As filed with the Securities and Exchange Commission on January 6, 1999
Registration No. 333-28237
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Post-Effective Amendment No. 1
to
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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800 TRAVEL SYSTEMS, INC.
(Name of small business issuer in its charter)
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Delaware 4724 59-3343338
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
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Mark D. Mastrini, President
800 Travel Systems, Inc.
4802 Gunn Highway 4802 Gunn Highway
Tampa, Florida 33624 Tampa, Florida 33624
(813) 908-0404 (813) 908-0404
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, and telephone number including
of registrant's principal executive offices) area code of agent for service)
---------------------------------
Copies of communications to:
Vincent J. McGill Richard F. Dahlson
Phillips Nizer Benjamin Krim & Ballon LLP Jackson Walker, L.L.P.
666 Fifth Avenue 901 Main Street, Suite 6000
New York, New York 10103-0084 Dallas, Texas 75202-3797
Telephone: (212) 977-9700 Telephone: (214) 953-6000
Telecopier: (212) 262-5152 Telecopier: (214) 953-5822
<PAGE>
800 TRAVEL SYSTEMS, INC.
3,321,800 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(and 3,321,800 shares of Common Stock Issuable under the Warrants)
Of the securities offered hereby 3,105,000 Redeemable Common Stock
Purchase Warrants (the "Warrants") were sold (along with 1,350,000 shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock")), by 800
Travel Systems, Inc., a Delaware corporation (the "Company") in its initial
public offering which closed on January 21, 1998 and January 23, 1998 (the
"IPO"). The Common Stock and the Warrants (collectively, the "Securities") were
offered and sold separately and not as units, and each is separately
transferable. Prior to the IPO, there was no public market for the Common Stock
and the Warrants. The initial public offering price was $5.00 per share of
Common Stock and $.125 per Warrant.
The Company hereby offers 3,321,800 shares of Common Stock issuable upon
exercise of the Warrants, including the 3,105,000 Warrants sold in the IPO. Each
Warrant entitles the holder to purchase one share of Common Stock at a price of
$6.25 per share during the five-year period commencing January 21, 1998. The
Warrants are redeemable by the Company for $.05 per Warrant on not less than 30
nor more than 60 days written notice if the closing price for the Common Stock
for seven trading days during a 10 consecutive trading day period ending not
more than 15 days prior to the date that the notice of redemption is mailed
equals or exceeds $10.00 per share, subject to adjustment under certain
circumstances and provided there is then a current effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the issuance and sale of Common Stock upon the exercise of the
Warrants. Any redemption of the Warrants until January 13, 1999 will require the
written consent of First London Securities Corporation, one of the
representatives of the underwriters of the IPO (collectively, along with First
Liberty Investment Group, Inc., the "Representatives"). The Company has agreed
to pay a solicitation fee (the "Solicitation Fee") in connection with the
exercise of the Warrants equal to 5% of the exercise price. See "Description of
Securities."
The initial public offering prices of the Common Stock and Warrants and
the exercise price and other terms of the Warrants were determined through
negotiations between the Company and the Representatives and are not related to
the Company's assets, book value, financial condition or other recognized
criteria of value. Although the Common Stock and Warrants are listed on the
Boston Stock Exchange under the symbols "IFL" and "IFLW", respectively, and on
the Nasdaq SmallCap Market under the symbols "IFLY" and "IFLYW," respectively,
there can be no assurance that an active trading market in the Company's
securities will be sustained. On December 31, 1998, the closing bid prices of
the Common Stock and Warrants were $12 1/4 and $6 1/8, respectively.
The Registration Statement relating to this Prospectus also covers the
offering by selling securityholders (the "Selling Securityholders") of 478,284
shares of Common Stock (the "Registered Shares") and 250,000 warrants (the
"Registered Warrants") identical to the Warrants (and 250,000 shares of Common
Stock issuable thereunder) (collectively, the "Registered Securities"), which
were not underwritten but which may be sold from time to time pursuant to
arrangements made by the Selling Securityholders. Sales of the Registered
Securities and other shares previsously subject to lock-up agreements or the
potential of such sales at any time, may have an adverse effect on the market
prices of the securities offered under this Prospectus. See "Shares Eligible for
Future Sale." The Company will not receive any of the proceeds from the sale of
the securities by the Selling Securityholders. The Company will bear all
expenses incurred by the Selling Securityholders, other than brokerage fees and
commissions and fees of independent counsel, if any.
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THESE ARE SPECULATIVE SECURITIES, AND AN INVESTMENT IN THE SECURITIES OFFERED
UNDER THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION FROM THE PUBLIC OFFERING PRICE OF THE COMMON STOCK AND SHOULD BE
CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is January ___, 1999
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement"), pursuant to the Securities Act with respect to the securities
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
THE STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT
OR OTHER DOCUMENT IDENTIFIED AS EXHIBITS IN THIS PROSPECTUS ARE NOT NECESSARILY
COMPLETE, AND IN EACH INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH CONTRACT OR
DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH STATEMENT BEING
QUALIFIED IN ANY AND ALL RESPECTS BY SUCH REFERENCE. For further information
with respect to the Company and the securities offered under this Prospectus,
reference is made to the Registration Statement and exhibits which may be
inspected without charge at the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, NW, Washington, DC 20549.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith will file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its New York Regional Office,
Room 1300, 7 World Trade Center, New York, New York 10048; and at its Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained
from the Public Reference Section of the Commission at prescribed rates. The
Company's Registration Statement on Form SB-2 as well as any reports to be filed
under the Exchange Act can also be obtained electronically after the Company has
filed such documents with the Commission through a variety of databases,
including among others, the Commission's Electronic Data Gathering, Analysis And
Retrieval ("EDGAR") program, Knight-Ridder Information, Inc., Federal
Filings/Dow Jones and Lexis/Nexis. Additionally, the Commission maintains a
Website (at http:\\www.sec.gov) that contains such information regarding the
Company.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements, quarterly reports containing unaudited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the Company are to 800 Travel Systems, Inc. and to the
businesses previously conducted by its predecessor, 1-800 Low-Air Fare, Inc.,
and by The Joseph Stevens Group, Inc. ("Stevens").
The Company
800 Travel is among the 100 largest independent travel agencies in the
United States. The Company provides low-priced airline tickets for domestic and
international travel to its customers through its easy-to-remember, toll-free
numbers "1-800-LOW-AIR-FARE" (1-800-569-2473), "1-800-FLY-4-LESS"
(1-800-359-4537) and "1-888-999-VUELA" (1-888-999-8835), and through its website
on the World Wide Web (at www.lowairfare.com). The Company operates 365 days a
year out of the Company's reservation centers in Tampa, Florida and San Diego,
California. The Company strives to provide its customers with the lowest-priced
airfare available for a particular travel route at the time of reservation by
utilizing the SABRE travel reservation system.
The Company generates revenues principally from (i) the commissions on air
travel tickets, (ii) override commissions on air travel tickets the Company
books on certain airlines, currently including Continental, United, Northwest,
TWA, America Trans Air, Trans Brazil, Mexicana and Korean airlines, (iii)
segment incentives under its contract with SABRE, (iv) co-op promotions with
other suppliers of travel-related products and services, such as long-distance
telephone companies, car rental companies and hotels, and (v) service fees that
it charges its customers. The Company markets its services primarily by
advertising in Yellow Pages covering those standard metropolitan areas in the
continental United States with populations whose general travel profiles are
attractive to the Company.
The Company's website utilizes the Interactive Reservation Internet System
("IRIS(TM)"). IRIS enables the Company's customers to reserve airline tickets on
line with the real-time assistance of the Company's trained travel agents. IRIS
capitalizes on various interactive technologies to provide a unique and easy
means for the customers to find low airfares on the Internet.
In January 1998, the Company completed its IPO in which it sold 1,350,000
shares of Common Stock and 3,105,000 Warrants (including 405,000 Warrants under
the underwriters over-allotment option). The gross proceeds of the IPO were
approximately $7,138,000. The Company used part of the proceeds of the IPO to
expedite the training of reservation agents and to further the development of
its website. Simultaneously with the IPO, the Company completed the acquisition
of Stevens. Stevens' 50 reservation agents provided airline tickets for domestic
and international travel to consumers through its "1-800-FLY-4-LESS"
(1-800-359-4537) toll-free number.
Our principal executive offices are located at 4802 Gunn Highway, Tampa,
Florida 33624. Our telephone number is (813) 908-0404.
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<PAGE>
The Offering
Securities Offered...................... 3,321,800 shares of Common Stock
issuable upon exercise of the Warrants
Securities Outstanding
Before Offering: 7,497,096 shares (1)
3,321,800 Warrants (2)
After Offering: 10,818,896 shares (2)
0 Warrants (2)
Estimated Net Proceeds $19,600,000 (3)
Use of Proceeds Working Capital. See "Use of Proceeds."
Trading Symbols(4):
Boston Stock Exchange:
Common Stock.................... IFL
Warrants........................ IFLW
Nasdaq SmallCap Market:
Common Stock.................... IFLY
Warrants........................ IFLYW
Risk Factors............................ The Common Stock offered under this
Prospectus is speculative and involves
a high degree of risk. Investors should
carefully consider the risk factors
enumerated herein before investing in
the Common Stock and the Warrants. See
"Risk Factors" and "Dilution."
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(1) Excludes (i) 100,000 shares issuable upon exercise of a warrant granted to
Perry Trebatch, (ii) 250,000 shares of Common Stock issuable upon exercise
of stock options granted pursuant to the Company's 1997 Stock Option Plan,
(iii) 100,000 shares of Common Stock issuable upon exercise of stock
options granted pursuant to the Company's 1998 Stock Option Plan, (iv)
475,000 shares of Common Stock issuable upon exercise of additional
options granted by the Company, (v) 600,000 shares of Common Stock
issuable upon exercise of options originally issued to directors and a
former director of the Company, (vi) 50,000 shares to be issued to the
Company's President on September 1, 1999 (assuming he is then employed by
the Company), (vii) 405,000 shares of Common Stock issuable upon exercise
of the warrants issued to the Representatives (the "Representatives'
Warrants") to purchase Common Stock (the "Representatives' Stock
Warrants") and warrants to purchase Common Stock (the "Representatives'
Warrant Warrants"), and the shares of Common Stock underlying the
Representatives' Warrant Warrants and (viii) 3,321,800 shares of Common
Stock issuable upon exercise of the Warrants.
(2) Excludes items (i) through (vii) referred to in footnote 1.
(3) After subtracting the Solicitation Fee and estimated offering expenses
payable by the Company.
(4) Boston Stock Exchange and Nasdaq SmallCap Market symbols do not imply that
an established public trading market for these securities will be
sustained. See "Risk Factors -- Possible Applicability of Rules Relating
to Low-Priced Stock; Possible Failure to Continue to Qualify for Boston
Stock Exchange or Nasdaq SmallCap Market Listing."
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<PAGE>
Summary Historical Financial Data
<TABLE>
<CAPTION>
The Company
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Nine Months Nine Months
Year Ended Year Ended Year Ended Ended Ended
December 31, December 31, December 31, September 30, September 30,
1995(1) 1996 1997(2) 1997(2) 1998
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Consolidated Income
Statement Data:
Revenues................................... $1,224,908 $3,235,777 $8,321,916 $6,016,416 8,579,411
Operating Expenses:
Payroll, commissions and
employee benefits...................... 1,291,007 2,490,770 4,307,529 2,905,981 4,012,845
Telephone................................ 407,396 702,870 1,250,888 787,488 1,442,029
Ticket Delivery Expense.................. 156,694 407,579 771,249 523,789 808,808
Advertising.............................. 333,957 137,223 293,036 178,180 236,852
General and
Administrative......................... 1,210,646 1,768,058 1,913,654 1,605,833 2,006,041
Interest Income (Expense)................ (172,874) (1,114,298) (54,526) (83,994) 58,073
Other Income............................... 43,741 12,610 6,461 4,726 --
Net Earnings (Loss)........................ (2,303,925) (3,372,411) (262,505) (64,123) 130,909
Net Earnings (Loss) per Share.............. (.60) (.68) (.04) (.01) .02
Weighted Average
Number of Common
Shares Outstanding....................... 3,840,000 5,951,209 5,957,584 5,956,859 7,451,035
</TABLE>
December 31,
------------------------------------ September 30,
1995 1996 1997(3) 1998
--------- --------- --------- ---------
Balance Sheet Data:
Working Capital (Deficit).. $(731,210) $(363,201) $(2,031,637) $2,176,847
Total Assets............... 1,444,298 2,788,770 4,378,510 9,633,945
Long-Term Debt............. 60,000 30,000 50,000 29,174
Total Stockholders' Equity. 613,882 1,500,466 1,569,960 8,242,411
Notes to Summary Historical and Pro Forma Financial Data
(1) On December 1, 1995, the Company acquired certain of the assets and
assumed certain liabilities of 1-800-Low Airfare, Inc. (the "Predecessor
Business"). The results of operations of the Company for the year ended
December 31, 1995, include the results of operations of the Predecessor
Business for the eleven months ended November 30, 1995.
(2) Pursuant to the Interim Operating Agreement the Company assumed the
operations of Stevens as of January 1, 1997 and, therefore, the Statement
of Income Data of the Company reflects the combined operations of the
Company and Stevens for 1997.
(3) Balance sheet data for the year ended December 31, 1997, gives pro forma
effect to the Stevens Merger as if it occurred on December 31, 1997.
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<PAGE>
RISK FACTORS
The securities offered under this Prospectus are highly speculative and
should be purchased only by persons who can afford to lose their entire
investment in the Company. In addition to the other information contained in
this Prospectus, prospective investors should consider carefully the following
factors in evaluating an investment in the securities offered under this
Prospectus.
History of Operating Losses; Future Operating Results
Although the Company had net income before taxes of $130,909 for the nine
months ended September 30, 1998, the Company had losses and generated negative
cash flows from continuing operations in each of the Company's fiscal years
since inception. For the years ended December 31, 1995, 1996 and 1997, the
Company's predecessor and the Company incurred losses of $2,303,925, $3,372,411,
and $262,505 respectively. The Company might not operate profitably in the
future, and the Company may not be successful in implementing and executing its
operating and growth strategies.
Shares Eligible for Future Sale
The Company has 7,497,096 shares of Common Stock outstanding.
Nevertheless, as a result of various lock-up agreements entered into with the
holders of the shares outstanding prior to the IPO, only approximately 2,000,000
shares were eligible for trading in the Nasdaq SmallCap Market and on the Boston
Stock Exchange prior to December 31, 1998. Of the 5,959,709 shares of Common
Stock issued and outstanding prior to the IPO, the holders of approximately
3,000,000 shares agreed not to offer, sell or otherwise dispose of ("Sell") such
shares until approximately one year from the IPO; the holders of 350,000 shares
agreed not to Sell such shares until July 21, 1999; and the holders of
approximately 2,400,000 shares (including the officers and directors of the
Company and Vito Balsamo, a former director of the Company) have agreed not to
Sell such shares until January 21, 2000.
The Company is unable to predict the effect, if any, that sales (or the
potential for such sales) under Rule 144 or otherwise of shares previously
subject to lock-up agreements may have on the market price of the Common Stock
prevailing from time to time. Future sales of substantial amounts of Common
Stock in the public market could impair the Company's ability to raise capital
through an offering of securities and may adversely affect the market price of
the Common Stock.
Competition
The travel agency business is intensely competitive. Many of the Company's
competitors, which include local, regional and national travel agencies, have
greater financial, personnel and other resources than the Company. Some of the
Company's competitors use a low-price discount strategy to expand their market
share and a number of travel agencies use toll-free phone lines that compete
with the Company's services. If any of the companies using a discount strategy
were to focus their marketing efforts on the Company's telemarketing niche, the
Company's results of operations could suffer.
In addition, the Internet permits consumers to have direct access to
airlines and distribution systems like the SABRE system, by-passing travel
agents. In recent years, airline ticket prices have dropped mainly as a result
of lower costs and greater competition in the airline industry. Since the
Company's revenues are based on the number of tickets it sells and the
percentage of the price of such tickets it receives, decreases in the price of
airline tickets will decrease the Company's revenues. The Company believes that
price-based competition will continue to exist in the airline industry and the
Company's markets for the near future. Any major decrease in airline ticket
prices could negatively affect the Company's results of operations.
The travel agency industry has been experiencing consolidation. The
Company may experience increased competition in the future if this trend
continues and its competitors combine to form larger companies. The
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<PAGE>
Company may not be able to remain competitive with larger travel agencies in the
future or maintain its size and industry position relative to its competitors.
Year 2000 Non-Compliance
The economy in general, and the travel and transportation industry in
particular, may be adversely affected by risks associated with the onset of the
Year 2000. The Company's business, financial condition, and results of
operations could be materially adversely affected if systems that it operates or
systems that are operated by other parties (e.g., SABRE, members of the airline
industry, utilities, telecommunications service providers, data providers,
associates, credit card transaction processors) with which the Company's systems
interface, are not Year 2000 compliant in time. There can be no assurance that
the systems of the Company or the systems of these other parties, in particular
the SABRE system, will continue to properly function and will otherwise be Year
2000 compliant. Although the Company is not aware of any threatened claims
related to the Year 2000, the Company may be subject to litigation arising from
such claims and, depending on the outcome, such litigation could have a material
adverse affect on the Company. It is not clear whether the Company's insurance
coverage would be adequate to offset these and other business risks related to
the Year 2000.
Risks Relating to the Airline Industry
Developments in the vacation and airline industries may cause a decrease
in the price or number of tickets the Company sells. Concerns about passenger
safety may result in a decrease in passenger air travel and a decrease in the
number of tickets the Company sells. Such developments could negatively impact
the Company's revenues.
Risks Relating to Airline Commissions
In recent years, the major airlines have announced reductions in the
commissions that they pay travel agents. Those commissions now range from
approximately 10% to 8%. The Company does the majority of its business through
airlines and consolidators (Continental, Northwest and the "TWA Discounter" (see
below)) which pay commissions in excess of the industry standard, but those
other airlines and consolidators may in the future institute similar reductions
which could reduce the Company's revenues. If instituted, those reductions in
commissions could have a negative effect on the Company. See "-- Risks Relating
to Override Commissions."
Risks Relating to Override Commissions
The Company is able to offer its customers attractive airfares in large
part due to the favorable override commission arrangements it has for selling
tickets on Continental, United, Northwest, the TWA Discounter, America Trans
Air, Trans Brazil, Mexicana and Korean airlines. For example, the Company is
able to offer attractive fares on TWA because of its override commission
arrangement with a consolidator which sells tickets on TWA at a discount (the
"TWA Discounter"). In 1997 and 1998, approximately 26% and 21%, respectively, of
the Company's tickets were sold on TWA through the TWA Discounter, which
accounted for approximately 28% and 29% of the Company's revenues for such
periods, respectively. Although the TWA Discounter estimates that it will be
able to continue selling tickets on TWA through 2003, the expiration date of the
Company's current agreement, there can be no assurance that the TWA Discounter
will be able to do so. Also, there is no guaranty that the Company's agreement
with the TWA Discounter will be extended beyond its current term.
In addition, the override commission agreements with the other airlines
are on a year-to-year basis. If and when the TWA Discounter is no longer able to
sell TWA tickets, or if the Company is unable to extend its current override
commission arrangements with other carriers or enter into similar arrangements
with similar carriers, the Company could lose its competitive advantages and its
business could be negatively affected.
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<PAGE>
Dependence on Certain Carriers for Substantial Portions of Revenues
During 1997, the Company generated approximately 51% of its revenues from
sales of tickets on Continental Airlines (17%) and TWA (34%). During the first
nine months of 1998, the Company generated approximately 71% of its revenues
from sales of tickets on Continental Airlines (26%), TWA (23%), and Northwest
Airlines (22%). Because of a combination of their low fares, the Company's
favorable override commissions with respect to tickets sold on them and the
agreement with the TWA Discounter, the Company is often able to offer the best
fares to its customers on these particular carriers and, consequently, sells a
large number of tickets on these particular airlines. If Continental, TWA, the
TWA Discounter or Northwest were to discontinue service, refuse to sell tickets
to the Company, impose higher fares relative to other airlines or terminate the
Company's favorable override commission structures, the Company may not be able
to sell as many tickets as it currently does, or maintain the level of
profitability on each sale that it currently has, and the Company's business and
results of operation could be negatively affected.
Dependence on SABRE System
The Company depends on its contractual right to use the SABRE electronic
travel reservation system for its ability to quote air travel ticket prices,
make reservations and sell tickets. In April 1996, the Company entered into a
five-year agreement with The SABRE Group, Inc. to lease the SABRE system in its
Tampa headquarters, and in November 1996, entered into a five-year agreement to
lease the SABRE system in its San Diego reservation center. If the Company loses
the right to use the SABRE system through its inability to renew the agreements
upon expiration or through default under the agreements, or if the SABRE system
were to cease functioning, the Company would not be able to conduct operations
until a replacement system was installed and became operational. Only a very
limited number of companies provide reservation systems to the travel agency
industry. The Company may not be able to obtain a replacement system or to
obtain one on favorable terms or in time to successfully continue operations.
During any interruption in the operation of SABRE, the Company would lose
revenues. Other travel agencies using other travel reservation systems would not
be subject to such interruption of their operations, and the Company might lose
market share to such competitors. If the operation of the SABRE system is
interrupted, the Company could decide to commence operations with another travel
reservation system. Such a change in reservation systems could require the
Company to incur substantial expenses for acquiring the right to use such system
and retraining its reservation agents. In addition, any impairment of the SABRE
system which does not cause it to cease operations could still negatively affect
the quality of the Company's services, resulting in lost revenues or market
share and could require the Company to subscribe to a different travel
reservation system.
Risks Relating to IRIS
The Company utilized the services of an independent contractor to develop
the IRIS software incorporated into its website, and is currently negotiating
with such party, the owner of the rights to the IRIS software, with respect to
the terms and conditions upon which the Company will be entitled to continue to
utilize IRIS. Although the Company expects that it will be able to reach an
amicable agreement with its developer, there can be no assurance that it will do
so on terms favorable to the Company. If the Company were to lose the right to
use IRIS through its inability to reach an agreement with its developer, upon
expiration of such agreement or through default under the agreement, or if IRIS
were to cease functioning or malfunctioned at any time, the Company would not be
able to conduct its website sales and operations until a replacement system was
installed and became operational. The Company may not be able to obtain a
replacement system or to obtain one on favorable terms or in time to
successfully continue its website sales and operations.
Dependence Upon Key Personnel
The success of the Company is substantially dependent upon the continuing
services of Mark D. Mastrini as well as other key personnel. While the Company
has employed a number of executives with industry experience,
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<PAGE>
the loss of Mr. Mastrini could have a negative effect on the Company's business,
financial condition and results of operations. The Company does not maintain a
life insurance policy on the life of Mr. Mastrini.
Risks Relating to Intellectual Property
The Company markets its services in the United States under the names,
"1-800-LOW-AIR-FARE," "1-800-FLY-4-LESS" and "1-888-999-VUELA."
"1-800-FLY-4-LESS," together with its logo, is a federally registered service
mark in the name of the Company. The Company has filed an application to
register the "1-800-LOW-AIR-FARE" name and logo and the Spanish language name,
"1-888-999-VUELA," as federal service marks with the U.S. Patent and Trademark
Office. There can be no assurance that such service marks will issue or of the
effect such failure might have on the Company.
On January 12, 1998, the Company received a letter from counsel for Travel
800, LLC, a wholly-owned subsidiary of Travel Services International, Inc.
("Travel"), (i) stating that the Company's use and advertisement of its "1-800
LOW-AIRFARE" mark and corresponding number is causing confusion among consumers
and regulatory problems for Travel, (ii) claiming that Travel commenced use and
promotion of its "1-800 LOW-FARE" mark and number prior to the Company's use and
advertisement of its "1-800 LOW-AIRFARE" mark and number, and (iii) requesting
that the Company cease and desist from continued use and advertisement of its
"1-800 LOW-AIRFARE" mark and number. On or about April 27, 1998, Travel filed
with the Trademark Trial and Appeal Board of the United States Patent and
Trademark Office (the "Board") a Notice of Opposition (the "Opposition")
opposing the Company's application for registration of the "1-800 LOW-AIRFARE"
mark.
The Company has investigated the facts underlying Travel's letter and
Opposition and, through its counsel, is mounting a vigorous defense of its
rights to use and market the "1-800 LOW-AIRFARE" name and number. In response to
Travel's letter and Opposition, the Company filed an answer in which it has
sought to have the Board overrule the Opposition and permit the Company to
register the "1-800 LOW-AIRFARE" mark. The parties are currently pursuing
discovery concerning the contentions advanced in this proceeding. If the Company
decides to abandon its "1-800 LOW-AIRFARE" mark and number, it will instead
promote its "1-800 FLY-4-LESS" mark and number.
Anti-takeover Effect of Certain Charter, Bylaw and Other Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") and Amended and Restated Bylaws ("Bylaws")
have anti-takeover effects and may discourage, delay, defer or prevent a change
in control of the Company. These provisions (i) divide the Company's Board of
Directors into three classes, each of which serves for a different three year
period and (ii) establish certain advance notice procedures for nomination of
candidates for election as directors and for stockholder proposals to be
considered at annual stockholders' meetings. Also, some provisions of the
Delaware General Corporation Law also have certain anti-takeover effects.
Preferred Stock
The Certificate authorizes the issuance of 1,000,000 shares of "blank
check" preferred stock with such designations, rights and preferences as the
Board of Directors may determine. Therefore, the Board of Directors can, without
shareholder approval, issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could negatively affect the voting power
or other rights of the holders of the Common Stock. If issued, the preferred
stock could be used to discourage, delay or prevent a change in control of the
Company. Although the Company currently has no intent to issue any preferred
stock, the Company might do so in the future.
Necessity to Maintain Current Prospectus and Registration Statement
The Company must maintain an effective registration statement on file with
the Commission before any Warrant may be redeemed or exercised. It is possible
that the Company may be unable to cause a registration
-8-
<PAGE>
statement covering the Common Stock underlying the Warrants to be effective. It
is also possible that the Warrants could be acquired by persons residing in
states where the Company is unable to qualify the Common Stock underlying the
Warrants for sale. In either event, the Warrants may expire, unexercised, which
would result in the holders losing all the value of the Warrants.
State Blue Sky Registration Required to Exercise Warrants
Holders of the Warrants have the right to exercise the Warrants only if
the underlying Common Stock is qualified, registered or exempt from registration
under applicable securities laws of the states in which the various holders of
the Warrants reside. The Company cannot issue shares of Common Stock to holders
of the Warrants in states where such shares are not qualified, registered or
exempt.
Limited Market for the Common Stock and Warrants
The Company has registered the Common Stock and Warrants for sale under
the securities laws of only a limited number of states. Consequently, there will
be only a limited market in which investors will be able to resell Common Stock
purchased hereunder.
Redeemable Warrants and Impact on Investors
The Warrants are subject to redemption by the Company in certain
circumstances. The Company's exercise of this right would force a holder of a
Warrant to exercise the Warrant and pay the exercise price at a time when it may
be disadvantageous for the holder to do so, to sell the Warrant at the then
current market price when the holder might otherwise wish to hold the warrant
for possible additional appreciation, or to accept the redemption price, which
is likely to be substantially less than the market value of the Warrant in the
event of a call for redemption. Holders who do not exercise their Warrants prior
to redemption by the Company will forfeit their right to purchase the shares of
Common Stock underlying the Warrants. However, the Company may not redeem the
Warrants at any time that a current registration statement under the Securities
Act covering the sale of the Common Stock issuable upon exercise of the Warrants
is not then effective.
Possible Applicability of Rules Relating to Low-priced Stocks or "Penny Stocks";
Possible Failure to Qualify for Nasdaq SmallCap Market Listing
The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share, subject to certain exceptions. Whether the Common Stock or
Warrants are "penny stocks" at any time is a function of their trading price. At
such times as the Common Stocks or Warrants are "penny stocks," they become
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors. There can be no assurance that the Common
Stock or the Warrants will trade for $5.00 or more per security. Consequently,
the "penny stock" rules may restrict the ability of broker/dealers to sell the
Company's securities and may affect the ability of purchasers in this offering
to sell the Company's securities in a secondary market.
Although the Common Stock and Warrants are listed on the Nasdaq SmallCap
Market, there can be no assurance that a trading market for the Common Stock and
the Warrants will be sustained. Furthermore, there can be no assurance that the
securities offered under this Prospectus may be resold at their original
offering price or at any other price.
In order to maintain its listing on the Nasdaq SmallCap Market, a company
must maintain $2,000,000 in net tangible assets, and a $1,000,000 market value
of the public float. In addition, continued inclusion requires two market makers
and a minimum bid of $1.00 per share. The failure to meet these maintenance
criteria in the future may result in the discontinuance of the listing of the
Common Stock and Warrants on the Nasdaq SmallCap Market.
-9-
<PAGE>
If the Company becomes unable to meet the criteria for continued listing
on the Nasdaq SmallCap Market and or becomes delisted therefrom, trading, if
any, in the Common Stock and the Warrants would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or, if then available,
the "Electronic Bulletin Board" administered by the National Association of
Securities Dealers, Inc. (the "NASD"). In such event, the market price of the
Common Stock and the Warrants may be adversely impacted. As a result, an
investor may find it difficult to dispose of or to obtain accurate quotations as
to the market value of the Common Stock and the Warrants.
Exercise of Representatives' Purchase Warrants
In connection with the IPO, the Company sold to the Representatives, for
nominal consideration, the Representatives' Warrant to purchase 135,000 shares
of Common Stock (the Representatives' Stock Warrants) and 310,500 Warrants (the
Representatives' Warrant Warrants) from the Company. The Representatives'
Warrant is exercisable for a four-year period commencing December 31, 1998, at
an exercise price of $8.25 for the Representatives' Stock Warrants and $.15625
for the Representatives' Warrant Warrants , respectively, subject to adjustment.
The terms of the Representatives' Warrant Warrants are substantially the same as
the Warrants sold to the public in the IPO, except that they have an exercise
price of $7.8125 per share. The Representatives' Warrant may have certain
dilutive effects because the holders will be given the opportunity to profit
from a rise in the market price of the underlying shares with a resulting
dilution in the interest of the Company's other shareholders. The terms on which
the Company could obtain additional capital during the life of the
Representatives' Warrant may be negatively affected because the holders of the
Representatives' Warrant might be expected to exercise them at a time when the
Company would otherwise be able to obtain comparable additional capital in a new
offering of securities at a price per share greater than the exercise price of
the Representatives' Warrant.
Dilution
Investors who exercise their Warrants to purchase Common Stock will
experience immediate dilution of $4.15 per share (66% of the Warrant Exercise
Price). See "Dilution."
No Prior Public Market; Possible Volatility of Securities Prices
Prior to the IPO, there was no public market for the Common Stock or the
Warrants. Although the Common Stock and the Warrants are listed on the Boston
Stock Exchange and on the Nasdaq SmallCap Market, there can be no assurance that
a regular trading market will be sustained, or that purchasers will be able to
resell their Common Stock or Warrants or otherwise liquidate their investment
without considerable delay, if at all. Recent history relating to the market
prices of newly public companies indicates that, from time to time, there may be
significant volatility in their market price. There can be no assurance that the
market price of the Common Stock or the Warrants will not be volatile as a
result of a number of factors, including the Company's financial results or
various matters affecting the stock market generally.
No Dividends
The Company has not declared or paid any cash dividends on the Common
Stock since its inception. The Company currently intends to retain all earnings
for the operation and expansion of its business and does not anticipate paying
any dividends in the foreseeable future.
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference include
"forward-looking statements" within the meaning of the securities laws. All
statements regarding our expected financial position, business and financing
plans are forward-looking statements. Forward-looking statements also include
representations of our expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect
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<PAGE>
of national and regional economic conditions, the overall level of consumer
spending, the performance of the Company within the prevailing economic
environment, customer acceptance of new services and the integration of Stevens'
business with our existing operations. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, such expectations
may prove to be incorrect. Important factors that could cause actual results to
differ materially from such expectations ("cautionary statements") are disclosed
in this Prospectus and the documents incorporated by reference. Please consider
all forward-looking statements in conjunction with the cautionary statements.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements.
-11-
<PAGE>
THE STEVENS MERGER
Simultaneously with the closing of the IPO, the Company completed the
acquisition by merger of Stevens with and into the Company. Stevens' 50
reservation agents provided airline tickets for domestic and international
travel to consumers through its "1-800-FLY-4-LESS" (1-800-359-4537) toll-free
number.
In consideration for all of the outstanding capital stock of Stevens,
pursuant to the Merger Agreement among the Company, Stevens and the Joseph
Stevens Group, LLC ("JSG"), the sole shareholder of Stevens, the Company issued
to JSG (i) 383,333 shares of Common Stock, (ii) 250,000 Warrants identical to
those sold in the IPO and (iii) a promissory note in the amount of approximately
$1.6 million, which was subsequently repaid. In addition the Company agreed that
if on the second anniversary of the closing of the IPO the value of the portion
of the 383,333 shares issued to JSG then held by JSG, together with the value of
any consideration received for shares no longer held by JSG, was less then
$2,571,429, the Company would issue to JSG such number of shares of the
Company's Common Stock, based upon its then bid price, to make up the deficiency
(the "Make-Whole Rights").
Subsequent to completion of the Stevens Merger, the Company entered into
an agreement with JSG whereby JSG forfeited its Make-Whole Rights and returned
184,615 shares of Common Stock to the Company for $558,000. In addition, the
Company concurrently agreed to close on the purchase of certain equipment
located in Stevens' office and assume certain equipment leases for an additional
$240,000. As part of this agreement, the Company obtained JSG's agreement not to
sell on the open market any of its shares of the Company's Common Stock prior to
January 1, 1999.
The equity members of JSG are Joseph Elizondo, Steve Rohrlick and Western
Horizons, Ltd., who are owners, respectively, of 44.3%, 44.3% and 11.4%,
respectively, of the equity interest in JSG. Joseph Stevens & Company, Inc., the
investment banking firm at which the Company's former Chairman of the Board of
Directors, Michael Gaggi, was a senior vice president, is not affiliated with or
related to Stevens, JSG or any of the equity members of Stevens or JSG.
USE OF PROCEEDS
To date, few Warrantholders have exercised their Warrants, and the Company
has not received any indications that the remaining Warrantholders wish to
exercise their Warrants and there can be no assurance that Warrantholders will
choose to exercise all or any of the Warrants in the future. However, in the
event that all of the Warrants were to be exercised, the net proceeds to the
Company upon such exercise, estimated at approximately $19,600,000, after
deducting the Solicitation Fee and other expenses of the offering, would be used
for working capital to finance the Company's growth, salaries and general
corporate purposes. The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders.
The Company intends, when and if the opportunity arises, to acquire other
businesses or products in the travel or telemarketing industries which are
compatible with the Company's business or expertise, for the purpose of
expanding its business and product base. If such a business opportunity arises,
the Company may use a portion of its working capital for that purpose. The
Company has no specific arrangement with respect to any such acquisition at the
present time, and it is uncertain as to when or if any acquisition will be made.
Prior to expenditure, the net proceeds from the exercise of the Warrants
initially will be invested in short-term interest bearing securities or money
market funds.
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<PAGE>
DIVIDEND POLICY
To date, the Company has neither declared nor paid any dividends on its
Common Stock nor does the Company anticipate that such dividends will be paid in
the foreseeable future. Rather, the Company intends to retain any earnings to
finance the growth and development of its business. Any payment of cash
dividends on its Common Stock in the future will be dependent, among other
things, upon the Company's earnings, financial condition, capital requirements
and other factors which the Board of Directors deems relevant.
PRICE RANGE OF SECURITIES
The Company's Common Stock and Warrants are traded in the NASDAQ SmallCap
Market under the symbols IFLY and IFLYW, respectively and on the Boston Stock
Exchange under the symbols IFL and IFLW, respectively. The following sets forth
the high and low closing bid prices for the Common Stock and Warrants on the
NASDAQ SmallCap Market for the periods indicated from January 21, 1998 to
December 31, 1998 as reported by the National Association of Securities Dealers
Automated Quotation System. Such prices represent prices between dealers without
adjustment for retail mark-ups, mark-downs, or commissions and may not
necessarily represent actual transactions.
High Low
COMMON STOCK: ---- ---
1998:
First quarter (from January 21, 1998) 5 3/4 1 3/32
Second quarter 9 1/4 2 11/32
Third quarter 7 1/8 3 1/4
Fourth quarter 16 1/16 3 1/2
WARRANTS:
1998:
First quarter (from January 21, 1998) 23/32 3/16
Second quarter 2 13/16 9/32
Third quarter 2 1/16 15/16
Fourth quarter 10 7/8
On December 31, 1998, the closing bid prices of the Common Stock and the
Warrants, as reported by NASDAQ, were $12.25 and $6.125 respectively. As of
December 31, 1998, there were approximately 100 beneficial owners of the Common
Stock. The number of record holders does not reflect the number of beneficial
owners of the Common Stock for whom shares are held by banks, brokerage firms
and others. Based on information requests received from representatives of such
beneficial owners, management believes that as of September 14, 1998, there were
approximately 4,000 beneficial holders of the Common Stock.
-13-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998. This table should be read in conjunction with Financial
Statements of the Company, including notes thereto, included elsewhere herein.
September 30, 1998
------------------
Current Maturities of long term debt........... 118,687
Long-term debt................................. 29,174
Preferred stock -- $100.00 par value; 400
shares authorized, none issued or outstanding
Common stock -- $.01 par value; 10,000,000
shares authorized, 7,497,096(1) shares issued
and outstanding................................ 74,971
Additional Paid-In Capital..................... 11,823,592
Stock Subscriptions Receivable................. (21,547)
Retained Deficit............................... (3,634,605)
Total Stockholders' Equity........... 8,242,411
Total Capitalization................. 8,390,272
- ----------
(1) Excludes (i) 100,000 shares issuable upon exercise of a warrant granted to
Perry Trebatch, (ii) 250,000 shares of Common Stock issuable upon exercise
of stock options granted pursuant to the Company's 1997 Stock Option Plan,
(iii) 100,000 shares of Common Stock issuable upon exercise of stock
options granted pursuant to the Company's 1998 Stock Option Plan, (iv)
475,000 shares of Common Stock issuable upon exercise of additional
options granted by the Company, (v) 600,000 shares of Common Stock
issuable upon exercise of options originally issued to directors and a
former director of the Company, (vi) 50,000 shares to be issued to the
Company's President on September 1, 2000 (assuming he is then employed by
the Company), (vii) 405,000 shares of Common Stock issuable upon exercise
of the Representatives' Warrants and the Representatives' Stock Warrants
and Representatives' Warrant Warrants underlying the Representatives'
Warrants and (viii) 3,321,800 shares of Common Stock issuable upon
exercise of the Warrants.
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<PAGE>
DILUTION
The difference between the exercise price of the Warrants and the pro
forma net tangible book value per share after the exercise of the Warrants
constitutes the dilution to those who choose to exercise their Warrants to
purchase Common Stock. Net tangible book value per share is determined by
dividing the net tangible book value of the Company (total tangible assets less
total liabilities) by the number of outstanding shares of Common Stock.
At September 30, 1998, the tangible book value of the Company was
$3,069,557 or $.41 per share. Without taking into account any changes in net
tangible book value attributable to operations after September 30, 1998, other
than the sale by the Company of the 3,321,800 shares of Common Stock issuable
upon exercise of the Warrants, after deducting the estimated expenses of this
Offering, including the Solicitation Fee, the pro forma net tangible book value
of the Company as of September 30, 1998 would have been $22,669,557, or $2.10
per share. This represents an immediate increase in net tangible book value of
$1.60 per share to the existing shareholders and an immediate dilution of $4.15
per share to new investors (66% of the exercise price per share of the
Warrants). The following table illustrates this dilution, on a per share basis:
Exercise price of Warrants........................ $6.25
Net tangible book value as of September 30, 1998.. $.41
Increase in net tangible book value attributable
to new investors.................................. 1.69
Pro forma net tangible book value after offering.. $2.10
-----
Total dilution to new investors............. $4.15
=====
The following table summarizes, as of September 30, 1998, the total number
of shares of Common Stock purchased from the Company, the aggregate
consideration paid and the average price per share paid by the existing
shareholders and investors who purchase shares by exercising warrants.
Shares Purchased Total Consideration Average
---------------- ------------------- Price
Number % Amount % Per Share
------ - ------ - ---------
Existing Shareholders.. 7,497,096 69% 11,877,016 36% $1.58
New Investors(1)....... 3,321,800 31% 20,761,250 64% $6.25
--------- -- ---------- --
Total........ 10,818,896 100% $32,638,266 100% $3.02
========== === =========== ===
- ----------
(1) The computation in both of the foregoing tables assume no exercise of the
Representatives' Warrant. See "Description of Securities."
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition and
results of operations of the Company and should be read in conjunction with the
financial statements of the Company and related notes thereto included elsewhere
in this Prospectus.
Overview
The Company operates primarily 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 and through its
website. 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
Stevens and its sole shareholder, JSG. Prior to the consummation of 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 IPO 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 on the service charges 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 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 service charge while still offering low priced tickets.
The Company only began to impose service charges in January 1997.
The Company anticipates that, assuming no decrease in the rate of
commissions and override commissions paid by airlines, 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 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 and net loss as a percentage of revenues. The numbers in the following
table for the year ended December 31, 1995, include the results of operations of
the Predecessor Business.
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<PAGE>
<TABLE>
<CAPTION>
Year Ended % Year Ended % Year Ended % Nine Months %
December 31, December 31, December 31, Ended
1995 1996 1997 September 30,
1998
------------ ----- ------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross
Reservations.... $ 11,256,516 -- $ 23,590,782 -- $53,845,888 -- $ 59,234,429 --
============ ===== ============ ===== ========== ===== ============ ====
Revenues
(including
override)....... 1,224,908 10.9%* 3,235,777 13.7% 8,321,916 15.5%* 8,579,411 14.5%*
------------ ----- ------------ ----- ------------ ----- ------------
OPERATING
EXPENSES:
Employee Costs.. 1,291,007 105.4** 2,490,770 77.0** 4,307,529 51.8** 4,012,845 46.8**
Telephone ...... 407,396 33.3 702,870 21.7 1,250,888 15.0 1,442,029 16.8
Ticket Delivery. 156,694 12.8 407,579 12.6 771,249 9.3 808,808 9.9
Advertising .... 333,957 27.3 137,223 4.2 293,036 3.5 236,852 2.8
General and .... 1,210,646 98.8 1,768,058 54.7 1,913,654 23.0 2,006,041 23.4
Administrative
Interest ....... 172,874 14.1 1,114,298 34.4 54,526 0.66 18,061 0.2
------------ ----- ------------ ----- ------------ ----- ------------
Total Expenses.. 3,572,574 291.7 6,620,798 204.6 8,590,882 103.2 8,524,636 99.4
------------ ----- ------------ ----- ------------ ----- ------------
Other Income ... 43,741 3.6 12,610 0.4 6,461 0.1 76,134 0.9
------------ ----- ------------ ----- ------------ ----- ------------
Net Earnings
(Loss) ......... $ (2,303,925) 188.1% $ (3,372,411) 104.2% $ (262,505) 3.2% 130,909 1.5%
============ ===== ============ ===== ========== ===== ============ ====
</TABLE>
- ----------
* Revenues as a percentage of gross reservations.
** Expenses as a percentage of revenues.
-17-
<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 table above and in
the discussion below for the year ended December 31, 1997, include the
operations of Stevens.
Nine Months Ended September 30, 1998
Compared to Nine Months Ended September 30, 1997
Revenue for the nine months ended September 30, 1998 increased 43% to
$8,579,411 compared to $6,016,416 for the nine months ended September 30, 1997.
The increase in revenue was the direct result of the increase in gross
reservations booked of 51% in the nine months ended September 30, 1998
($59,234,929) as compared to the nine months ended September 30, 1997
($39,152,651). Commissions and fees earned decreased to 14.5% of gross
reservations for the nine months ended September 30, 1998 compared to 15.4% for
the nine months ended September 30, 1997. The decrease in revenues as a
percentage of gross reservations reflects the industry-wide decrease in the
commission to 8% from 10% generally paid by airlines to reservation agents.
Operating expenses for the nine months ended September 30, 1998 increased
40% to $8,524,636 compared to $6,085,265 for the nine months ended September 30,
1997. Operating expenses did not increase proportionate to revenues due to the
fact that many expenses remain constant over broad ranges of revenues (i.e.
office rent, utilities, management wages, etc.) Nevertheless, the Company
incurred certain expenses associated with being a public company for the first
time during 1998, causing its operating expenses to increase more than might be
expected given the rate of increase in its revenues. The Company incurred
interest expenses in each of the years prior to the IPO, but generated interest
income of $58,000 during the first nine months of 1998.
Despite the increase in operating expenses from the first nine months of
'97 to the first nine months of '98, as reflected in the table above, total
operating expenses as a percentage of revenues decreased from 101% of revenues
during the first nine months of '97 to 99% of revenues during the first nine
months of '98. This decrease is largely attributable to the fact that the
Company's revenues increased by 43% during this period while operating expenses
increased by a lesser percentage.
Liquidity and Capital Resources
The Company's operations used $1,253,835 of cash during the nine months
ended September 30, 1998 as compared to $166,426 provided by operating
activities during the nine months ended September 30, 1997. The use of cash in
operating activities during the first nine months of 1998 reflects the
application of a substantial portion of the proceeds of the Company's IPO to the
reduction of the Company's accounts payable.
During the first nine months of 1998 the Company's capital expenditures
were $2,302,702 compared to $167,702 for the first nine months of 1997. A
substantial portion of the Company's capital expenditures during the first nine
months of 1998 is the result of the expenditure of $2,114,665 in connection with
the Stevens Merger.
If the Company's revenues continue to increase as currently anticipated,
the Company should not require any additional capital beyond that provided by
the IPO to achieve its current business plans. If, however, the Company were to
seek to expand its operations through acquisitions, the Company could require
capital beyond that provided by the IPO. There can be no assurance that such
capital will be available, or, if available, on terms acceptable to the Company.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 ("Fiscal '97") increased
157% to $8,321,916 compared to $3,235,777 for the year ended December 31, 1996
("Fiscal '96"). The increased revenues reflect the 128%
-18-
<PAGE>
increase in gross reservations of $53,845,888 booked in Fiscal '97 as compared
to $23,590,782 booked in Fiscal '96. Approximately $20,000,000 of the gross
reservation increase and $3,113,000 of the revenue increase is attributable to
the assumption of the operations of Stevens in January 1997. The increased gross
reservations booked and increased revenues also reflect the increase in the
volume of calls handled at each of the 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 from
13.7% of gross reservations during 1996 to 15.5% of gross reservations during
1997.
Operating expenses for Fiscal '97 increased 30% to $8,590,882 compared to
$6,620,798 for Fiscal '96. Operating expenses did not increase proportionate to
the increase in revenues due to the fact that many expenses (office rent,
utilities, management wages, etc.) remain relatively constant over a broad range
of revenues. The increase in operating expenses resulted primarily from an
increase in the Company's payroll, commissions and employee benefits expenses,
which increased 73% to $4,307,529 in Fiscal '97 from $2,490,770 in Fiscal '96.
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, though these increases were not
proportional with the increase in the Company's volume. Also contributing to the
increase in operating expenses was an increase in the Company's advertising
expense of 114% to $293,036 in Fiscal '97 from $137,223 in Fiscal '96 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 8.2% to $1,913,654 in
Fiscal '97 compared to $1,768,058 in Fiscal '96. This increase reflects an
increase of approximately $583,000 resulting from the absorption of the general
and administrative expenses associated with Stevens partially offset by a
reduction of $438,000 of general and administrative expenses associated with the
Florida office. The increase in the foregoing operating expenses was offset, in
part, by a substantial decrease, 95%, in the Company's interest expense to
$54,526 in Fiscal '97 from $1,114,298 in Fiscal '96. The substantial interest
expense incurred by the Company in Fiscal '96 reflects the Company's need to
borrow to fund its growth and shares issued either as penalties or to induce
lenders to roll over loans which were not timely paid. The substantial reduction
in the Company's interest expense in Fiscal '97 reflects the fact that the
Company generated cash from operations during Fiscal '97 and as a result, was
able to improve the terms on which it incurred debt.
During Fiscal '97 the Company's operating loss was $262,505, a reduction
of 92% from the operating loss of $3,372,411 incurred during Fiscal '96. The
reduction in the Company's operating loss reflects the substantial increase in
revenues, plus the net changes in operating expenses outlined above. Though the
non-cash charges incurred in respect of the Company's debt and other financing
activities decreased dramatically from Fiscal '96 to Fiscal '97, the Company did
incur non-cash operating expenses charged against income during Fiscal '97 of
$321,050, related to the issuance of stock, options and warrants, including a
charge of $300,000 resulting from options issued to induce its three new
directors to join its Board.
Liquidity and Capital Resources
The Company commenced operations in December 1995 upon the acquisition of
certain assets of the Predecessor Business for $1,407,008, of which $10,000 was
paid in cash, $90,000 was paid by the delivery of the Company's Promissory Note;
$720,480 was satisfied through the issuance of 600,400 shares of the Company's
Common Stock and $586,528 was satisfied through the assumption of certain
liabilities of the Predecessor Business. Of the 600,400 shares issued, 300,000
shares were to be issued to creditors of the Predecessor Business which elected
to convert their claims against the Predecessor Business into stock at the rate
of $10.00 per share. Pursuant to this agreement, during Fiscal '96 the Company
issued 153,934 shares of Common Stock to creditors of the Predecessor Business
and 146,066 shares of its Common Stock to the Predecessor Business.
Prior to completion of its IPO in January 1998, the Company financed its
operations from capital contributions, net of related expenses, in the amount of
$2,455,902; loans in the amount of $460,750; and through services provided by
certain vendors to be paid out of future revenues. The Company, including its
Predecessor,
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used $1,293,714 in operating activities in Fiscal '95 and $1,095,150 for
operating activities in Fiscal '96 and generated $1,092,357 from operating
activities in Fiscal '97. The improvement in the Company's operating cash flow
reflects primarily the substantial increase in the Company's operating revenues
and the resulting decline in its operating loss from $3,372,411 in Fiscal '96 to
$262,505 in Fiscal '97. During Fiscal '97 a substantial portion of its operating
cash flow, $1,358,573, was applied to costs associated with its IPO. Because the
offering was completed in January 1998, these cash outlays were not replicated
in Fiscal '98.
During Fiscal '96 the Company's capital expenditures were approximately
$485,000 primarily for leasehold improvements. Because the Company's computers
and telephone switching equipment are already in place, the Company did not
incur substantial capital expenditures during Fiscal '97 in respect of its Tampa
facility. The Company did, however, incur costs of $317,330 in connection with
the Stevens merger.
In January 1998, the Company completed its IPO, from which it derived net
proceeds of approximately $2,993,000 after payments to Stevens in connection
with the Stevens merger. The Company projects that if its revenues continue to
grow as they did during Fiscal '97, it will generate positive cash flow from
operations, enabling it to preserve its working capital or apply it as it
determines appropriate. For example, in March 1997 the Company used $558,000 to
redeem 184,615 shares issued to Stevens in connection with the Stevens Merger
and obtain the release of JSG's Make-Whole Rights.
At September 30, 1998, the Company had intangible assets of approximately
$5,172,854, including goodwill of $4,812,718. The amount carried on the
Company's Financial Statements as Goodwill represents, primarily, the amounts
paid or the value of the shares of Common Stock issued in connection with the
acquisition of the assets of the Predecessor Business and the Stevens Merger, in
excess of the net fair value of the assets acquired. The ability of the Company
to realize the value of such Goodwill is a function of its ability to operate
profitably the business conducted with the assets acquired. The Company
periodically reviews the amount of Goodwill included in its Financial Statements
to determine whether it is appropriate to write-down all or any portion of such
amount. Any decision to write-down substantially the amount of Goodwill on the
Company's Financial Statements would result in a charge against the Company's
earnings.
Risks of Year 2000 Non-Compliance.
The economy in general, and the travel and transportation industry in
particular, may be adversely affected by risks associated with the onset of the
Year 2000. The Company's business, financial condition, and results of
operations could be materially adversely affected if systems that it operates or
systems that are operated by other parties (e.g., SABRE, members of the airline
industry, utilities, telecommunications service providers, data providers,
credit card transaction processors) with which the Company's systems interface,
are not Year 2000 compliant in time. There can be no assurance that the systems
of the Company or the systems of these other parties will continue to properly
function and interface and will otherwise be Year 2000 compliant. Although the
Company is not aware of any threatened claims related to the Year 2000, the
Company may be subject to litigation arising from such claims and, depending on
the outcome, such litigation could have a material adverse affect on the
Company. It is not clear whether the Company's insurance coverage would be
adequate to offset these and other business risks related to the Year 2000.
The key systems integral to the operations of the Company's business are
the SABRE computer reservation system and its telephone switching equipment.
Because the Company books tickets in advance (in certain cases up to ten months
in advance), the Company may experience Year 2000 problems as early as the first
quarter of 1999. Representatives of SABRE have already implemented a project to
ensure that the SABRE system is Year 2000 compliant during the first half of
1999. Representatives of SABRE have already begun to upgrade the systems at the
Company's facilities and this work is substantially complete. The Company,
together with its telephone equipment vendors, have already completed service
intended to make sure its telephone switching equipment is Year 2000 compliant.
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The Company will continue to test its ancillary equipment and interface
with its vendors to determine if they are Year 2000 compliant and, if not, to
address any problems uncovered. The Company has substantially completed testing
its systems and does not see a need for substantial future expenditures with
respect to its systems.
The expected costs and completion dates for the Year 2000 projected are
forward looking statements based on management's best estimates, which were
derived using numerous assumptions of future events, including the continued
availability of resources, third party modification plans and other factors.
Actual results could differ materially from these estimates as a result of
factors such as the availability and cost of trained personnel, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Contingency Plans.
Given the inter dependence of the Company and certain third parties, for
example SABRE, ARC and other members of the airline industry, the Company may be
unable to maintain continuous operations if the systems of one or more of these
parties is not Year 2000 compliant. To the extent possible, the Company will
develop and implement contingency plans designed to allow continued operations
in the event of failure of the Company's or third parties' systems to be Year
2000 Compliant. For example, the Company plans to have dedicated staff available
at crucial dates to remedy unforeseen problems and may install defensive code to
protect its real-time systems from improperly formatted date data supplied by
third parties.
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BUSINESS
Unless otherwise noted or the context otherwise requires, references in
this Prospectus to the Company are to 800 Travel Systems, Inc. and to the
businesses previously conducted by its predecessor, 1-800 Low-Air Fare, Inc. and
The Joseph Stevens Group, Inc.
800 Travel Systems, Inc. (the "Company") is among the 100 largest
independent travel agencies in the United States. The Company provides
low-priced airline tickets for domestic and international travel to its
customers through its easy-to-remember, toll-free numbers "1-800-LOW-AIR-FARE"
(1-800-569-2473), "1-800-FLY-4-LESS" (1-800-359-4537) and "1-888-999-VUELA"
(1-888-999-8835) and through its website on the World Wide Web (at
www.lowairfare.com). The Company operates 365 days a year out of the Company's
reservation centers in Tampa, Florida and San Diego, California. The Company
strives to provide its customers with the lowest-priced airfare available for a
particular travel route at the time of reservation by utilizing the SABRE travel
reservation system.
The Company generates revenues principally from (i) the commissions on air
travel tickets, (ii) override commissions on air travel tickets the Company
books on certain airlines, currently including Continental, United, Northwest,
TWA, America Trans Air, Trans Brazil, Mexicana and Korean airlines, (iii)
segment incentives under its contract with SABRE, (iv) co-op promotions with
other suppliers of travel-related products and services, such as long-distance
telephone companies, car rental companies and hotels, and (v) service fees that
it charges its customers. The Company markets its services primarily by
advertising in Yellow Pages covering those standard metropolitan areas in the
continental United States with populations whose general travel profiles are
attractive to the Company.
The Company's website utilizes the Interactive Reservation Internet System
("IRIS"(TM)). IRIS enables the Company's customers to reserve airline tickets on
line with the real-time assistance of the Company's trained travel agents. IRIS
capitalizes on various interactive technologies to provide a unique and easy
means for the customers to find low airfares on the Internet.
The Initial Public Offering
In January 1998 the Company completed its IPO in which it sold to the
public 1,350,000 shares of its Common Stock and 3,105,000 Warrants, including
405,000 Warrants purchased pursuant to the underwriters over-allotment option.
The gross proceeds of the IPO were approximately $7,138,000.
The Stevens Merger
Simultaneously with the closing of the IPO, the Company completed the
acquisition by merger of Stevens into the Company. Stevens' 50 reservation
agents provided airline tickets for domestic and international travel to
consumers through its "1-800-FLY-4-LESS" (1-800-359-4537) toll-free number.
In consideration for all of the outstanding capital stock of Stevens,
pursuant to the Merger Agreement, the Company issued to JSG (i) 383,333 shares
of Common Stock, (ii) 250,000 warrants identical to those sold in the IPO and
(iii) a promissory note in the amount of approximately $1.6 million which has
subsequently been paid. In addition the Company agreed that if on the second
anniversary of the closing of the IPO the value of the portion of the 383,333
shares issued to JSG then held by JSG together with the value of any
consideration received for shares no longer held by JSG was less then
$2,571,429, the Company would issue to JSG such number of shares of the
Company's Common Stock, based upon its then bid price, to make up the deficiency
(the "Make-Whole Rights").
Subsequent to completion of the Merger, the Company entered into an
agreement with JSG whereby JSG forfeited its Make-Whole Rights and returned
184,615 shares of Common Stock to the Company for $558,000. In
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addition, the Company concurrently agreed to close on the purchase of certain
equipment located in Stevens' office and assume certain equipment leases for an
additional $240,000. As part of this agreement, the Company obtained JSG's
agreement not to sell on the open market any of its shares of the Company's
Common Stock prior to January 1, 1999.
Operating Strategy
The Company's operating strategy is to (i) strive to provide its customers
with the lowest-priced airfare available for a particular travel route at the
time of reservation on those airlines whose tickets the Company sells, (ii)
focus on consumer air travel, which the Company believes is the most profitable
segment of the travel industry, (iii) provide convenient, quick service to its
customers, (iv) maintain low operating costs by utilizing only two operating
facilities, (v) use state-of-the-art technology to maximize operating
efficiencies, (vi) constantly review and update its relationships with major
airlines and SABRE to obtain favorable commission structures, and (vii) provide
incentives to its sales force through a performance-based compensation
structure. The Company believes that this strategy distinguishes it from most
travel agencies in the United States, and that significant internal growth
opportunities exist as (x) customers' demand for low-price air travel remains
unsatisfied through traditional sources and (y) technological developments in
the area of information processing enable increasingly efficient global
distribution of travel information.
Low-Priced Airfare on Major Airlines
The Company strives to provide its customers with the lowest-priced
airfare available for a particular travel route at the time of the reservation
on those airlines whose tickets the Company sells (which includes most major
U.S. and international airlines), using the comprehensive ticket information
available on its customized Turbo SABRE system. The Company's SABRE system
provides the operating reservation agent, within two or three seconds of a
request for a particular route, up to 900 ticket options ranked in order of
price. The reservation agent can then offer ticket options in ascending order of
price until the customer chooses a suitable carrier and departure time. In
contrast, airlines typically quote only their own fares and often quote highest
fares first to avoid selling the lowest-priced tickets. The Company's operating
strategy is based on generating large sales volume rather than on high margins
on individual tickets. The Company's customers generally have one objective --
lowest-priced airfares - and the Company's strategy allows it to satisfy its
customers' demands for low airfares while obtaining higher commissions and
additional incentives for higher volumes. The Company believes that its ability
to provide low-priced airfare on the airlines whose tickets it sells (which is
almost always lower than the lowest fare published by that airline) provides a
distinct competitive advantage in attracting and retaining customers.
Sell Tickets of Almost All Major Airlines
The Company sells tickets for a large number of major U.S. and
international airlines. The Company is authorized to sell tickets on behalf of
all major domestic airlines including Continental, United, Northwest, TWA,
American, Alaska, Delta, Midway, Southwest, and U.S. Airways. Because of Delta
Airlines' pricing and commission policies, the volume of Delta tickets sold by
the Company is not commensurate with Delta's position in the airline industry.
The Company constantly monitors and periodically revisits its existing
relationships with individual airlines, and attempts to establish new
relationships with other airlines, as part of its general strategy of keeping
abreast of market conditions and industry trends.
Focus on Consumer Air Travel
The Company believes that consumer air travel is the most profitable
segment of the travel industry, and that it can compete effectively in this
segment because of its high technology, telemarketing approach to the consumer
air travel business and the resulting efficiencies. The Company considers the
consumer market to include any person who pays for his or her own travel
expense, regardless of the purpose of the travel, as opposed to business
travelers whose employers pay for their travel expenses. However, the Company
does sell to certain customers who purchase air travel for business purposes
which is paid for by their employers.
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The Company believes that its reservation agents require substantially
less time to book reservations because (i) all the information they need is
immediately available and the necessary steps can be conducted on their computer
screens, and (ii) the Company's services are focused on air travel, which does
not require research or follow-up work and can be completed in one phone call,
in contrast to the more time-consuming arrangements for hotel and car-rental
reservations. Consequently, the Company believes that the hourly dollar value of
bookings confirmed by its reservation agents are above the industry average. The
Company strives to increase its reservation agents' booking rates by rewarding
reservation agents with commissions for weekly sales in excess of various
levels.
Convenient Service
The Company believes that a significant factor in a customer's decision to
purchase air travel is the convenience of service. The Company believes that the
convenience of its service compares favorably to that of its competitors because
(i) its reservation agents provide immediate and comprehensive information, and
(ii) if purchased early enough, tickets are delivered the next day. The
Company's telemarketing service, coupled with its delivery of tickets by
next-day courier, eliminates the need for customers to visit a travel agency.
The Company offers one source for the lowest-priced airfare available, thus
eliminating the need for the customer to call several air carriers or travel
agents. In addition, the easy-to-remember "1-800-LOW-AIR-FARE" and
"1-800-FLY-4-LESS" names and associated numbers, "1-800-569-2473" and
"1-800-359-4537" facilitate repeat calls from customers who may call on
subsequent occasions from other locations where the area code may be different
or where they may not have access to a Yellow Pages directory. See "- Growth
Strategy -- Internal Growth."
Low Operating Costs
The Company seeks to have the lowest margin of operating costs in the
travel agency industry. The Company minimizes its operating costs by processing
all of its customer reservations and purchases through two centralized
facilities, rather than duplicating its financial and management resources at a
number of locations. Since its customers do not physically visit the Company's
reservation centers in Tampa or San Diego, the Company did not construct the
more expensive locations that traditional travel agents do. Similarly, the
Company does not need to incur the expense of furnishing its reservation
facilities to accommodate customers, but rather maintains functional reservation
centers geared toward maximizing the number of reservation agents that can
operate at any one time. The Company also minimizes its operating costs by
basing its marketing strategy on advertising through Yellow Pages directories in
those SMA's with populations whose general travel profiles are attractive to the
Company, which the Company believes is the most cost-effective method of
advertising available. See "-- Marketing." The Company also minimizes its costs
by contracting for its employees through a professional employee leasing
organization. All of the Company's workers (other than management) are retained
on an hourly basis through such services. The Company is responsible for
training and supervising the job performance of worksite employees. The Company
has determined that it is more economical to contract with employee providers
than to employ such hourly workers itself.
State-of-the-Art Technology
The Company uses state-of-the-art computer technology available to access
all the major U.S. and international air carriers' routes and fares. Each of the
Company's reservation agents operates a SABRE computer terminal and headset. The
Company has significantly customized the Turbo SABRE system specifically for the
Company's specific purposes and uses. As a result, the Company's reservation
agents have fewer procedures to master and therefore are trained and become
proficient on the Company's reservation system more quickly, thus incurring
lower training expenses.
Review and Update Relationships with Airlines
The Company's management constantly reviews and updates its relationship
with the major airlines and SABRE in order to obtain a favorable commission
structure. The Company believes that as a result of such efforts,
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the Company has been able to obtain commission structures that are more
favorable than those obtained by travel agents generally. See "-- Operations;
Standard Commissions" and "--; Override Commissions."
Employee Incentives
The Company's reservation agents are organized into teams of approximately
20 reservation agents under one supervisor. The reservation agents earn a base
salary and commission, each of which is dependent upon the volume of sales
generated by an agent within a moving, historic measuring period. The team
supervisors, in turn, are paid based on the average sales of their team. The
Company believes that this performance-based compensation structure enables it
to retain and constantly motivate the best-performing reservation agents.
Growth Strategy
The Company has a three-point growth strategy:
o Internal Growth.
The Company's reservation centers are currently operating at less than
maximum capacity because the Company can add additional reservation agents
while maintaining the quality of its customer service and operating
efficiencies. Consequently, the Company believes it can grow substantially
over the next twenty-four months as it adds additional personnel. The
Company's Tampa and the San Diego facilities can accommodate a combined
total of 1,560 reservation agents working in staggered shifts, or 520
working at any one time. The Company believes that it can achieve
substantial growth by increasing the number of its reservation agents and
consequently increasing its capacity to process the existing demand by
potential customers who call its toll-free numbers daily.
o Marketing.
The Company has already implemented a marketing strategy of focusing on
advertising in Yellow Pages directories in the largest standard
metropolitan areas ("SMA's"). The Company has advertisements of its
toll-free numbers listed in directories reaching a majority of the U.S.
population. The Company intends to continue its current strategy of
advertising in Yellow Pages, but intends to focus on directories in those
SMA's with populations whose general travel profiles are attractive to the
Company. Once the Company's ability to satisfy existing customer demand is
addressed, the Company anticipates increasing consumer awareness of its
easy-to-use, low-priced airfare approach to travel reservations through
select print and radio advertising campaigns. See "-- Marketing."
o Strategic Acquisitions.
The Company believes that opportunities exist for it to expand its market
share in the travel market through the acquisition of other travel
companies with valuable customer lists and intellectual property, and in
markets outside the travel arena by acquiring other call center
operations. The Company expects that such acquisitions would involve the
purchase of the relevant names, service marks and telephone numbers, as
well as any logos and other identifying features associated with them. The
Stevens Merger is an example of one such strategic acquisition. See "- The
Stevens Merger" and "-- Competition."
Services
The primary service the Company offers to its customers who call its
toll-free numbers or visit its website is a reservation service for domestic and
international flights. The Company strives to provide its customers with the
lowest-priced airfare available for a particular travel route at the time of the
reservation on those airlines whose tickets the Company sells. The Company's
Turbo SABRE system is customized to provide to the reservation agent
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within two or three seconds up to 900 ticket options, ranked in order of price.
Once tickets are purchased, they are printed at the Company's Tampa reservation
center and delivered by overnight courier to customers.
The Company's reservation centers operate 16 hours a day, 365 days a year.
Each reservation agent operates a computer terminal that accesses the SABRE
travel reservation and information system. The Company adjusts the number of
reservation agents serving customers on an hourly basis. At the peak hours of
11:30 a.m. through 4:30 p.m., Eastern time, the Company has the most reservation
agents working. It is during the peak hours of 11:30 a.m. through 4:30 p.m. that
the Company is not able to answer all of the calls it receives.
Personalized Service
The Company's customized Turbo SABRE system enables it to retain in its
files individual travel preferences for its customers, such as seating, special
meals and frequent flier numbers, which are automatically displayed when a
customer's identifying information is input. This tailored information program
personalizes the reservation process as well as reduces the time required to
complete each reservation.
Corporate Customers
While the Company's current customers are predominantly individuals and
the Company's operating strategy targets the consumer market, the Company offers
certain services targeted at corporate customers. These services, however, are
designed to be offered during the processing of a single telephone call, as with
calls from individual customers. The Company's Turbo SABRE system enables it to
program "pop-up-windows" specifying, for each corporate customer, its travel
policy, preferred air carrier vendors, specially negotiated rates, handling
instructions and emergency procedures. The "pop-up-window" for each corporate
customer appears on the terminal screen and guides the reservation agent during
the reservation process.
Repeat Customers
The Company believes that repeat customers are key to its ability to grow.
The Company's "1-800-LOW-AIR-FARE" (1-800-569-2473) number has a rate of repeat
customers (meaning customers who purchase at least one more ticket within a
year) of approximately 40%, and the Company's "1-800-FLY-4-LESS"
(1-800-359-4537) number has a repeat customer rate of approximately 50%. The
Company believes that while customers are initially attracted by the low-priced
airfares made available by the Company, they become repeat customers because of
their satisfaction not only with the prices but also the convenience of being
able to book their reservations on one relatively brief toll-free telephone
call. The Company believes that it can generate internal growth by obtaining an
even larger portion of the travel business of its existing customers and
consequently increasing its repeat customer business.
Operations
The Company's operations generate revenues principally from (i) the
commissions on air travel tickets, (ii) override commissions on air travel
tickets the Company books on Continental, United, Northwest, TWA, America Trans
Air, Trans Brazil, Mexicana and Korean airlines, (iii) segment incentives under
the SABRE contract, (iv) co-op promotions with other suppliers of travel-related
products and services, such as long-distance telephone companies, car rental
companies and hotels, and (v) service fees that it charges per ticket. The
Company also earns a shipping and handling fee (net of expenses) for delivering
tickets to its customers.
Standard Commissions
In accordance with industry practice, the Company receives a commission of
approximately 8% of the price of tickets that it sells. Most major U.S. airlines
impose caps on such commissions of $25 dollars for one-way domestic tickets, $50
dollars for round-trip domestic tickets, $50 for one-way international tickets
and $100 for round-trip international tickets. From time to time, most of the
major U.S. air carriers informally waive the
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commission cap for the Company and other large travel agencies. Such waivers
generally apply to sales of tickets for travel on selected routes and are
granted to provide an incentive to increase sales for those routes. In addition,
the Company obtains higher commissions through the payment of override
commissions in excess of the standard 8% commission pursuant to agreements with
most of the major U.S. airlines. Due to such override commissions and waivers of
the commission cap and the Company's strategy of selling tickets on airlines
with which it has override commission arrangements, the Company often receives a
commission above the commission cap. See "-- Override Commissions."
Override Commissions
The Company has entered into agreements with Continental, United,
Northwest, the TWA Discounter, America Trans Air, Trans Brazil, Mexicana and
Korean airlines for the payment of override commissions above the standard
commissions the Company receives. Under such agreements, additional commissions
are generally awarded if the volume of ticket sales surpasses certain agreed
upon thresholds based upon ticket sales as reported by the Airlines Reporting
Corporation (the "ARC"), a corporation owned and established by the airlines to
provide reporting, settlement and related services in connection with the sale
of transportation by travel agencies in the U.S. Override commissions are
generally paid quarterly and, depending upon the specific agreement with the air
carrier, may be paid directly by check from the air carrier to the Company, by
means of net payments by the Company to ARC with respect to amounts owed to the
air carrier, or through ARC by means of a credit memo in favor of the Company.
Segment Incentives under SABRE Contract
The Company earns additional revenue from SABRE for each segment of air
travel that it sells. A segment of air travel is non-stop air travel between two
destinations. For each segment of air travel it sells, the Company receives $.50
from SABRE.
Service Fee; Shipping and Handling
The Company also charges the customer a service fee per airline ticket
sold. These fees are already calculated into the cost of the ticket when quoted
to the caller. Because of the Company's override commission structure, the price
of the ticket (even inclusive of the service charge) is still generally lower
than the lowest-priced published fare quoted by the airlines. The Company also
earns a shipping and handling fee (net of expenses) for delivering tickets to
its customers.
Agreements with Consolidators
The Company also sells air travel tickets offered by consolidators.
Consolidators purchase large number of tickets directly from various air
carriers for resale to the public. When the Company sells such tickets, the
reservation is generally not booked through SABRE or settled through ARC, and
the Company is paid its commission directly from the consolidator. The Company
has entered into an agreement with a consolidator that sells tickets on TWA at a
discount (the "TWA Discounter") pursuant to which it (i) solicits customers to
purchase tickets for air travel on TWA at discounted fares from the TWA
Discounter and (ii) solicits businesses to enter into agreements for the
purchase of air travel on TWA from the TWA Discounter (the "TWA Agreement"). In
1998, the TWA Agreement was extended to January 31, 2003, and is terminable
before such date on 15 days' prior written notice by either party. The Company
receives a 15% commission on each air travel ticket solicited by the Company or
pursuant to an agreement solicited by the Company. Air travel tickets sold by
the Company pursuant to the TWA Agreement, unlike sales from most other
consolidators, are booked through SABRE; however, the Company receives its
commission directly from the TWA Discounter monthly. Although the TWA Discounter
estimates that it will be able to continue to sell tickets on TWA through 2003,
the expiration date of the TWA Agreement, there can be no assurance that the TWA
Discounter will be able to do so. Also, there can be no assurance that the
Company's TWA Agreement will be extended beyond its scheduled expiration date.
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World Wide Web Home Page
The Company's website utilizes the Interactive Reservation Internet System
("IRIS"). IRIS enables the Company's customers to reserve airline tickets on
line with the real-time assistance of the Company's trained travel agents. IRIS
capitalizes on various interactive technologies to provide a unique and easy
means for the customers to find low airfares on the Internet.
Refunds, Chargebacks and the SABRE Credit Card Authorization Guarantee
With the exception of sales to "walk-in" customers at the Tampa facility
(which account for less than 1% of sales), all of the Company's sales are paid
for by credit card. Once a sale is closed as described above under
"--Reservation and Sale Sequence," it is subject only to refund or chargeback.
Because the majority of the most inexpensive air travel tickets are
non-refundable, only approximately 5% of the tickets the Company sells are
refundable, and the refunds processed by the Company average less than .01% of
sales. The Company recoups some of its costs associated with processing such
refunds by imposing a $50 charge on each refund.
Chargebacks similarly account for a small part of the Company's sales. A
chargeback results from a customer who refuses to pay for a charge on his or her
credit card statement. In such an instance, the Company generally must either
return its commission to the relevant credit card issuer or seek recourse
directly against the customer. Approximately 1% of the tickets sold by the
Company result in chargebacks.
None of the Company's credit card sales are subject to refusal by the
relevant credit card issuer to remit payment to the Company. Since
authorizations of credit card charges are effected electronically through the
SABRE system, SABRE offers its subscribers a guarantee of such authorizations
for a fee of $.50 per authorization. The Company pays this fee for all
authorizations, and in return, SABRE pays the Company the amount of any
commission or other payment refused by the relevant credit card issuer.
Airlines Reporting Corporation
All of the Company's sales of air travel tickets that are offered directly
by air carriers are settled through the Airlines Reporting Corporation ("ARC").
For sales settled through ARC, all commissions and other amounts owed to the
Company are also settled through ARC according to ARC's procedures, except that
override commissions may also be paid directly by check or wire transfer from
the relevant air carrier to the Company. See "-- Override Commissions." The only
sales of air travel that are not generally settled through ARC are air travel
tickets offered by consolidators; however, some sales of air travel tickets by
the Company that are offered by consolidators are settled through ARC. See "--
Agreements with Consolidators." For sales of air travel offered by
consolidators, all commissions and other amounts owed to the Company are
generally paid directly by check or wire transfer from the relevant consolidator
to the Company.
As an ARC-affiliated travel agency, the Company is subject to all rules
and procedures imposed by ARC. ARC screens applications of new travel agencies,
initiates collection procedures against travel agencies in default of payment,
provides ticket stock to the travel agencies and facilitates payment between
travel agencies and airlines. Tickets purchased from the Company are reported
through ARC in accordance with the Company's Standard Ticket and Area Settlement
Plan ("ASP"). The ASP encompasses distribution and control of ARC air travel
tickets and other ARC traffic documents and processing and settlement services
in connection with the sale or issuance of such documents by the Company. ARC
administers the Company's ASP on behalf of ARC carriers.
Toll-Free Telephone Numbers
The Company has contractual rights customary to the industry to use each
of the three toll-free numbers through which customers call its reservation
centers. In addition, if the Company for any reason fails to pay its monthly fee
for such number, the Company believes that it will have a cure period to pay all
amounts outstanding. Should the Company not make such payments and consequently
lose the right to use such number, the Company
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<PAGE>
expects that a "cooling-off" period of up to between 4 to 8 months will be
imposed, during which no other party may use such number.
Marketing
The Company markets its services primarily to individual customers who pay
for their own tickets. The Company focuses its marketing efforts on placing
advertisements listing its three easy-to-remember names and toll-free telephone
numbers in Yellow Pages directories in those SMA's with populations whose
general travel profiles are attractive to the Company.
Given the broad distribution of Yellow Pages directories in metropolitan
areas and other large markets, the Company's strategy is to place advertisements
in directories of the largest SMA's, thereby reaching the greatest number of
consumers with each advertisement. The Company has advertisements of its
toll-free numbers listed in directories reaching a majority of the U.S.
population. The Company intends to continue its current strategy of advertising
in Yellow Pages, but intends to focus on directories in those SMA's with
populations whose general travel profiles are attractive to the Company. Once
the Company's ability to satisfy existing customer demand is addressed, the
Company anticipates increasing consumer awareness of its easy-to-use, low-priced
airfare approach to travel reservations through select print and radio
advertising campaigns.
SABRE Technology
Global distribution systems are the principal means of air travel
distribution in the United States and a growing means of air travel distribution
internationally. The Company has chosen the SABRE system, which it believes is
the best system available. A typical SABRE transaction -- consisting of an
information request by a subscriber, a search in SABRE and a response to the
subscriber -- averages less than two seconds in elapsed time. SABRE's "one-stop
shopping" capabilities permit the Company to locate, price, compare and purchase
the travel and travel-related products and services that best satisfy the
traveler's requirements.
General
SABRE is the largest global distribution system for electronic travel in
the United States. SABRE was first developed in the 1960's. SABRE evolved from
American Airlines' internal reservation system into a global distribution system
when SABRE's content was expanded to include additional airlines and other
travel providers. Other global distribution systems include Amadeus/System One
(owned by Air France, Continental Airlines, Iberia and Lufthansa); Covia, (owned
by United Airlines, British Airways, Swissair, KLM Royal Dutch and USAir, among
others) and Worldspan (owned by Delta, Northwest and TWA). Each offers similar
products and services.
The SABRE system is able to perform high-volume, high-reliability,
real-time transactions processing 24 hours a day, 365 days a year, enabling the
creation of an efficient electronic marketplace for the sale and purchase of
travel. The SABRE system maintains approximately 45 million airfares (updated
throughout the day) and processes an average of 93 million requests for
information per day. Such frequent updates of airfares are essential for the
Company to be able to strive to provide its customers with the lowest-priced
airfares. Through SABRE, reservations may be booked on all major U.S. and
international airlines, but generally not on charter companies or certain small
airlines or on air travel offered for resale by consolidators. In addition to
providing information to subscribers about airlines and other travel providers
and their products and services, SABRE also allows travel agency subscribers to
print airline tickets, boarding passes and itineraries and purchase travel
insurance or book theater tickets or limousines. Additionally, SABRE provides
subscribers with travel information on matters such as currency, health and visa
requirements, weather and sightseeing.
Turbo SABRE
Because travel agencies have differing needs, based on, among other
things, volume and location, the SABRE interface has been modified to meet the
specific needs of different categories of travel agents. Travel agents
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<PAGE>
can choose SABRE interfaces that range from simple text-based systems to
feature-laden graphical interfaces. The Company has taken advantage of these
options by choosing the Turbo SABRE system, an advanced point-of-sale interface
that allows for screen customization and reservations/sales process structuring
and eliminates SABRE-specific commands, thereby reducing keystrokes and training
requirements for high-volume travel companies that need high levels of
functionality. Turbo SABRE also provides data other than SABRE, such as back
office hosts and local area network (LAN) databases.
The Company has added a number of programs written and developed
exclusively for the Company to its Turbo SABRE system. They include programs
that generate "pop-up" windows to supply frequently requested or used
information, as well as programs to alert reservation agents, supervisors and
customer service agents using the system to errors frequently made by system
operators. The Company believes that these customized features enhance the speed
and efficiency of its operations.
SABRE Agreements
In April 1996, the Company renewed the agreement pursuant to which it
subscribes to the SABRE system at its Tampa headquarters for a five-year term.
In November 1996, the Company also executed a five-year subscriber agreement
pursuant to which it subscribes to the SABRE system at its San Diego reservation
center. Under these agreements, SABRE provides the Company with the hardware,
software, technical support and other services the Company needs to access SABRE
in return for leasing fees. These fees are reduced by the "segment incentives"
that the Company is credited with for each flight segment it books (at both its
Tampa and San Diego facilities) through the SABRE system. To the extent that the
segment incentives earned by the Company exceed the fees payable by it to
American during each quarter, the Company receives such excess in cash.
Intellectual Property
The Company markets its services in the United States under the names,
"1-800-LOW-AIR-FARE," "1-800-FLY-4-LESS" and "1-888-999-VUELA."
"1-800-FLY-4-LESS," together with its logo, is a federally registered service
mark in the name of the Company. The Company has filed an application to
register the "1-800-LOW-AIR-FARE" name and logo as a federal service mark with
the U.S. Patent and Trademark Office. It has also filed an application to
register the Spanish language name, "1-888-999-VUELA," and related logo as a
federal service mark with the U.S. Department of Commerce. There can be no
assurance that such service marks will issue or of the effect such failure might
have on the Company.
On January 12, 1998, the Company received a letter from counsel for Travel
800, LLC, a wholly-owned subsidiary or Travel Services International, Inc.
("Travel"), (i) stating that the Company's use and advertisement of its "1-800
LOW-AIRFARE" mark and corresponding number is causing confusion among consumers
and regulatory problems for Travel, (ii) claiming that Travel commenced use and
promotion of its "1-800 LOW-FARE" mark and number prior to the Company's use and
advertisement of its "1-800 LOW-AIRFARE" mark and number, and (iii) requesting
that the Company cease and desist from continued use and advertisement of its
"1-800 LOW-AIRFARE" mark and number. On or about April 27, 1998, Travel filed
with the Trademark Trial and Appeal Board of the United States Patent and
Trademark Office (the "Board") a Notice of Opposition (the "Opposition")
opposing the Company's application for registration of the "1-800 LOW-AIRFARE"
mark.
The Company has investigated the facts underlying Travel's letter and
Opposition and, through its counsel, is mounting a vigorous defense of its
rights to use and market the "1-800 LOW-AIRFARE" name and number. In response to
Travel's letter and Opposition, the Company filed an answer in which it has
sought to have the Board overrule the Opposition and permit the Company to
register the "1-800 LOW-AIRFARE" mark. The parties are currently pursuing
discovery concerning the contentions advanced in this proceeding. If the Company
decides to abandon its "1-800 LOW-AIRFARE" mark and number, it will instead
promote its "1-800 FLY-4-LESS" mark and number.
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<PAGE>
The Company considers its service marks and the related telephone numbers
to be valuable assets. There can be no assurance, however, that if others
develop trademarks or telephone numbers similar to those of the Company or
challenge the Company's use of its service marks, that the Company would be able
to successfully defend its marks.
Competition
The travel agency industry is intensely competitive. The Company competes
with a variety of other providers of travel and travel-related products and
services. Its principal competitors are (i) other telemarketing travel
companies, (ii) traditional travel agencies, (iii) air carrier vendors, and (iv)
various online services available on the Internet. The Company's competitors
generally have access to the same technology that the Company uses and also to
other global distribution systems of electronic travel. See "-- SABRE
Technology." Although distribution through travel agents continues to be the
primary method of travel distribution, new channels of distribution are
developing directly to businesses and consumers through computer on-line
services, the Internet and private networks. In addition, individual consumers
have access to other versions of SABRE technology and also to other global
distribution systems of electronic travel permitting consumer-direct travel
distribution via personal computer, cable television and other media. The
Company faces competition in these channels not only from its principal
competitors but also from possible new entrants in the sale of travel products
and services and from travel providers that distribute their products and
services directly. For example, in 1997, American Express Co. and Microsoft
Corp. released an on-line travel booking service called Microsoft Expedia, and
Preview Travel is a leading provider of on-line travel reservations. These
companies compete with directly with the Company. In addition, the Internet
permits consumers to have direct access to travel providers, thereby by-passing
both travel agents and global distribution systems such as SABRE. Further, some
of the Company's competitors have significantly greater financial or marketing
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements
than the Company.
During periods of recession in the travel industry, the Company's
competitive advantages with respect to quick, convenient processing of
reservations and purchases of lowest-priced airfare may be of reduced
importance. The Company's position in a recession may be more difficult than
some of its competitors, since the Company targets the consumer market which may
be the most adversely affected.
The travel agency industry has also been experiencing consolidation. The
Company may experience increased competition in the future if this trend
continues and its competitors combine to form larger companies. The Company may
not be able to remain competitive with larger travel agencies in the future or
maintain its size and industry position relative to its competitors.
The Company believes that its ability to compete depends upon a number of
factors, including price, reliability, name and toll-free number recognition and
speed of price quotations and reservations. There can be no assurance that the
Company will be able to continue to compete successfully with respect to these
or other factors.
Employees
At July 15, 1998 the Company had approximately 245 full-time employees.
All of the Company's reservation agents, supervisors and other worksite
employees are provided through a professional employee leasing organization. The
leasing organization is responsible for its employees' benefits. The Company
provides all necessary training. The services agreement between the Company and
the leasing organization may be terminated on 30 days' prior written notice.
Properties
The Company's corporate headquarters are located at its 33,000 square foot
reservation center in Tampa, Florida. The Company operates a second 9,200 square
foot reservation center in San Diego, California acquired
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<PAGE>
as part of the Stevens Merger. See "The Stevens Merger." The Company leases
these properties from unaffiliated third parties and believes that its existing
facilities are adequate for its current needs. The Company currently pays
approximately $14,300 per month for its Tampa headquarters and approximately
$12,000 per month for its San Diego reservation center.
Litigation
The Company may be involved from time to time in routine litigation
incidental to its business. However, the Company believes that it is not a party
to any material pending litigation which is likely to have a significant
negative impact on the business, income, assets or operation of the Company. See
also "Risk Factors -- Risks Relating to Intellectual Property" and "Business --
Intellectual Property."
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company, and certain
information concerning them, are as follows:
Name Age Position
- -------------------- --- ---------------------------------------------
Mark D. Mastrini.... 35 President, Chief Executive Officer, Chief
Operating Officer and Director
Jerrold B. Sendrow.. 54 Chief Financial Officer, Vice
President -- Finance, Treasurer and Secretary
Michael Gaggi....... 36 Director
Pasquale Guadagno... 41 Director
George A. Warde..... 76 Chairman of the Board
Carl A. Bellini..... 66 Director
L. Douglas Bailey... 57 Director
Biagio Bellizzi..... 59 Vice President -- Marketing
Frank Zhao.......... 39 Vice President -- Controller
Mr. Mastrini has served as the Company's Chief Operating Officer since
January 1996, President since January 1997 and Chief Executive Officer since
April 1998. Prior to joining the Company, from October 1992 until October 1996,
Mr. Mastrini was the founder and owner of One on One Consulting, a consulting
firm in Pueblo, Colorado. From September 1992 until October 1994, Mr. Mastrini
was owner of X-Press Printing, a printing business in Pueblo, Colorado. From
October 1993 until December 1996, he was the owner and editor of Pueblo West
Eagle Monthly Magazine. From May 1991 until June 1992, Mr. Mastrini was Vice
President of Sales and Marketing at the Braniff Airlines in Dallas, Texas, an
airline which subsequently filed for protection under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court in the Eastern District of New York in
July 1992.
Mr. Sendrow has served as the Company's Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary since the incorporation of the
Company in November 1995 and served as a director from inception until July
1997. From June 1994 through November 1995, Mr. Sendrow was employed by 1-800
Low-Air Fare, Inc., the Company's predecessor, in the same capacities. From
March 1993 through June 1994, Mr. Sendrow was employed by MSW Columbia Travel
Group, Inc. as vice president-finance. From December 1984 through March 1993,
Mr. Sendrow was employed by Pisa Brothers, Inc. as controller. Mr. Sendrow has
over 23 years experience in the travel industry.
Mr. Gaggi has served as a director of the Company since its incorporation
as 800 Travel Systems, Inc. in November 1995, and was its Chairman until April
1998. Since January 1998, Mr. Gaggi has been providing services through 8607
Colonial Group, Inc., a financial consulting firm which he controls to
privately- and publicly-held companies. Mr. Gaggi served as a senior vice
president at Joseph Stevens & Company, Inc., an investment banking firm in New
York City from 1994 until December 1997, when he resigned from such position.
From 1993 until 1994, Mr. Gaggi was employed as a vice president by Barington
Capital. Mr. Gaggi has been a principal director of Upscale Eyeglass Boutiques
Myoptics since 1990. Joseph Stevens & Company, Inc. is not affiliated with or
related to The Joseph Stevens Group, Inc., the travel agency acquired by the
Company in the Steven Merger, or its sole stockholder, The Joseph Stevens Group,
LLC or any of its equity members.
Mr. Guadagno has served as a director of the Company since its
incorporation as 800 Travel Systems, Inc. in November 1995. Since October 1998
Mr. Guadagno has been Vice President-Investments at Robb Peck McCooey, an
investment bank. Mr. Guadagno did not render substantial service to any firm
from December 1997 through September 1998. Mr. Guadagno had been a Senior
Vice-President at M.S. Farrell, Inc., an investment banking firm, from December
1996 to November 1997. From 1993 until November 1996, Mr. Guadagno was Senior
Vice President of Euro-Atlantic Securities, Inc., an investment banking firm in
Boca Raton, Florida. From 1990 through 1993, Mr. Guadagno was employed as a
Senior Vice President by Smith-Barney in New York City.
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<PAGE>
George A. Warde has served as a director of the Company since October
1997, and as its Chairman since April 1998. Since 1992, he has served as a
consultant to various businesses including Oaklawn Partners Ltd. (a consulting
firm), Sener (a financial advisory firm in Madrid, Spain), Aircraft Braking
Systems, Inc. (a manufacturer of aircraft braking systems), Ayres Corp. (an
aircraft manufacturer), Airline Capital Holding Corp. (an investment holding
company that invests in airline projects), America Trans Africa Airlines (an
airline) and Rich Airways (an airline on whose board he is also serving as a
director). From October 1994 until January 1995, he served as temporary
president and chief executive officer of Private Jet Expeditions, an airline.
From August 1995 until February 1996, he served as president and chief executive
officer of Presidential Air, an airline. From 1988 until 1992, Mr. Warde was
managing director of Foshing Airlines, an airline which services continental
Asia. From 1983 until 1988, he served as vice chairman of Continental Airlines
and as president of its Pacific Division. From 1981 until 1983, he served as
president and chief executive officer of Continental Airlines, and as a member
of its board of directors. From 1974 until 1981, Mr. Warde served as senior vice
president and a board member of Airbus Industrie, an airplane manufacturer in
Toulouse, France. From 1960 until 1974, he was president, chief executive
officer and director of American Airlines Inc. From 1950 until 1960, Mr. Warde
was a superintendent of maintenance for Pan American World Airways. From 1940
until 1950, he was director of overseas maintenance for American Airlines.
Carl A. Bellini has served as a director of the Company since November
1997. Mr. Bellini is a director (since August 1994), chief operating officer
(since October 1993), and executive vice president of marketing and stores
(since August 1992) of Revco D.S., Inc., the nation's second largest drugstore
chain which was sold to the CVS chain in May 1997. From 1989 until 1992, he was
president and chief executive officer of Erol's, Inc., a video and electronics
chain. Prior thereto, from 1987 until 1989, Mr. Bellini was executive vice
president of stores for Revco. From 1980 until 1987, Mr. Bellini was associated
in various capacities with The Sherwin-Williams Company, including as president
and manager of the stores division and as group vice president in charge of the
retail paint and Gray Drug Fair drug store divisions. From 1975 until 1980, Mr.
Bellini served as senior vice president of operations, distribution and real
estate of Family Dollar Store. From 1955 until 1975, Mr. Bellini was associated
in a variety of operations and management positions with W.T. Grant, a retail
variety chain. Mr. Bellini is on the board of directors of Sel-Lab Marketing, a
cosmetics firm. He is also advisor to the boards of Manco, a privately-owned
adhesives and tape company, Sensormatic, a New York Stock Exchange-listed
manufacturer of security devices, and Farmacia Ahumada, a Chilean drugstore
chain, and a consultant to Ratcher Press, a publisher of Chain Drug Review and
Mass Marketing Review, which are industry publications.
L. Douglas Bailey has served as a director of the Company since November
1997. In 1995, he founded Bailey & Associates, Inc., an international retail
consulting firm providing information and assistance to consumer goods companies
and retail stores, distribution centers and business properties. From 1993 until
1995, Mr. Bailey was president of Home Shopping Club, Inc., the flagship company
of the Home Shopping Network. From 1972 until 1992, he was employed in various
capacities with the Eckerd Drug Company, most recently as senior vice president
of procurement. In 1980, Mr. Bailey and his wife founded Regent Properties, a
company specializing in the development of commercial warehouse and office
space. From 1969 until 1970, Mr. Bailey was the Florida general merchandise
manager of Cunningham Drugs, a drugstore chain. From 1964 until 1968, Mr. Bailey
was softlines merchandise manager of Sears, Roebuck & Co. Mr. Bailey is on the
board of directors of Sel-Lab Marketing, a cosmetics firm, and Goodwill
Industries-Suncoast, Inc., a private foundation. He also serves on the boards of
the Pinellas (Florida) Industrial Council and the Florida Lung Association, and
serves on the board of trustees or advisory boards of Ruth Eckerd Hall (a
performing arts center), The Goodwill-Suncoast Foundation, Inc. (a private
foundation), the University of Florida Retail School and the University of
Florida's Stavros Economic Center.
Mr. Bellizzi has served as the Company's Vice President-Operations since
its incorporation as 800 Travel Systems, Inc. in November 1995. From June 1995
through November 1995, Mr. Bellizzi was employed by 1-800 Low-Air Fare, Inc.,
the Company's predecessor, as vice president-operations. From 1991 through June
1995, Mr. Bellizzi was employed by Thomas Cook Travel, Inc. as Director-Leisure
Marketing from 1993 until 1995 and as Director -- Retail Offices from 1991 to
1993. Mr. Bellizzi has over 30 years experience in the travel industry.
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<PAGE>
Frank Zhao was appointed Vice President -- Controller of the Company in
October 1997. Prior to joining the Company, Mr. Zhao a senior accountant at Toho
Shipping (USA), a shipping company. From 1993 until 1995, Mr. Zhao was an
associate auditor at Coopers and Lybrand in Washington, D.C. From 1986 until
1990, Mr. Zhao was finance manager of PDL Ltd., a trading and investment company
in Hong Kong. From 1983 until 1986 he was a financial consultant at Beijing
International Trust and Investment Corporation, an investment company in
Beijing, China. Mr. Zhao is a certified public accountant.
Director Compensation
As compensation for services, all outside directors are paid $2,000 per
month and are reimbursed for all expenses incurred in participating in Board
Meetings. In addition, in April 1998, the Company and Mr. Gaggi entered into a
Consulting Agreement providing for a fee of $5,000 per month. As an additional
incentive for his continued services, in December 1998, Mr. Gaggi was issued
options to purchase 25,000 shares of Common Stock exercisable at a price of
$5.50 per share.
The Company issued options to purchase 100,000 shares, to each of Messrs.
Warde, Bellini and Bailey in recognition of their agreements to serve as a
Director of the Company. Of the options issued to each of Messrs. Warde, Bellini
and Bailey, 50,000 are exercisable at $3.00 per share and 50,000 are exercisable
at $3.10 per share.
During 1996 and 1997 the Company paid personal expenses of certain
directors aggregating approximately $250,000. In May 1998, Mr. Gaggi returned to
the Company 24,765 shares of Common Stock in satisfaction of his outstanding
obligation to the Company of $101,041.20, and Mr. Balsamo returned to the
Company 24,766 shares of Common Stock in satisfaction of his outstanding
obligation to the Company $146,614.72.
For services rendered, in March 1996, the Company issued options to
purchase 100,000 shares of Common Stock, exercisable at $1.00 per share, to each
of Messrs. Gaggi and Guadagno. In addition, certain directors have received
commissions in connection with private placement of the Company's securities.
See "Certain Transactions."
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<PAGE>
Executive Compensation
The following table sets forth the compensation paid or payable in respect
of the years ended December 31, 1996 and December 31, 1997 to the Company's
executive officers who earned over $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------- ------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying All Other
Principal Position Salary Bonus Compensation Awards ($)(1) Options/SARS Compensation
- --------------------------- ------------- ------------ --------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Mastrini..........1996 $66,459 $0 $0 $120,000(1) $0 $0
President and Chief
Operating Officer
Mark Mastrini..........1997 $125,205 $0 $8,333 $0 $0 $0
President and Chief
Operating Officer
</TABLE>
- ----------
(1) Represents 100,000 shares of Common Stock, valued at $1.20 per share.
Employment Agreements
The Company has entered into employment agreements with each of Messrs.
Mastrini, Sendrow and Bellizzi. Each of the employment agreements of Mr.
Mastrini and Mr. Sendrow terminates on May 31, 2001. Mr. Bellizzi's employment
agreement terminates on September 30, 2000. Pursuant to their respective
agreements each of Messrs. Mastrini, Sendrow and Bellizzi has agreed to devote
his entire working time and attention to the business of the Company. In
addition, each of these individuals has agreed not to compete with the business
of the Company for a period of ninety days following the termination of his
employment with the Company.
Pursuant to his agreement, as amended, Mr. Mastrini is entitled to receive
a base salary initially at the rate of $200,000 per year. The base salary is to
increase by 5% plus the annual increase in the consumer price index on each of
June 1, 1999 and 2000. In addition to his base salary, Mr. Mastrini is to
receive medical and disability insurance comparable to that provided to the
Company's executive employees and a car allowance of $500 per month. As
additional compensation for his services, the Company agreed to issue an
aggregate of 150,000 shares of Common Stock to Mr. Mastrini, including 100,000
shares issued upon execution of his employment agreement, of which 50,000 vested
immediately and 50,000 are subjected to forfeiture in the event Mr. Mastrini is
not in the employ of the Company 12 months after execution of the agreement, and
50,000 shares are to be issued to him on September 1, 1999 (assuming he is then
employed by the Company).
In addition to his shares, the Company issued to Mr. Mastrini options,
exercisable at $5.00 per share, to purchase 50,000 shares of Common Stock, and
upon completion of the IPO issued to Mr. Mastrini registered warrants, identical
to the Warrants offered under this Prospectus, to purchase 25,000 shares of
Common Stock. In April 1998, the Company restructured Mr. Mastrini's
compensation package by (i) issuing options to purchase 40,000 shares of Common
Stock exercisable at $3.00 per share, 33,333 shares which vest on September 30,
2000 and the remainder which vest on January 1, 2001, and (ii) redeeming from
Mr. Mastrini 20,000 shares of Common Stock at $5.00 per share. In September
1998, the Company issued to Mr. Mastrini options to purchase 300,000 shares of
Common Stock exercisable at $5.00 per share. In December 1998, the Company
issued to Mr. Mastrini options to purchase 15,000 shares of Common Stock
exercisable at $5.50 per share, half of which vest on June 15, 2000 and the
remainder of which vest on December 15, 2000.
In the event of death, all of his stock and options will vest immediately.
In the event that Mr. Mastrini's employment is "constructively terminated" (as
that term is defined in his employment agreement) all of his stock and options
will vest immediately and he will be entitled to receive the compensation due
under his employment agreement in one lump sum.
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<PAGE>
Pursuant to his agreement Mr. Sendrow is entitled to receive a base salary
initially at the rate of $86,500 per year. Mr. Sendrow's base salary increases
by 5% plus the annual increase in the consumer price index on each of June 1,
1999 and 2000. In addition to his base salary Mr. Sendrow is to receive medical
and disability insurance comparable to that provided to the Company's executive
employees generally and a car allowance of $350 per month. At the time of the
execution of his employment agreement, the Company had issued an aggregate of
100,000 shares of Common Stock to Mr. Sendrow. As additional consideration for
his services, the Company issued options, exercisable at $5.00 per share, to
purchase 25,000 shares of the Company's Common Stock.
In September 1998, the Company issued to Mr. Sendrow options to purchase
25,000 shares of Common Stock exercisable at $5.00 per share. In December 1998,
the Company issued to Mr. Sendrow options to purchase 10,000 shares of Common
Stock exercisable at $5.50 per share, half of which vest on June 15, 2000 and
the remainder of which vest on December 15, 2000.
Pursuant to his agreement, Mr. Bellizzi is entitled to receive a base
salary initially at the rate of $50,000 per year, subject to a discretionary
increase based upon the Board of Directors review of his performance at the end
of this year. Mr. Bellizzi's base salary increases by 5% plus the annual
increase in the consumer price index on each of October 1, 1998 and 1999. In
addition to his base salary, Mr. Bellizzi is to receive medical and disability
insurance comparable to that provided to the Company's executive employees
generally. At the time of the execution of his employment agreement, the Company
had issued an aggregate of 50,000 shares of Common Stock to Mr. Bellizzi. As
additional consideration for his services, the Company issued options,
exercisable at $5.00 per share, to purchase 12,500 shares of the Company's
Common Stock.
In September 1998, the Company issued to Mr. Bellizzi options to purchase
2,000 shares of Common Stock exercisable at $5.00 per share. In December 1998,
the Company issued to Mr. Bellizzi options to purchase 7,000 shares of Common
Stock exercisable at $5.50 per share, half of which vest on June 15, 2000 and
the remainder of which vest on December 15, 2000.
In 1998, the Company entered into 2-year employment agreements with each
of Ms. Constance Norris (Vice President - Operations) and Frank Zhao (Controller
and Vice President - Finance), commencing June 1, 1998. Pursuant to their
agreements Ms. Norris and Mr. Zhao are entitled to receive a base salary
initially at the rate of $57,000 per year, increased by five percent plus the
annual increase in the consumer price index on each of June 1, 1999 and 2000. In
addition, Ms. Norris and Mr. Zhao are to receive medical and disability
insurance comparable to that provided to the Company's employees.
In September 1998, the Company issued to Ms. Norris and Mr. Zhao options
to purchase 20,000 shares each of Common Stock exercisable at $5.00 per share.
In December 1998, the Company issued to Ms. Norris and Mr. Zhao options to
purchase 7,000 shares each of Common Stock exercisable at $5.50 per share, half
of which vest on June 15, 2000 and the remainder of which vest on December 15,
2000.
Consultant
Lucien Bittar served as a consultant to the Company from January 1997
until March 1998 pursuant to an agreement which is scheduled to expire in
January 2000 and which provides for a consulting fee of $6,000 per month. Since
April 1998, Mr. Bittar has been on an unpaid leave of absence. At his option Mr.
Bittar may return as a consultant to the Company on the same terms for the
remainder of the original term of his consulting agreement. Mr. Bittar served as
the Company's President and Chief Operating Officer and a director from its
incorporation as 800 Travel Systems, Inc. in November 1995 until January 1997.
Mr. Bittar served as the Vice-Chairman of the Board from April 1996 until
February 1997. From August 1994 through November 1995, Mr. Bittar was president
and a director of 1-800 Low-Air Fare, Inc., the Company's predecessor. Mr.
Bittar founded Filigree, Inc., a travel consulting company, in May 1989 and
served as its president and chief executive officer from that time until he
joined 1-800 Low-Air Fare, Inc. in August 1994. Prior to 1989, Mr. Bittar was
employed by Thomas Cook Travel,
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<PAGE>
Inc. During that time he served as executive vice president responsible for all
United States operations and a member of the Board of Directors. Mr. Bittar
currently owns 175,000 shares of Common Stock.
Additional Service Provider
Scot Spencer was engaged by the Company pursuant to a Services Agreement
in November 1995 to assist the Company in locating sources of financing. Mr.
Spencer's agreement, which by its terms expired on December 31, 1996, provided
for a weekly fee of $2,500. From the expiration of the agreement until September
19, 1997, the Company paid Mr. Spencer a fee of $3,000 per week for services
rendered with respect to the Company's financing arrangements, including
services rendered with respect to the IPO. In addition, the Company had paid
various expenses incurred by Mr. Spencer in performing services on behalf of the
Company. Mr. Spencer resigned from his position with the Company as of September
19, 1997. The Company has not engaged Mr. Spencer from such date and does not
intend to engage him in the future. In May 1996, in a proceeding captioned
United States of America v. Scot Spencer, U.S. District Court, E.D.N.Y., Mr.
Spencer was convicted of one count of bankruptcy fraud and one count of
conspiracy to commit bankruptcy fraud as a result of his activities in
connection with Braniff Airlines and sentenced to 51 months in jail. On appeal,
the Second Circuit Court of Appeals affirmed Mr. Spencer's conviction and
sentence on October 30, 1997. He began serving such sentence in May 1998. From
1988 through 1989 Mr. Spencer served as a consultant to the corporate parent of
Braniff Airlines, which filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code in 1989 in the U.S. Bankruptcy Court, Central District of
Florida. From 1990 to June 30, 1991 Mr. Spencer served as president of Braniff
Airlines which subsequently filed for bankruptcy in the Bankruptcy Court,
Eastern District of New York, in July 1992 at which time it permanently ceased
operations.
Promoter
Vito Balsamo, a former director of the Company, may be considered a
promoter of the Company. Since December 1997, Mr. Balsamo has been Vice
President of Investments at Lexington Capital Partners and Company Ltd. From
1994 until December 1997, Mr. Balsamo held the position of Senior Vice President
of Joseph Stevens & Company, L.P., the investment banking firm with which Mr.
Gaggi is affiliated. Before joining Joseph Stevens & Company Mr. Balsamo served
as Vice President of Barington Capital (September 1993 -- 1994) and as account
executive with Thomas James and Company (September 1992 -- September 1993).
Engagement of Employees and Others
The Board of Directors has determined that the engagement of any
individual, as an employee or otherwise, whose compensation is reasonably
anticipated to exceed $50,000 per annum, inclusive of reimbursable expenses,
will require approval of a majority of the Board.
Stock Option Plan
Under the Company's 1997 Stock Option Plan (the "1997 Stock Option Plan"),
250,000 shares of Common Stock were reserved for issuance upon exercise of stock
options. The 1997 Stock Option Plan is designed as a means to attract, retain
and motivate qualified and competent persons who are key to the Company and its
subsidiaries, including employees, officers and directors, and upon whose
efforts and judgment the success of the Company is largely dependent, through
the encouragement of stock ownership in the Company by such persons. For
purposes of this discussion, the term director includes directors of the Company
and directors of any of its subsidiaries.
The Compensation Committee of the Board of Directors or, in the absence of
the appointment of a Committee, the Board of Directors (collectively referred to
herein as the "Compensation Committee") administers and interprets the 1997
Stock Option Plan and is authorized to grant options thereunder to all eligible
employees, officers and directors of the Company. The 1997 Stock Option Plan
provides for the granting of both incentive stock options and nonqualified stock
options. Options are granted under the 1997 Stock Option Plan on such terms and
at such prices as determined by the Compensation Committee, except that the per
share exercise price of incentive stock
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<PAGE>
options cannot be less than the fair market value of the Common Stock on the
date of grant. Each option is exercisable after the period or periods specified
in the option agreement, but no option may be exercisable after the expiration
of ten years from the date of grant. Incentive stock options granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all classes of stock of the Company must have an exercise price
of at least 110% of the fair market value of the Common Stock on the date of
grant and a term of no more than five years.
No incentive stock option, and unless the Compensation Committee's prior
written consent is obtained (which consent may be obtained at the time an Option
is granted) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Exchange Act no nonqualified stock option, may be
transferred other than by will or the laws of descent and distribution. Each
option may be exercisable during the optionee's lifetime only by the optionee,
or in the case of a nonqualified stock option that has been transferred with the
Compensation Committee's prior written consent, only by the transferee consented
to by the Compensation Committee. Unless the Compensation Committee's prior
written consent is obtained (which consent may be obtained at the time an Option
is granted) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Exchange Act, no shares of Common Stock acquired by an
officer, as that term is defined under Rule 16b-3, of the Company or director
pursuant to the exercise of an option may be transferred prior to the expiration
of the six-month period following the date on which the option was granted.
The 1997 Stock Option Plan also authorizes the Company to make or
guarantee loans to optionees to enable them to exercise their options. Such
loans must (i) provide for recourse to the optionee, (ii) bear interest at a
rate no less than the prime rate of interest, and (iii) be secured by the shares
of Common Stock purchased. The Board of Directors has the authority to amend or
terminate the 1997 Stock Option Plan, provided that no such action may
substantially impair any outstanding option without the written consent of the
holder, and provided further that certain amendments of the 1997 Stock Option
Plan are subject to shareholder approval. Unless terminated sooner, the 1997
Stock Option Plan will continue in effect until all options granted thereunder
have expired or been exercised, provided that no options may be granted after 10
years from the date the Board of Directors adopted the 1997 Stock Option Plan.
As of December 31, 1998, the Company had outstanding options to purchase
all 250,000 shares of Common Stock under the 1997 Stock Option Plan at a
weighted average exercise price of $4.68 per share.
In December 1998, the Board of Directors approved and adopted the
Company's 1998 Stock Option Plan, identical to the 1997 Stock Option Plan, and
under which the Company is authorized to issue 250,000 shares of Common Stock.
As of December 31, 1998, the Company had outstanding options to purchase 100,000
shares of Common Stock under the 1998 Stock Option Plan, each at an exercise
price of $5.50 per share.
Lock-Up Agreements
Each of the officers and directors of the Company, as well as Vito
Balsamo, a former director of the Company, has agreed not to sell any of the
shares of Common Stock or Warrants currently held by him until January 21, 2000.
In addition, Mr. Bittar, a former officer and director of the Company, has
agreed not to sell any of his shares of Common Stock, other than 25,000 shares,
until January 21, 2000.
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<PAGE>
CERTAIN TRANSACTIONS
The Company commenced operations in November 1995, upon the Company's
purchase of certain assets and assumption of certain liabilities of 1-800
Low-Air Fare, Inc., a Delaware corporation, and its wholly-owned subsidiary S.
Travel, Inc., a Delaware corporation (collectively, the "Predecessor Business"),
pursuant to an Asset Purchase Agreement dated November 13, 1995 (the "Asset
Purchase Agreement"). Under the Asset Purchase Agreement, the Company acquired
all rights to the tradename "1-800 Low Air Fare" and the telephone number
corresponding thereto, together with certain furniture, fixtures, equipment and
other assets including the Predecessor Business' SABRE Subscription Agreement.
In exchange, the Company paid the Predecessor Business $100,000, and assumed
certain of its liabilities. Additionally, the Company agreed to issue 600,400
shares of its Common Stock, including 300,000 shares to be issued to the
creditors of the Predecessor Business in exchange for forgiveness of the debt of
the Predecessor Business, at the exchange rate of $10 of debt for each share of
Common Stock. The creditors of the Predecessor Business elected to convert
$1,664,340 of such indebtedness for 166,434 shares of Common Stock. The
remaining 133,566 shares were issued to S. Travel, Inc.
In 1996, the Company issued 100,000 shares of Common Stock to Mark D.
Mastrini, the Company's Chief Operating Officer, as part of his compensation. In
connection with this issuance the Company accrued compensation expense of
$120,000. The Company has also agreed to issue 50,000 shares to Mr. Mastrini if
he remains in the employ of the Company for a period of two years from the
closing of the IPO. In addition, pursuant to the terms of his Employment
Agreement, the Company agreed to grant to Mr. Mastrini options to purchase
50,000 shares of Common Stock, exercisable at $5.00 per share and warrants,
identical to those offered under this Prospectus, to purchase 25,000 shares. The
50,000 shares to be granted to Mr. Mastrini will be treated as compensation and
amortized over the two-year period during which they are deemed earned.
In April 1998, the Company restructured Mr. Mastrini's compensation
package by (i) issuing options to purchase 40,000 shares of Common Stock
exercisable at $3.00 per share, 33,333 shares which vest on September 30, 2000
and the remainder which vest on January 1, 2001, and (ii) redeeming from Mr.
Mastrini 20,000 shares of Common Stock at $5.00 per share.
In September 1998, the Company issued to Mr. Mastrini options to purchase
300,000 shares of Common Stock exercisable at $5.00 per share. In December 1998,
the Company issued to Mr. Mastrini options to purchase 15,000 shares of Common
Stock exercisable at $5.50 per share, half of which vest on June 15, 2000 and
the remainder of which vest on December 15, 2000.
In 1995, in connection with the initial capitalization of the Company, the
Company issued 100,000 shares of Common Stock to Jerrold B. Sendrow, the
Company's Chief Financial Officer, for which he paid $1,000. The Company did not
accrue any compensation expense in connection with this transaction. In
addition, in 1997 the Company agreed to grant to Mr. Sendrow options to purchase
25,000 shares of Common Stock, exercisable at $5.00 per share.
In September 1998, the Company issued to Mr. Sendrow options to purchase
25,000 shares of Common Stock exercisable at $5.00 per share. In December 1998,
the Company issued to Mr. Sendrow options to purchase 10,000 shares of Common
Stock exercisable at $5.50 per share, half of which vest on June 15, 2000 and
the remainder of which vest on December 15, 2000.
In 1995, in connection with the initial capitalization of the Company, the
Company issued 50,000 shares of Common Stock to Biagio Bellizzi, the Company's
Vice-President, Marketing for which he paid $500.00. The Company did not accrue
any compensation expense in connection with this transaction. In addition, in
1997 the Company granted to Mr. Bellizzi options to purchase 12,500 shares of
Common Stock, exercisable at $5.00 per share. The Company did not accrue any
compensation expense in connection with the grant of such options to Mr.
Bellizzi or in connection with the options granted to Messrs. Mastrini and
Sendrow set forth in the two preceding paragraphs.
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<PAGE>
Pursuant to his agreement, Mr. Bellizzi is entitled to receive a base
salary initially at the rate of $50,000 per year, subject to a discretionary
increase based upon the Board of Directors review of his performance at the end
of this year. Mr. Bellizzi's base salary increases by 5% plus the annual
increase in the consumer price index on each of October 1, 1998 and 1999. In
addition to his base salary, Mr. Bellizzi is to receive medical and disability
insurance comparable to that provided to the Company's executive employees
generally. At the time of the execution of his employment agreement, the Company
had issued an aggregate of 50,000 shares of Common Stock to Mr. Bellizzi. As
additional consideration for his services, the Company issued options,
exercisable at $5.00 per share, to purchase 12,500 shares of the Company's
Common Stock.
In September 1998, the Company issued to Mr. Bellizzi options to purchase
2,000 shares of Common Stock exercisable at $5.00 per share. In December 1998,
the Company issued to Mr. Bellizzi options to purchase 1,000 shares of Common
Stock exercisable at $5.50 per share, half of which vest on June 15, 2000 and
the remainder of which vest on December 15, 2000.
In 1998, the Company entered into 2-year employment agreements with each
of Ms. Constance Norris (Vice President - Operations) and Frank Zhao (Controller
and Vice President - Finance), commencing June 1, 1998. Pursuant to their
agreements Ms. Norris and Mr. Zhao are entitled to receive a base salary
initially at the rate of $57,000 per year, increased by five percent plus the
annual increase in the consumer price index on each of June 1, 1999 and 2000. In
addition, Ms. Norris and Mr. Zhao are to receive medical and disability
insurance comparable to that provided to the Company's employees.
In September 1998, the Company issued to Ms. Norris and Mr. Zhao options
to purchase 20,000 shares each of Common Stock exercisable at $5.00 per share.
In December 1998, the Company issued to Ms. Norris and Mr. Zhao options to
purchase 7,000 shares each of Common Stock exercisable at $5.50 per share, half
of which vest on June 15, 2000 and the remainder of which vest on December 15,
2000.
In December 1997, the Company issued options to purchase 50,000 shares,
exercisable at $3.00 per share, to each of Messrs. Warde, Bellini and Bailey in
recognition of their agreements to serve as directors of the Company. The
Company also agreed to issue in June 1998 additional options to purchase 50,000
shares, exercisable at $3.00 per share. In May of 1998, Messrs. Warde, Bellini
and Bailey agreed to forego receipt of the options to be issued in June 1998,
accepting in exchange options to purchase 50,00 shares of Common Stock at $3.10
per share.
Perry Trebatch, who beneficially owns more than 5% of the Company's
outstanding capital stock, has purchased shares of the Company's Common Stock
and loaned money to the Company on various occasions.
In August 1995, Mr. Trebatch loaned $200,000 to the Predecessor Business
for which he received notes bearing interest at the rate of 10% per annum. The
obligation under these notes was assumed by the Company in connection with the
acquisition of the assets of the Predecessor Business. In addition to its
agreement to pay the principal and interest accrued, the Company issued 200,000
shares of its Common Stock to Mr. Trebatch in consideration for his agreement to
allow the Company to assume this loan. Such shares were valued at $1.20 per
share for purposes of determining the purchase price of the Predecessor
Business. As a result of the Company's failure to timely repay these notes, in
1996, the principal amount thereof was increased to $300,000 and the Company
accrued interest expense of $100,000. As a result of the Company's failure to
timely repay a portion of the principal amount of these notes, at the time a
partial principal payment was made, the remaining principal balance of $200,000
was increased to $250,000 and the Company accrued interest expense of $50,000.
In April 1996, Mr. Trebatch purchased 100,000 shares of Common Stock at a price
of $2.00 per share. In January 1997, Mr. Trebatch was issued 60,000 shares in
consideration of his agreement to extend the due date of the Company's notes in
respect of which the Company accrued interest expense of $120,000. Taking into
account the value of the shares received by Mr. Trebatch for his loans and the
increase in principal resulting from the Company's failure to timely repay
amounts due, Mr. Trebatch has received interest on all amounts loaned to the
Company at an effective rate of 135% per annum.
As of December 1997, the Company and Mr. Trebatch entered into an amended
agreement wherein Mr. Trebatch agreed to amend the terms of his loan to the
Company to provide that interest on the outstanding principal
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<PAGE>
amount thereof will accrue at the rate of 12% per annum beginning as of the
January 21, 1998, and that interest accrued and the principal portion of the
Note will be paid in twelve equal monthly installments commencing December 31,
1997 and continuing through November 30, 1998. Under the amended agreement, the
Company has no obligation to register Mr. Trebatch's shares and, with respect to
shares of Common Stock he currently owns, Mr. Trebatch has agreed that he will
not offer, sell or otherwise dispose of ("Sell") any such shares until January
21, 1999. In addition, Mr. Trebatch agreed to return warrants to purchase
300,000 shares of Common Stock at an exercise price of 110% of the price at
which the Common Stock is being offered under this Prospectus (the "IPO Price")
which he had previously been granted and receive in lieu therefor warrants to
purchase 100,000 shares of Common Stock at an exercise price equal to 200% of
the IPO Price, exercisable for a period of 7 years. To secure its obligations
under the loan, the Company granted Mr. Trebatch a security interest on portions
of the Company's telephone system, and upon an event of default, Mr. Trebatch
may file previously executed notices on UCC Form 1 to perfect such security
interest.
Michael Cantor, who beneficially owned more than 5% of the Company's
outstanding capital stock, has purchased shares of the Company's Common Stock
and loaned money to the Company on various occasions.
In October 1995, Mr. Cantor loaned the Predecessor Business $100,000. This
obligation was assumed by the Company in connection with the acquisition of the
assets of the Predecessor Business. As a result of the Company's failure to
timely repay this amount, in June 1996 Mr. Cantor was issued 220,600 shares of
Common Stock in respect of which the Company accrued interest expense of
$551,500. In January 1996, Mr. Cantor loaned the Company $100,000. In addition
to interest at the rate of 10% per annum, the Company issued Mr. Cantor 10,000
shares of Common Stock in consideration of this loan in respect of which the
Company accrued interest expense of $12,000. Taking into account the value of
the shares received by Mr. Cantor as consideration for his loans to the Company
and as a consequence of the Company's failure to timely repay amounts due, Mr.
Cantor has received interest on all amounts loaned to the Company at an
effective rate of 886% per annum.
In connection with the acquisition of the assets of the Predecessor
Business, Dr. Jose Colon (a shareholder who is not an officer, director,
promoter, or affiliate of the Company), was issued 40,000 shares of Common
Stock. In January 1996, in connection with a loan made by Dr. Colon, the Company
issued 2,500 shares of Common Stock to Dr. Colon, valued at $1.20 per share in
connection with which it accrued interest expense of $3,000. In July 1996, as a
result of its failure to timely repay this loan the Company issued 30,000 shares
of Common Stock to Dr. Colon, in respect of which the Company accrued interest
expense of $75,000. Taking into account the value of the shares received by Dr.
Colon as consideration for his loans to the Company and as a consequence of the
Company's failure to repay amounts due, Dr. Colon has received interest on all
amounts loaned by the Company at an effective rate of 312% per annum.
In 1996 the Company sold and issued 1,387,500 shares of Common Stock to
investors in a private placement conducted in connection with various
individuals who received finder's fees. The Common Stock was sold at an average
price per share of $2.11. The individuals set forth below were paid the
following commissions in connection with the Company's securities in the private
placement: (i) Pasquale Guadagno (Director) -- $45,000; (ii) Mark D. Mastrini
(President, Chief Operating Officer and Director) -- $2,000; (iii) Jerrold B.
Sendrow (Vice-President -- Finance, Chief Financial Officer, Treasurer and
Secretary) -- $2,000; (iv) Scot Spencer (service provider to the Company) --
$231,000; (v) Scott M. Goodman an unaffiliated broker -- $40,000; and (vi) Mario
Giovanelli an unaffiliated broker -- $20,000. Messrs. Mastrini and Sendrow
subsequently returned such commissions to the Company. The offering was made in
reliance on Section 4(2) of the Securities Act and Regulation D promulgated
thereunder, as an offering only to "accredited investors" (as such term is
defined in Rule 501 of the Securities Act) without general solicitation or
advertisements. The Company also paid Mr. Guadagno $10,000 in connection with
the issuance of shares to one of the Company's lenders.
In 1996, the Company issued options to purchase 100,000 shares of Common
Stock at $1.00 per share to each of Messrs. Gaggi and Guadagno (each a director
of the Company) and to Mr. Vito Balsamo, a former director of the Company.
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<PAGE>
During 1996 and 1997 the Company paid personal expenses of certain
directors aggregating approximately $250,000. In May 1998, Mr. Gaggi returned to
the Company 24,765 shares of Common Stock in satisfaction of his outstanding
obligation to the Company of $101,041.20, and Mr. Balsamo returned to the
Company 24,766 shares of Common Stock in satisfaction of his outstanding
obligation to the Company $146,614.72.
The Company believes that each of the foregoing transactions was completed
on terms at least as favorable to the Company as those which would have been
obtained from an unaffiliated party, and intends to conduct all future
transactions with directors, officers and affiliates of the Company on an
arms-length basis on terms no less favorable than would be obtained from
unaffiliated third parties. Furthermore, all such transactions will require the
approval of a majority of the independent, disinterested directors. In addition,
the Company intends that in the future, all stock options that it grants will
have exercise prices of no less than 85% of the then current fair market value
of the Common Stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock by (a) each person who was known by the
Company to beneficially own more than five percent of the Company's outstanding
Common Stock, (b) each executive officer who owns beneficially any shares, and
(c) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage
Number of Shares of Common Stock Outstanding(2)
Beneficially -------------------------------------
Name and Address(1) Owned(1) Before Offering After Offering
- ------------------------------------- ------------------- ------------------ ----------------
<S> <C> <C> <C>
Michael Gaggi(3)..................... 545,570 7.3% 5.0%
Pasquale Guadagno(4)................. 790,899 10.5% 7.3%
Mark D. Mastrini(5).................. 430,000 5.7% 4.0%
Jerrold B. Sendrow(6)................ 137,500 1.8% 1.3%
Biagio Bellizzi(7)................... 58,250 0.8% 0.5%
Perry Trebatch....................... 480,000 6.4% 4.4%
Mees Pierson (Bahamas) Ltd.(8)....... 492,000 6.6% 4.5%
George A. Warde(9)................... 100,000 1.3% 0.9%
Carl A. Bellini(9)................... 100,000 1.3% 0.9%
L. Douglas Bailey(9)................. 100,000 1.3% 0.9%
Joseph and Louise Modica(10)......... 434,566 5.8% 4.0%
Officers and Directors as a Group(11)
(8 persons)........................ 2,262,219 30.2% 20.9%
</TABLE>
- ----------
* Less than 1%
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 4802 Gunn Highway, Suite 140, Tampa, Florida 33624.
(2) Unless otherwise indicated, each person has sole voting and investment
power with respect to all such shares.
(3) Does not include 2,500 shares owned beneficially by Rose Gaggi, Mr.
Gaggi's mother, as to which shares Mr. Gaggi disclaims beneficial
ownership. Includes 335 shares issuable upon exercise of options which are
immediately exercisable at $1.00 per share.
(4) Includes 65,999 shares issuable upon exercise of options which are
immediately exercisable at $1.00 per share.
(5) Includes (i) 25,000 shares issuable upon exercise of options which are
immediately exercisable at $5.00 per share, (ii) 25,000 shares issuable
upon exercise of options which are exercisable as of January 21, 1999 at
$5.00 per share, (iii) 50,000 shares issuable upon exercise of options
which are immediately exercisable at $5.00 per share and (iv) 250,000
shares issuable upon exercise of options which are immediately exercisable
at $5.00 per share.
(6) Includes 37,500 shares issuable upon exercise of options which are
immediately exercisable at $5.00 per share.
(7) Includes 8,250 shares issuable upon exercise of options which are
immediately exercisable at $5.00 per share.
(8) Includes 67,000 shares purchasable upon exercise of options immediately
exercisable at a price of $1.00 per share. The beneficial owners of the
shares registered under this name are Clive Knowles and Sonia Gallanos.
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<PAGE>
(9) Comprised of (i) 50,000 shares purchasable pursuant to options immediately
exercisable at a price of $3.00 per share and (ii) 50,000 shares
purchasable pursuant to options immediately exercisable at a price of
$3.10 per share.
(10) The address of such persons is 157 Narrow North, Staten Island, New York
10305.
(11) Includes 762,084 shares purchasable pursuant to the options referred to in
footnotes 3, 4, 5, 6, 7 and 8.
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<PAGE>
CONCURRENT OFFERING
The Registration Statement covering this Prospectus also includes the
Prospectus Supplement covering an offering by the Selling Securityholders. The
478,284 Registered Shares and 250,000 Registered Warrants are being registered,
at the Company's expense (except for legal fees and expenses for counsels to the
Selling Securityholders), under the Securities Act and are freely tradeable. The
Company will not receive any proceeds from the sale of the Registered
Securities.
There are no material relationships between any holders of the Registered
Securities and the Company, nor have any such material relationships existed
within the past three years. See "Principal Stockholders" and "Certain
Transactions."
The Selling Securityholders may from time to time sell all or a portion of
their Registered Securities in the over-the-counter market or on any national
securities exchange or automated interdealer quotation system on which the
Registered Securities may hereafter be listed or traded, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Registered Securities may be
sold directly or through brokers or dealers or in a distribution by one or more
underwriters on a firm commitment or best efforts basis. The methods by which
the Registered Securities may be sold include (i) a block trade (which may
involve crosses) in which the broker or dealer engaged will attempt to sell the
Registered Securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction, (ii) purchases by a broker or
dealer as principal and resales by such broker dealer for its account pursuant
to this Prospectus and the accompanying Prospectus Supplement, (iii) ordinary
brokerage transactions and transactions in which the broker solicits purchasers
or to or through marketmakers, (iv) transactions in put or call options or other
rights (whether exchange-listed or otherwise) established after the
effectiveness of the Registration Statement of which this Prospectus is a part
and (v) privately negotiated transactions. In addition, any of the Registered
Securities that qualify for sale pursuant to Rule 144 under the Securities Act
may be sold in transactions complying with such Rule, rather than pursuant to
this Prospectus and the accompanying Prospectus Supplement.
In the case of the sales of the Registered Securities effected to or
through broker-dealers, such broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the Selling Securityholders or the
purchasers of the Registered Securities, sold by or through such broker-dealers,
or both. The Company has advised the Selling Securityholders that the
anti-manipulative provisions of Regulation M under the Exchange Act may apply to
their sales in the market and has informed them of the need for delivery of
copies of this Prospectus and the accompanying Prospectus Supplement. The
Company is not aware as of the date of this Prospectus of any agreements between
any of the Selling Securityholders and any broker-dealers with respect to the
sale of the Registered Securities. The Selling Securityholders and any
broker-dealers or agents participating in the distribution of the Securities may
be deemed to be "underwriters" within the meaning of the Securities Act and any
commissions received by any such broker-dealers or agents and profit on any
resale of the Registered Securities may be deemed to be underwriting commissions
under the Securities Act. The commissions received by a broker-dealer or agent
may be in excess of customary compensation. The Company will receive no part of
the proceeds from the sale of any of the shares of the Registered Securities by
the Selling Securityholders.
The Company will pay all costs and expenses incurred in connection with
the registration under the Securities Act of the Registered Securities offered
by the Selling Securityholders, including without limitation all registration
and filing fees, listing fees, printing expenses, fees and disbursements of
counsel and accountants for the Company. Each Selling Stockholder will pay all
brokerage fees and commissions, if any, incurred in connection with the sale of
the Registered Securities owned by the Selling Stockholder. In addition, the
Company has agreed to indemnify the Selling Securityholders against certain
liabilities, including liabilities under the Securities Act.
There is no assurance that any of the Selling Securityholders will sell
any or all of the Registered Securities offered by them.
- 46 -
<PAGE>
DESCRIPTION OF SECURITIES
As of the date hereof, the authorized capital stock of the Company
consists of (i) 20,000,000 shares of Common Stock, par value $.01 per share,
7,497,096 shares of which are issued and outstanding, and (ii) 1,000,000 shares
of Preferred Stock, of which none are outstanding. The following summary
description of the capital stock of the Company is qualified in its entirety by
reference to the Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws of the Company, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
Common Stock
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of stockholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities. Except as disclosed
herein, there are no conversion rights or redemption or sinking fund provisions
with respect to the Common Stock. All outstanding shares of Common Stock are,
and the shares of Common Stock offered under this Prospectus will be when
issued, fully paid and nonassessable.
Preferred Stock
The Board of Directors is authorized, without any action of the
stockholders, to provide for the issuance of one or more series of Preferred
Stock and to fix the designation, preferences, powers and relative,
participating, optional and other rights, qualifications, limitations and
restrictions thereof including, without limitation, the dividend rate, voting
rights, conversion rights, redemption price and liquidation preference per
series of Preferred Stock. Any series of Preferred Stock so issued may rank
senior to the Common Stock with respect to the payment of dividends or amounts
to be distributed upon liquidation, dissolution or winding up. There are no
agreements or understandings for the issuance of Preferred Stock, and the Board
of Directors has no present intent to issue any Preferred Stock. The existence
of authorized but unissued Preferred Stock may enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise. For
example, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal is not in the Company's
best interests, the Board of Directors could cause shares of Preferred Stock to
be issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquiror or insurgent stockholder or stockholder group. The issuance of shares
of Preferred Stock pursuant to the Board of Directors' authority described above
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock and adversely affect the rights and powers, including
voting rights, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company.
Warrants
The Warrants were issued in registered form pursuant to an agreement dated
January 13, 1998 (the "Warrant Agreement"), between the Company and Continental
Stock Transfer Corporation, as Warrant Agent (the "Warrant Agent"). The
following discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the Warrant Agreement. A form of the
certificate representing the Warrants which form a part of the Warrant Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
Each of the Warrants entitles the registered holder to purchase one share
of Common Stock. The Warrants are exercisable at a price equal to $6.25 (which
exercise price has been arbitrarily determined by the Company and the
Representatives), subject to certain adjustments. The Warrants are entitled to
the benefit of adjustments in their
- 47 -
<PAGE>
exercise prices and in the number of shares of Common Stock or other securities
deliverable upon the exercise thereof in the event of a stock dividend, stock
split, reclassification, reorganization, consolidation or merger. The Warrant
exercise period and the Warrant exercise price may not be changed or revised by
the Company without the prior written consent of First London.
The Warrants may be exercised at any time and continuing thereafter until
5:00 pm on January 13, 2003, unless such period is extended by the Company.
After the expiration date, Warrant holders shall have no further rights.
Warrants may be exercised by surrendering the certificate evidencing such
Warrant, with the form of election to purchase on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price and any transfer tax, to the Warrant Agent. If less than all of
the Warrants evidenced by a warrant certificate are exercised, a new certificate
will be issued for the remaining number of Warrants. Payment of the exercise
price may be made by cash, bank draft or official bank or certified check equal
to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders
of the Company. The Company has the right at any time to redeem the Warrants, at
a price of $.05 per Warrant, by written notice to the registered holders
thereof, mailed not less than 30 nor more than 60 days prior to the Redemption
Date. The Company may exercise this right only if the closing bid price for the
Common Stock for seven trading days during a 10 consecutive trading day period
ending no more than 15 days prior to the date that the notice of redemption is
given, equals or exceeds $10.00 per share, subject to adjustment. If the Company
exercises its right to call Warrants for redemption, such Warrants may still be
exercised until the close of business on the day immediately preceding the
Redemption Date. If any Warrant called for redemption is not exercised by such
time, it will cease to be exercisable, and the holder thereof will be entitled
only to the repurchase price. Notice of redemption will be mailed to all holders
of Warrants of record at least 30 days, but not more than 60 days, before the
Redemption Date. The foregoing notwithstanding, the Company may not call the
Warrants at any time that a current registration statement under the Securities
Act is not then in effect. Any redemption of the Warrants during the one-year
period commencing January 13, 1998 requires the written consent of First London.
The Warrant Agreement permits the Company and the Warrant Agent, without
the consent of Warrant holders, to supplement or amend the Warrant Agreement in
order to cure any ambiguity, manifest error or other mistake, or to address
other matters or questions arising thereafter that the Company and the Warrant
Agent deem necessary or desirable that are not inconsistent with the provisions
of the Warrants and that do not materially adversely affect the interest of any
Warrant holder.
In order for the holder to exercise a Warrant, there must be an effective
registration statement, with a current prospectus on file with the Commission
covering the shares of Common Stock underlying the Warrants, and the issuance of
such shares to the holder must be registered, qualified or exempt under the laws
of the state in which the holder resides. If required, the Company will file a
new registration statement with the Commission with respect to the securities
underlying the Warrants prior to the exercise of such Warrants and will deliver
a prospectus with respect to such securities to all holders thereof as required
by Section 10(a)(3) of the Securities Act. See "Risk Factors -- Necessity to
Maintain Current Prospectus" and "State Blue Sky Registration Required to
Exercise Warrants."
In connection with the Stevens Merger, at the Closing, the Company issued
warrants exercisable for 250,000 shares to Joseph Stevens Group, Inc.,
exercisable at the same price and entitled and subject to the same terms and
conditions as the Warrants described above.
In connection with his employment agreement, at the Closing the Company
issued warrants exercisable for 25,000 shares to Mark D. Mastrini, exercisable
at the same price and entitled and subject to the same terms and conditions as
the Warrants described above, all of which he has subsequently sold.
- 48 -
<PAGE>
Determination of IPO Price and Terms of Warrants
Prior to the IPO, there was no public market for the Common Stock or
Warrants. The IPO price of the Common Stock and the Warrants and the exercise
price of the Warrants, as well as the exercise price of the warrants underlying
the Representatives' Warrants, were determined solely by negotiations between
the Company and the Representatives. Among the factors considered in determining
these prices were the Company's current financial condition and prospects and
the general condition of the securities market. However, the public offering
price of the Common Stock and the Warrants and the exercise price of the
Warrants and the warrants underlying Representatives' Warrants do not
necessarily bear any relationship to the Company's assets, book value, earnings
or any other established criterion of value. See "Risk Factors."
Section 203 of the Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved either the transaction in which
the interested stockholder became an interested stockholder or the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation or by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of the stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.
Anti-Takeover Effects of Certain Provisions of the Company's Bylaws
Certain provisions of the Certificate and Bylaws of the Company summarized
in the following paragraphs may be deemed to have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Classified Board of Directors
The Certificate provides for the Board of Directors to be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
This provision, when coupled with the provisions of the Certificate and Bylaws
authorizing only the Board of Directors to fill vacant directorships, will make
it more difficult for a stockholder to remove incumbent directors and
simultaneously gain control of the Board of Directors by filling the vacancies
created by such removal with its own nominees.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Company's Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder, to be timely, must be received no later than the
close of business on the day following the day on which such notice of the date
of the meeting was
- 49 -
<PAGE>
mailed or such public disclosure was made. The Bylaws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting and may be deemed to have an
anti-takeover effect in that they may delay, defer or prevent the Company from
taking actions, including the election of new directors, that a stockholder
might consider in the Company's best interests.
Limitation of Liability of Directors and Officers and Indemnification.
The Company's Certificate of Incorporation eliminates, to the fullest
extent now or hereafter permitted by Delaware law, liability of a director to
the Company or its stockholders for monetary damages for a breach of such
Director's fiduciary duty as a Director. The Delaware General Corporation Law
presently permits such limitation of a Director's liability except where a
Director (i) breaches his or her duty of loyalty to the Company or its
stockholders, (ii) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (iii) authorizes payment of an
unlawful dividend or stock repurchase, or (iv) obtains an improper personal
benefit.
This provision is intended to afford Directors additional protection, and
limit their potential liability, from suits alleging a breach of the duty of
care by a Director. The Company believes this provision will assist it in
maintaining and securing the services of Directors who are not employees of the
company. As a result of the inclusion of such a provision, stockholders may be
unable to recover monetary damages against Directors for actions taken by them
that constitute negligence or gross negligence or that are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders for any particular case, stockholders may
not have any effective remedy against the challenged conduct. The Company's
Bylaws also provide that Directors and officers shall be indemnified against
liabilities arising from their service as Directors or officers to the fullest
extent permitted by law, which generally requires that the individual act in
good faith and in a manner he or she reasonably believes to be in or not opposed
to the Company's best interests.
Transfer Agent, Registrar and Warrant Agent
The transfer agent and registrar for the Common Stock, and the Warrant
Agent for the Warrants is Continental Stock Transfer & Trust Company.
Solicitation Fee
The Company agreed to pay the Representatives upon exercise or redemption
of the warrants a fee equal to 5% of the gross proceeds received by the Company.
The Representatives are not eligible to receive such fee until after December
31, 1998. Additionally, to receive such fee the Representatives or their
designees must be designated in writing by the Warrantholders as having
solicited the Warrant exercise and such fee shall not be paid with respect to
Warrants held in a discretionary account without prior written approval of such
exercise by the discretionary account holder.
Unless granted an exemption by the Securities and Exchange Commission from
Regulation M, the Representatives and any soliciting broker-dealers will be
prohibited from engaging in any market making activities with respect to the
Company's securities for the time periods prescribed by Regulation M prior to
any solicitation of the exercise of the Warrants until the later of the
termination of such solicitation activity or the termination by, waiver or
otherwise of any right the Representatives and soliciting broker-dealers may
have to receive a fee for the exercise of the Warrants. As a result, the
Representatives and soliciting broker-dealers may be unable to continue to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable.
- 50 -
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
General
The Company has 7,497,096 shares of Common Stock outstanding. Of the
5,959,709 shares of Common Stock issued and outstanding as of prior to the IPO,
the holders of approximately 3,000,000 shares have agreed not to offer, sell or
otherwise dispose of ("Sell") such shares until January 21, 1999; the holders of
350,000 shares have agreed not to Sell such shares until July 21, 1999; and the
holders of approximately 2,400,000 shares (including the officers and directors
of the Company and Vito Balsamo, a former director of the Company) have agreed
not to Sell such shares until January 21, 2000.
To the extent that the "lock-up" agreements were extended in favor of the
Representatives, the Representatives have no current plans or understandings to
waive, shorten or modify the foregoing lock-up arrangements. The Company will
(i) amend this Prospectus Supplement if these arrangements are waived for 10% or
more of the shares of the Selling Securityholders, and (ii) sticker this
Prospectus Supplement if these arrangements are waived for between 5% and 10% of
the shares of the Selling Securityholders.
The Company has also agreed that, without the prior written consent of the
Underwriters, it will not offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 1 year after the Closing, subject
to certain limited exceptions.
In general, under Rule 144 under the Securities Act as currently in effect
("Rule 144"), if one year has elapsed since the later of the date of acquisition
of restricted shares from the Company or any "affiliate" of the Company, as that
term is defined under the Securities Act, the acquiror or subsequent holder is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of the Company's Common
Stock (approximately 76,000 shares immediately after the IPO) or the average
weekly trading volume of the Company's Common Stock on all exchanges and/or
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date on which notice of
the sale is filed with the Commission. Sales under Rule 144 are also subject to
certain manner of sales provisions, notice requirements and the availability of
current public information about the Company. If two years have elapsed since
the later of the date of acquisition of restricted shares from the Company or
from any affiliate of the Company, and the acquiror or subsequent holder thereof
is deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
Since there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements, or otherwise, may have on any
then prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of the Common Stock in the public market, or the
perception that such sales could occur, could adversely affect market prices.
- 51 -
<PAGE>
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Available Information."
LEGAL MATTERS
The validity of the Securities offered under this Prospectus was passed
upon for the Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New
York.
EXPERTS
The audited Financial Statements and schedules of the Company included in
this Prospectus and elsewhere in the Registration Statement were audited by
Killman, Murrell & Company, P.C., independent certified public accountants
("Killman").
Effective on or about June 22, 1998 the Company dismissed Killman as the
Company's principal independent accountants. The decision to change independent
accountants was recommended by the Company's Board of Directors after
considering the significant additional expenses (including, without limitation,
travel, lodging and long-distance communications costs, all of which would have
been recurring costs) involved in continuing to retain the Dallas, Texas based
Killman, compared to the cost of retaining a Tampa, Florida based firm. See Item
4(b) below. The reports of Killman on the Company's financial statements for the
years ended December 31, 1996 and 1997 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. In connection with audits of the financial
statements of the Company for the years ended December 31, 1996 and 1997 and
during the interim period through the date of Killman's dismissal, there were no
disagreements between the Company and Killman on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures which, if not resolved to Killman's satisfaction, would have caused
Killman to make reference to the matter in their reports. Further, during such
periods, there were no events of the type required to be reported pursuant to
Item 304(a)(1)(iv)(B) of Regulation S-B.
On or about the date of the dismissal of Killman, the Company appointed
the Tampa, Florida office of Grant Thornton LLP ("Grant Thornton") as the
Company's new independent accountants, and Grant Thornton accepted such
engagement. Grant Thornton had never previously been consulted by the Company on
any matter, nor has it issued any reports on financial statements included or
not included herein.
- 52 -
<PAGE>
800 TRAVEL SYSTEMS, INC.
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants F-2
Balance Sheets as of December 31, 1997 and 1996
and September 30, 1998 (Unaudited) F-3
Statements of Operations for the years ended December 31, 1997 and 1996
and nine months ended September 30, 1998 and 1997 (Unaudited) F-5
Statements of Stockholders' Equity for the years ended December 31, 1997
and 1996 and nine months ended September 30, 1998 (Unaudited) F-6
Statements of Cash Flows for the years ended December 31, 1997 and 1996
and nine months ended September 30, 1998 and 1997 (Unaudited) F-7
Notes to Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
800 Travel Systems, Inc.
Tampa, Florida
We have audited the accompanying balance sheets of 800 Travel Systems, Inc. as
of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 800 Travel Systems, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Killman, Murrell & Company, P.C.
KILLMAN, MURRELL & COMPANY, P.C.
Certified Public Accountants
Dallas, Texas
February 28, 1998
F-2
<PAGE>
800 TRAVEL SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
AND SEPTEMBER 30, 1998 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30,
1997 1996 1998
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 18,710 $ 588,960 $ 2,429,881
Commissions Receivable 553,358 118,390 882,185
Receivable from AT&T -- 50,228 --
Prepaids 16,617 28,804 154,500
----------- ----------- -----------
TOTAL CURRENT ASSETS 588,685 786,382 3,466,566
----------- ----------- -----------
LEASEHOLD IMPROVEMENTS AND EQUIPMENT - Note 2 450,667 403,964 888,704
Less Accumulated Depreciation (110,104) (39,734) (219,424)
----------- ----------- -----------
Net Leasehold Improvements and Equipment 340,563 364,230 669,280
----------- ----------- -----------
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED
Less accumulated amortization of $93,126, $48,425
and $242,687, respectively 1,024,385 1,069,086 4,812,718
----------- ----------- -----------
DEFERRED OFFERING COSTS - Note 8 1,408,573 50,000 --
----------- ----------- -----------
OTHER ASSETS
Trademarks, net of accumulated amortization of $29,616,
$15,276 and $54,864, respectively 185,384 199,724 360,136
Capitalized Software -- -- 90,000
Related Party Receivables 308,425 109,000 2,400
Bonds and Security Deposits 37,824 31,007 39,724
Merger Deposits and Deferred Acquisition Costs - Note 9 416,671 99,341 --
Prepaid Expenses - Note 7 68,000 80,000 193,121
----------- ----------- -----------
TOTAL OTHER ASSETS 1,016,304 519,072 685,381
----------- ----------- -----------
TOTAL ASSETS $ 4,378,510 $ 2,788,770 $ 9,633,945
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
(Continued)
F-3
<PAGE>
800 TRAVEL SYSTEMS, INC.
BALANCE SHEETS
(Continued)
DECEMBER 31, 1997 AND 1996
AND SEPTEMBER 30, 1998 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
1997 1996 1998
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Note Payable - Note 3 $ 50,000 $ -- $ --
Current Maturities of Long-Term Debt -
Related Parties - Note 3 260,000 280,750 118,687
Accounts Payable 1,830,652 641,592 602,388
Accrued Liabilities 479,670 227,241 568,644
----------- ----------- ------------
TOTAL CURRENT LIABILITIES 2,620,322 1,149,583 1,289,719
DEFERRED RENT 138,228 108,721 72,641
LONG-TERM DEBT - Excluding Current Maturities - Note 3 50,000 30,000 29,174
----------- ----------- ------------
TOTAL LIABILITIES 2,808,550 1,288,304 1,391,534
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES - Notes 6, 7, 8 and 9 -- -- --
STOCKHOLDERS' EQUITY - Note 4, 8, 9 and 12
Preferred Stock, $.01 par value, 1,000,000 shares authorized;
none issued -- -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
5,959,709, 5,951,209 and 7,497,096 shares issued and
outstanding, respectively 59,597 59,512 74,971
Additional Paid-in-Capital 5,297,424 4,976,259 11,823,592
Stock Subscriptions Receivable (21,547) (32,296) (21,547)
Retained Deficit (3,765,514) (3,503,009) (3,634,605)
----------- ----------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,569,960 1,500,466 8,242,411
----------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,378,510 $ 2,788,770 $ 9,633,945
=========== =========== ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1997 1996 1998 1997
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 6,537,146 $ 2,814,237 $ 5,921,691 $ 4,820,022
Ticket delivery income 1,784,770 421,540 2,657,720 1,196,394
----------- ----------- ----------- -----------
Total Revenues 8,321,916 3,235,777 8,579,411 6,016,416
----------- ----------- ----------- -----------
OPERATING EXPENSES
Payroll, commissions and
employee benefits 4,307,529 2,490,770 4,012,845 2,905,981
Telephone 1,250,888 702,870 1,442,029 787,488
Ticket delivery expense 771,249 407,579 808,808 523,789
Advertising 293,036 137,223 236,852 178,180
General and administrative 1,913,654 1,768,058 2,006,041 1,605,833
Interest expense 54,526 1,114,298 18,061 83,994
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 8,590,882 6,620,798 8,524,636 6,085,265
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE OTHER INCOME (268,966) (3,385,021) 54,775 (68,849)
OTHER INCOME
Other income 6,461 12,610 -- --
Interest income -- -- 76,134 4,726
NET EARNINGS (LOSS) $ (262,505) $(3,372,411) $ 130,909 $ (64,123)
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC $ (.04) $ (.68) $ .02 $ (.01)
- DILUTED -- -- $ .02 $ --
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 5,957,584 4,947,823 7,451,035 5,956,859
- DILUTED -- -- 7,834,070 --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Additional Stock
Common Stock Paid-in Subscriptions Retained
Shares Amount Capital Receivable Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 3,550,000 $ 35,500 $ 741,276 $ (32,296) $ (130,598) $ 613,882
Sale of common stock -
net of expenses of $469,098 -
Note 4 1,387,500 13,875 2,442,027 -- -- 2,455,902
Issuance of common stock in
connection with debt issuance
and services rendered - Note 4 1,013,709 10,137 1,458,581 -- -- 1,468,718
Issuance of stock options and
warrants for services and interest -- -- 334,375 -- -- 334,375
Net loss, year ended
December 31, 1996 -- -- -- -- (3,372,411) (3,372,411)
----------- ----------- ----------- ----------- ----------- -----------
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 - Note 4 8,500 85 21,165 -- -- 21,250
Issuance of stock options to
Directors - Note 4 -- -- 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 (UNAUDITED) 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-6
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996 1998 1997
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings (loss) $ (262,505) $(3,372,411) $ 130,909 $ (64,123)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and Amortization 129,411 97,866 284,130 114,714
Stock, options and warrants issued for
expenses and debt redemption 321,250 1,803,093 -- 21,250
Prepaid Rent Amortization 12,000 8,000 -- 9,000
Changes in operating assets and liabilities,
net of effects of acquisition:
(Increase) in receivables (384,740) (149,005) (328,827) (320,306)
(Increase) decrease in prepaids 5,370 (21,581) (137,883) --
(Increase) decrease in other assets -- -- 2,713 5,347
Increase in related party receivables (199,425) (100,000) -- (43,636)
Increase in deferred rent liability 29,507 108,721 (65,587) 108,369
Increase in accounts payable and
accrued expenses 1,441,489 530,167 (1,139,290) 335,811
----------- ----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES 1,092,357 (1,095,150) (1,253,835) 166,426
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of leasehold improvements and equipment (46,703) (371,546) (188,037) (46,703)
Purchase of Trademark -- (15,000) -- --
Merger deposits and deferred acquisition costs (317,330) (99,341) -- (120,999)
Cash paid for acquisition -- -- (2,114,665) --
----------- ----------- ----------- -----------
NET CASH FLOW USED BY
INVESTING ACTIVITIES (364,033) (485,887) (2,302,702) (167,702)
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
(Continued)
F-7
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 ((UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996 1998 1997
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Deferred offering cost $(1,358,573) $ (50,000) -- (558,658)
Proceeds from borrowings, net 50,000 -- -- --
Principal payments on debt (750) (281,000) (282,139) --
Issuance of common stock -- 2,481,404 6,657,847 --
Purchase of common stock -- -- (408,000) --
Stock Subscription Collection 10,749 -- -- 8,749
----------- ----------- ----------- -----------
NET CASH FLOW (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,298,574) 2,150,404 5,967,708 (549,909)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (570,250) 569,367 2,411,171 (551,185)
CASH AT THE BEGINNING OF PERIOD 588,960 19,593 18,710 588,960
----------- ----------- ----------- -----------
CASH AT THE END OF PERIOD $ 18,710 $ 588,960 $ 2,429,881 $ 37,775
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest Expense $ 39,953 $ 67,205 $ 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-8
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
NOTE 1: BUSINESS AND BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
800 Travel Systems, Inc. (the "Company") is a telemarketing travel company which
provides air transportation reservation services. The Company was formed in
November 1995 to acquire certain of the assets and assume certain liabilities of
1-800-Low Airfare, Inc. (the Predecessor Business), which occurred December 1,
1995.
The Company strives to furnish the lowest air fare available at the time of
reservation within the parameters provided by a customer.
The Company incorporated LAF Financial Services, Inc. ("LAF") on January 16,
1996, in the State of Delaware. At December 31, 1997, LAF had not issued any
stock and had conducted no business activities.
Leasehold Improvements and Equipment
Leasehold improvements and equipment is stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the respective assets, five to ten years.
Excess of Cost Over Fair Value of Net Assets
The excess of cost over fair value of net assets acquired is amortized over a
period of twenty-five (25) years. The Company periodically reviews the carrying
amount of this asset and evaluates its recoverability based upon future
estimated operating cash flows.
Trademarks
The cost of the trademarks is being amortized using the straight-line method
over their useful estimated lives of fifteen (15) years.
Revenue Recognition
Commission revenues are recognized when travel services are ticketed.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Accounts Receivable, Accounts payable and Notes Payable: The carrying
amount reported in the balance sheet for accounts receivable, accounts payable
and notes payable approximates their fair values due to their relatively short
maturity.
Long-Term Debt: The fair values of the Company's fixed-rate long-term debt
is estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. At
December 31, 1997, the fair value of the Company's long-term debt approximated
its carrying value.
(Continued)
F-9
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 1: BUSINESS AND BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Taxes
The Company records income tax expense using the liability method of accounting
for deferred income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial statement and income tax bases of the
Company's assets and liabilities. An allowance is recorded when it is more
likely than not that any or all of a deferred tax assets will not be realized.
The provision for income taxes includes taxes currently payable plus the net
change during the accounting period in deferred tax assets and liabilities
recorded by the Company.
Concentration of Credit Risk
The Company places its cash and temporary cash investments with high credit
quality financial institutions. At times such investments may be in excess of
FDIC insurance limits. At December 31, 1997, the Company's deposits did not
exceed FDIC insurance limits.
Advertising
Advertising costs are charged to expense as incurred and for the period ended
December 31, 1997 and 1996, amounted to $293,036 and $137,223, respectively.
Stock Based Compensation
In October 1995, the Financial Accounting Standard Board issued Statement
No.123, "Accounting for Stock Based Compensation." Statement No 123 established
a fair value method for accounting for stock-based compensation plans either
through recognition or disclosure. The Company has recognized in the
accompanying statements of operations the fair value amounts applicable to
stock-based compensation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from estimated
amounts.
(Continued)
F-10
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 1: BUSINESS AND BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Net Loss Per Common Share
Net income (loss) per common share is based on the weighted average number of
common shares outstanding during each respective year.
At December 31, 1997, the Company had issued stock options for 687,500 shares of
stock and stock warrants for 375,000 shares of stock, the earnings per share
computation did not include the exercise of the stock options and warrants due
to the antidilutive effect.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(Statement No. 128), which is required to be adopted for financial statements
issued for annual or interim periods after December 15, 1997. The adoption of
Statement No. 128 required a change in the presentation of earnings per share
(EPS) to replace primary and fully diluted EPS with a presentation of basic and
diluted EPS and to restate EPS for all periods presented. The adoption of
Statement No. 128 did not have a material impact on the Company's financial
statements.
In February 1997, the FASB also issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure"
(Statement No. 129). Statement No. 129 establishes standards for disclosing
information about entity's capital structure and applies to all entities.
Statement No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
"Omnibus Opinion -- 1996", and 15, "Earnings per Share", and FASB Statements of
Financial Accounting Standards No. 47, "Disclosure of Long-Term Obligation", for
entities that were subject to the requirements of APB Opinions 10 and 15 and
Statement No. 47 and consolidates them for ease of retrieval and for greater
visibility to non-public entities. Statement No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company experienced
no material revision in its disclosures when Statement No. 129 was adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (Statement No. 130). Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Statement No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an entity display
an amount representing total comprehensive income for the period in that
financial statement. Statement No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Statement No. 130 will
have no impact on the financial condition or results of operations of the
Company, but will require changes in the Company's disclosure and presentation
requirements.
(Continued)
F-11
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 1: BUSINESS AND BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Reclassifications
Certain prior year balances have been reclassified to conform with the current
presentation.
NOTE 2: LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment by major classification are as follows:
December 31,
--------------------- September 30,
1997 1996 1998
--------- --------- -------------
(unaudited)
Leasehold Improvements $ 155,885 $ 155,885 $ 164,041
Telephone Equipment 155,100 147,133 298,114
Furniture and Fixtures 78,106 78,106 88,O67
Computer Equipment 14,858 14,858 63,161
Office Equipment 46,718 7,982 275,321
--------- --------- ----------
450,667 403,964 888,704
Less Accumulated Depreciation (110,104) (39,734)) (219,424)
--------- --------- ----------
TOTAL LEASEHOLD IMPROVEMENTS
AND EQUIPMENT $ 340,563 $ 364,230 $ 669,280
========= ========= ==========
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT - RELATED PARTIES
On December 18, 1997, the Company borrowed $50,000 from an individual and
executed a note agreement with the following terms:
o 12% interest rate
o 3% loan origination fee paid to noteholder
o Due date is the earlier of (1) the closing of the Company's initial
public offering or (2) June 1, 1998
o Unsecured
(Continued)
F-12
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT - RELATED PARTIES (CONTINUED)
At December 31, 1997 and 1996, long-term debt was as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996 1998
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
10% purchase money notes, payable in three
annual installments of $30,000 plus interest,
due November 1998, unsecured $ 60,000 $ 60,000 $ 64,528
12% note payable, payable in monthly principal
installments of $16,667 plus interest, due February 29, 1999,
secured by a telephone system 250,000 250,000 83,333
Other -- 750 --
-------- -------- --------
$310,000 $310,750 $147,861
======== ======== ========
</TABLE>
Approximate maturities of long-term debt at December 31, 1997 are as follows:
1998 $260,000
1999 50,000
--------
$310,000
========
NOTE 4: STOCKHOLDERS' EQUITY
In connection with the initial capitalization of the Company 3,229,600 shares of
common stock were issued in exchange for subscriptions receivable of $32,296
(par value). The $21,547 had not been paid as of December 31, 1997.
During February 1996, the Company initiated a private placement of shares of
common stock. As of December 31, 1996, a total of 1,387,500 shares of common
stock had been sold and issued. These shares carry certain resale restrictions.
The total sales price of these shares was $2,845,000. Sales commissions
amounting to $360,000 were paid to related parties.
In February 1996, the Company issued 20,000 shares valued at $50,000 as a
rollover of a past due note payable.
During 1996, the Company issued 100,000 shares of stock to an officer of the
Company as a bonus. An expense of $120,000 has been recognized in connection
this transaction.
A total of 180,000 shares have been issued in 1996, for consulting services for
which an expense of $336,000 has been recognized.
(Continued)
F-13
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 4: STOCKHOLDERS' EQUITY (CONTINUED)
A total of 12,500 shares have been issued in connection with loans obtained. The
value of $15,000 was amortized as additional interest expense over the term of
the loans.
During 1996, the Company issued 40,000 shares of common stock, valued at
$100,000, to its landlord in connection with a lease. This amount will be
amortized as additional rent expense at the rate of $1,000 per month. The
$92,000 unamortized balance is included in prepaid expenses and other assets in
the accompanying December 31, 1996 balance sheet.
In connection with late penalties for past due loans, two related party
creditors received during 1996, 361,209 shares of common stock valued at
$847,718.
In 1996, the Company issued 275,000 warrants to purchase 275,000 shares of the
Company's common stock at a price of 110% of the public offering price. The
warrants can be exercised beginning on the first anniversary date of the public
offering. The fair value of the warrants was twelve and one half cents ($.125)
per warrant (aggregate fair value $34,375). The warrants were issued as
incentive to extend a certain note payable; therefore, the fair value was
recognized as interest expense in 1996.
In 1996, the Company issued options to purchase 300,000 shares of its common
stock at a price of $1.00 per share. These options can be exercised beginning
one year from date of grant. The fair value of the common stock at the date of
issuance of the options was $2.00 per share; therefore, the accompanying
statement of operations for the year ended December 31, 1996, recognized a
consulting expense of $300,000 applicable to the difference between the option
exercise price and the fair value of the shares at the date of the grant of the
option.
In 1997, the Company issued 8,500 shares of its common stock valued at $21,250
for services.
In October and November 1997, three individuals were elected to the Board of
Directors of the Company and each of these new directors were issued options to
purchase 50,000 shares of the Company's common stock at a price of $3.00 per
share. The difference between the option price and the initial public offering
price of $5.00 was recognized as a charge against operations at the time the
options were issued. In addition, each new director was given an option to
purchase 50,000 shares of the Company's common stock at $3.10 per share
exercisable six months after the closing of the Company's initial public
offering. The difference between the initial public offering price and the
option price of these options will be amortized as a charge to operations
ratably over the six month period.
F-14
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 5: INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
December 31,
----------------------
1997 1996
--------- ---------
Deferred Tax Assets:
Net operating loss carryforwards $ 811,000 $ 779,000
Less valuation allowance (811,000) (779,000)
--------- ---------
NET DEFERRED TAX ASSET $ -- $ --
========= =========
At December 31, 1997 and 1996, the Company has a tax net operating loss
carryforward of approximately $2,386,000 and $2,423,000 respectively, to offset
future taxable income. The tax net operating loss carryforwards begin to expire
in 2010. Realization of any portion of the deferred tax asset resulting from the
Company's net operating loss carryforward is not considered more likely than
not. Accordingly, a valuation allowance has been established for the full amount
of the deferred tax asset.
NOTE 6: COMMITMENTS AND CONTINGENCIES
The minimum future office rental commitment for leases approximates the
following:
Year ending December 31,
1998 $ 189,921
1999 196,877
2000 206,615
2001 213,571
2002 223,309
Thereafter 1,084,053
----------
$2,114,346
==========
Rent expense totaled approximately $229,000 and $170,000 for the years ended
December 31, 1997 and 1996, respectively.
(Continued)
F-15
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 6: COMMITMENTS AND CONTINGENCIES (Continued)
The Company entered into a services agreement with a stockholder. The agreement
expired on December 31, 1996, and required $3,000 payments per week plus
expenses. This stockholder was paid services fees amounting to $152,700, a
common stock bonus of 150,000 shares of common stock (fair market value of
$300,000), commissions for sale of stock of $221,000, plus expenses of $199,853
for the year ended December 31, 1996. For the year ended December 31, 1997, the
same stockholder was paid $114,800 as services fees, plus expenses of $296,109.
In September 1996, the Company entered into a new agreement with its telephone
service provider. Pursuant to the new four-year agreement, the telephone service
provider granted the Company a credit of $15,000 towards installation charges
and an additional $180,000 for general charges in the fifth month following the
initiation of service (subject to forfeiture in the event the Company
discontinues services in the second year of the agreement) and will grant the
Company a credit of $180,000 for general charges in the seventeenth month
following initiation of services. These credits are being recognized as
reduction in telephone expense ratably over the four year term of the agreement.
The agreement requires a minimum annual commitment to the telephone service
provider of $1,680,000.
The Company is dependent on two (2) airlines for approximately fifty percent
(50%) of its revenues, and the Company's ability to quote air travel ticket
prices, make reservations and sell tickets is dependent upon the performance of
Sabre electronic travel reservation system.
The Company entered into employment agreements with three (3) executive
employees, which include the following contract provisions:
o Aggregate initial base compensation of $252,000
o Annual pay raises of five percent (5%) of base compensation plus the
annual increase in the consume price index on each October 1, 1998 and
1999
o Agreements terminate September 30, 2000
o Each employee agrees not to compete with the business of the Company
for a period of ninety (90) days following the termination of their
employment with the Company
o Options to purchase 87,500 shares of the Company's common stock at a
price of $5.00 per share
o Registered warrants to purchase 25,000 shares of Company stock
As a further inducement to sign the above mentioned employment agreement, the
President of the Company will be issued 50,000 shares of the Company's common
stock on the second anniversary of the execution of his employment agreement.
The per share fair value of the shares to be issued was $5.00, and the
aggregated value of $250,000 will be amortized as a charge against operations
ratably over the two (2) years.
F-16
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 7: SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1996:
1) The Company issued 20,000 shares of common stock valued at $50,000 for
a note payable.
2) The Company issued 12,500 shares of common stock for past due interest
totaling $15,000 on two notes payable.
3) There were 40,000 shares of common stock issued to JFJ Realty as
prepaid rent of $100,000.
4) Various creditors of the Predecessor Business and the Predecessor
Business were issued 300,000 shares of common stock.
5) The Company issued 361,209 shares of common stock valued at $847,718
for two past due notes payable.
6) The Company issued 100,000 shares of common stock with a value of
$120,000 as a bonus to the Company's President.
7) Two shareholders were issued 180,000 shares of common stock valued at
$336,000 for consulting services.
8) The Company issued 300,000 stock options with a fair value of $1.00
for services.
9) The Company issued 275,000 warrants with a fair value of $.125 in
recognition of a loan extension.
For the year ended December 31, 1997:
1) The Company issued 8,500 shares of common stock valued at $21,250 for
services.
2) The Company issued stock options for the purchase of 150,000 shares of
the common stock at a price of $3.00 which was $2.00 per share less
than its fair value. The aggregate $300,000 was charged against
operations in 1997.
F-17
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 8: INITIAL PUBLIC OFFERING
On January 15, 1998, the Company completed an initial public offering and sold
1,350,000 shares of its common stock (par share $.01) at a price of $5.00 per
share and 2,700,000 redeemable common stock purchase warrants at a price of
$.125 per warrant. The following summarizes this financial transaction:
Proceeds from Offering:
Common Stock $ 6,750,000
Redeemable Purchase Warrants 337,500
-----------
7,087,500
Less Underwriters' Commission and Expense (13%) (921,375)
-----------
Net Proceeds to Company 6,166,125
Less Company's Offering Expenses (1,410,929)
-----------
Net Proceeds $ 4,755,196
===========
The $6,166,125 was deposited in the Company's bank account on January 21, 1998.
Each warrant entitles its holder to purchase one (1) share of the Company's
common stock at a price of $6.25 per share during the five year period
commencing on January 15, 1998. The warrants are redeemable by the Company for
$0.05 per warrant on not less than thirty (30) nor more than sixty (60) days
written notice if the closing price for the common stock for seven (7) trading
days during a ten (10) consecutive trading period ending not more than fifteen
(15) days prior to the date that the note of redemption is mailed equals or
exceeds $10.00 per share.
Upon completion of the initial public offering, the Company's stockholders'
equity is as follows:
<TABLE>
<CAPTION>
December 31, January 15,
1997 1998
------------ ------------
(As Reported)
<S> <C> <C>
Common Stock, $.01 par value, 10,000,000 shares
authorized; 5,959,709 and 7,309,709 in 1997
and 1998, respectively $ 59,597 $ 73,097
Additional Paid-in-Capital 5,297,424 10,247,120
Stock Subscription Receivable (21,547) (21,547)
Retained Deficit (3,765,514) (3,765,514)
------------ ------------
$ 1,569,960 $ 6,533,156
============ ===========
</TABLE>
The additional paid-in-capital balance at January 15, 1998 is stated net of an
estimated $208,000 income tax effect.
F-18
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 9: MERGER AGREEMENT
In November, 1996, Company entered into a merger agreement with the Joseph
Stevens Group, Inc. ("Stevens"). The agreement calls for all of the capital
stock of Stevens to be exchanged for shares of the Company's common stock and a
note payable of $1,578,000 (subject to adjustment for assumed liabilities). The
merger became effective on the effective date of the Company's initial public
offering (January 15, 1998). The Company had made an escrow payment of $46,665
to the seller in connection with the anticipated merger. In addition the Company
has incurred costs and expenses associated with the merger of $295,006 which
were deferred at December 31, 1997, and made an advance payment on the note
payable of $75,000.
Upon the effective date, the Company issued to the Selling Shareholder 383,333
shares of the Company's stock. If, on the second anniversary date of the public
offering, the value of the Company's shares then held by the Selling
Shareholder, together with the aggregate amount of cash and the fair market
value of any assets or properties received by the Selling Shareholder in
connection with the sale prior to the second anniversary of the closing date of
all or any of the shares received in the merger, is less than $2,571,000, then
the Company shall issue to the Selling Shareholder, on the second anniversary of
the public offering closing, additional shares of the Company, using the price
of the Company's common stock on the second anniversary of the public offering
closing and an appropriate number of additional common shares of the Company
shall be issued to the Selling Shareholder based upon such price in order to
make up any such deficiency.
As part of the merger agreement, the Company entered into an operating agreement
with Stevens, whereby, the Company assumed all operations of Stevens as of
January 1, 1997, and assumed any economic gains or losses from these operating
activities. The financial statement for the year ended December 31, 1997,
includes the operations of Stevens from January 1, 1997 to December 31, 1997.
For the year ended December 31, 1997, approximately thirty-seven per cent (37%)
of commission revenues were applicable to the Stevens operations.
NOTE 10: GROSS RESERVATIONS
The gross dollar amounts for reservations of airline tickets were as follows:
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- 1998
Quarter 1997 1996 (Unaudited)
----------- ----------- -----------
January - March $10,441,784 $ 3,779,151 $15,150,399
April - June 13,134,864 6,791,925 20,818,983
July - September 15,576,003 6,387,082 23,265,047
October - December 14,693,237 6,632,624 --
----------- ----------- -----------
$53,845,888 $23,590,782 $59,234,429
=========== =========== ===========
F-19
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the results of operations for each of the quarters in
the year ended December 31, 1997 and 1996 ('000 omitted, except for (loss) per
share):
<TABLE>
<CAPTION>
1996 1997
--------------------------------------------------- -------------------------------------------------
Mar 31, Jun 30, Sep. 30, Dec 31 Total Mar 31, Jun 30, Sep. 30, Dec 31 Total
------- ------- -------- ------ ----- ------- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 364 $ 959 $ 867 $ 1,046 $ 3,236 $ 1,639 $ 2,083 $ 2,294 $ 2,306 $ 8,322
Operating Expenses 1,539 1,519 1,499 2,064 6,621 1,979 1,955 2,151 2,506 8,591
(Loss) Income Before
Other Income (1,175) (560) (632) (1,018) (3,385) (340) 128 143 (200) (269)
Other Income -- 6 64 (57) 13 3 2 -- 1 6
Net (Loss) Income (1,175) (554) (568) (1,075) (3,372) (337) 130 143 (199) (263)
(Loss) Per Share (.29) (.12) (.11) (.19) (.68) (.06) .02 .02 (.03) (.04)
</TABLE>
In the last quarter of 1997, the Company recognized a $300,000 charge against
operations applicable to the stock options issued to members of the Board of
Directors.
NOTE 12: STOCK OPTIONS AND WARRANTS
In 1997, the Company adopted its 1997 Stock Option Plan (the "Stock Option
Plan"), and under the Stock Option Plan, 250,000 shares of common stock have
been reserved for issuance upon exercise of stock options. The Stock Option Plan
is designed as a means to attract, retain and motivate qualified and competent
persons who are key to the Company, including employees, officers and directors,
and upon whose efforts and judgment the success of the Company is largely
dependent, through the encouragement of stock ownership in the Company by such
persons.
(Continued)
F-20
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 12: STOCK OPTIONS AND WARRANTS (CONTINUED)
The Compensation Committee of the Board of Directors (the "Compensation
Committee") administers and interprets the Stock Option Plan and is authorized
to grant options thereunder to all eligible employees, officers and directors of
the Company. The Stock Option Plan provides for the granting of both incentive
stock options and nonqualified stock options. Options are granted under the
Stock Option Plan on such terms and at such prices as determined by the
Compensation Committee, except that the per share exercise price of incentive
stock options cannot be less than the fair market value of the common stock on
the date of grant. Each option is exercisable after the period or periods
specified in the option agreement, but no option may be exercisable after the
expiration of ten years from the date of grant. Incentive stock options granted
to an individual who owns (or is deemed to own) at least 10% of the total
combined voting power of all classes of stock of the Company must have an
exercise price of at least 110% of the fair market value of the common stock on
the date of grant and a term of no more than five years.
No incentive stock option, and unless the Compensation Committee's prior written
consent is obtained (which consent may be obtained at the time an Option is
granted) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Exchange Act no nonqualified stock option, may be
transferred other than by will or the laws of descent and distribution. Each
option may be exercisable during the optionee's lifetime only by the optionee,
or in the case of a nonqualified stock option that has been transferred with the
Compensation Committee's prior written consent, only by the transferee consented
to by the Compensation Committee. Unless the Compensation Committee's prior
written consent is obtained (which consent may be obtained at the time an Option
is granted) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Exchange Act, no shares of common stock acquired by an
officer, as that term is defined under Rule 16b-3, of the Company or director
pursuant to the exercise of an option may be transferred prior to the expiration
of the six-month period following the date on which the option was granted.
The Stock Option Plan also authorizes the Company to make or guarantee loans to
optionees to enable them to exercise their options. Such loans must (i) provide
for recourse to the optionee, (ii) bear interest at a rate no less than the
prime rate of interest, and (iii) be secured by the shares of common stock
purchased. The Board of Directors has the authority to amend or terminate the
Stock Option Plan, provided that no such action may substantially impair any
outstanding option without the written consent of the holder, and provided
further that certain amendments of the Stock Option Plan are subject to
shareholder approval. Unless terminated sooner, the Stock Option Plan will
continue in effect until all options granted thereunder have expired or been
exercised, provided that no options may be granted after 10 years from the date
the Board of Directors adopted the Stock Option Plan.
As of December 31, 1997, the Company had outstanding options to purchase an
aggregate of 87,500 shares of common stock under the Plan at a weighted average
exercise price of $5.00 per share.
(Continued)
F-21
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
(Continued)
NOTE 12: STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of all the stock option activity:
Weighted Average
Stock Exercise Price
Options Per Share
------- ----------------
Outstanding as of December 31, 1995 -- $ --
Granted 300,000 $ 1.00
Expired or cancelled -- $ --
-------
Outstanding as of December 31, 1996 300,000 $ 1.00
Granted 387,500 $ 3.46
Expired or cancelled -- $ --
-------
Outstanding as of December 31, 1997 687,500 $ 2.39
=======
Exercisable at:
December 31, 1996 300,000 $ 1.00
======= ========
December 31, 1997 450,000 $ 1.67
======= ========
Available for grant:
December 31, 1997 162,500
=======
At December 31, 1997, the Company had 375,000 warrants outstanding with a
weighted average exercise price of $7.25.
NOTE 13 - 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 nine month period
ended September 30, 1998, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
F-22
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
NOTE 14 - ACQUISITION
In January 1998, the Company acquired selected assets and selected liabilities
of Joseph Stevens Group, Inc. in exchange for the issuance of 383,333 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 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 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-23
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes applicable to
unaudited periods)
NOTE 15 - 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
September 30,
--------------------
1998 1997
<S> <C> <C>
Net earnings (loss) -
(numerator) $ 130,909 $ (64,123)
=========== ===========
Basic:
Weighted average shares
outstanding
(denominator) 7,451,035 5,956,859
=========== ===========
Net earnings (loss) per
common share - basic $ .02 $ .01
=========== ===========
Diluted:
Weighted average shares
outstanding 7,451,035 5,956,859
Effect of dilutive options 383,035 --
----------- -----------
Adjusted weighted
average shares
(denominator) 7,834,070 5,956,859
=========== ===========
Net earnings (loss) per
common share - diluted $ .02 $ .01
=========== ===========
</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 16 - INCOME TAXES
Income taxes have not been provided on the earnings for the nine months ended
September 30, 1998 due to the utilization of net operating loss carryovers that
have not been previously recognized.
NOTE 17 - 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.
In September 1998 the Company entered into a further new agreement with its
telephone service provider. Pursuant to this three-year agreement the Company
waived its right to receive the $180,000 credit due in the seventeenth month of
its prior agreement; and the service provider waived any claim it might have had
against the Company for its failure to meet the minimum usage levels provided in
the prior agreement and reduced the Company's minimum usage commitment to
$1,560,000.
F-24
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company or the Selling
Securityholders. This Prospectus does not constitute an offer to sell or
solicitation of an offer to buy any of the securities offered under this
Prospectus in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
---------------
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary.................. 2
Risk Factors........................ 7
The Stevens Merger.................. 15
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 19
Dilution............................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 27
Management.......................... 40
Certain Transactions................ 45
Concurrent Offering................. 49
Description of Securities........... 50
Shares Eligible for Future Sale..... 53
Legal Matters....................... 57
Experts............................. 57
---------------
Until February __, 1999 (25 days after the date of this Prospectus) all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- 54 -
<PAGE>
================================================================================
800 TRAVEL
SYSTEMS, INC.
3,321,800 Redeemable
Common Stock Purchase Warrants
and
3,310,800 shares of Common Stock
Issuable Thereunder
---------------
PROSPECTUS
---------------
January __, 1999
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY __, 1999
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED JANUARY __, 1999)
800 TRAVEL SYSTEMS, INC.
478,284 Shares of Common Stock
250,000 Redeemable Common Stock Purchase Warrants
(and 250,000 Shares of Common Stock Issuable under the Warrants)
This Prospectus supplement relates to the offer and sale by certain
selling securityholders (the "Selling Securityholders") named herein under
"Selling Securityholders" of up to 478,284 shares (the "Registered Shares") of
common stock, $.01 par value per share ("Common Stock"), of 800 Travel Systems,
Inc. (the "Company"), 250,000 Redeemable Common Stock Purchase Warrants (the
"Registered Warrants") and 250,000 shares of Common Stock issuable under the
Warrants (collectively, the "Registered Securities").
The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders. All expenses of registration incurred
in connection with this Offering are being borne by the Company, but all selling
and other expenses incurred by Selling Securityholders will be borne by the
Selling Securityholders. The outstanding Registered Securities were originally
issued by the Company in private transactions. See "Selling Securityholders."
The Selling Securityholders may from time to time sell all or a
portion of their Registered Securities in the over-the-counter market or on any
national securities exchange or automated interdealer quotation system on which
the Registered Securities may hereafter be listed or traded, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Registered Securities may be
sold directly or through brokers or dealers or in a distribution by one or more
underwriters on a firm commitment or best efforts basis. Each Selling
Stockholder and any agent or broker-dealer participating in the distribution of
the Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). Any commissions
received by and any profit on the resale of the Registered Securities may be
deemed to be underwriting commissions or discounts under the Securities Act.
The Registration Statement, of which this Prospectus forms a part,
also covers the offering by the Company of 3,321,800 shares of Common Stock
issuable upon exercise of 3,321,800 Warrants, including 3,105,000 Warrants sold
by the Company in its initial public offering which closed on January 21, 1998
(the "IPO") and the closing of the Representatives' exercise of their
over-allotment option which occurred on January 23, 1998.
Brokers or dealers effecting transactions in the Registered
Securities on behalf of the Selling Securityholders should confirm the
registration thereof under the securities laws of the state in which such
transactions occur or the existence of an exemption from registration.
The Registered Securities are listed on the Nasdaq SmallCap Market
System ("Nasdaq"); however no assurance can be given that a trading market for
the Registered Securities will be sustained.
SEE "RISK FACTORS" ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus Supplement is January __, 1999.
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from sales of any
of the Registered Securities by the Selling Securityholders.
SELLING STOCKHOLDERS
The Prospectus Supplement relates to the offer and sale from time to
time by certain stockholders of the Company of up to 478,283 outstanding shares
of Common Stock and 250,000 Warrants (and 250,000 shares of Common Stock
issuable thereunder).
TRANSFER RESTRICTIONS
The holders of the Registered Securities (other than The Joseph
Stevens Group, LLC) have agreed not to offer, sell or otherwise dispose of
("Sell") such Registered Securities until January 21, 1999.
2
<PAGE>
IDENTITY AND OWNERSHIP OF SELLING SECURITYHOLDERS
The following table provides certain information with respect to the
Selling Securityholders and the number of shares of Common Stock owned, offered
and to be owned after the offering by each Selling Securityholder, subject to
certain transfer restrictions. See "-- Transfer Restrictions."
<TABLE>
<CAPTION>
Maximum
Shares of Number of Shares Shares of
Common Stock of Common Stock Common Stock to
Owned Before to be Sold in the be Owned After
Selling Securityholders Offering Offering the Offering(1)
- ----------------------- ------------ ----------------- ---------------
<S> <C> <C> <C>
The Joseph Stevens Group, LLC(2)........ 198,718 198,718 0
Neil Prior.............................. 150,000 150,000 0
Jerry Dowell............................ 129,566 129,566 0
The Joseph Stevens Group, LLC........... 250,000(3) 250,000 0
</TABLE>
(1) Assumes all shares registered herewith are sold by each Selling
Stockholder. The referenced offering is not the public offering covered by
the accompanying Prospectus.
(2) The sole stockholder of The Joseph Stevens Group, Inc. is The Joseph
Stevens Group, LLC ("JSG"). The equity members of JSG are Joseph Elizondo,
Steve Rohrlick and Western Horizons, Ltd., who are owners, respectively,
of 44.3%, 44.3% and 11.4%, respectively, of the equity interest in JSG.
See "The Stevens Merger."
(3) Represents the warrants being registered hereunder.
Outstanding Common Stock.
As of the date of this Prospectus Supplement, the Company has issued
and outstanding 7,497,096 shares of Common Stock. See "Capitalization."
PLAN OF DISTRIBUTION
The Selling Securityholders may from time to time sell all or a
portion of their Registered Securities in the over-the-counter market or on any
national securities exchange or automated interdealer quotation system on which
the Registered Securities may hereafter be listed or traded, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Registered Securities may be
sold directly or through brokers or dealers or in a distribution by one or more
underwriters on a firm commitment or best efforts basis. The methods by which
the Registered Securities may be sold include (i) a block trade (which may
involve crosses) in which the broker or dealer engaged will attempt to sell the
Registered Securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction, (ii) purchases by a broker or
dealer as principal and resales by such broker dealer for its account pursuant
to this Prospectus Supplement, (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchasers or to or through
marketmakers, (iv) transactions in put or call options or other rights (whether
exchange-listed or otherwise) established after the effectiveness of the
Registration Statement of which this Prospectus Supplement is a part and (v)
privately negotiated transactions. In addition, any of the Registered Securities
that qualify for sale
3
<PAGE>
pursuant to Rule 144 under the Securities Act may be sold in transactions
complying with such Rule, rather than pursuant to this Prospectus Supplement.
In the case of the sales of the Registered Securities effected to or
through broker-dealers, such broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the Selling Securityholders or the
purchasers of the Registered Securities, sold by or through such broker-dealers,
or both. The Company has advised the Selling Securityholders that the
anti-manipulative provisions of Regulation M under the Exchange Act may apply to
their sales in the market and has informed them of the need for delivery of
copies of this Prospectus Supplement. The Company is not aware as of the date of
this Prospectus Supplement of any agreements between any of the Selling
Securityholders and any broker-dealers with respect to the sale of the
Registered Securities. The Selling Securityholders and any broker-dealers or
agents participating in the distribution of the Securities may be deemed to be
"underwriters" within the meaning of the Securities Act and any commissions
received by any such broker-dealers or agents and profit on any resale of the
Registered Securities may be deemed to be underwriting commissions under the
Securities Act. The commissions received by a broker-dealer or agent may be in
excess of customary compensation. The Company will receive no part of the
proceeds from the sale of any of the Registered Securities by the Selling
Securityholders.
The Company will pay all costs and expenses incurred in connection
with the registration under the Securities Act of the Registered Securities
offered by the Selling Securityholders, including without limitation all
registration and filing fees, listing fees, printing expenses, fees and
disbursements of counsel and accountants for the Company. Each Selling
Securityholder will pay all brokerage fees and commissions, if any, incurred in
connection with the sale of the Registered Securities owned by the Selling
Securityholder. In addition, the Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Securities Act.
There is no assurance that any of the Selling Securityholders will
sell any or all of the Registered Securities offered by them.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby was passed
upon for the Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New
York.
4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
The Registrant has authority under Section 145 of the Delaware
General Corporations Law to indemnify its directors and officers to the extent
provided in such statute. The Registrant's Amended and Restated Certificate of
Incorporation provides that the Registrant shall indemnify its executive
officers and directors to the fullest extent permitted by law either now or
hereafter. The Registrant has also entered into an agreement with each of its
directors and certain of its officers wherein it has agreed to indemnify each of
them to the fullest extent permitted by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 25. Other Expenses of Issuance and Distribution.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (excluding
the Solicitation Fee) will be as follows:
Printing and engraving expenses.............................. 20,000
Accounting fees and expenses................................. 30,000
Legal fees and expenses...................................... 60,000
Miscellaneous................................................ 13,187
------
Total.................................... $123,187
========
All amounts are estimated.
ITEM 26. Recent Sales of Unregistered Securities.
In connection with the initial capitalization of the Company, the
Company issued 3,229,600 shares of Common Stock to the officers and directors of
the Company in exchange for subscriptions receivable of $32,296 (par value). The
offering was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering. Each of the investors was an
officer or director of the Company, or a sophisticated investor familiar with
the Company.
In December 1995, in connection with the purchase of assets of 1-800
Low-Airfare, Inc. and its wholly-owned subsidiary S. Travel, Inc. (collectively,
the "Predecessor Business") and the assumption by the Company of certain of its
liabilities, the Company agreed to issue an aggregate of 300,000 shares of
Common Stock to creditors of the Predecessor Business who chose to convert debt
held by them at the rate of $10.00 of such debt in the Predecessor Business per
share of the Company's Common Stock. Approximately 50 creditors of the
Predecessor Business elected to convert $1,664,340 of such indebtedness for
166,434 shares of Common Stock. The remaining 133,566 shares were issued to S.
Travel, Inc. The offering was made in reliance on Section 4(2) of the Securities
Act as a transaction not involving any public offering. No public solicitation
was made in connection with
<PAGE>
that offering which was limited to creditors of the Predecessor Business.
Further, the Company believes that each of the persons or entities who elected
to convert their debt for shares in the Company was a sophisticated investor.
During 1996 the Company issued an aggregate of 713,709 shares of
Common Stock to the following employees, consultants, third party service
providers, its landlord and lenders in satisfaction of amounts due for services
rendered, rent and as penalties for failure to timely repay amounts loaned to
the Company:
# of Shares Value ($)
of Shares
Steve Clarke................................... 20,000 50,000
Michael Cantor................................. 10,000 12,000
Jose Colon..................................... 2,500 3,000
JFJ Real Estate LP............................. 40,000 100,000
Michael Cantor................................. 220,600 551,500
Jose Colon..................................... 30,000 75,000
Mark Mastrini.................................. 100,000 120,000
Thomas Stalzer................................. 25,000 30,000
Pasquale Guadagno.............................. 5,000 6,000
Scot Spencer................................... 150,000 300,000
Michael Cantor................................. 50,609 101,218
Perry Trebatch................................. 60,000 120,000
------ -------
713,709 $1,468,718
======= ==========
The offerings were made in reliance on Section 4(2) of the Securities Act as
transactions involving a limited number of offerees and not involving any public
offering. Further, with the exception of JFJ Real Estate LP, the Company's
landlord, each of the investors had a pre-existing relationship with the
Company, as officer, director, shareholder, creditor or counsel, and the Company
believes that all of the investors were sophisticated investors capable of
evaluating the works of an investment in the Company.
In December 1995 the Company issued 20,000 shares of Common Stock to
a lender in satisfaction of debt outstanding. The offering was made in reliance
on Section 4(2) of the Securities Act as a transaction not involving any public
offering. The Company believes that such lender was a sophisticated investor.
In 1996 the Company sold and issued 1,387,500 shares of Common Stock
to investors in a private placement conducted through various individuals who
were paid finder's fees. The Common Stock was sold at an average price per share
of $2.11 to the persons set forth below:
Buyer Name # Shares $ Amount
- ----------
Herbert Wolas, Tte............................. 40,000 80,000
Casino Partners................................ 40,000 80,000
Warren Smith................................... 20,000 50,000
<PAGE>
Stan Erickson.................................. 40,000 80,000
Michael Smith.................................. 40,000 80,000
Joseph Smith................................... 40,000 80,000
Alfred Angrisani............................... 40,000 80,000
Jack Threadgill................................ 80,000 160,000
Barry Saunders................................. 40,000 100,000
Rex Beal....................................... 20,000 41,000
Perry Trebatch................................. 100,000 200,000
Don Clancy..................................... 20,000 42,000
Andrew Shevins................................. 20,000 42,000
Mees Pierson (Bahamas) Ltd..................... 425,000 850,000
George Fina.................................... 20,000 50,000
Arthur Pava.................................... 40,000 100,000
Albert Wardi................................... 12,500 25,000
Charles Roeske................................. 20,000 40,000
B.A. Bobanic................................... 10,000 25,000
Edward Marini.................................. 20,000 40,000
Michael Smith.................................. 10,000 20,000
Robert Horowitz................................ 40,000 100,000
Ernest Gottdiener.............................. 40,000 100,000
Eric Hamilton.................................. 40,000 100,000
Jack Busselle.................................. 20,000 50,000
Andrew Shevins................................. 20,000 50,000
Harry Baron.................................... 40,000 80,000
Alfred Angrisani............................... 40,000 80,000
Romajo Partners LP............................. 50,000 100,000
------ -------
1,387,500 $2,925,000
========= ==========
The individuals set forth below were paid the following fees in
connection with their placement of the Company's securities in the private
placement: (i) Pasquale Guadagno (Director) -- $45,000; (ii) Mark D. Mastrini
(President, Chief Operating Officer and Director) -- $2,000; (iii) Jerrold B.
Sendrow (Vice-President-Finance, Chief Financial Officer, Treasurer and
Secretary) -- $2,000; (iv) Scot Spencer (service provider to the Company) --
$231,000; (v) Scott M. Goodman, an unaffiliated third party, $40,000; and (vi)
Mario Giovanelli an unaffiliated third party $20,000. Messrs. Mastrini and
Sendrow subsequently returned such commissions to the Company. The offering was
made in reliance on Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, as an offering only to accredited investors. The Company
also paid Mr. Guadagno $10,000 in connection with the issuance of shares to one
of the Company's lenders.
<PAGE>
During 1997 the Company issued 8,500 shares to the following third party
vendors for services rendered:
Reason For
Stockholder Name Issuance # of Shares Value
- ----------------
Albert Wardi............................... Services 3,500 $ 8,750
Barry Saunders............................. Services 5,000 12,500
----- ------
8,500 $21,250
===== =======
The offerings were made in reliance on Section 4(2) of the Securities Act as
transactions involving a limited number of offerees and not involving any public
offerings. Mr. Saunders has represented to the Company in writing that he is an
accredited investor.
Simultaneously with the Company's initial public offering which
closed on January 21, 1998, the Company issued 383,333 shares of its Common
Stock to The Joseph Stevens Group, Inc. in connection with the Stevens Merger.
Such issuance was made in reliance on Section 4(2) of the Securities Act as a
transaction involving a limited number of offerees and not involving any public
offering.
ITEM 27. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit Description
------- -----------
1.1 -- Proposed form of Underwriting Agreement(3)
1.2 -- Agreement Among Underwriters(3)
1.3 -- Selected Dealer Agreement(3)
1.4 -- Representatives' Warrant Agreement(5)
2.1 -- Asset Purchase Agreement dated as of November 13, 1995
among 1-800 Low-Air Fare, Inc., S. Travel, Inc. and
the Company(2)
2.2 -- Amended and Restated Agreement and Plan of Merger
dated November 11, 1996 among the Company, Joseph
Stevens Group, Inc. and Joseph Stevens Group, LLC(3)
2.3 -- Amended and Restated Interim Operating Agreement
between the Company and Joseph Stevens Group, Inc.(3)
2.4 -- Form of Indemnity and Release Agreement among the
Company, Joseph Stevens Group, Inc., Joseph Stevens
Group, LLC, Steve Rohrlick, Joe Elizondo, MOHS, Inc.
and WH/JSG LLC (Exhibit C to the Merger Agreement
listed as Exhibit 2.2 herein)(5)
2.5 -- Form of Mutual Release Agreement (Exhibit D to the
Merger Agreement listed as Exhibit 2.2 herein)(5)
2.6 -- Form of Promissory Note from Joseph Stevens Group,
Inc. to Joseph Stevens Group, LLC (Exhibit E to the
Merger Agreement listed as Exhibit 2.2 herein)(5)
2.7 -- Form of Escrow Agreement by and among the Company,
Joseph Stevens Group, Inc. and Vincent, Berg, Stalzer,
Menendez, P.C. (Exhibit F to the Merger Agreement
listed as Exhibit 2.2 herein)(5)
2.8 -- First Amendment dated September 9, 1997 to Amended and
Restated Agreement and Plan of Merger(5)
2.9 -- Second Amendment dated October 17, 1997 to Amended and
Restated Agreement and Plan of Merger(6)
<PAGE>
2.10 -- Third Amendment dated October 29, 1997 to Amended and
Restated Agreement and Plan of Merger (8)
2.11 -- Fourth Amendment dated December 16, 1997 to Amended
and Restated Agreement and Plan of Merger (8)
3.1 -- Proposed form of Registrant's Amended and Restated
Certificate of Incorporation(3)(5)
3.2 -- Proposed form of Registrant's Amended and Restated
Bylaws(3)(5)
4.1 -- Specimen Common Stock certificate(5)
4.2 -- Specimen Warrant Certificate and Form of Warrant
Agreement(3)
5.1 -- Opinion of Phillips Nizer Benjamin Krim & Ballon LLP
as to the validity of the Common Stock being
registered(5)
10.1 -- Form of Registrant's 1997 Stock Option Plan(2)
10.2 -- Promissory Note of the Company dated November 7,95 in
the amount of $30,000 to the order of S. Travel, Inc.
due and payable November 7, 1997(2)
10.3 -- Promissory Note of the Company dated November 7, 1995
in the amount of $30,000 to the order of S. Travel,
Inc. due and payable November 7, 1998(2)
10.4 -- Redemption Agreement between the Company and Michael
Cantor(2)
10.5 -- Form of Redemption Agreement between the Company and
Jose Colon(3)
10.6 -- Agreement between the Company and Perry Trebatch(2)
10.7 -- Lease dated February 10, 1996 by and between JFJ Real
Estate Limited Partnership and the Company(2)
10.8 -- Airlines Reporting Corporation ("ARC") Agent Reporting
Agreement(2)
10.9 -- Letter dated March 6, 1996 from ARC approving change
of ownership(2)
10.10 -- Subscriber Service Agreement dated November 27, 1995
between the Company and Payroll Transfers Interstate,
Inc.(2)
10.11 -- Form of Employment Agreement between the Company and
Mark D. Mastrini(2)(5)
10.12 -- Form of Employment Agreement between the Company and
Jerrold B. Sendrow(2)(5)
10.13 -- Form of Employment Agreement between the Company and
Biagio Bellizzi(2)(5)
10.14 -- Form of Consulting Agreement between the Company and
Lucien Bittar(3)
10.15 -- Agreement dated as of March 1, 1997 by and between the
Company and Global Discount Travel Services(3)
10.16* -- SABRE Subscriber Agreement dated as of January 28,
1994 by and between S. Travel, Inc., (the Company's
predecessor entity), and American Airlines, Inc.(3)(4)
10.17* -- Amendment No. 1 to SABRE Subscriber Agreement dated
February 14, 1994 by and between 1-800 Low-Air Fare
Travel (predecessor entity of the Company), and
American Airlines, Inc.(3)(4)
10.18* -- Suspension of Service Agreement dated April 3, 1996 by
and between the Company and American Airlines,
Inc.(3)(4)
10.19* -- Amendment to SABRE Subscriber Agreement dated July 19,
1996 by and between the Company, and American
Airlines, Inc.(3)(4)
10.20* -- SABRE Subscriber Agreement dated November 20, 1996 by
and between the Company and The SABRE Group,
Inc.(3)(4)
10.21* -- Cluster Amendment to SABRE Subscriber Agreement dated
November 20, 1996 by and between the Company and The
SABRE Group, Inc.(3)(4)
10.22 -- Lease Agreement effective November 27, 1995 between
the Company and Roque De La Fuente Alexander Revocable
Trust No. 1, and addendum thereto dated June 27,
1995(3)
10.23 -- Form of Promissory Note in the amount of $50,000
issued by Michael Gaggi to the Company(5)
10.24 -- Form of Promissory Note in the amount of $9,000 issued
by Lucien Bittar to the Company(5)
10.25 -- Form of Promissory Note in the amount of $50,000
issued by Vito Balsamo to the Company(5)
10.26 -- Form of Registration Rights Agreement by and among the
Company and Michael Gaggi and Pasquale Guadagno(5)
<PAGE>
10.27 -- Amended Release and Redemption Agreement, dated
September 4, 1997, between the Company and Michael
Cantor (amending the agreement listed as Exhibit 10.4
above)(5)
10.28 -- Amended Release and Redemption Agreement, dated
September 4, 1997, between the Company and Jose Colon
(amending the agreement listed as Exhibit 10.5
above)(5)
10.29 -- Form of Amendment to Agreement, dated September ,
1997, between the Company and Perry Trebatch (amending
the agreement listed as Exhibit 10.6 above)(5)
10.30 -- Form of Amendment to Agreement, dated November , 1997,
between the Company and Perry Trebatch (amending the
agreement listed as Exhibit 10.6 above, as amended by
the agreement listed as Exhibit 10.29 above)(6)
10.31 -- Amended and Restated Release and Redemption Agreement,
dated November , 1997, between the Company and Michael
Cantor (amending the agreement listed as Exhibit 10.4
above, as amended by amended agreement listed as
Exhibit 10.27 above)(6)
10.32 -- Amended and Restated Release and Redemption Agreement,
dated November , 1997, between the Company and Jose
Colon (amending the agreement listed as Exhibit 10.5
above, as amended by amended agreement listed as
Exhibit 10.28 above)(6)
10.33 -- Form of Registrant's 1998 Stock Option Plan(1)
11.1 -- Statement regarding computation of per share
earnings(8)
12.1 -- Statement regarding computation of ratios(8)
21.1 -- Subsidiaries of the Registrant(2)
23.1 -- Consent of Phillips Nizer Benjamin Krim & Ballon LLP
(included in its opinion filed as Exhibit 5.1)
23.2 -- Consent of Killman, Murrell & Company(5)(6)(7)(8)(1)
23.3 -- Consent of Accetta and Olmstead, Accountancy
Corporation(2)(6)(7)(8)
23.4 -- Consent of Feldman Radin & Co., P.C.(2)(5)(6)(7)(8)
23.5 -- Consent of Feldman Radin & Co., P.C. regarding
termination of engagement(3)(5)(6)(7)(8)
24.1 -- Reference is made to the Signatures section of the
Registration Statement filed on June 2, 1997 for the
Power of Attorney contained therein
(1) Filed herewith.
(2) Filed on June 2, 1997.
(3) Filed on July 24, 1997
(4) Refiled on August 22, 1997
(5) Filed on September 12, 1997
(6) Filed on November 6, 1997
(7) Filed on December 2, 1997
(8) Filed on December 17, 1997
* Portions of this exhibit are the subject of a confidential treatment
request.
(b) Financial Statement Schedules:
The following supplemental schedules can be found on the indicated
pages of this Registration Statement.
Item Page
---- ----
<PAGE>
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
ITEM 28. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any additional or changed material
information with respect to the plan of distribution not previously
disclosed in the registration statement; and
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the Offering.
(b) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of a registration statement in reliance upon
<PAGE>
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of the registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(e) The undersigned registrant hereby undertakes to provide appropriate
disclosure in the event that any of the underwriters in the offering
contemplated hereby enter into transactions with any of the selling security
holders or waive the lock-ups applicable to such selling security holders'
securities. Such disclosure will be accomplished by means of a "Sticker"
supplement to the prospectus if such transactions involve from 5% up to 10% of
the registered security holders' securities as provided in Rule 424(e) and if
such transactions involve more than 10% of the registered security holders
securities' by means of a post effective amendment to this registration
statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tampa,
State of Florida on January 5, 1999.
800 TRAVEL SYSTEMS, INC.
By: /s/ MARK D. MASTRINI
----------------------------------------
Mark D. Mastrini, President,
Chief Executive Officer,
Chief Operating Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ MARK D. MASTRINI President, Chief Executive January 5, 1999
- --------------------------- Officer, Chief Operating
Mark D. Mastrini Officer and Director
/s/ JERROLD B. SENDROW Vice President -- Finance, January 5, 1999
- --------------------------- Treasurer and Secretary
Jerrold B. Sendrow (principal accounting officer)
/s/ PASQUALE GUADAGNO Director January 5, 1999
- ---------------------------
Pasquale Guadagno
/s/ MICHAEL GAGGI Director January 5, 1999
- ---------------------------
Michael Gaggi
Chairman of the Board January _, 1999
- ---------------------------
George A. Warde
/s/ CARL A. BELLINI Director January 5, 1999
- ---------------------------
Carl A. Bellini
Director January _, 1999
- ---------------------------
L. Douglas Bailey
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
1.1 -- Proposed form of Underwriting Agreement(3)
1.2 -- Agreement Among Underwriters(3)
1.3 -- Selected Dealer Agreement(3)
1.4 -- Representatives' Warrant Agreement(5)
2.1 -- Asset Purchase Agreement dated as of November 13, 1995
among 1-800 Low-Air Fare, Inc., S. Travel, Inc. and
the Company(2)
2.2 -- Amended and Restated Agreement and Plan of Merger
dated November 11, 1996 among the Company, Joseph
Stevens Group, Inc. and Joseph Stevens Group, LLC(3)
2.3 -- Amended and Restated Interim Operating Agreement
between the Company and Joseph Stevens Group, Inc.(3)
2.4 -- Form of Indemnity and Release Agreement among the
Company, Joseph Stevens Group, Inc., Joseph Stevens
Group, LLC, Steve Rohrlick, Joe Elizondo, MOHS, Inc.
and WH/JSG LLC (Exhibit C to the Merger Agreement
listed as Exhibit 2.2 herein)(5)
2.5 -- Form of Mutual Release Agreement (Exhibit D to the
Merger Agreement listed as Exhibit 2.2 herein)(5)
2.6 -- Form of Promissory Note from Joseph Stevens Group,
Inc. to Joseph Stevens Group, LLC (Exhibit E to the
Merger Agreement listed as Exhibit 2.2 herein)(5)
2.7 -- Form of Escrow Agreement by and among the Company,
Joseph Stevens Group, Inc. and Vincent, Berg, Stalzer,
Menendez, P.C. (Exhibit F to the Merger Agreement
listed as Exhibit 2.2 herein)(5)
2.8 -- First Amendment dated September 9, 1997 to Amended and
Restated Agreement and Plan of Merger(5)
2.9 -- Second Amendment dated October 17, 1997 to Amended and
Restated Agreement and Plan of Merger(6)
2.10 -- Third Amendment dated October 29, 1997 to Amended and
Restated Agreement and Plan of Merger (8)
2.11 -- Fourth Amendment dated December 16, 1997 to Amended
and Restated Agreement and Plan of Merger (8)
3.1 -- Proposed form of Registrant's Amended and Restated
Certificate of Incorporation(3)(5)
3.2 -- Proposed form of Registrant's Amended and Restated
Bylaws(3)(5)
4.1 -- Specimen Common Stock certificate(5)
4.2 -- Specimen Warrant Certificate and Form of Warrant
Agreement(3)
5.1 -- Opinion of Phillips Nizer Benjamin Krim & Ballon LLP
as to the validity of the Common Stock being
registered(5)
10.1 -- Form of Registrant's 1997 Stock Option Plan(2)
10.2 -- Promissory Note of the Company dated November 7,95 in
the amount of $30,000 to the order of S. Travel, Inc.
due and payable November 7, 1997(2)
10.3 -- Promissory Note of the Company dated November 7, 1995
in the amount of $30,000 to the order of S. Travel,
Inc. due and payable November 7, 1998(2)
10.4 -- Redemption Agreement between the Company and Michael
Cantor(2)
10.5 -- Form of Redemption Agreement between the Company and
Jose Colon(3)
10.6 -- Agreement between the Company and Perry Trebatch(2)
10.7 -- Lease dated February 10, 1996 by and between JFJ Real
Estate Limited Partnership and the Company(2)
10.8 -- Airlines Reporting Corporation ("ARC") Agent Reporting
Agreement(2)
10.9 -- Letter dated March 6, 1996 from ARC approving change
of ownership(2)
<PAGE>
10.10 -- Subscriber Service Agreement dated November 27, 1995
between the Company and Payroll Transfers Interstate,
Inc.(2)
10.11 -- Form of Employment Agreement between the Company and
Mark D. Mastrini(2)(5)
10.12 -- Form of Employment Agreement between the Company and
Jerrold B. Sendrow(2)(5)
10.13 -- Form of Employment Agreement between the Company and
Biagio Bellizzi(2)(5)
10.14 -- Form of Consulting Agreement between the Company and
Lucien Bittar(3)
10.15 -- Agreement dated as of March 1, 1997 by and between the
Company and Global Discount Travel Services(3)
10.16* -- SABRE Subscriber Agreement dated as of January 28,
1994 by and between S. Travel, Inc., (the Company's
predecessor entity), and American Airlines, Inc.(3)(4)
10.17* -- Amendment No. 1 to SABRE Subscriber Agreement dated
February 14, 1994 by and between 1-800 Low-Air Fare
Travel (predecessor entity of the Company), and
American Airlines, Inc.(3)(4)
10.18* -- Suspension of Service Agreement dated April 3, 1996 by
and between the Company and American Airlines,
Inc.(3)(4)
10.19* -- Amendment to SABRE Subscriber Agreement dated July 19,
1996 by and between the Company, and American
Airlines, Inc.(3)(4)
10.20* -- SABRE Subscriber Agreement dated November 20, 1996 by
and between the Company and The SABRE Group,
Inc.(3)(4)
10.21* -- Cluster Amendment to SABRE Subscriber Agreement dated
November 20, 1996 by and between the Company and The
SABRE Group, Inc.(3)(4)
10.22 -- Lease Agreement effective November 27, 1995 between
the Company and Roque De La Fuente Alexander Revocable
Trust No. 1, and addendum thereto dated June 27,
1995(3)
10.23 -- Form of Promissory Note in the amount of $50,000
issued by Michael Gaggi to the Company(5)
10.24 -- Form of Promissory Note in the amount of $9,000 issued
by Lucien Bittar to the Company(5)
10.25 -- Form of Promissory Note in the amount of $50,000
issued by Vito Balsamo to the Company(5)
10.26 -- Form of Registration Rights Agreement by and among the
Company and Michael Gaggi and Pasquale Guadagno(5)
10.27 -- Amended Release and Redemption Agreement, dated
September 4, 1997, between the Company and Michael
Cantor (amending the agreement listed as Exhibit 10.4
above)(5)
10.28 -- Amended Release and Redemption Agreement, dated
September 4, 1997, between the Company and Jose Colon
(amending the agreement listed as Exhibit 10.5
above)(5)
10.29 -- Form of Amendment to Agreement, dated September ,
1997, between the Company and Perry Trebatch (amending
the agreement listed as Exhibit 10.6 above)(5)
10.30 -- Form of Amendment to Agreement, dated November , 1997,
between the Company and Perry Trebatch (amending the
agreement listed as Exhibit 10.6 above, as amended by
the agreement listed as Exhibit 10.29 above)(6)
10.31 -- Amended and Restated Release and Redemption Agreement,
dated November , 1997, between the Company and Michael
Cantor (amending the agreement listed as Exhibit 10.4
above, as amended by amended agreement listed as
Exhibit 10.27 above)(6)
10.32 -- Amended and Restated Release and Redemption Agreement,
dated November , 1997, between the Company and Jose
Colon (amending the agreement listed as Exhibit 10.5
above, as amended by amended agreement listed as
Exhibit 10.28 above)(6)
10.33 -- Form of Registrant's 1998 Stock Option Plan(8)
11.1 -- Statement regarding computation of per share
earnings(8)
12.1 -- Statement regarding computation of ratios(8)
21.1 -- Subsidiaries of the Registrant(2)
23.1 -- Consent of Phillips Nizer Benjamin Krim & Ballon LLP
(included in its opinion filed as Exhibit 5.1)
23.2 -- Consent of Killman, Murrell & Company(5)(6)(7)(8)(1)
<PAGE>
23.3 -- Consent of Accetta and Olmstead, Accountancy
Corporation(2)(6)(7)(8)
23.4 -- Consent of Feldman Radin & Co., P.C.(2)(5)(6)(7)(8)
23.5 -- Consent of Feldman Radin & Co., P.C. regarding
termination of engagement(3)(5)(6)(7)(8)
24.1 -- Reference is made to the Signatures section of the
Registration Statement filed on June 2, 1997 for the
Power of Attorney contained therein
(1) Filed herewith.
(2) Filed on June 2, 1997.
(3) Filed on July 24, 1997
(4) Refiled on August 22, 1997
(5) Filed on September 12, 1997
(6) Filed on November 6, 1997
(7) Filed on December 2, 1997
(8) Filed on December 17, 1997
* Portions of this exhibit are the subject of a confidential treatment
request.
800 TRAVEL SYSTEMS, INC.
1998 STOCK OPTION PLAN
1. Purpose of the 1998 Stock Option Plan.
800 Travel Systems, Inc., a Delaware corporation (the "Corporation"),
desires to attract and retain the best available employees and to encourage the
highest level of performance. The 1998 Stock Option Plan (the "Stock Option
Plan") is intended to contribute significantly to the attainment of these
objectives, by (i) providing long-term incentives and rewards to all key
employees of the Corporation (including officers and directors who are key
employees of the Corporation and also including key employees of any subsidiary
of the Corporation which may include officers or directors of any subsidiary of
the Corporation who are also key employees of said subsidiary), and those
directors and officers, consultants, advisers, agents or independent
representatives of the Corporation or of any subsidiary (together, "Eligible
Individuals"), who are contributing or in a position to contribute to the
long-term success and growth of the Corporation or of any subsidiary, (ii)
assisting the Corporation and any subsidiary in attracting and retaining
Eligible Individuals with experience and ability, and (iii) associating more
closely the interests of such Eligible Individuals with those of the
Corporation's stockholders.
2. Scope and Duration of the Stock Option Plan.
Under the Stock Option Plan, options ("Options") to purchase common stock,
par value $.01 per share ("Common Stock"), may be granted to Eligible
Individuals. Options granted to employees (including officers and directors who
are employees) of the Corporation or a subsidiary corporation thereof, may, at
the time of grant, be designated by the Corporation's Board of Directors as
incentive stock options ("ISOs"), with the attendant tax benefits as provided
for under Sections 421 and 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The aggregate number of shares of Common Stock reserved for grant
from time to time under the Stock Option Plan is 250,000 shares of Common Stock,
which shares of Common Stock may be authorized but unissued shares of Common
Stock or shares of Common Stock which shall have been or which may be reacquired
by the Corporation, as the Board of Directors of the Corporation shall from time
to time determine. Such aggregate numbers shall be subject to adjustment as
provided in Paragraph 11. If an Option shall expire or terminate for any reason
without having been exercised in full, the shares of Common Stock represented by
the portion thereof not so exercised or surrendered shall (unless the Stock
Option Plan shall have been terminated) become available for other options under
the Stock Option Plan. Subject to Paragraph 13, no Option shall be granted under
the Stock Option Plan after December 15, 2007. The grant of an Option and/or a
Right is sometimes referred to herein as an Award thereof.
<PAGE>
3. Administration of the Stock Option Plan.
This Stock Option Plan will be administered by the Board of Directors of
the Corporation (the "Board of Directors"). The Board of Directors, in its
discretion, may designate an option committee (the "Option Committee" or
"Committee") composed of at least two members of the Board of Directors to
administer this Stock Option Plan. Subject to the express provisions of this
Plan, the Board of Directors or the Committee (hereinafter, the terms "Option
Committee" or "Committee" shall mean the Board of Directors whenever no such
Option Committee has been designated) shall have authority in its discretion,
subject to and not inconsistent with the express provisions of this Stock Option
Plan, to direct the grant of Options, to determine the purchase price of the
Common Stock covered by each Option, the Eligible Individuals to whom, and the
time or times at which, Options shall be granted and subject to the maximum set
forth in Paragraph 4 hereof, the number of shares of Common Stock to be covered
by each Option; to designate Options as ISOs; to interpret the Stock Option
Plan; to determine the time or times at which Options may be exercised; to
prescribe, amend and rescind rules and regulations relating to the Stock Option
Plan, including, without limitation, such rules and regulations as it shall deem
advisable, so that transactions involving Options may qualify for exemption
under such rules and regulations as the Securities and Exchange Commission may
promulgate from time to time exempting transactions from Section 16(b) of the
Securities and Exchange Act of 1934, as amended; to determine the terms and
provisions of and to cause the Corporation to enter into agreements with
Eligible Individuals in connection with (Awards) Options granted under the Stock
Option Plan (the "Agreements"), which Agreements may vary from one another as
the Committee shall deem appropriate; and to make all other determinations it
may deem necessary or advisable for the administration of the Stock Option Plan.
Members of the Committee shall serve at the pleasure of the Board of
Directors. The Committee shall have and may exercise all of the powers of the
Board of Directors under the Stock Option Plan, other than the power to appoint
a director to committee membership. A majority of the Committee shall constitute
a quorum, and acts of a majority of the members present at any meeting at which
a quorum is present shall be deemed the acts of the Committee. The Committee may
also act by instrument signed by a majority of the members of the Committee.
Every action, decision, interpretation or determination by the Committee
with respect to the application or administration of this Stock Option Plan
shall be final and binding upon the Corporation and each person holding any
Option granted under this Stock Option Plan.
4. Eligibility: Factors in Granting Options and Designating ISOs (Awards).
(a) Options may be granted only to (i) key employees (including officers
and directors who are employees) of the Corporation or any subsidiary
corporation thereof on the date of grant (Options so granted may be designated
as ISOs), and (ii) directors or officers of the Corporation or a subsidiary
corporation thereof on the date of grant, without regard to whether they are
employees, and (iii) consultants or advisers to or agents or independent
representatives of the Corporation or a subsidiary thereof. In determining the
persons to whom Options (Awards) shall
-2-
<PAGE>
be granted and the number of shares of Common Stock to be covered by each Award,
the Committee shall take into account the nature of the duties of the respective
persons, their present and potential contributions to the Corporation's
(including subsidiaries) successful operation and such other factors as the
Board of Directors in its discretion shall deem relevant. Subject to the
provisions of Paragraph 2, an Eligible Individual may receive Options (Awards)
on more than one occasion under the Stock Option Plan. No person shall be
eligible for an Option grant if he shall have filed with the Secretary of the
Corporation an instrument waiving such eligibility; provided that any such
waiver may be revoked by filing with the Secretary of the Corporation an
instrument of evocation, which revocation will be effective upon such filing.
(b) In the case of each ISO granted to an employee, the aggregate fair
market value (determined at the time the ISO is granted) of the Common Stock
with respect to which the ISO is exercisable for the first time by such employee
during any calendar year (under all plans of the Corporation and any subsidiary
corporation thereof) may not exceed $100,000.
5. Option Price.
(a) The purchase price per share of the Common Stock covered by each
Option shall be established by the Committee, but in no event shall it be less
than the fair market value of a share of the Common Stock on the date the Option
is granted. If, at the time an Option is granted, the Common Stock is publicly
traded, such fair market value shall be the closing price (or the mean of the
latest bid and asked prices) of a share of Common Stock on such date as reported
in The Wall Street Journal (or a publication or reporting service deemed
equivalent to The Wall Street Journal for such purpose by the Board of
Directors) for any national securities exchange or other securities market which
at the time is included in the stock price quotations of such publication. In
the event that the Committee shall determine such stock price quotation is not
representative of fair market value by reason of the lack of a significant
number of recent transactions or otherwise, the Committee may determine fair
market value in such a manner as it shall deem appropriate under the
circumstances. If, at the time an Option is granted, the Common Stock is not
publicly traded, the Committee shall make a good faith attempt to determine such
fair market value.
(b) In the case of an employee who, at the time an ISO is granted owns
stock possessing more than 10% of the total combined voting power of all classes
of the stock of the employer corporation or of its parent or a subsidiary
corporation thereof (a "10% Holder"), the purchase price of the Common Stock
covered by any ISO shall in no event be less than 110% of the fair market value
of the Common Stock at the time the ISO is granted.
6. Term of Options.
The term of each Option shall be fixed by the Committee, but in no event
shall it be exercisable more than 10 years from the date of grant, subject to
earlier termination as provided in Paragraphs 9 and 10. An ISO granted to a 10%
Holder shall not be exercisable more than 5 years from the date of grant.
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<PAGE>
7. Exercise of Options.
(a) Subject to the provisions of the Stock Option Plan, an Option granted
to an employee under the Stock Option Plan shall become fully exercisable at the
earlier of (A) employee's actual retirement date, unless such retirement is
without the consent of the Board of Directors and is prior to the employee's
normal retirement date as determined under any qualified retirement plan
maintained by the Corporation at such time or, if no such plan is than in
effect, age 65 (but in no event prior to the first anniversary of the date of
grant), or (B) at such time or times as the Committee in its sole discretion
shall determine at the time of the granting of the Option, except that in no
event shall any such Option be exercisable later than 10 years after its grant.
Notwithstanding anything in this Stock Option Plan to the contrary, Options that
are not designated as ISOs may be exercised in such manner and at such time or
times as the Committee in its sole discretion shall determine, except that in no
event shall any such Option be exercisable earlier than six months or later than
10 years after its grant.
(b) An Option may be exercised as to any or all full shares of Common
Stock as to which the Option is then exercisable.
(c) The purchase price of the shares of Common Stock as to which an Option
is exercised shall be paid in full in cash at the time of exercise; provided
that, if permitted by the related Option Agreement or by the Committee, the
purchase price may be paid, in whole or in part, by surrender or delivery to the
Corporation of securities of the Corporation having a fair market value on the
date of the exercise equal to the portion of the purchase price being so paid.
Fair market value shall be determined as provided in Paragraph 5 for the
determination of such value on the date of the grant. In addition, the holder
shall, upon notification of the amount due and prior to or concurrently with
delivery to the holder of a certificate representing such shares of Common
Stock, pay promptly any amount necessary to satisfy applicable federal, state or
local tax requirements.
(d) Except as provided in Paragraphs 9 and 10, no Option may be exercised
unless the original grantee thereof is then an Eligible Individual.
(e) The Option holder shall have the rights of a stockholder with respect
to shares of Common Stock covered by an Option only upon becoming the holder of
record of such shares of Common Stock.
(f) Notwithstanding any other provision of this Stock Option Plan, the
Corporation shall not be required to issue or deliver any share of stock upon
the exercise of an Option prior to the admission of such share to listing on any
stock exchange or automated quotation system on which the Corporation's Common
Stock may then be listed.
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<PAGE>
8. Non-transferability of Options.
No Options granted under the Stock Option Plan shall be transferable other
than by will or by the laws of descent and distribution ("Permitted
Transferee"). With respect to ISOs, Options may be exercised, during the
lifetime of the holder, only by the holder, or by his guardian or legal
representative.
9. Termination of Relationship to the Corporation.
(a) In the event that any original grantee shall cease to be an Eligible
Individual of the Corporation (or any subsidiary thereof), except as set forth
in Paragraph 10, such Option may (subject to the provisions of the Stock Option
Plan) be exercised (to the extent that the original grantee was entitled to
exercise such Option at the termination of his employment or service as a
director, officer, consultant, adviser, agent or independent representative, as
the case may be) at any time within three months after such termination, but not
more than 10 years (five years in the case of a 10% Holder) after the date on
which such Option was granted or the expiration of the Option, if earlier.
Notwithstanding the foregoing, if the position of an original grantee shall be
terminated by the Corporation or any subsidiary thereof for cause or if the
original grantee terminates his employment or position voluntarily and without
the consent of the Corporation or any subsidiary corporation thereof, as the
case may be (which consent shall be presumed in the case of normal retirement),
the Options granted to such person, whether held by such person or by a
Permitted Transferee shall, to the extent not theretofore exercised, forthwith
terminate immediately upon such termination. The holder of any ISO may not
exercise such Option unless at all times during the period beginning with the
date of grant of the ISO and ending on the three months before the date of
exercise he is an employee of the Corporation granting such Option, a subsidiary
thereof, or a corporation or a subsidiary corporation issuing or assuming a
stock option in a transaction to which Section 424(a) of the Code applies.
(b) Other than as provided in Paragraph 9(a), Options granted under the
Stock Option Plan shall not be affected by any change of duties or position so
long as the holder remains an Eligible Individual.
(c) Any Option Agreement may contain such provisions as the Committee
shall approve with reference to the determination of the date employment
terminates or the date other positions or relationships terminate for purposes
of the Stock Option Plan and the effect of leaves of absence, which provisions
may vary from one another.
(d) Nothing in the Stock Option Plan or in any Option granted pursuant to
the Stock Option Plan shall confer upon any Eligible Individual or other person
any right to continue in the employ of the Corporation or any subsidiary
corporation (or the right to be retained by, or have any continued relationship
with the Corporation or any subsidiary corporation thereof), or affect the right
of the Corporation or any such subsidiary corporation, as the case may be, to
terminate his employment, retention or relationship at any time. The grant of
any option pursuant to the Stock Option Plan shall be entirely in the discretion
of the Committee and nothing in the Stock
-5-
<PAGE>
Option Plan shall be construed to confer on any Eligible Individual any right to
receive any Option under the Stock Option Plan.
10. Death or Disability of Holder.
(a) If a person to whom an Option has been granted under the Stock Option
Plan shall die (and the conditions in sub-paragraph (b) below are met) or become
permanently and totally disabled (as such term is defined below) while serving
as an Eligible Individual and if the Option was otherwise exercisable
immediately prior to the happening of such event, then the period for exercise
provided in Paragraph 9 shall be extended to one year after the date of death of
the original grantee, or in the case of the permanent and total disability of
the original grantee, to one year after the date of permanent and total
disability of the original grantee, but, in either case, not more than 10 years
(five years in the case of a 10% Holder) after the date such Option was granted,
or the expiration of the Option, if earlier, as shall be prescribed in the
original grantee's Option Agreement. An Option may be exercised as set forth
herein in the event of the original grantee's death, by a Permitted Transferee
or the person or persons to whom the holder's rights under the Option pass by
will or applicable law, or if no such person has the right, by his executors or
administrators; or in the event of the original grantee's permanent and total
disability, by the holder or his guardian.
(b) In the case of death of a person to whom an Option was originally
granted, the provisions of subparagraph (a) apply if such person dies (i) while
in the employ of the Corporation or a subsidiary corporation thereof or while
serving as an Eligible Individual of the Corporation or a subsidiary corporation
thereof or (ii) within three months after the termination of such position other
than termination for cause, or voluntarily on the original grantee's part and
without the consent of the Corporation or a subsidiary corporation thereof,
which consent shall be presumed in the case of normal retirement.
(c) The term "permanent and total disability" as used above shall have the
meaning set forth in Section 22(e)(3) of the Code.
11. Adjustments upon Changes in Capitalization.
Notwithstanding any other provision of the Stock Option Plan, each
Agreement may contain such provisions as the Committee shall determine to be
appropriate for the adjustment of the number and class of shares of Common Stock
covered by such Option, the Option prices and the number of shares of Common
Stock as to which Options shall be exercisable at any time, in the event of
changes in the outstanding Common Stock of the Corporation by reason of stock
dividends, split-ups, split-downs, reverse splits, recapitalizations, mergers,
consolidations, combinations or exchanges of shares, spin-offs, reorganizations,
liquidations and the like. In the event of any such change in the outstanding
Common Stock of the Corporation, the aggregate number of shares of Common Stock
as to which Options may be granted under the Stock Option Plan to any Eligible
Individual shall be appropriately adjusted by the Committee whose determination
shall be conclusive. In the event of (i) the dissolution, liquidation, merger or
consolidation of the
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<PAGE>
Corporation or a sale of all or substantially all of the assets of the
Corporation, or (ii) the disposition by the Corporation of substantially all of
the assets or stock of a subsidiary of which the original grantee is then an
employee, officer or director, consultant, adviser, agent or independent
representative or (iii) a change in control (as hereinafter defined) of the
Corporation has occurred or is about to occur, then, if the Committee shall so
determine, each Option under the Stock Option Plan, if such event shall occur
with respect to the Corporation, or each Option granted to an employee, officer,
director, consultant, adviser, agent or independent representative of a
subsidiary respecting which such event shall occur, as determined by the Option
Committee, shall (x) become immediately and fully exercisable or (y) terminate
simultaneously with the happening of such event, and the Corporation shall pay
the optionee in lieu thereof an amount equal to (a) the excess of the fair
market value over the exercise price of one share on the date on which such
event occurs, multiplied by (b) the number of shares subject to the Option,
without regard to whether the Option is then otherwise exercisable.
12. Effectiveness of the Stock Option Plan.
Options may be granted under the Stock Option Plan, subject to its
authorization and adoption by stockholders of the Corporation, at any time or
from time to time after its adoption by the Committee, but no Option shall be
exercised under the Stock Option Plan until the Stock Option Plan shall have
been authorized and adopted by a majority of the votes properly cast thereon at
a meeting of stockholders of the Corporation duly called and held within 12
months from the date of adoption of the Stock Option Plan by the Board of
Directors. If so adopted, the Stock Option Plan shall become effective as of the
date of its adoption by the Board of Directors. The exercise of the Options
shall also be expressly subject to the condition that at the time of exercise a
registration statement under the Securities Act of 1933, as amended (the "Act"),
shall be effective, or other provisions satisfactory to the Committee shall have
been made to ensure that such exercise will not result in a violation of such
Act, and such other qualification under any state or federal law, rule or
regulation as the Corporation shall determine to be necessary or advisable shall
have been effected. If the shares of Common Stock issuable upon exercise of an
Option are not registered under such Act, and if the Committee shall deem it
advisable, the Optionee may be required to represent and agree in writing (i)
that any shares of Common Stock acquired pursuant to the Stock Option Plan will
not be sold except pursuant to an effective registration statement under such
Act or an exemption from the registration provisions of the Act and (ii) that
such Optionee will be acquiring such shares of Common Stock for his own account
and not with a view to the distribution thereof and (iii) that the holder
accepts such restrictions on transfer of such shares, including, without
limitation, the affixing to any certificate representing such shares of an
appropriate legend restricting transfer as the Corporation may reasonably
impose.
13. Termination and Amendment of the Stock Option Plan.
The Board of Directors of the Corporation may, at any time prior to the
termination of the Stock Option Plan, suspend, terminate, modify or amend the
Stock Option Plan; provided that any increase in the aggregate number of shares
of Common Stock reserved for issue upon the exercise of Options, any amendment
which would materially increase the benefits accruing to participants
-7-
<PAGE>
under the Stock Option Plan, or any material modification in the requirements as
to eligibility for participation in the Stock Option Plan, shall be subject to
the approval of stockholders in the manner provided in Paragraph 12, except that
any such increase, amendment or change that may result from adjustments
authorized by Paragraph 11 or adjustments based on revisions to the Code or
regulations promulgated thereunder (to the extent permitted by such authorities)
shall not require such approval. No suspension, termination, modification or
amendment of the Stock Option Plan may, without the express written consent of
the Eligible Individual (or his Permitted Transferee) to whom an Option shall
theretofore have been granted, adversely affect the rights of such Eligible
Individual (or his Permitted Transferee) under such Option.
14. Financing for Investment in Stock of the Corporation.
The Committee may cause the Corporation or any subsidiary to give or
arrange for financing, including direct loans, secured or unsecured, or
guaranties of loans by banks which loans may be secured in whole or in part by
assets of the Corporation or any subsidiary, to any Eligible Individual under
the Stock Option Plan who shall have been so employed or so served for a period
of at least six months at the end of the fiscal year ended immediately prior to
arranging such financing; but the Committee may, in any specific case, authorize
financing for an Eligible Individual who shall not have served for such a
period. Such financing shall be for the purpose of providing funds for the
purchase by the Eligible Individual of shares of Common Stock pursuant to the
exercise of an Option and/or for payment of taxes incurred in connection with
such exercise, and/or for the purpose of otherwise purchasing or carrying a
stock investment in the Corporation. The maximum amount of liability incurred by
the Corporation and its subsidiaries in connection with all such financing
outstanding shall be determined from time to time in the discretion of the Board
of Directors. Each loan shall bear interest at a rate not less than that
provided by the Code and other applicable law, rules, and regulations in order
to avoid the imputation of interest. Each recipient of such financing shall be
personally liable for the full amount of all financing extended to him. Such
financing shall be based upon the judgment of the Committee that such financing
may reasonably be expected to benefit the Corporation, and that such financing
as may be granted shall be consistent with the Certificate of Incorporation and
By-Laws of the Corporation or such subsidiary, and applicable laws. If any such
financing is authorized by the Board of Directors, such financing shall be
administered by the Committee.
15. Severability.
In the event that any one or more provisions of the Stock Option Plan or
any Agreement, or any action taken pursuant to the Stock Option Plan or such
Agreement, should, for any reason, be unenforceable or invalid in any respect
under the laws of the United States, any state of the United States or any other
government, such unenforceability or invalidity shall not affect any other
provision of the Stock Option Plan or of such or any other Agreement, but in
such particular jurisdiction and instance the Stock Option Plan and the affected
Agreement shall be construed as if such unenforceable or invalid provision had
not been contained therein or if the action in question had not been taken
thereunder.
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<PAGE>
16. Applicable Law.
The Stock Option Plan shall be governed and interpreted, construed and
applied in accordance with the laws of the State of Delaware.
17. Withholding.
A holder shall, upon notification of the amount due and prior to or
concurrently with delivery to such holder of a certificate representing such
shares of Common Stock, pay promptly any amount necessary to satisfy applicable
federal, state, local or other tax requirements.
18. Miscellaneous.
1. The terms "parent," "subsidiary" and "subsidiary corporation" shall
have the meanings set forth in Sections 424(e) and (f) of the Code,
respectively.
2. The term "disinterested person" shall mean a person who is not at the
time he exercises discretion in administering the Stock Option Plan eligible and
has not at any time within one year prior thereto been eligible for selection as
a person to whom stock may be allocated or to whom stock options may be granted
pursuant to the Stock Option Plan or any other plan of the Corporation or any of
its affiliates entitling the participants therein to acquire stock or stock
options of the Corporation or any of its affiliates.
3. The term "terminated for cause" shall mean termination by the
Corporation (or a subsidiary thereof) of the employment of or other relationship
with, the original grantee by reason of the grantee's (i) willful refusal to
perform his obligations to the Corporation (or a subsidiary thereof), (ii)
willful misconduct, contrary to the interests of the Corporation (or a
subsidiary thereof), (iii) commission of a serious criminal act, whether
denominated a felony, misdemeanor or otherwise or (iv) such reasons as may be
included within the term "for cause" (or similar phrase) in the employment or
consulting agreement of the grantee. In the event of any dispute regarding
whether a termination for cause has occurred, the Board of Directors may by
resolution resolve such dispute and such resolution shall be final and
conclusive on all parties.
4. The term "change in control" shall mean an event or series of events
that would be required to be described as a change in control of the Corporation
in a proxy or information statement distributed by the Corporation pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended, in response to
Item 6(e) of Schedule 14A promulgated thereunder, or any substitute provision
which may hereafter be promulgated thereunder or otherwise adopted. The
determination of whether and when a change in control has occurred or is about
to occur shall be made by the Board of Directors in office immediately prior to
the occurrence of the event or series of events constituting such change in
control.
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<PAGE>
800 TRAVEL SYSTEMS, INC.
STOCK OPTION AGREEMENT
(NON-QUALIFIED STOCK OPTION)
THIS AGREEMENT, made as of this _____ day of _______________, ____, by 800
TRAVEL SYSTEMS, INC., a Delaware corporation (hereinafter called the "Company"),
with ________________________________ (hereinafter call the "Holder"):
The Company has adopted a 1998 Stock Option Plan (the "Plan"). Said Plan,
as it may hereafter be amended and continued, is incorporated herein by
reference and made part of this Agreement.
The Committee, which is charged with the administration of the Plan
pursuant to Section 3 of the Plan, has determined that it would be to the
advantage and interest of the Company to grant the option provided for herein to
the Holder
NOW, THEREFORE, pursuant to the Plan, the Company with the approval of the
Committee hereby grants to the Holder as of the date hereof an option to
purchase all or any part of ________ shares of Common Stock of the Company, par
value $.01 per share, at a price per share of $__________, which price is not
less than the fair market value of a share of Common Stock on the date hereof
(the "Option"), and upon the following terms and conditions:
1. The Option shall continue in force through _____________________
(the "Expiration Date"), unless sooner terminated as provided herein and in the
Plan. Subject to the provisions of the Plan, the Option shall become fully
exercisable, as to the _____________________ shares covered hereby, on
____________________.
2. If the Holder shall (a) die or (b) become permanently and totally
disabled, and if the Option was otherwise exercisable, immediately prior to the
occurrence of such event, then such Option may be exercised as set forth herein
by the Holder or by the person or persons to whom the Holder's rights under the
Option pass by will or applicable law, or if no such person has such right, by
his executors or administrators, at any time within one year after the date of
death of the original Holder, or one year after the date of permanent or total
disability, but in either case, not later than the Expiration Date.
3. a. The Holder may exercise the Option with respect to all or any
part of the shares then purchasable hereunder by giving the Company written
notice in the form annexed, as provided in paragraph 7 hereof, of such exercise.
Such notice shall specify the number of shares as to which the Option is being
exercised and shall be accompanied by payment in full in cash of an amount equal
to the exercise price of such shares multiplied by the number of shares as to
which the Option is being exercised; provided that, if permitted by the Board,
the purchase price may be paid, in whole or in part, by surrender or delivery to
the Company of securities of the Company having a fair market value on the date
of the exercise equal to the portion of the purchase price being so paid. In
such event fair market value should be determined pursuant to paragraph 5 of the
Plan.
b. Prior to or concurrently with delivery by the Company to
the Holder of a certificate(s) representing such shares, the Holder shall, upon
notification of the amount due, pay promptly any amount necessary to satisfy
applicable federal, state or local tax requirements. In the event such amount is
not paid promptly, the Company shall have the right to apply from the purchase
price paid any taxes
<PAGE>
required by law to be withheld by the Company with respect to such payment and
the number of shares to be issued by the Company will be reduced accordingly.
4. Notwithstanding any other provision of the Plan, in the event of
a change in the outstanding Common Stock of the Company by reason of a stock
dividend, split-up, split-down, reverse split, recapitalization, merger,
consolidation, combination or exchange of shares, spin-off, reorganization,
liquidation or the like, then the aggregate number of shares and price per share
subject to the Option shall be appropriately adjusted by the Board, whose
determination shall be conclusive.
5. No options granted hereunder shall be transferable other than by
will or by the laws of descent and distribution. Options may be exercised,
during the lifetime of the Holder, only by the Holder, or by his guardian or
legal representative. In the event of any attempt by the Holder to transfer,
assign, pledge, hypothecate or otherwise dispose of this Option or of any right
hereunder, except as provided for herein, or in the event of the levy or any
attachment, execution or similar process upon the rights or interest hereby
conferred, the Company may terminate this Option by notice to the Holder and it
shall thereupon become null and void.
6. Neither the Holder nor in the event of his death, any person
entitled to exercise his rights, shall have any of the rights of a stockholder
with respect to the shares subject to the Option until share certificates have
been issued and registered in the name of the Holder or his estate, as the case
may be.
7. Any notice to the Company provided for in this Agreement shall be
addressed to the Company in care of its Secretary, 4802 Gunn Highway, Suite 140,
Tampa, Florida 33624, and any notice to the Holder shall be addressed to him at
his address now on file with the Company, or to such other address as either may
last have designated to the other by notice as provided herein. Any notice so
addressed shall be deemed to be given on the second business day after mailing,
by registered or certified mail, at a post office or branch post office within
the United States.
8. In the event that any question or controversy shall arise with
respect to the nature, scope or extent of any one or more rights conferred by
this Option, the determination by the Committee (as constituted at the time of
such determination) of the rights of the Holder shall be conclusive, final and
binding upon the Holder and upon any other person who shall assert any right
pursuant to this Option.
800 TRAVEL SYSTEMS, INC.
By:__________________________
Name:
Title:
ACCEPTED AND AGREED
__________________________
Holder
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<PAGE>
FORM OF NOTICE OF EXERCISE
TO: 800 TRAVEL SYSTEMS, INC.
4802 Gunn Highway, Suite 140,
Tampa, Florida 33624
The undersigned hereby exercises his option to purchase _________ shares
of Common Stock of 800 TRAVEL SYSTEMS, INC. (the "Company") as provided in the
Stock Option Agreement dated as of ___________________, ____ at $___________ per
share, a total of $___________, and makes payment therefor as follows:
(a) To the extent of $_______ of the purchase price, the undersigned
hereby surrenders to the Company certificates for shares of its Common Stock
which, valued at $__________________ per share, the fair market value thereof,
equals such portion of the purchase price.
(b) To the extent of the balance of the purchase price, the
undersigned has enclosed a certificate or bank check payable to the order of the
Company for $________________.
A stock certificate or certificate for the shares should be
delivered in person or mailed to the undersigned at the address shown below.
The undersigned hereby represents and warrants that it is his
present intention to acquire and hold the aforesaid shares of Common Stock of
the Company for his own account for investment, and not with a view to the
distribution of any thereof, and agrees that he will make no sale, thereof,
except in compliance with the applicable provisions of the Securities Act of
1933, as amended.
Signature: _________________________
Address: _________________________
_________________________
_________________________
Dated: ________________________
<PAGE>
800 TRAVEL SYSTEMS, INC.
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTION)
THIS AGREEMENT, made as of this ___ day of _____________, _____ by 800
TRAVEL SYSTEMS, INC., a Delaware corporation (hereinafter called the "Company"),
with _____________________________ ________ (hereinafter call the "Holder"):
The Company has adopted a 1998 Stock Option Plan (the "Plan"). Said Plan,
as it may hereafter be amended and continued, is incorporated herein by
reference and made part of this Agreement.
The Committee, which is charged, with the administration of the Plan
pursuant to Section 3 of the Plan, has determined that it would be to the
advantage and interest of the Company to grant the option provided for herein to
the Holder as an inducement to remain in the service of the Company or one of
its subsidiaries, and as an incentive for increased efforts during such service.
NOW, THEREFORE, pursuant to the Plan, the Company with the approval of the
Committee hereby grants to the Holder as of the date hereof an option (the
"Option") to purchase all or any part of _________ shares of Common Stock of the
Company, par value $.01 per share, at a price per share of $_________, which
price is not less than the fair market value of a share of Common Stock on the
date hereof (or 110% of the fair market value of a share of Common Stock if the
Holder is a 10% Holder (as defined in the Plan)), and upon the following terms
and conditions:
1. The Option shall continue in force through _______ ___, ____ (the
"Expiration Date"), unless sooner terminated as provided herein and in the Plan.
Subject to the provisions of the Plan, the Option shall become exercisable as
follows:
as to 33 and 1/3% of the number of shares originally covered thereby
upon the first anniversary of the date of grant of the Option, and
as to 33 and 1/3% of the number of shares originally covered thereby
upon the second anniversary of the date of grant of the Option, and
on the third anniversary, the Option shall become fully exercisable.
Such installments shall be cumulative, subject to the following:
a. Except as provided hereinbelow, the Option may not be exercised
unless the Holder is then an employee (including officers and directors who are
employees), non-employee director, consultant, advisor, agent or independent
representative of the Company or any subsidiary of the Company or any
combination thereof and unless the Holder has remained in the continuous employ
or service thereof from the date of grant.
<PAGE>
b. This Option is designated as an incentive stock option ("ISO")
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder.
2. In the event that the employment or service of the Holder shall be
terminated prior to the Expiration Date (otherwise than by reason of death or
disability), the Option may, subject to the provisions of the Plan, be exercised
(to the extent that the Holder was entitled to do so at the termination of this
employment or service) at any time within three months after such termination,
but not after the Expiration Date, provided, however, that if such termination
shall have been for cause or voluntarily by the Holder and without the consent
of the Company or any subsidiary corporation thereof, as the case may be (which
consent shall be presumed in the case of normal retirement), the Option and all
rights of the Holder hereunder, to the extent not theretofore exercised, shall
forthwith terminate immediately upon such termination. Nothing in this Agreement
shall confer upon the Holder any right to continue in the employ or service of
the Company or any subsidiary of the Company or affect the right of the Company
or any subsidiary to terminate his employment or service at any time.
3. If the Holder shall (a) die while he is employed by or serving the
Company or a corporation which is a subsidiary thereof or within three months
after the termination of such position (other than termination for cause, or
voluntarily on his part and without the consent of the Company or subsidiary
corporation thereof, as the case may be, which consent shall be presumed in the
case of normal retirement), or (b) become permanently and totally disabled
within the meaning of Section 22 (e) (3) of the Internal Revenue Code of 1986,
as amended (the "Code"), while employed by or serving any such company, and if
the Option was otherwise exercisable, immediately prior to the occurrence of
such event, then such Option may be exercised as set forth herein by the Holder
or by the person or persons to whom the Holder's rights under the Option pass by
will or applicable law, or if no such person has such right, by his executors or
administrators, at any time within one year after the date of death of the
original Holder, or one year after the date of permanent or total disability,
but in either case, not later than the Expiration Date.
4. a. The Holder may exercise the Option with respect to all or any part
of the shares then purchasable hereunder by giving the Company written notice in
the form annexed, as provided in paragraph 8 hereof, of such exercise. Such
notice shall specify the number of shares as to which the Option is being
exercised and shall be accompanied by payment in full in cash of an amount equal
to the exercise price of such shares multiplied by the number of shares as to
which the Option is being exercised; provided that, if permitted by the Board,
the purchase price may be paid, in whole or in part, by surrender or delivery to
the Company of securities of the Company having a fair market value on the date
of the exercise equal to the portion of the purchase price being so paid. In
such event fair market value should be determined pursuant to paragraph 5 of the
Plan.
b. Prior to or concurrently with delivery by the Company to the
Holder of a certificate(s) representing such shares, the Holder shall, upon
notification of the amount due, pay promptly any amount necessary to satisfy
applicable federal, state or local tax requirements. In the event such amount is
not paid promptly, the Company shall have the right to apply from the
<PAGE>
purchase price paid any taxes required by law to be withheld by the Company with
respect to such payment and the number of shares to be issued by the Company
will be reduced accordingly.
5. Notwithstanding any other provision of the Plan, in the event of a
change in the outstanding Common Stock of the Company by reason of a stock
dividend, split-up, split-down, reverse split, recapitalization, merger,
consolidation, combination or exchange of shares, spin-off, reorganization,
liquidation or the like, then the aggregate number of shares and price per share
subject to the Option shall be appropriately adjusted by the Board, whose
determination shall be conclusive.
6. This Option shall, during the Holder's lifetime, be exercisable only by
him, and neither this Option nor any right hereunder shall be transferable by
him, by operation of law or otherwise, except by will or by the laws of descent
and distribution. In the event of any attempt by the Holder to transfer, assign,
pledge, hypothecate or otherwise dispose of this Option or of any right
hereunder, except as provided for herein, or in the event of the levy or any
attachment, execution or similar process upon the rights or interest hereby
conferred, the Company may terminate this Option by notice to the Holder and it
shall thereupon become null and void.
7. Neither the Holder nor in the event of his death, any person entitled
to exercise his rights, shall have any of the rights of a stockholder with
respect to the shares subject to the Option until share certificates have been
issued and registered in the name of the Holder or his estate, as the case may
be.
8. Any notice to the Company provided for in this Agreement shall be
addressed to the Company in care of its Secretary, 4802 Gunn Highway, Suite 140,
Tampa, Florida 33624, and any notice to the Holder shall be addressed to him at
his address now on file with the Company, or to such other address as either may
last have designated to the other by notice as provided herein. Any notice so
addressed shall be deemed to be given on the second business day after mailing,
by registered or certified mail, at a post office or branch post office within
the United States.
9. In the event that any question or controversy shall arise with respect
to the nature, scope or extent of any one or more rights conferred by this
Option, the determination by the Committee (as constituted at the time of such
determination) of the rights of the Holder shall be conclusive, final and
binding upon the Holder and upon any other person who shall assert any right
pursuant to this Option.
800 TRAVEL SYSTEMS, INC.
By:__________________________
Name:
Title:
ACCEPTED AND AGREED
______________________________
Holder
<PAGE>
FORM OF NOTICE OF EXERCISE
TO: 800 TRAVEL SYSTEMS, INC.
4802 Gunn Highway, Suite 140,
Tampa, Florida 33624
The undersigned hereby exercises his/her option to purchase _____ shares
of Common Stock of 800 TRAVEL SYSTEMS, INC. (the "Company") as provided in the
Stock Option Agreement dated as of _____________________, _________ at $_______
per share, a total of $_____________, and makes payment therefor as follows:
(a) To the extent of $_______ of the purchase price, the undersigned
hereby surrenders to the Company certificates for shares of its Common Stock
which, valued at $__________________ per share, the fair market value thereof,
equals such portion of the purchase price.
(b) To the extent of the balance of the purchase price, the
undersigned has enclosed a certificate or bank check payable to the order of the
Company for $________________.
A stock certificate or certificate for the shares should be delivered in
person or mailed to the undersigned at the address shown below.
The undersigned hereby represents and warrants that it is his (her)
present intention to acquire and hold the aforesaid shares of Common Stock of
the Company for his (her) own account for investment, and not with a view to the
distribution of any thereof, and agrees that he (she) will make no sale,
thereof, except in compliance with the applicable provisions of the Securities
Act of 1933, as amended.
Signature: _________________________
Name: _________________________
Address: _________________________
_________________________
_________________________
Dated: ______________________
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this Post-effective Amendment No. 1
Registration Statement on Form SB-2 of 800 Travel Systems, Inc. (the "Company")
of our report dated February 28, 1998 on the balance sheets of the Company as of
December 31, 1997 and 1996 and the related statements of operations,
stockholder's equity and cash flows for the years ended December 31, 1997 and
1996. We also consent to the reference to our Firm under the caption "Experts"
in the Prospectus which is a part of the Registration Statement.
/s/ KILLMAN, MURRELL & COMPANY, P.C.
Certified Public Accountants
Dallas, Texas
January 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<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
<EPS-DILUTED> .02
</TABLE>
