<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended June 30, 2000
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _____________ to ______________
Commission file number 1-13271
800 TRAVEL SYSTEMS, INC.
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 59-3343338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4802 GUNN HIGHWAY TAMPA, FLORIDA 33624
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 908-0404
N/A
(Former name, former address and former fiscal year
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No | |
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,666,296 shares of Common Stock,
$.01 par value, were outstanding, as of July 31, 2000.
Transitional Small Business Disclosure Format (check one):
Yes | | No |X|
<PAGE>
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 2000 (unaudited) and
December 31, 1999 3
Condensed Statements of Operations - Three and six months
ended June 30, 2000 and June 30, 1999 (unaudited) 4
Condensed Statement of Stockholders' Equity - Six months
ended June 30, 2000 (unaudited) 5
Condensed Statements of Cash Flows - Six months ended
June 30, 2000 and June 30, 1999 (unaudited) 6
Notes to Condensed Financial Statements - June 30, 2000
(unaudited) 7-8
Item 2. Management's Discussion and Analysis or Plan of Operations 9-27
PART II. OTHER INFORMATION 28
SIGNATURES 29
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,859,502 $ 2,181,020
Commissions receivable 839,938 1,217,144
Prepaid assets 183,407 166,986
------------- -------------
Total current assets 2,882,847 3,565,150
------------- -------------
LEASEHOLD IMPROVEMENTS, EQUIPMENT AND
COMPUTER SOFTWARE, NET 2,507,848 1,799,050
------------- -------------
EXCESS OF COST OVER NET ASSETS ACQUIRED, NET 4,459,531 4,560,640
------------- -------------
OTHER ASSETS
Trademarks, net 309,466 323,299
Capitalized software - 387,007
Other 84,605 77,025
------------- -------------
Total other assets 394,071 787,331
------------- -------------
TOTAL ASSETS $ 10,244,297 $ 10,712,171
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 128,927 $ 135,901
Accounts payable and accrued liabilities 781,275 958,048
Unearned revenue 92,796 100,529
------------- -------------
Total current liabilities 1,002,998 1,194,478
UNEARNED REVENUE 260,660 299,325
DEFERRED RENT 149,214 136,517
LONG-TERM DEBT - excluding current maturities 208,297 273,231
------------- -------------
Total liabilities 1,621,169 1,903,551
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 76,663 76,163
Additional paid-in capital 12,386,650 12,137,150
Accumulated deficit (3,840,185) (3,404,693)
------------- -------------
Total stockholders' equity 8,623,128 8,808,620
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,244,297 $ 10,712,171
============= =============
The accompanying notes are an integral part of these condensed statements.
</TABLE>
3
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 1,804,206 $ 2,003,499 $ 3,379,084 $ 3,836,001
Ticket delivery and service fees 1,694,060 1,047,905 3,195,963 2,095,851
-------------- -------------- -------------- --------------
Total revenues 3,498,266 3,051,404 6,575,047 5,931,852
OPERATING EXPENSES
Employee costs 1,783,166 1,448,985 3,400,800 2,906,719
Other selling, general and admin expenses 2,090,325 1,504,289 3,645,144 3,057,863
-------------- -------------- -------------- --------------
Total operating expenses 3,873,491 2,953,274 7,045,944 5,964,582
-------------- -------------- -------------- --------------
EARNINGS (LOSS) FROM
OPERATIONS (375,225) 98,130 (470,897) (32,730)
INTEREST INCOME, NET 13,070 21,744 35,405 45,283
-------------- -------------- -------------- --------------
EARNINGS (LOSS) BEFORE
INCOME TAXES (362,155) 119,874 (435,492) 12,553
Provision (benefit) for income taxes - - - -
-------------- -------------- -------------- --------------
NET EARNINGS (LOSS) $ (362,155) $ 119,874 $ (435,492) $ 12,553
============== ============== ============== ==============
NET EARNINGS (LOSS) PER
COMMON SHARE - BASIC $ (.05) $ .02 $ (.06) $ -
============== ============== ============== ==============
- DILUTED $ (.05) $ .01 $ (.06) $ -
============== ============== ============== ==============
AVERAGE OUTSTANDING
COMMON SHARES - BASIC 7,666,296 7,616,296 7,660,801 7,615,482
============== ============== ============== ==============
- DILUTED 7,666,296 8,066,503 7,660,801 7,840,581
============== ============== ============== ==============
The accompanying notes are an integral part of these condensed statements.
</TABLE>
4
<PAGE>
<TABLE>
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Additional
----------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 7,616,296 $ 76,163 $12,137,150 $(3,404,693) $ 8,808,620
Common stock issued for
Service (unaudited) 50,000 500 249,500 - 250,000
Net loss (unaudited) - - - (435,492) (435,492)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2000
(unaudited) 7,666,296 $ 76,663 $12,386,650 $(3,840,185) $ 8,623,128
============ ============ ============ ============ ============
The accompanying notes are an integral part of this condensed statement.
</TABLE>
5
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
June 30,
-------------------------------
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (435,492) $ 12,553
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 419,747 196,736
Commissions Receivable 377,206 (926,409)
Prepaid assets and other assets (24,001) 61,393
Deferred rent and unearned revenue (33,701) 491,041
Accounts payable and accrued liabilities 73,227 373,369
------------- -------------
Net cash provided by operating activities 376,986 208,683
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leasehold improvements, equipment and computer software (415,489) (86,768)
Software development costs (211,107) (245,230)
------------- -------------
Net cash used in investing activities (626,596) (331,998)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (71,908) (39,223)
Proceeds from exercise of options and warrants - 70,000
------------- -------------
Net cash provided by (used in) financing activities (71,908) 30,777
------------- -------------
NET DECREASE IN CASH (321,518) (92,538)
CASH, AT THE BEGINNING OF PERIOD 2,181,020 2,387,273
------------- -------------
CASH, AT THE END OF THE PERIOD $ 1,859,502 $ 2,294,735
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 19,411 $ 1,880
============= =============
</TABLE>
NON-CASH ACTIVITIES
During 2000, the company issued $250,000 of common stock in conjunction with a
compensatory stock award to the Company's former CEO.
During 2000, capitalized software development costs totaling $ 598,000 were
transferred to leasehold improvements, equipment and computer software.
The accompanying notes are an integral part of these condensed statements.
6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2000 (unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed 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. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2000 are
not necessarily indicative of results that may be expected for the year ending
December 31, 2000 or any future period. The condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto, included in the annual report on Form 10-KSB for the year ended
December 31, 1999, together with management's discussion and analysis or plan of
operations.
NOTE B: NET EARNINGS (LOSS) PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic and
diluted net earnings (loss) per common share computations, as computed in
accordance with FAS 128:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net earnings (loss) - (numerator) $ (362,155) $ 119,874 $ (435,492) $ 12,553
Basic:
Average common shares outstanding
(denominator) 7,666,296 7,616,296 7,660,801 7,615,482
============== ============== ============== ==============
Net earnings (loss) per
common share-basic $ (.05) $ .02 $ (.06) $ -
============== ============== ============== ==============
Diluted:
Average common shares outstanding 7,666,296 7,616,296 7,660,801 7,615,482
Effect of dilutive options - 450,207 - 225,099
-------------- -------------- -------------- --------------
Adjusted average common shares
(denominator) 7,666,296 8,066,503 7,660,801 7,840,581
============== =============== ============== ==============
Net earnings (loss) per
common share-diluted $ (.05) $ .01 $ (.06) $ -
============== =============== ============== ==============
</TABLE>
All options and warrants outstanding for the three and six months ended June 30,
2000 are excluded from the calculation of diluted weighted average shares as
they are anti-dilutive.
7
<PAGE>
NOTE C: COMMITMENTS AND CONTINGENCIES
Agreements with Related Parties
-------------------------------
In April 1999, 800 Travel Systems entered into a $60,000 loan agreement and a
$100,000 deferred compensation agreement with Mr. Mark Mastrini, then President
and CEO of 800 Travel Systems. The loan amount would be forgiven in two $30,000
installments if Mr. Mastrini was employed by 800 Travel Systems as of January 1,
2000 and 2001. The total deferred compensation would be paid if Mr. Mastrini was
employed by 800 Travel Systems as of April 1, 2009. In June 2000, Mark D.
Mastrini resigned from the Company, the deferred compensation agreement was
terminated and the outstanding loan of $30,000 is due to the Company according
to the terms of the agreement. In June 2000, 800 Travel Systems entered into a
consulting agreement for the term of 12 months with Mark D. Mastrini, under
which $180,000 of compensation will be paid and expensed over the life of the
agreement.
Legal Proceedings
-----------------
The Company is the defendant in an action currently pending in the 134th
District Court of Dallas County, Texas entitled FIRST LONDON SECURITIES
CORPORATION V. 800 TRAVEL SYSTEMS, INC. A/K/A/ I FLY, Case No. 00-02222. The
Company was served with this action in April, 2000; the action was brought by
First London Securities, the Company's managing underwriter for its IPO in
January 1998. The plaintiff asserts in this action that the Company failed to
keep current all filings necessary to enable the plaintiff to exercise its
rights under its Underwriting and Representatives' Warrant Agreements at an
optimal market price. Plaintiff currently alleges damages up to approximately
$1.7 million, in addition to court costs and attorney's fees. While it is
impossible to predict the eventual outcome of this action, the Company believes
that it has defenses to these claims and intends to defend this suit vigorously.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Financial Statements and Notes thereto included elsewhere in this Form
10-QSB. This discussion contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those discussed in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth herein and elsewhere in this Form 10-QSB.
OVERVIEW
800 Travel Systems, Inc. referred to herein as "800 Travel Systems", "800
Travel", "the Company", "we", "our", "us" is a leading direct marketer of travel
related services, focused primarily on providing air transportation reservation
services. The Company provides low-priced airline tickets for domestic and
international leisure travel to its customers through its easy-to-remember,
toll-free numbers and through its website on the World Wide Web (at
www.LowAirFare.com). The Company operates two reservation centers, one in Tampa,
Florida and the other in San Diego, California 7 days a week throughout the
year. As a result of its agreements to sell discounted tickets with airlines
directly, as well as other ticket suppliers, 800 Travel Systems is able to
charge its customers a service charge, while still offering low-priced tickets.
Since 800 Travel Systems is currently a broker for tickets, it does not purchase
or inventory tickets and accordingly, has no costs and/or risks associated with
such inventory.
The Company generates revenues principally from (i) commissions on air travel
tickets including override commissions on air travel tickets the Company books
on certain airlines, (ii) segment incentives under its contract with SABRE, and
(iii) service fees that it charges its customers. The Company markets its
services primarily by advertising in Yellow Pages throughout the continental
United States with populations whose general travel profiles are attractive to
the Company.
In January 1999, 800 Travel Systems broadened its ticket distribution by
offering online booking at "www.LowAirfare.com." Internet bookings as a
percentage of total gross reservations for the three and six months ended June
30, 2000 and 1999 were approximately 10.8%, 1.4%, 12.6% and 1.1%, respectively.
800 Travel Systems expects online gross reservations and online revenues to
represent an increasing percentage of gross reservations and net revenues in
future periods. To differentiate itself from the competition, the Company's
website was designed to have human interaction capabilities. The desired result
from the Company's Internet initiative is to increase completed Internet sales
in a cost effective manner by providing business to business (B2B) and business
to consumer (B2C) customers a website that offers the choice of making
reservations conveniently, without an agent or if needed, with an agent. The
Company jointly announced the completion of certain enhancements to its website
in April 2000 by integrating technology developed with Sabre Holdings
Corporation and e-Business Interactive Solutions, Inc. This new technology
provides the online travel customers the flexibility to book air travel online
by themselves or with the assistance of an online travel agent. With this
integrated technology, the Company is experiencing an approximate 18% completed
sales ratio (look-to-book ratio) which compares favorably to the e-commerce
industry average of approximately 2%. The Company considers a "look" to be an
online shopper who requests an airfare. In addition, this technology enables the
Company's reservation agents to handle up to eight online customers at once as
each online customer progresses through the online booking process.
9
<PAGE>
800 Travel Systems believes its growth strategy will leverage Internet
technologies with its core competencies of low cost, call center operations and
travel industry expertise to both B2B and B2C markets. The growth strategy
includes the expectation of selling higher volumes of cruise tickets, hotel
reservations and auto rentals as well as providing travel operation functions
such as, order administration, ticketing, shipping, quality control and customer
service to online travel service providers who typically outsource these
functions. This growth strategy should lessen the current dependency on air
travel reservations and should help offset the anticipated continued pressure on
margins from airline commission reductions and other competitive forces. The
Company announced in July 2000 the signing of a one-year strategic marketing
alliance whereby the 800 Travel System's customers will be offered hotel
accommodations fulfilled by First Internet Travel, L.L.C and likewise, First
Internet Travel, L.L.C.'s online customers will be offered airline reservations
fulfilled by 800 Travel Systems. Revenues from sales made through the strategic
marketing alliance will be shared by the two companies. 800 Travel Systems
expects revenues from sources other than airline ticket sales to increase in
future periods.
Net earnings for the three and six months ended June 30, 2000 were negatively
impacted from the Internet initiative by approximately $185,000 and $250,000
respectively. Net earnings for the three and six months ended June 30, 2000 were
negatively impacted from the additional costs and compensation for new
executives and consultants associated with the implementation of the Company's
growth strategy by approximately $206,000 and $388,000 respectively. The Company
also anticipates its operating and marketing expenses to increase as its
strategy continues to be implemented.
Gross reservations represent the aggregate retail value of the tickets sold to
consumers, including delivery and service fees charged by the Company and taxes
and impact fees levied on the behalf of various authorities. For comparative
purposes, it is important to recognize that certain other travel companies
report their gross reservations as revenues. Gross reservations are not required
by generally accepted accounting principles (GAAP) and should not be considered
in isolation or as a substitute for other information prepared in accordance
with GAAP. Gross reservations for the three and six months ended June 30, 2000
and 1999 were $23,596,920, $20,017,840, $44,661,922 and $38,740,140
respectively. Substantially all of the gross reservations are generated from
airline ticket sales. As previously disclosed, airline commissions were reduced
in October 1999 and continue to negatively impact revenues to the extent that
such reduced commissions are not able to be offset by increases in service fees
charged to customers. The Company anticipates being able to offset future
commission reductions by negotiating non-published fares directly with the
airline carriers to which a mark up paid by the consumer could be earned by the
Company.
800 Travel Systems' operating expenses include primarily those items necessary
to advertise its services, maintain and staff its travel reservation centers
including technological enhancements, payroll, commissions and benefits,
telephone, ticket delivery, general and administrative expenses including rent
and computer maintenance fees; and interest, fees and expenses associated with
800 Travel Systems' financing activities. The Company expects to continue to
incur additional operating and selling expenses relating to its Internet and
technological initiatives.
Set forth below for the periods indicated are the revenues as a percentage of
gross reservations and operating expenses, other income and net loss as a
percentage of revenues for the three and six months ended June 30, 2000 and
1999, respectively.
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Commissions 7.6% * 10.0% * 7.6% * 9.9% *
Ticket delivery and service fees 7.2 5.2 7.2 5.4
---------- ---------- ---------- ----------
Total Revenues 14.8% 15.2% 14.8% 15.3%
========== ========== ========== ==========
Operating Expenses
Employee costs 51.0% ** 47.5% ** 51.7% ** 49.1% **
SG & A, other 59.7 49.3 55.4 51.5
---------- ---------- ---------- ----------
Total Operating Expenses 110.7 96.8 107.1 100.6
---------- ---------- ---------- ----------
Other Income 0.4 0.7 0.5 0.8
---------- ---------- ---------- ----------
Net Earnings (Loss) (10.3)% 3.9% (6.6)% 0.2%
========== ========== ========== ==========
</TABLE>
* Revenues as a percentage of gross reservations.
** Expenses as a percentage of revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $.4 million, or 14.6%, to $3.5 million for the
three months ended June 30, 2000. This increase resulted primarily from
increases in the volume of tickets sold and the higher price of tickets sold
resulting and increased service fees charged to the customer. The average
revenue per ticket increased as increased service fees charged to customers and
commissions related to the new contract with 800 Travel Systems' reservation
system provider were partially offset by a reduction in commissions paid by
airlines. Revenues as a percentage of gross reservations decreased to 14.8% for
the three months ended June 30, 2000 from 15.2% for the three months ended June
30, 1999. This decrease was primarily due to the increased percentage of
Internet bookings, since the Company charges lower service fees on such bookings
when compared to its call center bookings. The Company currently earns the same
amount of commissions and segment incentives on Internet and call center
bookings. Gross reservations booked for the three months ended June 30, 2000
increased $3.6 million or 17.9% to $23.6 million. This increase resulted
primarily from increases in the volume and the price of tickets sold.
Revenues through call centers increased $.2 million or 7.5% to $3.2 million for
the three months ended June 30, 2000. This increase resulted primarily from the
higher price of tickets sold resulting from increased service fees charged to
the customer and higher ticket prices charged by the airlines. The volume of
tickets sold through the call centers remained relatively constant. To increase
this volume 800 Travel Systems intends to improve certain core competencies such
as negotiated discounted ticket pricing with airlines, hiring additional
reservation agents, improving the efficiency of reservation agents' schedules,
increasing sales of travel-related products and increasing and/or reallocating
advertising dollars to new advertising programs. Gross reservations booked
through call centers for the three months ended June 30, 2000 increased $1.3
million or 6.6% to $21 million. This increase resulted primarily from increases
in the price of tickets sold.
11
<PAGE>
Revenues from Internet bookings were $.2 million (or 7.1% of total revenues) for
the three months ended June 30, 2000. Revenues from Internet bookings for the
three months ended June 30, 1999 were immaterial. Gross reservations from
Internet bookings for the three months ended June 30, 2000 increased $2.3
million or 788% to $2.6 million. This increase resulted primarily from increases
in the volume and the price of tickets sold. 800 Travel Systems expects Internet
gross reservations and revenues to represent an increasing portion of gross
reservations and revenues in future periods.
OPERATING EXPENSES. Operating expenses increased $.9 million, or 31.1%, to $3.9
million for the three months ended June 30, 2000. Operating expenses as a
percentage of revenues increased 14% to 110.7%. Employee costs increased $.4
million to $1.8 million (or 51% of revenues) for the three months ended June 30,
2000 from $1.4 million (or 47.5% of revenues) for the three months ended June
30, 1999. This increase resulted primarily from increased Internet and call
center reservation agent, new corporate personnel hired to implement the
Company's growth strategy and the addition of a quality control department.
Other selling, general and administrative ("SG&A") expenses increased $.6
million to $2.1 million (or 59.7% of revenues) for the three months ended June
30, 2000 from $1.5 million (or 49.3% of revenues) for the three months ended
June 30, 1999. SG&A expenses including increases in advertising, legal and
consulting expenses were partially offset by decreases in telephone expenses.
This decrease resulted primarily from a telecommunications contract that became
effective in August 1999.
INCOME TAXES. No provision for income taxes has been recorded since 800 Travel
Systems currently does not record a benefit for losses.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $.6 million, or 10.8%, to $6.6 million for the six
months ended June 30, 2000. This increase resulted primarily from increases in
the volume of tickets sold and the higher price of tickets sold resulting and
increased service fees charged to the customer. The average revenue per ticket
increased as increased service fees charged to customers and commissions related
to the new contract with 800 Travel Systems' reservation system provider were
partially offset by a reduction in commissions paid by airlines. Revenues as a
percentage of gross reservations decreased to 14.8% for the six months ended
June 30, 2000 from 15.3% for the six months ended June 30, 1999. This decrease
was primarily due to the increased percentage of Internet bookings, since the
Company charges lower service fees on such bookings when compared to its call
center bookings. The Company currently earns the same amount of commissions and
segment incentives on Internet and call center bookings. Gross reservations
booked for the six months ended June 30, 2000 increased $5.9 million or 15.3% to
$44.7 million. This increase resulted primarily from increases in the volume and
the price of tickets sold.
Revenues through call centers increased $.2 million or 2.7% to $6 million for
the six months ended June 30, 2000. This increase resulted primarily from the
higher price of tickets sold resulting from increased service fees charged to
the customer and higher ticket prices charged by the airlines and was partially
offset by a decrease in the volume of tickets sold. To increase this volume 800
Travel Systems intends to improve certain core competencies such as negotiated
discounted ticket pricing with airlines, hiring additional reservation agents,
increasing reservation agent hours worked through schedule adjustments,
increasing sales of travel-related products and increasing and/or reallocating
advertising dollars to new advertising programs. Gross reservations booked
through call centers for the six months ended June 30, 2000 increased $.7
million or 1.9% to $39 million. This increase resulted primarily from increases
in the price of tickets sold.
12
<PAGE>
Revenues from Internet bookings were $.5 million (or 8.1% of total revenues) for
the six months ended June 30, 2000. Revenues from Internet bookings for the six
months ended June 30, 1999 were immaterial. Gross reservations from Internet
bookings for the six months ended June 30, 2000 increased $5.2 million or 1221%
to $5.6 million. This increase resulted primarily from increases in the volume
and the price of tickets sold. 800 Travel Systems expects Internet gross
reservations and revenues to represent an increasing portion of gross
reservations and revenues in future periods.
OPERATING EXPENSES. Operating expenses increased $1.1 million, or 18.1%, to $7
million for the six months ended June 30, 2000. Operating expenses as a
percentage of revenues increased 6.5% to 107.1%. Employee costs increased $.5
million to $3.4 million (or 51.7% of revenues) for the six months ended June 30,
2000 from $2.9 million (or 49.1% of revenues) for the six months ended June 30,
1999. This increase resulted primarily from increased Internet and call center
reservation agent, new corporate personnel hired to implement the Company's
growth strategy and the addition of a quality control department. Other selling,
general and administrative ("SG&A") expenses increased $.6 million to $3.6
million (or 55.4% of revenues) for the six months ended June 30, 2000 from $3
million (or 51.5% of revenues) for the six months ended June 30, 1999. SG&A
expenses including increases in advertising, legal and consulting expenses were
partially offset by decreases in telephone expenses. This decrease resulted
primarily from a telecommunications contract that became effective in August
1999.
INCOME TAXES No provision for income taxes has been recorded since 800 Travel
Systems currently does not record a benefit for losses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $.4 million for the six months
ended June 30, 2000 primarily as a result of depreciation and amortization
expenses and decreases in receivables and was partially offset by a net loss.
For the six months ended June 30, 1999, net cash provided by operating
activities was $.2 million primarily as a result of depreciation and
amortization expenses, an increase in accounts payable and accrued liabilities
and a decrease in unearned revenue and was partially offset by an increase in
receivables.
Net cash used in investing activities was $.6 million for the six months ended
June 30, 2000 primarily as a result of computer hardware, software and software
development costs incurred in connection with the Company's Internet and
technological initiatives. For the six months ended June 30, 1999, net cash used
in investing activities was $.3 million primarily as a result of software
development costs incurred in connection with the Company's Internet and
technological initiatives.
Net cash used by financing activities was $71,908 for the six months ended June
30, 2000 primarily as a result of principal payment on debt. For the six months
ended June 30, 1999 net cash provided by financing activities was $30,777
primarily as a result of net proceeds received from the exercise of stock
options and warrants and was partially offset by the principal payment on debt.
Management believes that the existing cash and cash expected to be provided by
operating activities will be sufficient to fund the short term capital and
liquidity needs of 800 Travel Systems' operations. In anticipation of the
Company's longer term capital requirements, the Company currently has made plans
to seek to raise between $4 million and $10 million of private equity capital.
800 Travel Systems has budgeted approximately $3.5 million for capital
expenditures, nearly all of which is intended for the Internet initiative and
necessary computer hardware relating to the new contract with the reservation
system provider effective May 1999. Approximately $2 million has been expended
through June 30, 2000 with the remainder to be expended within the next 12
months. If cash on hand or cash expected to be provided by operating activities
is not sufficient to satisfy 800 Travel Systems' liquidity and capital
13
<PAGE>
requirements, 800 Travel Systems would need to seek to sell additional equity or
debt securities or obtain credit lines from financial institutions. The sale of
equity securities or convertible debt could result in additional dilution to 800
Travel Systems' shareholders. There is no assurance that 800 Travel Systems will
be able to obtain additional capital or financing in amounts or on terms
acceptable to 800 Travel Systems, if at all or on a timely basis.
YEAR 2000 READINESS
As of the date of this report 10-QSB, which is subsequent to the year beginning
2000, 800 Travel Systems has experienced no material adverse affects from the
onset of Year 2000. 800 Travel Systems will continue to monitor for potential
negative affects from the Year 2000 however, no material adverse affects are
anticipated. 800 Travel Systems' total costs of its year 2000 preparedness were
not material. There can be no assurances that the costs resulting from future
potential year 2000 issues will not have a material impact on 800 Travel
Systems' business, operations or financial condition in future periods.
SEASONALITY
Based upon the results of its operations during 1999 and 2000 to date and its
knowledge of the travel industry, 800 Travel Systems anticipates its business
may be affected by seasonality. Travel bookings typically are lower in the
months November through March and higher in April through October as consumers
plan their vacations. In response, 800 Travel Systems will vary the number of
agents on staff at any time. There can be no assurance that 800 Travel Systems
may not have to take proactive steps to reduce its work force in response to
seasonal fluctuations in the future. Notwithstanding 800 Travel Systems'
efforts, the seasonality of the travel industry is likely to adversely impact
800 Travel Systems' business. Moreover, as a consequence of such seasonality and
other factors, 800 Travel Systems' quarterly revenue and operating results will
be difficult to forecast and period to period comparisons of results may not be
relevant or informative.
FORWARD LOOKING STATEMENTS -- RISK FACTORS
Investors should carefully consider the following risk factors, in
addition to the other information concerning the factors affecting forward
looking statements. Each of these risk factors could adversely affect our
business, operating results and financial condition as well as adversely affect
the value of an investment in 800 Travel Systems. You should be able to bear a
complete loss of your investment.
Certain oral statements made by management from time to time and
certain statements contained herein and in documents incorporated herein by
reference that are not historical facts are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and, because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. The terms "800 Travel Systems,"
"company," "we," "our," and "us" refer to 800 Travel Systems, Inc. The words
"expect", "believe", "goal", "plan", "intend", "anticipate", "estimate", "will"
and similar expressions and variations thereof if used, are intended to
specifically identify forward-looking statements. Forward-looking statements are
statements regarding the intent, belief or current expectations, estimates or
projections of 800 Travel Systems, our Directors or our Officers about 800
Travel Systems and the industry in which we operate, and assumptions made by
management, and include among other items, (i) our strategies regarding growth,
including our intention to further develop and improve our Internet capabilities
and diversify revenues utilizing our call center operation and travel industry
expertise; (ii) our financing plans; (iii) trends affecting our financial
condition or results of operations; (iv) our ability to continue to control
costs and to meet our liquidity and other financing needs; (v) our ability to
respond to changes in customer demand, including as a result of increased
competition and the increase of Internet activity. Although we believe our
expectations are based on reasonable assumptions, we can give no assurance that
the anticipated results will occur. We disclaim any intention or obligation to
update or revise forward-looking statements, whether as a result of new
information, future events or otherwise.
14
<PAGE>
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors which
include, among others, (i) general economic conditions, particularly those
affecting fuel and other travel costs and their effect on the volume of consumer
air travel; (ii) conditions in the capital markets, including the interest rate
environment and the availability of capital, which could affect our internal
growth and possibilities for strategic alliances in the travel and telemarketing
areas; (iii) changes in the competitive marketplace that could affect our
revenue and/or cost bases, such as increased competition from traditional and
Internet based travel agencies, consolidators and the airlines themselves,
changes in the commissions paid by airlines, and increased labor, marketing,
computer software/hardware and telecommunications costs; (iv) the availability
and capabilities of the SABRE electronic travel reservation system and ancillary
software; (v) the success of our Internet initiatives; (vi) changes in
commission rates; (vii) the improved productivity of our reservation agents as
they gain experience and utilize technological improvements; (viii) our rights
to the use of software and other intellectual property and the potential for
others to challenge and otherwise adversely affect such rights; and (ix) other
factors including those identified in our filings with the SEC including but not
limited to information under the heading "Risk Factors" in the Form SB-2
Registration Statement and Prospectus for our initial public offering as amended
from time to time, and the following risk factors:
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES. OUR FUTURE
OPERATING RESULTS MAY NOT BE PROFITABLE.
We have been operating for less than four years and during that time we
have generated a significant accumulated operating loss. There can be no
assurance that we will be able to operate profitably, particularly if we seek to
expand through acquisitions or the addition of new Internet services. We only
recently initiated our online operations and, accordingly, our prospects in this
field must be considered in light of the difficulties encountered in any new
business. These risks include our failure to:
o attract additional travel suppliers and consumers to our
service
o maintain and enhance our brand
o expand our service offerings
o operate, expand and develop our operations and systems
efficiently
o maintain adequate control of our expenses
o raise additional capital
o attract and retain qualified personnel
o respond to technological changes
o respond to competitive market conditions
o operate at a profit
OUR LOSSES AND NEGATIVE CASH FLOWS MAY CONTINUE.
We have incurred net losses and negative cash flows on both an annual
and interim basis. For the six months ended June 30, 2000, we had a net loss of
$435,492 and we had a net decrease in cash of $321,518. We may continue to incur
net losses for the foreseeable future and we cannot assure you that we will ever
achieve, or if achieved, sustain profitability or generate positive cash flow.
We expect our operating expenses to grow. These increased expenses will result
primarily from our Internet initiatives, advertising and expansion of our
operations. As a result, we will need to increase our revenues to become
profitable. If our revenues do not grow as expected, or if increases in our
expenses are not in line with our plans, there could be a material adverse
effect on our business, operating results and financial condition.
15
<PAGE>
WE ARE DEPENDENT ON THE SABRE SYSTEM.
Our ability to quote air travel ticket prices, make reservations and
sell tickets is dependent upon our contractual right to use, and the performance
of, the SABRE electronic travel reservation system. In May 1999, we entered into
a five-year agreement with SABRE, Inc. to lease the SABRE system in our Tampa
and San Diego reservation centers. If the SABRE system were to cease
functioning, or if we were to lose our contractual right to use the SABRE system
through our inability to renew the agreement, upon expiration thereof or through
a default by us or other termination event under the agreement during the term
thereof, we 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. There can be no
assurance that a replacement system could be obtained on comparable terms or if
obtained, installed in time to successfully continue operations.
During any interruption in the operation of SABRE, we would lose
revenues. Other travel agencies using other travel reservation systems would not
be subject to such interruption of their operations, and we may lose market
share to such competitors. Upon the interruption of the operation of the SABRE
system, we could decide to commence operations with another travel reservation
system. Substantial expenses could be required for acquiring the right to use a
new system and retraining reservation agents. In addition, any impairment of the
SABRE system which does not cause us to cease operations could, nevertheless,
adversely affect the quality of our services, resulting in lost revenues or
market share and could require us to subscribe to a different travel reservation
system.
WE ARE SUBJECT TO ADJUSTMENTS IN AIRLINE COMMISSIONS WHICH COULD REDUCE OUR
REVENUES.
In October 1999, the major airlines announced reductions in the
commissions they will pay traditional travel agents from approximately 8% to 5%
and subject to a cap of $50.00 for domestic round trip ticket sales. In
addition, many airlines have implemented a fixed-rate commission of $10.00 for
domestic online round trip ticket sales. We anticipate continued downward
pressure on airline commission rates. Such reductions and future reductions, if
any, could have a material adverse effect on our operations. We may not be paid
commissions by airlines for stand-alone bookings on our web site or online agent
assisted bookings on our web site. We also may not be able to impose service
charges for our Internet services, which could adversely affect our future
online revenues and earnings.
A DECLINE IN COMMISSION RATES OR THE ELIMINATION OF COMMISSIONS COULD REDUCE OUR
REVENUES AND MARGINS.
A substantial majority of our online revenues depends on the
commissions paid by travel suppliers for bookings made through our call centers
and through our online travel service. Generally, we do not have written
commission agreements with most of our suppliers. As is standard practice in the
travel industry, we rely on informal arrangements for the payment of commissions
which applies to all travel agencies. Travel suppliers are not obligated to pay
any specified commission rate for customer bookings made online through our
websites. We cannot assure you that airlines, hotel chains or other travel
suppliers will not reduce current industry commission rates or eliminate
commissions entirely, either of which could reduce our revenues and margins. For
example, in 1995, most of the major airlines placed a cap on per-ticket
commissions payable to all travel agencies for domestic airline travel. In
September 1997, the major United States airlines reduced the commission rate
payable to traditional travel agencies from 10% to 5%. In 1997, the major United
States airlines reduced the commission rate payable for online reservations from
8% to 5%. In addition, since 1998, many airlines have implemented a commission
cap of $10.00 for domestic online round-trip ticket sales. Because a high
percentage of our business relates to airline ticket sales, a further reduction
in airline ticket commissions could reduce our revenues.
16
<PAGE>
RISKS RELATING TO THE AIRLINE INDUSTRY
Developments in the airline industry may result in a decrease in the
price of tickets or number of tickets we sell. Consolidation of airline carriers
could adversely impact ticket prices, the available discounts on same as well as
commission rates. Concerns about passenger safety may result in a decrease in
passenger air travel and a consequent decrease in the number of tickets we sell.
There can be no assurance that any such developments will not occur or that we
will not be adversely affected by any such decrease in the level of passenger
air travel.
IF TRAVEL RELATED INTERNET SERVICES OR THE DIVERSIFIED USE OF OUR CALL CENTER
OPERATIONS DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS MAY NOT
GROW.
Our success will depend in large part on widespread market acceptance
of the Internet as a vehicle for the buying of airline tickets and other travel
related products and services as well as the diversified use of our call center
operations. Consumers who have historically purchased airline tickets and other
travel related products and services using traditional commercial channels, such
as local travel agents and calling airlines directly, must instead purchase
these products through our website or through call center operations. Consumers
frequently use our website or call centers for route pricing and other travel
information and then choose to purchase airline tickets or make other
reservations directly from travel suppliers or other travel agencies. If the
online market develops more slowly than expected, or if our services do not
achieve widespread market acceptance, our business may decline, may not grow or
may grow more slowly than expected. Our future growth, if any, will depend on
critical factors including but not limited to: (i) the growth of the Internet as
a tool used in the process of buying airline tickets and other travel related
products and services; (ii) our ability to successfully and cost effectively
market our services to a sufficiently large number of people and thereby attract
new and repeat customers; and (iii) our ability to consistently deliver high
quality and fast and convenient service at competitive prices.
Our revenues will not grow as much as we anticipate if the market for
our services does not continue to develop, our services do not continue to be
adopted or consumers fail to significantly increase their use of the Internet as
a tool in the process of buying airline tickets and other travel related
products and services or opt to use competitors services or airline carriers
Internet services directly.
In order to achieve the acceptance of consumers, travel suppliers and
advertisers contemplated by our business plan, we will need to continue to make
substantial investments in our technology. However, we cannot assure you that
these investments will be successful. Our failure to make progress in these
areas will harm the growth of our business.
17
<PAGE>
WE MAY BE UNABLE TO DEVELOP NEW RELATIONSHIPS WITH STRATEGIC PARTNERS AND
MAINTAIN OUR EXISTING RELATIONSHIPS.
Our business depends on establishing and maintaining relationships with
airlines, SABRE and others. As a result of our agreements to sell discounted
tickets with airlines directly, as well as other ticket suppliers, we are able
to charge our customers a service charge, while still offering low priced
tickets. We cannot assure you that we will be able to establish new
relationships or maintain existing relationships. If we fail to establish or
maintain these relationships, it could adversely affect our business.
Our business model relies on relationships with travel suppliers, and
it would be negatively affected by adverse changes in these relationships. We
depend on travel suppliers to enable us to offer our customers comprehensive
access to travel services and products. It is possible that travel suppliers may
choose not to make their inventory of services, discounts and products available
through online distribution. Travel suppliers could elect to sell exclusively
through other sales and distribution channels or to restrict our access to their
inventory, either of which could significantly decrease the amount or breadth of
our inventory of available travel offerings. Of particular note is the proposed
airline direct-distribution website, which is currently named "Orbitz." Orbitz
has announced its intention to launch in August 2000 and is reportedly owned by
American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and
United Air Lines. Forester Research reports that Orbitz will be the only website
for consumers to find unpublished special fares on these and at least 23 other
airlines. If a substantial number of our airline suppliers collectively agree or
choose to restrict their special fares solely to Orbitz, such action may have a
material adverse affect on our business. Adverse changes in any of these
relationships, whether due to Orbitz or otherwise, could reduce the amount of
travel services which we are able to offer through our websites.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET WITH LOW BARRIERS TO ENTRY WHICH COULD
HARM OUR BUSINESS.
While the market for buying airline tickets and other travel related
products and services on the Internet is relatively new and rapidly evolving, it
is already competitive and characterized by entrants that may develop services
similar to ours. Many of our existing competitors, as well as our potential
competitors, have longer operating histories on the Web, greater name
recognition, higher amounts of user traffic and significantly greater financial,
technical and marketing resources than we do. In addition, there are relatively
low barriers to entry to our business. We do not have patents or other
intellectual property that would preclude or inhibit competitors from entering
the market. Moreover, due to the low cost of entering the market, competition
may intensify and increase in the future. We compete against other online travel
web sites, including those of airline carriers. We also compete with traditional
methods used by travel agents to market airline tickets, including yellow pages,
classified ads, travel brochures and other media advertising. This competition
may limit our ability to become profitable or result in the loss of market
share.
18
<PAGE>
WE COMPETE WITH A VARIETY OF COMPANIES WITH RESPECT TO EACH PRODUCT OR SERVICE
WE OFFER. THESE COMPETITORS INCLUDE:
o Internet travel agents such as Travelocity.com, Expedia and
American Express Interactive, Inc.;
o local, regional, national and international traditional travel
agencies;
o consolidators and wholesalers of airline tickets, hotels and
other travel products, including online consolidators such as
Cheaptickets.com and Priceline.com and online wholesalers such
as Hotel Reservations Network, Inc.;
o airlines, hotels, rental car companies, cruise operators and
other travel service providers, whether working individually
or collectively, some of which are suppliers to our websites;
and
o operators of travel industry reservation databases.
In addition to the traditional travel agency channel, many travel
suppliers also offer their travel services as well as third-party travel
services directly through their own websites. These travel suppliers include
many suppliers with which we do business. In particular, five airline suppliers,
American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and
United Air Lines, have announced their intention to launch a direct-
distribution website, currently named "Orbitz," by the end of August 2000.
Forester Research reports that Orbitz will be the only website for consumers to
find unpublished weekly special fares on at least 23 other airlines. Suppliers
also sell their own services directly to consumers, predominantly by telephone.
As the market for online travel services grows, we believe that travel
suppliers, traditional travel agencies, travel industry information providers
and other companies will increase their efforts to develop services that compete
with our services by selling inventory from a wide variety of suppliers. We
cannot assure you that our online operations will compete successfully with any
current or future competitors.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us and may enter into
strategic or commercial relationships with larger, more established and well
financed companies. Certain of our competitors may be able to secure services
and products from travel suppliers on more favorable terms, devote greater
resources to marketing and promotional campaigns and devote substantially more
resources to website and systems development than us. In addition, new
technologies and the expansion of existing technologies may increase competitive
pressures on us. In particular, Microsoft Corporation has publicly announced its
intent to continue to invest heavily in the area of travel technology and
services. Increased competition may result in reduced operating margins, loss of
market share and brand recognition. There can be no assurance that we will be
able to compete successfully against current and future competitors, and
competitive pressures faced by us may have a material adverse effect on our
business, operating results and financial condition.
Our sales affiliates and employees are generally not subject to
non-competition agreements. In addition, our business model does not involve the
use of a large amount of proprietary information. As a result, we are subject to
the risk that our sales affiliates or employees may leave us and may work for
competitors or may start competing businesses. The emergence of these
enterprises will further increase the level of competition in our market and
could harm our growth and financial performance.
WE MAY NOT BE ABLE TO MAINTAIN OUR WEB DOMAIN NAME, WHICH MAY CAUSE CONFUSION
AMONG WEB USERS AND DECREASE THE VALUE OF OUR BRAND NAME.
We currently hold a Web domain name relating to our brand. Currently,
the acquisition and maintenance of domain names is regulated by governmental
agencies and their designees. The regulation of domain names in the U.S. and in
foreign countries is expected to change in the near future. As a result, we may
19
<PAGE>
not be able to maintain our domain name. These changes could include the
introduction of additional top level domains, which could cause confusion among
Web users trying to locate our sites. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. We may be unable to prevent third parties from
acquiring domain names that are similar to ours. The acquisition of similar
domain names by third parties could cause confusion among Web users attempting
to locate our site and could decrease the value of our brand name and the use of
our site.
WE MAY NOT BE ABLE TO ATTRACT AND EXPAND OUR ONLINE TRAFFIC.
We believe that establishing, maintaining and enhancing our
LowAirfare.com website is a critical aspect of our efforts to attract and expand
our online traffic. The number of Internet sites that offer competing services
increases the importance of establishing and maintaining brand recognition. Many
of these Internet sites already have well-established brands in online services
or the travel industry generally. Promotion of the LowAirfare.com website will
depend largely on our success in providing a high-quality online experience
supported by a high level of customer service. In addition, we intend to
increase our spending on marketing and advertising with the intention of
expanding the recognition of our website to attract and retain online users and
to respond to competitive pressures. However, we cannot assure you that these
expenditures will be effective to promote our brand or that our marketing
efforts generally will achieve our goals.
IF WE ARE UNABLE TO INTRODUCE AND SELL NEW PRODUCTS AND SERVICES, OUR BUSINESS
COULD BE ADVERSELY EFFECTED.
We need to broaden the range of travel products and services and
increase the availability of products and services that we offer in order to
enhance our service. We will incur substantial expenses and use significant
resources trying to expand the range of products and services that we offer.
However, we may not be able to attract sufficient travel suppliers and other
participants to provide desired products and services to our consumers. In
addition, consumers may find that delivery through our service is less
attractive than other alternatives. If we launch new products and services and
they are not favorably received by consumers, our reputation, business and the
value of the Lowairfare.com.com brand could be adversely effected.
Our relationships with consumers and travel suppliers are mutually
dependent since consumers will not use a service that does not offer a broad
range of travel services. Similarly, travel suppliers will not use a service
unless consumers actively make travel purchases through it. We cannot predict
whether we will be successful in expanding the range of products and services
that we offer. If we are unable to expand successfully, this could also
adversely effect our business.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED.
We may be unable to retain our key employees and consultants and key
sales agents or attract, assimilate or retain other highly qualified employees
and sales agents in the future. Our future success depends on our ability to
attract, retain and motivate highly skilled employees and sales agents. If we do
not succeed in attracting new personnel or retaining and motivating our current
personnel, it may be difficult for us to manage our business and meet our
objectives.
20
<PAGE>
A FAILURE IN THE PERFORMANCE OF OUR WEB HOSTING FACILITY SYSTEMS COULD HARM OUR
BUSINESS AND REPUTATION.
We depend upon a third party Internet service provider to host and
maintain our web site. Any system failure, including network, software or
hardware failure, that causes an interruption in the delivery of our web site or
a decrease in responsiveness of our web site service could result in reduced
revenue, and could be harmful to our reputation and brand. Our Internet service
provider does not guarantee that our Internet access will be uninterrupted,
error free or secure. Any disruption in the Internet service provided by such
provider could significantly harm our business. In the future, we may experience
interruptions from time to time. Our insurance may not adequately compensate us
for any losses that may occur due to any failures in our system or interruptions
in our service. Our Web servers must be able to accommodate a high volume of
traffic and we may in the future experience slower response times for a variety
of reasons. If we are unable to add additional software and hardware to
accommodate increased demand, this could cause unanticipated system disruptions
and result in slower response times. The costs associated with accommodating
such increased demand may exceed the revenues the increased demand may generate.
Ticket buyers may become dissatisfied by any system failure that interrupts our
ability to provide access or results in slower response time and thereby not
return to the site.
Any reduction in performance, disruption in the Internet access or
discontinuation of services provided by our Internet service provider, Verizon
and AT&T, or other telecommunications provider, or any disruption in our ability
to access the SABRE systems, could have a material adverse effect on our
business, operating results and financial condition. There can be no assurance
that our transaction processing systems and network infrastructure will be able
to accommodate increases in traffic in the future, or that we will, in general,
be able to accurately project the rate or timing of such increases or upgrade
our systems and infrastructure to accommodate future traffic levels on our
online sites. In addition, there can be no assurance that we will be able in a
timely manner to effectively upgrade and expand our transaction processing
systems or to successfully integrate any newly developed or purchased modules
with our existing systems. There can be no assurance that we will successfully
utilize new technologies or adapt our online sites, proprietary technology and
transaction processing systems to customer requirements or emerging industry
standards.
Our call center computer and communications hardware is provided under
a leasing arrangement and is located at the respective centers in Tampa, Florida
and San Diego, California. If either call center experiences a disaster that
interrupts service, inbound telephone calls can be re-routed to the other
center. Substantially all of our Internet computer and communications hardware
is provided by Exodus and is located at Exodus' New York Internet data center.
Our systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. We currently do not have redundant systems or a formal disaster recovery
plan and may not carry sufficient business interruption insurance to compensate
us for losses that may occur. Despite the implementation of network security
measures by us, our servers are vulnerable to computer viruses, physical or
electrical break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and confirm customer
reservations.
21
<PAGE>
OUR INTERNET SOFTWARE DEVELOPMENT EFFORTS MAY NOT SUCCEED.
We are in the process of working to enhance and expand our business and
opportunities through the use of the Internet and we are exposed to various
risks and uncertainties related to our arrangements or agreements with third
parties for the co-development or development of software systems for use in
conjunction with our Internet initiatives. Such risks and uncertainties include
but are not limited to the following: (i) we may expend significant funds for
co-development or development of software that exceed the benefits, if any,
ultimately derived from such software or the benefits that could be derived from
less expensive software available from other sources; (ii) any software
co-developed by us or developed for us may be functionally or technologically
obsolete by the time co-development or development is completed; (iii) the
timetables necessary to attain the advantages anticipated from such
co-development or development may not be achieved; (iv) others may develop
similar software and make such software available to our competitors or our
competitors may develop similar software or the software developed by others may
have features and benefits beyond the capabilities of the software co-developed,
licensed or otherwise utilized by us; (v) our rights with respect to any
co-development or development arrangement may become the subject of disputes and
may result in our not having any rights in or to such software and result in
claims of violations of intellectual property rights which could result in
significant defense cost and the possibility of damages being assessed against
us; and (vi) key individuals involved in connection with any software
co-development arrangement with us could become unable to complete or continue
the co-development, which could cause the co-development to end, or result in
significant delays and increases in costs to continue such co-development.
WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We may receive in the future, notice of claims of infringement of other
parties' proprietary rights. Infringement or other claims could be asserted or
prosecuted against us in the future and it is possible that past or future
assertions or prosecutions could harm our business. Any such claims, with or
without merit, could be time consuming, resulting in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of new products or services, or require us to develop non-infringing
technology or enter into royalty or licensing arrangements. Such royalty or
licensing arrangements, if required, may not be available on terms acceptable to
us, or at all. For these reasons, infringement claims could harm our business.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
BRAND AND OUR BUSINESS.
We rely on a combination of trademark and copyright law and trademark
protection. Despite our efforts, we cannot be sure that we will be able to
prevent misappropriation of our intellectual property. It is possible that
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation could result in substantial costs
and diversion of our resources away from the operation of our business.
22
<PAGE>
DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY GENERALLY COULD REDUCE OUR
REVENUES.
We rely on the health and growth of the travel industry. Travel is
highly sensitive to business and personal discretionary spending levels, and
thus tends to decline during general economic downturns. In addition, other
adverse trends or events that tend to reduce travel are likely to reduce our
revenues. These may include:
o price escalation in the airline industry or other
travel-related industries
o increased occurrence of travel-related accidents
o airline or other travel-related strikes
o political instability
o regional hostilities and terrorism
o bad weather
REGULATORY AND LEGAL CHANGES MAY IMPOSE TAXES OR OTHER BURDENS ON OUR BUSINESS.
The laws and regulations applicable to the travel industry affect us
and our travel suppliers. We must comply with laws and regulations relating to
the sale of travel services, including those prohibiting unfair and deceptive
practices and those requiring us to register as a seller of travel, comply with
disclosure requirements and participate in state restitution funds. In addition,
many of our travel suppliers and computer reservation systems providers are
heavily regulated by the United States and other governments. Our services are
indirectly affected by regulatory and legal uncertainties affecting the
businesses of our travel suppliers and computer reservation systems providers.
We must also comply with laws and regulations applicable to businesses
generally and online commerce. Currently, few laws and regulations directly
apply to the Internet and commercial online services. Moreover, there is
currently great uncertainty about whether or how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and commercial online services. It is possible that laws
and regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial online
services. In turn, this could decrease the demand for our products and services
or increase our cost of operations.
Federal legislation imposing limitations on the ability of states to
tax Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as
this legislation is known, exempts specific types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible that this legislation will not
be renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet-based sales,
and these taxes could decrease the demand for our products and services or
increase our costs of operations.
RISKS RELATED TO THE INTERNET INDUSTRY
RAPID TECHNOLOGICAL CHANGES MAY RENDER OUR TECHNOLOGY OBSOLETE OR DECREASE THE
COMPETITIVENESS OF OUR SERVICES.
To remain competitive in the online travel industry, we must continue to
enhance and improve the functionality and features of our websites. The Internet
and the online commerce industry are rapidly changing. In particular, the online
travel industry is characterized by increasingly complex systems and
infrastructures. If competitors introduce new services embodying new
technologies, or if new industry standards and practices emerge, our existing
websites and proprietary technology and systems may become obsolete. Our future
success will depend on our ability to do the following:
23
<PAGE>
o enhance our existing services;
o develop and license new services and technologies that address
the increasingly sophisticated and varied needs of our
prospective customers and suppliers;
o respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
Developing our websites and other proprietary technology entails
significant technical and business risks. We may use new technologies
ineffectively or we may fail to adapt our websites, transaction-processing
systems and network infrastructure to customer requirements or emerging industry
standards. If we face material delays in introducing new services, products and
enhancements, our customers and suppliers may forego the use of our services and
use those of our competitors.
INTERNET RELATED REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
There are an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, domain name registration, online content regulation, user privacy,
taxation and quality of products and services. Moreover, the applicability to
the Internet of existing laws governing issues including intellectual property
ownership and infringement, copyright, patent, trademark, trade secret,
obscenity, libel, employment and personal privacy is uncertain and developing.
Further, the growth and development of the market for online commerce may prompt
calls for more stringent consumer protection laws. New laws or different
applications of existing laws would likely impose additional burdens on
companies conducting business online and may decrease the growth of the Internet
or commercial online services. In turn, this could decrease the demand for our
products and services or increase our cost of operations.
Federal legislation imposing limitations on the ability of states to
impose new state taxes on e-commerce was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, exempts specific types of sales
transactions conducted over the Internet from multiple or discriminatory state
and local taxation through October 21, 2001. It is possible that this
legislation will not be renewed when it terminates in October 2001. Failure to
renew this legislation or the enactment of new legislation could allow state and
local governments to impose taxes on Internet-based sales and use. Such taxes
could decrease the demand for our products and services or increase our costs of
operations.
OUR ABILITY TO GENERATE BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE COMMERCE.
Our ability to generate business through our web site depends on
continued growth in the use of the Internet and in the acceptance and volume of
commerce transactions on the Internet. Rapid growth in the use of the Internet
and online services is a recent phenomenon. This growth may not continue. A
sufficiently broad base of consumers may not accept, or continue to use, the
Internet as a medium of commerce. We cannot assure you that the number of
Internet users will continue to grow in general or with respect to our site or
that commerce over the Internet will become more widespread or that our sales
will grow at a comparable rate. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
are subject to a high level of uncertainty. The Internet may not prove to be a
viable commercial marketplace for a number of reasons including but not limited
to: (i) the lack of acceptable security technologies; (ii) the lack of access
and ease of use; (iii) congestion of traffic; inconsistent quality of service
and the lack of availability of cost effective, high speed service; (iv)
potentially inadequate development of the necessary infrastructure; (v)
governmental regulation and/or taxation; and (vi) uncertainty regarding
intellectual property ownership or the enforcement of intellectual property
rights.
24
<PAGE>
DUE TO OUR ANTICIPATED GROWTH, WE MAY BE UNABLE TO PLAN OR MANAGE OUR OPERATIONS
AND GROWTH EFFECTIVELY.
Our growth to date has placed, and our anticipated future operations
will continue to place, a significant strain on our management, systems and
resources. We continue to increase the scope of our operations and the size of
our workforce. In addition to needing to train and manage our workforce, we will
need to continue to improve and develop our financial and managerial controls
and our reporting systems and procedures. A failure to plan, implement and
integrate these systems successfully could adversely affect our business.
We cannot assure you that the Internet will support increasing use or
will prove to be a viable commercial marketplace.
The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic. Our
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity and security and the
timely development of complementary products for providing reliable Internet
access and services. Major online service providers and the Internet itself have
experienced outages and other delays as a result of software and hardware
failures and could face such outages and delays in the future. Outages and
delays are likely to affect the level of Internet usage and the processing of
transactions on our websites. In addition, the Internet could lose its viability
because of delays in the development or adoption of new standards to handle
increased levels of activity or of increased government regulation. The adoption
of new standards or government regulation may require us to incur substantial
compliance costs.
INFORMATION DISPLAYED ON OUR WEB SITE MAY SUBJECT US TO LITIGATION AND THE
RELATED COSTS.
We may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to information
published or contained on our web site. We could also be subject to claims based
upon the content that is accessible from our web site through links to or from
other web sites. Defending against any such claims could be costly and divert
resources and the attention of management from the operation of our business.
ADDITIONAL RISKS
WE MAY NEED FUTURE CAPITAL.
We intend to increase sales volumes by expanding our business with both
our Internet initiatives as well as our traditional "bricks and mortar" call
center operations. There can be no assurance that our revenues will increase as
a result thereof or even continue at their current levels. As we expend
significant resources to expand our operations, it is possible that we would
continue to incur losses and negative cash flow. In such event it is likely that
we would require additional capital. An increase in capital resulting from a
capital raising transaction could result in dilution to existing holders of our
common stock and adversely impact our stock price. There is no assurance that
such capital will be available to us or, if available, be on terms acceptable to
us.
25
<PAGE>
OUR REVENUES ARE UNPREDICTABLE AND ARE SUBJECT TO FLUCTUATION.
As a result of our limited operating history and the recent addition of
our online operations, we are unable to accurately forecast our revenues. Our
current and future expense levels are based on our operating plans and estimates
of future revenues and are subject to increase as we implement our strategy. We
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall in revenues
would likely have an immediate material adverse effect on our business,
operating results and financial condition. Further, if we should substantially
increase our operating expenses to offer expanded services, to increase sales
and marketing or to develop our technology and transaction processing systems,
and such expenses are not subsequently followed by increased revenues, our
operating performance and results would be adversely effected and if sustained
could have a material adverse effect on our business.
We will experience seasonality in our business, reflecting seasonal
fluctuations in the travel industry. Seasonality in the travel industry is
likely to cause quarterly fluctuations in our operating results and could have a
material adverse effect on our business, operating results and financial
condition.
OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD.
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To transmit confidential information such as customer credit
card numbers securely, we rely on encryption and authentication technology.
Unanticipated events or developments could result in a compromise or breach of
the systems we use to protect customer transaction data. Furthermore, our
servers may also be vulnerable to viruses transmitted via the Internet. While we
proactively check for intrusions into our infrastructure, a new and undetected
virus could cause a service disruption.
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT UPON CERTAIN KEY PERSONNEL.
Our success is substantially dependent upon the continuing services of
certain key personnel. While we have employed a number of executives with
industry experience, the loss of any significant members of management could
have a material adverse effect on our business, financial condition and results
of operations.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY IMPACT THE MARKET PRICE OF THE
COMMON STOCK.
We are unable to predict the effect, if any, that future sales of
Common Stock (or the potential for such sales) 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, including those obtained from the
exercise of the Warrants, could impair our ability to raise capital through an
offering of securities and may adversely affect the market price of the Common
Stock.
THE COMPANY MUST MAINTAIN A CURRENT PROSPECTUS AND REGISTRATION STATEMENT IN
ORDER FOR WARRANTS TO BE EXERCISED BY THEIR HOLDERS.
We must maintain an effective registration statement on file with the
Commission before the holder of any of the Warrants may be redeemed or
exercised. It is possible that we may be unable to cause a registration
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 we are 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. There can be no
assurance that we will be able to maintain an effective registration statement
covering the issuance of Common Stock upon redemption or exercise of the
Warrants. If we are unable to maintain an effective registration for the
issuance of Common Stock upon redemption of exercise of the Warrants, we may be
subject to claims by the Warrant holders.
26
<PAGE>
OUR COMMON STOCK PRICE AND WARRANT PRICE MAY BE VOLATILE.
The market price for our Common Stock and Warrants are likely to be
highly volatile and are likely to experience wide fluctuations in response to
factors including the following:
o actual or anticipated variations in our quarterly operating
results
o announcements of technological innovations or new services by
us or our competitors
o changes in financial estimates by securities analysts
o conditions or trends in the Internet or online commerce
industries
o changes in the economic performance or market valuations of
other Internet, online commerce or travel companies
o announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or
capital commitments
o additions or departures of key personnel
o release of lock-up or other transfer restrictions on our
outstanding shares of common stock or sales of additional
shares of common stock
o potential litigation
The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. Broad market and industry
factors may adversely affect the market price of our Common Stock and Warrants,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of their stock, many companies have been the
subject of securities class action litigation. If we were sued in a securities
class action, it could result in substantial costs and a diversion of
management's attention and resources and would adversely affect our stock price.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference herein to Part I, Item 1, Note C, Legal Proceedings.
ITEM 6. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibit Index:
Exhibit Description
------- -----------
3.1 -- Amended and Restated Certificate of Incorporation (1)
3.2 -- Amended and Restated Bylaws (1)
10.1 -- Form of Registrants 1997 Stock Option Plan (1)
10.2 -- Lease dated February 10, 1996 between JFJ Real Estate L.P. and
800 Travel Systems (1)
10.3 -- Airlines Reporting Corporation ("ARC") Agent Reporting
Agreement (1)
10.4 -- Letter dated March 6, 1996 from ARC approving change of
ownership (1)
10.5 -- Subscriber Service Agreement dated November 27, 1995 between
800 Travel Systems and Payroll
Transfers Interstate, Inc. (1)
10.6 -- Form of Employment Agreement between 800 Travel Systems and
Mark D. Mastrini (1)
10.7 -- Form of Employment Agreement between 800 Travel Systems and
Biagio Bellizzi (1)
10.8 -- Agreement of March 1, 1997 between 800 Travel Systems and
Global Discount Travel Services (1)
10.9 -- 1998 Stock Option Plan (2)
10.10 -- SABRE Subscriber Agreement dated May 1, 1999 between 800
Travel Systems and SABRE, Inc.(3)
10.11 -- Loan and Pledge Agreement dated April 1, 1999 between 800
Travel Systems and Mark D. Mastrini (3)
10.12 -- Deferred Compensation Agreement dated April 20, 1999 between
800 Travel Systems and Mark D. Mastrini (3)
10.13 -- Phone Agreement dated August 24, 1999 between 800 Travel
Systems and AT&T (4)
10.14 -- Employment agreement dated September 16, 1999 between 800
Travel Systems and Robert B. Morgan (4)
10.15* -- Amendment to SABRE Subscriber Agreement dated November 5, 1999
between 800 Travel Systems and SABRE, Inc. (5)
10.16* -- Software Development Agreement dated November 5, 1999 between
800 Travel Systems and SABRE, Inc. (5)
10.17 -- Employment agreement dated November 22, 1999 between 800
Travel Systems and Peter M. Sontag (5)
10.18 -- Employment agreement dated November 5, 1999 between 800
Travel Systems and Michael Gaggi (5)
10.19 -- Amendment to Employment Agreement dated November 23, 1999
between 800 Travel Systems and Mark D. Mastrini (5)
10.20 -- Agreement of Separation and Release dated June 5, 2000 between
800 Travel Systems and Mark D. Mastrini (6)
10.21 -- Consulting agreement dated June 5, 2000 between 800 Travel
Systems and Mark D. Mastrini (6)
27.1 -- Financial Data Schedule (for SEC use only)
(1) Incorporated by reference to 800 Travel Systems' Registration Statement
on Form SB-2 No. 333-28237.
(2) Incorporated by reference to 800 Travel Systems' Registration Statement
on Form S-8 filed December 15, 1998.
(3) Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
filed August 14, 1999.
(4) Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
filed November 11, 1999.
(5) Incorporated by reference to 800 Travel Systems' Report on Form 10-KSB
filed June 30, 2000. (6) Attached herein.
* Portions of this exhibit are the subject of a confidential treatment request.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 9, 2000
800 TRAVEL SYSTEMS, INC.
------------------------
(Registrant)
By: /s/ Peter M. Sontag
--------------------------------------------
Peter M. Sontag, Chief Executive Officer
By: /s/ Robert B. Morgan
--------------------------------------------
Robert B. Morgan, Chief Financial Officer
29
