:
3.1 CORPORATE ORGANIZATION, ETC. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation with full corporate power and authority to carry
on its business as it is now being conducted and to own, operate and lease its
properties and assets. The Purchaser is duly qualified or licensed to do
business in good standing in every jurisdiction in which the conduct of its
business, the ownership or lease of its properties, or the transactions
contemplated by this Agreement, require it to be so qualified or licensed and
the failure to be so qualified or licensed would have a Material Adverse Effect.
3.2 AUTHORIZATION, ETC. The Purchaser has full corporate power and
authority to enter into this Agreement and the agreements or documents
contemplated hereby to which it is or will become a party and to carry out the
transactions contemplated hereby and thereby. The Board of Directors of the
Purchaser has duly authorized the execution, delivery and performance of this
Agreement and the other agreements and transactions contemplated hereby, and no
other corporate proceedings on its part are necessary to authorize this
Agreement and the transactions contemplated hereby. Upon execution and delivery
of this Agreement and the other agreements contemplated hereby to which the
Purchaser is party by the parties thereto, this Agreement and such other
agreements shall constitute the legal, valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with their respective
terms, except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization and similar laws which effect
creditors' rights generally and by general equitable principles.
3.3 NO VIOLATION. The execution, delivery and performance by the
Purchaser of this Agreement, and all other agreements contemplated hereby, and
the fulfillment of and compliance with the respective terms hereof and thereof
by the Purchaser, do not and will not (a) conflict with
20
<PAGE>
or result in a material breach of the terms, conditions or provisions of, (b)
result in a violation of, or (c) require any authorization, consent, approval,
exemption or other action by or notice to any Authority pursuant to, the
certificate of incorporation or by-laws of the Purchaser, or any Regulation to
which the Purchaser is subject, or any material Contract or Order to which the
Purchaser or its properties are subject. The Purchaser will comply with all
applicable Regulations and Orders in connection with its execution, delivery and
performance of this Agreement and the transactions contemplated hereby.
3.4 GOVERNMENTAL AUTHORITIES. The Purchaser has complied in all
material respects with all applicable Regulations in connection with its
execution, delivery and performance of this Agreement and the agreements and
transactions contemplated hereby. The Purchaser is not required to submit any
notice, report, or other filing with any governmental authority in connection
with its execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby. No authorization, consent, approval, exemption
or notice is required to be obtained by the Purchaser in connection with the
execution, delivery, and performance of this Agreement and the agreements and
transactions contemplated hereby.
3.5 ISSUANCE OF TSI STOCK. The shares of TSI Stock and Additional TSI
Shares that are required to be issued by TSI to the Sellers pursuant to, in
accordance with the terms and subject to the conditions set forth in this
Agreement, shall, upon issuance and delivery, be duly authorized, validly
issued, fully paid and non-assessable.
3.6 SHELF REGISTRATION STATEMENT. Subject to Section 1.1 hereof, the
issuance of TSI Stock and Additional TSI Shares, when issued under this
Agreement, shall be registered pursuant to the Shelf Registration Statement (or,
the Other Registration Statement, in the case of the Additional TSI Shares). The
Shelf Registration Statement is effective as of the date hereof and, if
Additional TSI Shares are issued hereunder, the Other Registration Statement
will be effective as of the date upon which the Additional TSI Shares are issued
to the Sellers. Upon any such issuance of TSI Stock or Additional TSI Shares,
the Shelf Registration Statement (and the Other Registration Statement, as
applicable) will comply in all material respects with the applicable
requirements of the Securities Act. The Shelf Registration Statement did not and
will not (and the Other Registration Statement will not) (i) at the time such
registration statement became effective under the Securities Act, (ii) at the
time the prospectus contained in such registration statement was delivered to
the Sellers by TSI, (iii) on the Closing Date, in the case of the Shelf
Registration Statement or (iv) on the date upon which the Additional TSI Shares
are issued to the Sellers, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
3.7 COMMISSION REPORTS. TSI has filed all reports, statements, forms
and other documents required to be filed with the Securities Exchange Commission
since July 22, 1997 (collectively, the "COMMISSION REPORTS"), all of which
complied as of the filing date (or, in the case of any Commission Report that
has been amended, as of the date of amendment) in all material respects with the
applicable requirements of the Securities Act or the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), as the case may be, and of all applicable
rules and regulations thereunder. None of the Commission Reports contained as of
the
21
<PAGE>
filing date (or, in the case of any Commission Report that has been amended, as
of the date of amendment) any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the consolidated financial statements (including
the notes thereto) contained in the Commission Reports (collectively, the "TSI
FINANCIAL STATEMENTS"), was prepared in accordance with GAAP except as disclosed
otherwise therein (and, in the case of the financial statements for interim
periods, the absence of notes thereto and normal year-end adjustments) applied
on a consistent basis throughout the periods covered thereby (except as may be
indicated in any notes thereto) and the TSI Financial Statements fairly present
in all material respects in accordance with GAAP the consolidated financial
position of TSI and its consolidated subsidiaries as of the respective dates
thereof and the consolidated results of operations and changes in cash flows of
TSI and its consolidated subsidiaries for the periods indicated.
3.8 NO MATERIAL ADVERSE CHANGE. Since the date of the most recent
Commission Report, there has not been any Material Adverse Change or any event,
occurrence or development which could reasonably be expected to have a Material
Adverse Effect on TSI.
3.9 SECURITIES ACT. The Purchaser is acquiring the Company Interests
solely for the purpose of investment and not with a view to, or for sale in
connection with, any distribution thereof within the meaning of the Securities
Act. The Purchaser acknowledges that the Company Interests have not been
registered under the Securities Act or any applicable state securities law, and
that such partnership interests may not be transferred or sold except pursuant
to the registration provisions of such Securities Act or pursuant to an
applicable exemption therefrom and pursuant to applicable state securities laws
and regulation as applicable. The Purchaser is knowledgeable, sophisticated and
experienced in business and financial matters of the type contemplated by this
Agreement and is able to bear the economic risks associated with its investment
regarding the Company. The Purchaser has been afforded access to information
regarding the Company and its financial condition, operating results,
properties, liabilities, operations and management sufficient to enable it to
evaluate the risks and merits of its investment in the Company.
3.10 NO BROKERS. The Purchaser has not employed any broker, finder,
advisor, consultant or other intermediary in connection with this Agreement or
the transactions contemplated by this Agreement who is or might be entitled to
any fee, commission or other compensation from the Purchaser or from the Company
or the Seller, upon or as a result of the execution of this Agreement or the
consummation of the transactions contemplated hereby.
ARTICLE IV
OTHER AGREEMENTS
The parties hereto further agree as follows:
4.1 FURTHER ASSURANCES. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable best efforts to
take, or cause to be taken, all action,
22
<PAGE>
and to do, or cause to be done, all things necessary, proper or advisable under
applicable Regulations to consummate and make effective the transactions
contemplated by this Agreement. If at any time after the Closing Date the
Purchaser shall consider or be advised that any further assignments or
assurances in law or in any other things are necessary, desirable or proper to
vest, perfect or confirm, of record or otherwise, in the New Partners, the title
to the Company Interests acquired or to be acquired by reason of, or as a result
of, the Purchaser's acquisition of the Company Interests hereunder, the Sellers
agree that the Sellers shall execute and deliver all such proper assignments and
assurances reasonably requested by Purchaser and do all things necessary,
desirable or proper to vest, perfect or confirm title to the Company Interests
in the New Partners, and otherwise to carry out the purpose of this Agreement.
4.2 CONSENT OF PARTNERS. Notwithstanding anything to the contrary in
the Partnership Agreement, all of the Partners hereby agree and consent to the
sale and assignment of the Company Interests to the New Partners under this
Agreement, and to the New GP becoming the sole general partner and the New LP
becoming the sole limited partner of the Company. In addition, all of the
Partners hereby waive compliance with any provisions of the Partnership
Agreement or any other agreement to which they are parties which may restrict or
prohibit the consummation of the transactions contemplated hereby.
4.3 CONSENTS. Without limiting the generality of SECTION 4.1, each of
the parties hereto shall use their reasonable best efforts to obtain all
permits, authorizations, consents and approvals of all Persons and governmental
authorities necessary, proper or advisable in connection with the consummation
of the transactions contemplated by this Agreement prior to the Closing Date.
4.4 NO TERMINATION OF SELLERS' OBLIGATIONS BY SUBSEQUENT INCAPACITY,
ETC. To the fullest extent permitted by law, each Seller specifically agrees
that the obligations of such Seller hereunder, including, without limitation,
obligations pursuant to Article VI shall not be terminated by the death or
incapacity of any trustee, beneficiary, officer, shareholder, director or any
agent or representative of any Seller.
4.5 EMPLOYMENT AGREEMENTS; TERMINATION OF RELATED PARTY AGREEMENTS.
(a) NEW AND TERMINATED EMPLOYMENT AGREEMENTS. At or prior to
Closing, the Company and Sellers shall terminate or cause to be terminated any
existing employment or independent contractor agreements between the Company or
Affiliates of the Company and such persons listed on SCHEDULE 4.5(A) hereto; and
the Company and each of Zolon A. Wilkins, Jr., Zolon Wilkins, III, and Shawn
Heaton (the "EXECUTIVES") shall enter into an employment agreement in the form
contained in EXHIBIT 4.5 attached hereto (the "EMPLOYMENT AGREEMENTS").
(b) TERMINATION OF CERTAIN RELATED PARTY AGREEMENTS. At or
prior to Closing, the Sellers and the Company shall terminate or cause to be
terminated the agreements listed on SCHEDULE 4.5(B) hereto.
4.6 PUBLIC ANNOUNCEMENTS. Neither any Seller nor the Company nor any
Affiliate, representative, employee or shareholder of either of such Persons,
shall disclose any of the terms of this Agreement to any third party (other than
the Purchaser's advisors and senior lending group
23
<PAGE>
and the Sellers' advisors) without the Purchaser's prior written consent unless
required by any applicable law or to the extent previously publicly disclosed by
TSI. The form, content and timing of any and all press releases, public
announcements or publicity statements with respect to this Agreement or the
transactions contemplated hereby shall be subject to the prior approval of the
Purchaser and Sellers, which approval shall not be unreasonably withheld, but
subject to TSI's public disclosure obligations under applicable law and stock
exchange regulations. Notwithstanding the foregoing, and except for any
disclosures required under or pursuant to Federal or State securities laws in
connection with the registration of TSI's securities or otherwise required by
law or stock exchange regulations, the initial press release or other public
communication in connection with this transaction or any agreement pertaining
hereto will not be made without the mutual agreement of the Purchaser and
Sellers after prior review of such proposed release, which approval shall not be
unreasonably withheld.
4.7 NON-COMPETITION COVENANT.
(a) As a material and valuable inducement for the Purchaser to
enter into this Agreement, pay the purchase price for the Company Interests
hereunder and consummate the transactions provided for herein, during the
"RESTRICTED PERIOD" (as hereinafter defined), each of the Sellers and Zolon A.
Wilkins, Jr. (collectively, the "RESTRICTED PARTIES") agrees, unless otherwise
permitted by TSI in writing, that such Restricted Party shall not (except as
expressly permitted in SECTION 4.7(B) below), directly or indirectly, for
himself or on behalf of or in conjunction with any other person, persons,
company, partnership, corporation or business of whatever nature:
(i) engage, as an officer, director, shareholder,
owner, partner, joint venturer or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor or as a sales representative, in the business of
providing central reservation services to hotels and motels or
any other businesses to which the Company has provided such
services on or before the Closing Date (including, without
limitation, any such reservation services conducted through
telephone or other reservation centers, or through electronic
distribution channels of any nature such as GDS, CRS,
Switches, the Internet, etc.) (the "COVERED BUSINESS") in
direct competition with TSI or the Company or any subsidiary
or Affiliate of TSI (collectively with TSI, the "TSI ENTITIES"
and each (including TSI), a "TSI ENTITY"), within the United
States or within 100 miles of any other geographic area in
which any TSI Entity conducts business, including any
territory serviced by any TSI Entity (the "RESTRICTED
Territory");
(ii) solicit any person who is, at that time, or who
has been within one (1) year prior to that time, an employee
of any TSI Entity for the purpose or with the intent of
enticing such employee away from or out of the employ of any
TSI Entity; or
(iii) solicit any person or entity which is, at that
time, or which has been within one (1) year prior to that
time, a customer or supplier of any TSI Entity in connection
with the Covered Business for the purpose of soliciting or
selling
24
<PAGE>
products or services related to the Covered Business in direct
competition with any TSI Entity within the Restricted
Territory.
(b) Notwithstanding the above, the foregoing covenant shall
not be deemed to prohibit (i) the Restricted Parties from acquiring in the
aggregate, as an investment, not more than two percent (2%) of the capital stock
of a competing business, whose stock is traded on a national securities exchange
or over-the-counter, or (ii) any Restricted Party from providing hotel
reservation services to hotels in which the Restricted Party owns a controlling
interest, or to hotels franchised by the Restricted Party which conduct business
under names as to which the Restricted Party owns the trademark for use of such
name in such business and in which the Restricted Party is the hotel franchisor.
(c) As used in this Agreement, the term "RESTRICTED PERIOD"
shall mean a period of five (5) years, from the Closing to the fifth (5th)
anniversary of the Closing, except that with respect to Zolon A. Wilkins, Jr.,
the Restricted Period shall mean the longer of (x) such five-year period, and
(y) during such time as he is employed by any TSI Entity and for a period of two
(2) years following the effective date of termination of such employment.
(d) In recognition of the substantial nature of such potential
damages and the difficulty of measuring economic losses to TSI as a result of a
breach of the foregoing covenants, and because of the immediate and irreparable
damage that could be caused to TSI for which it would have no other adequate
remedy, each Restricted Party agrees that in the event of breach by such
Restricted Party of the foregoing covenant, the Company and TSI shall be
entitled to specific performance of this provision and injunctive and other
equitable relief.
(e) It is agreed by the parties that the foregoing covenants
in this SECTION 4,7 impose a reasonable restraint on the Restricted Parties in
light of the activities and business of the Company and other TSI Entities on
the date of the execution of this Agreement and the current plans of the Company
and other TSI Entities; but it is also the intent of TSI and the Restricted
Parties that such covenants be construed and enforced with respect to Zolon A.
Wilkins, Jr. in accordance with the changing activities, business and locations
of the TSI Entities, whether before or after the date of termination of his
employment or other relationship with the Company or other TSI Entity; provided,
that he is actively involved in the management, operation or development of the
changed activity, business or location. For example, if, during the Restricted
Period, the Company and other TSI Entity engages in new and different
activities, enters a new business or establishes new locations for its current
activities or business in addition to or its existing activities or business or
the locations currently established therefor and Zolon A. Wilkins, Jr. is
involved in the management, development or operation of such new or different
activities or business, then Zolon A. Wilkins, Jr. will be precluded from
soliciting the customers or employees of such new or different activities or
business or from such new location and from directly competing with such new or
different business within 100 miles of its then-established operating
location(s) through the Restricted Period.
(f) The covenants in this SECTION 4.7 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time or
25
<PAGE>
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall be reformed in accordance
therewith.
(g) All of the covenants in this SECTION 4.7 shall be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of any Restricted Party
against TSI, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by TSI of such covenants. Further, this
SECTION 4.7 shall survive the Closing and the termination of any Restricted
Party's employment with a TSI Entity. It is specifically agreed that the
Restricted Period, during which the agreements and covenants of any Restricted
Party made in this SECTION 4.7 shall be effective, shall be computed by
excluding from such computation any time during which such Restricted Party is
in violation of any provision of this SECTION 4.7.
4.8 NON-DISCLOSURE; CONFIDENTIALITY.
(a) CONFIDENTIAL INFORMATION. By virtue of any Restricted
Party's prior or future employment, association or involvement with the Company
or other TSI Entity, the Restricted Party may have obtained or may hereafter
obtain confidential or proprietary information developed, or to be developed, by
the Company or other TSI Entity. "Confidential Information" means all
proprietary or confidential business information, whether in oral, written,
graphic, machine-readable or tangible form, and whether or not registered, and
including all notes, plans, records, documents and other evidence thereof,
including but not limited to all: patents, patent applications, copyrights,
trademarks, trade names, service marks, service names, "know-how," customer
lists, details of client or consulting contracts, pricing policies, operational
methods, marketing plans or strategies, product development techniques or plans,
procurement and sales activities, promotion and pricing techniques, credit and
financial data concerning customers, business acquisition plans or any portion
or phase of any scientific or technical information, discoveries, computer
software or programs used or developed in whole or in part by any TSI Entity
(including source or object codes), processes, procedures, formulas or
improvements of any TSI Entity; algorithms; computer processing systems and
techniques; price lists; customer lists; procedures; improvements, concepts and
ideas; business plans and proposals; technical plans and proposals; research and
development; budgets and projections; technical memoranda, research reports,
designs and specifications; new product and service developments; comparative
analyses of competitive products, services and operating procedures; and other
information, data and documents now existing or later acquired by an TSI Entity,
regardless of whether any of such information, data or documents qualify as a
"trade secret" under applicable Federal or State law. "Confidential Information"
shall not include any information which is in the public domain, provided such
information is not in the public domain as a consequence of disclosure by any
Restricted Party in violation of this Agreement.
(b) NON-DISCLOSURE. Each Restricted Party agrees that, except
as directed by such Restricted Party's TSI Entity employer, as required or
otherwise contemplated under this Agreement or such Restricted Party's
Employment Agreement or as otherwise required by law, he will not at any time
(including the term of such Restricted Party's employment, if any, by an TSI
Entity or at any time thereafter), except as may be expressly authorized by the
TSI Entity in
26
<PAGE>
writing, disclose to any Person or use any Confidential Information whatsoever
for any purpose whatsoever, or permit any Person whatsoever to examine and/or
make copies of any reports or any documents or software (whether in written form
or stored on magnetic, optical or other mass storage media) prepared by him or
that come into his possession or under his control by reason of his employment
by an TSI Entity or by reason of any consulting or software development services
he has performed or may in the future perform for an TSI Entity which contain or
are derived from Confidential Information. Each Restricted Party further agrees
that while employed at an TSI Entity, no Confidential Information shall be
removed from the TSI Entity's business premises except as permitted by TSI
policies, without the prior written consent of such TSI Entity. In addition,
each of the Restricted Parties hereby acknowledges that he is aware of the
restrictions imposed by federal securities laws on persons possessing material
non-public information with respect to SEC reporting companies and agree that
such Restricted Party will not effect any transactions in the stock of TSI
without compliance with such laws.
(c) TSI GROUP PROPERTY. As used in this Agreement, the term
"TSI GROUP PROPERTY" means all documents, papers, computer printouts and disks,
records, customer or customer lists, files, manuals, supplies, computer hardware
and software, equipment, inventory and other materials that have been created,
used or obtained by any TSI Entity, or otherwise belonging to any TSI Entity, as
well as any other materials containing Confidential Information as defined
above. Each Restricted Party recognizes and agrees that:
(i) All the TSI Group Property shall be and remain
the property of the TSI Entity to which such belongs;
(ii) The Restricted Parties will preserve, use and
hold the TSI Group Property only for the benefit of TSI and
its Affiliates and to carry out the business of the TSI
Entity, TSI and its Affiliates; and
(iii) When any Restricted Party's employment is
terminated, such Restricted Party will immediately deliver and
surrender to the TSI Entity all the TSI Group Property,
including all copies, extracts or any other types of
reproductions, which such Restricted Party has in his
possession or control.
4.9 STOCK OPTIONS. TSI shall grant stock options for 5,000 shares of
TSI common stock as of the Closing Date to each of Shawn Heaton and Zolon
Wilkins, III, and options for 5,000 shares to Robert Bayless when he becomes an
employee of the Company or at such earlier time approved by TSI. The provisions
of the stock options will be consistent with (and the options will be granted
under) TSI's existing stock option plan (4-year vesting at 25% per year, 10-year
exercise term, etc.).
4.10 NO HART-SCOTT-RODINO FILING. The Sellers and the Company hereby
represent and warrant to Purchaser that the Company's "acquired person" for
purposes of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR ACT"), does not meet the $10 million "size of the parties" test under
the HSR Act because the Company's assets are under $10 million, the Company's
revenues are not counted for purposes of the test, and because the Company is
not "controlled" by any other entity as defined in the HSR Act. Accordingly, the
27
<PAGE>
parties acknowledge and agree based on such representations (among other
things), that no filing is required to be made under the HSR Act regarding the
Acquisition contemplated hereby.
4.11 SETTLEMENT OF CERTAIN OBLIGATIONS.
(a) On the Closing Date, the Sellers shall pay or cause to be
paid to the Company $1,885,557.03 in cash (the "SELLER PAYMENT"), it being
understood that, upon receipt of the Seller Payment by the Company and subject
only to paragraph (d) below, the Intercompany Payable (as defined below) and
Intercompany Receivable (as defined below) shall be deemed to be fully
discharged, satisfied and paid and neither the Company nor any Affiliates of the
Sellers shall have any further rights, liabilities or obligations in respect
thereof (other than any rights provided for under the express terms of this
Section 4.11). The Sellers represent to TSI that they believe in good faith,
based on the information available to them on the Closing Date, that the amount
of the Seller Payment is greater than the Net Intercompany Receivable (as
defined below).
(b) Immediately upon receipt of the Seller Payment on the
Closing Date, the Company shall use such funds to repay in full all indebtedness
for borrowed money (including accrued and unpaid interest) owing by the Company
to NationsBank of Texas, N.A. as of the Closing Date (the "BANK DEBT") under its
existing bank credit facilities and any other obligations to such bank
(collectively, the "EXISTING BANK FACILITIES"), and the Sellers warrant that
upon the payment of such funds to such bank, the Existing Bank Facilities (and
all of the lenders security interests and collateral therefor) will thereupon be
terminated and cease to be of any further force or effect, and Sellers shall
cause lender to deliver to TSI deliver the lenders written confirmation thereof
to TSI and to file appropriate UCC-3 filings within a reasonable period
thereafter.
(c) Within 30 days after the Closing Date, TSI, the Company
and the Sellers shall jointly prepare a statement (the "SETTLEMENT STATEMENT")
setting forth (i) the aggregate amount of the indebtedness or other obligations
in respect of intercompany loans, advances and other obligations owing by the
Company to the Sellers or any Affiliates of the Sellers as of the Closing Date
(the "INTERCOMPANY PAYABLE") and (ii) the aggregate amount of any indebtedness
or other obligations in respect of intercompany loans, advances or any other
obligations owing by the Sellers or any Affiliates of the Sellers to the Company
as of the Closing Date (the "INTERCOMPANY RECEIVABLE"). If TSI, the Company and
the Sellers fail to agree upon the Settlement Statement within 30 days after the
Closing Date, any dispute among the parties relating to such statement shall be
resolved in accordance with procedures which approximate as nearly as possible
the procedures described in Section 1.1(c). As used herein, the term "NET
INTERCOMPANY RECEIVABLE" means the net amount, if any, by which the Intercompany
Receivable exceeds the Intercompany Payable.
(d) Within five days after the Settlement Statement has been
agreed upon by the parties, if the Net Intercompany Receivable calculated based
on such statement exceeds the Seller Payment, the Sellers shall pay or cause to
be paid to the Company an amount in cash equal to such excess.
4.12 TRANSFERRED TRADEMARKS. Prior to the date hereof, the Company
assigned to an Affiliate of the Sellers the trademarks and trademark
applications set forth in SCHEDULE 4.12 (the
28
<PAGE>
"TRANSFERRED TRADEMARKS"). The Purchaser acknowledges that it is aware of the
assignment of the Transferred Trademarks, and the Purchaser and the Company
hereby waive any rights and claims of any kind that they may have therein or in
respect thereof, except as otherwise granted to the Company and TSI in the
trademark license agreement relating to the "Lexington" trademark delivered to
the Company at Closing (the "TRADEMARK LICENSE").
4.13 USE OF NAMES. From and after the date hereof, the Purchaser shall
not, and shall cause the company not to, use the name "Lexington" or any
derivatives thereof or any names deceptively similar thereto in any of its
present or future business operations or for any other purpose except for any
use permitted under the express terms of the Trademark License.
4.14 CONSENT OF ERNST & YOUNG. The Sellers shall use their best efforts
to cause the Company's prior auditors, Ernest & Young, LLP (the "CPA"), at the
expense of TSI, to prepare and deliver to TSI upon reasonable request of TSI
from time to time, (i) the CPA's written consent, as required under SEC rules,
to the filing of the CPA's audit report relating to the Company in any of TSI's
SEC filings that require such audited financial statements, and (ii) a customary
accounting "comfort letter" in connection with securities offerings or other
transactions engaged in by TSI.
4.15 EARN-OUT BUDGET; WORKING CAPITAL; ETC. At all times during the
Accounting Period, TSI and its Affiliates shall comply with the following
provisions (in each case, unless otherwise agreed by the Sellers in writing):
(a) TSI may cause the Company to distribute cash to TSI and/or
the New Partners, but not to the extent that such reductions in the Company's
cash would impair the ability of the Company to have adequate sources of funds
to meet its working capital, operating and capital expenditure requirements
during the Accounting Period at substantially the levels contemplated by the
Company's budgets included in SCHEDULE 2.29 to the extent such budgets relate to
the Accounting Period (the "EARN-OUT BUDGET").
(b) Subject to TSI's debt covenants, during the Accounting
Period, TSI shall cause the Company to make, or TSI shall make on behalf of the
Company, capital expenditures substantially at the aggregate amount contemplated
by the Earn-Out Budget, but the decisions as to capital expenditures for
technology and telecommunications resources and equipment (including, without
limitation, hardware and software), and the particular products and services
purchased therewith, shall be made following consultation with and approval by
TSI's Chief Information Officer, but the decisions made by TSI's CIO shall not
materially impair the Company's ability to operate its business at volume levels
commensurate with the Company's operating budgets; and
(c) Neither TSI nor any of its Affiliates shall take any other
action with the intent and purpose to defer the recognition of any item of
income or gain or accelerate the recognition of any item of loss or expense so
as to reduce the amount of Company EBIT for the Accounting Period (other than
actions consistent with the Company's prior business practices).
29
<PAGE>
4.16 SALES UNDER SECURITIES LAWS. No Seller shall transfer any shares
of the TSI Stock at any time if such transfer would constitute a violation of
any federal or state securities or "blue sky" laws, rules or regulations
(collectively, "SECURITIES LAWS")
ARTICLE V
CLOSING
5.1 CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall be effective as of 12:01 a.m. on June 1, 1998
(the "CLOSING DATE").
5.2 CLOSING DELIVERIES. At the Closing,
(a) the Sellers and the Company shall deliver or cause to be
delivered to the Purchaser:
(i) assignments of the Company Interests to the New
Partners;
(ii) copies of certain consents and approvals
required under the Company's Contracts;
(iii) the Opinions of counsel to Company and Sellers
requested by TSI;
(iv) the Services Agreement between Lexington
Management Corporation and the Company;
(v) the Employment Agreements, and terminations of
agreements, required by SECTION 4.5;
(vi) Landlord's consent to assignment of office lease
to the Company and sublease to Glade Properties, Inc.
(vii) assignment of trademarks referenced in Section
4.12, and the Trademark License;
(viii) a certificate, signed an officer of the GP of
the Company, as to the partnership agreement and other
organizational documents of the Company, the resolutions
adopted by the board of directors and shareholders of the GP,
and by all the Partners of the Company, in connection with
this Agreement, and the incumbency of certain officers of the
GP and the Partners of the Company;
(ix) certificates issued by the appropriate
governmental authorities evidencing the existence of the
Company and the existence and good standing of the GP; and
(x) such other documents and certificates as are
required to consummate the transactions contemplated by this
Agreement.
30
<PAGE>
(b) The Purchaser shall deliver to the Sellers:
(i) immediately available funds in the amount of
$20,000,000, delivered as directed by Sellers under Section
1.1;
(ii) the TSI Stock to be issued and delivered in
accordance with SECTION 1.1;
(iii) an Officers' Certificate of TSI;
(iv) the Employment Agreements required by SECTION
4.5; and
(v) such other documents and certificates as are
required to consummate the transactions contemplated by this
Agreement.
ARTICLE VI
SURVIVAL OF TERMS; INDEMNIFICATION
6.1 SURVIVAL. All of the terms and conditions of this Agreement,
together with the representations, warranties and covenants contained herein or
in any instrument or document delivered or to be delivered pursuant to this
Agreement, shall survive the execution of this Agreement and the Closing
notwithstanding any investigation heretofore or hereafter made by or on behalf
of any party hereto; provided, however, that (a) the agreements and covenants
set forth in this Agreement shall survive and continue until all obligations set
forth therein shall have been performed and satisfied; and (b) all
representations and warranties of the Company and the Sellers (and all rights to
indemnification in respect thereof), shall expire on May 31, 1999 (the
"EXPIRATION DATE"), except that: (I) representations, warranties and indemnities
for which an indemnification claim shall be pending (and of which written notice
shall have been received by the Sellers) as of the Expiration Date shall survive
with respect to such claim until the final disposition thereof, and (II)
representations, warranties and indemnities under Section 2.18 (tax matters) and
2.20 (ERISA matters) shall survive until the expiration of the respective
statutes of limitations applicable to the matters addressed therein and until
the final disposition of any indemnification claim thereunder that is pending
(and of which written notice shall have been received by the Sellers) as of the
date of expiration of such applicable limitations period.
6.2 INDEMNIFICATION BY THE SELLERS. Subject to this ARTICLE VI, the
Purchaser and the New Partners and their respective officers, directors,
employees, shareholders, assigns, representatives and agents shall be
indemnified and held harmless by the Sellers at all times after the date of this
Agreement, against and in respect of any and all damage, loss, deficiency,
liability, obligation, commitment, cost or expense (including the fees and
expenses of counsel) resulting from, or in respect of, any of the following:
(a) Any misrepresentation, breach of warranty, or
non-fulfillment of any obligation on the part of any Seller or the Company under
this Agreement, or contained in any schedule or exhibit to this Agreement or
from any misrepresentation in or omission from any certificate, schedule, other
agreement or instrument executed by any Seller or the Company and
31
<PAGE>
delivered hereunder; provided, however, that to the extent that this paragraph
(a) relates to any breach or non-fulfillment of any covenant or agreement by the
Company, such breach or non-fulfillment occurred prior to or on the Closing Date
and not at any time thereafter.
(b) All demands, assessments, judgments, costs and reasonable
legal and other expenses arising from, or in connection with any claim incident
to any of the foregoing.
All third-party claims shall be resolved in accordance with Section 6.4 as
applicable.
6.3 INDEMNIFICATION BY THE PURCHASER. Subject to this ARTICLE VI, the
Sellers and their officers, directors, employees, shareholders, trustees,
beneficiaries, heirs, assigns, representatives and agents shall be indemnified
and held harmless by the Purchaser, at all times after the date of this
Agreement, against and in respect of any and all damage, loss, deficiency,
liability, obligation, commitment, demands, assessments, judgment, cost or
expense (including the fees and expenses of counsel) resulting from, or in
respect of, any of the following:
(a) Any misrepresentation, breach of warranty, or
non-fulfillment of any obligation on the part of the Purchaser under this
Agreement, or contained in any schedule or exhibit to this Agreement or from any
misrepresentation in or omission from any certificate, schedule, other agreement
or instrument executed by Purchaser and delivered hereunder;
(b) All demands, assessments, judgments, costs and reasonable
legal and other expenses arising from, or in connection with any claim incident
to any of the foregoing.
All third-party claims shall be resolved in accordance with
Section 6.4 as applicable.
6.4 THIRD-PARTY CLAIMS. Except as otherwise provided in this Agreement,
the following procedures shall be applicable with respect to indemnification for
third-party claims. Promptly after receipt by the party seeking indemnification
hereunder (hereinafter referred to as the "INDEMNITEE") of notice of the
commencement of any (a) Tax audit or proceeding for the assessment of Tax by any
taxing authority or any other proceeding likely to result in the imposition of a
Tax liability or obligation or (b) any action or the assertion of any Claim,
liability or obligation by a third party (whether by legal process or
otherwise), against which assessment, imposition, Claim, liability or obligation
any other party to this Agreement (hereinafter the "INDEMNITOR") is, or may be,
required under this Agreement to indemnify such indemnitee, the indemnitee will,
if a claim thereon is to be, or may be, made against the indemnitor, notify the
indemnitor in writing of the commencement or assertion thereof and give the
indemnitor a copy of such Claim, process and all legal pleadings. The indemnitor
shall have the right to participate in the defense of such action with counsel
of reputable standing. The indemnitor shall have the right to assume and control
the defense of such action unless such action if adversely determined (i) may if
adversely determined result in injunctions or other equitable remedies in
respect of the indemnitee or its business; (ii) may if adversely determined
result in liabilities which, taken with other then existing claims under this
ARTICLE VI, would not be fully indemnified hereunder (as determined without
reference to the $300,000 "deductible" described below); or (iii) may have an
adverse impact on the business or financial condition of the indemnitee after
the Closing Date (including an effect on the Tax liabilities, earnings or
ongoing business relationships of the
32
<PAGE>
indemnitee), other than as a result of the payment of money damages. The
indemnitor and the indemnitee shall cooperate in the defense of such Claims. In
the case that the indemnitor shall assume or participate in the defense of such
audit, assessment or other proceeding as provided herein, the indemnitee shall
make available to the indemnitor all relevant records and take such other action
and sign such documents as are necessary to defend such audit, assessment or
other proceeding in a timely manner. Subject to the immediately following
paragraph, if the indemnitee shall be required by judgment or a settlement
agreement to pay any amount in respect of any obligation or liability against
which the indemnitor has agreed to indemnify the indemnitee under this
Agreement, the indemnitor shall promptly reimburse the indemnitee in an amount
equal to the amount of such payment plus all reasonable expenses (including
legal fees and expenses, subject to the last paragraph of this Section 6.4)
incurred by such indemnitee in connection with such obligation or liability
subject to this ARTICLE VI.
Prior to paying or settling any Claim against which an indemnitor is,
or may be, obligated under this Agreement to indemnify an indemnitee, the
indemnitee must first supply the indemnitor with a copy of a final court
judgment or decree holding the indemnitee liable on such claim or, in the case
of a settlement, the indemnitee must first receive the written approval of the
terms and conditions of such settlement from the indemnitor. An indemnitor shall
have the right to settle any Claim for which it is or would be liable to the
indemnitee hereunder, but not until and subject to and in accordance with the
prior written approval of the indemnitee, which approval shall not be
unreasonably withheld.
An indemnitee shall have the right to employ its own counsel and
participate in any case, but the fees and expenses of such counsel shall be at
the expense of the indemnitee unless (a) the employment of such counsel shall
have been authorized in writing by the indemnitor in connection with the defense
of such action or Claim, (b) the indemnitor shall not have employed counsel in
the defense of, or the indemnitor does not have the right under this SECTION 6.4
to assume the defense of, such action or Claim, or (c) such indemnitee shall
have reasonably concluded that there may be defenses available to it which are
contrary to, or inconsistent with, those available to the indemnitor, in any of
which events such fees and expenses of not more than one additional counsel for
the indemnified parties shall be borne by the indemnitor.
6.5 LIMITATION ON INDEMNIFICATION. (a a) The Sellers shall be obligated
to indemnify as and to the extent set forth in this Article VI only if and to
the extent that the aggregate of all of the Sellers' aggregate liability under
such indemnity obligations exceeds $300,000, it being understood that said
$300,000 figure is to serve as a one time "deductible" (for example, if the
indemnity claims for which the Sellers would, but for the provisions of this
sentence, be liable aggregate $350,000, the Sellers would then be liable for
$50,000 and not $350,000). In addition, in no event shall the aggregate
indemnification liability of any Seller under this Article VI exceed the amount
resulting by multiplying such Seller's "PROPORTIONATE SHARE" as specified in
SCHEDULE 1.1 hereto) by $15,000,000 (i.e., $4,500,000 in the case of 1997-1
Irrevocable Trust; $4,500,000 in the case of R.A. Wilkins 1998 Irrevocable
Trust; $4,500,000 in the case of SS-1998 Irrevocable Trust and $1,500,000 in the
case of Lexington Services Corporation); PROVIDED, HOWEVER, that such
$15,000,000 limitation on indemnification liability (and the $300,000
"deductible") shall not be applicable with respect to breaches of Sections 2.3
(partnership interests), 2.5 (title to interests) and 2.6 (options and rights);
and FURTHER PROVIDED that the parties
33
<PAGE>
agree that indemnification as provided under this Article VI shall be the sole
and exclusive remedy for the matters indemnified against under Sections 6.2 and
6.3 above, except that notwithstanding such exclusive remedy, nothing herein
shall limit Purchaser's remedies for (x) actual fraud under applicable law or
(y) equitable remedies (other than the payment of money damages) under
applicable law (such as injunctive relief, specific performance, etc.) The
parties further agree that with respect to any indemnification claim for which
the Sellers are liable to Purchaser under the terms of this Article VI, no
Seller shall be obligated to pay more than such Seller's Proportionate Share of
such claim.
(b) The Purchaser shall be obligated to indemnify as and to
the extent set forth in this Article VI only if and to the extent that the
aggregate of all of the Purchaser's aggregate liability under such indemnity
obligations exceeds $300,000, it being understood that said $300,000 figure is
to serve as a one time "deductible" (for example, if the indemnity claims for
which the Purchaser would, but for the provisions of this sentence, be liable
aggregate $350,000, the Purchaser would then be liable for $50,000 and not
$350,000). In addition, in no event shall the aggregate indemnification
liability of Purchaser under this Article VI exceed $15,000,000.
(c) For purposes of this paragraph, "TSI Shares" means any TSI
Stock and Additional TSI Shares issued under this Agreement. Each Seller hereby
agrees that any claims for indemnification by Purchaser against the Sellers (or
any of them) hereunder may be satisfied, as provided below, by TSI canceling the
TSI Shares held by Sellers (it being agreed that each such TSI Share shall be
deemed to have a value equal to $35.2125 (the "SHARE VALUE") and that all
cancellations for indemnity claims made pursuant to this paragraph shall be made
with respect to each Seller's TSI Shares in accordance with such Seller's
Proportionate Share of the indemnification claim). Unless a Seller otherwise
elects to satisfy a greater portion (or all) of his or its indemnification
liability hereunder by paying cash to TSI, TSI must satisfy a Seller's
indemnification liability by canceling a Seller's TSI Shares having an aggregate
value (based on the Share Value) equal to 50% of the liability (or such lesser
portion of the liability to the extent of the value of the total number of TSI
Shares still held by such Seller, if the value is less than 50% of the
liability), and the Seller shall satisfy the remainder of his liability by cash
payment to TSI. Unless a Seller promptly delivers his certificates for
cancellation by TSI within 10 days of the date on which his indemnification
liability is determined under this Article VI, TSI may at its option elect to
require the Seller's entire liability to be satisfied in cash. Any Seller's
failure to so deliver his certificates shall not negate TSI's right to
nevertheless cancel the TSI Shares represented thereby. Notwithstanding the
foregoing, in the event of a "non-third-party" indemnification claim by
Purchaser to which Section 6.4 does not apply, TSI shall not cancel a Seller's
TSI Shares unless and until TSI obtains a final court judgment or decree holding
the Seller liable on such claim or, in the case of a settlement, TSI obtains the
written approval of such settlement from the Seller.
(d) No indemnitee that is entitled to receive an
indemnification payment from an indemnitor under this Article VI shall have any
right to setoff, under applicable law or otherwise, the amount due hereunder
against any payment obligation of the indemnitee to the indemnitor (including
any amount owing by the Purchaser pursuant to Section 1.1) unless and until (i)
the right of the indemnitee to such payment has been determined by a final court
judgment
34
<PAGE>
or decree holding the indemnitor liable for such indemnification payment or (ii)
the indemnitor has agreed in writing that it is obligated to pay such amount.
6.6 BUSINESS RECORDS. Sellers hereby agree and warrant to Purchaser
that all files, records and documents constituting or relating to the assets,
liabilities and business of the Company are the property of the Company, and are
in the possession of the Company at its office facilities on the date hereof,
except for certain records held in offsite storage which Sellers shall cause to
be made available and delivered to the Company at Company's request hereafter.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by a written agreement
signed by the Company, the Purchaser and the Sellers.
7.2 ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits hereto and the documents, annexes, attachments, certificates and
instruments referred to herein and therein, embodies the entire agreement and
understanding of the parties hereto in respect of the agreements and
transactions contemplated by this Agreement and supersedes all prior agreements,
representations, warranties, promises, covenants, arrangements, communications
and understandings, oral or written, express or implied, between the parties
with respect to such transactions. There are no agreements, representations,
warranties, promises, covenants, arrangements or understandings between the
parties with respect to such transactions, other than those expressly set forth
or referred to herein.
7.3 CERTAIN DEFINITIONS.
"AFFILIATE" means, with regard to any Person, (a) any Person,
directly or indirectly, controlled by, under common control of, or controlling
such Person, (b) any Person, directly or indirectly, in which such Person holds,
of record or beneficially, ten percent or more of the equity or voting
securities, (c) any Person that holds, of record or beneficially, ten percent or
more of the equity or voting securities of such Person, (d) any Person that,
through Contract, relationship or otherwise, exerts a substantial influence on
the management of such Person's affairs, or (e) any director, officer, partner
or individual holding a similar position in respect of such Person.
"AUTHORITY" means any governmental, regulatory or
administrative body, agency, arbitrator or authority, any court or judicial
authority, or any regulatory agency or arbitrator authority, whether
international, national, federal, state or local.
"CLAIM" means any action, claim, obligation, liability,
expense, lawsuit, demand, suit, inquiry, hearing, or investigation that is
sought or commenced against a Person pursuant to any official proceeding or
process or forum of any Authority for the resolution of disputes or the
provision of remedies or the imposition of fines, penalties or other damages or
liabilities, including, without limitation, any court, tribunal, hearing,
litigation, proceeding, arbitration, or other dispute, whether civil, criminal,
administrative or otherwise.
35
<PAGE>
"CONTRACT" means any agreement, contract, commitment,
instrument or other binding arrangement or understanding, whether written or
oral.
"COMPANY EBIT" means for the Accounting Period, the sum of (i)
the consolidated net income of the Company, as determined in accordance with
GAAP applied on a basis consistent with the Financial Statements, (ii) plus
interest expense less interest income, to the extent taken into account in
computing consolidated net income, (iii) provision for income taxes, to the
extent taken into account in computing consolidated net income, (iv) any charges
related to the amortization of goodwill arising from the consummation of the
transactions contemplated by this Agreement, to the extent taken into account in
computing consolidated net income, and (v) plus extraordinary expenses less
extraordinary income not related to operations, to the extent taken into account
in computing consolidated net income. Company EBIT shall also be computed in
accordance with the following requirements:
(1) Company EBIT shall not include deductions or
expenses for any TSI intercompany charges (including, but not limited
to, any management fees, transaction fees or allocations of general and
administrative or other overhead expenses, technology fees, shared
services or license fees), and shall not include travel expenses for
travel by Company management required by TSI for (a) meetings outside
of the continental United States other than such travel in the ordinary
course of the Company's business or (b) other travel that is unusually
excessive and extraordinary in comparison to the nature and extent of
travel customarily made by managers of TSI's operating companies.
(2) If the Company is party to any transaction with
TSI or an Affiliate of TSI (including, but not limited to, any sale of
assets, investment, loan or provision of services) with the Company,
and if such transaction is not on an arms-length basis and on terms
which are as favorable as could reasonably be expected to be obtained
by the Company from an unaffiliated third party, then any expenses or
revenue of the Company from such transaction shall be appropriately
adjusted (up or down), to reflect in all material respects the expenses
or revenues that the Company would have incurred or realized if such
transaction were on an arms'-length basis and to reflect the terms that
could reasonably be expected to have been obtained from an unaffiliated
third party;
(3) If the Company makes any cash distributions or
advances to TSI and/or the New Partners during the Accounting Period,
Company EBIT shall be adjusted to reflect the net effects that would
result as if TSI had paid interest to the Company at the rate of 5% per
annum, on the average net daily outstanding balance of such
distributions during the Accounting Period.
(4) If the Company's capital expenditures during
the Accounting Period exceed the levels of capital expenditures
contemplated by the Earn-Out Budget (AND such increased levels of
expenditures were not approved by the Executives), then the amount of
charges for depreciation and amortization applied in computing Company
EBIT shall not exceed the amount of such charges that would otherwise
reasonably be expected to have been applied if such capital
expenditures were consistent with the maximum budgeted amounts for the
Accounting Period.
36
<PAGE>
"ENVIRONMENTAL LAW" means any Regulation, Order, settlement
agreement or governmental requirement, which relates to or otherwise imposes
liability or standards of conduct concerning mining or reclamation of mined
land, discharges, emissions, releases or threatened releases of noises, odors or
any pollutants, contaminants or hazardous or toxic wastes, substances or
materials, whether as matter or energy, into ambient air, water, or land, or
otherwise relating to the manufacture, processing, generation, distribution,
use, treatment, storage, disposal, cleanup, transport or handling of pollutants,
contaminants, or hazardous wastes, substances or materials, including (but not
limited to) the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, as
amended, the Resource Conservation and Recovery Act of 1976, as amended, the
Toxic Substances Control Act of 1976, as amended, the Federal Water Pollution
Control Act Amendments of 1972, the Clean Water Act of 1977, as amended, any
so-called "Superlien" law, and any other similar Federal, state or local
statutes.
"ENVIRONMENTAL PERMIT" shall mean Permits, certificates,
approvals, licenses and other authorizations relating to or required by
Environmental Law and necessary or desirable for the Company's business.
"GAAP" means generally accepted accounting principles.
"LIEN" means any security interest, lien, mortgage, pledge,
hypothecation, encumbrance, easement or restriction of another Person of any
kind or nature.
"MATERIAL ADVERSE CHANGE" means any development or change
which has, had or would have a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" means any circumstances, state of
facts or matters which has, or would reasonably be expected to have, a material
adverse effect in respect of TSI's or the Company's (as the case may be)
business, operations, properties, assets, condition (financial or otherwise), or
results of operations.
"ORDER" means any decree, consent decree, judgment, award,
order, injunction, or ruling of or by an Authority.
"PERSON" means any corporation, partnership, joint venture,
company, syndicate, organization, association, trust, entity, Authority or
natural person.
"PROPRIETARY RIGHTS" means any patent, patent application,
copyright, trademark, trade name, service mark, service name, trade secret,
know-how, confidential information or other intellectual property or proprietary
rights.
"REGULATION" means any law, statute, rule, regulation,
ordinance, requirement or other binding action of or by an Authority.
"SUBSIDIARY" means, with respect to any Person (the "Parent"),
any Person as to which the Parent owns, directly or indirectly, 50% or more of
the outstanding stock or other equity interests.
37
<PAGE>
(5) NOTICES. All notices, requests, demands and
other communications required or permitted hereunder shall be in
writing and shall be delivered by hand delivery, via facsimile or
overnight receipted courier service, and shall be deemed to have been
duly given when delivered by hand or mailed, first class certified mail
with postage paid or by overnight receipted courier service:
(a) If to the Sellers or the Company, to:
c/o Lexington Services Corporation
2120 Walnut Hill Lane
Suite 100
Irving, Texas 75038
Attention: Zolon Wilkins, Jr.
Facsimile: (972) 717-0770
with a copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, Texas 75201
Attention: Geoffrey L. Newton
Facsimile: (214) 953-6503
or to such other person or address as the Sellers or the Company shall furnish
by notice to the Purchaser in writing.
(b) If to the Purchaser to:
Travel Services International, Inc.
220 Congress Park Drive
Delray Beach, Florida 33445
Attention: Michael J. Moriarty
President and Chief Operating Officer
with a copy to:
Travel Services International, Inc.
220 Congress Park Drive
Delray Beach, Florida 33445
Attention: Suzanne B. Bell, Esq.
Senior Vice President and General Counsel
38
<PAGE>
with a further copy to:
Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, P.A.
515 E. Las Olas Boulevard, Suite 1500
Fort Lauderdale, Florida 33301
Attn: Daniel H. Aronson, Esq.
or to such other person or address as the Purchaser shall furnish by notice to
Sellers in writing. Notice shall be deemed to have been duly given when the
party being noticed has received delivery of the notice, except that notice
effected via facsimile shall be deemed given upon delivery of hard copy of the
facsimile by one of the other delivery methods specified above.
7.4 EXHIBITS AND SCHEDULES. The Exhibits and Schedules referred to in
this Agreement are attached hereto and incorporated herein by this reference.
Disclosure of a specific item in any one Schedule shall be deemed restricted
only to the Section of this Agreement to which such disclosure relates, except
where such disclosure gives the party to whom such disclosure is made fair and
reasonable notice of the matter set forth in the disclosure, and to the extent
that, there is an explicit cross-reference in such Schedule to another Schedule.
7.5 WAIVER OF COMPLIANCE; CONSENTS. Any failure of any party hereto to
comply with any obligation, covenant, agreement or condition herein may be
waived in writing by the other parties hereto, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party hereto, such consent shall be given in writing.
7.6 ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except that the Purchaser may assign its rights (but not its obligations)
hereunder to any wholly-owned Subsidiary.
7.7 GOVERNING LAW. The Agreement shall be governed by the internal laws
of the State of Florida as to all matters, including but not limited to matters
of validity, construction, effect and performance.
7.8 CONSENT TO JURISDICTION; SERVICE OF PROCESS. The Company and each
of the Sellers and TSI hereby irrevocably submit to the jurisdiction of the
state or federal courts located in Broward County, Florida and in Dallas County,
Texas, in connection with any suit, action or other proceeding arising out of or
relating to this Agreement and the transactions contemplated hereby, and hereby
agree not to assert, by way of motion, as a defense, or otherwise in any such
suit, action or proceeding that the suit, action or proceeding is brought in an
inconvenient forum, that the venue of the suit, action or proceeding is improper
or that this Agreement or the subject matter hereof may not be enforced by such
courts.
39
<PAGE>
7.9 INJUNCTIVE RELIEF. The parties hereto agree that in the event of a
breach of any provision of this Agreement, the aggrieved party or parties may be
without an adequate remedy at law. The parties therefore agree that in the event
of a breach of any provision of this Agreement, the aggrieved party or parties
may elect to institute and prosecute proceedings in any court of competent
jurisdiction to enforce specific performance or to enjoin the continuing breach
of such provision, as well as to obtain damages for breach of this Agreement. By
seeking or obtaining any such relief, the aggrieved party shall not be precluded
from seeking or obtaining any other relief to which it may be entitled.
7.10 HEADINGS. The article, section and other headings contained in
this Agreement are for reference purposes only and do not affect in any way the
meaning or interpretation of this Agreement (or any provision hereof).
7.11 PRONOUNS AND PLURALS. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine, or neuter forms, and the singular forms of nouns, pronouns, and verbs
include the plural and vice versa.
7.12 CONSTRUCTION. The parties acknowledge that each party has reviewed
and revised this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement.
7.13 BINDING EFFECT. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the signatories to this
Agreement and each of their respective successors and permitted assigns.
7.14 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any party hereto, upon any breach or default of any
other party under this Agreement, shall impair any such right, power or remedy
of such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party hereto of any breach or default under this Agreement, or
any waiver on the part of any party of any provisions or conditions of this
Agreement must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall be cumulative and
not alternative except as expressly provided herein.
7.15 SEVERABILITY. Unless otherwise provided herein, if any provision
of this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
7.16 EXPENSES. Except as otherwise expressly provided in this
Agreement, all fees, costs and expenses (including, without limitation, legal,
auditing and accounting fees, costs and expenses) incurred in connection with
considering, pursuing, negotiating, documenting or
40
<PAGE>
consummating this Agreement and the transactions contemplated hereby shall be
borne and paid solely by the party incurring such fees, costs and expenses.
7.17 ATTORNEYS' FEES. If any party to this Agreement seeks to enforce
the terms and provisions of this Agreement, then the prevailing party in such
action shall be entitled to recover all costs in connection with such action,
including without limitation reasonable attorneys' fees, expenses and costs
incurred in attempting to resolve the dispute and with respect to trials,
appeals and collection.
7.18 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, which may be delivered by facsimile, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument.
* * * *
[Remainder of Page Intentionally Left Blank]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have made and entered into this
Agreement the date first hereinabove set forth.
PURCHASER:
TRAVEL SERVICES INTER-NATIONAL, INC.
By:__________________________________________
Name: Jill Vales
Title: Senior Vice President and Chief
Financial Officer
COMPANY:
LEXINGTON SERVICES ASSOCIATES, LTD.
By: LEXINGTON SERVICES CORPORATION,
its general partner
By:__________________________________________
Name: Shawn Heaton
Title: Vice President
SELLERS:
LEXINGTON SERVICES CORPORATION
By:__________________________________________
Name: Shawn Heaton
Title: Vice President
SIGNATURES CONTINUED NEXT PAGE
42
<PAGE>
1997-1 IRREVOCABLE TRUST
By:_________________________________________________
Name: Zolon A. Wilkins, Jr.
As Trustee for the
1997-1 Irrevocable Trust
R.A. WILKINS 1998 IRREVOCABLE TRUST
By:_________________________________________________
Name: Ricky A. Wilkins
As Trustee for the
R.A. Wilkins 1998 Irrevocable Trust
SS-1998 IRREVOCABLE TRUST
By:_________________________________________________
Name: Michael G. Wilkins
As Trustee for the
SS-1998 Irrevocable Trust
RESTRICTED PARTY:
The undersigned Restricted Party
agrees to the provisions of
Sections 4.7 and 4.8 of this
Agreement applicable to such party
as provided therein
____________________________________________________
ZOLON A. WILKINS, JR.
43
EXHIBIT 21
EXHIBIT 21
LIST OF SUBSIDIARIES
AutoEurope, LLC
AutoNet International, Inc.
Cruise Mart, Inc.
Cruise Masters, Inc.
Cruise Time, Inc.
CruiseOne, Inc.
Cruises Inc.
Cruises Only, LLC
CruiseWorld, Inc.
D-FW Tours, Inc., d/b/a D-FW Travel Arrangements
Diplomat Tours, Inc., d/b/a International Airline Consolidators
Gold Coast Travel Agency Corporation, Inc. d/b/a Gold Coast Cruise Center
Goodfellow Enterprises, Inc. d/b/a The Travel Company
Lexington Services, Inc.
Lexington Services Associates, Ltd.
Lexington Services Limited, Inc.
Landry & Kling, Inc.
Ship `N' Shore Cruises, Inc.
SNS Coachline, Inc.
SNS Travel Marketing, Inc.
The Anthony Dean Corporation, d/b/a Cruise Fairs of America
The Cruise Line, Inc.
Travel 800, LLC, d/b/a 1-800-FLY CHEAP
Trax Software, Inc.
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent 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
registration statement.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
June 9, 1998.
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 17, 1998, with respect to the financial
statements of Lexington Services Associates Ltd. included in the Registration
Statement on Form S-1 and related Prospectus of Travel Services International
Inc. dated June 11, 1998.
Ernst & Young LLP
Dallas, Texas
June 9, 1998.