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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO 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.
(Name of small business issuer in its charter)
Delaware 59-3343338
(State of incorporation) (IRS Employer Identification No.)
4802 Gunn Highway, Tampa, Florida 33624
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (813) 908-0404
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
Redeemable Common Stock Purchase Warrants
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. [X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
The revenues of registrant for the fiscal year ended December 31, 1999 were
$12,193,633.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 21, 2000, was approximately $23,435,079 based upon a
last sales price of $3.375.
As of March 21, 2000, there were 7,616,296 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-KSB Report except with respect to information specifically incorporated by
reference in this Form 10-KSB Report, the Definitive Proxy statement is not
deemed to be filed as a part hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This description contains certain forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements as a result of certain of
the risks set forth herein and elsewhere in this Form 10-KSB. The Company
assumes no obligation to update any forward-looking statements contained herein.
GENERAL
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.
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.
800 Travel is currently in the process of integrating an Internet business model
with its existing model. The resulting business model will allow 800 Travel
Systems to focus on new business to business ("B2B") as well as business to
consumer ("B2C") travel markets. We believe this strategy will diversify our
future revenues. 800 Travel Systems' new diversified strategy seeks to leverage
Internet technologies with its core competencies of low cost, call center
operations and travel industry expertise. This diversified 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. To facilitate the changes needed to successfully
complete this new diversified Internet initiative with "brick and mortar",
together commonly called "click and mortar", 800 Travel Systems has started to
recruit and reorganize management talent, redesign the existing organization and
pursue strategic alliances and acquisitions. The Company anticipates its
operating and marketing expenses to increase as its growth strategy is executed.
In January 1998, 800 Travel Systems completed its initial public offering
("IPO") in which it sold 1,350,000 shares of Common Stock and 3,105,000 warrants
(including 405,000 warrants for the underwriters over-allotment option). The
gross proceeds of the IPO were approximately $7,138,000. Simultaneously with the
IPO, 800 Travel Systems completed the acquisition of the Joseph Stevens Group,
Inc. ("Stevens"). Stevens' 50 reservation agents provided airline tickets for
domestic and international leisure travel to consumers through its call center
located in San Diego, California. In consideration for all of the outstanding
capital stock of Stevens, pursuant to the Merger Agreement among 800 Travel
Systems, Stevens and the Joseph Stevens Group, LLC ("JSG"), the sole shareholder
of Stevens, 800 Travel Systems issued to JSG 383,333 shares of Common Stock;
250,000 Warrants identical to those sold in the IPO; and a promissory note in
the amount of approximately $1.6 million, which was subsequently repaid.
INDUSTRY BACKGROUND
U.S. Travel Industry. The travel industry is large and growing, with travelers
in the United States spending over $502 billion on travel and tourism in 1997
according to the Travel Industry Association of America. Historically, airlines,
hotels, rental car agencies, cruise lines and vacation packagers have relied on
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internal sales departments and travel agencies as their primary distribution
channels. According to the American Society of Travel Agents ("ASTA"), travel
agency sales in the United States grew from $86 billion in 1991 to $126 billion
in 1997, of which approximately half was spent on leisure travel. Leisure travel
bookings increased 30% from 1995 to 1997, the largest increase in recent years.
Management believes that the growth in leisure travel has been driven by a
number of factors, including an increase in disposable income levels in the
United States, the aging of the population and the availability of affordable
airfares. Airline travel (including business and leisure travel) continues to be
the largest segment of the travel industry, with $70.5 billion, or 56%, of total
travel booked through travel agencies in 1997. The traditional travel agency
channel is highly fragmented, with few nationally recognized brands. According
to Travel Weekly's 1998 U.S. Travel Agency Survey published in August 1998,
there are over 28,000 travel agencies operating in more than 33,000 locations in
the United States, with the average travel agency location generating less than
$4 million in annual gross bookings per location.
Worldwide Travel Industry. The travel industry is very large in terms of both
dollars spent and number of participants. According to the United States
Department of Transportation, there will be over 700 million air passengers
worldwide in 1999, rising to one billion air passengers in 2010. The World
Travel and Tourism Council estimates that spending on travel and tourism
worldwide will reach $3.7 trillion in 1999, growing to $7.5 trillion in 2010.
According to the World Travel and Tourism Council, approximately 72% of the
revenues in this market are attributable to personal travel and tourism.
Online Travel Market. As a result of pressures on traditional travel
distribution channels and the emergence of new "e-commerce" opportunities, the
online travel industry has grown rapidly. The Internet provides a convenient and
efficient medium for sales of airline tickets by affording customers direct
access to up-to-the-minute travel information, including changing fares and
routes, the ability to engage in competitive shopping, and the capability to
purchase tickets. According to Forrester Research, travel has already become the
largest online retail category with users making an estimated $7.8 billion in
airline ticket purchases and hotel and car rental reservations through travel
websites in 1999, growing to an estimated $32 billion in 2004.
INTERNET INITIATIVE
800 Travel's Internet initiative commenced in January 1999 when its website was
first established. Prior to this, during 1998, the Company determined that
Internet competitors i) were spending millions of dollars on Internet
advertising in an effort to develop a brand name; ii) were better capitalized;
iii) were larger in terms of transaction volume; and iv) had similar
functionality in their websites. Recognizing these competitive pressures, the
Company began to formulate an Internet strategy that would differentiate itself
from the competition. To differentiate itself from the competition, the
Company's website was designed to have human interaction capabilities through
the Interactive Reservation Internet System ("IRIS!(TM)"), a software product
developed in conjunction with the Company by e-Business Interactive Solutions,
Inc. ("EIS"). The Company realized through these early efforts that enhanced
Internet capabilities would be required to effectively service the expected
increase in demand from the growth and popularity of e-commerce. In connection
with the foregoing, 800 Travel commenced with EIS the development of
enhancements to the capabilities of the agent interactive component to improve
efficiencies and to further integrate such capabilities with existing operations
and the anticipated stand-alone reservation booking functionality. In November
1999 and in furtherance of its Internet initiative, the Company entered into an
amendment to its SABRE Agreement that will enable 800 Travel to provide its
customers the ability to make travel reservations through its website without
the assistance of a reservation agent (often called "stand-alone booking"). In
addition, the Company entered into a development agreement with SABRE to enable
the SABRE stand-alone booking system to interface with 800 Travel's other
operational systems. The desired result from the above initiatives is to
increase completed Internet sales in a cost effective manner by providing
customers a website that offers the choice of making reservations conveniently,
without an agent or if needed, with an agent. The Company expects these
additions and enhancements to be in place during the first half of the year
2000. From January through November, 1999 the interactive website was staffed by
approximately 2% of the Company's reservation agents and was increased to
approximately 8% in December 1999 in anticipation of certain enhancements to the
interactive website being implemented. 800 Travel anticipates increasing its
number of Internet reservation agents when the expected enhancements are
completed and when future demand warrants.
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CORE COMPETENCIES; OPERATING STRATEGY
Overview. Since its inception in November 1995, 800 Travel Systems' operating
strategy has been to (i) strive to provide its customers with low priced airfare
on major airlines, (ii) focus on the consumer leisure air travel (iii) provide
convenient, quick service to its customers, (iv) minimize call center operating
costs by utilizing large, high-volume operating facilities, (v) use technology
to maximize operating efficiencies, (vi) constantly review and update its
relationships with major airlines and SABRE to obtain favorable commission
structures and segment incentives, and (vii) provide incentives to its sales
force through a performance based compensation structure. 800 Travel Systems
believes this core strategy distinguishes it from most traditional travel
agencies. 800 Travel Systems is currently in the process of formulating
strategies to diversify through the introduction of new products and services
for new customers and markets in addition to the ones listed below. (See "GROWTH
STRATEGY" section below). The Company anticipates its operating and marketing
expenses will increase as its growth strategy is executed.
Low Priced Airfare on Major Airlines. 800 Travel Systems has agreements with
many major airlines to offer discounted airfares to its customers which often
allows the Company to provide its customers with the lowest priced airfare.
Utilizing the comprehensive ticket information available on its customized Turbo
SABRE reservation system, the reservation agent, within seconds of a request for
a particular route, can 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 low priced tickets. The Company believes that its
ability to provide low priced airfare provides a distinct competitive advantage
in attracting and retaining customers. 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.
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.
Consumer Leisure Air Travel. 800 Travel Systems believes that consumer leisure
air travel is the most profitable segment of the air travel industry and that it
can compete effectively in this segment because of its high technology,
telemarketing approach and the resulting efficiencies. 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. 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. Convenience of service and low prices are significant
factors in a customer's decision to purchase air travel. The Company offers the
convenience of one source for access to the low priced airfares from numerous
carriers, thus eliminating the need for customers to contact several air
carriers or travel agents. Online customers can access the Companys easy-to-use,
interactive website at their convenience or make a toll free telephone call to
the Company's reservation centers. The Company believes that 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 by overnight courier. The Company's
online and telemarketing service, along with its delivery of tickets by a next
day service, eliminates the need for customers to visit a travel agency. The
Company believes that its toll free telephone "vanity numbers" 1-800-LowAirFare
(1-800-569-2473), 1-800-Fly4Less (1-800-359-4537) and 1-888-999-Vuela
(1-888-999-8835) promote repeat calls because they are easy to remember and can
be dialed from anywhere in the U.S. or Canada.
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Low Operating Costs. The Company seeks to minimize its call center operating
costs by processing all reservations through large, high-volume, centralized
call center facilities, rather than duplicating resources at numerous, expensive
retail locations like those of traditional travel agents. The Company also seeks
to minimize its call center costs by basing its marketing strategy primarily on
advertising in the "airline ticket agency" section of the Yellow Pages
directories throughout the United States, which the Company believes is one of
the most cost effective method of advertising available. The Company contracts
for its employees through a professional employee leasing organization even
though Company management is responsible for training and supervising the job
performance of worksite employees. The Company believes it is more economical to
contract with employee providers than to directly employ workers.
Technology. 800 Travel Systems utilizes customized Internet sales and customer
service software that integrates the online customer with a live reservation
agent. Recent enhancements allow reservation agents to service multiple online
customers at once. In addition, each of the Company's computer terminals is
linked directly to the SABRE system which provides access to all major U.S. and
international air carriers' routes and fares. The Company has customized the
Turbo SABRE system specifically for the Company's purposes. As a result, the
Company's reservation agents have fewer procedures to master and therefore
become proficient on the Company's reservation system quickly, thus incurring
lower training expenses.
Review and Update Relationships with Airlines and SABRE. The Company seeks to
review and update its relationships with the major airlines and SABRE to obtain
favorable commission structures and segment incentives. The Company believes
that as a result of such efforts, it has been able to obtain commission
structures that are generally more favorable than those obtained by other travel
agents. Typically, the airline contracts range from one to one and a half years
in length and can be cancelled on short notice. These airline carriers typically
have no obligation to renew their contracts with travel agents at expiration,
but 800 Travel Systems has consistently been successful in obtaining such
contract renewals. Although 800 Travel Systems has a consistent history of
renewing its contracts, there are no assurances that any one or several of them
will be renewed.
Employee Incentives. 800 Travel Systems' reservation agents are organized into
teams of approximately 20 reservation agents under one supervisor. The
reservation agents earn a base hourly rate 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 generally retain and constantly motivate
the best performing reservation agents.
GROWTH STRATEGY
Overview. 800 Travel Systems' objective is to become the leading provider of
discount leisure travel products and services to consumers as well other travel
service providers. 800 Travel Systems' new diversified growth strategy is to
expand its customer and product base aggressively, form additional strategic
relationships and continue investing in technology. The key elements of 800
Travel Systems' growth strategy are as follows:
Launch an Integrated Interactive/Stand-Alone Website. In December 1999, 800
Travel Systems announced a joint venture with SABRE to integrate their existing
human interaction website with a "stand-alone" website. This venture is expected
to be completed in the first half of year 2000. The Company intends on providing
the convenience that a "stand-alone" website provides to customers with the
option to "click" to an agent if needed to help the customer complete his or her
online purchase. 800 Travel Systems anticipates this "click" to an agent feature
will result in a higher ratio of completed online sales ("look-to-book" or
"close" ratio) than is currently being realized by Internet travel competitors.
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Broaden Existing Consumer Products. 800 Travel Systems has historically realized
nearly all gross reservations through airline ticket sales, however, we will
explore the the possibility of selling higher volumes of cruise tickets, hotel
reservations and auto rentals. The Company intends to capitalize on its market
presence, existing infrastructure and customer base to promote these additional
travel products. 800 Travel Systems is focusing on developing complementary
products that require minimal incremental resources to sell and distribute.
Expand Strategic B2B Relationships. 800 Travel Systems seeks to develop
strategic relationships to capitalize on its call center and travel operating
experience and the Internet's popularity by 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. These services are typically referred to as "e-fulfillment",
"outsourcing" or "fulfillment". The Company will also determine the
feasibability of providing these services along with certain Internet travel
services to traditional travel agencies.
Begin to Build Brand Recognition. By focusing on unique Internet consumer and
business travel solutions with quality customer service, 800 Travel Systems
seeks to build its brand recognition and strong customer loyalty. The Company is
evaluating and has not yet determined the feasability of employing a variety of
marketing and promotional efforts, including public relations activities,
targeted advertising across a variety of electronic and print media and
strategic distribution arrangements.
Reliable, Secure and Scalable Technology Platform. We are designing our customer
service platform to provide a high level of reliability, security and
scalability. Our multi-layered platform design allows us to deliver a high
performance website capable of managing high transaction volumes and ensuring
reliable access for our customers and suppliers. We also offer advanced security
features, maintain excess capacity to handle peak traffic loads in the rapidly
expanding online travel market and have built dedicated distributed storage for
critical data such as customer profile information. Our selection of technology
and the scalability of our platform will enable us to generate future revenue by
offering core parts of our customer service platform to strategic partners. In
addition, our existing infrastructure is able to support certain broadband
technologies which can be utilized to provide new consumer services such as
video and wireless.
Continue Investment in Technology. 800 Travel Systems uses scaleable, industry
standard hardware and software that enable rapid deployment of additional
capacity. In addition, the Company intends to continue to invest substantial
resources in developing, acquiring and implementing technology driven
enhancements to its online and call center services.
Strategic Acquisitions, Joint Ventures, Alliances, Relationships. 800 Travel
Systems continually evaluates potential strategic relationships with companies
that may add to its customer base, product lines or distribution. 800 Travel
Systems currently has no agreements or understandings with respect to any such
transactions that is material or whose outcome can be reasonably assured.
International Expansion. 800 Travel Systems plans to grow internationally
through acquisitions, joint ventures or internal expansion. 800 Travel Systems
may seek to acquire, partner with or invest in, travel service companies in
foreign countries where there is the potential to apply the 800 Travel Systems'
business model.
OPERATIONS
Call Center Operations. Depending on the volume of incoming calls being received
during 1999, 800 Travel Systems has employed approximately 200 to 320
reservation agents and other call center employees at its two call centers.
Facilities are located in Tampa, Florida and San Diego, California and operate
16 hours a day, seven days a week, 363 days a year. Reservation agents at these
call centers receive all inbound calls to the Company's toll free numbers. For
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the year ended 1999, the call centers received on average, approximately 20,000
calls per day. Reservation agents currently conduct fare searches for requested
itineraries, sell airline tickets, explain rules and restrictions applicable to
fares and ticket delivery details and provide other assistance. The call centers
also provide quality control, ticketing, shipping and customer service for both
call center customers and Internet users. 800 Travel Systems' reservation
centers are currently operating at less than the maximum capacity of 1,800
reservation agents working in staggered shifts, or 600 working at any one time.
Interactive Online Operations. 800 Travel Systems' website at www.LowAirFare.com
was initially launched in January 1999. This website currently enables 800
Travel Systems' customers to reserve airline tickets online with the real time
interactive assistance of 800 Travel Systems' trained travel agents in its
Tampa, Florida call center. Since December 1999, the new enhanced technology
allows each of the Company's online agents to interact with multiple customers
as such customers proceed through the online booking process. 800 Travel Systems
anticipates this interaction will result in a higher ratio of completed online
sales ("look-to-book" or "close" ratio) than is currently being realized by
Internet travel competitors and that certain operational efficiencies may be
realized since multiple online customers are capable of being serviced by a
single agent. 800 Travel Systems seeks to capitalize on various technologies to
provide a unique and easy means for the customers to find low airfares on the
Internet and to interface the website with the SABRE electronic booking system
and database. Once online customers purchase tickets, the tickets are printed at
800 Travel Systems' Tampa reservation center and delivered by overnight courier
to customers or an "electronic ticket" is made available at the airline's ticket
counter.
Stand-Alone Online Operations. In December 1999, 800 Travel Systems announced a
joint venture with SABRE to integrate its human interactive website with a
"stand-alone" website. This venture should be completed in the first half of the
year 2000 and will enable the execution of 800 Travel Systems' future
strategies. Once additional enhancements are completed this integrated,
interactive website will provide online reservations, ticketing and travel
services through its existing website at www.LowAirFare.com and will provide its
customers access to information on schedules, availability and published fares
and enables them to book their own travel arrangements at their convenience. The
website is designed to provide customers with quick, efficient, and flexible
service and automates the processing of customer orders, interacts with the
systems of third party travel suppliers, and allows 800 Travel Systems to
gather, store and use customer and transaction information in a comprehensive
and cost efficient manner. The website allows customers to dispense with
providing personal profile and payment information after their initial
registration. The website will permit the Company to expand its customer base
through better service while reducing transactional costs. In addition to
accessing the Company's traditional reservation services, customers will use
online travel related services to make better informed travel purchase decisions
such as destination guides, mapping and weather services, vacation and cruise
packages.
MARKETING AND SALES
Overview. 800 Travel Systems' marketing strategy is to build the Company's brand
name to improve customer awareness, to communicate 800 Travel Systems' B2B
initiative, develop loyalty programs to better serve the Company's customers, to
add new customers to the Company's database and pursue complementary revenue
opportunities by leveraging the Company's distribution capabilities, travel
expertise, compelling content and customer database. Since its inception in
November 1995, 800 Travel Systems has focused its advertising efforts on placing
advertisements listing its easy to remember names and toll free telephone
numbers in Yellow Pages directories. However, the Company is currently
developing strategies and evaluating alternatives that will best support the
Company's growth objectives.
Consumer Marketing. We believe that important drivers of our business are our
ability to attract visitors to our websites and call centers, our ability to
convert those visitors into purchasing customers and our ability to convert
first time purchasers into repeat customers. We are evaluating alternatives to
attract new visitors to our websites and call centers by increasing our brand
enhancement efforts and promotional advertising, both online and in traditional
television, radio and print media, and by continuing to work with influential
press and industry analysts. Our strategy to convert visitors into purchasers
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includes our anticipated online interactive customer service, offering a
combination of broad purchase related promotions, increased emphasis on
merchandising of available offers and increased efforts to work with our travel
suppliers to offer superior selection and quality of travel inventory. We plan
to convert first time purchasers to repeat customers by focusing on enhanced
customer satisfaction and new personalization features and launching a loyalty
program. The Company has the ability to maintain a proprietary customer database
comprised of demographic profiles, customer preferences, shopping and buying
patterns and other key customer attributes. This data will enable the Company to
create and quickly implement marketing programs targeted to specific customer
segments. In addition, the Company plans to regularly communicate with its
customers through targeted, relevant e-mail.
Online Co-Branded Business Sales. 800 Travel Systems intends on developing
relationships with strategic business customers who seek a cost effective way to
add travel products to their online content without compromising their own brand
awareness.
Travel Service Sales. 800 Travel Systems is formulating a strategy and
evaluating alternatives to target online and traditional travel service
providers who desire to outsource any part or all of their travel operations.
TECHNOLOGY
800 Travel Systems, working with strategic technology partners, believes that
technological enhancements will differentiate our website and call centers from
those of our competitors. Our goal is to build a reliable, scalable and secure
environment for consumers to plan and purchase travel and for businesses to
receive travel services.
An Application Service Provider ("ASP") model supports 800 Travel Systems'
Internet initiative and allows the Company to leverage the Internet as a quick,
efficient and relatively inexpensive product and services distribution model for
both our B2C and B2B initiatives. Our core booking engine's three-tier
architecture allows us to connect to each of the four major computer
reservations systems: Worldspan, Sabre, Apollo and Amadeus, giving our website
the ability to choose which computerized reservation system to support. The ASP
applications are highly scalable and built on IBM's X-architecture as well as
industry recognized best practices for software design. X-architecture is a
design blueprint which leverages existing, innovative IBM technologies to build
the most powerful, scalable and reliable Intel processor based servers. The
three-tier hardware/software design allows for one of the highest levels of
scalability, performance and reliability available for the Intel Platform. It
also allows to seamlessly integrate heterogenous environments, such as Microsft,
Oracle and IBM database and application servers on various hardware platforms
and operating environments.
EIS on behalf of 800 Travel Systems, has contracted with Exodus to provide
substantially all of our Internet systems, software and hardware. The Exodus
Network is today one of the largest internet protocol ("IP") networks in the
world. The Exodus Network achieves its greatest strength with one of the
industry's most comprehensive sets of public and private network interconnects.
With a high concentration in private connections with major internet service
providers ("ISPs") and telecommunication providers, Exodus provides superior
speed and dependability by way of these greatly preferred private routes.
800 Travel Systems working with EIS, maintains a relational database containing
information compiled from customer profiles, shopping patterns and sales data.
The Company has developed, and continues to develop, techniques for analyzing
the information in this database to develop targeted marketing programs, to
provide personalized and enhanced customer service and to take advantage of
short term opportunities in the travel marketplace. The Company's complex
database was designed to be scaleable to permit large transaction volumes with
no significant software changes. In most circumstances, capacity is increased
through the addition of new servers or the addition of processing boards to
existing servers.
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800 Travel Systems has significantly expanded its data communications capacities
during the past year and anticipates continuing to do so in the future to
support anticipated increased growth. The Company maintains an Internet firewall
to protect its internal systems, and all credit card transactions are processed
using encryption and authentication technology, including public key
cryptography technology and secure socket layer technology. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such security breaches will not have a material adverse
effect on the Company's business, operating results and financial condition.
SABRE TECHNOLOGY AND AGREEMENTS
800 Travel Systems has chosen the SABRE system as its reservation system. SABRE
is a world leader in the electronic distribution of travel related products and
services and is a leading provider of information technology solutions for the
travel and transportation industry. SABRE's electronic booking system and
database contains flight schedules, availability, and published fare information
for more than 400 airlines, 50 auto rental companies, 35,000 hotel properties,
and dozens of railways, tour companies, passenger ferries, and cruise lines
located throughout the world. Through the SABRE reservations system, 800 Travel
Systems offers approximately 45 million published airfares, including those of
all major domestic and international commercial airlines. In May 1999, 800
Travel Systems entered into a five year agreement pursuant to which it
subscribes to the SABRE system at its call center facilities. Under this
agreement, SABRE provides 800 Travel Systems with segment incentives, the
software, technical support and other services the Company needs to access SABRE
in return for a minimum commitment of sales volume. This agreement was amended
in November 1999, whereby SABRE would provide its Internet reservation system to
the Company. In addition, the Company entered into a development agreement with
SABRE to enable the SABRE Internet reservation system to interface with 800
Travel's other operational systems.
EIS TECHNOLOGY AND AGREEMENTS
EIS is an emerging technology firm that develops and integrates e-commerce
solutions. In July 1998, 800 Travel Systems entered into an agreement with ZA,
Inc., a predecessor business of EIS, to develop its interactive, integrated
website. The online interactive agent component of 800 Travel's website was the
result of this initial agreement, which the Company believes was a cost
effective way of initiating its Internet business. In 1999, the Company
furthered its development relationship with EIS, as the successor in interest to
ZA, Inc., to significantly enhance the capabilities of the online agent
interactive component which included the ability to ultimately interface such
functionality with an online reservation system to be provided by SABRE and with
800 Travel's other operational systems. The Company is currently in the process
of further negotiations with EIS in order to finalize written agreements that
include system maintenance, upgrade availability and the possibility of further
expansion of the Company's relationship with EIS.
COMPETITION
The travel services market is rapidly evolving and intensely competitive and 800
Travel Systems expects such competition to intensify in the future. We intend on
competing on the basis of operations, service, merchandising, reliability,
amount and accessibility of information and breadth of products and services
offered. We make available to our customers a wide range of products and prices
offered by our travel suppliers. The Company competes primarily with traditional
travel agency reservation methods, online travel reservation services and
specialized high volume call center travel agencies. The traditional travel
agencies are highly fragmented, with few nationally recognized brands. In the
online travel services market, several competitors maintain similar commercial
websites, such as Expedia (operated by Microsoft Corporation), Travelocity
(operated by SABRE Inc., a majority owned subsidiary of American Airlines),
Preview Travel, CheapTickets.com, Cendant Corporation, TravelWeb (operated by
9
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Pegasus), Internet Travel Network, and Biztravel.com (operated by Rosenbluth
Travel) among others. Travelocity has recently announced its intention to
acquire Preview Travel. Several traditional travel agencies, including larger
travel agencies such as American Express Travel Related Services Co. Inc.,
Uniglobe Travel and Carlson Wagonlit Travel, have established, or may establish
in the future, commercial websites offering online travel services. CheapTickets
and Travel Services International operate high volume call center based
operations. Additionally, Priceline.com operates a website that allows users to
bid on airline tickets and hotel rooms.
In addition to the traditional travel agency channel, most travel suppliers also
sell their services directly to customers, predominantly by telephone. As the
market for online travel services grows, the Company believes that the range of
companies involved in the online travel services industry, including travel
suppliers, traditional travel agencies and travel industry information
providers, will increase their efforts to develop services that compete with the
Company's services. Most major airlines, car rental companies and hotel chains
offer travel services directly through their own websites, including travel
services from other travel suppliers, eliminating the need to pay commissions to
third parties such as the Company. The Company is unable to anticipate which
other companies are likely to offer competitive services in the future. There
can be no assurance that the Company's online operations will compete
successfully with any current or future competitors.
PROPRIETARY RIGHTS
800 Travel Systems regards its name, logos, phone numbers, copyrights, service
marks, trademarks, domain names, trade dress, trade secrets and similar
intellectual property as critical to its success, and relies on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with the Company's employees, customers, partners and others to
protect its proprietary rights. The Company pursues the registration of certain
of its key trademarks and service marks in the United States and
internationally. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which the Company's products
and services are made available online. The Company has licensed in the past,
and expects that it may license in the future, certain of its proprietary
rights, such as trademarks or copyrighted material, to third parties. While the
Company attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of the Company's proprietary
rights or reputation, which could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's copyrights, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company. The Company may be subject to legal
proceedings and claims from time to time in the ordinary course of its business,
including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by the Company and its licensees.
Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources.
On January 12, 1998, 800 Travel Systems received a letter from Travel 800, LLC,
a wholly-owned subsidiary or Travel Services International, Inc. ("Travel"),
stating that 800 Travel Systems' use and advertisement of its "1-800-LowAirFare"
mark and corresponding number infringes upon certain proprietary rights of
Travel and requested that 800 Travel Systems cease and desist from continued use
and advertisement of such 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 800 Travel Systems' application for registration of the
"1-800-LowAirFare" mark. 800 Travel Systems has investigated the facts
underlying Travel's letter and Opposition and has vigorously defended its rights
to use and market the "1-800-LowAirFare" name and number. The case is currently
on going and in the discovery phase. 800 Travel Systems continues to market
"1-800-LowAirFare" without interruption.
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GOVERNMENT REGULATION
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 requiring us to register as a seller of travel, to comply with disclosure
requirements and to 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 specifically. Currently, few laws and regulations apply
directly to the Internet and commercial online services. Moreover, there is
currently great uncertainty 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 doing business.
Federal legislation imposing limitations on the ability of states to impose
taxes on Internet based sales was enacted in 1998. The Internet Tax Freedom Act,
as this legislation is known, exempts certain types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible 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 cost of operations.
EMPLOYEES
As of March 19, 2000, 800 Travel Systems had 310 employees including 266
reservation agents and other call center employees, 25 operations support
employees and 19 corporate and administrative employees. The Company's ability
to attract and retain highly qualified employees will be the principal
determinant of its success. 800 Travel Systems has a policy of using performance
based and equity based compensation programs to reward and motivate significant
contributors among its employees. Competition for qualified personnel in the
industry is intense. There can be no assurance that the Company's current and
planned staffing will be adequate to support its future operations or that
management will be able to hire, train, retain, motivate and manage required
personnel. Although none of 800 Travel Systems' employees is represented by a
labor union, there can be no assurance that its employees will not join or form
a labor union. Given the nature of the Company's industry, a relatively constant
amount of attrition is considered normal. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
All of 800 Travel Systems' employees are provided through a professional
employee leasing organization. The leasing organization is responsible for its
employees' benefits and payroll reporting and processing. 800 Travel Systems
provides all necessary training. The services agreement between 800 Travel
Systems and the leasing organization may be terminated on 30 days' prior written
notice in which case the Company believes a new professional employee leasing
arrangement could be entered.
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ITEM 2. DESCRIPTION OF PROPERTY
800 Travel Systems' corporate headquarters are located at its 33,000 square foot
reservation center in Tampa, Florida. Our lease for this space expires in June
2008 with an option to renew for an additional five-year term. 800 Travel
Systems operates a second 9,200 square foot reservation center in San Diego,
California. Our lease for this space expires in December 2007 with an option to
renew for an additional five-year term. 800 Travel Systems leases these
properties from unaffiliated third parties and believes that its existing
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is one of twelve defendants in an action currently pending in the
United States District Court for the Southern District of California entitled
The Joseph Stevens Group LLC v. Steve Rohrlick, et al., Case No. 98CV2098 L
(NLS). This action was originally commenced in or about October 1998 by The
Joseph Stevens Group LLC ("JSG") against two defendants, and arose out of
disputes between the plaintiff and those defendants over the management of
plaintiff's affairs and the disposition of various of plaintiff's assets,
including Company stock held in the name of JSG. Subsequently, in November 1999,
JSG served an amended complaint, in which it joined a number of additional
parties as defendants, including the Company. JSG asserts in this action a
number of claims against the Company arising out of its involvement in the
purchase of various assets from JSG pursuant to an agreement between JSG and the
Company dated March 20, 1998 ("the March 20, 1998 Agreement"), reported in
previous filings, and its alleged involvement in the transfer of Company stock
held in the name of JSG. JSG does not specify the relief it seeks from the
Company in its amended complaint, stating only that it seeks to recover an
amount of actual and punitive damages "subject to proof at trial" and recession
of the March 20, 1998 Agreement. The Company believes that the claims asserted
against it in this action are wholly lacking in merit, and is vigorously
defending this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of 800 Travel Services, Inc. was held on
December 1, 1999. Each share of Common Stock entitled its holder to one vote on
the matters considered by stockholders at the annual meeting. Stockholders
present in person, or by proxy, representing 4,679,590 shares of common stock
vote on the matters described below.
(1) The following stockholders were elected to the Company to hold
office until his term expires and until his successor has been
duly elected and qualified, pursuant to the vote indicated:
FOR WITHHELD
--- --------
L. Douglas Bailey 4,603,410 76,180
Carl A. Bellini 4,603,215 76,375
George A. Warde 4,603,490 76,100
Mark D. Mastrini 4,600,710 78,880
Michael A. Gaggi 4,603,060 76,530
(2) The stockholders approved the adoption of the Company's Stock
Option Plan. The Plan received 4,364,180 votes, 300,810 votes
against and 14,600 votes abstained.
(3) The stockholders approved the proposal to ratify the
appointment of Grant Thornton LLP as the Company's independent
auditors for the fiscal year 2000. Grant Thornton LLP received
4,575,910 votes, 70,200 votes against and 33,480 votes
abstained.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
800 Travel Systems' 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, 1999 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.
<TABLE>
<CAPTION>
1998 1999
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
COMMON STOCK
First quarter 5.875 1.063 14.500 4.875
Second quarter 10.375 2.188 8.313 3.969
Third quarter 7.500 2.500 4.719 2.688
Fourth quarter 16.625 3.375 6.000 1.625
2000:
First quarter (through March 21, 2000) 4.313 2.375
1998 1999
HIGH LOW HIGH LOW
---- --- ---- ---
WARRANTS
First quarter .938 .125 8.313 2.125
Second quarter 3.563 .250 3.563 1.000
Third quarter 2.188 .813 1.750 0.875
Fourth quarter 10.000 .750 2.375 0.625
2000:
First quarter (through March 21, 2000) 1.688 .813
</TABLE>
On March 21, 2000, the closing bid prices of the Common Stock and the Warrants,
as reported by NASDAQ, were $3.375 and $1.031 respectively. As of December 31,
1999, there were approximately 120 record 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 March 25, 2000, there were approximately 4,000
beneficial holders of the Common Stock.
DIVIDENDS
To date, 800 Travel Systems has neither declared nor paid any dividends on its
Common Stock nor does 800 Travel Systems anticipate that such dividends will be
paid in the foreseeable future. Rather, 800 Travel Systems 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 800 Travel Systems' earnings, financial condition, capital
requirements and other factors which the Board of Directors deems relevant.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-KSB. 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-KSB.
OVERVIEW
Since its inception 800 Travel Systems has focused on being a leading retail
seller of discount tickets for domestic and international leisure air travel.
800 Travel Systems 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 800 Travel Systems entered into a Merger Agreement
with Stevens and its sole shareholder, JSG. Pursuant to the Merger Agreement,
simultaneously with the closing of 800 Travel Systems' IPO on January 21, 1998,
Stevens was merged with and into 800 Travel Systems, with 800 Travel Systems as
the surviving corporation.
800 Travel Systems' operating revenues presently consist of commissions on air
travel tickets including override commissions on air travel tickets booked on
certain airlines, segment incentives under 800 Travel Systems' agreement with
its reservation system provider and service fees charged to customers. 800
Travel Systems' revenues are a function of the number and price of the tickets
its sells and the percentage of the price of such tickets it retains as
commissions and override commissions, as well as the service charge imposed on
customers. 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. As a result of its diversified strategy 800
Travel Systems expects revenues from sources other than airline ticket sales to
increase in future periods.
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 years ended December 31, 1999 and 1998
were $77,436,614 and $76,680,000, respectively. Substantially all of the gross
reservations are generated from airline ticket sales. As anticipated by the
management of 800 Travel Systems, airline commissions were further reduced in
October 1999 and will negatively impact future revenues to the extent that such
reduced revenues may be partially 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.
800 Travel Systems' new diversified strategy will leverage Internet technologies
with its core competencies of low cost, call center operations and travel
industry expertise. This diversified 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. To facilitate the changes needed to successfully complete
this new diversified Internet initiative with "brick and mortar", together
commonly called "click and mortar", 800 Travel Systems has started to recruit
and reorganize management talent, redesign the existing organization and pursue
strategic alliances and acquisitions. 800 Travel Systems expects revenues from
sources other than airline ticket sales to increase in future periods. The
Company also anticipates its operating and marketing expenses to increase as its
strategy is executed.
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Until January 1999, when 800 Travel's website was first established, air travel
tickets were sold exclusively through the Company's call centers from inbound
toll free telephone calls generated by Yellow Page advertising of its easy to
remember "vanity" telephone numbers. To differentiate itself from the
competition, the Company's website was designed to have human interaction
capabilities. From January through November, 1999 the interactive website was
staffed by approximately 2% of the Company's reservation agents and was
increased to 8% in December 1999 when certain enhancements to its website were
initially made. 800 Travel anticipates increasing its number of Internet
reservation agents when enhancements are completed and advertising begins. The
desired result from the above initiatives is to increase completed Internet
sales in a cost effective manner by providing customers a website that offers
the choice of making reservations conveniently, without an agent or if needed,
with an agent. The Company expects these additions and enhancements to be in
place during the first half of the year 2000.
For the year ended December 31, 1999, 800 Travel Systems' Internet initiative
accounted for approximately $2.0 million (or 2.6%) of total gross reservations
and $.2 million (or 1.3%) of total revenues. For the year ended December 31,
1999 these Internet revenues represented a smaller percentage of gross
reservations since the Company charges no service fees on such sales.
Furthermore, as is customary in the travel industry, travel suppliers are not
obligated to pay any specified commission rate for bookings made through our
website, therefore future online revenues as a percentage of gross reservations
are uncertain. 800 Travel Systems expects online gross reservations and revenues
to represent an increasing portion of gross reservations and revenues in future
periods. Net earnings for the year ended December 31, 1999 were negatively
impacted by approximately $200,000 resulting from the initial operations of the
Internet initiative and by an additional $250,000 resulting from the additional
compensation and costs for new executives and consultants. The Company expects
to continue to incur additional operating and selling expenses relating to its
Internet initiative.
800 Travel Systems' operating expenses include primarily those items necessary
to advertise its services, maintain and staff its travel reservation centers
including 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 initiative.
Set forth below for the periods indicated are the revenues as a percentage of
gross reservations and operating expenses, other income and net earnings as a
percentage of revenues for year ended December 31, 1999 and 1998, respectively.
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Year Ended
December 31,
---------------------------
1999 1998
-------- ---------
Revenues
Commissions 9.9% * 10.3% *
Ticket delivery and service fees 5.9% 4.7%
-------- ---------
Total Revenue 15.8% 15.0%
Operating Expenses
Employee costs 48.5% ** 47.1% **
SG & A, Other 51.9% 51.0%
-------- ---------
Total Operating Expenses 100.4% 98.1%
-------- ---------
Other Income 0.9% 0.7%
Net Earnings 0.5% 2.6%
======== =========
* Revenues as a percentage of gross reservations.
** Expenses as a percentage of revenues.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased $.7 million, or 6%, to $12.2 million for the year
ended December 31, 1999. This increase resulted from an increase in the average
revenue per ticket and was partially offset by a decrease in the volume of
tickets sold. The increased average revenue per ticket is attributed to
increased service fees charged to customers and commissions related to the new
contract with 800 Travel Systems' reservation system provider and was partially
offset by a reduction in airline commissions. The decreased volume of tickets
sold was primarily due to increased competitive pressures from Internet based,
online travel agencies, and less productive, new reservation agents who were
hired to replace certain experienced agents that were reassigned to develop 800
Travel Systems' Internet initiative. To increase the volume of online ticket
sales, 800 Travel Systems is continuing to make enhancements to its website
(http://www.LowAirFare.com) which currently enables customers to make
reservations on-line with human intervention. 800 Travel Systems's website when
enhancements are completed will allow for "stand-alone" and/or human
intervention, which Management believes will result in a higher ratio of
completed online sales ("look-to-book" or "close" ratio) than is currently being
realized by Internet travel competitors. To increase the volume of ticket sales
in its traditional "brick and mortar" operations, 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 travel-related
products to sell and increasing and/or reallocating advertising dollars to new
advertising programs. Revenues as a percentage of gross reservations increased
to 15.8% for the year ended December 31, 1999 from 15.0% for the year ended
December 31, 1998. This increase represents a 4.7% increase in the mix of
revenues generated by commissions, segment incentives and fees on gross
reservations. Gross reservations booked for the year ended December 31, 1999
increased $.8 million or 1% to $77.4 million. This increase resulted from a
higher average reservation price per ticket and was partially offset by a
decrease in the volume of tickets sold.
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OPERATING EXPENSES. Operating expenses increased $1.0 million, or 8.5%, to $12.2
million for the year ended December 31, 1999. Operating expenses as a percentage
of revenues increased 2.3% to 100.4%. Employee costs increased to $5.9 million
(or 48.5% of revenues) for the year ended December 31, 1999 from $5.4 million
(or 47.1% of revenues) for the year ended December 31, 1998. This $.5 million
increase resulted primarily from higher reservation agent, quality control and
corporate wages. Employee costs as a percentage of revenues increased for new
corporate personnel hired to implement the Company's growth strategy and the
addition of a quality control department. New reservation agents, who are
initially less productive, were also hired to replace experienced agents who
were reassigned to 800 Travel Systems' Internet initiative. Employee costs as a
percentage of revenues were also negatively impacted by increased competitive
pressures resulting in customers making more telephone calls to compare prices
before deciding to purchase. Other selling, general and administrative ("SG&A")
expenses increased to $6.3 million (or 51.9% of revenues) for the year ended
December 31, 1999 from $5.9 million (or 51.0% of revenues) for the year ended
December 31, 1998. This $.4 million increase resulted primarily from additional
advertising and professional fees and was partially offset by decreases in
ticket delivery expenses and telephone expenses. Effective May 1999, 800 Travel
Systems began to maintain its reservation computer hardware, therefore the
related operating expenses associated with such maintenance has increased and is
offset by an increase in commission revenues from the reservation system
provider. The Company anticipates its operating and marketing expenses and the
corresponding percentages to revenues to increase as its growth strategy is
executed. Management believes the percentage of operating expenses to revenues
will improve as the Company begins to realize the anticipated revenues from the
implementation of the growth strategy.
INCOME TAXES. No provision for income taxes has been recorded since 800 Travel
Systems expects earnings before income taxes for the year ended December 31,
1999 to be offset with operating loss carry forwards from prior years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $.6 million for the year ended
December 31, 1999 primarily as a result of net earnings and depreciation and
increases in accounts payable and unearned revenues and offset by an increase in
receivables. For the year ended December 31, 1998, net cash used in operating
activities was $1.1 million primarily as a result of a decrease in accounts
payable.
Net cash used in investing activities was $.8 million for the year ended
December 31, 1999 primarily as a result of software development costs incurred
in connection with the development of its Internet initiative. For the year
ended December 31, 1998, net cash used in investing activities was $2.6 million
primarily as a result of the acquisition of the San Diego, California call
center operation in January 1998.
Net cash used by financing activities was $8,522 for the year ended December 31,
1999 primarily as a result of net principal payment on debt. For the year ended
December 31, 1998 net cash provided by financing activities was $6 million
primarily as a result of net proceeds received from the initial public offering
(IPO) in January 1998.
In April 1999, 800 Travel Systems entered into a $60,000 loan agreement and a
$100,000 deferred compensation agreement with Mr. Mark Mastrini, CEO and COO of
800 Travel Systems. The total loan amount will be forgiven and the deferred
compensation will be paid if Mr. Mastrini is employed by 800 Travel Systems as
of January 1, 2001 and April 1, 2009, respectively.
Management believes that the existing cash and cash expected to be provided by
operating activities will be sufficient to fund both the short and long term
capital and liquidity needs of 800 Travel Systems' call center operations for
the foreseeable future. 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 $1.2
million has been expended through December 31, 1999 with the remainder to be
expended within the next 12 months. If cash expected to be provided by operating
activities is not sufficient to satisfy 800 Travel Systems' liquidity and
capital requirements, 800 Travel Systems may 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 financing will be
available in amounts or on terms acceptable to 800 Travel Systems, if at all.
17
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YEAR 2000 READINESS
As of the date of this report 10-KSB, 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,
however, there can be no assurances that the costs resulting from 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 1998 and 1999 to date and its
knowledge of the travel industry, 800 Travel Systems anticipates its business
may be affected by seasonality. Travel bookings typically are low in the months
January through March, increase in April through October as consumers plan their
vacations and typically decline in November through December. In response, 800
Travel Systems will vary the number of agents on staff at any time. During 1998,
800 Travel Systems was able to decrease the number of its reservation agents
during the fourth quarter through attrition. 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
Certain oral statements made by management from time to time and certain
statements contained herein 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,
including those in Management's Discussion and Analysis of Financial Condition
and Results of Operations, are statements regarding the intent, belief or
current expectations, estimates or projections of 800 Travel Systems, its
Directors or its Officers about 800 Travel Systems and the industry in which it
operates, 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) the future impact from Year 2000 readiness plans and costs;
and (vi) 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.
18
<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) the future
impact of our Year 2000 readiness and the Year 2000 readiness of third parties
with which we have material relationships, particularly SABRE; (ix) 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 (x) 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 800 Travel Systems' initial public
offering as amended, and the following 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.
We have a limited operating history; history of losses; future operating
results.
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
expect to initiate our online operations and, accordingly, our prospects in this
field must be considered in light of the difficulties encountered in any new
business.
We are dependent on the SABRE System.
Our ability to quote air travel ticket prices, make reservations and sell
tickets is dependent upon its contractual right to use, and the performance of,
the SABRE electronic travel reservation system. In May 1999, 800 Travel Systems
entered into a five year agreement with SABRE, Inc. to lease the SABRE system in
its 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, 800 Travel Systems 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.
19
<PAGE>
We are subject to adjustments in airline commissions.
In October 1999, the major airlines announced reductions in the commissions they
will pay travel agents from approximately 8% to 5%. 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.
Risks Relating to the Airline Industry.
Developments in the airline industry may result in a decrease in the price or
number of tickets 800 Travel Systems sells. Concerns about passenger safety may
result in a decrease in passenger air travel and a consequent decrease in the
number of tickets 800 Travel Systems sells. There can be no assurance that any
such developments will not occur or that 800 Travel Systems 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. If the online market develops more slowly than expected, or if our
services do not achieve widespread market acceptance, our business will 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 (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.
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, 800 Travel
Systems is able to charge its 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.
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. 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.
20
<PAGE>
Many of the Company's current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than the Company and may enter
into strategic or commercial relationships with larger, more established and
well financed companies. Certain of the Company's 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 the
Company. In addition, new technologies and the expansion of existing
technologies may increase competitive pressures on the Company. 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 the Company will be able to compete successfully
against current and future competitors, and competitive pressures faced by the
Company may have a material adverse effect on the Company's business, operating
results and financial condition.
Our sales affiliates and employees are not subject to noncompetition 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 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
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.
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.
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 accomodating 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.
21
<PAGE>
Any reduction in performance, disruption in the Internet access or
discontinuation of services provided by the Company's Internet service provider,
GTE and AT&T, or other telecommunications provider, or any disruption in the
Company's ability to access the Sabre systems, could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company's transaction processing systems and
network infrastructure will be able to accommodate increases in traffic in the
future, or that the Company will, in general, be able to accurately project the
rate or timing of such increases or upgrade its systems and infrastructure to
accommodate future traffic levels on its online sites. In addition, there can be
no assurance that the Company will be able in a timely manner to effectively
upgrade and expand its transaction processing systems or to successfully
integrate any newly developed or purchased modules with its existing systems.
There can be no assurance that the Company will successfully utilize new
technologies or adapt its online sites, proprietary technology and transaction
processing systems to customer requirements or emerging industry standards.
The Company's 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 the Company's Internet computer and communications
hardware is provided by Exodus and is located at Exodus' New York internet data
center. The Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. The Company currently does not have
redundant systems or a formal disaster recovery plan and may not carry
sufficient business interruption insurance to compensate it for losses that may
occur. Despite the implementation of network security measures by the Company,
its 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.
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; (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 (vii) 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.
22
<PAGE>
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.
Risks Related To The Internet Industry
Our business will suffer if we fail to adapt to evolving standards and
technologies.
The standards and technologies that make up the Internet will evolve and change
over time. We must adapt our services to maintain compatibility in the future to
assure that we can continue to deliver high quality services on the Web. We may
expend significant amounts of our capital to maintain and adapt our Web services
without achieving any benefit in return. Our inability to deliver high quality
services would lead to a decline in the demand for our services.
Third party breaches of database security could disrupt our operations and
increase our capital expenditures.
A party who is able to circumvent our security measures could misappropriate
proprietary database information or cause interruptions in our operations. As a
result we may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such
breaches, which could harm our business.
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 person privacy is uncertain and developing.
Our ability to generate business depends on continued growth of online commerce.
23
<PAGE>
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. We cannot assure you that the number of Internet
users will continue to grow 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 (vi) uncertainty
regarding intellectual property ownership.
We cannot assure you that the Internet will support increasing use or will prove
to be a viable commercial marketplace.
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 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 other web sites. Defending against
any such claims could be costly and divert 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
incur losses and negative cash flow. In such event it is likely that we would
require additional capital. There is no assurance that such capital will be
available to us or, if available, be on terms acceptable to us.
Our revenues are unpredictable and are subject to fluctuation.
As a result of 800 Travel Systems' limited operating history, 800 Travel Systems
is unable to accurately forecast its revenues. 800 Travel Systems' current and
future expense levels are based on its operating plans and estimates of future
revenues and are to a large extent fixed. 800 Travel Systems 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 800 Travel Systems' business, operating
results and financial condition. Further, if 800 Travel Systems should
substantially increase its operating expenses to offer expanded services, to
fund increased sales and marketing or to develop its technology and transaction
processing systems, and such expenses are not subsequently followed by increased
revenues, 800 Travel Systems' operating results may deteriorate.
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.
Dependence upon key personnel.
Our success is substantially dependent upon the continuing services of Mark D.
Mastrini, as well as other key personnel. While 800 Travel Systems has employed
a number of executives with industry experience, the loss of Mr. Mastrini or
other significant members of management could have a material adverse effect on
our business, financial condition and results of operations.
24
<PAGE>
Shares eligible for future sale.
800 Travel Systems is unable to predict the effect, if any, that future sales of
Common Stock (or the potential for such sales), whether those currently subject
to lock-up agreements or otherwise, 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 our ability to raise capital
through an offering of securities and may adversely affect the market price of
the Common Stock.
800 Travel Systems has 7,616,296 shares of Common Stock outstanding, without
giving effect to an additional 4,481,956 shares issuable upon exercise of
options and warrants currently outstanding. Of the currently outstanding shares,
2,821,966 are subject to "lock-up" agreements which have prevented them from
being offered on the open market. The lock-up agreements with respect to 350,000
shares expired in July 1999 and the lock-up agreements with respect to 2,471,966
shares expires in January 2000.
Necessity to maintain current prospectus and registration statement.
800 Travel Systems must maintain an effective registration statement on file
with the Commission before the holder of any of the warrants sold in its IPO
(the "Warrants") may be redeemed or exercised. It is possible that 800 Travel
Systems 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 800 Travel
Systems 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. 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.
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements, Page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
25
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that the
Company expects to file a definitive proxy statement with the Securities and
Exchange Commission (the "Commission") within 120 days after the end of its
fiscal year pursuant to Regulation 14A, as promulgated by the Commission, for
its 2000 Annual Meeting of Shareholders (the "Proxy Statement"), and certain
information included in the Proxy Statement will be incorporated herein by
reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the heading "Management-Directors and Executive
Officers."
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the heading "Summary Compensation Table."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the headings "Security Ownership of Officers and
Directors" and "Security Ownership of Certain Beneficial Owners."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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 (3)
10.10 -- SABRE Subscriber Agreement dated May 1, 1999 between 800
Travel Systems and SABRE, Inc.(4)
26
<PAGE>
10.11 -- Loan and Pledge Agreement dated April 1, 1999 between 800
Travel Systems and Mark D. Mastrini (4)
10.12 -- Deferred Compensation Agreement dated April 20, 1999 between
800 Travel Systems and Mark D. Mastrini (4)
10.13 -- Phone Agreement dated August 24, 1999 between 800 Travel
Systems and AT&T (5)
10.14 -- Employment agreement dated September 16, 1999 between 800
Travel Systems and Robert B. Morgan (5)
10.15* -- Amendment to SABRE Subscriber Agreement dated November 5, 1999
between 800 Travel Systems and SABRE, Inc.
10.16* -- Software Development Agreement dated November 5, 1999 between
800 Travel Systems and SABRE, Inc.
10.17 -- Employment agreement dated November 22, 1999 between 800
Travel Systems and Peter M. Sontag
10.18 -- Employment agreement dated November 5, 1999 between 800 Travel
Systems and Michael Gaggi
10.19 -- Amendment to Employment agreement dated November 23, 1999
between 800 Travel Systems and Mark D. Mastrini
23.1 -- Consent of Grant Thornton LLP
27.1 -- Financial Data Schedule
(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' Report on Form 8-K filed
March 30, 1998.
(3) Incorporated by reference to 800 Travel Systems' Registration Statement on
Form S-8 filed December 15, 1998.
(4) Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
filed August 14, 1999.
(5) Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
filed November 11, 1999.
* Portions of this exhibit are the subject of a confidential treatment request.
(b) Reports on Form 8-K.
None.
27
<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: March 27, 2000
800 TRAVEL SYSTEMS, INC.
(Registrant)
BY: /S/ MARK D. MASTRINI
------------------------
Mark D. Mastrini, Chief Executive Officer
and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ MARK D. MASTRINI Chief Executive Officer and March 27, 2000
- -------------------- Chief Operating Officer and Director
Mark D. Mastrini
/S/ PETER M. SONTAG President and Director March 27, 2000
- -------------------
Peter M. Sontag
/S/ ROBERT B. MORGAN Chief Financial Officer and March 27, 2000
- -------------------- Treasurer and Secretary
Robert B. Morgan (principal accounting officer)
/S/ GEORGE A. WARDE Chairman of the Board March 27, 2000
- -------------------
George A. Warde
/S/ MICHAEL GAGGI Director March 27, 2000
- -----------------
Michael Gaggi
/S/ CARL A. BELLINI Director March 27, 2000
- -------------------
Carl A. Bellini
/S/ L. DOUGLAS BAILEY Director March 27, 2000
- ---------------------
L. Douglas Bailey
</TABLE>
28
<PAGE>
INDEX
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Reports of Independent Certified Public Accountants F-1
Balance sheets F-2
Statements of Earnings F-3
Statement of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
800 Travel Systems, Inc.
We have audited the accompanying balance sheet of 800 Travel Systems, Inc. as of
December 31, 1999 and 1998 and the related statements of earnings, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Tampa, Florida
February 28, 2000
F-1
<PAGE>
<TABLE>
800 TRAVEL SYSTEMS, INC.
BALANCE SHEETS
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,181,020 $ 2,387,273
Commissions receivable, net 1,217,144 501,555
Prepaid expenses 166,986 166,547
------------- -------------
Total current assets 3,565,150 3,055,375
LEASEHOLD IMPROVEMENTS, EQUIPMENT AND COMPUTER
SOFTWARE, net 1,799,050 815,225
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net 4,560,640 4,762,864
OTHER ASSETS
Trademarks, net 323,299 350,971
Capitalized software 387,007 397,194
Related party receivables 6,325 3,500
Bonds, security deposits and other assets 70,700 51,771
Prepaid expenses - 154,494
------------- -------------
Total other assets 787,331 957,930
------------- -------------
TOTAL ASSETS $ 10,712,171 $ 9,591,394
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 135,901 $ 61,645
Accounts payable and accrued liabilities 646,150 592,527
Accrued compensation 311,898 157,098
Unearned revenue 100,529 -
------------- -------------
Total current liabilities 1,194,478 811,270
LONG-TERM DEBT - less current maturities 273,231 24,818
DEFERRED RENT 136,517 75,641
UNEARNED REVENUE 299,325 -
------------- -------------
Total liabilities 1,903,551 911,729
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 20,000,000 shares authorized;
7,616,296 and 7,597,096 shares issued and outstanding,
respectively 76,163 75,971
Additional paid-in capital 12,137,150 12,067,342
Accumulated deficit (3,404,693) (3,463,648)
------------- -------------
Total stockholders' equity 8,808,620 8,679,665
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,712,171 $ 9,591,394
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF EARNINGS
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
REVENUES
Commissions $ 7,648,748 $ 7,879,163
Ticket delivery and service fees 4,544,885 3,622,003
------------- -------------
Total revenues 12,193,633 11,501,166
------------- -------------
OPERATING EXPENSES
Payroll, commissions, and employee benefits 5,911,615 5,421,019
Telephone 1,696,055 1,856,364
Ticket delivery 886,025 1,068,625
Advertising 693,291 323,528
General and administrative 3,051,682 2,609,034
------------- -------------
Total operating expenses 12,238,668 11,278,570
------------- -------------
EARNINGS (LOSS) FROM OPERATIONS (45,035) 222,596
INTEREST INCOME, net 103,990 79,270
------------- -------------
EARNINGS BEFORE INCOME TAXES 58,955 301,866
PROVISION FOR INCOME TAXES - -
------------- -------------
- -
NET EARNINGS $ 58,955 $ 301,866
============= =============
NET EARNINGS PER COMMON SHARE - BASIC $ .01 $ .04
============= =============
NET EARNINGS PER COMMON SHARE - DILUTED $ .01 $ .04
============= =============
WEIGHTED AVERAGE NUMBER COMMON SHARES
OUTSTANDING - BASIC 7,615,892 7,475,611
============= =============
WEIGHTED AVERAGE NUMBER COMMON SHARES
OUTSTANDING - DILUTED 7,978,299 7,886,488
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
800 TRAVEL SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Additional Stock Accumulated
---------------------- Paid-in Subscriptions Retained
Shares Amount Capital Receivable Deficit Total
---------- ---------- ------------ --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 $2,253,000 1,350,000 13,500 4,872,024 - - 4,885,524
Joseph Stevens Group, Inc. acquisition 383,333 3,833 1,944,082 - - 1,947,915
Purchase and retirement of shares (204,615) (2,046) (405,954) - - (408,000)
Shares exchanged in payment of receivables (49,531) (495) (247,152) - - (247,647)
Payment of stock subscription - - - 21,547 - 21,547
Exercise of warrants 58,200 582 363,168 - - 363,750
Exercise of stock options 100,000 1,000 99,000 - - 100,000
Issuance of options for services - - 144,750 - - 144,750
Net earnings - - - - 301,866 301,866
---------- ---------- ------------ --------------- ------------- ------------
Balance, December 31, 1998 7,597,096 75,971 12,067,342 - (3,463,648) 8,679,665
Exercise of warrants 2,000 20 12,480 - - 12,500
Exercise of stock options 17,200 172 57,328 - - 57,500
Net earnings - - - - 58,955 58,955
---------- ---------- ------------ --------------- ------------- ------------
Balance, December 31, 1999 7,616,296 $ 76,163 $12,137,150 $ - $ (3,404,693) $ 8,808,620
========== ========== ============ =============== ============= ============
The accompanying notes are an integral part of this financial statement.
F-4
</TABLE>
<PAGE>
<TABLE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 58,955 $ 301,866
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 465,341 387,803
Changes in operating assets and liabilities, net of effects of acquisition:
Commissions receivable (715,589) 51,803
Prepaid expenses and other assets 132,301 (193,093)
Deferred rent 60,876 (62,587)
Unearned revenue 399,854 -
Accounts payable, accrued liabilities and accrued compensation 208,423 (1,560,697)
------------- ------------
Net cash provided by (used in) operating activities 610,161 (1,074,905)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of leasehold improvements and equipment (173,079) (284,891)
Software development costs (634,813) (252,444)
Cash paid for acquisition - (2,047,054)
------------- ------------
Net cash used in investing activities (807,892) (2,584,389)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (78,522) (343,537)
Issuance of common stock - 6,294,097
Purchase of common stock - (408,000)
Proceeds from exercise of options and warrants 70,000 463,750
Stock subscription collection - 21,547
------------- ------------
Net cash (used in) provided by financing activities (8,522) 6,027,857
------------- ------------
NET (DECREASE) INCREASE IN CASH (206,253) 2,368,563
CASH AT THE BEGINNING OF PERIOD 2,387,273 18,710
------------- ------------
CASH AT THE END OF PERIOD $ 2,181,020 $ 2,387,273
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 3,523 $ 28,752
============= ============
Income taxes $ - $ -
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
800 TRAVEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS - Continued
SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1999:
1) The Company transferred $645,000 of capitalized software to
fixed assets.
2) The Company entered into a capital lease, which resulted in
$401,000 of fixed asset additions.
For the year ended December 31, 1998:
1) The Company received common stock as payment for $247,647 of
receivables from related parties.
2) The Company granted stock options with a fair value of
$144,750 to a consultant who is developing software. These
costs were capitalized with software.
3) The Company acquired assets with a fair value of approximately
$4.5 million in exchange for approximately $2.1 million of
cash, $2.0 million of common stock and warrants, and
approximately $400,000 of acquisition costs paid in 1997.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
800 Travel Systems, Inc. (the "Company") is a leading direct marketer of travel
related services, focusing primarily on air transportation reservation services.
The Company was formed in November 1995 in Tampa, Florida to acquire certain of
the assets and assume certain liabilities of 1-800-Low airfare, Inc. (the
Predecessor Business), which occurred December 1, 1995. On January 15, 1998, the
Company acquired the stock of Joseph Stevens Group in a business combination
accounted for as a purchase.
The Company strives to furnish the lowest airfare available at the time of
reservation within the parameters provided by a customer.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with maturities of three months or less to be cash
equivalents.
LEASEHOLD IMPROVEMENTS, EQUIPMENT AND COMPUTER SOFTWARE
- -------------------------------------------------------
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter. 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,
three to ten years for both financial reporting purposes and on the accelerated
method for tax purposes. Capitalized software for internal use is transferred to
computer software and amortized over four years, when Management has deemed that
the software is fully operational. Software costs are capitalized when the
project stage is complete, management has authorized the project and completion
of the project is probable.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
- -----------------------------------------------------
The excess of cost over fair value of net assets acquired is amortized over a
period of twenty-five (25) years. Accumulated amortization at December 31, 1999
and 1998 approximates $495,000 and $293,000, respectively.
TRADEMARKS
- ----------
The cost of the trademarks is being amortized using the straight-line method
over their useful estimated lives of fifteen (15) years. Accumulated
amortization at December 31, 1999 and 1998 approximates $92,000 and $64,000,
respectively.
IMPAIRMENT OF ASSETS
- --------------------
The Company periodically reviews the projected undiscounted cash flows for each
business unit to determine whether or not there has been permanent impairment of
its long-lived assets, including identifiable intangibles and goodwill, and
accrues expenses for the amounts, if any, determined to be permanently impaired.
No impairment exists for the years presented.
F-7
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
REVENUE RECOGNITION
- -------------------
Commission revenues are recognized when travel services are ticketed. Ticket
delivery and service fees are recognized when the services are performed. As of
December 31, 1999 and 1998, the allowance for bad debts was approximately
$59,000 and $114,000, respectively. The Company believes that such allowance is
adequate based upon review of the aged accounts receivable as of December 31,
1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The Company, in estimating its fair value disclosures for financial instruments,
used the following methods and assumptions:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND NOTES PAYABLE: The carrying
amounts reported in the balance sheet for accounts receivable, accounts
payable and notes payable approximate their fair value due to their
relatively short maturity.
LONG-TERM DEBT: the fair value 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, 1999, the fair value of the
Company's long-term debt approximated its carrying value.
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 asset will not be realized.
ADVERTISING
- -----------
Advertising costs are charged to expense as incurred. for the periods ended
December 31, 1999 and 1998, these costs amounted to approximately $693,000 and
$324,000, respectively.
STOCK BASED COMPENSATION
- ------------------------
The Company accounts for its stock based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". the
Company has elected only the disclosure option of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", which requires that companies not electing to account for stock
based compensation as prescribed by this statement, disclose the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted
(see Note 11).
F-8
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
EARNINGS PER SHARE
- ------------------
The Company follows the provisions of SFAS No. 128, EARNINGS PER SHARE, which
requires the presentation of basic and diluted earnings per share (see Note 5).
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the prior year balances to conform
to the current presentation.
NOTE 3 - 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 3,105,000 redeemable common stock purchase warrants at a price of
$.125 per warrant. The following summarizes this financial transaction:
Proceeds:
Common stock $ 6,750,000
Redeemable purchase warrants 388,125
------------
7,138,125
Less underwriters' commission and expense (13%) (927,956)
------------
Net proceeds to company 6,210,169
Less company's offering expenses (1,324,645)
------------
Net proceeds $ 4,885,524
============
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) day 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.
NOTE 4 - BUSINESS COMBINATION
In November 1996, the 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 for $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.
F-9
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 - BUSINESS COMBINATION - Continued
Upon the effective date, the Company acquired selected assets and selected
liabilities of Joseph Stevens Group, Inc. in exchange for the issuance of
383,733 shares of its common stock, 250,000 warrants to purchase common stock,
and the payment of a $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 3,937,895
------------
$ 4,477,895
============
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, was less than $2,571,000, then the Company was required to issue to
the Selling Shareholder additional shares of the Company.
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 totaling $490,000. These have been
included in the calculation of the purchase shown above.
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.
Results of the Steven's operations are included in the Company's operations for
the entire year ended December 31, 1998.
F-10
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5 - NET INCOME 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 SFAS 128:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net earnings - (numerator) $ 58,955 $ 301,866
============= =============
Basic:
Weighted average shares outstanding (denominator) 7,615,892 7,475,611
============= =============
Net earnings per common share - basic $ .01 $ .04
============= =============
Diluted:
Weighted average shares outstanding 7,615,892 7,475,611
Effect of dilutive options 362,407 410,877
------------- -------------
Adjusted weighted average shares (denominator) 7,978,299 7,886,488
============= =============
Net earnings per common share - diluted $ .01 $ .04
============= =============
</TABLE>
All warrants outstanding are excluded from the calculation of diluted weighted
average shares, as they are anti-dilutive. Options for 886,400 and 215,000
shares of common stock are excluded from the adjusted weighted average shares
for the year ended December 31, 1999 and 1998, respectively, as they are
anti-dilutive.
NOTE 6 - LEASEHOLD IMPROVEMENTS, EQUIPMENT, AND COMPUTER SOFTWARE
Leasehold improvements, equipment and computer software by major classification
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Leasehold improvements $ 204,823 $ 194,598
Telephone equipment 408,605 390,044
Furniture and fixtures 156,355 109,454
Computer software 631,562 -
Computer equipment 455,598 27,028
Office equipment 442,117 358,178
------------- -------------
2,299,060 1,079,302
Less accumulated depreciation (500,010) (264,077)
------------- -------------
Leasehold improvements, equipment and
computer software, net $ 1,799,050 $ 815,225
============= =============
</TABLE>
Depreciation expense approximated $235,000 and $154,000 for the years ended
December 31, 1999 and 1998, respectively.
F-11
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - NOTE PAYABLE AND LONG-TERM DEBT
At December 31, 1999 and 1998, long-term debt was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Capital lease, payable in monthly payments of $13,166 through
December 2002. $ 384,537 $ -
12% note payable, payable in monthly principal installments of
$16,667 plus interest, paid in February 29, 1999, secured by a
telephone system. - 33,333
Capital lease, payable in monthly payments of $2,290 through
November 2000. 24,595 53,130
------------- -------------
409,132 86,463
Less current maturities (135,901) (61,645)
------------- -------------
$ 273,231 $ 24,818
============= =============
</TABLE>
Approximate maturities of long-term debt at December 31, 1999 are as follows:
2000 $ 135,901
2001 133,454
2002 139,777
---------
$ 409,132
=========
Interest expense totaled approximately $5,000 and $20,000 for the years ended
December 31, 1999 and 1998, respectively.
NOTE 8 - INCOME TAXES
Reconciliation of the Federal statutory income tax rate of 34% to the effective
rate for the year ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Federal statutory income tax rate 34.00% 34.00%
State taxes, net of Federal 3.60 3.60
Excess of cost over fair value of net assets acquired 100.40 19.30
Net operating loss carryforward (147.70) (59.90)
Other 9.70 3.00
---------- ----------
- -
========== ==========
</TABLE>
F-12
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - INCOME TAXES - Continued
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,027,000 $ 760,000
Deferred revenue 150,000 -
Accrued compensation 92,000 45,000
Allowance for bad debt 22,000 -
------------- -------------
2,291,000 805,000
Deferred tax liabilities:
Software development costs (360,000) (93,000)
Goodwill amortization (46,000) -
------------- -------------
1,885,000 712,000
Less: valuation allowance (1,885,000) (712,000)
------------- -------------
$ - $ -
============= =============
</TABLE>
At December 31, 1999 and 1998, the Company has a tax net operating loss
carryforward of approximately $5,400,000 and $2,000,000 respectively, to offset
future taxable income. Approximately $1,800,000 of these net operating loss
carryforwards are also affected by IRS Section 382 limitations, which limit the
utility of the net operating loss carryforwards in any given year. 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 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
- ----------------
The minimum future office rental commitment for leases approximates the
following:
Year ending December 31,
2000 $ 347,952
2001 357,963
2002 373,909
2003 383,555
2004 399,136
Thereafter 928,493
-----------
$ 2,791,008
===========
Rent expense totaled approximately $448,000 and $361,000 for the years ended
December 31, 1999 and 1998, respectively.
F-13
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES - Continued
PHONE AGREEMENTS
- ----------------
In September 1998, the Company entered into an agreement with its telephone
provider which provided an agreed upon rate for its services. This rate is based
upon the Company reaching an annual minimum of $1,200,000 in charges for its
long-distance services. The agreement was terminated in May 1999.
In August 1999, the company entered into a new agreement with its telephone
provider which provided an agreed upon rate for its services. This rate is based
upon the Company reaching an annual minimum charge for its long-distance
services. The Company anticipates reaching this annual minimum charge.
AGREEMENTS WITH RESERVATION SYSTEM PROVIDER
- -------------------------------------------
In May 1999, 800 Travel Systems entered into a five-year agreement with its
reservation system provider. Pursuant to this agreement, the reservation system
provider paid 800 Travel Systems an incentive that is recorded as unearned
revenue and will be recognized as revenue ratably over the life of the
agreement. If 800 Travel Systems should terminate or be deemed in default upon
the terms of this agreement, 800 Travel Systems agrees to repay this incentive
in full.
As part of this agreement, the Company is accruing revenue based upon the number
of bookings made with the reservation system provider. This revenue may be
reduced if a minimum number of annual bookings are not obtained. As of December
31, 1999, the Company has accrued approximately $546,000 of revenue based on the
bookings. The Company believes they will reach the annual minimum number of
bookings needed to realize the full amount of this revenue.
LETTERS OF CREDIT
- -----------------
The Company has letters of credit totaling $35,000, which is collateralized by
certain cash accounts of the Company at December 31, 1999.
RISKS AND UNCERTAINTIES
- -----------------------
The Company is dependent on four airlines for approximately 71% 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 the Sabre electronic
travel reservation system.
EMPLOYMENT AGREEMENTS
- ---------------------
As of December 31, 1999, the Company has employment agreements with five (5)
executive employees, which include the following contract provisions:
o Aggregate initial base compensation of $598,000
o Annual pay raises of five percent (5%) of base compensation
plus the annual increase in the consumer price index
F-14
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES - Continued
o Agreements terminate between September 30, 2000 through
December 31, 2003
o Options to purchase 797,500 shares of the Company's common
stock at prices ranging from $3.00 to $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
CEO of the Company was issued 50,000 shares of the Company's common stock in
January 2000 (the second anniversary of the execution of his employment
agreement). The market value of the shares to be issued was $5.00, with the
aggregated value of $250,000 amortized as a charge against operations ratably
over two (2) years. During 1999 and 1998, the Company recognized $120,000 of
compensation expense in each year for this grant.
CONSULTING AGREEMENT
- --------------------
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 $3.5 million. As of
December 31, 1999, the company has capitalized approximately $1,032,000 in
software costs related to this project. $145,000 of this amount represents the
fair value of options granted to the consultant in 1998. During 1999, the
Company transferred $645,000 of capitalized software to fixed assets and is
amortizing this software over 4 years.
LITIGATION
- ----------
The Company is engaged in various lawsuits in the normal course of business. In
the opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company's financial
statements.
NOTE 10 - STOCKHOLDERS' EQUITY
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, 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 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, although it may determine to do so in the future.
F-15
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
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 therefore 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. There are no conversion
rights or redemption or sinking fund provisions with respect to the Common
Stock.
CERTAIN CAPITAL TRANSACTIONS
- ----------------------------
During 1998, the Company received 49,531 shares of Common Stock as payment for
$247,647 of receivables from related parties.
During 1998, the Company granted options to a consultant to purchase 250,000
shares of Common Stock at prices ranging from $3.00 to $10.00 per share. The
fair value of these options is $144,750 and is included in the software
development costs.
NOTE 11 - STOCK OPTIONS AND WARRANTS
The Company has adopted 1997 and 1998 Stock option Plans (collectively, the
"Stock Option Plans") under which 500,000 shares of common stock have been
reserved for issuance upon exercise of stock options. The Stock Option Plans are
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 those 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.
The Compensation Committee of the Board of Directors (the "Compensation
Committee") administers and interprets the Stock Option Plans and is authorized
to grant options there under to all eligible employees, officers, and directors
of the Company. The Stock Option Plans provide for the granting of both
incentive stock options and nonqualified stock options. Options are granted
under the Stock Option Plans 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.
F-16
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - STOCK OPTIONS AND WARRANTS - Continued
No incentive stock option may be transferred other than by will or the laws of
descent and distribution, 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 on nonqualified stock options. 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 of the Company (as that term is defined under Rule 16b-3) 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 Plans also authorize 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 Plans, provided that no such action may substantially impair any
outstanding option without the written consent of the holder, and provided that
certain amendments of the Stock Option Plans are subject to shareholder
approval. Unless terminated sooner, the Stock Option Plans will continue in
effect until all options granted there under have expired or been exercised,
providing that no options may be granted after 10 years from the date the Board
of Directors adopted the Stock Option Plans.
The following is a summary of all the stock option activity:
Weighted
Average
Stock Exercise Price
Options Per Share
----------- --------------
Outstanding as of December 31, 1997 687,500 $2.39
1998 ACTIVITY
-------------
Granted 877,500 $4.66
Exercised (100,000) $1.00
Expired or canceled (150,000) $3.10
----------- -----------
Outstanding as of December 31, 1998 1,315,000 $3.93
1999 ACTIVITY
-------------
Granted 710,000 $3.87
Exercised (17,200) $3.34
Expired or canceled (600) $5.00
----------- -----------
Outstanding as of December 31, 1999 2,007,200 $3.91
=========== ===========
The weighted average fair value of options granted during 1999 on granted
options whose exercise price exceeds the market price of the stock on the grant
date is $.80. There were no options granted during 1999 on granted options whose
exercise price is less than the market price of the stock on the grant date.
F-17
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - STOCK OPTIONS AND WARRANTS - Continued
The weighted average fair value of options granted during 1998 on granted
options whose exercise price exceeds the market price of the stock on the grant
date is $.94. The weighted average fair value of options granted during 1998 on
granted options whose exercise price is the market price of the stock on the
grant date is $.96.
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<CAPTION>
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (Years) Exercise Price
--------------- ----------- ---------------- --------------
<S> <C> <C> <C>
Outstanding Shares
$1.00 200,000 7 $ 1.00
$3.00 - $4.00 925,000 6.09 $ 3.07
$5.00 - $5.50 757,200 8.24 $ 5.13
$7.00 - $10.00 125,000 5.20 $ 7.60
Exercisable Shares
$1.00 200,000 $ 1.00
$3.00 - $4.00 385,000 $ 3.16
$5.00 - $5.50 457,200 $ 5.00
$10 25,000 $10.00
</TABLE>
The following is a summary of all warrant activity:
<TABLE>
<CAPTION>
Range of Weighted Average
Per Share Exercise Price
Warrants Exercise Price Per Share
-------------- -------------- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 375,000 $5.50 $ 5.50
1998 ACTIVITY
-------------
Granted 3,510,000 $6.25 - $7.98 6.46
Expired or canceled -
Exercised (58,200) $6.25 6.25
-------------- ---------------
Outstanding at December 31, 1998 3,826,800 6.37
1999 ACTIVITY
-------------
Granted -
Expired or canceled -
Exercised (2,000) $6.25 6.25
-------------- ---------------
Outstanding at December 31, 1999 3,824,800 $6.34
============== ===============
</TABLE>
The weighted average fair value of warrants granted during 1998 $1.91.
F-18
<PAGE>
800 TRAVEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - STOCK OPTIONS AND WARRANTS - Continued
The Company has adopted only the disclosure provisions of SFAS No. 123, as it
relates to employee awards. APB No. 25 is applied in accounting for the
Company's plans. Accordingly, no compensation expense is recognized related to
the stock based compensation plans. The pro forma net earnings and net earnings
per common share, if the Company had elected to account for its plans consistent
with the methodology prescribed by SFAS No. 123, are as follows:
1999 1998
----------- -----------
Net earnings:
As reported $ 58,955 $ 301,866
Pro forma $ (135,655) $ (355,090)
Net earnings per common share - basic:
As reported $ .01 $ .04
Pro forma $ (.02) $ (.05)
Net earnings per common share - diluted:
As reported $ .01 $ .04
Pro forma $ (.02) $ (.05)
The fair value of each option grant is estimated on the date of grant using the
binomial option pricing model with the following weighted average assumptions
used for grants in 1999 and 1998, respectively, no dividend yields for both
years; expected volatility of 43.1% and 45.5%; risk free interest rates of 5.92%
and 5.10%; and expected lives of 3.0 and 3.1 years.
NOTE 12 - RELATED PARTY TRANSACTIONS
Effective February 1998, the Company entered into a consulting agreement with a
shareholder and director, whereby the Company pays a monthly fee of $5,000. In
May 1999, the Company increased the monthly payments paid to the shareholder and
director to $10,500 per month in return for such consulting services. During
1999 and 1998, $104,000 and $55,000 were recorded as expense under this
agreement.
In July 1999, The Colonial Group, a company that is majority owned by a director
and stockholder, agreed to provide investor-relations services to the Company
for $3,000 per month. During 1999, $18,000 was recorded as expense under this
agreement.
In April 1999, 800 Travel Systems entered into a $60,000 loan agreement and a
$100,000 deferred compensation agreement with Mr. Mark Mastrini, CEO, and COO of
800 Travel Systems. The loan amount will be forgiven in two $30,000 installments
if Mr. Mastrini is employed by 800 Travel Systems as of January 1, 2000 and
2001. The total deferred compensation will be paid if Mr. Mastrini is employed
by 800 Travel Systems as of April 1, 2009. During 1999, $30,700 was recorded as
expense related to these agreements.
F-19
Exhibit 10.15
CONFIDENTIAL TREATMENT REQUESTED BY 800 TRAVEL SYSTEMS, INC. FOR PORTIONS OF
THIS AGREEMENT INDICATED BY [**..**] AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
AMENDMENT TO SABRE SUBSCRIBER AGREEMENT
(INTERNET/ON-LINE USAGE)
This Amendment to that certain SABRE Subscriber Agreement is made and entered
into this 5th day of November, 1999 between Sabre Inc., formerly known as The
SABRE Group, Inc., ("Sabre") and 800 Travel Systems, Inc. ("Customer").
RECITALS
WHEREAS, Sabre and Customer have entered into that certain Sabre Subscriber
Agreement, dated as of May 21, 1999 (the "Agreement"); and
WHEREAS, it is in the best interest of the parties to modify certain provisions
of the Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein, Sabre
and Customer hereby agree as follows:
1. ARTICLE 16.1 OF THE AGREEMENT IS HEREBY MODIFIED BY THE ADDITION OF
THE FOLLOWING SENTENCE:
Notwithstanding the previous provisions, Customer may create and
maintain an Internet Connection for third-parties with Sabre's prior permission
and as long as: (i) all travel related activity done through such websites is
done through the Sabre System, (ii) Customer is responsible for all Charges
related to such activity, (iii) such third parties can not have their principal
offices in Asia or the South Pacific, (iv) such websites can not target or be
marketed directly to consumers located in Asia or the South Pacific, and (v)
such sites must comply with all other terms and conditions of this Article 16.
2. ARTICLE 16.2 OF THE AGREEMENT IS HEREBY REPLACED WITH THE FOLLOWING:
The limited license granted in Article 16.1 may be terminated by Sabre
for Customer's misuse of the System or the Sabre System via the Internet
Connection upon fifteen (15) days written notice to Customer and Customer's
failure to remedy such misuse within the allotted fifteen days. Upon such
termination, Customer must immediately remove the Internet Connection and cease
utilizing data transmitted under the Agreement for purposes of developing,
operating or maintaining a reservation booking site.
3. THE CHARGES APPLICABLE IN ARTICLE 16.4 OF THE AGREEMENT WILL BE
BASED ON THE FOLLOWING MONTHLY RATE SCHEDULE:
[**..**]
This rate shall apply from the effective date of this Amendment until
December 31, 2000 and will be subject to change thereafter upon thirty
(30) days written notice to Customer.
4. CONFIDENTIALITY. It is expressly understood and agreed that this
Amendment and the Agreement, and each and every provision hereof, shall be held
and treated as confidential and shall not be disclosed by either party to any
other person, firm, organization, association, or entity, of any and every kind,
whether public, private or governmental, for any reason, or at any time, without
<PAGE>
the prior written consent of the non-disclosing party, unless such disclosure is
requested by law or legal process relating to proceedings between a party hereto
and any third party. In the event of a disclosure inconsistent with the
foregoing, this Amendment and the Agreement may be terminated immediately by the
non-disclosing party, with notice to the disclosing party, and the
non-disclosing party shall have the right to pursue any remedies available to it
in law or in equity. Notwithstanding the foregoing, either party may disclose
Confidential Information as required by law or governmental authority, including
pursuant to a subpoena or court order, only if the receiving party: (i) promptly
notifies the disclosing party of the disclosure requirement; (ii) cooperates
with the disclosing party's reasonable efforts to resist or narrow the
disclosure and to obtain an order or other reliable assurance that confidential
treatment will be accorded the disclosing party's Confidential Information; and
(iii) furnishes only Confidential Information that the receiving party is
legally compelled to disclose according to advice of its legal counsel.
"Confidential Information" excludes information that: (i) was in the public
domain when communicated; (ii) enters the public domain through no fault of the
receiving party; (iii) was in the receiving party's possession free of any
obligation of confidence when communicated; (iv) is rightfully communicated to
the receiving party by a third party free of any obligation of confidence to the
disclosing party; or (v) is developed by or on behalf of the receiving party
independently of and without reference to any of the disclosing party's
Confidential Information.
5. DEFINED TERMS. The defined terms not otherwise defined in this
Amendment shall have the meaning given to them in the Agreement.
6. UNIQUE PSEUDO CITY CODE (IPCC) REQUIREMENT. All On-line/Internet
booking and shopping activity is required to be conducted through a unique IPCC.
Booking and shopping activity terminating in the Customer's chat-enabled site
will be booked through a Sabre agency PCC.
7. AGREEMENT. Except as otherwise provided herein, all other terms of
the Agreement remain in full force and effect and are hereby reaffirmed. In the
event of any conflict between the terms of the Agreement and this Amendment, the
Amendment shall control.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and
year written above.
800 Travel Systems, Inc. SABRE INC.
By: By:
- --------------------------------------- --------------------------------------
(SIGNATURE) (SIGNATURE)
Name: Mark Mastrini Name: Michael Sites
- --------------------------------------- --------------------------------------
(PRINT NAME) (PRINT NAME)
Title: Chief Executive Officer Title: Vice President
- --------------------------------------- --------------------------------------
PCC: B8T3
Exhibit 10.16
CONFIDENTIAL TREATMENT REQUESTED BY 800 TRAVEL SYSTEMS, INC. FOR PORTIONS OF
THIS AGREEMENT INDICATED BY [**..**] AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
AGREEMENT FOR DEVELOPMENT SERVICES
November 5, 1999 (the "Effective Date"), for and in consideration of
the mutual promises herein, 800 Travel Systems, Inc. located at 4802 Gunn
Highway, Ste. 140, Tampa, FL 33624 and incorporated in Delaware ("Customer") and
Sabre Inc., formerly known as The SABRE Group, Inc., located at 4255 Amon Carter
Blvd., Fort Worth, Texas 75261 and incorporated in Delaware ("Sabre")
WHEREAS, Sabre provides computerized reservations services with related
data processing activities through its SABRE(R) computer reservation system
("Sabre System"); and
WHEREAS, Customer and Sabre have entered into a Sabre Subscriber
Agreement dated May 21, 1999 ("Subscriber Agreement") for access to and use of
the Sabre System; and
WHEREAS, Customer wishes to obtain and Sabre wishes to provide certain
software development and consulting services related to the creation of an
Internet travel reservation booking site, including its integration with
Customer's interactive chat site, for use in conjunction with the Sabre System
and subject to the provisions of the Subscriber Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the
parties hereto agree as follows:
1. DESCRIPTION OF SERVICES. Sabre will perform certain consulting and
software development services for Customer upon the terms and
conditions herein, as such services are more particularly described in
Exhibit A, which is attached hereto and incorporated by reference
herein (the "Services"). Any software delivered under Exhibit A as part
of the Services shall be referred to as "the Software." This Agreement
relates only to the Services and does not relate to additional services
as defined below that Sabre may be asked to perform on Customer's
behalf.
2. ACCEPTANCE TESTING. During the thirty (30) day period following
delivery, Customer shall perform user acceptance testing of the
Software deliverable, pursuant to mutually agreed upon
Customer-provided test scripts, to confirm material conformity of the
Software with the functional description identified in Exhibit A. Sabre
shall provide assistance to Customer during such user acceptance
testing at no additional charge. Customer shall notify Sabre
immediately of any material non-conformities between the Software and
the functionality described in Exhibit A. Sabre shall make corrections
in any such material non-conformities of the Software to the
functionality identified in Exhibit A and re-submit such previously
non-conforming portion for re-testing. Acceptance shall take place when
the Software conforms to the functionality identified in Exhibit A or
when the Software is put in productive use by Customer, whichever is
earlier ("Acceptance").
3. PAYMENT. (a) Customer shall pay Sabre [**..**] for the Services due and
payable as follows: [**..**] payable within [**..**] after Acceptance.
(b) Additional services not described in this Agreement ("Additional
Services") which are requested by Customer shall be provided at a rate
of [**..**] per hour per Sabre representative. Such Additional Services
may include, but are not limited to, software modifications that may
<PAGE>
alter the function or look of the site (the "Programming Changes").
Sabre shall make all Programming Changes requested by Customer, except
where the Programming Changes would infringe upon Sabre's trademark
rights, for a period of [**..**] days following Acceptance and up to a
maximum of [**..**] of labor time or until a Maintenance Agreement or
other Development Agreement has been signed.
(c) In addition, food, lodging and related expenses incurred by a Sabre
representative in connection with any travel requested by Customer in
connection with the Services, will be reimbursed by Customer at the
rate of [**..**] per person ("Per Diem"). The Per Diem is subject to
adjustment from time to time in accordance with rates published by the
U.S. government for the city where the Services are being performed
("CONUS"). Customer shall reimburse Sabre for actual air and local
transportation expenses incurred in connection with the performance of
the Services and approved in advance by Customer.
(d) Customer shall reimburse Sabre as additional fees for (i) all
taxes, excluding any interest or penalties, imposed on Sabre arising
from this Agreement excluding U.S. income taxes, and (ii) any
additional taxes, including U.S. income taxes, imposed on Sabre as a
result of any reimbursements of taxes under clause (i) or (ii) of this
paragraph 3(d).
(e) Fees for additional Services in paragraph 3(b) and expenses in
paragraph 3(c) shall be due thirty (30) days after receipt of invoice
from Sabre. Any request by Customer for back-up documentation relating
to a particular Sabre invoice must be received by Sabre within thirty
(30) days of receipt of such invoice by Customer.
4. OWNERSHIP. Sabre shall retain all right, title and interest in and to
any deliverable provided to Customer hereunder. Sabre hereby grants to
Customer, in consideration for the payment of all fees and charges
identified in paragraph 3 above, a royalty-free, non-exclusive,
non-transferable right and license to use, and copy any Sabre
deliverable solely for the purpose of Customer, its employees and its
customers accessing the Sabre System for travel-related information or
to make travel reservations. Customer shall not market, sub-license or
otherwise transfer any Sabre deliverable to any third party without the
prior written consent of Sabre which consent will not be unreasonably
withheld, unreasonably delayed or unreasonably conditioned. Any
sub-license of the Software will be subject to an additional [**..**]
per sub-licensed site and will require Customer to execute a separate
Software Support and Maintenance Agreement with Sabre for each
sub-licensed site. Any export of the Software or any intellectual
property delivered hereunder shall be in accordance with the U.S.
Department of Commerce regulations and all applicable laws or
regulations.
5. NON-DISCLOSURE. This Agreement and any information disclosed by either
party to the other pursuant to this Agreement, will be governed by that
certain Non-Disclosure Agreement and its Supplement entered into
between the parties dated November 5, 1999.
6. RELATIONSHIP. Sabre shall be and act as an independent contractor
hereunder and no employee of Sabre shall be deemed to be an employee of
the Customer for any purpose whatsoever.
7. INDEMNIFICATION. (a) Sabre will defend, indemnify and hold harmless
Customer, its affiliates, subsidiaries, successors and assigns and
their officers, directors, agents and employees, jointly and severally,
at Sabre's expense, from, against, and with respect to any claim,
action, suit or other proceeding arising out of or in any manner,
incident, relating, or attributable to third party claims of direct
infringement of any duly issued United States patent, copyright,
trademark, service mark, trade dress, trade secret, or other
proprietary right resulting from the supply to Customer by Sabre, or
the use by Customer or its approved sub-licensees, of the Software as
delivered ("Infringement"). Sabre shall pay all damages and costs
(including without limitation reasonable attorney's fees) finally
awarded against Customer which are attributable to such Infringement.
<PAGE>
(b) Should the Software as delivered by Sabre hereunder
become, or in Sabre's opinion be likely to become the subject of a
claim of Infringement, then Sabre may, at its option and expense; (i)
procure for Customer the right to use the Software free of any
liability for Infringement; (ii) replace or modify the Software with a
non-Infringing substitute otherwise complying with all the
functionality identified in Exhibit A, or (iii) repurchase the Software
for its depreciated value (based upon a three year straight line
depreciation schedule), and thereby terminate this Agreement. Sabre
shall not be obligated to defend, or be liable for costs and damages,
if the Infringement arises out of (1) modification of the Software
other than by Sabre or its agent, (2) the compliance with Customer's
specifications in Exhibit A (to the extent the same go beyond
specifications of Software previously developed by Sabre), (3) use of
the Software in combination with or in addition to the equipment or
computer programs not licensed or developed by Sabre, or (4) a breach
of this Agreement by Customer.
(c) Each party agrees to indemnify and hold each other, their
affiliates, subsidiaries, successors and assigns and their officers,
directors, agents and employees, jointly and severally, harmless
against any suit, claim, damages and expense (including reasonable
attorneys' fees) by reason of (i) any personal injuries or tangible
property damage which may occur as the result of its acts or omissions
in the course of the performance of this Agreement, or (ii) breach of
its obligations under this Agreement.
(d) Except as expressly provided for in this paragraph 7,
Customer shall defend, indemnify and hold harmless Sabre from any and
all claims or causes of action arising out of Customer's or any of its
approved sub-licensee's use of the Software, and pay any and all
damages and expenses (including reasonable attorneys fees incurred by
Sabre) in connection therewith, regardless of the circumstances of the
claim or damage.
(e) All indemnification obligations under this paragraph 7
will be subject to the following requirements: (i) the indemnified
party shall provide the indemnifying party with prompt written notice
of any claim; (ii) the indemnified party shall permit the indemnifying
party to assume and control the defense of any action upon the
indemnifying party's written acknowledgment of the obligation to
indemnify (unless, in the opinion of counsel of the indemnified party,
such assumption would result in a material conflict of interest); and
(iii) the indemnifying party shall not enter into any settlement or
compromise of any claim without the indemnified party's prior written
consent, which shall not be unreasonably withheld. In addition, the
indemnified party may, at its own expense, participate in its defense
of any claim.
8. WARRANTY. SABRE DISCLAIMS, AND CUSTOMER HEREBY WAIVES ALL EXPRESS AND
IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR PURPOSE OF ANY PRODUCTS OR SERVICES
FURNISHED HEREUNDER. CUSTOMER UNDERSTANDS THAT PRODUCTS AND SERVICES
ARE PROVIDED "AS IS".
9. LIMITATION OF LIABILITY. EXCEPT FOR SABRE'S INDEMNIFICATION OBLIGATIONS
UNDER PARAGRAPHS 7(a) AND 7(c), CUSTOMER WAIVES ALL LIABILITY IN TORT
OF SABRE, INCLUDING, WITHOUT LIMITATION, ANY LIABILITY ARISING FROM
NEGLIGENCE. SABRE SHALL NOT BE LIABLE TO CUSTOMER FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, UNDER ANY CIRCUMSTANCES, INCLUDING, BUT NOT
LIMITED TO, LOST PROFITS, REVENUE OR SAVINGS, OR THE LOSS OF USE OF ANY
DATA, EVEN IF SABRE HAD BEEN ADVISED OF, KNEW, OR SHOULD HAVE KNOWN, OF
THE POSSIBILITY THEREOF. EXCEPT FOR SABRE'S INDEMNIFICATION OBLIGATIONS
UNDER PARAGRAPH 7(a) AND, WITH REGARD TO CLAIMS ARISING FROM SABRE'S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, UNDER PARAGRAPH 7(c), UNDER NO
CIRCUMSTANCES SHALL SABRE'S LIABILITY IN CONNECTION WITH THE SERVICES
EXCEED IN THE AGGREGATE THE TOTAL AMOUNT OF CHARGES ACTUALLY PAID TO
SABRE PURSUANT TO THIS AGREEMENT.
<PAGE>
10. CHOICE OF LAW. THIS AGREEMENT AND ANY DISPUTE ARISING HEREUNDER SHALL
BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF TEXAS WITHOUT REGARD TO
PRINCIPLES OF CONFLICT OF LAWS.
11. TERM. This Agreement shall be effective as of the Effective Date and
shall continue in effect until termination or expiration of the
Subscriber Agreement , or any renewal thereof.
12. NOTICES. Any notice, demand or document which any party is required or
desires to give or deliver to or make upon the other party shall be in
writing and shall be (a) personally delivered or (b) delivered by
depositing in the United States Mail, registered or certified, return
receipt requested, with postage prepaid, addressed as follows:
If to Sabre:
4255 Amon Carter Boulevard
MD4462
Fort Worth, TX 76155
ATTN: President
with cc to General Counsel: 4255 Amon Carter Boulevard
MD4204
Fort Worth, TX 76155
ATTN: General Counsel
If to Customer: 4802 Gunn Highway, Ste. 140
Tampa, FL 33624
ATTN: Mark Mastrini
or to such other address as the respective parties hereto shall
designate by notice similarly given to the other party. Any such
notice, demand or document shall be deemed to be effective upon receipt
of the same by the party to whom said notice, demand or document is
addressed.
13. SAVINGS CLAUSE. If any provision of this Agreement is prohibited by law
or held to be invalid, illegal or unenforceable, the remaining
provisions hereof shall not be affected, and this Agreement shall
continue in full force and effect as if such prohibited, illegal or
invalid provision had never constituted a part hereof, with this
Agreement being enforced to the fullest extent possible.
14. ENTIRE AGREEMENT. This Agreement, together with Exhibit A, constitutes
the entire agreement between the parties related to the subject matter
hereof, supersedes any prior agreement between the parties relating to
the subject matter hereof, and shall not be changed except by written
agreement signed by a duly authorized representative of each party.
15. PROMOTIONS. Notwithstanding anything herein to the contrary, Sabre or
Customer may publicly disclose that Sabre and Customer have entered
into this Agreement and that Sabre has agreed to provide the Services
to Customer.
16. OTHER PRODUCTS. Except for the parties' obligations under Paragraphs 4
and 5, nothing herein shall prohibit, or in any way limit, the parties'
rights to use, develop or market existing or subsequently developed or
modified software, technology or concepts, or to use their expertise,
skills or knowledge acquired during the performance of the Services
rendered under this Agreement in any current or subsequent endeavors.
<PAGE>
17. FORCE MAJEURE. Sabre shall be excused from performing hereunder to the
extent that it is prevented from performing as a result of any act or
event which occurs and is beyond the reasonable control of Sabre,
including, without limitation, acts of God, war, or any action of a
governmental entity; provided that Sabre provides Customer with prompt
written notice thereof and uses all reasonable efforts to remove or
avoid such causes.
19. MISCELLANEOUS. Any rights and obligations which expressly or by their
nature are intended to survive and continue after termination of this
Agreement, including, without limitation, paragraphs 4, 5, 7, 8, 9 and
16 shall so survive and bind the parties, their successors and assigns.
The parties warrant and represent that they are authorized to enter
into this Agreement and that this Agreement is binding and enforceable
against them.
IN WITNESS WHEREOF, the Customer and Sabre have executed this Agreement
on the date set out below.
800 Travel Systems, Inc. Sabre Inc.
By: By:
- ----------------------------------------- ----------------------------------
(Signature) (Signature)
Name: Mark Mastrini Name: Michael Sites
- ----------------------------------------- ----------------------------------
(Print Name) (Print Name)
Title: Chief Executive Officer Title: Vice President
- ----------------------------------------- ----------------------------------
PCC: B8T3 Date:
<PAGE>
EXHIBIT A
PHASE I/II CUSTOMER SYSTEM REQUIREMENTS
The following exhibit enumerates the specific functionality of the Software, to
be delivered and available for Customer's testing within [**..**] of the
execution of this Agreement by Sabre, provided however, delivery of the Services
may be extended by 12 weeks by Sabre as a result of Sabre's Year 2000
freeze-related delays upon prior written notice to Customer. Any functionality
not specifically delineated in this exhibit will not be provided, except as an
enhancement to be separately negotiated following completion of the Services.
[**..**]
Exhibit 10.17
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, DATED AS OF NOVEMBER 22, 1999, by and between
PETER M. SONTAG, an individual residing at 1731 Pine Hill Court, Safety Harbor,
Florida 34695 (the "EXECUTIVE"), and 800 TRAVEL SYSTEMS, INC., a Florida
corporation maintaining business offices at 4802 Gunn Highway, Tampa, Florida
33624, and each of its successors in interest (collectively the "COMPANY").
BACKGROUND INFORMATION
----------------------
The Company wishes to secure the employment services of the Executive
for a definite period of time and upon the particular terms and conditions
hereinafter set forth. The Executive is willing to be so employed. Accordingly,
for good and valuable consideration, the receipt and adequacy of which is
expressly acknowledged, the parties agree as follows:
OPERATIVE PROVISIONS
--------------------
1. EMPLOYMENT AND TERM.
-----------------------
The Company hereby employs the Executive and the latter hereby accepts
employment by the Company for the four year period commencing as of the date of
this Agreement and continuing through November 30, 2003 (the "INITIAL TERM"),
which employment shall thereafter be automatically extended for unlimited
successive one year periods (each a "SUCCESSOR TERM") unless it is terminated
during the pendency of any such Term, whether Initial or Successor, by the
occurrence of one of the events described in Section 8 hereof, or at the end of
any such Term by one party furnishing the other with notice, at least 60 days
prior to the expiration of such Term, of an intent to terminate this Agreement
upon the expiration of such Term.
2. DUTIES.
----------
During the Term of this Agreement, whether Initial or Successor, the
Executive shall render to the Company services as its President, and shall
perform such duties normally associated with that position, including but not
limited to the formulation and implementation of business strategies and
initiatives, overseeing and developing marketing plans, and initiating and
reviewing merger and acquisition opportunities, and as may otherwise be
reasonably designated by and subject to the supervision of the Company's Chief
Executive Officer and its Board of Directors, and he shall serve in such
additional capacities appropriate to his responsibilities and skills as shall be
designated by the Company, through action of its Chief Executive Officer and the
Board of Directors. During such Term, the Executive shall devote his primary and
substantial business attention, time and energies to the operations and affairs
of the Corporation, and will use his best efforts to promote the interests and
reputation of the Company, provided that he may pursue such other activities,
both remunerative and non-remunerative, as do not interfere or compete with, to
any material degree, the complete performance of his obligations hereunder. Any
question of interpretation which may arise under the preceding proviso shall be
resolved by majority decision of the Company's Board of Directors, provided that
the Executive's current and any continuing membership on the board of directors
of each of Fast Lane Travel, Inc. ("FAST LANE TRAVEL"), World Airways, Inc.,
IJBI, Inc., Aden Enterprises or Epsilon, Inc. is hereby approved, as are any
operational or administrative activities engaged in by the Executive in
performing services for Trip.com, within the period ending June 1, 2000,
involving no more than 32 hours per month and which are not competitive to the
interests of the Company. The Company shall cause the Executive, as of the date
of this Agreement, to be appointed to membership on the Company's Board of
Directors and covenants that its best efforts shall be used during the Term to
cause the Executive to be nominated for and, with shareholder approval, elected
to continued and uninterrupted service in that capacity.
<PAGE>
The Executive represents and warrants to the Company that, other than
under the terms of the Travel Industries, Inc. Employee Confidentiality
Agreement, dated September 16, 1999, a complete and correct copy of which has
been furnished to the Company, (a) he is not proscribed by any agreement with
any prior employer or other party from using or disclosing any confidential
information, or competing with the business, of such employer or other party,
(b) his performance under this Agreement will not breach any other agreement by
which he is bound, and (c) in the performance of his duties hereunder, he will
not make use of materials or information proprietary to any former employer and
which are not generally available to the public.
3. BASE COMPENSATION; DIRECTOR FEES; CASH BONUS ELIGIBILITY.
------------------------------------------------------------
For the services to be rendered by the Executive under this Agreement
the Company shall pay him, while he is rendering such services and performing
his duties hereunder, and the Executive shall accept in exchange for such
service, an annualized base compensation of not less than $174,000 during the
Initial or any Successor Term (inclusive of any amounts subject to federal,
state or local employment related withholding requirements), payable in
substantially equal installments coinciding with the Company's normal employment
compensation payment cycle or pursuant to such other arrangements as the parties
may agree upon (the "BASE COMPENSATION"). Such Base Compensation shall be
increased on each anniversary date of this Agreement to give effect, in the
manner described in SCHEDULE I hereto, to any change in the Consumer Price Index
(as defined in such Schedule) occurring within the preceding annual period; and
it shall also be reviewed by the Company's Board of Directors or any
compensation committee thereof within the 90 day period preceding each
anniversary of the date of this Agreement in the expectation of increasing the
same to award superior performance, with any such increase to be implemented as
of such anniversary by action of the Company's Board of Directors; but under no
condition may the Executive's Base Compensation be decreased below the amount
hereinabove set forth, or below any higher amount then being paid to him,
regardless of any change in or diminution of the Executive's duties owed to the
Company.
The Executive shall also be eligible to receive an annual cash bonus,
to be paid within the 90 day period succeeding the expiration of each fiscal
year of the Company within the Term of this Agreement, with the actual amount,
if any, to be determined by the Company's Board of Directors upon the
recommendation of any compensation committee thereof and in accordance with an
executive performance bonus plan to be established by the Company's Board of
Directors on or before June 1, 2000 and then to be attached as an exhibit to
this Agreement.
4. FRINGE BENEFITS; REIMBURSEMENT OF EXPENSES.
----------------------------------------------
During his period of employment hereunder, the Executive shall be
entitled to:
a. the most favorable leave by reason of physical or mental
disability or incapacity and to the most favorable participation in
medical, dental and group insurance, pension and other retirement
benefits and disability and other fringe benefit plans as the Company
may make available to any of its most senior executive employees or
directors from time to time; subject, however, as to such plans, to
such budgetary constraints or other limitations as may be imposed by
the Board of Directors of the Company from time to time;
b. reimbursement for all normal and reasonable expenses,
legal, accounting, financial or otherwise, (i) appropriately incurred
by him in the negotiation and preparation of this Agreement, in an
amount not to exceed $5,000; (ii) in the relocation of his business
office from Colorado to Florida, in an amount not to exceed $10,000;
and (iii) in the performance of his duties hereunder, but subject in
each case to such reasonable substantiation requirements as may be
imposed by the Company and to the deductibility by the Company of all
such amounts for federal income tax purposes;
c. the full time use of a private office at the principal
location of the Company's activities, with all ordinary and customary
office equipment appropriate to his position and to the duties which he
is to undertake on behalf of the Company.
<PAGE>
In addition, subject to any limitations as may be imposed by applicable law, the
Company shall:
a. indemnify the Executive against, and shall hold him
harmless from, all expenses (including all attorney and other
professional fees), judgments or fines incurred or paid in connection
with, or any amount incurred or paid in settlement of, any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including an action by or in
the right of the Company) by reason of his being or having been an
officer, director, employee or agent of the Company or any affiliated
entity;
b. advance all expenses (including attorneys' fees) incurred
by the Executive in investigating or defending any such action, suit or
proceeding;
c. maintain directors' and officers' liability insurance
coverage (including coverage with respect to any claim made under or in
connection with any federal or state securities law, regulation or
rule) in a principal amount reasonably sufficient to provide the
Executive with economic protection against any claim that might be
expected to be brought against an individual by reason of his service
as a Company officer, director, employee or agent, which coverage shall
remain in force (or be supplemented by the acquisition of a separate
policy) for the three year period following the Executive's termination
of service with the Company for any reason; and
d. during the Term of this Agreement, employ an executive
assistant of the Executive's selection who shall serve both the
Executive and the Company's Chief Executive Officer; compensate her for
such services at an annual rate of no less than $40,000, payable in
substantially equal installments coinciding with the Company's normal
employment compensation payment cycle or pursuant to such other
arrangements as the parties may agree upon; and provide her with leave
by reason of physical or mental disability or incapacity and to
participation in medical, dental and group insurance, pension and other
retirement benefits, and disability, vacation and other fringe benefits
as the Company may make available from time to time to any of its
employees who are performing similar services for other Company
executives or are being compensated at approximately the same level as
such executive assistant; it being agreed, however, that any such
employee shall be deemed an employee at will and shall be subject to
all of the Company's employment policies and procedures.
5. STOCK OPTIONS.
-----------------
Subject to all terms and conditions of this Agreement, the Executive is
hereby granted a non-qualified option (the "OPTION"), exercisable by or on
behalf of the Executive commencing as of the earlier of the Applicable Exercise
Commencement Date or Full Vesting Date, each as defined below, to acquire from
the Company up to 700,000 shares of its single class of authorized common voting
stock, $.01 par value (the "COMMON STOCK"), with such number of shares and the
prices at which they may be acquired upon exercise of the Option to be subject
to adjustment from time to time in accordance with the provisions of Section 9k
below (with or without any such adjustment, the "SHARES"), and it being agreed
that the Option is not being granted under or to be subject to the terms of any
pre-existing stock option plan presently being administered by the Company for
the benefit of any of its employees. For purposes of determining the Option
exercise prices and the time as of which and manner in which the Executive shall
be entitled to exercise the Option the Shares shall be divided into four
separate groups, herein designated as Group A, Group B, Group C and Group D,
with Group A to be comprised of 100,000 Shares and each of Groups B, C and D
200,000 Shares. As to the Shares comprising each Group, the Option may be
exercised in one or more separate transactions, in each case consummated at a
date, time and place of the parties' reasonable choice, within the three
business day period succeeding the date upon which a notice of exercise is
furnished to the Company, but in each case subject to the following additional
provisions and limitations:
<PAGE>
a. Following the third monthly anniversary of this Agreement,
the Option may be exercised as to a maximum of 50,000 Group A Shares at
an exercise price of $3.00 per Share, 25,000 Group B Shares at an
exercise price of $5.00 per Share, and 25,000 Group B Shares at an
exercise price of $7.00 per Share;
b. Following the later of the (i) sixth monthly anniversary of
this Agreement, or (ii) attainment by the Common Stock of a Closing
Price of $4.00, the Option may be exercised as to a maximum of 50,000
Group A Shares at an exercise price of $3.00 per Share;
c. Following the later of the (i) sixth monthly anniversary of
this Agreement, or (ii) attainment by the Common Stock of a Closing
Price of $6.00, the Option may be exercised as to a maximum of 75,000
Group B Shares at an exercise price of $5.00 per Share;
d. Following the later of the (i) sixth monthly anniversary of
this Agreement, or (ii) attainment by the Common Stock of a Closing
Price of $8.00, the Option may be exercised as to a maximum of 75,000
Group B Shares at an exercise price of $7.00 per Share;
e. Following attainment by the Common Stock of a Closing Price
of $10.00, the Option may be exercised as to all Group C Shares at an
exercise price of $3.00 per Share;
f. Following attainment by the Common Stock of a Closing Price
of $25.00, the Option may be exercised as to all Group D Shares at an
exercise price of $3.00 per Share;
g. For purposes of this Section:
CLOSING PRICE, as used in sub-paragraphs b. through
e. above, shall be determined as follows: (i) if at the time
the Executive elects to exercise the Option as to any Shares,
shares of the Company's Common Stock are then, or have
previously been, listed on any national securities exchange
(or, if such shares are listed on more than one such exchange,
then on the exchange through which trades of the Common Stock
shall have produced the largest trading volume during the
Relevant Period, as defined below), the applicable Closing
Price shall be deemed to have been attained so as to enable
such election to be made if the reported closing price of a
single share of Common Stock traded on such exchange on seven
of any ten consecutive trading days, the last of which shall
have ended at least three trading days prior to the date of
notification by the Executive of his election to exercise the
Option (such time period being hereinafter referred to as the
"RELEVANT PERIOD"), shall have been at or above the applicable
Closing Price; (ii) if at the time of such election the Common
Stock is, or has previously been, publicly traded but not
listed on any national securities exchange, the applicable
Closing Price shall be deemed to have been attained so as to
enable such election to be made if the reported closing bid
price of a single share of Common Stock traded over the Nasdaq
Stock Market, Inc. Automated Quotation System ("NASDAQ") or,
if not listed on NASDAQ, then as reported by the National
Quotation Bureau, Inc. or a comparable general securities
quotation service, on seven trading days within the Relevant
Period shall have been at or above the applicable Closing
Price; or (iii) if at the time of such election the Common
Stock is not, or has not previously been, publicly traded, the
applicable Closing Price shall be deemed to have been attained
so as to enable such election to be made if the net book value
of a single share of Common Stock as reflected on the
Company's audited statement of financial position prepared as
of the last day of its fiscal year ending most recently prior
to the election date is equal to or above the applicable
Closing Price;
CLOSING PRICE, as used in sub-paragraph f. above,
shall be determined in the same manner as set forth in the
preceding paragraph, provided that the closing price or
closing bid price of the Common Stock need be equal to or
above the applicable Closing Price on only a single day which
<PAGE>
shall have occurred at least three trading days prior
to the date of notification by the Executive of his election
to exercise the Option;
FULL VESTING DATE shall mean the fourth yearly
anniversary of the date of this Agreement; and
each of the dates identified in subsections a.
through f. above as the date upon which the exercise period of
the Option shall be deemed to have commenced as to specific
Shares is sometimes herein referred to as the APPLICABLE
EXERCISE COMMENCEMENT DATE.
h. Notwithstanding the provisions of subsections a. through e.
above, upon the occurrence of a Change in the Control of the Company
(as such capitalized term is defined in Section 8e below) the Option
shall fully vest as to all Group A, B and C Shares not then purchased
by the Executive or otherwise made available for such purchase and
shall be deemed amended to allow the Executive, within the 60 day
period following his receipt of notice that such Change in the Control
of the Company has occurred, to exercise the Option and acquire all or
any portion of the Group A, B and C Shares then subject to its terms
upon payment of the exercise price applicable to each Group, subject to
adjustment as contemplated by Section 9k below.
i. The Option shall terminate and no longer be subject to
exercise upon the third monthly anniversary of the termination of the
Executive's employment by the Company hereunder; provided that if:
(A) such termination is effected by the Executive
under the provisions of Section 8e below (a Good Reason
termination), then his exercise rights shall be determined by
reference to the last paragraph of Section 8e;
(B) if, prior to expiration of the Option the
Executive is disabled to the extent that he cannot reasonably
exercise the Option or decide whether to exercise it, then the
Executive's spouse, any holder of a general power of attorney
granted by Executive, or the Executive's legal representative
shall be entitled to exercise the Option, as to any Shares
that shall have been available for purchase upon the
termination of his employment hereunder, during the six month
period succeeding such date of termination; or
(C) if the Executive's termination of service
hereunder is caused by his death, then the Executive's
personal representative or any devisee or other beneficiary of
his rights hereunder shall be entitled to exercise the Option,
as to any Shares that shall have been available for purchase
upon the date of his death, during the succeeding one year
period.
6. PROPRIETARY INTEREST AND CONFIDENTIALITY COVENANTS.
------------------------------------------------------
During or after the expiration of his term of employment with the
Company, the Executive shall not communicate or divulge to, or use for the
benefit of, any individual, association, partnership, trust, corporation or
other entity except the Company, any proprietary or confidential information of
the Company received by the Executive by virtue of such employment, expressly
including information relating to the Company's customers, its pricing policies,
methods of operation, proprietary computer programs and trade secrets, without
first being in receipt of the Company's consent to do so and in compliance with
the terms of any other confidentiality or non-competition agreement which the
Executive may hereafter execute with the Company; provided that nothing
contained herein shall restrict the Executive's use or disclosure of such
information generally known to the public (other than that which he may have
disclosed in breach of this Agreement), or as required by law (so long as the
Executive gives the Company prior notice of such required disclosure).
<PAGE>
During the Term of this Agreement and within the 12 month period
following the Executive's resignation under Section 8f or his termination by the
Company under Section 8b or 8c, the Executive shall not, directly or indirectly,
either on Executive's behalf or on behalf of any other person, entity, partner,
joint venture, agent, salesman, contractor or otherwise:
i. Solicit or accept business from any customer or
account of the Company existing at any time during the term of
Executive's employment with the Company or from any other
person known by the Executive at the time his employment with
the Company terminated to be a prospective customer of the
Company; or
ii. Solicit any employee, independent contractor or
vendor of the Company to terminate his, her or its employment,
consulting arrangement or vending arrangement with the Company
or to employ or retain any such employee or independent
contractor if such person should terminate his or her
employment or consulting arrangement with the Company
(including any such person as shall have terminated such
employment or arrangement within the 90 day period preceding
the date of the Executive's termination).
7. REMEDIES FOR BREACH OF OBLIGATIONS.
--------------------------------------
a. INJUNCTIVE RELIEF. The parties agree that the services of
the Executive are of a personal, specific, unique and extraordinary
character and cannot be readily replaced by the Company. They further
agree that in the course of performing his services, the Executive will
have access to various types of proprietary information of the Company,
which, if released to others or used by the Executive other than for
the benefit of the Company, in either case without the Company's
consent, could cause the Company to suffer irreparable and continuing
injury. Therefore, the obligations of the Executive established under
Section 6 hereof shall be enforceable by the Company both at law and in
equity, by injunction, specific performance, damages or other remedy;
and the right of the Company to obtain any such remedy shall be
cumulative and not alternative and shall not be exhausted by any one or
more uses thereof.
b. ARBITRATION. Any controversy, dispute or claim arising out
of, in connection with or otherwise relating to any provision of this
Agreement, or to the breach, termination or validity hereof or any
transaction contemplated hereby (any such controversy, dispute or claim
being referred to as a "DISPUTE"), shall be finally settled by
arbitration conducted expeditiously in accordance with the Commercial
Arbitration Rules then in force (the "AAA RULES") of the American
Arbitration Association (the "AAA"), with application of the following
additional procedural requirements. A single arbitrator (the
"ARBITRATOR") shall be appointed by the AAA to consider such Dispute
within five business days after the demand for arbitration is received
by the AAA and the respondent in any such proceeding. The Arbitrator
shall be a certified public accountant or attorney with no less than 15
years' experience in the practice of business accountancy or law who
shall not have performed any legal services for any of the parties or
person controlled by any of the parties for a period of five years
prior to the date the demand for arbitration is received by the
respondent.
The situs for an arbitration pursuant to this Section shall be
as agreed to by the parties, failing which it shall be Hillsborough
County, Florida. Each party may submit memoranda and other
documentation as it or he deems appropriate to aid the formulation of
the Arbitrator's decision, and request a hearing (which may be
conducted in person or telephonically) so as to be able to present oral
testimony and argument. A final arbitration decision and award shall be
rendered as soon as reasonably possible and, in any event, within 30
business days following appointment of the Arbitrator; PROVIDED,
however, that if the Arbitrator determines that fairness so requires,
such period may be extended by no more than 30 additional days. The
Arbitrator shall have the right and power to shorten the length of any
notice periods or other time periods provided in the AAA Rules and to
implement Expedited Procedures under the AAA Rules in order to ensure
that the arbitration process is completed within the time frames
provided herein.
<PAGE>
The arbitration decision or award shall be reasoned and in
writing, and the Arbitrator shall have the right and authority to
determine how the decision or award as to each issue and matter in
dispute may be implemented or enforced. Any decision or award shall be
final and conclusive on the parties; there shall be no appeal therefrom
other than for claimed bias, fraud or misconduct by the Arbitrator;
judgment upon any decision or award may be entered in any court of
competent jurisdiction in the State of Florida or elsewhere; and the
parties hereto consent to the application by any party in interest to
any court of competent jurisdiction for confirmation or enforcement of
such decision or award. The party against whom a decision or award is
rendered shall pay the fees of the American Arbitration Association.
Any arbitration held pursuant to the provisions of this Section shall,
to the extent not in conflict with the express terms of this Agreement,
be governed by the Federal Arbitration Act and the Federal Rules of
Civil Procedure. All arbitrations commenced pursuant to this Agreement
while any other arbitration hereunder shall be in progress shall be
consolidated and heard by the Arbitrator.
Notwithstanding the foregoing, the Company, at its sole
option, shall be entitled to enforce its rights, as contemplated by
Section 7a hereof, to injunctive and other equitable relief in the
event of a breach of Section 6 hereof or of any material term of a
confidentiality or non-competition agreement to which the Company and
the Executive shall then be parties, either by arbitration pursuant to
this Section 7b or directly in any court of competent jurisdiction.
8. TERMINATION OF EMPLOYMENT.
-----------------------------
a. DEATH. The Executive's employment hereunder shall terminate
in the event of the Executive's death. Except for any salary and
benefits accrued, vested and unpaid as of the date of any such
termination and except for any benefits to which the Executive or his
heirs or personal representatives may be entitled under and in
accordance with the terms of any employee benefit plan, policy or
program maintained by the Company, the Company shall be under no
further obligation hereunder to the Executive or to his heirs or
personal representatives, and the Executive or his heirs or personal
representatives no longer shall be entitled to receive any payments or
any other rights or benefits under this Agreement.
b. DISABILITY. The Company may terminate the Executive's
employment hereunder for "DISABILITY" if an independent physician
mutually selected by the Executive (or his legal representative) and
the Board of Directors or its designee shall have determined that the
Executive has been substantially unable to render to the Company
services of the character contemplated by Section 2 of this Agreement,
by reason of a physical or mental illness, injury or other related
condition for more than 90 consecutive days or for shorter periods
aggregating more than 180 days in any period of 12 consecutive months
(excluding in each case days on which the Executive shall be on
vacation). In the event of such a termination, the Executive shall be
entitled to receive any salary and benefits accrued, vested and unpaid
as of the date his employment ends, and any benefits to which the
Executive may be entitled under and in accordance with the terms of any
Executive benefit plan, policy or program maintained by the Company.
Upon the Executive's receipt of such salary and benefits the
Corporation shall be under no further obligation hereunder to the
Executive and the Executive no longer shall be entitled to receive any
payments or any other rights or benefits under this Agreement.
c. TERMINATION BY THE COMPANY FOR CAUSE. The Company's Board
of Directors may terminate the Executive's employment hereunder for
"CAUSE." For purposes of this Agreement, "Cause" shall mean any of the
following:
<PAGE>
i. The Executive's willful misconduct or gross
negligence as related to a material matter;
ii. The Executive's intentional or willful failure to
substantially perform his obligations hereunder or of any
other duties reasonably assigned to him by the Company's Board
of Directors or Chief Executive Officer;
iii. The Executive's intentional or willful violation
of any material provision of the Company's by-laws or of its
other stated policies, standards or regulations;
iv. The Executive's commission of any act or omission
involving intentional or willful disloyalty to the Company
such as embezzlement, fraud or misappropriation of Company
assets;
v. A determination that the Executive has
demonstrated a dependence upon any addictive substance,
including but not limited to alcohol, controlled substances,
narcotics or barbiturates; or
vi. The Executive's conviction of any felony crime,
or his conviction of any lesser crime committed in connection
with his employment by the Company or involving moral
turpitude;
provided, however, that if the Board of Directors desires to terminate
the Executive for any of the reasons set forth in clause (i), (ii),
(iii), (iv) or (v) of this Section 8c., it shall, within the 60 day
period immediately following each alleged commission of a proscribed
act or omission, be required to furnish the Executive with notice
including a detailed description of the allegedly proscribed act or
omission; a statement advising him that the Board views such conduct as
being of the type which should lead to a termination of the Executive
for Cause; a specification of the clause(s) which the Board deems
violated as a result of the alleged act; a statement advising of the
Board's intention to terminate him for Cause as a result of such act;
an offer to provide him, within the ten day period following the date
of the notice, with an opportunity to present to the Board, either in
person or, at his discretion, in writing, any defenses which he
believes to exist with respect to the allegations set forth in the
notice; and a statement indicating that the Board will, once presented
with such defenses, provide the Executive with an opportunity to
correct or otherwise cure the act or omission giving rise to such
notice if the Board, acting at its discretion, reasonably exercised,
finds the Executive's defenses to merit such an action. Except for any
salary and benefits accrued, vested and unpaid as of the date of any
termination for Cause, the Company shall be under no further obligation
hereunder to the Executive and the Executive no longer shall be
entitled to receive any payments or any other rights or benefits under
this Agreement.
d. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. The
Company may terminate the Executive's employment hereunder upon the
expiration of the Initial Term or any Successor Term, provided that
notice of termination is furnished as set forth in Section 1, or at any
time prior to the expiration of any such Term, upon 60 days notice to
the Executive, and subject, in the event of such termination prior to
the expiration of a Term, to the right of the Executive, within such
notification period, to effect his own Good Reason termination as
described in subsection e. below. In the event of either such
termination, the Executive shall be entitled to receive any salary and
benefits accrued, vested and unpaid as of the date of any such
termination and any benefits to which the Executive may be entitled
under and in accordance with the terms of any employee benefit plan,
policy or program maintained by the Company, as well as, in the event
that the Executive shall have timely effected a Good Reason
termination, those benefits authorized under the provisions of
subsection e; and following his receipt of such salary and benefits the
Company shall be under no further obligation hereunder to the Executive
and the Executive no longer shall be entitled to receive any payments
or any other rights or benefits under this Agreement.
<PAGE>
e. TERMINATION BY THE EXECUTIVE FOR GOOD REASON.
Notwithstanding anything herein to the contrary, the Executive shall be
entitled to terminate his employment hereunder for Good Reason without
breach of this Agreement. For purposes of this Agreement, "GOOD REASON"
shall exist upon the occurrence of any of the following events or
matters, in each case without the Company first being in receipt of the
Executive's consent thereto, and the period of time within which the
Executive shall be required to exercise a Good Reason termination of
service shall be 30 days, measured from the date upon which he is
notified by the Company of such occurrence, or, with respect to the
matter identified in subparagraph iii. below, from the date upon which
the Executive notifies the Company of his belief that a material breach
has occurred:
i. A directed change in the Executive's principal
place of employment, other than within the Tampa Bay
metropolitan area;
ii. A material adverse change in, or a substantial
elimination of, the duties and responsibilities of the
Executive as described herein;
iii. A material breach by the Company of any of its
obligations hereunder;
iv. A Change in the Control of the Company; or
v. Receipt by the Executive of the Company's notice
that it intends to terminate him other than for Cause and
prior to the end of a particular Term of employment, whether
Initial or Successor.
For purposes of clause iv. above, a "CHANGE IN THE CONTROL OF THE
COMPANY" shall mean (A) the acquisition, directly or indirectly, after
the date hereof, by any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as in effect on
the date hereof), of voting power over voting shares of the Company
that would entitle the holder(s) thereof to cast at least 40% of the
votes that all shareholders would be entitled to cast in the election
of directors of the Company, provided that such term shall not be
deemed to apply to an acquisition by one or more institutional
underwriters directly from the Company in accordance with the
conditions of a registration statement theretofore filed with and
declared effective by the United States Securities and Exchange
Commission; (B) the failure, at any time during any period of two
consecutive years occurring within the Term of this Agreement
(inclusive of both Initial and Successor), of the individuals who at
the beginning of such period shall constitute the Company's Board of
Directors to constitute at least a majority of such membership, unless
the election of each director who is not a director at the beginning of
such period shall have been approved in advance by directors
representing at least 75% of the directors then in office who are
directors at the beginning of the period; (C) approval by the Company's
shareholders of any form of merger or consolidation other than (i) one
in which the voting securities of the Company outstanding immediately
prior thereto continue to represent or are converted into securities of
the surviving entity which represent at least 50% of the combined
voting power of the Company or such entity, or (ii) one effected to
implement a recapitalization of the Company in which no person acquires
more than 50% of the combined voting power of the Company's then
outstanding securities; or (D) approval by the Company's shareholders
of a plan of the Company's complete liquidation or a sale by the
Company of substantially all of its assets.
<PAGE>
In the event of a Good Reason termination by the Executive
within the Initial Term, the Executive shall be entitled to receive
from the Company, on the first day of each succeeding month within such
Term, one-twelfth of his then existing Base Compensation, or, if
greater, the same amount for each of the succeeding 12 months, and if
such a termination is effected during a Successor Term he shall be
entitled to receive one-twelfth of his then existing Base Compensation
for each of the succeeding 12 months; or, at the Executive's option,
exercisable at the time he notifies the Company of his intention to
effect a Good Reason Termination, he may elect to receive all amounts
due him in a single lump sum payment, discounted to their then present
value at an annual discount rate of 8%. Under either circumstance, the
Executive shall also be entitled to exercise the Option within the
succeeding one year period as to any Shares which shall have been
available for acquisition in accordance with Section 5 at the time of
such termination. Except for such cash payments or continuing
entitlement to compensation following any such termination, and except
for any salary and benefits accrued, vested and unpaid as of the date
of any such termination, the Executive no longer shall be entitled to
receive any payments or any other rights or benefits under this
Agreement, and the Company shall have no further obligation hereunder
to the Executive following any such termination.
f. TERMINATION BY THE EXECUTIVE FOR OTHER THAN GOOD REASON.
The Executive may terminate his employment hereunder upon the
expiration of the Initial Term or any Successor Term, provided that
notice of termination is provided as set forth in Section 1. In the
event of such termination, the Executive shall be entitled to receive
any salary and benefits accrued, vested and unpaid as of the date of
any such termination and any benefits to which the Executive may be
entitled under and in accordance with the terms of any employee benefit
plan, policy or program maintained by the Company; and following his
receipt of such salary and benefits the Company shall be under no
further obligation hereunder to the Executive and the Executive no
longer shall be entitled to receive any payments or any other rights or
benefits under this Agreement.
g. LIFE AND DISABILITY INSURANCE COVERAGE. If termination of
employment is due to any reason other than death or for Cause, the
Company shall, for the lesser of the (i) two year period measured from
the date of termination, or (ii) the period preceding the date as of
which the Executive obtains comparable coverage from a successor
employer, continue to provide Executive, at Company expense, with the
highest level of health insurance benefits to which he shall have been
entitled during the period of his employment by the Company hereunder,
and he shall have the additional right (but not the obligation) to
purchase any policy of insurance on his life or insuring against his
disability which is then owned by the Company, the exercise of which
right shall be made by notice furnished to the Company within 30 days
subsequent to the date of termination. The purchase price of each
policy of life insurance shall be the sum of its interpolated terminal
reserve value (computed as of the closing date) and the proportional
part of the gross premium last paid before the closing date which
covers any period extending beyond that date; or if the policy to be
purchased shall not have been in force for a period sufficient to
generate an interpolated terminal reserve value, the price shall be an
amount equal to all net premiums paid as of the closing date. The
purchase price of each disability income policy shall be the sum of its
cash value and the proportional part of the gross premium last paid
before the closing date which covers any period extending beyond that
date. The purchase of any insurance policy by the Executive shall be
closed as promptly as may be practicable after the giving of notice, in
no event to exceed 30 days therefrom.
h. EXCISE TAX INDEMNITY. In the event that any payment to
the Executive under Section 8e is subject to any federal or state
excise tax, the Company shall pay the Executive an additional amount
equal to the excise tax imposed, including additional federal and state
income and excise taxes as a result of the payments under this
paragraph, and such payments will be due contemporaneously with the due
date of the identified excise and/or income taxes. Whether an excise
tax is payable, and the amount of the excise tax and additional income
taxes payable, shall be determined by the Company's accountants and the
Company shall hold the Executive harmless from any and all taxes,
penalties and interest that may become due as a result of the failure
to properly determine that an excise tax is payable or the correct
amount of the excise tax and additional income taxes, together with all
legal and accounting fees reasonably incurred by the Executive in
connection with any dispute with any tax authority with respect to such
determinations and/or payments.
<PAGE>
i. RETENTION OF COMPANY PROPERTY. Upon the Executive's
termination of service for any reason other than Cause he shall be
entitled to retain possession of any mobile telephone and notebook
computer that shall have been issued to him by the Company in the
course of his employment hereunder, provided that the Executive shall
be responsible for the satisfaction of all license fees and other
payments, and for the performance of any other obligations, owing by
the Company subsequent to the date of such termination under any
service contract applicable to any such property so retained. The
Company acknowledges that certain of the Executive's Company office
furnishings are the property of Executive the ownership and possession
of which shall be retained by the Executive following his termination
of employment hereunder.
j. NON-DISPARAGEMENT. Following the termination of this
Agreement for any reason, neither of the Company nor the Executive
shall, except as otherwise required by applicable securities law, stock
exchange listing agreement, or other applicable law or regulation, make
any disparaging or derogatory statements regarding the other in any
communication likely to become public.
9. MISCELLANEOUS PROVISIONS.
----------------------------
a. NOTICE. All notices, consents, approvals, joinders,
waivers and other communications required or permitted under this
Agreement (each a "COMMUNICATION") shall be in writing and shall be
personally delivered or sent by facsimile machine (with a confirmation
copy sent by one of the other methods authorized in this Section),
commercial courier or United States Postal Service overnight delivery
service, or, deposited with the United States Postal Service and mailed
by first class, registered or certified mail, postage prepaid, if to
the Company to the attention of its chief executive officer, and if to
either party in care of the address set forth in preamble hereto, or to
such other address as either shall have provided notice to the other in
the manner herein permitted. Each such Communication shall be deemed
given upon the earlier to occur of (i) actual receipt by the party to
whom such Communication is directed; (ii) if sent by facsimile machine,
on the day (other than a Saturday, Sunday or legal holiday in the
jurisdiction to which such Communication is directed) such
Communication is sent if sent (as evidenced by the facsimile confirmed
receipt) prior to 5:00 p.m. Eastern Time and, if sent after 5:00 p.m.
Eastern Time, on the day (other than a Saturday, Sunday or legal
holiday in the jurisdiction to which such Communication is directed)
after which such Communication is sent (subject in each case to the
above-referenced confirmation copy being timely furnished); (iii) on
the first business day (other than a Saturday, Sunday or legal holiday
in the jurisdiction to which such Communication is directed) following
the day the same is deposited with the commercial carrier if sent by
commercial overnight delivery service; or (iv) the fifth day (other
than a Saturday, Sunday or legal holiday in the jurisdiction to which
such Communication is directed) following deposit thereof with the
United States Postal Service as aforesaid. Each party, by notice duly
given in accordance therewith may specify a different address for the
giving of any Communication hereunder.
b. NO ASSIGNABILITY. Each of the provisions and agreements
herein contained shall be binding upon and enure to the benefit of the
respective parties hereto, as well as their personal representatives,
devisees, heirs, successors, transferees or Beneficiaries, as
applicable, but no statement contained herein is intended to confer
upon any person or entity, other than the parties hereto and their
successors in interest, Beneficiaries and permitted assignees, any
rights or remedies under or by reason of this Agreement unless so
stated to the contrary. No right under this Agreement shall be
assignable nor any duty delegable by any party, except as expressly
authorized in this Agreement, without the prior consent of the other
party.
<PAGE>
c. ENTIRE AGREEMENT. This Agreement, and any other document
referenced herein, constitute the entire understanding of the parties
hereto with respect to the subject matter hereof, and no amendment,
modification or alteration of the terms hereof shall be binding unless
the same be in writing, dated subsequent to the date hereof and duly
approved and executed by each of the parties hereto.
d. SEVERABILITY. If any term or other provision of this
Agreement is held by a court of competent jurisdiction to be invalid,
illegal or incapable of being enforced in any particular respect or
under any particular circumstance, such term or provision shall
nevertheless remain in full force and effect in all other respects and
under all other circumstances, and all other terms, conditions and
provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely
as possible in an acceptable manner, to the end that the transactions
contemplated hereby are fulfilled to the fullest extent possible.
e. APPLICATION OF FLORIDA LAW. This Agreement, and the
application or interpretation thereof, shall be governed exclusively by
its terms and by the laws of the State of Florida. Venue for any legal
action which may be brought hereunder shall be deemed to lie in
Hillsborough County, Florida.
f. HEADINGS, GENDER, NUMBER. The headings of this Agreement
are inserted for convenience and identification only, and are in no way
intended to describe, interpret, define or limit the scope, extent or
intent hereof. Words of gender used herein may be read as masculine,
feminine, or neuter, as required by context, and words of number may be
read as singular or plural, as similarly required.
g. NO WAIVER OF BREACH. No failure or delay by either party
to exercise any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise of such right, power or
privilege.
h. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, by means of multiple signature pages each
containing less than all required signatures, and by means of facsimile
signatures, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
i. LEGAL FEES AND COSTS. If a legal action is initiated by
any party to this Agreement against another, arising out of or relating
to the alleged performance or non-performance of any right or
obligation established hereunder, or any dispute concerning the same,
any and all fees, costs and expenses reasonably incurred by each
successful party or his or its legal counsel in investigating,
preparing for, prosecuting, defending against, or providing evidence,
producing documents or taking any other action in respect of, such
action shall be the joint and several obligation of and shall be paid
or reimbursed by the unsuccessful party(ies).
j. BENEFICIARY. As used herein, the term "BENEFICIARY" shall
mean the person or persons (who may be designated contingently or
successively and who may be an entity other than an individual,
including an estate or trust) designated on a written form prescribed
by the Board of Directors to receive the expiration of Agreement or
death benefits described in Section 8 above. Each Beneficiary
designation shall be effective only when filed with the Secretary of
the Company during the Executive's lifetime. Each Beneficiary
designation filed with the Secretary will cancel all designations
previously so filed. If the Executive fails to properly designate a
Beneficiary or if the Beneficiary predeceases the Executive or dies
before complete distribution of the benefit has been made, the Company
shall distribute the benefit (or balance thereof) to the Executive's
surviving spouse, if any, or otherwise to his probate estate.
<PAGE>
k. ADJUSTMENTS. In the event of any change in the Common
Stock of the Company by reason of a stock dividend or forward or
reverse stock split that affects the Option or the ability of the
Executive to exercise his Option rights, granted under Section 5 above,
in accordance with the terms of this Agreement (each a "TRANSACTION"),
the number of Shares made the subject of the Option, the price at which
each such Share is subject to purchase by the Executive, and/or the
target Closing Prices required for exercisability shall be adjusted
appropriately to insure that the Shares will be subject to acquisition
by the Executive at a price and upon terms commensurate to those herein
set forth. The Company shall be required to notify the Executive
promptly following its approval of each Transaction and to provide the
Executive with a statement describing how the proposed Transaction will
affect his Option rights and what adjustment is being made to offset
such affect.
IN WITNESS WHEREOF, the parties have executed this Agreement.
800 TRAVEL SYSTEMS, INC.
By:/S/ Mark Mastrini
--------------------
Mark Mastrini, Chief Executive Officer
EXECUTIVE
/S/ Peter M. Sontag
-------------------
Peter M. Sontag
<PAGE>
SCHEDULE I
BASE COMPENSATION INCREASE CALCULATION
In effecting increases to the Executive's Base Compensation, as
contemplated by Section 3 of the Agreement, the following provisions shall
apply:
The Base Compensation payable to the Executive within each 12 month
period initiated by an anniversary of this Agreement shall be an amount which
bears the same ratio to $174,000 as the monthly Index figure published for the
August immediately preceding the occurrence of such anniversary bears to the
Base Period Index figure, where "INDEX" refers to the Consumer Price Index for
Urban Wage Earners and Clerical Workers - U.S. City Average, All Items, 1967
Base, as presently promulgated by the United States Department of Labor, Bureau
of Labor Statistics, and "BASE PERIOD INDEX" refers to the Index figure
published for the month of August 1999. As an example of the manner in which
such periodic income is to be calculated, assume that the published Base Period
Index figure is 248.2 and that the published Index figure for August 2001 is
286.7. The Base Compensation payable to the Executive by the Company during the
12 month period commencing as of November __, 2001, rounded to the nearest whole
dollar, would consequently be calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Base Compensation Base Compensation August
for applicable 12 = in initial 12 month x 2001
month period (X) period of Agreement Index
($174,000) FIGURE (286.7)
-------------------------------------------------
Base Period Index figure (248.2)
X = $174,000 X 286.7
----------------
248.2
X = $200,990
</TABLE>
If at any time the Index is adjusted to reflect a Base subsequent to
1967 to which prices are compared, the parties shall be required to make such
further adjustments to the published Index figures as may be necessary to insure
that they bear an accurate relationship to the Base Period Index designated
herein. Further, if the Index is altogether discontinued at any time, the
parties shall use any other standard nationally recognized cost of living index
then available and published by the United States Department of Labor, or, if
unavailable, by the United States Department of Commerce, or, if unavailable, by
a nationally recognized publisher of economic statistics which, in the absence
of agreement by the parties on or before the applicable adjustment date, shall
be selected by the Tampa, Florida office of the independent certified public
accounting firm of Price Waterhouse Coopers or its successor.
Exhibit 10.18
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, DATED AS OF DECEMBER 1, 1999, by and between
MICHAEL A. GAGGI, an individual residing at 8607 Colonial Road, Brooklyn, New
York 11209 (the "EXECUTIVE"), and 800 TRAVEL SYSTEMS, INC., a Florida
corporation maintaining business offices at 4802 Gunn Highway, Tampa, Florida
33624, and each of its successors in interest (collectively the "COMPANY").
BACKGROUND INFORMATION
----------------------
Executive is currently a director of the Company and is a party to a
consulting agreement with the Company dated February 1, 1998 (the "CONSULTING
AGREEMENT").
The Company wishes to secure the employment services of the Executive
for a definite period of time and upon the particular terms and conditions
hereinafter set forth and to terminate the existing Consulting Agreement. The
Executive is willing to be so employed and to terminate the existing Consulting
Agreement. Accordingly, for good and valuable consideration, the receipt and
adequacy of which is expressly acknowledged, the parties agree as follows:
OPERATIVE PROVISIONS
--------------------
1. EMPLOYMENT AND TERM.
-----------------------
The Company hereby employs the Executive and the latter hereby accepts
employment by the Company for the four year period commencing as of the date of
this Agreement and continuing through December 31, 2003 (the "INITIAL TERM"),
which employment shall thereafter be automatically extended for unlimited
successive one year periods (each a "SUCCESSOR TERM") unless it is terminated
during the pendency of any such Term, whether Initial or Successor, by the
occurrence of one of the events described in Section 8 hereof, or at the end of
any such Term by one party furnishing the other with notice, at least 60 days
prior to the expiration of such Term, of an intent to terminate this Agreement
upon the expiration of such Term. The Consulting Agreement is hereby terminated.
2. DUTIES.
----------
During the Term of this Agreement, whether Initial or Successor, the
Executive shall render to the Company services as its Vice President of Business
Development, and shall perform such duties normally associated with that
position, and as may otherwise be reasonably designated by and subject to the
supervision of the Company's Chief Executive Officer and its Board of Directors,
and he shall serve in such additional capacities appropriate to his
responsibilities and skills as shall be designated by the Company, through
action of its Chief Executive Officer and the Board of Directors, provided
however, Executive shall not be required to relocate from Brooklyn, New York.
During such Term, the Executive shall devote his primary and substantial
business attention, time and energies to the operations and affairs of the
Corporation, and will use his best efforts to promote the interests and
reputation of the Company, provided that he may pursue such other activities,
both remunerative and non-remunerative, as do not interfere or compete with, to
any material degree, the complete performance of his obligations hereunder. Any
question of interpretation which may arise under the preceding proviso shall be
resolved by majority decision of the Company's Board of Directors, provided that
the Executive's current and any continuing membership on the board of directors
of each of Myoptics Opticians, Inc. ("MYOPTICS") and 8607 Colonial Group, Inc.
("COLONIAL") are hereby approved, as are any operational or administrative
activities engaged in by the Executive in performing services for Colonial,
Myoptics and Winchester Financial Services and which are not competitive to the
interests of the Company. The Company covenants that its best efforts shall be
used during the Term to cause the Executive to be nominated for re-election and,
with shareholder approval, elected to continued and uninterrupted service as a
director.
The Executive represents and warrants to the Company that, (a) he is
not proscribed by any agreement with any prior employer or other party from
using or disclosing any confidential information, or competing with the
business, of such employer or other party, (b) his performance under this
Agreement will not breach any other agreement by which he is bound, and (c) in
the performance of his duties hereunder, he will not make use of materials or
information proprietary to any former employer and which are not generally
available to the public.
<PAGE>
3. BASE COMPENSATION; CASH BONUS ELIGIBILITY.
---------------------------------------------
For the services to be rendered by the Executive under this Agreement
the Company shall pay him, while he is rendering such services and performing
his duties hereunder, and the Executive shall accept in exchange for such
service, an annualized base compensation of not less than $162,500 during the
Initial or any Successor Term (inclusive of any amounts subject to federal,
state or local employment related withholding requirements), payable in
substantially equal installments coinciding with the Company's normal employment
compensation payment cycle or pursuant to such other arrangements as the parties
may agree upon (the "BASE COMPENSATION"). Such Base Compensation shall be
increased by a minimum of 5% on each anniversary date of this Agreement and
increased to give effect, to any percentage increase in the Consumer Price Index
occurring within the preceding annual period. For example, if the Consumer Price
Index increased 5%, Executive's Base Compensation would be adjusted to $178,750
for the subsequent period, computed as follows: ($162,500 + ($162,500 x (5% +
5%))). Executive's Base Compensation shall also be reviewed by the Company's
Board of Directors or any compensation committee thereof within the 90 day
period preceding each anniversary of the date of this Agreement in the
expectation of increasing the same to award superior performance, with any such
increase to be implemented as of such anniversary by action of the Company's
Board of Directors; but under no condition may the Executive's Base Compensation
be decreased below the amount hereinabove set forth, or below any higher amount
then being paid to him, regardless of any change in or diminution of the
Executive's duties owed to the Company.
The Executive shall also be eligible to receive an annual cash bonus,
to be paid within the 90 day period succeeding the expiration of each fiscal
year of the Company within the Term of this Agreement, with the actual amount,
if any, to be determined by the Company's Board of Directors upon the
recommendation of any compensation committee thereof and in accordance with an
executive performance bonus plan to be established by the Company's Board of
Directors on or before June 1, 2000 and then to be attached as an exhibit to
this Agreement.
4. FRINGE BENEFITS; REIMBURSEMENT OF EXPENSES.
----------------------------------------------
During his period of employment hereunder, the Executive shall be
entitled to:
a. the most favorable leave by reason of physical or mental
disability or incapacity and to the most favorable participation in
medical, dental and group insurance, pension and other retirement
benefits and disability and other fringe benefit plans as the Company
may make available to any of its most senior executive employees or
directors from time to time; subject, however, as to such plans, to
such budgetary constraints or other limitations as may be imposed by
the Board of Directors of the Company from time to time;
b. reimbursement for all normal and reasonable expenses,
legal, accounting, financial or otherwise, in the performance of his
duties hereunder, but subject in each case to such reasonable
substantiation requirements as may be imposed by the Company and to the
deductibility by the Company of all such amounts for federal income tax
purposes;
c. the use of a private office at the principal location of
the Company's activities, with all ordinary and customary office
equipment appropriate to his position and to the duties which he is to
undertake on behalf of the Company and ordinary and customary office
equipment for Executive's use at his residence.
In addition, subject to any limitations as may be imposed by applicable law, the
Company shall:
a. indemnify the Executive against, and shall hold him
harmless from, all expenses (including all attorney and other
professional fees), judgements or fines incurred or paid in connection
with, or any amount incurred or paid in settlement of, any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including an action by or in
the right of the Company) by reason of his being or having been an
officer, director, employee or agent of the Company or any affiliated
entity;
b. advance all expenses (including attorneys' fees) incurred
by the Executive in investigating or defending any such action, suit or
proceeding;
c. maintain directors' and officers' liability insurance
coverage (including coverage with respect to any claim made under or in
connection with any federal or state securities law, regulation or
rule) in a principal amount reasonably sufficient to provide the
<PAGE>
Executive with economic protection against any claim that might be
expected to be brought against an individual by reason of his service
as a Company officer, director, employee or agent, which coverage shall
remain in force (or be supplemented by the acquisition of a separate
policy) for the three year period following the Executive's termination
of service with the Company for any reason; and
5. STOCK OPTIONS.
-----------------
Executive shall be entitled to options to the extent such options are
granted to executives from time to time by the Board of Directors or any
Compensation Committee thereof.
6. PROPRIETARY INTEREST AND CONFIDENTIALITY COVENANTS.
------------------------------------------------------
During or after the expiration of his term of employment with the
Company, the Executive shall not communicate or divulge to, or use for the
benefit of, any individual, association, partnership, trust, corporation or
other entity except the Company, any proprietary or confidential information of
the Company received by the Executive by virtue of such employment, expressly
including information relating to the Company's customers, its pricing policies,
methods of operation, proprietary computer programs and trade secrets, without
first being in receipt of the Company's consent to do so and in compliance with
the terms of any other confidentiality or non-competition agreement which the
Executive may hereafter execute with the Company; provided that nothing
contained herein shall restrict the Executive's use or disclosure of such
information generally known to the public (other than that which he may have
disclosed in breach of this Agreement), or as required by law (so long as the
Executive gives the Company prior notice of such required disclosure).
During the Term of this Agreement and within the 12 month period
following the Executive's resignation under Section 8f or his termination by the
Company under Section 8b or 8c, the Executive shall not, directly or indirectly,
either on Executive's behalf or on behalf of any other person, entity, partner,
joint venture, agent, salesman, contractor or otherwise:
i. Solicit or accept business from any customer or
account of the Company existing at any time during the term of
Executive's employment with the Company or from any other
person known by the Executive at the time his employment with
the Company terminated to be a prospective customer of the
Company; or
ii. Solicit any employee, independent contractor or
vendor of the Company to terminate his, her or its employment,
consulting arrangement or vending arrangement with the Company
or to employ or retain any such employee or independent
contractor if such person should terminate his or her
employment or consulting arrangement with the Company
(including any such person as shall have terminated such
employment or arrangement within the 90 day period preceding
the date of the Executive's termination).
provided, however that Company acknowledges that Executive has pre-existing
relationships with Jack Zahran and e-Business Interactive Solutions, Inc. and
Executive's current and future relationships with such persons and entity shall
not constitute a violation of this Section.
7. REMEDIES FOR BREACH OF OBLIGATIONS.
--------------------------------------
a. INJUNCTIVE RELIEF. The parties agree that the services of
the Executive are of a personal, specific, unique and extraordinary
character and cannot be readily replaced by the Company. They further
agree that in the course of performing his services, the Executive will
have access to various types of proprietary information of the Company,
which, if released to others or used by the Executive other than for
the benefit of the Company, in either case without the Company's
consent, could cause the Company to suffer irreparable and continuing
injury. Therefore, the obligations of the Executive established under
Section 6 hereof shall be enforceable by the Company both at law and in
equity, by injunction, specific performance, damages or other remedy;
and the right of the Company to obtain any such remedy shall be
cumulative and not alternative and shall not be exhausted by any one or
more uses thereof.
<PAGE>
b. ARBITRATION. Any controversy, dispute or claim arising out
of, in connection with or otherwise relating to any provision of this
Agreement, or to the breach, termination or validity hereof or any
transaction contemplated hereby (any such controversy, dispute or claim
being referred to as a "DISPUTE"), shall be finally settled by
arbitration conducted expeditiously in accordance with the Commercial
Arbitration Rules then in force (the "AAA RULES") of the American
Arbitration Association (the "AAA"), with application of the following
additional procedural requirements. A single arbitrator (the
"ARBITRATOR") shall be appointed by the AAA to consider such Dispute
within five business days after the demand for arbitration is received
by the AAA and the respondent in any such proceeding. The Arbitrator
shall be a certified public accountant or attorney with no less than 15
years' experience in the practice of business accountancy or law who
shall not have performed any legal services for any of the parties or
person controlled by any of the parties for a period of five years
prior to the date the demand for arbitration is received by the
respondent.
The situs for an arbitration pursuant to this Section shall be
as agreed to by the parties, failing which it shall be Hillsborough
County, Florida. Each party may submit memoranda and other
documentation as it or he deems appropriate to aid the formulation of
the Arbitrator's decision, and request a hearing (which may be
conducted in person or telephonically) so as to be able to present oral
testimony and argument. A final arbitration decision and award shall be
rendered as soon as reasonably possible and, in any event, within 30
business days following appointment of the Arbitrator; PROVIDED,
however, that if the Arbitrator determines that fairness so requires,
such period may be extended by no more than 30 additional days. The
Arbitrator shall have the right and power to shorten the length of any
notice periods or other time periods provided in the AAA Rules and to
implement Expedited Procedures under the AAA Rules in order to ensure
that the arbitration process is completed within the time frames
provided herein.
The arbitration decision or award shall be reasoned and in
writing, and the Arbitrator shall have the right and authority to
determine how the decision or award as to each issue and matter in
dispute may be implemented or enforced. Any decision or award shall be
final and conclusive on the parties; there shall be no appeal therefrom
other than for claimed bias, fraud or misconduct by the Arbitrator;
judgment upon any decision or award may be entered in any court of
competent jurisdiction in the State of Florida or elsewhere; and the
parties hereto consent to the application by any party in interest to
any court of competent jurisdiction for confirmation or enforcement of
such decision or award. The party against whom a decision or award is
rendered shall pay the fees of the American Arbitration Association.
Any arbitration held pursuant to the provisions of this Section shall,
to the extent not in conflict with the express terms of this Agreement,
be governed by the Federal Arbitration Act and the Federal Rules of
Civil Procedure. All arbitrations commenced pursuant to this Agreement
while any other arbitration hereunder shall be in progress shall be
consolidated and heard by the Arbitrator.
Notwithstanding the foregoing, the Company, at its sole
option, shall be entitled to enforce its rights, as contemplated by
Section 7a hereof, to injunctive and other equitable relief in the
event of a breach of Section 6 hereof or of any material term of a
confidentiality or non-competition agreement to which the Company and
the Executive shall then be parties, either by arbitration pursuant to
this Section 7b or directly in any court of competent jurisdiction.
8. TERMINATION OF EMPLOYMENT.
-----------------------------
a. DEATH. The Executive's employment hereunder shall terminate
in the event of the Executive's death. Except for any salary and
benefits accrued, vested and unpaid as of the date of any such
termination and except for any benefits to which the Executive or his
heirs or personal representatives may be entitled under and in
accordance with the terms of any employee benefit plan, policy or
program maintained by the Company, the Company shall be under no
further obligation hereunder to the Executive or to his heirs or
personal representatives, and the Executive or his heirs or personal
representatives no longer shall be entitled to receive any payments or
any other rights or benefits under this Agreement.
b. DISABILITY. The Company may terminate the Executive's
employment hereunder for "DISABILITY" if an independent physician
mutually selected by the Executive (or his legal representative) and
the Board of Directors or its designee shall have determined that the
Executive has been substantially unable to render to the Company
services of the character contemplated by Section 2 of this Agreement,
by reason of a physical or mental illness, injury or other related
condition for more than 90 consecutive days or for shorter periods
aggregating more than 180 days in any period of 12 consecutive months
(excluding in each case days on which the Executive shall be on
vacation). In the event of such a termination, the Executive shall be
entitled to receive any salary and benefits accrued, vested and unpaid
as of the date his employment ends, and any benefits to which the
Executive may be entitled under and in accordance with the terms of any
Executive benefit plan, policy or program maintained by the Company.
Upon the Executive's receipt of such salary and benefits the
Corporation shall be under no further obligation hereunder to the
Executive and the Executive no longer shall be entitled to receive any
payments or any other rights or benefits under this Agreement.
<PAGE>
c. TERMINATION BY THE COMPANY FOR CAUSE. The Company's Board
of Directors may terminate the Executive's employment hereunder for
"CAUSE." For purposes of this Agreement, "Cause" shall mean any of the
following:
i. The Executive's willful misconduct or gross
negligence as related to a material matter;
ii. The Executive's intentional or willful failure to
substantially perform his obligations hereunder or of any
other duties reasonably assigned to him by the Company's Board
of Directors or Chief Executive Officer;
iii. The Executive's intentional or willful violation
of any material provision of the Company's by-laws or of its
other stated policies, standards or regulations;
iv. The Executive's commission of any act or omission
involving intentional or willful disloyalty to the Company
such as embezzlement, fraud or misappropriation of Company
assets;
v. A determination that the Executive has
demonstrated a dependence upon any addictive substance,
including but not limited to alcohol, controlled substances,
narcotics or barbiturates; or
vi. The Executive's conviction of any felony crime,
or his conviction of any lesser crime committed in connection
with his employment by the Company or involving moral
turpitude;
provided, however, that if the Board of Directors desires to terminate
the Executive for any of the reasons set forth in clause (i), (ii),
(iii), (iv) or (v) of this Section 8c., it shall, within the 60 day
period immediately following each alleged commission of a proscribed
act or omission, be required to furnish the Executive with notice
including a detailed description of the allegedly proscribed act or
omission; a statement advising him that the Board views such conduct as
being of the type which should lead to a termination of the Executive
for Cause; a specification of the clause(s) which the Board deems
violated as a result of the alleged act; a statement advising of the
Board's intention to terminate him for Cause as a result of such act;
an offer to provide him, within the ten day period following the date
of the notice, with an opportunity to present to the Board, either in
person or, at his discretion, in writing, any defenses which he
believes to exist with respect to the allegations set forth in the
notice; and a statement indicating that the Board will, once presented
with such defenses, provide the Executive with an opportunity to
correct or otherwise cure the act or omission giving rise to such
notice if the Board, acting at its discretion, reasonably exercised,
finds the Executive's defenses to merit such an action. Except for any
salary and benefits accrued, vested and unpaid as of the date of any
termination for Cause, the Company shall be under no further obligation
hereunder to the Executive and the Executive no longer shall be
entitled to receive any payments or any other rights or benefits under
this Agreement.
d. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. The
Company may terminate the Executive's employment hereunder upon the
expiration of the Initial Term or any Successor Term, provided that
notice of termination is furnished as set forth in Section 1, or at any
time prior to the expiration of any such Term, upon 60 days notice to
the Executive, and subject, in the event of such termination prior to
the expiration of a Term, to the right of the Executive, within such
notification period, to effect his own Good Reason termination as
described in subsection e. below. In the event of either such
termination, the Executive shall be entitled to receive any salary and
benefits accrued, vested and unpaid as of the date of any such
termination and any benefits to which the Executive may be entitled
under and in accordance with the terms of any employee benefit plan,
policy or program maintained by the Company, as well as, in the event
that the Executive shall have timely effected a Good Reason
termination, those benefits authorized under the provisions of
subsection e; and following his receipt of such salary and benefits the
Company shall be under no further obligation hereunder to the Executive
and the Executive no longer shall be entitled to receive any payments
or any other rights or benefits under this Agreement.
<PAGE>
e. TERMINATION BY THE EXECUTIVE FOR GOOD REASON.
Notwithstanding anything herein to the contrary, the Executive shall be
entitled to terminate his employment hereunder for Good Reason without
breach of this Agreement. For purposes of this Agreement, "GOOD REASON"
shall exist upon the occurrence of any of the following events or
matters, in each case without the Company first being in receipt of the
Executive's consent thereto, and the period of time within which the
Executive shall be required to exercise a Good Reason termination of
service shall be 30 days, measured from the date upon which he is
notified by the Company of such occurrence, or, with respect to the
matter identified in subparagraph iii. below, from the date upon which
the Executive notifies the Company of his belief that a material breach
has occurred:
i. A directed change in the Executive's principal
place of employment, other than Brooklyn, New York;
ii. A material adverse change in, or a substantial
elimination of, the duties and responsibilities of the
Executive as described herein;
iii. A material breach by the Company of any of its
obligations hereunder;
iv. A Change in the Control of the Company;
v. Receipt by the Executive of the Company's notice
that it intends to terminate him other than for Cause and
prior to the end of a particular Term of employment, whether
Initial or Successor; or
vi. Mark Mastrini leaves the employment of the
Company or his duties are materially adversely eliminated or
changed.
For purposes of clause iv. above, a "CHANGE IN THE CONTROL OF THE
COMPANY" shall mean (A) the acquisition, directly or indirectly, after
the date hereof, by any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as in effect on
the date hereof), of voting power over voting shares of the Company
that would entitle the holder(s) thereof to cast at least 40% of the
votes that all shareholders would be entitled to cast in the election
of directors of the Company, provided that such term shall not be
deemed to apply to an acquisition by one or more institutional
underwriters directly from the Company in accordance with the
conditions of a registration statement theretofore filed with and
declared effective by the United States Securities and Exchange
Commission; (B) the failure, at any time during any period of two
consecutive years occurring within the Term of this Agreement
(inclusive of both Initial and Successor), of the individuals who at
the beginning of such period shall constitute the Company's Board of
Directors to constitute at least a majority of such membership, unless
the election of each director who is not a director at the beginning of
such period shall have been approved in advance by directors
representing at least 75% of the directors then in office who are
directors at the beginning of the period; (C) approval by the Company's
shareholders of any form of merger or consolidation other than (i) one
in which the voting securities of the Company outstanding immediately
prior thereto continue to represent or are converted into securities of
the surviving entity which represent at least 50% of the combined
voting power of the Company or such entity, or (ii) one effected to
implement a recapitalization of the Company in which no person acquires
more than 50% of the combined voting power of the Company's then
outstanding securities; or (D) approval by the Company's shareholders
of a plan of the Company's complete liquidation or a sale by the
Company of substantially all of its assets.
In the event of a Good Reason termination by the Executive
within the Initial Term, the Executive shall be entitled to receive
from the Company, on the first day of each succeeding month within such
Term, one-twelfth of his then existing Base Compensation, or, if
greater, the same amount for each of the succeeding 12 months, and if
such a termination is effected during a Successor Term he shall be
entitled to receive one-twelfth of his then existing Base Compensation
for each of the succeeding 12 months; or, at the Executive's option,
exercisable at the time he notifies the Company of his intention to
effect a Good Reason Termination, he may elect to receive all amounts
due him in a single lump sum payment, discounted to their then present
value at an annual discount rate of 8%. Under either circumstance, the
Executive shall also be entitled to exercise any outstanding options
within the succeeding one year period as to any Shares which shall have
been available for acquisition pursuant to Section 5 at the time of
such termination. Except for such cash payments or continuing
<PAGE>
entitlement to compensation following any such termination, and except
for any salary and benefits accrued, vested and unpaid as of the date
of any such termination, the Executive no longer shall be entitled to
receive any payments or any other rights or benefits under this
Agreement, and the Company shall have no further obligation hereunder
to the Executive following any such termination. The amounts payable in
this section 8e as a result of a Good Reason termination of Executive
are in the nature of liquidated damages and are not subject to offset
or reduction of any kind, including as a result of Executive's having
or securing other employment and Executive is under no duty to seek to
mitigate damages by having or seeking other employment.
f. TERMINATION BY THE EXECUTIVE FOR OTHER THAN GOOD REASON.
The Executive may terminate his employment hereunder upon the
expiration of the Initial Term or any Successor Term, provided that
notice of termination is provided as set forth in Section 1. In the
event of such termination, the Executive shall be entitled to receive
any salary and benefits accrued, vested and unpaid as of the date of
any such termination and any benefits to which the Executive may be
entitled under and in accordance with the terms of any employee benefit
plan, policy or program maintained by the Company; and following his
receipt of such salary and benefits the Company shall be under no
further obligation hereunder to the Executive and the Executive no
longer shall be entitled to receive any payments or any other rights or
benefits under this Agreement.
g. LIFE AND DISABILITY INSURANCE COVERAGE. If termination of
employment is due to any reason other than death or for Cause, the
Company shall, for the lesser of the (i) two year period measured from
the date of termination, or (ii) the period preceding the date as of
which the Executive obtains comparable coverage from a successor
employer, continue to provide Executive, at Company expense, with the
highest level of health insurance benefits to which he shall have been
entitled during the period of his employment by the Company hereunder,
and he shall have the additional right (but not the obligation) to
purchase any policy of insurance on his life or insuring against his
disability which is then owned by the Company, the exercise of which
right shall be made by notice furnished to the Company within 30 days
subsequent to the date of termination. The purchase price of each
policy of life insurance shall be the sum of its interpolated terminal
reserve value (computed as of the closing date) and the proportional
part of the gross premium last paid before the closing date which
covers any period extending beyond that date; or if the policy to be
purchased shall not have been in force for a period sufficient to
generate an interpolated terminal reserve value, the price shall be an
amount equal to all net premiums paid as of the closing date. The
purchase price of each disability income policy shall be the sum of its
cash value and the proportional part of the gross premium last paid
before the closing date which covers any period extending beyond that
date. The purchase of any insurance policy by the Executive shall be
closed as promptly as may be practicable after the giving of notice, in
no event to exceed 30 days therefrom.
h. EXCISE TAX INDEMNITY. In the event that any payment to
the Executive under Section 8e is subject to any federal or state
excise tax, the Company shall pay the Executive an additional amount
equal to the excise tax imposed, including additional federal and state
income and excise taxes as a result of the payments under this
paragraph, and such payments will be due contemporaneously with the due
date of the identified excise and/or income taxes. Whether an excise
tax is payable, and the amount of the excise tax and additional income
taxes payable, shall be determined by the Company's accountants and the
Company shall hold the Executive harmless from any and all taxes,
penalties and interest that may become due as a result of the failure
to properly determine that an excise tax is payable or the correct
amount of the excise tax and additional income taxes, together with all
legal and accounting fees reasonably incurred by the Executive in
connection with any dispute with any tax authority with respect to such
determinations and/or payments.
i. RETENTION OF COMPANY PROPERTY. Upon the Executive's
termination of service for any reason other than Cause he shall be
entitled to retain possession of any mobile telephone and notebook
computer that shall have been issued to him by the Company in the
course of his employment hereunder, provided that the Executive shall
be responsible for the satisfaction of all license fees and other
payments, and for the performance of any other obligations, owing by
the Company subsequent to the date of such termination under any
service contract applicable to any such property so retained. Executive
shall also make arrangements with the Company for the removal or return
or transfer to the Company of any Company information existing on such
computer.
j. NON-DISPARAGEMENT. Following the termination of this
Agreement for any reason, neither of the Company nor the Executive
shall, except as otherwise required by applicable securities law, stock
exchange listing agreement, or other applicable law or regulation, make
any disparaging or derogatory statements regarding the other in any
communication likely to become public.
<PAGE>
9. MISCELLANEOUS PROVISIONS.
----------------------------
a. NOTICE. All notices, consents, approvals, joinders,
waivers and other communications required or permitted under this
Agreement (each a "COMMUNICATION") shall be in writing and shall be
personally delivered or sent by facsimile machine (with a confirmation
copy sent by one of the other methods authorized in this Section),
commercial courier or United States Postal Service overnight delivery
service, or, deposited with the United States Postal Service and mailed
by first class, registered or certified mail, postage prepaid, if to
the Company to the attention of its chief executive officer, and if to
either party in care of the address set forth in preamble hereto, or to
such other address as either shall have provided notice to the other in
the manner herein permitted. Each such Communication shall be deemed
given upon the earlier to occur of (i) actual receipt by the party to
whom such Communication is directed; (ii) if sent by facsimile machine,
on the day (other than a Saturday, Sunday or legal holiday in the
jurisdiction to which such Communication is directed) such
Communication is sent if sent (as evidenced by the facsimile confirmed
receipt) prior to 5:00 p.m. Eastern Time and, if sent after 5:00 p.m.
Eastern Time, on the day (other than a Saturday, Sunday or legal
holiday in the jurisdiction to which such Communication is directed)
after which such Communication is sent (subject in each case to the
above-referenced confirmation copy being timely furnished); (iii) on
the first business day (other than a Saturday, Sunday or legal holiday
in the jurisdiction to which such Communication is directed) following
the day the same is deposited with the commercial carrier if sent by
commercial overnight delivery service; or (iv) the fifth day (other
than a Saturday, Sunday or legal holiday in the jurisdiction to which
such Communication is directed) following deposit thereof with the
United States Postal Service as aforesaid. Each party, by notice duly
given in accordance therewith may specify a different address for the
giving of any Communication hereunder.
b. NO ASSIGNABILITY. Each of the provisions and agreements
herein contained shall be binding upon and enure to the benefit of the
respective parties hereto, as well as their personal representatives,
devisees, heirs, successors, transferees or Beneficiaries, as
applicable, but no statement contained herein is intended to confer
upon any person or entity, other than the parties hereto and their
successors in interest, Beneficiaries and permitted assignees, any
rights or remedies under or by reason of this Agreement unless so
stated to the contrary. No right under this Agreement shall be
assignable nor any duty delegable by any party, except as expressly
authorized in this Agreement, without the prior consent of the other
party.
c. ENTIRE AGREEMENT. This Agreement, and any other document
referenced herein, constitute the entire understanding of the parties
hereto with respect to the subject matter hereof, and no amendment,
modification or alteration of the terms hereof shall be binding unless
the same be in writing, dated subsequent to the date hereof and duly
approved and executed by each of the parties hereto.
d. SEVERABILITY. If any term or other provision of this
Agreement is held by a court of competent jurisdiction to be invalid,
illegal or incapable of being enforced in any particular respect or
under any particular circumstance, such term or provision shall
nevertheless remain in full force and effect in all other respects and
under all other circumstances, and all other terms, conditions and
provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely
as possible in an acceptable manner, to the end that the transactions
contemplated hereby are fulfilled to the fullest extent possible.
e. APPLICATION OF FLORIDA LAW. This Agreement, and the
application or interpretation thereof, shall be governed exclusively by
its terms and by the laws of the State of Florida. Venue for any legal
action which may be brought hereunder shall be deemed to lie in
Hillsborough County, Florida.
f. HEADINGS, GENDER, NUMBER. The headings of this Agreement
are inserted for convenience and identification only, and are in no way
intended to describe, interpret, define or limit the scope, extent or
intent hereof. Words of gender used herein may be read as masculine,
feminine, or neuter, as required by context, and words of number may be
read as singular or plural, as similarly required.
<PAGE>
g. NO WAIVER OF BREACH. No failure or delay by either party
to exercise any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise of such right, power or
privilege.
h. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, by means of multiple signature pages each
containing less than all required signatures, and by means of facsimile
signatures, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
i. LEGAL FEES AND COSTS. If a legal action is initiated by
any party to this Agreement against another, arising out of or relating
to the alleged performance or non-performance of any right or
obligation established hereunder, or any dispute concerning the same,
any and all fees, costs and expenses reasonably incurred by each
successful party or his or its legal counsel in investigating,
preparing for, prosecuting, defending against, or providing evidence,
producing documents or taking any other action in respect of, such
action shall be the joint and several obligation of and shall be paid
or reimbursed by the unsuccessful party(ies).
j. BENEFICIARY. As used herein, the term "BENEFICIARY" shall
mean the person or persons (who may be designated contingently or
successively and who may be an entity other than an individual,
including an estate or trust) designated on a written form prescribed
by the Board of Directors to receive the expiration of Agreement or
death benefits described in Section 8 above. Each Beneficiary
designation shall be effective only when filed with the Secretary of
the Company during the Executive's lifetime. Each Beneficiary
designation filed with the Secretary will cancel all designations
previously so filed. If the Executive fails to properly designate a
Beneficiary or if the Beneficiary predeceases the Executive or dies
before complete distribution of the benefit has been made, the Company
shall distribute the benefit (or balance thereof) to the Executive's
surviving spouse, if any, or otherwise to his probate estate.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement.
800 TRAVEL SYSTEMS, INC.
By:/S/ Mark Mastrini
--------------------
Mark Mastrini, Chief Executive Officer
EXECUTIVE
/S/ Michael A. Gaggi
--------------------
Michael A. Gaggi
Exhibit 10.19
November 23, 1999
Mark D. Mastrini
c/o 800 Travel Systems, Inc.
4802 Gunn Highway
Tampa, Florida 33624
Re: Employment Agreement dated as of September 1, 1997, by and
between 800 Travel Systems, Inc. and Mark D. Mastrini, as
amended by letter amendment dated September 24, 1998 (as so
amended, the "Employment Agreement")
Dear Mr. Mastrini:
This letter will serve to further amend the Employment Agreement. All
capitalized terms used without definition herein shall have the same meanings
herein as the Employment Agreement.
By executing this letter agreement at the space provided therefor
below, you agree that the Employment Agreement is hereby amended effective as of
November ____, 1999 (the "Effective Date") to provide as follows:
1. Notwithstanding anything to the contrary set forth in Section 1 or
any other section of the Employment Agreement, Employee shall serve as the Chief
Operating Officer and Chief Executive Officer of the Company, and Employee's
duties shall be those customarily associated with such offices. Employee shall
no longer serve as the President of the Company.
2. Section 2 shall be deleted in its entirety, and the following new
Section 2 shall be inserted in lieu thereof:
"2. TERM.
----
(a) The term of Employee's employment (the "Term") shall commence on
the Effective Date and end on December 31, 2003.
(b) In the event that Employee continues in the full-time employ of
Company after the end of the Term, such continued employment shall be on a
year-to-year basis subject to the terms and conditions hereof. As used in this
Agreement, the "First Contract Year" means the period commencing on the June 1,
1999 and ending on May 31, 2000, the "Second Contract Year" means the one-year
period immediately following the First Contract Year," the "Third Contract Year"
means the one-year period immediately following the Second Contract Year; the
"Fourth Contract Year" means the one-year period immediately following the Third
Contract Year; and the "Fifth Contract Period" means the period from June 1,
2003 until December 31, 2003. Each subsequent January 1st occurring during the
period in which Employee is employed by the Company shall be deemed to commence
a new contract year."
3. Section 3(a) shall be deleted in its entirety, and the following new
Section 3(a) shall be inserted in lieu thereof:
"3. COMPENSATION; BENEFITS.
----------------------
(a) In consideration of the services to be rendered by Employee
hereunder, Company shall pay Employee the following Compensation:
(i) in the First Contract Year a base salary at the rate of
$225,000 per annum;
(ii) in the Second Contract Year the Employee shall be paid a
base salary equal to $225,000 plus an amount equal to $225,000 times
(the percentage increase in the Consumer Price Index from June 1,
1999 to May 31, 2000 plus 5%). Thus, if the percentage increase in
the CPI was 5% commencing October 1, 1999, Employee's salary would
be $247,500 ($225,000 + ($225,000 x .10));
(iii) in the Third Contract Year the Employee shall be paid a
base salary equal to his salary rate for the Second Contract Year
plus an amount equal to his salary rate for the Second Contract Year
times the percentage increase in the Consumer Price Index from June
1, 2000 to May 31, 2001 plus 5%;
<PAGE>
(iv) in the Fourth Contract Year the Employee shall be paid a
base salary equal to his salary rate for the Third Contract Year
plus an amount equal to his salary rate for the Third Contract Year
times the percentage increase in the Consumer Price Index from June
1, 2001 to May 31, 2002 plus 5%; and
(v) in the Fifth Contract Period the Employee shall be paid a
base salary equal to his salary rate for the Fourth Contract Year
plus an amount equal to his salary rate for the Fourth Contract Year
times the percentage increase in the Consumer Price Index from June
1, 2002 to May 31, 2003 plus 5%;
Except as specifically amended hereby, all terms, conditions and
provisions of the Employment Agreement shall survive execution and delivery of
this letter agreement and remain in full force and effect.
If the above comports with your understanding, please execute both
copies of this letter agreement at the space provided therefor and return one
fully executed original counterpart to the undersigned at your earliest
convenience.
Very truly yours,
800 Travel Systems, Inc.
By: /S/ Robert B. Morgan
------------------------------------------
Robert B. Morgan, Chief Financial Officer
Agreed to and Accepted:
/S/ Mark D. Mastrini
- --------------------
Mark D. Mastrini
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 28, 2000 accompanying the financial
statements of 800 Travel Systems, Inc. that is included in the Company's Form
10-KSB for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statement of 800
Travel Systems, Inc. on Forms S-8 (File No. 333-68973, effective December 15,
1998 and File No. 333-78745, effective May 19, 1999).
/S/ GRANT THORNTON LLP
Tampa, Florida
February 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,181,020
<SECURITIES> 0
<RECEIVABLES> 1,217,144
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,565,150
<PP&E> 1,799,050
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,712,171
<CURRENT-LIABILITIES> 1,194,478
<BONDS> 273,231
0
0
<COMMON> 76,163
<OTHER-SE> 8,732,457
<TOTAL-LIABILITY-AND-EQUITY> 10,712,171
<SALES> 12,193,633
<TOTAL-REVENUES> 12,193,633
<CGS> 0
<TOTAL-COSTS> 12,238,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (103,990)
<INCOME-PRETAX> 58,955
<INCOME-TAX> 0
<INCOME-CONTINUING> 58,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,955
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
