UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-29298
TRAVEL SERVICES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 52-2030324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Congress Park Drive
Delray Beach, Florida 33445
(Address of principal executive offices)
(Zip Code)
(561) 266-0860
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
The number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of May 13, 1999, was 13,795,658.
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION...........................................................................3
Item 1. Consolidated Financial Statements...............................................................3
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999 .........................3
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1999 ........................................................................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1999...................................................................5
Notes to Consolidated Financial Statements......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................20
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................21
Item 2. Changes in Securities and Use of Proceeds......................................................21
Item 3. Defaults Under Senior Securities...............................................................21
Item 4. Submission of Matters to a Vote of Security Holders............................................21
Item 5. Other Information..............................................................................21
Item 6. Exhibits and Reports on Form 8-K...............................................................22
SIGNATURES.......................................................................................................23
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 26,084 $ 36,373
Accounts receivable, net 15,460 20,271
Receivables from affiliates and employees 250 312
Prepaid expenses 3,380 12,704
Prepaid income taxes 2,920 3,239
Deferred income taxes 827 1,031
Other current assets 1,476 1,739
-------- --------
Total current assets 50,397 75,669
Property and equipment, net 22,504 26,806
Goodwill, net 105,773 142,864
Notes receivable from employees 410 325
Other assets 1,045 1,372
-------- --------
Total assets $180,129 $247,036
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current maturities of long-term debt 257 274
Trade payables and accrued expenses 27,412 60,738
-------- --------
Total current liabilities 27,669 61,012
Borrowings under line of credit - 24,000
Long-term debt, net of current portion 2,888 2,817
Deferred income taxes 3,774 4,273
Other long-term liabilities 501 431
-------- --------
Total liabilities 34,832 92,533
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized;
none outstanding
Common stock, $0.01 par value; 50,000,000 shares authorized;
13,376,969 and 13,795,658 shares outstanding, respectively 134 138
Additional paid-in capital 129,623 137,830
Retained earnings 15,540 16,535
-------- --------
Total stockholders' equity 145,297 154,503
-------- --------
Total liabilities and stockholders' equity $180,129 $247,036
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
Net revenues $ 26,223 $ 41,352
Operating expenses 14,573 26,331
Gross profit 11,650 15,021
---------- ----------
General and administrative expenses 7,414 12,595
Goodwill amortization 407 1,003
---------- ----------
Income from operations 3,829 1,423
Other income (expense), net (29) 230
---------- ----------
Income before provision for income taxes 3,800 1,653
Provision for income taxes 1,596 661
---------- ----------
Net income $ 2,204 $ 992
========== ==========
Basic earnings per share $ 0.20 $ 0.07
========== ==========
Diluted earnings per share $ 0.19 $ 0.07
========== ==========
Shares used in computing basic earnings per share 10,951,543 13,664,325
========== ==========
Shares used in computing diluted earnings per share 11,342,337 14,019,160
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
1998 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,204 $ 992
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 867 1,855
Amortization of unearned compensation 3 8
Interest rate swap - (280)
Deferred tax provision (benefit) (387) 2,174
Changes in operating assets and liabilities:
Accounts receivable (1,731) (3,576)
Receivables and notes from affiliates and employees 868 (337)
Prepaid taxes and expenses (212) 725
Other current assets (338) (168)
Trade payables and accrued expenses 13,583 13,334
------- --------
Net cash provided by operating activities 14,857 14,727
------- --------
Cash flows from investing activities:
Capital expenditures (789) (4,393)
Proceeds from sale of property and equipment - 6
Cash paid for acquisitions, net of cash acquired (8,249) (24,335)
------- --------
Net cash used in investing activities (9,038) (28,722)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt and lines of credit 8,600 24,000
Payments on long-term debt and lines of credit (260) (65)
Net proceeds from options exercised - 349
------- --------
Net cash provided by financing activities 8,340 24,284
------- --------
Net increase in cash and cash equivalents 14,159 10,289
Cash and cash equivalents, beginning of period 8,451 26,084
------- --------
Cash and cash equivalents, end of period $ 22,610 $ 36,373
======== ========
Supplemental cash flow information:
Cash paid for interest $ 241 $ 365
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
TRAVEL SERVICES INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
Travel Services International, Inc. and its subsidiaries (the "Company") provide
specialized distribution of leisure travel products and services. The Company
was founded in April 1996 and on July 28, 1997 the Company consummated its
initial public offering of common stock and acquired five specialized
distributors of travel services (the "Founding Companies") in separate
combination transactions which were accounted for using the purchase method of
accounting (the "Combinations").
Auto Europe, one of the Founding Companies, 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 financial statements for
each period presented represent those of Auto Europe and four companies acquired
in 1997 and four companies acquired in 1998 under transactions accounted for
using the pooling of interests method of accounting (the "1997 Pooling
Acquisitions" and the "1998 Pooling Acquisitions", respectively), as well as
balances and transactions of the Company and four other Founding Companies since
July 28, 1998 and other companies acquired and accounted for using the purchase
method of accounting subsequent to the date of acquisition.
The interim consolidated financial statements as of March 31, 1999 and for the
three month periods ended March 31, 1998 and 1999 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to fairly present the financial position,
results of operations, and cash flows with respect to interim financial
statements, have been included. Operating results for interim periods are not
necessarily indicative of the results for full years as a result of seasonality
and other factors.
The financial statements included herein should be read in conjunction with the
Company's Consolidated Financial Statements and related Notes thereto (the "1998
Consolidated Financial Statements"), and Management's Discussion and Analysis of
Financial Condition and Results of Operations related thereto, which are
included in the Company's Form 10-K for the year ended December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 to the 1998 Consolidated Financial Statements.
The Company follows 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 all periods presented, there were no differences between reported net income
on the consolidated financial statements and comprehensive income.
The Company follows Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for the way information about reporting segments is
reported in financial statements and establishes standards for related
disclosures about products and services, geographical areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision makers in deciding how to allocate resources
and in assessing performance. The Company's reportable
6
<PAGE>
operating segments include cruise, outbound, lodging and other.
In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued which establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. Changes in the derivative's fair value are required to be recognized
currently in earnings unless specific hedge accounting criteria are met. The
statement is effective for fiscal years beginning after June 15, 1999.
Management believes the impact of adopting this statement in 1999 will not have
a material effect upon the Company's results of operations or financial
position.
3. REPORTING SEGMENTS
<TABLE>
<CAPTION>
1998 CRUISE OUTBOUND LODGING OTHER ADJUSTING TOTAL
AND REC.
ITEMS (1)
-------- -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $12,347 $11,265 $- $2,611 $- $26,223
Operating expenses 5,700 7,320 - 1,553 -- 14,573
-------- -------- -- ------- ------- --------
Gross profit 6,647 3,945 - 1,058 -- 11,650
General and administrative expenses 3,081 1,429 - 600 2,304 7,414
Goodwill amortization -- -- - -- 407 407
------- ------- -- ------ ------- --------
Income from operations 3,566 2,516 - 458 (2,711) 3,829
Other income (expense), net -- 50 - 38 (117) (29)
------- ------- -- ------ ------- --------
Net Income before income taxes 3,566 2,566 - 496 (2,828) 3,800
Provision for income taxes -- -- - -- 1,596 1,596
------- ------- -- ------ ------- --------
Net income $ 3,566 $ 2,566 $- $ 496 $(4,424) $ 2,204
======= ======= == ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
1999 CRUISE OUTBOUND LODGING OTHER ADJUSTING TOTAL
AND REC.
ITEMS (1)
-------- -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $15,500 $14,928 $4,853 $6,071 $- $41,352
Operating expenses 10,381 9,230 2,891 3,829 - 26,331
------- ------- ------ ------- ------- -------
Gross profit 5,119 5,698 1,962 2,242 - 15,021
General and administrative expenses 4,569 2,019 1,213 928 3,866 12,595
Goodwill amortization - - - - 1,003 1,003
------- ------- ------ ------- ------- ------
Income from operations 550 3,679 749 1,314 (4,869) 1,423
Other income (expense), net 124 221 11 77 (203) 230
------- ------- ------ ------- ------- ------
Net Income before income taxes 674 3,900 760 1,391 (5,072) 1,653
Provision for income taxes - - - - 661 661
------- ------- ------ ------- ------- ------
Net income $674 $3,900 $760 $1,391 $(5,733) $992
======= ======= ====== ======= ======= ======
</TABLE>
(1) Adjusting and reconciling items includes goodwill amortization, software
amortization and support expenses, expenses of corporate headquarters, interest
expense, income taxes and certain other expenses controlled and recorded at
corporate headquarters. On a consolidated basis, inter-segment sales were
immaterial.
7
<PAGE>
4. LONG-TERM DEBT AND CREDIT FACILITY
The Company has a credit facility agreement with NationsBank, N.A.
("NationsBank") with respect to a $30 million revolving line of credit (the
"Credit Facility") and a term loan facility of $2.1 million (the "Term Loan").
Borrowings under the Credit Facility and the Term Loan are due October 15, 2000
and October 5, 2000, respectively. The Credit Facility may be used for
acquisitions, letters of credit and for capital expenditures (including but not
limited to investments in technology) and general corporate purposes, which in
the aggregate may not exceed $5 million. As of March 31, 1999, there were
outstanding borrowings of $24 million and letters of credit totaling $5.6
million under the Credit Facility. All amounts repaid under the Credit Facility
may be reborrowed. Interest on outstanding balances of the Credit Facility and
the Term Loan are computed based on the Eurodollar Rate plus a margin ranging
from 1.25% to 2.0%, depending on certain financial ratios. During 1998 and 1999,
the margin was 1.25%.
The Credit Facility requires the Company to secure an interest rate hedge on
fifty percent of the outstanding principal amount borrowed under the Credit
Facility and one hundred percent of the outstanding balance on the Term Loan. As
of March 31, 1999, the Company had outstanding interest rate swap hedge
agreements totaling $16.4 million that mature in October 2000, of which $2.1
million related to the Term Loan and $14.3 million to borrowings under the
Credit Facility. Interest rate swap hedge agreements totaling $14.3 million were
not liquidated when related borrowings under the Credit Facility were repaid
during 1998 and, accordingly, an unrealized loss of approximately $280,000 was
accrued at December 31, 1998. This unrealized loss was reversed in 1999 when $24
million was borrowed under the Credit Facility.
The Credit Facility is secured by substantially all the assets of the Company
and requires the Company to comply with various loan covenants, which include
maintenance of certain financial ratios, restrictions on additional indebtedness
and restrictions on liens, guarantees, advances, capital expenditures, sale of
assets and dividends. At March 31, 1999, the Company was in compliance with the
loan covenants or obtained waivers for any instances of non-compliance.
On March 26, 1999, NationsBank agreed to increase the amount of the Credit
Facility to $35 million and to amend certain provisions and debt covenants,
subject to certain documentation and closing conditions, including but not
limited to extending the term of the Credit Facility and the Term Loan to
October 2001, permitting letters of credit not to exceed $10 million in the
aggregate and making the full Credit Facility available for general corporate
purposes.
5. ACQUISITIONS, PRO FORMA RESULTS AND CAPITAL STOCK
Since November 1997, the Company has acquired eight operating companies under
transactions accounted for using the pooling of interests method of accounting.
The 1997 Pooling Acquisitions include Cruise World, Inc., CruiseOne, Inc., The
Anthony Dean Corporation (d/b/a Cruise Fairs of America) and Ship `N' Shore
Cruises, Inc. The aggregate consideration paid in connection with such
acquisitions was 1,351,704 shares of common stock. The 1998 Pooling Acquisitions
include CruiseMasters, Inc., Landry & Kling, Inc., Goodfellow Enterprises, Inc.
(dba The Travel Company), and Cruise Outlets of the Carolinas, Inc. The
aggregate consideration paid in connection with such acquisitions was 645,640
shares of common stock.
Aggregate net revenues of $1.6 million and income before taxes of $401,000
included in the accompanying consolidated statement of income for the three
month period ended March 31, 1998 were generated prior to the closing dates of
the 1998 Pooling Acquisitions.
From December 1997 through 1998, in addition to the Combinations, the Company
acquired one software development company and seven operating companies under
transactions accounted for using the purchase method of accounting. The
operating companies acquired include Lexington Services Associates, Ltd.
("Lexington"), Trax Software, Inc., Diplomat Tours, Inc., Gold Coast Travel
Agency Corporation, The Cruise Line, Inc., ABC Corporate Services ("ABC") and
1-800-CRUISES, Inc. Accordingly, the financial results of these operating
companies have been included in the accompanying financial statements from the
date of acquisition. The aggregate consideration paid for these acquisitions,
excluding consideration paid for Lexington, was 255,107 shares of common stock
and $26.5 million in cash.
Effective June 1, 1998, the Company acquired all of the outstanding partnership
interests of Lexington. The aggregate consideration paid was 283,990 shares of
common stock and $24 million in cash, including $4 million in
8
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contingent consideration paid in 1998. Lexington is an electronic hotel
reservation services company. The acquisition is accounted for using the
purchase method of accounting. The historical operations of Lexington are
significant when compared to the historical operations of the Company.
Effective February 1, 1999, the Company acquired all of the outstanding capital
stock of AHI International Corporation ("AHI"). The aggregate consideration paid
was 145,400 shares of common stock and $24 million in cash. AHI develops,
markets and sells packaged European vacations to individuals that are members of
over 200 university and college alumni associations. AHI is also a longstanding
provider of alumni tour packages to college bowl games. The acquisition is
accounted for using the purchase method of accounting. The historical operations
of AHI are significant when compared to the historical operations of the
Company.
Effective February 1, 1999, the Company acquired all of the outstanding capital
stock of Lifestyle Vacation Incentives, Inc. and All Seasons Smart Traveler,
Inc., an affiliated company (collectively, "LVI"). The aggregate consideration
paid was 248,600 shares of common stock and $6.25 million in cash. Additional
purchase consideration not to exceed $3.0 million may be paid based upon
financial performance for the year ended December 31, 1999. LVI's proprietary
travel incentive programs provide structured discounts to consumers for various
forms of leisure travel, including airline tickets, cruise vacations, rental
cars, hotel rooms and vacation packages. The acquisition is accounted for using
the purchase method of accounting. The historical operations of LVI when
compared to the historical operations of the Company are not significant.
The following are unaudited pro forma combined results of operations of the
Company, Lexington and AHI for the three month periods ended March 31, 1998 and
1999, as if the acquisitions of Lexington and AHI had occurred on January 1,
1998 (in thousands, except per share data):
1998 1999
---- ----
Net revenues $31,022 $41,869
======= =======
Net income $2,384 $ 494
====== =====
Pro forma diluted earnings per share $0.20 $0.04
===== =====
Weighted average shares outstanding 12,076,838 14,067,627
========== ==========
These unaudited pro forma combined results have been prepared for comparative
purposes only and include certain adjustments, such as additional amortization
expense as a result of goodwill, increased interest expense on acquisition debt
and certain contractual adjustments to salaries, bonuses, management fees and
benefits to former owners to which such persons have agreed prospectively. They
do not purport to be indicative of the results of operations which actually
would have resulted had the acquired companies been under common control prior
to the date of the acquisition or which may result in the future.
On July 21, 1998, the Company consummated a secondary stock offering. An
aggregate of 4,025,000 shares of common stock were registered and sold,
including 2,025,000 shares of common stock sold by the Company and 2,000,000
shares of common stock sold by certain selling stockholders. All of the shares
of common stock were sold to the public at a price of $34.50 per share. Net
proceeds to the Company from the secondary stock offering (after deducting
underwriting discounts and commissions and estimated offering expenses) were
approximately $65.6 million, of which $28.6 million was used to repay borrowings
under the Credit Facility. The Company did not receive any proceeds from shares
sold by selling stockholders.
9
<PAGE>
5. EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standard No. 128,
"Earnings Per Share". Basic earnings per common share calculations are
determined by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per common share
calculations are determined by dividing net income by the weighted average
number of common shares and dilutive common share equivalents.
A reconciliation of weighted average shares used in the calculation of basic and
diluted earnings per share for the three month periods ended March 31, 1998 and
1999 is as follows:
1998 1999
---- ----
Basic common shares outstanding 10,951,543 13,664,324
Dilutive effects of stock options 390,794 354,836
---------- ----------
Dilutive shares outstanding 11,342,337 14,019,160
========== ==========
Options totaling 576,672 at March 31, 1999 were not included as the inclusion
would have been anti-dilutive.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the ordinary course
of business. The Company believes that none of the actions currently pending
will have a material adverse effect on its business, financial condition or
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with (i) the Company's
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report and (ii) the 1998 Consolidated Financial Statements and related
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations related thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Statements contained
in this discussion regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements. The
forward looking statements are subject to numerous risks and uncertainties to
the Company. See Part II, Item 5, Risk Factors and Qualification of Forward
Looking Statements.
INTRODUCTION
The Company is a leading specialized distributor of leisure travel products
including cruise vacations, vacation packages, domestic and international
airline tickets and European auto rentals, and is a leading provider of travel
services such as electronic hotel reservation services, specialized hotel
programs and services and incentive travel programs. The Company does not record
the gross amount of the travel products and services sold to consumers and
travel agents, but rather records the commission and fee revenue received by the
Company from travel providers and customers.
The Company, following its initial public offering and the Combinations of the
Founding Companies in July 1997, focused for the remainder of 1997 on forming a
corporate headquarters, developing a technology strategy and acquiring operating
companies. During 1998, the Company focused on developing strategic software
applications, creating a marketing and branding strategy, expanding call centers
for cruise and domestic air operations, centralizing certain activities at
corporate headquarters and acquiring additional operating companies. During
1999, the Company plans to focus on expanding its presence and on-line booking
capabilities on the Internet, further developing and rolling out its strategic
software applications, integrating its cruise segment operations, maximizing
revenue opportunities and improving call center operations. In 1999, the Company
anticipates making certain investments and further integrating its operations to
strategically position the Company for the future.
10
<PAGE>
The Company operates and reports under the following segments: cruise, outbound,
lodging and other.
The cruise segment is comprised of operating companies distributing cruises
through call centers, home-based agents and the Internet. Net revenues include
commissions and markups, volume override commissions, and royalty fees and
franchise fees from franchisees. The Company records net 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 cruise departure date. The Company
provides an allowance for cancellations and reservation changes, which is based
on historical experience.
The outbound segment is comprised of operating companies distributing European
auto rentals, international airline tickets and international vacation packages.
Net revenues include commissions and markups. The Company records net revenue
when the reservation is booked and ticketed except for international tour
packages for which net revenue is recorded when the tour departs. The Company
provides an allowance for cancellations, reservation changes and currency
exchange guarantees, which is based on historical experience.
The lodging segment is comprised of operating companies providing electronic
hotel reservation services to independent hotels and specialized hotel programs
and other reservation and support services to travel agencies. Net revenues
include commissions and fees for reservation services, and fees for
subscriptions and advertising related to the hotel program. The Company records
net revenue at the time the traveler checks out of the hotel for hotel
reservation services, when service is provided for after-hours travel services
to travel agencies, over the subscription period for hotel program
subscriptions, and when the hotel program publication is mailed for
advertisement fees. The Company provides an allowance for cancellations,
reservation changes and "no shows", which is based on historical experience.
The other segment is comprised of operating companies providing domestic airline
tickets and incentive travel programs. Net revenues include commissions,
markups, volume overrides and segment, processing and delivery fees. The Company
records net revenue when the reservation is booked and ticketed for domestic
airline tickets, when the customer is no longer entitled to a full refund of the
cost of the incentive cruise, which is generally 45 to 90 days prior to the
cruise departure date and ratably over estimated economic lives of incentive
travel programs. The Company provides an allowance for cancellations, which is
based on historical experience.
For the above segments, operating expenses include compensation of sales and
sales support personnel, commissions and remuneration paid to travel agents and
alumni associations, credit card merchant fees, telecommunications, mail,
courier, marketing and other expenses that vary with revenues. Commissions and
remuneration to travel agents and alumni associations, respectively, 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. Conversely, the Company receives as a royalty
a portion of commissions earned by its franchisees selling cruises. General and
administrative expenses include compensation and benefits to management,
professional and administrative employees, fees for professional services, rent,
information services, depreciation, travel and entertainment, office services,
and other overhead costs.
The financial results presented by reporting segment represent the historical
information of the Company in the manner in which the Company's management
internally disaggregates financial information for the purpose of assisting in
making operational decisions. Excluded from the four reporting segments are
goodwill amortization, software amortization and support expenses, expenses of
corporate headquarters, interest expense, income taxes and certain other
expenses controlled by and recorded at corporate headquarters.
The Company's business and growth strategies encompass many components,
including providing extensive expertise in specific travel segments and high
levels of customer service, embracing multiple selling models and distribution
channels, including the Internet, implementing cross selling opportunities
across travel segments, implementing state-of-the-art technology infrastructure,
and pursuing selected strategic acquisitions.
11
<PAGE>
CONSOLIDATED FINANCIAL REVIEW
The following table sets forth certain historical consolidated financial data,
also stated as a percentage of net revenues, for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
1998 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues $ 26,223 100.0% $41,352 100.0%
Operating expenses 14,573 55.6 26,331 63.7
-------- ----- ------- -----
Gross profit 11,650 44.4 15,021 36.3
General and administrative expenses 7,414 28.3 12,595 30.5
Goodwill amortization 407 1.5 1,003 2.4
-------- ----- ------- -----
Income from operations 3,829 14.6 1,423 3.4
Other income (expense), net (29) (.1) 230 .6
-------- ----- ------- -----
Income before provision for income taxes 3,800 14.5 1,653 4.0
Provision for income taxes 1,596 6.1 661 1.6
-------- ----- ------- -----
Net income $ 2,204 8.4% $ 992 2.4%
========= ===== ======= =====
Diluted earnings per share $ 0.19 $ 0.07
========= =======
</TABLE>
The Company reported net income of $992,000, or $0.07 diluted earnings per share
in 1999, compared to net income of $2.2 million, or $0.19 diluted earnings per
share in 1998. Net revenues increased 57.7% as compared to 1998, as a result of
acquisitions and increases in transaction volumes and net revenue per
transaction. Of the 57.7% increase in net revenues, 21.6% was from internal
growth (which excludes the impact of acquisitions made subsequent to January 1,
1998 accounted for using the purchase method of accounting.) However,
profitability declined primarily as a result of a decreased gross profit margin
in the cruise reporting segment and increased general and administrative
expenses.
Gross profit margin decreased in 1999 primarily as a result of increased
marketing, compensation and other operating costs within the cruise reporting
segment. In addition, the overall gross profit margin declined as a result of a
change in the relative net revenues by reporting segment compared to 1998; and
specifically, gross profit margin declined as a result of acquiring companies in
the lodging segment and from an increase in the sales volume of domestic airline
tickets within the other reporting segment.
General and administrative expenses increased $5.2 million, or 70%, in 1999, of
which $2.6 million was attributable to companies acquired in 1998 and 1999
accounted for using the purchase method of accounting, $1.5 million was
attributable to increased costs at corporate headquarters and $1.1 million was
attributable to increased costs at other operating companies, primarily in the
cruise reporting segment. The increase at corporate headquarters was the result
of various centralization initiatives introduced over the course of 1998 and
1999 and non-capitalizable operating costs associated with technology and
telecommunications initiatives. The Company expects its expenses associated with
technology will continue to increase in 1999 as more systems are rolled out and
once capitalized software costs are amortized as particular software releases
are ready for their intended use.
Goodwill amortization increased $596,000 in 1999 as a result of several
acquisitions in 1998 and 1999 accounted for under the purchase method of
accounting.
Provision for income taxes, as a percentage of income before provision for
income taxes, was 40% in 1999 and 42% in 1998. The decrease in the effective tax
rate is the result of certain corporate restructuring initiatives undertaken by
the Company which have resulted in a reduction of the Company's effective tax
rate in 1999.
12
<PAGE>
CRUISE REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as
a percentage of net revenues, for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
1998 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues $12,347 100.0% $15,500 100.0%
Operating expenses 5,700 46.2 10,381 67.0
------- ----- ------- -----
Gross profit 6,647 53.8 5,119 33.0
General and administrative expenses 3,081 24.9 4,569 29.5
------- ----- ------- -----
Income from operations 3,566 28.9 550 3.5
Other income (expense), net - 124 .8
------- ----- ------- -----
Income before provision for income taxes (1) $ 3,566 28.9% $ 674 4.3%
======= ===== ======= =====
</TABLE>
(1) Excludes goodwill amortization, software amortization and support expenses,
expenses of corporate headquarters, interest expense, income taxes and
certain other expenses controlled and recorded at corporate headquarters.
The cruise reporting segment reported income before income taxes of $674,000
in 1999 compared to $3.6 million in 1998. The decrease in profitability
was the result of a decline in the gross profit margin and increased general and
administrative expenses. Net revenues increased 25.5% in 1999 compared to 1998,
primarily because of acquisitions, increased sales volume and increased net
revenue per transaction. Of the 25.5% increase in net revenues, 9.8% was from
internal growth. The increase in net revenue per transaction was the result of
selling cruises with higher average package prices due to product mix offset in
part by lower base commissions. Lower base commissions were the result of cruise
line contracts for 1999 which provided, in some cases, a base commission that is
one or two percentage points less than in effect for 1998. This decrease in base
commission may be offset by incremental override commissions which, if achieved,
would be recorded in the fourth quarter of 1999. However, based on current
trends, the Company anticipates volume levels required to achieve override
commissions will not be achieved.
Gross profit margin decreased in 1999 as a result of increased marketing,
compensation and other operating costs. The Company, based in part on the
significant internal growth experienced in the cruise reporting segment in 1998,
substantially increased marketing expenditures and the number of sales personnel
at its cruise call centers. Despite these initiatives, cruise transaction
volumes during the first quarter of 1999 were moderate and significantly lower
than expected. The Company believes the decreased growth rate in the cruise
reporting segment resulted primarily from lower than expected consumer
acceptance of new Company marketing programs as well as unexpected softness in
the cruise industry compared to growth rates for the industry in 1998,
particularly for Alaskan and European destinations. The Company is reviewing
measures which it believes it will be able to take to reduce operating costs as
a percentage of net revenues for the remainder of 1999.
General and administrative expenses increased $1.5 million, or 48.3%, in 1999.
General and administrative expenses increased as a percentage of net revenues
primarily as a result of acquisitions and expansion of cruise call centers in
anticipation of significant sales volume growth.
13
<PAGE>
OUTBOUND REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as
a percentage of net revenues, for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
1998 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues $ 11,265 100.0% $14,928 100.0%
Operating expenses 7,320 65.0 9,230 61.8
-------- ----- ------- -----
Gross profit 3,945 35.0 5,698 38.2
General and administrative expenses 1,429 12.7 2,019 13.5
-------- ----- ------- -----
Income from operations 2,516 22.3 3,679 24.7
Other income (expense), net 50 .4 221 1.4
-------- ----- ------- -----
Income before provision for income taxes (1) $ 2,566 22.7% $ 3,900 26.1%
======== ===== ======= =====
</TABLE>
(1) Excludes goodwill amortization, software amortization and support
expenses, expenses of corporate headquarters, interest expense, income
taxes and certain other expenses controlled and recorded at corporate
headquarters.
Outbound reporting segment reported income before taxes of $3.9 million in 1999,
compared to $2.6 million in 1998. Net revenues increased 32.5% in 1999 compared
to 1998, primarily because of acquisitions and increased sales volume. Of the
32.5% increase in net revenues, 17.9% was from internal growth.
Gross profit margin improved in 1999 a result of the lower commissions,
remuneration and telephone costs per transaction. Commission and remuneration
expense decreased as a result of increased sales directly to consumers and the
impact of an acquisition in 1999, which provides remuneration to alumni
associations at a rate lower than commissions paid to travel agencies. Telephone
costs as a percentage of net revenues decreased in 1999 from lower rates.
General and administrative expenses increased $590,000, or 41.3%, in 1999
primarily as a result of acquisitions.
14
<PAGE>
LODGING REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as
a percentage of net revenues, for the periods indicated (dollars in thousands):
THREE MONTHS
ENDED MARCH 31,
---------------
1999
-------------------
Net revenues $4,853 100.0%
Operating expenses 2,891 59.6
------ -----
Gross profit 1,962 40.4
General and administrative expenses 1,213 25.0
------ -----
Income from operations 749 15.4
Other income (expense), net 11 .3
------ -----
Income before provision for income taxes (1) $ 760 15.7%
====== =====
(1) Excludes goodwill amortization, software amortization and support expenses,
expenses of corporate headquarters, interest expense, income taxes and
certain other expenses controlled and recorded at corporate headquarters.
Lodging reporting segment reported income before taxes of $760,000 in 1999.
Lexington and ABC were acquired in June and July 1998, respectively, and were
accounted for using the purchase method of accounting.
15
<PAGE>
OTHER REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as
a percentage of net revenues, for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues $2,611 100.0% $6,071 100.0%
Operating expenses 1,553 59.5 3,829 63.1
------ ----- ------ -----
Gross profit 1,058 40.5 2,242 36.9
General and administrative expenses 600 23.0 928 15.3
------ ----- ------ -----
Income from operations 458 17.5 1,314 21.6
Other income (expense), net 38 1.5 77 1.3
------ ----- ------ -----
Income before provision for income taxes (1) $ 496 19.0% $1,391 22.9%
====== ===== ====== =====
</TABLE>
(1) Excludes goodwill amortization, software amortization and support expenses,
expenses of corporate headquarters, interest expense, income taxes and
certain other expenses controlled and recorded at corporate headquarters.
Other reporting segment reported income before taxes of $1.4 million in 1999
compared to $500,000 in 1998. The other reporting segment includes three
operating companies consisting of a domestic airline ticket specialized
distributor, an incentive cruise specialized distributor, and LVI, a travel
incentive promotions company acquired in February 1999. Net revenues increased
132.5% in 1999 as a result of the acquisition of the travel promotions company
and an increase in sales volume. Of the 132.5% increase in net revenues, 86.6%
was from internal growth., including an 84.2% increase in net revenue from the
sale of domestic airline tickets.
Gross profit margin decreased in 1999 primarily as a result of increased
compensation and advertising operating costs per ticket issued. The increase in
compensation costs per airline ticket was the result of training periods and
learning curves associated with the significant number of new sales agents and
supervisors hired in late 1998 and early 1999 to prepare for the significant
growth expected in 1999. The increase in domestic airline tickets sold was less
than expected primarily because of delays in fully implementing Release 2.0 of
Flight Attendant, the Company's reservation technology for domestic airline
tickets. The implementation was completed in April 1999. The increase in
advertising costs was attributable to a new newspaper advertising campaign for
the 1-800-Fly-Cheap brand.
General and administrative expenses increased $328,000, or 54.7%, in 1999.
General and administrative expenses increased as a result of the acquisition of
LVI and increased costs at the domestic airline ticket specialized distributor.
Excluding the acquisition of LVI, general and administrative expenses increased
$191,000, or 31.8%. Facilities and the management team at the domestic airline
ticket specialized distributor were expanded in late 1998 in anticipation of
significant sales growth.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS, INCLUDING ACQUISITIONS
The Company's three primary sources of liquidity and capital resources are cash
flow from operating activities, borrowings under its Credit Facility and
issuances of common stock.
For the periods ended March 31, 1998 and 1999, net cash provided by operating
activities was $14.9 million and $14.7 million, respectively, capital
expenditures were $800,000 and $4.4 million, respectively, borrowings under the
Credit Facility, Term Loan and other loans were $8.6 million and $24.0 million,
respectively, repayment of debt was $260,000 and $65,000, respectively and cash
16
<PAGE>
paid for acquisitions, net of cash acquired, was $8.2 million and $24.3 million,
respectively.
The Company expects to spend an aggregate of $17 million during 1999 for capital
expenditures, including approximately $9 million for development of "Universal
Technology" software applications for internal use. The remainder of the 1999
capital budget relates to purchases of computer hardware and personal computers,
telecommunications equipment, leasehold and building improvements and furniture
and fixtures. Capital expenditures in 1999 totaled $4.4 million, of which $2.8
million relates to development of "Universal Technology" software applications
for internal use. As of March 31, 1999, capitalized internal use software totals
$9.8 million. An assessment of the Company's Year 2000 preparedness is discussed
below.
The Company believes that current cash balances of the Company, together with
cash flow from operating activities and borrowings under its Credit Facility,
should be adequate to meet the Company's capital requirements over the next 9 to
12 months. However, future acquisitions and/or other investments in connection
with the Internet or other initiatives, depending on their size and the method
of financing, may affect the Company's liquidity and capital requirements during
that time.
LONG-TERM DEBT AND CREDIT FACILITY
The Company has a credit facility agreement with NationsBank, N.A.
("NationsBank") with respect to a $30 million revolving line of credit (the
"Credit Facility") and a term loan facility of $2.1 million (the "Term Loan").
Borrowings under the Credit Facility and the Term Loan are due October 15, 2000
and October 5, 2000, respectively. The Credit Facility may be used for
acquisitions, letters of credit, and for capital expenditures (including but not
limited to investments in technology) and general corporate purposes, which in
the aggregate may not exceed $5 million. As of March 31, 1999, there were
outstanding borrowings of $24 million and letters of credit totaling $5.6
million under the Credit Facility. All amounts repaid under the Credit Facility
may be reborrowed. Interest on outstanding balances of the Credit Facility and
the Term Loan are computed based on the Eurodollar Rate plus a margin ranging
from 1.25% to 2.0%, depending on certain financial ratios. During 1998 and 1999,
the margin was 1.25%.
The Credit Facility requires the Company to secure an interest rate hedge on
fifty percent of the outstanding principal amount borrowed under the Credit
Facility and one hundred percent of the outstanding balance on the Term Loan. As
of March 31, 1999, the Company had outstanding interest rate swap hedge
agreements totaling $16.4 million that mature in October 2000, of which $2.1
million related to the Term Loan and $14.3 million to borrowings under the
Credit Facility. Interest rate swap hedge agreements totaling $14.3 million were
not liquidated when related borrowings under the Credit Facility were repaid
during 1998 and, accordingly, an unrealized loss of approximately $280,000 was
accrued at December 31, 1998. This unrealized loss was reversed in 1999 when $24
million was borrowed under the Credit Facility.
The Credit Facility is secured by substantially all the assets of the Company
and requires the Company to comply with various loan covenants, which include
maintenance of certain financial ratios, restrictions on additional indebtedness
and restrictions on liens, guarantees, advances, capital expenditures, sale of
assets and dividends. At March 31, 1999, the Company was in compliance with the
loan covenants or obtained waivers for any instances of non-compliance.
On March 26, 1999, NationsBank agreed to increase the amount of the Credit
Facility to $35 million and to amend certain provisions and debt covenants,
subject to certain documentation and closing conditions, including but not
limited to extending the term of the Credit Facility and the Term Loan to
October 2001, permitting letters of credit not to exceed $10 million in the
aggregate and making the full Credit Facility available for general corporate
purposes.
17
<PAGE>
YEAR 2000 PREPAREDNESS
STATE OF READINESS
The Company recognizes that computer systems and all forms of electronic
technology, information technologies ("IT") and non-information technologies
("Non- IT"), could be adversely affected by the Year 2000 date. This is because
many systems and technology components use a two-digit field to represent the
year in dates (e.g., "98" rather than "1998"). With the advent of the Year 2000,
systems and programs may fail or produce incorrect data believing it is the year
1900, causing not just IT problems but also business and operations problems.
To help ensure that the Company's systems can survive the turn of the century,
any occurrences of dates being used in technology or systems are being
identified, assessed, corrected and tested where necessary. To support this
effort, the Company has developed an overall project approach, a project
reporting and accountability structure, and process methodology. The project
approach has been developed to address the following: (1) IT systems
(applications and computing environment), (2) Non-IT systems (embedded
technology and systems), and (3) Business Partner Management (vendors,
suppliers, banks, leasing companies). Internal and external compliance factors
that may have an impact on the Company's business operations are being addressed
and monitored using this approach.
The Company's project reporting and accountability structure encompasses every
level of the organization, including: (1) an Executive Committee (senior level
management of the Company), (2) an Executive Sponsor (the Chief Information
Officer) who is responsible for reviewing and advising on Year 2000 project
progress and processes, (3) the Year 2000 Project Office which is responsible
for overall coordination, maintenance, collection and dissemination of all Year
2000 project information as well as the centralized systems and processes, and
(4) subsidiary operating company management and assigned points of contact
responsible for any systems developed, purchased, operated and supported within
an operating company.
The Year 2000 Project Office has developed a reporting schedule and requires
monthly updates from the operating companies and others such as suppliers and
business partners, throughout the life of the project. These updates provide
associated project detail on all Year 2000 activity (i.e., budget, risks,
timeline and schedule, contingency plans, testing plans and updates, issues and
concerns, and Company awareness activities). The Year 2000 Project Office is
responsible for reporting on the Company's state of compliance.
The Company employs a seven phase process methodology for the project: Phase 1 -
Project Organization, Phase 2 Assessment (i.e., conducting an inventory and
identifying areas of exposure), Phase 3 - Planning (i.e., developing project and
contingency plans, establishing priorities, and developing strategies for
correcting problems), Phase 4 - Correction, Phase 5 - Testing, Phase 6 -
Implementation, and Phase 7 - Maintaining Compliance.
The Company has completed the Organization, Assessment and Planning phases, and
has made significant progress in the remaining phases of the project. The degree
to which operating companies had addressed the Year 2000 issue for their
operations prior to acquisition by the Company varies; many of these companies
had made significant progress towards achieving compliance prior to their
acquisition by the Company. The Company believes the preliminary inventory
gathered has identified all significant systems and processes, and the operating
companies have been asked to prioritize "business critical" and "important"
systems and assign compliance status to the systems identified. External and
internal resources have been used for this effort and will continue to be used
to correct, test and implement these items for Year 2000 readiness and
compliance. As of March 15, 1999, approximately 70% of the Company's systems
have been remediated and are either fully tested or in the final stages of
testing.
As part of the Company's overall technology strategy, the Company has been
developing new common applications including the Universal Technology (already
Year 2000 compliant) that are expected to be implemented in 1999 in air, auto
and cruise companies, replacing many, although not all, of the existing systems
currently in place at those companies. New hardware and software required to
support these applications are expected to be in place by mid-1999 and will be
Year 2000 compliant.
18
<PAGE>
The Company has developed a communication process and has designed an approach
to informing and educating the Year 2000 project team and other Company
employees. A corporate compliance statement, a "Year 2000 Readiness Disclosure
Statement" (which adheres to the requirements of the Year 2000 Readiness
Disclosure Act), and a vendor/supplier survey have been developed. The survey
has been distributed to all business partners and suppliers, with continued
follow-up for those who fail to respond. Although most third parties have
responded in writing that they are addressing their Year 2000 issues on a timely
basis, the readiness of third parties varies widely. Vendor systems that will
not be made compliant are generally being replaced with compliant alternatives.
Because the Company's Year 2000 compliance is dependant on key third parties
being compliant on a timely basis, there can be no assurance the Company's
efforts alone will resolve all Year 2000 issues. A schedule has been developed
for follow-up and review of responses. An action plan has been developed to
closely work with and monitor the progress of the Company's critical and
important business partners that could impact business operations if such
partners are not compliant.
COSTS
The Company's total cost of Year 2000 remediation activities over the course of
the project is anticipated to be approximately $2 million. These costs, which
include capitalizable expenses such as hardware purchases, are spread across the
operating companies and corporate headquarters and were incurred in 1998 or are
budgeted for 1999. The Company's spending level on Year 2000 remediation is
attributed in large part to the Company's strategy for the development and
implementation of new common applications that will replace a significant
portion of the Company's legacy systems. The Company expects to spend an
aggregate of approximately $22 million for the development of these new
applications between 1998 and 2000. The Year 2000 project costs do not include
costs that may be incurred by the Company as a result of the failure of any
third parties, including suppliers, to become Year 2000 compliant or costs to
implement any contingency plans.
RISKS
The Company utilizes IT and Non-IT systems in many aspects of its business and
is dependent on a multitude of business partners. The assessment is based upon
numerous assumptions as to future events. There can be no guarantee these
estimates will prove accurate, and actual results could differ from those
estimated if these assumptions are inaccurate. Risks associated with the Year
2000 include, but are not limited to, the following:
o Business partners that experience Year 2000 issues may be unable to
provide goods or services to the Company, including those suppliers
providing goods and services sold by the Company. Disruption of other
services, such as electrical utilities, could also negatively impact
the Company's operations.
o Packaged software vendors that provide inadequate solutions,
corrections and testing.
o Project delays for the technology applications currently under
development could impact overall Year 2000 compliance efforts and
associated costs.
o Any internal applications, non-IT systems and IT infrastructure within
the Company that have not been identified during the Inventory and
Assessment phases of the Year 2000 project have the potential to cause
a disruption in business. The Company has a high level of confidence
that the vast majority of its systems have been identified and that
risks associated with those systems have been identified.
CONTINGENCY PLANS
The Company is preparing contingency plans to identify and determine how to
handle its most reasonably likely worst case scenarios. While the Company
believes it is pursuing the appropriate courses of action to ensure Year 2000
readiness, there can be no assurance that the objectives will be achieved
internally or with business partners. Those areas will be addressed by
contingency plans. These contingency plans will include the identification,
acquisition and/or preparation of backup systems and processes in case of
non-compliance. This is a full-scale initiative that includes both internal and
external experts under the guidance of a Company-wide Executive Committee.
Contingency plans will be based in part on an assessment of the magnitude and
probability of potential risks, which will primarily focus on proactive steps to
prevent Year 2000 failures from occurring, or if they do occur, minimizing their
impact. Completion of contingency plans for all business critical and important
systems, including worst case scenarios, is expected by the third quarter of
1999. Plans will continue to be refined throughout 1999 as additional
information related to our exposure is identified.
19
<PAGE>
In addition to contingency plans, the Company is planning to perform internal
and external audits of mission critical systems and processes to ensure ongoing
compliance. Several critical applications currently considered to be compliant
have been targeted for audits by the end of the second quarter of 1999.
ONGOING PLANS AND ACTIVITIES
Based on its efforts and plans to date, the Company does not believe the Year
2000 issue will have a material effect on its financial condition. The Company
is completing the correction and testing phases and continues to monitor the
likelihood of successfully completing and addressing the full range of issues in
a timely manner.
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 nature of the
travel products and services. Net revenues and operating income of the outbound
reporting segment are generally higher in the first and second quarters; net
revenues and operating income of the cruise reporting segment are generally
higher in the second and third quarters; and net revenues and operating income
of the lodging segment are generally higher in the third and fourth quarters.
The Company expects this seasonality and quarterly fluctuations to continue.
The Company's quarterly results of operations may also be subject to
fluctuations as a result of 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 and the timing and cost of acquisitions.
ITEM 3. QUANTITATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and foreign
currency fluctuations. In the normal course of business, the Company employs
established policies and procedures to manage its exposure to changes in
interest rate and fluctuations in the value of foreign currencies using a
variety of financial instruments.
The Company has utilized derivative financial instruments to reduce financial
market risks. The Company has managed its interest rate risk on its Credit
Facility through use of interest rate swaps pursuant to which the Company has
exchanged its floating rate interest obligations for fixed rates for at least
50% of the outstanding borrowings. The fixing of the interest rates offsets the
Company's exposure to the uncertainty of floating interest rates during the term
of the Credit Facility and Term Loan.
The Company has foreign currency denominated liabilities and reservation
commitments to foreign travel providers. To mitigate potential adverse trends,
the Company's operating strategy takes into account changes in exchange rates
over time. Accordingly, for operating companies owned as of December 31, 1998
with foreign currency exposure, the Company enters into various contracts that
change in value as foreign exchange rates change to protect the value of its
existing foreign currency denominated liabilities and commitments. The principal
currencies hedged are Italian Lira, Duetsche Marks, British Pounds and French
Francs. The Company is currently evaluating the degree to which it will enter
into contracts for foreign currency denominated liabilities and commitments
related to AHI, an operating company acquired in February 1999.
It is the Company's policy to enter into foreign currency and interest rate
transactions only to the extent considered necessary to meet its objectives as
stated above. The Company does not enter into foreign currency or interest rate
transactions for speculative purposes.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal claims and actions arising in the
ordinary course of business. The Company believes that none of the actions
currently known to the Company will have a material adverse effect on its
business, financial condition or operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's ability to pay dividends is restricted by the terms of the Credit
Facility.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
quarter ended March 31, 1999.
ITEM 5. OTHER INFORMATION
MANAGEMENT CHANGES
Effective April 30, 1999, the Company appointed John Balson to the position of
President and Chief Operating Officer reporting to Joseph V. Vittoria, Chairman
and Chief Executive Officer of the Company. Mr. Balson has also been been
appointed to the Company's Board of Directors. The Company also accepted the
resignations, effective April 30, 1999, of its Chief Information Officer and its
Chief Marketing Officer.
RISK FACTORS AND QUALIFICATION OF FORWARD LOOKING STATEMENTS
The Company is subject to various risks associated with its operations,
strategies, management and industry, including the risk factors discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. In
addition, the statements contained in this Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including without limitation statements regarding the Company's expectations,
beliefs, intentions or strategies regarding future financial and operating
performance and results, sales, revenue, individual reporting segments,
marketing plans and initiatives, the Internet, acquisitions, operational
initiatives, technology, the economy and other statements. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause actual
results, experience and the performance or achievements of the Company to be
materially different from those anticipated, expressed or implied by the
forward-looking statements. Past performance is not necessarily indicative of
future results, and actual results could differ significantly from any results
anticipated in any forward-looking statement. In evaluating the Company's
business, the following factors, in addition to the Risk Factors set forth in
the Company's Annual Report on Form 10-K referred to above, should be carefully
considered: successful deployment and integration of systems; factors affecting
internal growth and management of growth; dependence on travel providers; the
Company's acquisition strategy and availability of acquisition financing on
acceptable terms; success in entering new segments of the travel market and new
geographic areas; the Company's ability to implement its strategic technology,
marketing Internet and operational initiatives; dependence on personnel,
technology and travel providers; the ability to recruit and retain appropriate
personnel; labor and technology costs; cost, availability and success of
advertising and promotional efforts; risks associated with the travel industry
generally; seasonality and quarterly fluctuations; competition; and general
economic
21
<PAGE>
conditions. In addition, the Company's business strategy and growth strategy
involve a number of risks and challenges, and there can be no assurance that
these risks and other factors will not have a material adverse effect on the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
10.19 Employment Agreement, dated April 30, 1999, Between the
Registrant and John Balson.
11 Schedule of Computations of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-k:
The Company filed the following reports on Form 8-K during
the fiscal quarter ended March 31, 1999:
Current Report on Form 8-K dated January 11, 1999.
Current Report on Form 8-K dated February 1, 1999.
Current Report on Form 8-K dated February 16, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
TRAVEL SERVICES INTERNATIONAL, INC.
Date: May 17, 1999 By: /S/ JILL M. VALES
--------------------------------------------------------
Jill M. Vales
Senior Vice President and Chief Financial Officer
(as both a duly authorized officer of the
registrant and the principal financial officer or
chief accounting officer of the registrant)
</TABLE>
23
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.19 Employment Agreement, dated April 30, 1999, Between the
Registrant and John Balson.
11 Schedule of Computations of Earnings Per Share
27 Financial Data Schedule
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), by and between Travel
Services International, Inc., a Florida corporation ("TSI"), and John Balson
("Employee"), is hereby entered into as of the 30th day of April, 1999 (the
"Effective Date").
R E C I T A L S
A. As of the date of this Agreement, TSI is engaged primarily in the business of
providing travel services.
B. Employee is employed hereunder by TSI in a confidential relationship wherein
Employee, in the course of Employee's employment with TSI, has and will continue
to become familiar with and aware of information as to TSI's customers, specific
manner of doing business, including the processes, techniques and trade secrets
utilized by TSI, and future plans with respect thereto, all of which has been
and will be established and maintained at great expense to TSI; this information
is a trade secret and constitutes the valuable goodwill of TSI.
A G R E E M E N T S
In consideration of the mutual promises, terms, covenants and conditions
set forth herein and the performance of each, the parties hereto hereby agree as
follows:
1. EMPLOYMENT AND DUTIES.
(a) TSI hereby employs Employee as President and Chief Operating Officer
of TSI. As such, Employee shall have responsibilities, duties and authority
reasonably accorded to and expected of a President and Chief Operating Officer
and will report directly to the Chairman and Chief Executive Officer of TSI.
Employee hereby accepts this employment upon the terms and conditions herein
contained and, subject to paragraph 1(c) hereof, agrees to devote Employee's
full business time, attention and efforts to promote and further the business of
TSI.
(b) Employee shall faithfully adhere to, execute and fulfill all
policies established by the Board of Directors of TSI (the "Board").
(c) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require Employee's services in the operation or affairs of the
companies or enterprises in which such investments are made nor violate the
terms of paragraph 4 hereof.
2. COMPENSATION.
For all services rendered by Employee, TSI shall compensate Employee as
follows:
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(a) BASE SALARY. The base salary payable to Employee shall be $170,000
per year, payable on a regular basis in accordance with TSI's standard payroll
procedures but not less than monthly. On at least an annual basis, the Board
will review Employee's performance and may make increases to such base salary
if, in its discretion, any such increase is warranted. Such recommended increase
would, in all likelihood, require approval by the Board or a duly constituted
committee thereof. In no event shall Employee's base salary be reduced.
(b) INCENTIVE BONUS PLAN. Employee shall be eligible to receive year-end
bonus awards pursuant to the Company's Incentive Bonus Plan. The maximum bonus
for which Employee may be eligible will be 75% of Employee's base salary.
(c) EXECUTIVE PERQUISITES, BENEFITS, AND OTHER COMPENSATION. Employee
shall be entitled to receive additional benefits and compensation from TSI in
such form and to such extent as specified below:
(i) Payment of all premiums for coverage for Employee and
Employee's dependent family members under health, hospitalization,
disability, dental, life and other insurance plans that TSI may have in
effect from time to time. Reimbursement for COBRA payments for coverage
for Employee and Employee's dependent family members in the event that
TSI is unable to provide insurance coverage at the Effective Date.
(ii) Reimbursement for all business travel and other
out-of-pocket expenses reasonably incurred by Employee in the
performance of Employee's services pursuant to this Agreement. All
reimbursable expenses shall be appropriately documented in reasonable
detail by Employee upon submission of any request for reimbursement, and
in a format and manner consistent with TSI's expense reporting policy.
(iii) TSI shall provide Employee with other executive perquisites
as may be available to senior management of TSI and participation in all
other TSI-wide employee benefits as available from time to time,
including vacation benefits in accordance with TSI's established
policies.
3. NON-COMPETITION.
(a) Employee will not, during the period of Employee's employment with
TSI, and for a period of two (2) years immediately following the termination of
Employee's employment under this Agreement, for any reason whatsoever, directly
or indirectly, for himself or on behalf of or in conjunction with any other
person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
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joint venturer or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor or as a sales
representative, in any travel service business in direct competition
with TSI or any subsidiary of TSI, within the United States or within
100 miles of any other geographic area in which TSI or any of TSI's
subsidiaries conducts business, including any territory serviced by TSI
or any of its subsidiaries (the "Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of TSI (including the subsidiaries thereof) in a
managerial capacity for the purpose or with the intent of enticing such
employee away from or out of the employ of TSI (including the
subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of
TSI (including the respective subsidiaries thereof) within the Territory
for the purpose of soliciting or selling products or services in direct
competition with TSI or any subsidiary of TSI within the Territory; or
(iv) call upon any prospective acquisition candidate, on
Employee's own behalf or on behalf of any competitor, which candidate
was, to Employee's actual knowledge after due inquiry, either called
upon by TSI (including the respective subsidiaries thereof) or for which
TSI made an acquisition analysis, for the purpose of acquiring such
entity.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as an investment not more than two percent (2%)
of the capital stock of a competing business, whose stock is traded on a
national securities exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to TSI as a
result of a breach of the foregoing covenant, and because of the immediate and
irreparable damage that could be caused to TSI for which it would have no other
adequate remedy, Employee agrees that the foregoing covenant may be enforced by
TSI in the event of breach by him, by injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 4 impose a reasonable restraint on Employee in light of the activities
and business of TSI (including TSI's subsidiaries) on the date of the execution
of this Agreement and the current plans of TSI (including TSI's subsidiaries);
but it is also the intent of TSI and Employee that such covenants be construed
and enforced in accordance with the changing activities, business and locations
of TSI (including TSI's subsidiaries) throughout the term of this Agreement. For
example, if, during the term of this Agreement, TSI (including TSI's
subsidiaries) engages in new and different activities, enters a new business or
establishes new locations for its current activities or
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business in addition to or other than the activities or business enumerated
under the Recitals above or the locations currently established therefor, then
Employee will be precluded from soliciting the customers or employees of such
new activities or business or from such new location and from directly competing
with such new business within 100 miles of its then-established operating
location(s) through the term of this Agreement.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with TSI (including TSI's
subsidiaries), or similar activities, or business in locations the operation of
which, under such circumstances, does not violate clause (i) of this paragraph
3, and in any event such new business, activities or location are not in
violation of this paragraph 3 or of employee's obligations under this paragraph
3, if any, Employee shall not be chargeable with a violation of this paragraph 3
if TSI (including TSI's subsidiaries) shall thereafter enter the same, similar
or a competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
(d) The covenants in this paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and the
Agreement shall be reformed in accordance therewith.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against TSI, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by TSI of such covenants. It is specifically agreed that the period
of two (2) years following termination of employment stated at the beginning of
this paragraph 3, during which the agreements and covenants of Employee made in
this paragraph 3 shall be effective, shall be computed by excluding from such
computation any time during which Employee is in violation of any provision of
this paragraph 3.
4. PLACE OF PERFORMANCE.
(a) Employee understands that he may be requested by the Board to
relocate from Employee's present residence to another geographic location in
order to more efficiently carry out Employee's duties and responsibilities under
this Agreement. In such event, TSI will pay all actual reasonable relocation
costs to move Employee, Employee's immediate family and their personal property
and effects. Such costs may include, but are not limited to, moving expenses,
temporary lodging expenses prior to moving into a new permanent residence; all
closing costs on the purchase of a residence (comparable to Employee's present
residence) in the new location. The general intent of the foregoing is that
Employee shall not personally bear any out-of-pocket cost as a result of the
relocation, with an understanding that Employee will use Employee's best efforts
to incur only those costs which are reasonable and necessary to effect a smooth,
efficient and orderly relocation with minimal disruption to the business affairs
of TSI and the personal life of Employee and Employee's family.
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(b) Notwithstanding the above, if Employee is requested by the Board to
relocate and Employee refuses, such refusal shall not constitute "cause" for
termination of this Agreement under the terms of paragraph 5(c).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
The term of this Agreement shall begin on the Effective Date and
continue for three years (until April 29, 2002), and, unless terminated sooner
as herein provided, shall continue thereafter on a year-to-year basis on the
same terms and conditions contained herein in effect as of the time of renewal.
As used herein, the word "Term" shall mean (i) during the three-year period
referred to in the preceding sentence, such three-year period, and (ii) during
any one year renewal pursuant to the terms hereof, such one-year period. This
Agreement and Employee's employment may be terminated in any one of the
following ways:
(a) DEATH. The death of Employee shall immediately terminate this
Agreement with no severance compensation due to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, as reasonably determined by Employee's physician, Employee
shall have been absent from Employee's full-time duties hereunder for four (4)
consecutive months, then thirty (30) days after receiving written notice (which
notice may occur before or after the end of such four (4) month period, but
which shall not be effective earlier than the last day of such four (4) month
period), TSI may terminate Employee's employment hereunder provided Employee is
unable to resume Employee's full-time duties at the conclusion of such notice
period. Also, Employee may terminate Employee's employment hereunder if his
health should become impaired to an extent that makes the continued performance
of Employee's duties hereunder hazardous to Employee's physical or mental health
or life, provided that Employee shall have furnished TSI with a written
statement from a qualified doctor to such effect and provided, further, that, at
TSI's request made within thirty (30) days of the date of such written
statement, Employee shall submit to an examination by a doctor selected by TSI
who is reasonably acceptable to Employee or Employee's doctor and such doctor
shall have concurred in the conclusion of Employee's doctor. In the event this
Agreement is terminated by either party as a result of Employee's disability,
Employee shall receive from TSI, in a lump-sum payment due within ten (10) days
of the effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Term of this Agreement or for
one (1) year, whichever amount is greater.
(c) GOOD CAUSE. TSI may terminate the Agreement ten (10) days after
delivery of written notice to Employee for good cause, which shall be: (1)
Employee's willful, material and irreparable breach of this Agreement; (2)
Employee's gross negligence in the performance or intentional nonperformance
continuing for ten (10) days after receipt of written notice of need to cure of
any of Employee's material duties and responsibilities hereunder; (3) Employee's
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willful dishonesty, fraud or misconduct with respect to the business or affairs
of TSI which materially and adversely affects the operations or reputation of
TSI; (4) Employee's conviction of a felony crime; or (5) chronic alcohol abuse
or illegal drug abuse by Employee. In the event of a termination for good cause,
as enumerated above, Employee shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment,
Employee may, without cause, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to TSI. Employee may
only be terminated without cause by TSI during the Term hereof if such
termination is approved by at least two-thirds of the members of the Board.
Should Employee's employment be terminated by TSI without cause
during the Term, Employee shall receive from TSI, in a lump-sum payment due on
the effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Term of this Agreement or for
one (1) year, whichever amount is greater, plus any accrued salary and declared
but unpaid bonus and reimbursement of expenses. Should Employee's employment be
terminated by TSI without cause at any time after the Term, Employee shall
receive from TSI, in a lump-sum payment due on the effective date of
termination, the base salary rate then in effect equivalent to one (1) year of
salary, plus any accrued salary and declared but unpaid bonus and reimbursement
of expenses.
Further, any termination without cause by TSI shall operate to
shorten the period set forth in paragraph 3(a) and during which the terms of
paragraph 3 apply to one (1) year from the date of termination of employment. If
Employee resigns or otherwise terminates Employee's employment without cause
pursuant to this paragraph 5(d), Employee shall receive no severance
compensation.
(e) CHANGE IN CONTROL OF TSI. In the event of a "Change in Control of
TSI" (as defined below) during the Term, refer to paragraph 12 below.
Upon termination of this Agreement for any reason provided above,
Employee shall be entitled to receive all compensation earned and all benefits
and reimbursements due through the effective date of termination. Additional
compensation subsequent to termination, if any, will be due and payable to
Employee only to the extent and in the manner expressly provided above or in
paragraph 12 hereof. All other rights and obligations of TSI and Employee under
this Agreement shall cease as of the effective date of termination, except that
TSI's obligations under paragraphs 9 and 16 hereof and Employee's obligations
under paragraphs 3, 6, 7, 8, 10 and 16 hereof shall survive such termination in
accordance with their terms.
If termination of Employee's employment arises out of TSI's failure to
pay Employee on a timely basis the amounts to which he is entitled under this
Agreement or as a result of any other material breach of this Agreement by TSI
(including but not limited to a material reduction in Employee's
responsibilities hereunder), as determined by a court of competent jurisdiction
or
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pursuant to the provisions of paragraph 16 below, such termination shall be
deemed a termination without cause, and TSI shall pay to Employee severance
compensation pursuant to the applicable provisions of paragraph 5(d) and all
amounts and damages to which Employee may be entitled as a result of such
breach, including interest thereon and all reasonable legal fees and expenses
and other costs incurred by Employee to enforce Employee's rights hereunder.
Further, none of the provisions of paragraph 3 hereof shall apply in the event
this Agreement is terminated as a result of a breach by TSI.
In the event of any termination of Employee's employment for any reason
provided above, Employee shall be under no obligation to seek other employment
and there shall be no offset against any amounts due to Employee under this
Agreement on account of any remuneration attributable to any subsequent
employment that Employee may obtain. Any amounts due under this paragraph 5 are
in the nature of severance payments, or liquidated damages, or both, and are not
in the nature of a penalty.
6. RETURN OF COMPANY PROPERTY.
All records, designs, patents, business plans, financial statements,
manuals, memoranda, lists and other property delivered to or compiled by
Employee by or on behalf of TSI, or its representatives, vendors or customers
which pertain to the business of TSI shall be and remain the property of TSI,
and be subject at all times to its discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials, and other
similar data pertaining to the business, activities or future plans of TSI which
is collected by Employee shall be delivered promptly to TSI without request by
it upon termination of Employee's employment.
7. INVENTIONS.
Employee shall disclose promptly to TSI any and all significant
conceptions and ideas for inventions, improvements and valuable discoveries,
whether patentable or not, which are conceived or made by Employee, solely or
jointly with another, during the period of employment, and which are directly
related to the business or activities of TSI and which Employee conceives as a
result of Employee's employment by TSI. Employee hereby assigns and agrees to
assign all of Employee's interests therein to TSI or its nominee. Whenever
requested to do so by TSI, Employee shall execute any and all applications,
assignments or other instruments that TSI shall deem necessary to apply for and
obtain Letters Patent of the United States or any foreign country or to
otherwise protect TSI's interest therein.
8. TRADE SECRETS.
Employee agrees that he will not, other than as required by court order,
during or after the Term of this Agreement with TSI, disclose the confidential
terms of TSI's or its subsidiaries' relationships or agreements with its
significant vendors or customers or any other significant and material trade
secret of TSI or its subsidiaries, whether in existence or proposed, to any
person, firm, partnership, corporation or business for any reason or purpose
whatsoever.
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9. INDEMNIFICATION.
In connection with any threatened, pending or completed claim, demand,
liability, action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by TSI against Employee), by reason of
the fact that Employee is or was performing services (including an act, omission
or failure to act) under this Agreement, then TSI shall indemnify and hold
harmless, to the maximum extent permitted by law, Employee against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by Employee in connection therewith. In the
event that both Employee and TSI are made a party to the same third-party
action, complaint, suit or proceeding, TSI agrees to engage competent legal
representation reasonably acceptable to Employee, and Employee agrees to use the
same representation, provided that if counsel selected by TSI shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and TSI shall pay all attorneys' fees of
such separate counsel. Further, while Employee is expected at all times to use
Employee's best efforts to faithfully discharge her or her duties under this
Agreement, Employee cannot be held liable to TSI for errors or omissions made in
good faith where Employee has not exhibited gross, willful or wanton negligence
or misconduct or performed criminal and fraudulent acts which materially damage
the business of TSI. TSI shall pay, on behalf of Employee upon presentation of
proper invoices, all fees, costs and expenses (including attorneys' fees)
incurred in connection with any matter referenced in this paragraph 9.
10. NO PRIOR AGREEMENTS.
Employee hereby represents and warrants to TSI that the execution of
this Agreement by Employee and his employment by TSI and the performance of
Employee's duties hereunder will not violate or be a breach of any agreement
with a former employer, client or any other person or entity. Further, Employee
agrees to indemnify TSI for any claim, including but not limited to attorneys'
fees and expenses of investigation, by any such third party that such third
party may now have or may hereafter come to have against TSI based upon or
arising out of any noncompetition agreement, invention or secrecy agreement
between Employee and such third party which was in existence as of the date of
this Agreement.
11. ASSIGNMENT; BINDING EFFECT.
Employee understands that he has been selected for employment by TSI on
the basis of his personal qualifications, experience and skills. Employee,
therefore, shall not assign all or any portion of Employee's performance under
this Agreement. Subject to the preceding two (2) sentences and the express
provisions of paragraph 12 below, this Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties hereto and their respective
heirs, legal representatives, successors and assigns.
12. CHANGE IN CONTROL.
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(a) Unless Employee elects to terminate this Agreement pursuant to (c)
below, Employee understands and acknowledges that TSI may be merged or
consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of TSI hereunder or that TSI
may undergo another type of Change in Control. In the event such a merger or
consolidation or other Change in Control is initiated prior to the end of the
Term, then the provisions of this paragraph 12 shall be applicable.
(b) In the event of a pending Change in Control wherein TSI and Employee
have not received written notice at least five (5) business days prior to the
anticipated closing date of the transaction giving rise to the Change in Control
from the successor to all or a substantial portion of TSI's business and/or
assets that such successor is willing as of the closing to assume and agree to
perform TSI's obligations under this Agreement in the same manner and to the
same extent that TSI is hereby required to perform, then such Change in Control
shall be deemed to be a termination of this Agreement by TSI without cause
during the Term and the applicable portions of paragraph 5(d) will apply;
however, under such circumstances, the amount of the lump-sum severance payment
due to Employee shall be triple the amount calculated under the terms of
paragraph 5(d) and the noncompetition provisions of paragraph 3 shall not apply.
(c) In any Change in Control situation, Employee may elect to terminate
this Agreement by providing written notice to TSI at least five (5) business
days prior to the anticipated closing of the transaction giving rise to the
Change in Control. In such case, the applicable provisions of paragraph 5(d)
will apply as though TSI had terminated the Agreement without cause during the
Term; however, under such circumstances, the amount of the lump-sum severance
payment due to Employee shall be double the amount calculated under the terms of
paragraph 5(d) and the noncompetition provisions of paragraph 3 shall all apply
for a period of two (2) years from the effective date of termination.
(d) For purposes of applying paragraph 5 hereof under the circumstances
described in (b) and (c) above, the effective date of termination will be the
closing date of the transaction giving rise to the Change in Control and all
compensation, reimbursements and lump-sum payments due Employee must be paid in
full by TSI at or prior to such closing. Further, Employee will be given
sufficient time and opportunity to elect whether to exercise all or any of
Employee's vested options to purchase TSI Common Stock, including any options
with accelerated vesting under the provisions of TSI's 1997 Long-Term Incentive
Plan, as amended, such that Employee may convert the options to shares of TSI
Common Stock at or prior to the closing of the transaction giving rise to the
Change in Control, if Employee so desires.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person or entity, or group of persons or entities acting
together, other than TSI or an employee benefit plan of TSI, acquires
directly or indirectly the Beneficial Ownership (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) of any voting
security of TSI and immediately after such acquisition such person,
entity or group is, directly or indirectly, the Beneficial Owner of
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voting securities representing 33% or more of the total voting power of
all of the then-outstanding voting securities of TSI and has a larger
percentage of voting securities of TSI than any other person, entity or
group holding voting securities of TSI, unless the transaction pursuant
to which such acquisition is made is approved by at least two-thirds
(2/3) of the Board; or
(ii) the following individuals no longer constitute a majority of
the members of the Board: (A) the individuals who, as of the closing
date of TSI's initial public offering, constitute the Board (the
"Original Directors"); (B) the individuals who thereafter are elected to
the Board and whose election, or nomination for election, to the Board
was approved by a vote of at least two-thirds (2/3) of the Original
Directors then still in office (such directors becoming "Additional
Original Directors" immediately following their election); and (C) the
individuals who are elected to the Board and whose election, or
nomination for election, to the Board was approved by a vote of at least
two-thirds (2/3) of the Original Directors and Additional Original
Directors then still in office (such directors also becoming "Additional
Original Directors" immediately following their election); or
(iii) the stockholders of TSI shall approve a merger,
consolidation, recapitalization or reorganization of TSI, a reverse
stock split of outstanding voting securities, or consummation of any
such transaction if stockholder approval is not obtained, other than any
such transaction which would result in at least 75% of the total voting
power represented by the voting securities of the surviving entity
outstanding immediately after such transaction being Beneficially Owned
by at least 75% of the holders of outstanding voting securities of TSI
immediately prior to the transaction, with the voting power of each such
continuing holder relative to other such continuing holders not
substantially altered in the transaction; or
(iv) the stockholders of TSI shall approve a plan of complete
liquidation of TSI or an agreement for the sale or disposition by TSI of
all or a substantial portion of TSI's assets (I.E., 50% or more of the
total assets of TSI).
(f) Employee must be notified in writing by TSI at any time that TSI or
any member of its Board anticipates that a Change in Control may take place.
(g) Employee shall be reimbursed by TSI or its successor, on a grossed
up basis, for any excise taxes that Employee incurs under Section 4999 of the
Internal Revenue Code of 1986, as a result of any Change in Control. Such amount
will be due and payable by TSI or its successor
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within ten (10) days after Employee delivers a written request for reimbursement
accompanied by a copy of Employee's tax return(s) showing the excise tax
actually incurred by Employee.
13. COMPLETE AGREEMENT.
This Agreement supersedes any other agreements or understandings,
written or oral, between TSI and Employee, and Employee has no oral
representations, understandings or agreements with TSI or any of its officers,
directors or representatives covering the same subject matter as this Agreement.
This written Agreement is the final, complete and exclusive statement
and expression of the agreement between TSI and Employee and of all the terms of
this Agreement, and it cannot be varied, contradicted or supplemented by
evidence of any prior or contemporaneous oral or written agreements. This
written Agreement may not be later modified except by a written instrument
signed by a duly authorized officer of TSI and Employee, and no term of this
Agreement may be waived except by a written instrument signed by the party
waiving the benefit of such term.
14. NOTICE.
Whenever any notice is required hereunder, it shall be given in writing
addressed as follows:
To TSI: Travel Services International, Inc.
220 Congress Park Drive
Delray Beach, FL 33445
Attention: General Counsel
To Employee:
JOHN BALSON
-----------------------------------
-----------------------------------
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS.
If any portion of this Agreement is held invalid or inoperative, the
other portions of this Agreement shall be deemed valid and operative and, so far
as is reasonable and possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. The paragraph
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headings herein are for reference purposes only and are not intended in any way
to describe, interpret, define or limit the extent or intent of the Agreement or
of any part hereof.
16. ARBITRATION.
Any unresolved dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators in the community where the corporate
headquarters of TSI is located on the Effective Date, in accordance with the
rules of the American Arbitration Association then in effect. The arbitrators
shall not have the authority to add to, detract from or modify any provision
hereof nor to award punitive damages to any injured party. The arbitrators shall
have the authority to order back-pay, severance compensation, vesting of options
(or cash compensation in lieu of vesting of options), reimbursement of costs,
including those incurred to enforce this Agreement, and interest thereon in the
event the arbitrators determine that Employee was terminated without disability
or good cause, as defined in paragraphs 5(b) and 5(c) hereof, respectively, or
that TSI has otherwise materially breached this Agreement. A decision by a
majority of the arbitration panel shall be final and binding. Judgment may be
entered on the arbitrators' award in any court having jurisdiction. The direct
expense of any arbitration proceeding shall be borne by TSI.
17. GOVERNING LAW.
This Agreement shall in all respects be construed according to the laws
of the State of Florida without regard to the conflicts of laws principles of
such state.
18. COUNTERPARTS.
This Agreement may be executed simultaneously in two (2) or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TRAVEL SERVICES INTERNATIONAL, INC.
By: /s/ JOSEPH V. VITTORIA
----------------------------------------
Name: Joseph V. Vittoria
Title: Chairman and Chief Executive Officer
/s/ JOHN BALSON
-------------------------------------------
John Balson
EXHIBIT 11
TRAVEL SERVICES INTERNATIONAL, INC.
SCHEDULE OF COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Basic Diluted
Weighted Average Weighted Average
Shares Shares Shares
----------- ------------- ----------------
<S> <C> <C> <C>
HISTORICAL:
Quarter ended March 31, 1998
Shares attributable to Auto Europe, accounting acquiror, at beginning of period 1,083,334 1,083,334 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,997,344 1,997,344 1,997,344
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891 2,338,891 2,338,891
Shares issued to founders and management of TSI 2,484,501 2,484,501 2,484,501
Sold pursuant to the Offering 2,875,000 2,875,000 2,875,000
Shares issued in consideration for acquisition of Trax Software 32,985 32,985 32,985
Shares issued in consideration for acquisition of Goldcoast 21,821 12,123 12,123
Shares issued in consideration for acquisition of Diplomat 163,755 127,365 127,365
Options granted 1,018,675 -- 390,794
---------- ---------- ----------
Shares used in computing earnings per share for quarter ended March 31, 1998 12,016,306 10,951,543 11,342,337
========== ========== ==========
Quarter ended March 31, 1999
Shares attributable to Auto Europe, accounting acquiror, at beginning of period 1,083,334 1,083,334 1,083,334
Shares issued in consideration for acquisition of the Pooling Acquisitions 1,997,344 1,997,344 1,997,344
Shares issued in consideration for acquisition of Other Founding Companies 2,338,891 2,338,891 2,338,891
Shares issued to founders and management of TSI 2,484,501 2,484,501 2,484,501
Sold pursuant to the Offering 2,875,000 2,875,000 2,875,000
Shares issued in consideration for acquisition of Trax Software 32,985 32,985 32,985
Shares issued in consideration for acquisition of Diplomat 21,821 21,821 21,821
Shares issued in consideration for acquisition of Goldcoast 163,755 163,755 163,755
Shares issued in consideration for acquisition of AutoNet 2,183 2,183 2,183
Shares issued in consideration for acquisition of Lexington 283,990 283,990 283,990
Shares issued in consideration for acquisition of 1-800-CRUISES 36,546 36,546 36,546
Shares issued in consideration for acquisition of AHI 145,400 96,933 96,933
Shares issued in consideration for acquisition of Lifestyles 248,600 165,733 165,733
Shares issued in connection with the secondary stock offering 2,025,000 2,025,000 2,025,000
Exercised options 56,308 56,308 56,308
Options granted 1,768,497 -- 354,836
-========= ========== ==========
Shares used in computing earnings per share for the quarter ended March 31, 1999 15,564,155 13,664,325 14,019,160
========== ========== ==========
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0
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