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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended September 30, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____________ to ______________
Commission file number 1-13271
800 TRAVEL SYSTEMS, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 59-3343338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4802 Gunn Highway
Tampa, Florida 33624
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 908-0903
------------------------------------------------------------------
N/A
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report
Check whether the issuer (1) 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 |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 7,508,427 shares of Common
Stock, $.01 par value, were outstanding, as of November 6, 1998.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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<PAGE>
Form 10-QSB
INDEX
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements .....................................F-1 to F-9
Balance Sheets ...............................................F-1
Statements of Operations .....................................F-3
Statements of Stockholders' Equity ........................ F-4
Statements of Cash Flows .................................. F-5
Notes to Financial Statements ............................. F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 2
PART 2. OTHER INFORMATION ............................................. 6
Item 6. Exhibits, Lists and Reports on Form 8-K ...................... 6
(a) Exhibits ............................................. 6
(b) Reports on Form 8-K .................................. 6
SIGNATURES ............................................................... 7
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
800 TRAVEL SYSTEMS, INC.
BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
CURRENT ASSETS
Cash $ 2,429,881 $ 18,710
Commissions receivable 882,185 553,358
Prepaids 154,500 16,617
----------- -----------
Total current assets 3,466,566 588,685
----------- -----------
LEASEHOLD IMPROVEMENTS AND EQUIPMENT 888,704 450,667
Less accumulated depreciation (219,424) (110,104)
----------- -----------
Net leasehold improvements and equipment 669,280 340,563
----------- -----------
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED
Less accumulated amortization of
$242,687 and $93,126, Respectively 4,812,718 1,024,385
----------- -----------
DEFERRED OFFERING COSTS -- 1,408,573
----------- -----------
OTHER ASSETS
Trademarks, net of accumulated
amortization of $54,864 and
$29,616, respectively 360,136 185,384
Capitalized software 90,000 --
Related party receivables 2,400 308,425
Bonds, security deposits and 39,724 37,824
other assets
Merger deposits and deferred -- 416,671
acquisition costs
Prepaid expenses 193,121 68,000
----------- -----------
Total other assets 685,381 1,016,304
----------- -----------
TOTAL ASSETS $ 9,633,945 $ 4,378,510
=========== ===========
(continued)
F-1
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
CURRENT LIABILITIES
Note payable $ -- $ 50,000
Current maturities of
long-term debt 118,687 260,000
Accounts payable 602,388 1,830,652
Accrued liabilities 568,644 479,670
------------ ------------
Total current liabilities 1,289,719 2,620,322
DEFERRED RENT 72,641 138,228
LONG-TERM DEBT - excluding current maturities 29,174 50,000
------------ ------------
Total liabilities 1,391,534 2,808,550
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
1,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 7,497,096 and 5,959,709 shares
issued and outstanding, respectively 74,971 59,597
Additional paid-in capital 11,823,592 5,297,424
Stock subscriptions receivable (21,547) (21,547)
Accumulated deficit (3,634,605) (3,765,514)
------------ ------------
Total stockholders' equity 8,242,411 1,569,960
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,633,945 $ 4,378,510
============ ============
The accompanying notes are an integral part of these financial statements
F-2
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 5,921,691 $ 4,820,022 $ 2,347,417 $ 1,819,830
Ticket delivery and service fees 2,657,720 1,196,394 1,156,676 474,935
----------- ----------- ----------- -----------
Total revenues 8,579,411 6,016,416 3,504,093 2,294,765
----------- ----------- ----------- -----------
OPERATING EXPENSES
Payroll, commissions and employee
benefits 4,012,845 2,905,981 1,685,053 1,130,367
Telephone 1,442,029 787,488 631,380 286,242
Ticket delivery 808,808 523,789 361,259 195,863
Advertising 236,852 178,180 82,493 71,136
General and administrative 2,006,041 1,605,833 564,730 495,669
----------- ----------- ----------- -----------
Total operating expenses 8,506,575 6,001,271 3,324,915 2,179,277
----------- ----------- ----------- -----------
EARNINGS BEFORE OTHER
INCOME 72,836 15,145 179,178 115,488
OTHER INCOME (EXPENSE)
Interest income 76,134 4,726 25,096 --
Interest expense (18,061) (83,994) (4,933) (17,183)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 130,909 $ (64,123) $ 199,341 $ 98,305
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER
COMMON SHARE - BASIC $ .02 $ (.01) $ .03 $ .02
=========== =========== =========== ===========
- DILUTED $ .02 $ (.01) $ .03 $ .02
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING - BASIC 7,451,035 5,956,859 7,497,096 5,959,709
=========== =========== =========== ===========
- DILUTED 7,834,070 5,956,859 7,942,043 6,199,709
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------
Additional Stock
Paid-in Subscriptions Retained
Shares Amount Capital Receivable Deficit Total
------ ------ ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 5,951,209 $ 59,512 $ 4,976,259 $ (32,296) $ (3,503,009) $ 1,500,466
Issuance of common stock in
connection with debt
issuance
and services 8,500 85 21,165 -- -- 21,250
Issuance of stock options to
Directors -- -- 300,000 -- -- 300,000
Payment of stock
subscription -- -- -- 10,749 -- 10,749
Net loss, year ended
December 31, 1997
-- -- -- -- (262,505) (262,505)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 5,959,709 59,597 5,297,424 (21,547) (3,765,514) 1,569,960
Sales of common stock and
warrants net of issuance
expenses of $2,252,602 1,350,000 13,500 4,872,024 -- -- 4,885,524
Joseph Stevens Group, Inc.
Purchase 383,333 3,833 1,944,082 -- -- 1,947,915
Purchase and retirement of
204,615 shares (204,615) (2,046) (405,954) -- -- (408,000)
Exercise of warrants 58,200 582 363,168 -- -- 363,750
Shares exchanged in payment
of receivables (49,531) (495) (247,152) -- -- (247,647)
Net earnings -- -- -- -- 130,909 130,909
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 7,497,096 $ 74,971 $ 11,823,592 $ (21,547) $ (3,634,605) $ 8,242,411
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 130,909 $ (64,123)
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 284,130 114,714
Stock, options and warrants issued for expenses -- 21,250
Prepaid rent amortization -- 9,000
Changes in operating assets and liabilities, net of effects of
acquisition:
Commissions receivable (328,827) (320,306)
Prepaids (137,883) --
Other assets 2,713 5,347
Related party receivables -- (43,636)
Deferred rent liability (65,587) 108,369
Accounts payable and accrued expenses (1,139,290) 335,811
----------- -----------
Net cash provided by (used in) operating activities (1,253,835) 166,426
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of leasehold improvements and equipment (188,037) (46,703)
Merger deposits and deferred acquisition costs -- (120,999)
Cash paid for acquisition (2,114,665) --
----------- -----------
Net cash used in investing activities (2,302,702) (167,702)
CASH FLOW FROM FINANCING ACTIVITIES
Deferred offering cost -- (558,658)
Proceeds from borrowings, net -- --
Principal payments on debt (282,139) --
Issuance of common stock 6,657,847 --
Purchase of common stock (408,000) --
Stock subscription collection -- 8,749
----------- -----------
Net cash provided by (used in) financing activities 5,967,708 (549,909)
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,411,171 (551,185)
CASH AT THE BEGINNING OF PERIOD 18,710 588,960
----------- -----------
CASH AT THE END OF PERIOD $ 2,429,881 $ 37,775
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest expense $ 18,061 $ 83,994
=========== ===========
NON-CASH FINANCING ACTIVITIES
Common stock received for payment of related party receivables $ 247,647 $ --
=========== ===========
Non-case activities
During 1998, the Company acquired approximately $4.5 million in assets and
assumed approximately $100,000 in liabilities in exchange for $2.1 million in
cash, $400,000 of acquisition expenses and $1.9 million of common stock.
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual Report on Form 10-KSB of 800 Travel Systems, Inc. for the year
ended December 31, 1997. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1998, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
NOTE 2 - SALE OF COMMON STOCK
In January 1998, the Company sold 1,350,00 shares of common stock ($5.00) and
3,105,000 warrants ($.125). The following summarizes the transactions:
Proceeds:
Common stock $6,750,000
Warrants 388,125
----------
7,138,125
Expenses:
Underwriter commissions and expenses 927,956
Printing 226,000
Other 1,098,645
----------
Net proceeds $4,885,524
==========
F-6
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 3 - ACQUISITION
In January 1998, the Company acquired selected assets and selected liabilities
of Joseph Stevens Group, Inc. in exchange for the issuance of 383,733 shares of
its common stock, issuance of 250,000 warrants to purchase common stock and the
payment of $1,578,000 purchase acquisition note. The following summarizes the
transaction:
Purchase Price:
Cash payment on note $1,578,000
Common stock 1,916,665
Warrants 31,250
Cash payments 536,665
Acquisition expenses 345,315
Capital lease assumed 70,000
----------
$4,477,895
==========
Assets Acquired:
Equipment $ 340,000
Trademarks 200,000
Goodwill, amortized over 25 years 3,937,895
----------
$4,477,895
==========
In March 1998, the Company entered into an agreement with the previous
stockholders of Joseph Stevens Group, Inc. to purchase a telephone switch and
certain other fixed assets and to release the Company from its guaranty of the
future value of the Company's common stock issued to the principal stockholder
of Joseph Stevens Group, Inc. for payments totalling $490,000. These have been
included in the calculation of the purchase shown above.
Prior to the January 1998 acquisition of selected assets and selected
liabilities of Joseph Stevens Group, Inc., the Company entered into an Interim
Operating Agreement pursuant to which the Company operated Joseph Stevens
business for the account of the Company effective January 1, 1997. As a result,
the statements of operations for the three and nine months ended September 30,
1997 and cash flows for the nine month period ended September 30,1997, include
the operations of the Joseph Stevens Group, Inc. for the period January 1, 1997
to September 30, 1997. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting of only normal recurring adjustments, necessary to state
fairly the information set forth therein. Operating results for the three and
nine months ended September 30,1997 are not necessarily indicative of the
results that would have occurred had they been a single entity during the
period.
F-7
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 4 - NET INCOME (LOSS) PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic and
diluted income per share computations, as computed in accordance with FAS 128:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
-------------------- -----------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings (loss) -
(numerator) $ 130,909 $ (64,123) $ 199,341 $ 98,305
=========== =========== =========== ===========
Basic:
Weighted average shares
outstanding
(denominator) 7,451,035 5,956,859 7,497,096 5,959,709
=========== =========== =========== ===========
Net earnings (loss) per
common share - basic $ .02 $ .01 $ .03 $ .02
=========== =========== =========== ===========
Diluted:
Weighted average shares
outstanding 7,451,035 5,956,859 7,497,096 5,959,709
Effect of dilutive options 383,035 -- 444,947 240,000
----------- ----------- ----------- -----------
Adjusted weighted
average shares
(denominator) 7,834,070 5,956,859 7,942,043 6,199,709
=========== =========== =========== ===========
Net earnings (loss) per
common share - diluted $ .02 $ .01 $ .03 $ .02
=========== =========== =========== ===========
</TABLE>
All warrants outstanding are excluded from the calculation of adjusted weighted
average shares, as they are anti-dilutive. Options for 460,000 shares of common
stock are excluded from the adjusted weighted average shares for the nine months
ended September 30, 1997, as they are anti-dilutive.
NOTE 5 - INCOME TAXES
Income taxes have not been provided on the earnings for the three months ended
September 30, 1998 and the nine months ended September 30, 1998 due to the
utilization of net operating loss carryovers that have not been previously
recognized.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with an outside consultant to
supervise the development of the Company's new interactive website. The total
cost of such development is expected to be approximately $350,000. As of
September 30, 1998, the Company has capitalized approximately $90,000 in
software costs related to this project.
F-8
<PAGE>
Item 2. Management 's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company operates as a telemarketing travel agency, providing air
transportation reservation services for domestic and international travel to
customers through its easy to remember, toll-free numbers. The Company was
formed in November 1995 to acquire certain assets of and assume certain
liabilities of 1- 800-Low Airfare, Inc. (the "Predecessor Business"). The
acquisition was consummated on December 1, 1995. To expand its operations, in
November 1996 the Company entered into a Merger Agreement with the Joseph
Stevens Group, Inc. ("Stevens") and its sole shareholder, Joseph Stevens Group,
LLC ("JSG"). Prior to the consummation of the merger with Stevens (the "Stevens
Merger"), Stevens operated as an independent travel agency specializing in the
telemarketing of airline tickets. Pursuant to the Merger Agreement,
simultaneously with the closing of the Company's initial public offering on
January 21, 1998, Stevens was merged with and into the Company, with the Company
as the surviving corporation.
The Company's operating revenues presently consist, and for the immediate
future will continue to consist, principally of (i) commissions on air travel
tickets; (ii) override commissions on air travel tickets booked on airlines with
which the Company has override agreements; (iii) segment incentives under the
Company's agreement with SABRE; (iv) co-op promotions with suppliers of travel
related products and services; and (v) service fees charged to customers.
The Company's revenues are a function of the number and price of the
tickets its sells and the percentage of the price of such tickets it retains as
commissions and override commissions, as well as the service charge imposed on
customers. Although the Company entered into its first override agreement in
December 1995, it only began to achieve the volume necessary to benefit from
these agreements in the third quarter of 1996. The Company entered into an
agreement with a consolidator that sells tickets on TWA at a discount (the "TWA
Discounter") on March 1, 1996. As a result of its override agreements and its
agreement with the TWA Discounter, the Company is able to charge its customers a
$10 or $20 service charge, depending on the price of the ticket, while still
offering low priced tickets. The Company only began to impose this service
charge in January 1997.
The Company anticipates that as the volume of tickets sold increases and
the proportion of tickets sold which are subject to an override agreement
increases, the percentage of the price of the tickets sold retained by the
Company will increase. The Company's operating expenses include primarily those
items necessary to advertise its services, maintain and staff its travel
reservation centers, including payroll, commissions and benefits; telephone;
general and administrative expenses, including rent and computer maintenance
fees; and, to date, interest, fees and expenses associated with the Company's
financing activities. Set forth below for the periods indicated are the gross
dollar amounts of reservations booked, revenues and revenues as a percentage of
reservations, the gross dollar amount of expenses, expenses as a percentage of
revenues, net loss as a percentage of revenues and changes therein for the nine
and three month periods ended September 30, 1998 and 1997.
-2-
<PAGE>
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
Sept. 30, 1998 % Sept. 30, 1997 % Change %
-------------- --- -------------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Gross Reservations .... $ 59,234,429 $ 39,152,651 $ 20,081,778 51
Revenues
(including override
and service charges) 8,579,411 15* 6,016,416 14* 2,562,995 43*
OPERATING
EXPENSES:
Employee Costs ...... 4,012,845 47** 2,905,981 48** 1,106,864 38**
Telephone ........... 1,442,029 17 787,488 13 654,541 83
Ticket Delivery ..... 808,808 9 523,789 9 285,019 54
Advertising ......... 236,852 3 178,180 3 58,672 33
General and
Administrative .... 2,006,041 23 1,605,833 27 400,208 25
Total Operating
Expenses ............ 8,506,575 99 6,001,271 100 2,505,304 42
Other Income (net) 58,073 1 (79,268) -- 137,341 --
Net Earnings (Loss) ... 130,909 2 (64,123) 1 195,032 --
============ === ============ === ============ =====
</TABLE>
- ----------
* Revenues as a percentage of gross reservations.
** Expenses as a percentage of revenues.
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
Sept. 30, 1998 % Sept. 30, 1997 % Change %
-------------- --- -------------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Gross Reservations .... $ 23,265,047 $ 15,576,009 $ 7,689,038 50
Revenues
(including override
and service charges) 3,504,093 15* 2,294,765 15* 1,209,328 53*
OPERATING
EXPENSES:
Employee Costs ...... 1,685,053 48** 1,130,367 49** 554,686 49**
Telephone ........... 631,380 18 286,242 12 345,138 121
Ticket Delivery ..... 361,259 10 195,863 9 165,396 84
Advertising ......... 82,493 2 71,136 3 11,357 16
General and
Administrative .... 564,730 16 495,669 22 69,061 14
Total Operating
Expenses ............ 3,324,915 95 2,179,277 95 1,145,638 53
Other Income (net) 20,163 1 (17,183) -- 37,346 --
Net Earnings (Loss) ... 199,341 6 98,305 4 101,036 103
============ === ============ === ============ ===
</TABLE>
- ----------
* Revenues as a percentage of gross reservations.
** Expenses as a percentage of revenues.
-3-
<PAGE>
Results of Operations
In connection with the Stevens Merger, the Company and Stevens entered
into an Interim Operating Agreement pursuant to which the Company operated
Stevens' business for the account of the Company effective January 1, 1997
through the closing of the Stevens Merger. The numbers in the tables above and
in the discussion below include the operations of Stevens.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues for the nine months ended September 30, 1998 ("1998") increased
43% to $8,579,411 compared to $6,016,416 for the nine months ended September 30,
1997 ("1997"). The increased revenues reflect the 51% increase in gross
reservations booked in 1998 ($59,234,429) as compared to 1997 ($39,152,651). The
gross reservation increase and the resulting revenue increase is largely
attributable to the increase in the volume of calls handled at the Company's
reservation centers as a result of increases in the number of reservation agents
and certain operating efficiencies. The Company employed approximately 200
reservations agents as of September 30, 1997 as compared to 119 reservation
agents employed as of December 31, 1998. As a percentage of gross reservations,
revenues decreased to 14.5% of gross reservations during 1998 from 15.4% of
gross reservations during 1997. The decrease in revenues as a percentage of
gross reservations reflects the industry-wide decrease to 8% from 10% generally
paid by airlines to reservation agents.
Operating expenses for 1998 increased 42% to $8,506,575 compared to
$6,001,271 for 1997. The increase in operating expenses resulted primarily from
an increase in the Company's payroll, commissions and employee benefits
expenses, which increased 38% to $4,012,845 in 1998 from $2,905,981 in 1997. The
increase in payroll expenses reflects the absorption of the employees of Stevens
as well as the increase in the number of reservation agents which occurred at
both reservation centers. In addition, consistent with the increase in the
volume of tickets sold by the Company, the Company also recorded increases in
its telephone and ticket delivery expenses. Also contributing to the increase in
operating expenses was an increase in the Company's advertising expense of 33%
to $236,852 in 1998 from $178,180 in 1997 as the Company increased the number of
yellow page directories in which it advertises and absorbed the cost of
advertising its and Stevens' toll free numbers. The Company's general and
administrative costs increased 25% to $2,006,041 in 1998 compared to $1,605,833
in 1997. Despite the increase in general and administrative expenses over the
two periods, general and administrative expenses decreased as a percentage of
revenues to 23% in 1998 as compared to 27% in 1997. The increase in the
foregoing operating expenses was offset, in part, by an increase in interest and
other income, on a net basis to $58,073 in 1998, from a net expense of ($79,268)
in 1997.
During the first three quarters of 1998 the Company's operating income was
$72,836, slightly improved over the Company's operating income of $15,145 in the
first three quarters of 1997. This improvement reflects the substantial increase
in revenues, offset by the net changes in operating expenses outlined above.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues for the three months ended September 30, 1998 ("Third Quarter
'98") increased 53% to $3,504,093 compared to $2,294,765 for the three months
ended September 30, 1997 ("Third Quarter '97"). The increased revenues reflect
the 50% increase in gross reservations booked in Third Quarter '98 ($23,265,047)
as compared to Third Quarter '97 ($15,576,009). The gross reservation increase
and the resulting revenue increase is largely attributable to the increase in
the volume of calls handled at the
-4-
<PAGE>
Company's reservation centers as a result of increases in the number of
reservation agents and certain operating efficiencies. As a percentage of gross
reservations, revenues increased to 15.1% of gross reservations during Third
Quarter '98 from 14.7% of gross reservations during Third Quarter '97. The
increase in revenues as a percentage of gross reservations reflects the
Company's ability to increase its revenues through overrides and service fees
charged to customers offset , in part, by the loss of revenues resulting from
the drop in basic commission rates from 10% to 8%.
Operating expenses for Third Quarter '98 increased 53% to $3,324,915
compared to $2,179,277 for Third Quarter '97. The increase in operating expenses
resulted primarily from an increase in the Company's payroll, commissions and
employee benefits expenses, which increased 49% to $1,685,053 in Third Quarter
'98 from $1,130,367 in Third Quarter '97. The increase in payroll expenses
reflects the absorption of the employees of Stevens as well as the increase in
the number of reservation agents which occurred at both reservation centers.
Consistent with the increase in the volume of tickets sold by the Company, the
Company also recorded increases in its telephone and ticket delivery expenses.
Also contributing to the increase in operating expenses was an increase in the
Company's advertising expense of 16% to $82,493 in Third Quarter '98 from
$71,136 in Third Quarter '97 as the Company increased the number of yellow page
directories in which it advertises. The Company's general and administrative
costs increased 14% to $564,730 in Third Quarter 1998 compared to $495.669 in
Third Quarter '97. Despite the increase in general and administrative expenses
over the two periods, general and administrative expenses decreased as a
percentage of revenues to 16% in Third Quarter '98 as compared to 22% in Third
Quarter '97. The increase in the foregoing operating expenses was offset, in
part, by an increase in interest and other income, on a net basis to $20,163 in
Third Quarter '98, from a net expense of ($17,183) in Third Quarter '97.
During Third Quarter '98 the Company's operating income was $179,178, an
improvement over the $115,488 in operating income recorded in Third Quarter "97.
The improvement in operating income reflects the substantial increase in
revenues, offset by the net changes in operating expenses outlined above.
Liquidity and Capital Resources
Prior to completion of its initial public offering in January 1998, the
Company financed its operations from capital contributions, loans, and through
services provided by certain vendors to be paid out of future revenues. In
January 1998 the Company completed its initial public offering of its securities
from which it derived net proceeds of $4,885,524. A portion of such proceeds was
used to acquire the Joseph Stevens Group, Inc. and to satisfy liabilities
accrued prior to completion of the offering.
The Company used $1,253,855 in operating activities in the first nine
months of 1998 as compared to $166,426 generated by operating activities in the
first nine months of 1997. The use of cash in 1998 reflects the substantial
reduction in the Company's accounts payable and accrued expenses and an increase
in prepaid assets. 1998 capital expenditures were primarily for leasehold
improvements, computers and other operating equipment purchased out of the
initial public offering.
During the third quarter of 1998 the Company generated in excess of
$300,000 from operating activities. Further, the Company projects that if its
revenues continue to grow as they did during the first nine months of 1998 it
will continue to generate positive cash flow from operations, enabling it to
preserve its working capital or apply it as it deems appropriate, as, for
example, in completing the Company's electronic commerce initiative. For
example, in March 1998 the Company used $558,000 to redeem 184,615 shares issued
to JSG in connection with the Stevens Merger and to obtain the release of the
Make-Whole Rights granted to JSG in the Merger Agreement.
-5-
<PAGE>
YEAR 2000
The Company is aware of the uncertainty surrounding the ability of
computer systems to function properly with the coming of the year 2000 and
related issues. Management has begun to assess and in the immediate future will
complete its assessment of the functionality of the Company's computer systems.
Upon completion of this assessment the Company will determine which of the
Company's hardware and software systems should be upgraded or replaced.
Much of the computer hardware and software used by the Company is provided
by Sabre pursuant to its agreement with the Company. Sabre has begun the process
of implementing upgrades to the software provided to the Company to ensure that
no disruptions to the reservation system are encountered as a result of the
onset of the Year 2000. The Company intends to continue to work with SABRE to
ensure that the travel reservation systems operate properly beyond 1999.
PART 2
OTHER INFORMATION
Item 6. Exhibits, Lists and Reports on Form 8-K.
(a) Exhibits.
Exhibit Description
- ------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
Not Applicable.
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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.
Dated: November 13, 1998
800 TRAVEL SYSTEMS, INC.
(Registrant)
By: /s/ Mark D. Mastrini
--------------------------------
Mark D. Mastrini, President and
Chief Executive Officer
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,429,881
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,466,566
<PP&E> 888,704
<DEPRECIATION> 219,424
<TOTAL-ASSETS> 9,633,945
<CURRENT-LIABILITIES> 1,289,719
<BONDS> 29,174
0
0
<COMMON> 74,971
<OTHER-SE> 11,823,592
<TOTAL-LIABILITY-AND-EQUITY> 9,633,945
<SALES> 5,921,691
<TOTAL-REVENUES> 8,579,411
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,506,575
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,061
<INCOME-PRETAX> 130,909
<INCOME-TAX> 0
<INCOME-CONTINUING> 130,909
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130,909
<EPS-PRIMARY> .02
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