<PAGE>
As filed with the Securities and Exchange Commission on June 22, 1999
Registration No. 333-77073
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
AMENDMENT NO. 4
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------------
TRAVELSCAPE.COM, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 4724 51-0387511
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
8951 W. Sahara Ave.
Las Vegas, Nevada 89117-5826
(702) 792-3811
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
---------------------------------------------
TIMOTHY N. POSTER
Chief Executive Officer
TRAVELSCAPE.COM, INC.
8951 W. Sahara Ave.
Las Vegas, NV 89117-5826
(702) 792-3811
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------------------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
Francis S. Currie, Esq. Kenneth R. Lamb, Esq.
Martin A. Wellington, Esq. Peter T. Heilmann, Esq.
Kelly S. Boyd, Esq. Brian R. Gin, Esq.
Wilson Sonsini Goodrich & Rosati, P.C. Gibson, Dunn & Crutcher LLP
650 Page Mill Road One Montgomery Street
Palo Alto, CA 94304 Telesis Tower
(650) 493-9300 San Francisco, CA 94104
(415) 393-8200
</TABLE>
------------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
------------------------------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Subject to completion, dated June 22, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES
OUR REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
5,000,000 Shares
TRAVELSCAPE.COM, INC.
Common Stock
[LOGO]
$ per share
- ----------------------------------------------------------------------
- - Travelscape.com, Inc. is offering 5,000,000 shares.
- - We anticipate that the initial public offering price will be between $10.00
and $12.00 per share.
- - This is our initial public offering and no public market currently exists for
our shares.
- - Proposed trading symbol: Nasdaq National Market -- RSVN
------------------------------------
This investment involves risk. You should carefully consider the "Risk Factors"
beginning on page 8.
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<TABLE>
<CAPTION>
Per Share Total
----------- --------------
<S> <C> <C>
Public offering price................................................................. $ $
Underwriting discounts and commissions................................................ $ $
Proceeds to Travelscape.com, Inc...................................................... $ $
</TABLE>
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- --------------------------------------------------------------------------------
THE UNDERWRITERS HAVE A 30-DAY OPTION TO PURCHASE UP TO 750,000 ADDITIONAL
SHARES OF COMMON STOCK FROM US TO COVER OVER-ALLOTMENTS, IF ANY. WE GENERALLY
REFER TO THIS AS AN OVER-ALLOTMENT OPTION IN THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved of anyone's investment in these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
<TABLE>
<S> <C>
JOINT LEAD MANAGER JOINT LEAD MANAGER
U.S. Bancorp Piper Jaffray CIBC World Markets
DLJDIRECT Inc.
</TABLE>
The date of this prospectus is , 1999
<PAGE>
OUTSIDE GATEFOLD:
[On this page, a graphic illustration depicts our home page. The page is headed
by our logo, followed by the caption "the travelscape.com difference."]
[Captions point to various items on the web page and read as follows:]
- ["Travelscape's guaranteed low rates and flexible change/cancel
policies are designed to give customers added confidence."]
- ["Travelscape's specialty! customers have access to below market
prices and room availability with our featured hotels and
negotiated discount rates."]
- ["Advanced low fare search technology and access to all major
airlines provide customers with the tools to find the lowest
published airfares."]
- ["The fast and simple online booking form allows for flexibility
with minimal keystrokes for customer convenience."]
- ["Travelscape offers customized travel packages online. We offer
customers low rates on these proprietary packages."]
INSIDE GATEFOLD:
[The next two pages make a gatefold consisting of six images of our web site. A
list of our "Internet Service Providers," "Major Travel Sites," "Search Engines
and Portals" and "Major Content Sites" run down the right side of the right
page.]
[The captions under each image read as follows:]
- ["Travelscape.com Home Page. Customers find an easy to use booking
form, a destination guide, "hot deals," and consistent
navigation."]
- ["Destination Guide. Travelscape.com provides customers an overview
of the city and a selection of quality hotels."]
- ["Hotel Descriptions. Customers can view detailed hotel information
on one page, and can easily check rates and availability for their
travel preferences."]
- ["Rates and Availability. Shop and Select. Travelscape.com searches
published fares on all major airlines plus our own proprietary air
and hotel rates. Complete travel package options and prices are
displayed."]
- ["Review Itinerary. Customers select their trip and receive an
itinerary summary."]
- ["Confirmation. Customers complete the simple trip and booking
information and receive prompt email confirmation. You're
confirmed. Enjoy your trip!"]
INSIDE BACK COVER:
[This page includes a picture of our logo and a variety of travel-related
images.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary................................................................................ 5
Risk Factors........................................................................... 8
Forward Looking Statements............................................................. 23
Use of Proceeds........................................................................ 24
Dividend Policy........................................................................ 24
Capitalization......................................................................... 25
Dilution............................................................................... 26
Selected Combined and Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 28
Business............................................................................... 39
Management............................................................................. 51
Certain Transactions................................................................... 60
Principal Stockholders................................................................. 61
Description of Capital Stock........................................................... 62
Shares Eligible for Future Sale........................................................ 65
Underwriting........................................................................... 66
Legal Matters.......................................................................... 68
Experts................................................................................ 68
Where You Can Find More Information.................................................... 68
Index to Financial Statements.......................................................... F-1
</TABLE>
------------------------------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date.
3
<PAGE>
(This page has been intentionally left blank.)
4
<PAGE>
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SUMMARY
THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS
PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES
NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO
READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, THE FINANCIAL
STATEMENTS AND THE OTHER INFORMATION INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS.
Travelscape.com is a leading consumer-direct online travel wholesaler serving
popular destination markets across the United States, including Las Vegas,
Orlando, New York, San Francisco and Hawaii. Through our relationships with
selected travel service suppliers, we provide low prices on a wide range of
accommodation and transportation alternatives to meet a variety of consumer
travel preferences and budgets. At March 31, 1999, we had wholesale supply
agreements with over 335 hotels in 35 destination markets and negotiated rate
agreements for discount airfares with major airlines that enable us to offer our
customers hotel or hotel/air packages at significant discounts from published
rates and fares. Visitors to our web sites at WWW.TRAVELSCAPE.COM and
WWW.LVRS.COM have immediate access both to our easy to use proprietary booking
engine to compare travel options, rates and availability, and to detailed hotel
information and destination guides. Customers may book and purchase travel
services, 24 hours a day, 7 days a week, in a few easy steps, either online or
through our toll-free call center at (888) 335-0101. From 1996 to 1998, our
annual revenue grew from $8.3 million to $20.9 million, a compound annual growth
rate of 59%. We launched our Internet operations in March 1998, and Internet
sales have grown from approximately 30% of gross bookings in 1998 to
approximately 65% of gross bookings for the three months ended March 31, 1999,
based on the aggregate retail value of the travel booked.
Online sales of travel services have expanded dramatically in recent years due
to the substantial benefits of e-commerce to both travel service providers and
consumers. According to Forrester Research, online travel bookings are expected
to grow to $29.5 billion in 2003 from $3.1 billion in 1998, representing a
compound annual growth rate of 57%.
Our strong relationships with hotels and airlines enable us to provide consumers
access to a lower rate structure for hotels and hotel/air packages than is
generally available from other online travel service providers. Our hotel
partners include a wide range of independent hotel operators, as well as hotels
associated with national chains, including Doubletree, Hilton, Marriott, Westin,
Loews, Best Western and Hampton Inn. We also have system-wide non-exclusive
negotiated rate agreements for discount airfares with a number of U.S. air
carriers, including American Airlines. We believe that by offering wholesale
pricing of travel services directly to consumers, we are able to maintain better
gross margins than are available either to retail travel agencies or to travel
wholesalers that rely on travel agencies for distribution.
Our objective is to be the premier consumer-direct online travel wholesaler by:
- enhancing the consumer value proposition by offering a complete
travel planning solution at discount prices;
- strengthening and expanding our strategic hotel relationships;
- aggressively developing our brand through high quality service,
active marketing and promotional programs;
- increasing airfare sales and pursuing incremental revenue
opportunities;
- investing in leading technology to enhance our web sites,
transaction-processing systems and call center; and
- pursuing strategic acquisitions.
We have aggressively invested to implement this strategy beginning in 1998, and
as a result we experienced net losses of approximately $4.4 million and $5.4
million in 1998 and the three months ended March 31, 1999, respectively. We
expect to continue to experience net losses for the foreseeable future.
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5
<PAGE>
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Travelscape.com was incorporated in January 1999 under the laws of the State of
Delaware. Our predecessor corporations, Las Vegas Reservation Systems, Inc.,
Professional Travel Services, Inc. and Travelscape.com, Inc., or Old
Travelscape, were incorporated under the laws of the State of Nevada in 1990,
1993 and 1998, respectively. Our offices are located at 8951 West Sahara Avenue,
Las Vegas, Nevada 89117, and our telephone number is (702) 792-3811.
The Offering
<TABLE>
<S> <C>
Common stock offered by Travelscape.com, Inc....... 5,000,000 shares
Common stock outstanding after the offering........ 20,000,000 shares
Assumed offering price............................. $11.00 per share
Use of proceeds.................................... For the repayment of approximately $7.0
million of debt and for advertising and
brand development, working capital,
general corporate purposes and
potential strategic investments or
acquisitions.
</TABLE>
Common stock outstanding after the offering does not include:
- 2,190,750 shares subject to options at March 31, 1999;
- 364,375 shares subject to options granted after March 31, 1999; and
- 527,752 shares subject to warrants at March 31, 1999 (all of which
we expect to issue within 30 days of the completion of this
offering).
Please see, "Description of Capital Stock--Options and Warrants," for further
descriptions of these securities.
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6
<PAGE>
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Summary Combined and Consolidated Financial Data
(in thousands, except per share data)
On January 21, 1999, we were formed for the purpose of completing an
organizational restructuring, in which all of the outstanding common stock of
Las Vegas Reservation Systems, Old Travelscape and Professional Travel Services
was contributed to us in exchange for an aggregate of 15,000,000 shares of our
common stock. As a result, Las Vegas Reservation Systems, Old Travelscape and
Professional Travel Services became our wholly-owned subsidiaries. Statement of
operations and balance sheet data are presented on a combined basis through
January 22, 1999 and on a consolidated basis after that date. The pro forma
statement of operations data below is presented as if the organizational
restructuring had taken place on January 1, 1998. Net loss and the related per
share amounts reflect adjustments for amortization of intangible assets recorded
in the organizational restructuring. No adjustments have been made to reflect
federal income taxes as if the combined company had been taxed as a sub-chapter
C corporation rather than a sub-chapter S corporation under the Internal Revenue
Code because the pro forma income tax provision would be zero.
The "as adjusted" balance sheet data below gives effect to this offering and the
application of the net proceeds we receive in the offering.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Room sales......................................... $ 3,670 $ 4,961 $ 8,078 $ 11,716 $ 18,852 $ 2,901 $ 7,603
Airfare sales...................................... 50 129 178 716 2,027 439 472
--------- --------- --------- --------- ---------- --------- ---------
Total revenue.................................... 3,720 5,090 8,256 12,432 20,879 3,340 8,075
Gross profit....................................... 1,531 2,249 3,343 4,232 6,181 983 2,450
Total operating expenses(1)........................ 1,391 2,047 3,019 4,171 10,427 1,257 7,518
Operating income (loss)............................ 140 202 324 61 (4,246) (274) (5,068)
--------- --------- --------- --------- ---------- --------- ---------
Net income (loss).................................. $ 263 $ 159 $ 336 $ 2 $ (4,427) $ (294) $ (5,427)
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
Pro Forma Statement of Operations Data:
Pro forma net loss................................. $ (4,552) $ (5,437)
Pro forma net loss per share(2):
Basic and Diluted.................................. $ (0.30) $ (0.36)
Weighted average shares outstanding(2):
Basic and Diluted.................................. 15,000 15,000
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
--------------------------
Actual As Adjusted
----------- -------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Net working capital (deficit)..................................................... $ (2,407) $ 40,406
Total assets...................................................................... 13,340 56,153
Long-term debt, including current portion(3)...................................... 4,525 2,357
Net stockholders' equity (deficiency)(3).......................................... (247) 49,603
</TABLE>
- ---------------------------------------------
(1) Total operating expenses in the three months ended March 31, 1999, include
approximately $1.8 million in stock compensation expense.
(2) Please refer to note 9 to our combined and consolidated financial
statements for the calculation of net loss per share, including an
explanation of the number of shares used in computing the amount of basic
and diluted net loss per share.
(3) On February 28, 1999, we issued $7.0 million in senior notes with
detachable warrants to purchase an aggregate of 527,752 shares of our common
stock at $0.01 per share. The issuance of the debt was recorded as $7.0
million in notes payable. The warrants were recorded at their fair value of
approximately $5.1 million as an original issuance discount, reflected as a
reduction in the notes payable and additional paid-in capital.
PLEASE SEE "CAPITALIZATION" FOR A MORE COMPLETE DISCUSSION REGARDING THE
OUTSTANDING SHARES OF TRAVELSCAPE.COM COMMON STOCK, OPTIONS AND WARRANTS TO
PURCHASE TRAVELSCAPE.COM COMMON STOCK AND OTHER RELATED MATTERS.
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7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR COMMON
STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE RISKS
AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. ANY OF THESE PRESENTLY
UNKNOWN OR IMMATERIAL RISKS OR ANY OF THE FOLLOWING RISKS COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND
COULD RESULT IN A PARTIAL OR COMPLETE LOSS OF YOUR INVESTMENT.
Our success depends on growth of our online sales. Because we have a limited
online operating history, we cannot be sure that our online sales will grow.
Our future success is heavily dependent upon growth of our online operations,
which we have only operated since March 1998. We believe the ability to grow our
online operations will depend upon a number of factors, many of which we do not
control. These factors include, among others:
- Increased market acceptance of e-commerce. While e-commerce has
grown rapidly to date, there is no guarantee that this growth will
continue or that our business will benefit from this growth.
- Our success in establishing brand awareness and increasing web site
traffic through online and offline marketing and strategic
relationships.
- Increased customer acceptance of our automated online booking
system. Booking travel has traditionally involved intensive human
contact, and we do not know if customers will accept our system as
a substitute for personal interaction.
- Increased customer acceptance of our pre-selected and, thus,
limited hotel selection.
- Our ability to provide a fast, easy to use, reliable and secure
online shopping experience.
- Our ability to build customer loyalty and increase the percentage
of visitors to our web sites who make travel purchases.
If we are unable to take advantage of growth in e-commerce, or to successfully
meet any of the foregoing challenges, we may be unable to grow our online
business and our operating results and stock price would be adversely affected.
Because we are investing heavily to grow our online sales, we expect to
recognize significant net losses in the second quarter of 1999 and do not know
when, if ever, we will become profitable.
We have invested heavily in growing our online operations, including substantial
increases in operating expenses that resulted in net losses of approximately
$4.4 million in 1998 and approximately $5.4 million in the three months ended
March 31, 1999. We expect to spend an aggregate of approximately $40 million to
expand our online operations during the next 12 months, although our actual
expenses may exceed this amount. In addition, we plan to continue to invest
heavily in growing our online operations for the foreseeable future. We also
expect to recognize significant non-cash expenses in the second quarter of 1999,
including interest expense of approximately $5.3 million as a result of
repayment of our senior notes and stock compensation expense of approximately
$600,000. Further, we expect to recognize stock compensation expense of
approximately $475,000 per quarter beginning in the third quarter of 1999, based
on stock options granted to date. To the extent we grant additional options or
rights to acquire our stock in the future, we may recognize additional stock
compensation expense in future periods. As a result of the foregoing factors, we
expect to experience a record net loss in the second quarter of 1999, and to
continue to experience substantial additional losses in the foreseeable future.
8
<PAGE>
In evaluating the risks involved in investing in a company in the early stages
of development, such as ours, you should consider uncertainties and expenses
such as additional marketing and sales expenses to grow the business, expenses
and uncertainties involved in building new products and services and expenses
and uncertainties in funding opportunities such as strategic acquisitions. We do
not know if we will be successful in addressing these risks or in executing our
business strategy.
Our operating results are subject to quarterly fluctuations and our revenue is
unpredictable. Future fluctuations in operating results or revenue shortfalls
could adversely affect the value of your investment.
Because we have a limited operating history in e-commerce and because of the
emerging nature of the markets in which we compete, our revenue is highly
unpredictable. At the same time, our current and future expense levels are based
on our operating plans and are to a large extent fixed. We are unlikely to be
able to adjust spending quickly to compensate for any revenue shortfall. As a
result, any significant revenue shortfall would have an immediate negative
effect on our results of operations and stock price.
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which we do not control.
Factors that may adversely affect our quarterly operating results include, but
are not limited to:
- our inability to successfully replicate our business model in new
destination markets;
- our inability to develop strong brand recognition, build customer
loyalty and attract new and repeat customers;
- our inability to increase the level of traffic on our web sites;
- our inability to retain or expand our wholesale hotel and airfare
supply arrangements or reductions in discounts we receive on these
wholesale travel services;
- decreases in commission rates paid by travel suppliers on published
rates and fares;
- the announcement or introduction of lower prices or new travel
services and products by our competitors;
- any deterioration in general economic conditions, such as a global
recession, or economic conditions specific to the Internet or
travel industry;
- seasonal fluctuations in consumer travel spending patterns;
- slower growth in the level of use of online services and consumer
acceptance of the Internet for the purchase of consumer products
and services such as those we offer;
- any inability to upgrade and develop our systems and
infrastructure;
- any inability to retain or to attract qualified personnel in a
timely and effective manner;
- technical difficulties, system downtime or slowdowns in Internet
response times;
- increases in operating expenses or capital expenditures relating to
expansion of our business, operations and infrastructure that are
not accompanied by increased revenue;
- difficulties in assimilating the operations and personnel of any
acquired business;
- adverse government regulation; and
- events affecting the travel industry such as natural disasters,
wars or terrorist attacks.
9
<PAGE>
For any of the foregoing reasons, or for other reasons we do not presently
anticipate, in a future quarter it is likely that our operating results will not
meet market expectations, including the expectations of financial analysts. If
this occurs, it would have a material and adverse effect on our stock price.
If we are unable to successfully replicate our business model in new markets,
our future growth and operating results would be adversely affected.
From our inception in 1990 through 1998, we developed our business model serving
the Las Vegas market and derived substantially all of our revenue from
transactions associated with Las Vegas. Our growth strategy depends in part upon
substantially replicating this model in new markets across the United States. We
cannot be sure that this business model will be successful in other markets. For
example, as we have expanded our network of hotels into new markets, we have
generally received smaller room blocks and discounts than we receive in Las
Vegas, where we have longstanding relationships. These less favorable terms are
expected to adversely affect gross margins. We believe that, unless we prove our
ability to successfully distribute hotel rooms in these new markets, hotel
operators will not offer us their most favorable room blocks and discounts. In
addition, our room utilization rates in destinations outside Las Vegas have so
far been lower than in Las Vegas. If we are unable to increase utilization rates
outside Las Vegas, this may hinder our ability to develop strong strategic hotel
relationships in these new markets. We cannot assure you that we can reproduce
relationships with strategic hotel partners in the new markets we are entering
or that such new hotel partners will provide us with room blocks and discounts
comparable to what we receive in Las Vegas. In either case, operating results
would be adversely affected. Please see "Business -- Strategy" for a discussion
of our strategy for replicating our business model in new markets.
If our strategy to increase market awareness of our brand through extensive
online advertising fails, we may be unable to substantially grow our business.
We believe that establishing, maintaining and enhancing the Travelscape.com and
lvrs.com brands is a critical aspect of our efforts to attract and expand our
online traffic. We plan to spend a significant portion of the proceeds of the
offering on establishing brand recognition. However, our expenditures may fail
to increase market awareness of our brand. We have recently entered into a
number of significant online advertising agreements, many of which involve
substantial financial commitments. For example, effective March 1999, we entered
into an agreement with DoubleClick pursuant to which we are required to pay up
to $6.5 million through June 2000 in exchange for online advertising services.
We are also obligated to pay MapQuest an aggregate of approximately $1.9 million
through May 2000, in exchange for advertising rights on the MapQuest web site.
In addition, we have advertising arrangements with a variety of other web sites
that include commitments in the aggregate of over $6.9 million through June
2000. We expect to enter into additional agreements of these types after the
offering. We believe that the success of this aggressive marketing campaign is
critical to our ability to establish brand awareness and increase our revenue.
If this campaign is unsuccessful, we expect that these substantial financial
commitments will cause us to experience increasing operating losses for the
foreseeable future. In addition, if we are unable to maintain and expand our
online marketing relationships, our ability to establish brand awareness and
increase sales in the future will be adversely affected. Please see "Business --
Strategy" and "-- Online Marketing" for a discussion of our branding strategy.
We could lose market share if we do not keep up with the significant competition
in the travel services market.
The online travel services market is new, rapidly evolving, intensely
competitive and has relatively low barriers to entry. We compete primarily with
online travel reservation services such as Preview Travel, Expedia Travel and
Travelocity, as well as online travel wholesalers such as Cheap Tickets, Hotel
Reservation Network, Lowestfare.com and Priceline.com. In addition, and to a
lesser extent, we compete with
10
<PAGE>
traditional travel agencies, such as American Express Travel Service, Carlson
Wagonlit Travel and Uniglobe Travel, individual airlines and hotels selling
directly to consumers, and consolidators and wholesalers of airline tickets and
other travel products such as Global Vacation Group and 800 Travel Systems.
Some of our current and potential competitors have competitive advantages due to
various factors, which include, among others:
- greater brand recognition and web site traffic;
- longer operating histories;
- larger customer bases;
- greater financial, marketing and other resources; and
- ability to secure products and services from travel suppliers with
greater discounts and on more favorable terms than we can.
These and other competitors may be able to replicate the factors that make us
successful. In addition, we may face competitive pressure due to the expansion
of current and the creation of new technologies. Announcements of technological
innovations, new services, business relationships or acquisitions by our
competitors could cause our stock price to decline. Increased competition could
reduce our operating margins and profitability, result in loss of market share
and diminish our brand recognition, which would materially and adversely affect
our business, results of operations and financial condition. Please see
"Business -- Competition" for a discussion of our competition.
If any of our airline partners cease offering their services to us on negotiated
rate terms or at all, or if they reduce commissions on published fares, these
actions could adversely affect our operating results.
Our strategy includes increasing sales of airfares both as a means of promoting
additional hotel room sales and also on a stand-alone basis. If we fail to
increase airfare sales, our growth will be adversely affected. We have recently
entered into a non-exclusive negotiated rate agreement with American Airlines
that provides us with access to non-published airfares throughout American
Airlines' domestic system, provided sales of such fares are in combination with
hotel room sales. While sales of airfares pursuant to the agreement have not
accounted for a material amount of revenue to date, we expect to increasingly
rely on the American Airlines agreement as we implement our growth strategy. The
agreement terminates in March 2000, and is subject to renegotiation at that
time. We do not know whether we will be able to renew this agreement on
acceptable terms, if at all. In addition, we have non-exclusive negotiated rate
agreements with a number of other U.S. airlines. These agreements expire at the
end of each calendar year and are subject to renegotiation upon expiration. If
one or more of these airlines were to cease doing business with us or refuse to
renew their agreements with us on favorable terms or at all, our growth strategy
would be severely impaired, and our future operating results and stock price
would be adversely affected. We also sell published airfares on a commission
basis. Any reduction or limitation on commissions paid by airlines for these
sales could materially and adversely affect future operating results. Please see
"Business -- Strategic Travel Relationships" for a discussion of our
partnerships with airlines.
Changes to or cancellations of our wholesale arrangements with hotel suppliers
could adversely affect our operating results.
We operate almost exclusively on a wholesale basis with our hotel suppliers. We
rely on these suppliers to provide us with hotel room capacity to sell. We do
not have any non-cancelable, long-term contracts
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with any of our hotel suppliers. In addition, our agreements with our hotel
suppliers allow them to enter into wholesale arrangements with any of our
competitors. If we are unable to maintain satisfactory relationships with our
hotel suppliers and establish new wholesale agreements with hotel suppliers in
new markets, or if our hotel suppliers establish similar or more favorable
relationships with our competitors, either development would adversely affect
our operating results and the value of our stock. In 1997 and 1998, sales of
rooms at the Luxor Hotel/Casino in Las Vegas accounted for 18.7% and 14.5%,
respectively, of our gross hotel bookings. Our wholesale contract with Luxor is
a non-exclusive, one-year agreement that gives us the ability to offer rooms at
the Luxor Hotel/Casino in Las Vegas at non-published rates. No other single
supplier accounted for more than 10% of gross hotel bookings in 1997 or 1998. In
addition, our top ten hotel suppliers accounted for approximately 66.6% of gross
hotel bookings in 1998. The loss of one of these top ten supplier relationships,
or any substantial reduction in the room blocks available to us from these
suppliers would have an immediate and adverse affect on our operating results
and stock price. Please see "Business -- Strategic Travel Relationships" for
more detailed information about our strategic relationship with our hotel
suppliers.
We may be unable to protect our intellectual property, including our trademarks,
which could adversely affect our operating results.
We regard our trademarks, domain names, service marks, trade dress, trade
secrets, copyrights and similar intellectual property as important to our
success, and rely on trademark and copyright law, trade secret protection and
confidentiality to protect our proprietary rights. We are pursuing the
registration of our key trademarks in the United States and internationally.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available online. Failure to effectively protect our intellectual property could
adversely affect our business and stock price or result in erosion of our brand
name.
Currently, the only registered trademark we own is "Travelscapes Vacations,"
which we acquired in April 1999. In addition, we have filed an application with
the United States Patent and Trademark Office, or the Trademark Office, for the
trademark "Travelscape.com," and that application is currently pending. We are
aware of two other applications for the trademark "Travelscape" that are under
rejection by the Trademark Office. We have obtained the rights to the first of
these applications from the party who filed it. We believe that our ownership of
the Travelscapes Vacations trademark and the rights to the first application for
Travelscape will be sufficient to allow us to register the trademark
"Travelscape.com" with the Trademark Office. However, we cannot assure you that
we are correct in this regard. Further, we are aware that there are a number of
other businesses using the name Travelscape or variations thereof in commerce.
We do not know when these companies started using the name. One or more of these
companies may have started using the name prior to the time the rights we have
acquired were established, and could have rights in the name that are superior
to ours. As part of our strategy to protect our trademarks, we plan to contact
these companies and take actions to cause them to stop using the name. There is
also the chance that another party could claim that our use of the name
infringes their rights. We have recently received a letter from a party claiming
rights in the Travelscape name and asking us to cease using the name, and we are
seeking further information from this party. As a result of our efforts to
protect our rights in the Travelscape name, we could become involved in
litigation, which would likely be expensive and time consuming, and could
distract management from the operations of the business. Furthermore, we cannot
be sure we would prevail in any such litigation. We also plan to apply for the
trademark "lvrs.com," which is the name of our Las Vegas focused web site. We
cannot be sure we will be successful with this application.
We cannot be sure that the steps we have taken to protect our proprietary rights
will be adequate or that third parties will not infringe or misappropriate our
copyrights, trademarks, trade dress and similar proprietary rights. In the
future, litigation may be necessary to enforce our intellectual property and
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contractual rights, or determine the validity and scope of the proprietary
rights of others. Such litigation, regardless of the outcome, could result in
substantial costs and diversion of management and technical resources, either of
which could materially harm our business. In addition, other parties might
assert infringement claims against us. We may be subject to legal proceedings
and claims from time to time in the ordinary course of our business, including
claims that we or our licensees have infringed the trademarks and other
intellectual property rights of third parties. If we do not prevail, we could be
required to stop using our trademarks or domain names or to pay damages. Such
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
We may not acquire or maintain our domain name in all of the countries in which
we do business, and we may be required to expend significant funds to prevent
infringement of our domain name, which could inhibit our ability to expand our
business internationally.
We currently hold the Internet domain names WWW.TRAVELSCAPE.COM and WWW.LVRS.COM
as well as various other related names. Third parties may acquire domain names
that are similar to, infringe or otherwise decrease the value of our domain
names, trademarks and other proprietary rights, which may hurt our business. We
may be required to expend significant funds in the legal defense of our domain
names. Domain names generally are regulated by Internet regulatory bodies. The
regulation of domain names is subject to change. Regulatory bodies could
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. The relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. As a result, we may not acquire or
maintain the "TRAVELSCAPE" and "LVRS" domain names in all of the countries in
which we conduct business in the future.
Adverse conditions in Las Vegas could have a disproportionately large negative
effect on our operating results.
For 1998 and the three months ended March 31, 1999, we derived approximately 99%
and 85%, respectively, of our gross hotel bookings from transactions in which
Las Vegas was the destination. We expect that Las Vegas travel will continue to
account for a substantial portion of revenue and gross profits for the
foreseeable future. Adverse events or conditions which affect travel to Las
Vegas, such as changes in regional travel patterns, extreme weather conditions,
natural disasters, or a reduction in Las Vegas travel due to the legalization or
expansion of gaming in other states or geographic regions, could have a
disproportionate negative effect on our operations.
Managing potential growth may be difficult, time consuming and expensive. The
failure to properly manage growth may negatively affect the value of your
investment.
Since early 1998, we have grown our business by launching our online operations,
significantly expanding the number of destination markets we serve and largely
transitioning our inbound call center to a web site customer support service.
These changes have rapidly increased the volume of sales through our web sites
and have placed, and are expected to continue to place, a significant strain on
our managerial, operational and financial resources. Our inability to manage our
growth effectively could disrupt operations and have an adverse effect on our
revenue. For example, the increased volume of calls to our call center generated
by our web sites has, at times, resulted in long hold times for customers and,
we believe, lost sales. In addition, being a public company will place new
strains on our senior management, none of whom have experience in operating a
public company. We anticipate that further significant growth and development of
our business will be required to expand our customer base and take advantage of
market opportunities. We expect to hire additional key personnel and support
staff in the future. To manage the expected growth of our operations and
personnel, we will be required to:
- improve existing and implement new transaction-processing,
operational, customer service and financial systems, procedures and
controls;
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- implement a formal disaster recovery program; and
- expand, train and manage our growing employee base.
We also will be required to expand our finance, administrative and operations
staff. Further, we will be required to maintain and expand our relationships
with various travel service suppliers, other web sites and other web service
providers, Internet service providers and other third parties necessary to our
business. We cannot be sure that:
- our current and planned personnel, systems, procedures and controls
will be adequate to support our future operations;
- our management will be able to hire, train, retain, motivate and
manage required personnel; or
- our management will be able to successfully identify, manage and
exploit existing and potential market opportunities.
Our productivity and operating results will be negatively affected if we are
unable to manage growth effectively. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business --
Strategy," "-- Employees" and "Management" for a discussion of factors that may
affect our ability to manage potential growth.
Our gross margins vary depending on the mix of travel services sold, which could
have a detrimental effect on our operating results.
Our operating results will be affected by a number of factors, including the mix
of travel services we sell, the proportion of our sales that are associated with
the Las Vegas market and the mix of sales of non-published versus commission
rates and fares. We typically realize higher gross margins on hotel revenue than
airline revenue, higher gross margins on hotel rooms in Las Vegas than hotel
rooms outside Las Vegas and higher gross profits on wholesale business than on
commission business. Our business strategy includes expanding sales in markets
other than Las Vegas and increasing sales of airfares as a percentage of total
revenue. As a result, if we are successful in executing our strategy, we are
likely to experience lower overall gross margins. Any change in one or more of
the foregoing factors could have a detrimental effect on our gross margins and
operating results in future periods, which could in turn adversely affect the
value of your investment. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" for further
discussion of how our gross margins have varied depending on the mix of travel
services sold.
We expect increased operating expenses in connection with new and expanded
services. If these services are unsuccessful or revenue increases are
significantly below expenses, the value of your investment could be negatively
affected.
We currently intend to:
- develop and offer new and expanded travel services;
- further develop our technology and transaction-processing systems;
and
- begin offering international travel services.
Of the approximately $40 million we expect to invest to grow our online business
during the next 12 months, we expect to invest approximately $8 million to
develop these new and expanded services. We expect that these investments will
contribute to net losses for the foreseeable future. To the extent the expenses
we incur to fund these activities are not followed by increased revenue, we may
be unable to achieve or maintain profitability. In addition, we may incur
expenses when we enter new markets or offer
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new services that significantly exceed the amounts we anticipate. If so, our
management, financial and operational resources may be severely strained. Our
inability to generate revenue from such expanded services or products sufficient
to offset our expenses could be damaging to our business. Please see "Business
- -- Strategy" for details about our planned new and expanded services.
We depend on internally developed technology systems and Internet capacity to
handle all traffic to our web sites, and we could be subject to Internet
capacity constraints. If our systems fail or do not perform optimally, our
operations and revenue may be negatively affected.
Our revenue depends on the number of customers who use our web sites to book
their travel reservations. Accordingly, the satisfactory performance,
reliability and availability of our web sites, transaction-processing systems
and network infrastructure are critical to our operating results, as well as our
ability to attract and retain customers and maintain adequate customer service
levels. Any system interruptions that result in the loss of data, the
unavailability of our web sites or reduced performance of the reservation system
would reduce the volume of reservations and the attractiveness of our service
offerings, which could have a negative effect on our operating results and stock
price.
We use an internally developed system that supports our web sites and
substantially all aspects of transaction processing, including making
reservations and confirmations. We have experienced periodic system
interruptions and delays, which we believe will continue to occur from time to
time. Any substantial increase in the volume of traffic on our web sites or the
number of reservations made by customers will require us to expand and upgrade
our technology, transaction-processing systems and network infrastructure. We
have experienced and expect to continue to experience temporary capacity
constraints due to sharply increased traffic during "fare wars" or other
promotions. Capacity constraints such as these may cause unanticipated system
disruptions, slower response times, degradation in levels of customer service,
impaired quality and speed of reservations and confirmations and delays in
reporting accurate financial information.
We cannot be sure that our transaction-processing systems and network
infrastructure will be able to accommodate increases in web site traffic in the
future, or that we will, in general, be able to accurately project the rate or
timing of such increases or upgrade our systems and infrastructure to
accommodate future traffic levels on our web sites. In addition, e-commerce is
characterized by rapid technological change, changes in user and customer
requirements and preferences and changes in industry standards and practices.
Our existing technology and systems could quickly become obsolete because of the
rapidly changing technologies of e-commerce. We cannot be sure that we will be
able to effectively upgrade and expand our transaction-processing systems in a
timely manner or to successfully integrate any newly developed or purchased
modules with our existing systems. Upgrading or expanding our systems would
likely be expensive and time-consuming, and could have an adverse effect on our
operating results.
Our call center and substantially all of our computer and communications systems
are located at a single facility in Las Vegas. Our systems and operations are
vulnerable to damage or interruption from human error, fire, flood, power loss,
telecommunications failure, break-ins, sabotage, intentional acts of vandalism,
natural disasters and similar events. We currently do not have redundant systems
or a disaster recovery plan and do not carry sufficient business interruption
insurance to compensate us for losses that may occur. Despite our implementation
of network security measures, our servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and confirm
customer reservations. Please see "Business -- Technology" for a discussion of
our technology.
If providers of the third-party systems on which we rely decide to no longer
offer or maintain our services, the value of your investment might decrease.
We depend on third-party service providers for a substantial portion of our
communications, technology and operating infrastructure, including UUNet and
Epoch Networks, our Internet service providers; the
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SABRE Group, our airline booking system; and Thoughtmail, our web site
development consultant. Any discontinuation of third-party provider services, or
any reduction in performance that requires us to replace these services, would
be disruptive to our business. In the past, these third-party providers have
experienced interruptions or failures in their systems or services that have
temporarily prevented our customers from accessing or purchasing certain travel
services through our web sites. Any reduction in performance, disruption in
Internet or web site access or discontinuation of services provided by UUNet,
Epoch or any other Internet service provider, or any disruption in our ability
to access the SABRE system or any other travel reservation systems, could have a
negative effect on our business, operating results and financial condition.
Please see "Business -- Strategic Travel Relationships" and "-- Technology" for
a discussion of our third-party system providers.
Our operations and customer databases are susceptible to security risks, which
might adversely affect our operating results.
A fundamental requirement for e-commerce is the secure transmission of
confidential information over public networks. Our security measures may not
prevent security breaches. If our security were ever compromised, it could have
a detrimental effect on our reputation, operating results and stock price. We
rely on encryption and authentication technology licensed from third parties to
ensure secure transmission of confidential information, such as customer credit
card numbers. In addition, we maintain an extensive confidential database of
customer profiles and transaction information. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the algorithms we use to
protect customer transaction data and personal information contained in our
customer database. A person who circumvents our security measures could steal or
misuse proprietary information or cause interruptions in our operations. We may
be required to expend significant financial and other resources to protect
against security breaches or to alleviate problems caused by such breaches.
Publicized security problems could increase concerns over the security of online
transactions and the privacy of users, which may also inhibit the Internet's
growth, especially as a means of conducting commercial transactions. To the
extent that our or our third-party contractors' activities involve the storage
and transmission of proprietary information, such as credit card numbers or
other personal information, security breaches could expose us to a risk of loss
or litigation and possible liability. Failure to prevent security breaches will
have a negative effect on our reputation, business and operating results. Please
see "Business -- Technology" for a more detailed discussion of our technology.
The loss of our senior management or other key personnel or our failure to
attract additional personnel could negatively affect our business and decrease
the value of your investment.
Our performance is substantially dependent on the continued services and
performance of our senior management and other key personnel. The loss of the
services of any of our executive officers or other key employees would adversely
affect our ability to manage our business and would likely have a detrimental
effect on our operating results. In particular, we are dependent upon the
services of Timothy Poster, our Chairman and Chief Executive Officer, and Thomas
Breitling, our Chief Operating Officer. Both Messrs. Poster and Breitling own
substantial amounts of our stock, none of which is subject to vesting. We do not
intend to maintain "key person" life insurance policies on any of our key
personnel. In April 1999, we hired a new Chief Technology Officer, who will play
a critical role in managing and developing our online services. Failure of our
new Chief Technology Officer to work well with our existing management team
could adversely affect our operating results and the value of your investment.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate other highly skilled technical, managerial, marketing
and customer service personnel. Competition for such personnel is intense, and
we are not sure that we will be able to successfully attract, assimilate or
retain sufficiently qualified personnel. In particular, we may encounter
difficulties in attracting and retaining a sufficient number of qualified
software developers for our online services and transaction-processing
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systems. Failure to retain and attract necessary technical, managerial,
marketing and customer service personnel would have a negative effect on our
operating results and stock price. Please see "Business -- Employees" and
"Management" for more detailed information about our management team.
Declines in consumer travel spending could harm our operating results.
The majority of our revenue is derived from consumer spending in the travel
industry. The travel industry, especially leisure travel, depends on personal
discretionary spending levels and suffers during economic downturns and
recessions. The travel industry is also highly susceptible to unforeseen events,
such as political instability, regional hostilities, terrorism, fuel price
escalation, travel-related accidents, natural disasters, unusual weather
patterns or travel industry related labor strikes. Any event that results in
decreased consumer travel spending would likely have a negative effect on our
operating results.
We experience seasonality in customer travel that could cause quarterly
fluctuations and adversely affect our business and stock price.
Seasonality in the travel industry is likely to cause quarterly fluctuations in
our operating results which may adversely affect our stock price. Our sales do
not currently reflect typical seasonal fluctuations in the travel industry
because of the magnitude of our sales associated with Las Vegas. For the
business we do with the destination of Las Vegas, our revenue typically
increases during late winter/early spring and fall and are slightly lower during
the middle of the summer and at year end. As our business expands beyond Las
Vegas, seasonal fluctuations will affect us in different ways. For the business
we do with destinations other than Las Vegas, we anticipate that our revenue
will increase during the summer as a result of vacation travel and will decline
during the winter as spending on travel declines, as is typical in the travel
industry. Because of our limited operating history, we do not know which
seasonal patterns, if any, will predominate. If seasonality in the travel
industry causes quarterly fluctuations, there could be a material adverse effect
on our business and stock price.
We may need more money, which may not be available to us on favorable terms or
at all.
We require substantial working capital to fund our business. We currently
anticipate that the net proceeds of this offering, together with our existing
funds and ability to borrow, will be sufficient to meet our capital requirements
for the foreseeable future. We may, however, be required to raise additional
funds if our needs or circumstances change. Additional financing may not be
available in sufficient amounts or on favorable terms. If we raise additional
funds by issuing equity or convertible debt securities, the percentage ownership
of our stockholders will be diluted. In addition, any new securities could have
rights, preferences and privileges senior to those of our common stock. If we
are unable to raise additional financing when necessary, our operations and
financial condition will be materially adversely affected. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for more detailed information
regarding our possible future capital requirements.
We could face litigation because of our web page content, which might require
considerable effort and expense to defend and result in significant liability.
As a publisher and distributor of online content, we face potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials that we publish or
distribute. Such claims have been brought, and sometimes successfully pressed,
against other online services. In addition, we do not and cannot practically
screen all of the content generated by other web sites that are linked to our
web sites, and we could be exposed to liability with respect to such content.
Although we carry general liability insurance, our insurance may not cover
claims of these types or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability, particularly liability that is
not covered by insurance or is in excess
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of insurance coverage, could have a damaging effect on our reputation, operating
results, financial condition and stock price. Please see "Business --
Travelscape.com Services" for more detailed information concerning our web page
content.
Our business could be hurt if we make acquisitions that are unsuccessful.
We believe that there are opportunities for consolidation in the online travel
services market and in travel-related web sites. One element of our growth
strategy is to pursue strategic acquisitions to broaden the scope and content of
our business through the acquisition of existing complementary businesses. Our
management team does not have experience in completing or integrating
acquisitions, and we may not be successful in overcoming problems encountered in
connection with such acquisitions. Even if we are successful, such acquisitions
may be time consuming and costly, which may affect our operating results.
Acquisitions would also expose us to various other risks such as those
associated with:
- the assimilation of new operations, sites and personnel;
- the diversion of resources from our existing operations, sites and
technologies;
- the inability to generate revenue from acquisitions sufficient to
offset associated acquisition costs;
- the inability to maintain uniform standards, controls, procedures
and policies; and
- the impairment of relationships with employees, suppliers and
customers as a result of integration of new businesses.
Acquisitions may also result in additional expenses associated with one-time
charges or amortization of acquired intangible assets. Furthermore, although we
will conduct due diligence and generally require representations, warranties and
indemnifications from the former owners of acquired companies, we cannot be sure
that such owners will accurately represent the results of operations, financial
condition and business of their companies or will have the means to satisfy
their indemnification obligations. If misrepresentations are made, the
acquisition could have a material adverse effect on our business, financial
condition and results of operations. We do not have current commitments with
respect to any particular acquisition, but management regularly evaluates
acquisition opportunities. Please see "Business -- Strategy" for more
information about our acquisition strategy.
Our business could be adversely affected by evolving government regulations, and
we could be subject to fines or other penalties for failure to comply with such
regulations.
Certain segments of the travel industry are heavily regulated by the United
States and foreign governments, and accordingly, certain services we offer are
affected by such regulations. For example, we are subject to United States
Department of Transportation regulations prohibiting unfair and deceptive
practices. In addition, Transportation Department regulations concerning the
display and presentation of information that are currently applicable to the
SABRE Group's services we access could be extended to us in the future, as well
as other laws and regulations aimed at protecting consumers. We are subject to
regulation by a number of states that have "seller of travel" acts. These acts
require us to register as a seller of travel, comply with certain disclosure
requirements, post a bond or escrow funds and/or participate in state
restitution funds. We are in the process of obtaining bonds in and making
applications, as appropriate, in California, Florida, Hawaii, Iowa, Ohio,
Washington and Illinois. There is a possibility that we may be subject to fines
for any past failure to comply with these requirements, although we do not
expect the total amount of any such fines to exceed $150,000, in the aggregate.
All of our services are subject to federal and state consumer protection laws
and regulations prohibiting unfair and deceptive trade practices. These consumer
protection laws could result in substantial compliance costs and interfere with
the conduct of our business.
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We are also subject to regulations applicable to businesses generally and laws
or regulations directly applicable to e-commerce. Although there are currently
few laws and regulations directly applicable to e-commerce, it is possible that
a number of laws and regulations may be adopted with respect to e-commerce
covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust and characteristics and quality of products and
services. For example, California requires that sellers of goods and services
online make certain disclosures to California residents. In addition, California
also imposes certain requirements on such sellers relating to refunds, returns
and exchanges. Furthermore, the growth and development of the market for
e-commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may impose additional burdens on
us or decrease the growth of the Internet, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business, or
otherwise have a negative effect on our business, operating results and
financial condition.
Moreover, the applicability to e-commerce of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
For example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in e-commerce, and new state tax
regulations may subject us to additional state sales and income taxes. Any such
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to e-commerce could negatively
affect our operating results.
There are uncertainties regarding taxes that could have a negative effect on us
if unfavorable changes or determinations are made.
Changes in tax laws, determinations, or interpretations that result in
significant additional taxes on our business could have an adverse effect on our
cash flows and results of operations.
POTENTIAL FEDERAL AIR TRANSPORTATION TAX LIABILITY. Currently, a federal air
transportation tax is imposed upon the amount paid for airline transportation
and generally is collected by the airlines selling the tickets. The tax is based
upon a percent of the cost of transportation, which is 8% until October 1, 1999
and 7.5% after October 1, 1999. In our arrangements with certain airlines, we
purchase airline tickets and then resell them to customers at a higher price. It
is not clear how this federal tax should be calculated when these ticket sales
are made by us, and we have not obtained any opinion of counsel as to how this
tax should be calculated. We pay this tax based on the price charged to us by
the airline for a ticket, rather than the price paid to us by the customer.
There is a significant risk that current law requires computation of the tax
based on the price paid by the customer to us. While our potential exposure for
incorrectly paying this tax has historically not been material, if our airfares
sales grow in the future and it is ultimately determined that our method of
calculating the tax is incorrect, we could be required significant additional
taxes as well as any penalties and interest on back taxes we are required to
pay.
STATE TAXES. We file tax returns in certain states based on applicable
statutory requirements. In addition, we do not collect sales or other similar
taxes with respect to transactions conducted through our web sites. However, one
or more states could seek to impose additional income tax obligations or sales
tax collection obligations on out-of-state companies, such as ours, which engage
in or facilitate online commerce. A number of proposals have been made at state
and local levels that could impose these taxes on the sale of products and
services online or the income derived from such sales. These proposals, if
adopted, could substantially impair the growth of online commerce.
Federal legislation imposing limitations on the ability of states to impose
taxes on online sales was enacted in 1998. The Internet Tax Freedom Act, as this
legislation is known, imposes on electronic
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commerce a three-year moratorium on state and local taxes imposed after October
1, 1998 but only where such taxes are discriminatory on Internet access. It is
possible that the legislation could not be renewed when it terminates in October
2001. Failure to renew the legislation could allow state and local governments
to impose taxes on online sales, and such taxes could have an adverse effect on
our operating results.
Management will have broad discretion over the use of the proceeds of this
offering, and may use these proceeds in ways you might not believe are
desirable.
The net proceeds of this offering are estimated to be approximately $49.9
million (approximately $57.5 million if the underwriters' over-allotment option
is exercised in full) at an assumed initial public offering price of $11.00 per
share and after deducting the estimated underwriting discount and estimated
offering expenses. Approximately $7.0 million will be used to repay debt. We
currently plan to use the remaining net proceeds for advertising and brand
development, additional working capital, future development of our web sites and
technology or possible acquisitions of businesses, products or technologies. Our
management will retain broad discretion as to the allocation of the remaining
approximately $42.9 million of the net proceeds of this offering. The broad
discretion we have in the use of proceeds of this offering involves risks that
we will not use such proceeds effectively or that we will use them in ways with
which you may not agree. Please see "Use of Proceeds," for a more detailed
discussion of how we will allocate proceeds.
Because our directors and officers will own approximately 75% of our outstanding
stock after this offering, you and other investors will have minimal influence
on stockholder decisions.
Upon consummation of this offering, our executive officers and directors,
together with their respective affiliates, will beneficially own approximately
75% (72% if the underwriters' over-allotment option is exercised in full), of
our outstanding common stock. As a result, if they act together, they will have
the ability to control the outcome on all matters requiring stockholder
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets, and to control
our management and affairs. Such control could discourage others from initiating
potential merger, takeover or other change of control transactions. As a result,
the market price of our common stock could be adversely affected. Please see
"Principal Stockholders" for a more detailed discussion of the influence our
principal stockholders have over us.
Some of the products we work with may not be year 2000 compliant, which could
result in customer dissatisfaction or claims against us.
We believe that our internal computer systems are Year 2000 compliant and do not
anticipate that we will incur significant expenditures to ensure that our
systems will function properly with respect to dates in the Year 2000 and
beyond. However, the Internet could face serious disruptions arising from the
Year 2000 computer problem. If there are serious Internet failures, consumers
may not be able to visit our web site. Given the pervasive nature of the Year
2000 problem, these issues may impact other entities with which we do business,
including, for example, those responsible for maintaining telephone and online
communications. Accordingly, we cannot predict the effect of the Year 2000
problem on those entities or us. We cannot be sure that a failure of third party
systems on which our systems and operations rely to be Year 2000 compliant will
not have a damaging affect on our business, financial condition or operating
results. The foregoing constitutes Year 2000 readiness disclosure within the
meaning of the Year 2000 Information and Readiness Disclosure Act. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure" for a more detailed discussion of
year 2000 issues.
20
<PAGE>
Our charter and bylaw provisions could limit another party's ability to acquire
us.
A number of provisions in our certificate of incorporation and bylaws, as well
as provisions of Delaware law, may make it more difficult for another company to
acquire us, which could adversely affect the value of our stock. For example,
our certificate of incorporation allows our board of directors to issue up to
5,000,000 shares of preferred stock without a stockholder vote, divides our
board into three classes of directors, each with a three year term, and
eliminates the ability of stockholders to take action without a meeting. In
addition, our bylaws do not allow stockholders to call special stockholder
meetings or to take any action without a stockholder meeting. Finally, Delaware
law will prohibit an acquisition of Travelscape.com in some situations. Any or
all of these provisions could have the effect of delaying or prohibiting a
change of control, and as such, may preclude stockholders from receiving any
premium that might be offered in such a transaction. See "Description of Capital
Stock" for more details about these provisions.
We expect that the market price for our common stock may be volatile, which
could cause the value of your investment in our company to decline.
The value of your investment could decline due to the impact of any of following
factors, among others, upon the market price of our common stock:
- changes in our earnings estimates by financial analysts;
- our failure to meet financial analysts' performance expectations;
- changes in market valuations of other online service companies; and
- lack of liquidity.
In addition, many of the risks described elsewhere in this section could
materially and adversely affect our stock price, as discussed in those risk
factors. The stock markets have recently experienced price and volume volatility
that has affected companies' stock prices. Stock prices for many companies in
the Internet and emerging growth sectors have experienced wide fluctuations that
have often been unrelated to the operating performance of these companies.
Fluctuations such as these are likely to affect the market price of our common
stock.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of such
companies' securities. If instituted against us, regardless of the outcome, such
litigation could result in substantial costs and diversion of our management's
attention and resources and have a material adverse effect on our business,
financial condition and results of operations. We could be required to pay
substantial damages, including punitive damages, if we were to lose such a
lawsuit.
Some of our shares will be eligible for future sale which could adversely affect
our stock price.
Sales of substantial amounts of our common stock in the public market after this
offering could adversely affect the prevailing market price of our common stock.
Upon completion of the offering, we will have 20,000,000 shares of common stock
outstanding, assuming no exercise of outstanding warrants or options after March
31, 1999. In addition, within 30 days after the closing of this offering, we
expect to issue up to 527,752 shares of common stock pursuant to the exercise of
outstanding warrants. Please see "Description of Capital Stock--Options and
Warrants" for a more detailed discussion of our outstanding shares.
Of the shares expected to be outstanding after the offering, all of the shares
sold in the offering will be freely tradable without restriction or further
registration under the Securities Act unless purchased by
21
<PAGE>
"affiliates" of Travelscape.com as that term is defined in Rule 144 under the
Securities Act. The remaining 15,527,752 shares expected to be outstanding after
the offering (including shares issuable upon exercise of warrants) will be
"restricted securities" as that term is defined under Rule 144 and may not be
sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. These restricted
securities will be be eligible for resale pursuant to Rule 144, subject to
compliance with the volume limitations and other restrictions under Rule 144 as
follows:
Eligibility of Restricted Securities For Sale in Public Market
<TABLE>
<S> <C>
At Effective Date............................................... 0
At January 22, 2000............................................. 15,000,000
At February 16, 2000............................................ 164,250
At February 28, 2000............................................ 363,502
</TABLE>
Within 180 days after the offering, we intend to file a registration statement
on Form S-8 under the Securities Act to register 2,555,125 shares of common
stock issuable under our 1998 Stock Plan, 2,000,000 shares of common stock
issuable under our 1999 Stock Plan and 500,000 shares of common stock issuable
under our 1999 Stock Purchase Plan. Please see "Description of Capital Stock"
and "Shares Eligible for Future Sale" for a more detailed discussion of our
outstanding stock.
22
<PAGE>
Forward Looking Statements
Certain statements under the captions "Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including the
factors discussed under "Risk Factors."
23
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,000,000 shares of common stock
offered by us at an assumed initial public offering price of $11.00 per share
are estimated to be approximately $49.9 million, after deducting the
underwriting discount and estimated offering expenses (approximately $57.5
million if the over-allotment option is exercised in full).
We intend to use approximately $7.0 million of the net proceeds to repay debt
that was incurred in February 1999 to meet working capital requirements. This
debt is subject to senior notes due February 2001 bearing interest at 10%
through February 2000 and 12% after February 2000. The maturity of these notes
will be accelerated by the completion of this offering. In addition, we
currently have advertising commitments through June 2000 totalling over $15.0
million, which we expect to fund in part with the net proceeds of this offering.
We currently have no specific plans or commitments for the use of the balance of
the net proceeds of this offering. We currently expect to use a portion of these
net proceeds for substantial investments in additional advertising and brand
development, the development of new and expanded services for our web sites and
improvements to our information technology, and to use the balance of the net
proceeds for working capital, general corporate purposes and potential strategic
investments or acquisitions that complement our products, services, technologies
or distribution channels. We currently have no commitments or agreements and are
not involved in any negotiations with respect to any acquisition or investment.
We cannot specify with certainty the particular uses for the net proceeds to be
received upon the completion of this offering. Accordingly, our management team
will have broad discretion in using the net proceeds of this offering. Pending
such uses, we intend to invest the net proceeds of the initial public offering
in investment grade interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common stock.
We intend to retain any future earnings for future growth and do not anticipate
paying any cash dividends in the foreseeable future.
24
<PAGE>
CAPITALIZATION
All information in this prospectus relating to outstanding shares of
Travelscape.com common stock or options or warrants to purchase Travelscape.com
common stock is based upon information as of March 31, 1999 on a pro forma basis
to give effect to a 3-for-2 split of our common stock completed on June 18,
1999. Unless otherwise indicated, the information throughout this prospectus
does not take into account the possible issuance of additional shares of common
stock to the underwriters pursuant to their over-allotment option.
The following table sets forth the capitalization of Travelscape.com at March
31, 1999:
- on an actual basis; and
- as adjusted to give effect to Travelscape.com's receipt of the
estimated net proceeds from the sale of 5,000,000 shares of common
stock offered by Travelscape.com at an assumed initial public
offering price of $11.00 per share and the application of these net
proceeds.
The outstanding share information excludes 527,752 shares of common stock
subject to outstanding warrants exercisable at $0.01 per share, all of which we
expect to issue within 30 days after the completion of this offering. Please see
"Description of Capital Stock--Options and Warrants" for a discussion of the
terms of these securities.
The outstanding share information also excludes 2,555,125 shares of common stock
subject to options outstanding under the 1998 Plan as of the date of this
prospectus at a weighted average exercise price of $3.23 per share. In addition,
in connection with this offering, our board of directors has approved:
- a reserve of 2,000,000 shares for issuance under the 1999 Stock
Plan; and
- a reserve of 500,000 shares for issuance under the 1999 Employee
Stock Purchase Plan.
In this prospectus, we refer to these equity incentive plans as the 1998 Plan,
the 1999 Plan and the 1999 Stock Purchase Plan as appropriate. Please see
"Management--Incentive Stock Plans" for a discussion of the terms of these
plans.
The capitalization information set forth in the table below is qualified by, and
should be read in conjunction with, our more detailed combined and consolidated
financial statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------
Actual As Adjusted
---------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................................................... $ 6,335 $ 49,148
---------- -----------
---------- -----------
Long-term debt, including current portion(1)............................................ $ 4,525 $ 2,357
Stockholders' equity (deficiency):
Preferred stock: $0.01 par value, 5,000,000 shares authorized; no shares issued and
outstanding, actual and as adjusted................................................. -- --
Common stock: $0.01 par value, 50,000,000 shares authorized; 15,000,000 shares issued
and outstanding, actual; 20,000,000 shares issued and outstanding, pro forma as
adjusted............................................................................ 150 200
Additional paid-in capital.............................................................. 16,112 65,912
Deferred stock compensation............................................................. (4,810) (4,810)
Stockholder loans....................................................................... (83) (83)
Accumulated deficit..................................................................... (11,616) (11,616)
---------- -----------
Net stockholders' equity (deficiency)............................................... (247) 49,603
---------- -----------
Total capitalization................................................................ $ 4,278 $ 51,960
---------- -----------
---------- -----------
</TABLE>
- ------------------------------------
(1) The long-term debt is recorded net of original issuance discount of $4.9
million. Please see note 6 to the unaudited combined and consolidated
financial statements for further details.
25
<PAGE>
DILUTION
Our net tangible book value as of March 31, 1999 was ($2.1) million, or
approximately ($0.14) per share. Net tangible book value per share represents
the amount of Travelscape.com's total assets less total liabilities and
intangible assets, divided by the number of shares of common stock outstanding.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of common stock in the
offering made hereby and the net tangible book value per share of common stock
immediately after the completion of this offering. After giving effect to the
sale of the 5,000,000 shares of common stock offered by Travelscape.com hereby
at an assumed initial public offering price of $11.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by Travelscape.com, the net tangible book value of
Travelscape.com at March 31, 1999 would have been $47.7 million, or
approximately $2.39 per share. The following table illustrates this dilution on
a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 11.00
Net tangible book value per share as of March 31, 1999.................... ($ 0.14)
Increase per share attributable to new investors.......................... 2.53
---------
Net tangible book value per share after this offering....................... 2.39
---------
Dilution per share to new investors......................................... $ 8.61
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1999, the
differences between the number of shares of common stock purchased from
Travelscape.com, the total effective cash consideration paid and the average
price per share paid by existing holders of common stock and by the new
investors, before deducting underwriting discounts and commissions and estimated
offering expenses payable by Travelscape.com, at an assumed initial public
offering price of $11.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ ------------------------- Average Price
Number Percent Amount Percent Per Share
------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 15,000,000 75% $ 2,668,305 5% $ 0.18
New investors................................ 5,000,000 25 55,000,000 95 11.00
------------ ---------- ------------- ---------- ------
Total.................................... 20,000,000 100% $ 57,668,305 100% $ 2.88
------------ ---------- ------------- ---------- ------
------------ ---------- ------------- ---------- ------
</TABLE>
The foregoing excludes 527,752 shares of common stock subject to warrants
exercisable for $0.01 per share outstanding as of March 31, 1999, all of which
we expect to issue within 30 days after the completion of this offering.
Assuming the issuance of these shares, dilution per share to new investors would
equal $8.67, and the average price per share for all outstanding shares would
equal $2.33.
To the extent that any shares are issued upon exercise of options that were
outstanding at March 31, 1999 or granted after that date, or reserved for future
issuance under our stock plans, there will be further dilution to new investors.
Please see "Management--Incentive Stock Plans," "Description of Capital
Stock--Options and Warrants" and note 8 to our combined and consolidated
financial statements for further details.
26
<PAGE>
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table sets forth for the periods indicated selected combined and
consolidated financial data for Travelscape.com, and is qualified by our more
detailed combined and consolidated financial statements and notes thereto
included elsewhere in this prospectus. The following table should be read in
conjunction with such financial statements and notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
combined statement of operations data for the years ended December 31, 1996,
1997 and 1998 and the combined balance sheet data at December 31, 1997 and 1998
have been derived from our combined financial statements included elsewhere in
this prospectus. The combined statement of operations data and balance sheet
data for and as of the years ended December 31, 1994 and 1995 and the combined
balance sheet data as of December 31, 1996 have been derived from unaudited
(1994 and 1995) and audited (1996) financial statements not included in the
prospectus. The combined and consolidated statement of operations data and
balance sheet data for and as of the three months ended March 31, 1998 and 1999
are derived from unaudited combined and consolidated financial statements
included elsewhere in this prospectus which, in the opinion of management, have
been prepared on the same basis as the audited combined financial statements and
contain all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the financial position and results of operations for
such periods. On January 21, 1999, we completed an organizational restructuring
in which all of the outstanding common stock of Las Vegas Reservation Systems,
Old Travelscape and Professional Travel Services was contributed to us in
exchange for an aggregate of 15,000,000 shares of our common stock. As a result,
Las Vegas Reservation Systems, Old Travelscape and Professional Travel Services
became our wholly-owned subsidiaries. Statement of operations and balance sheet
data are presented on a combined basis through January 22, 1999 and on a
consolidated basis thereafter. The pro forma statement of operations data below
is presented as if the organizational restructuring had taken place on January
1, 1998. Net loss and the related per share amounts reflect adjustments for
amortization of intangible assets recorded in the organizational restructuring.
No adjustments have been made for federal income taxes as if the combined
company had been taxed as a sub-chapter C corporation rather than a sub-chapter
S corporation under the Internal Revenue Code, as the pro forma income tax
provision would be zero.
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended December 31, March 31,
----------------------------------------------------- ---------
1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- 1998
---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Room sales.................................................. $ 3,670 $ 4,961 $ 8,078 $ 11,716 $ 18,852 $ 2,901
Airfare sales............................................... 50 129 178 716 2,027 439
--------- --------- --------- --------- --------- ---------
Total revenues............................................ 3,720 5,090 8,256 12,432 20,879 3,340
Cost of sales................................................. 2,189 2,841 4,913 8,200 14,698 2,357
--------- --------- --------- --------- --------- ---------
Gross profit.................................................. 1,531 2,249 3,343 4,232 6,181 983
--------- --------- --------- --------- --------- ---------
Operating expenses:
General and administrative.................................. 1,187 1,575 2,087 3,066 5,421 853
Sales and marketing......................................... 204 472 797 990 4,109 383
Systems development......................................... -- -- 135 115 897 21
Stock compensation.......................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total operating expenses.................................. 1,391 2,047 3,019 4,171 10,427 1,257
--------- --------- --------- --------- --------- ---------
Operating income (loss)....................................... 140 202 324 61 (4,246) (274)
--------- --------- --------- --------- --------- ---------
Other income (expense):
Interest expense, net....................................... 1 (43) (4) (77) (184) (28)
Other income................................................ 122 -- 16 18 3 8
--------- --------- --------- --------- --------- ---------
Total other income (expense).............................. 123 (43) 12 (59) (181) (20)
--------- --------- --------- --------- --------- ---------
Net income (loss)............................................. $ 263 $ 159 $ 336 $ 2 $ (4,427) $ (294)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro Forma Statement of Operations Data:
Pro forma net loss............................................ $ (4,552)
Pro forma net loss per share:(1)
Basic and Diluted........................................... $ (0.30)
Weighted average shares outstanding:(1)
Basic and Diluted........................................... 15,000
Balance Sheet Data:
Net working capital deficit................................... $ (362) $ (511) $ (1,241) $ (2,580) $ (5,032) $ (2,922)
Total assets.................................................. 542 577 718 2,507 3,844 2,970
Long-term debt, including current portion..................... 173 142 78 1,568 2,235 1,577
Net stockholders' deficiency.................................. (59) (503) (926) (1,716) (3,606) (2,131)
<CAPTION>
1999
---------
<S> <C>
Statement of Operations Data:
Revenues:
Room sales.................................................. $ 7,603
Airfare sales............................................... 472
---------
Total revenues............................................ 8,075
Cost of sales................................................. 5,625
---------
Gross profit.................................................. 2,450
---------
Operating expenses:
General and administrative.................................. 2,209
Sales and marketing......................................... 3,194
Systems development......................................... 288
Stock compensation.......................................... 1,827
---------
Total operating expenses.................................. 7,518
---------
Operating income (loss)....................................... (5,068)
---------
Other income (expense):
Interest expense, net....................................... (360)
Other income................................................ 1
---------
Total other income (expense).............................. (359)
---------
Net income (loss)............................................. $ (5,427)
---------
---------
Pro Forma Statement of Operations Data:
Pro forma net loss............................................ $ (5,437)
Pro forma net loss per share:(1)
Basic and Diluted........................................... $ (0.36)
Weighted average shares outstanding:(1)
Basic and Diluted........................................... 15,000
Balance Sheet Data:
Net working capital deficit................................... $ (2,407)
Total assets.................................................. 13,340
Long-term debt, including current portion..................... 4,525
Net stockholders' deficiency.................................. (247)
</TABLE>
- ------------------------------------
(1) Please refer to note 9 to our combined and consolidated financial
statements for the calculation of net loss per share, including an
explanation of the number of shares used in computing the amount of basic
and diluted net loss per share.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR COMBINED AND
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. TRAVELSCAPE.COM'S ACTUAL RESULTS AND
THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS. OUR HISTORICAL RESULTS ARE NOT NECESSARILY INDICATIVE OF OUR FUTURE
RESULTS.
Overview
Travelscape.com is a leading consumer-direct online travel wholesaler serving
popular destination markets across the United States. Through our relationships
with selected travel service suppliers, we provide low prices on a wide range of
accommodation and transportation alternatives to meet a variety of consumer
travel preferences and budgets. Our wholesale supply agreements with hotels and
major airlines enable us to offer our customers hotel or hotel/air packages at
significant discounts from published rates and fares. Visitors to our web sites
at WWW.TRAVELSCAPE.COM and WWW.LVRS.COM have immediate access both to our easy
to use proprietary booking engine to compare travel options, rates and
availability, and to detailed hotel information and destination guides. From
1996 to 1998, our revenue grew from $8.3 million to $20.9 million, a compound
annual growth rate of 59%.
Travelscape.com was formed in Delaware on January 21, 1999. Concurrent with our
formation, we executed a reorganization of our three predecessor Nevada
corporations, Las Vegas Reservation Systems, Professional Travel Services and
Old Travelscape, as wholly-owned subsidiaries of Travelscape.com. Las Vegas
Reservation Systems, Professional Travel Services and Old Travelscape commenced
operations in 1990, 1993 and 1998, respectively. Statement of operations and
balance sheet data for all periods up to and including the year ended December
31, 1998 are presented on a combined basis reflecting the operating results and
financial condition of all three subsidiaries. Statement of operations and
balance sheet data for and as of the three months ended March 31, 1999 are
presented on a combined basis through January 22, 1999 and on a consolidated
basis for the remainder of the period.
Substantially all of our revenue through the end of 1998 was generated by
reselling travel services to Las Vegas visitors, principally through our call
center. In March 1998, we began selling travel services over the Internet from
our web site at WWW.LVRS.COM, and in November 1998, we began selling travel
services from our second web site at WWW.TRAVELSCAPE.COM. Internet sales
represented approximately 30% of our gross bookings in 1998 and approximately
65% of our gross bookings in the three months ended March 31, 1999, based on the
aggregate retail value of the travel booked. We expect that Internet bookings
will continue to increase as a percentage of bookings. Historically, hotel room
sales have comprised the vast majority of our revenue. We expect airfare sales
to increase as we expand our marketing of these services. In addition, in 1998
we began to offer travel services associated with destinations other than Las
Vegas. While bookings associated with travel outside Las Vegas were not material
in 1998, their sales accounted for 15% of our travel bookings in the three
months ended March 31, 1999, and we expect these bookings to increase as we
execute our strategy to enter into new destination markets.
Our revenue includes sales of both "non-published" and "published" rates and
fares. In sales of non-published rates and fares, or "wholesale transactions,"
we purchase travel services from the travel supplier pursuant to an agreement,
resell the services to consumers and act as the merchant of record for the
credit card transaction. We receive payment of the aggregate retail value of the
travel booked in wholesale transactions at the time travel is booked and record
the payment as deferred revenue. Revenue is recognized at the time the customer
checks into the hotel or completes the air travel. After the
28
<PAGE>
consummation of this offering we will hold deferred revenue in interest bearing
accounts pending recognition, although historically we have not done so.
Wholesale transactions accounted for approximately 97%, 99%, 98% and 95% of
revenue in 1996, 1997 and 1998 and the three months ended March 31, 1999,
respectively.
In sales of published rates and fares, or "commissionable transactions," we
receive a commission from the travel supplier for acting as the booking agent
and the travel supplier is the merchant of record for the credit card
transaction. Commissions are recognized at the time the commission is received
from the travel supplier, and average approximately 5% and 10% of the aggregate
value of travel booked for airlines and hotels, respectively.
Our cost of sales in wholesale transactions includes the price paid to travel
suppliers for the services that we resell. Our gross margin on non-published
airfare sales tends to be substantially lower than our gross margin on hotel
room sales because airlines do not generally offer discounts from published
rates comparable to those offered by hotels. In addition, our gross margins tend
to be lower on room sales outside of Las Vegas than they are for room sales in
Las Vegas because our relationships with our hotel partners in these new markets
are not as well developed as our relationships in Las Vegas, and therefore hotel
operators in these markets often do not offer us their most favorable discounts
from published rates. Our commissions on published rates and fares are generally
less than our gross profits in wholesale transactions. However, all commissions
are reflected as gross profits because we do not recognize cost of sales on
commissionable transactions. In 1996, 1997 and 1998 and the three months ended
March 31, 1999, gross margins were approximately 40.5%, 34.0%, 29.6% and 30.3%,
respectively. The decline in gross margins reflects disproportionate growth in
sales of non-published airfares and, in the three months ended March 31, 1999,
increased sales associated with destinations other than Las Vegas, offset by
increases in commissionable sales. To the extent that non-published airfare
sales and sales associated with destinations other than Las Vegas continue to
increase as a percentage of revenue, we expect to continue to experience
declining overall gross margins.
During 1998 and the three months ended March 31, 1999, we substantially
increased our operating expenses in connection with the launch of our online
operations. General and administrative expense increased as the result of
additional staffing to launch our web sites, expand our call center and increase
the number of hotels we have under contract. Sales and marketing expense
increased principally as the result of entering into online advertising
arrangements with other web sites and online marketing representatives. Systems
development expense increased as the result of increased technical staff and
infrastructure requirements to support our web sites. We expect that operating
expenses will continue to increase as we execute our strategy to develop greater
brand recognition and web site traffic, increase destination content, expand
into new markets and improve our web sites.
In the three months ended March 31, 1999, we recorded an aggregate of $6.6
million in deferred stock compensation relating to stock options granted with an
exercise price below the deemed fair market value of our common stock on the
date of grant. Stock compensation expense is recognized as the options vest.
During the three months ended March 31, 1999, we recognized approximately $1.8
million in stock compensation expense. The remaining $4.8 million of deferred
stock compensation expense at March 31, 1999 is reflected in the stockholders'
deficiency section of our balance sheet and will be amortized over the three
year vesting period of the related options. To the extent we grant additional
options or rights to acquire our stock in the future, we may recognize
additional stock compensation expense in future periods. Please see note 8 to
our combined and consolidated financial statements for further details on our
stock compensation expense.
In the three months ended March 31, 1999, we issued approximately $7.0 million
of our senior notes. In connection with the issuance of the notes, we also
issued warrants to purchase an aggregate of 527,752 shares of our common stock
for $0.01 per share, and recorded an aggregate of $5.1 million in original
29
<PAGE>
issuance discount to be amortized over the two year term of the notes. In
addition, we incurred approximately $500,000 in debt issuance costs in
connection with the issuance of the notes, which will be amortized over the term
of the notes. The consummation of this offering will cause the maturity of the
notes to be accelerated. As a result, we expect to recognize the unamortized
balance of original issuance discount and debt issuance costs, or approximately
$5.3 million, as interest expense in the three months ending June 30, 1999,
assuming this offering is completed in that period.
Prior to our reorganization with Las Vegas Reservation Systems, Professional
Travel Services and Old Travelscape, Las Vegas Reservation Systems and
Professional Travel Services operated as sub-chapter S corporations under the
Internal Revenue Code, and were not subject to federal income taxes. We are now
a sub-chapter C corporation and will be subject to applicable federal income
tax.
Results of Operations
The following table sets forth our historical results of operations expressed as
a percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Statement of Operations Data:
Revenues:
Room sales.................................................... 97.8% 94.2% 90.3% 86.9% 94.2%
Airfare sales................................................. 2.2 5.8 9.7 13.1 5.8
--------- --------- --------- --------- ---------
Total revenues............................................ 100.0 100.0 100.0 100.0 100.0
Cost of sales................................................... 59.5 66.0 70.4 70.6 69.7
--------- --------- --------- --------- ---------
Gross profit.................................................... 40.5 34.0 29.6 29.4 30.3
--------- --------- --------- --------- ---------
Operating expenses:
General and administrative.................................... 25.3 24.7 25.9 25.5 27.4
Sales and marketing........................................... 9.7 8.0 19.7 11.5 39.5
Systems development........................................... 1.6 0.8 4.3 0.6 3.6
Stock compensation............................................ -- -- -- -- 22.6
--------- --------- --------- --------- ---------
Total operating expenses.................................. 36.6 33.5 49.9 37.6 93.1
--------- --------- --------- --------- ---------
Operating income (loss)......................................... 3.9 0.5 (20.3) (8.2) (62.8)
--------- --------- --------- --------- ---------
Other income (expense):
Interest expense, net......................................... -- (0.6) (0.9) (0.9) (4.4)
Other income.................................................. 0.2 0.1 -- 0.3 --
--------- --------- --------- --------- ---------
Total other income (expense).............................. 0.2 (0.5) (0.9) (0.6) (4.4)
--------- --------- --------- --------- ---------
Net income (loss)............................................... 4.1% --% (21.2)% (8.8)% (67.2)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Comparison of Three Months Ended March 31, 1999 and 1998
ROOM SALES. Room sales increased $4.7 million, or 162.1%, to $7.6 million in
the three months ended March 31, 1999 from $2.9 million in the prior year
period. As a percentage of total revenue, room sales increased to 94.2% in the
three months ended March 31, 1999 from 86.9% in the prior year period. The
increase in room sales was attributable to operation of both of our web sites
for the entire period in 1999, while we had only one web site operational for
one month in the 1998 period. The additional
30
<PAGE>
volume was supported by an increase in our contracted room allotments both
within and outside of Las Vegas.
AIRFARE SALES. Airfare sales increased $33,000, or 7.6%, to $472,000 in the
three months ended March 31, 1999 from $439,000 in the prior year period. As a
percentage of total revenue, airfare sales decreased to 5.8% in the three months
ended March 31, 1999 from 13.1% in the prior year period. In the three months
ended March 31, 1999, we sold 64% more airline tickets than we sold in the prior
year period. However, because a greater proportion of these tickets were at
published rates in 1999, we recognized only the net commission from the supplier
in these transactions and, as a result, our revenue from airfare sales was only
marginally higher in the 1999 period.
GROSS PROFIT. Gross profit increased $1.5 million, or 149.4%, to $2.5 million
in the three months ended March 31, 1999 from $983,000 in the prior year period.
Gross margin increased to 30.3% in the three months ended March 31, 1999 from
29.4% in the prior year period. The increase in overall gross margin was
primarily attributable to an increase in commissionable airfare sales, all of
which is reflected as gross profit. This increase was partially offset by a
decrease in gross margins on room sales caused by increased room sales in
markets other than Las Vegas, which produced lower gross margins than room sales
in Las Vegas.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense includes
salaries for customer support, administrative and financial staff, merchant
fees, corporate overhead and amortization of goodwill. General and
administrative expense increased $1.4 million, or 159.1%, to $2.2 million in the
three months ended March 31, 1999 from $853,000 in the prior year period. As a
percentage of total revenue, general and administrative expense increased to
27.4% in the three months ended March 31, 1999 from 25.5% in the prior year
period. Of the increase in general and administrative expense, approximately
$1.0 million was attributable to variable operating expenses such as call center
payroll, long-distance charges and other fulfillment costs and approximately
$400,000 was attributable to efforts to increase our contracted room allotments.
SALES AND MARKETING EXPENSE. Sales and marketing expense includes advertising
costs under both fixed rate and revenue sharing arrangements. Sales and
marketing expense increased $2.8 million, or 733.8% to $3.2 million in the three
months ended March 31, 1999 from $383,000 in the prior year period. As a
percentage of total revenue, sales and marketing expense increased to 39.5% in
the three months ended March 31, 1999 from 11.5% in the prior year period. The
increase in sales and marketing expense in both absolute dollars and as a
percentage of total revenue was primarily attributable to increased online
advertising expenditures to build market share, generate traffic on our web
sites and further develop brand awareness. In the three months ended March 31,
1999, we entered into new advertising commitments pursuant to which we expect to
pay DoubleClick approximately $6.5 million through June 2000 and MapQuest
approximately $1.9 million through May 2000. We expect to enter into additional
similar advertising commitments after the offering and as a result we expect
sales and marketing expense to continue to increase in absolute dollars for the
foreseeable future.
SYSTEMS DEVELOPMENT EXPENSE. Systems development expense includes salaries of
our technical staff, expenses to maintain our web sites and payments to outside
vendors for technical systems and support. Systems development expense increased
$267,000 to $288,000 in the three months ended March 31, 1999 from $21,000 in
the prior year period. As a percentage of total revenue, systems development
expense increased to 3.6% in the three months ended March 31, 1999 from 0.6% in
the prior year period. Of the increase in systems development expense,
approximately $200,000 was attributable to additional expenditures made to
further develop our web sites and approximately $67,000 was attributable to the
expansion of our in-house technical staff. We expect systems development expense
to continue to increase in absolute dollars for the foreseeable future.
31
<PAGE>
STOCK COMPENSATION EXPENSE. Stock compensation expense in the three months
ended March 31, 1999 totaled approximately $1.8 million. Based on options
granted to date, we expect to recognize approximately $600,000 in stock
compensation expense in the three months ending June 30, 1999, and approximately
$475,000 in stock compensation expense each quarter thereafter through the first
quarter of 2002. To the extent we grant additional options or rights to acquire
our stock in the future, we may recognize additional stock compensation expense
in future periods.
OTHER INCOME (EXPENSE). Other expense increased $339,000 to $359,000 in the
three months ended March 31, 1999 from $20,000 in the prior year period. The
increase in other expense was primarily attributable to the increase in interest
expense resulting from the sale of approximately $7.0 million of senior notes in
February 1999 and the amortization of $232,000 of the original issuance discount
on the warrants issued and debt issuance costs in connection with the notes. We
expect to recognize interest expense of approximately $5.3 million in the three
months ending June 30, 1999 in connection with our issuance of notes in February
1999, assuming we complete this offering prior to June 30, 1999.
NET LOSS. Net loss increased $5.1 million to $5.4 million in the three months
ended March 31, 1999 from $294,000 in the prior year period. The increase in net
loss was primarily attributable to the increased operating expenses discussed
above.
Comparison of Fiscal Years Ended December 31, 1998 and 1997
ROOM SALES. Room sales increased $7.2 million, or 60.9%, to $18.9 million in
1998 from $11.7 million in 1997. As a percentage of total revenue, room sales
decreased to 90.3% in 1998 from 94.2% in 1997. Of the increase in room sales,
approximately $4.7 million was attributable to the launch of our web sites and
the success of our online advertising efforts, and approximately $2.5 million
was attributable to increased sales through our call center. The decrease as a
percentage of total revenue was attributable to the disproportionate growth of
airfare sales.
AIRFARE SALES. Airfare sales increased $1.3 million, or 183.1%, to $2.0 million
in 1998 from $716,000 in 1997. As a percentage of total revenue, airfare sales
increased to 9.7% in 1998 from 5.8% in 1997. The increase in airfare sales both
in absolute dollars and as a percentage of sales was primarily attributable to
our having a full year of non-published airfare sales in 1998 compared to only
seven months of non-published airfare sales in 1997.
GROSS PROFIT. Gross profit increased $2.0 million, or 46.1%, to $6.2 million in
1998 from $4.2 million in 1997. Gross margin decreased to 29.6% in 1998 from
34.0% in 1997. The decrease in gross margin was primarily attributable to
declining margins on room sales, which resulted from discounts we offered to
promote our web sites and build market share combined with general declines in
Las Vegas room prices. To a lesser extent, increased sales of non-published
airfares, which produce lower gross margins than room sales, had a negative
effect on our gross margin. The decline in gross margin was partially offset by
increased sales of published airfares, all of which is reflected as gross
profit.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $2.3 million, or 76.8%, to $5.4 million in 1998 from $3.1 million in
1997. As a percentage of total revenue, general and administrative expense
increased to 25.9% in 1998 from 24.7% in 1997. Of the increase in general and
administrative expense, approximately $1.4 million was attributable to variable
operating expenses such as call center payroll, long-distance charges and other
fulfillment costs and approximately $900,000 was attributable to efforts to
increase our contracted room allotments in markets outside Las Vegas in
preparation for the launch of our second web site.
SALES AND MARKETING EXPENSE. Sales and marketing expense increased $3.1
million, or 314.8%, to $4.1 million in 1998 from $990,000 in 1997. As a
percentage of total revenue, sales and marketing expense increased to 19.7% in
1998 from 8.0% in 1997. The increase in sales and marketing expense in both
absolute dollars
32
<PAGE>
and as a percentage of total revenue was primarily attributable to increased
online marketing expenses to build market share, generate traffic on our web
sites and develop brand awareness.
SYSTEMS DEVELOPMENT EXPENSE. Systems development expense for 1998 increased
$782,000, or 680.5%, to $897,000 in 1998 from $115,000 in 1997. As a percentage
of total revenue, systems development expense increased to 4.3% in 1998 from
0.8% in 1997. Of the increase in systems development expense, approximately
$700,000 was attributable to additional expenditures made to develop our web
sites and approximately $82,000 was attributable to the expansion of our
in-house technical staff.
OTHER INCOME (EXPENSE). Other expense increased $122,000 to $181,000 in 1998
from $59,000 in 1997. The increase in other expense resulted primarily from a
full year of interest expense on the mortgage on our headquarters facility
compared to a partial year in 1997.
NET INCOME (LOSS). We had a net loss of $4.4 million in 1998 compared to net
income of $2,000 in 1997. The net loss was primarily attributable to increased
operating expenses discussed above.
Comparison of Fiscal Years Ended December 31, 1997 and 1996
ROOM SALES. Room sales increased $3.6 million, or 45.0%, to $11.7 million in
1997 from $8.1 million in 1996. As a percentage of total revenue, room sales
decreased to 94.2% in 1997 from 97.8% in 1996. The increase in room sales was
attributable to growth in our customer base due to increases in advertising
expenditures. The decrease as a percentage of total revenue was attributable to
our introduction of non-published airfares in 1997.
AIRFARE SALES. Airfare sales increased $538,000 or 302.1% to $716,000 in 1997
from $178,000 in 1996. As a percentage of total revenue, airfare sales increased
to 5.8% in 1997 from 2.2% in 1996. The increase in airfare sales in both
absolute dollars and as a percentage of total revenue was primarily attributable
to our entry into negotiated rate agreements with a number of airlines that
allowed us to sell non-published airfares to our customers.
GROSS PROFIT. Gross profit increased $890,000, or 26.6%, to $4.2 million in
1997 from $3.3 million in 1996. Gross margin decreased to 34.0% in 1997 from
40.5% in 1996. The decrease in gross margin was primarily attributable to
declining margins on room sales due to aggressive pricing. To a lesser extent,
gross margins were also adversely affected by the introduction of non-published
airfare sales and a decrease in the sale of published airfares.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $979,000, or 46.9%, to $3.1 million in 1997 from $2.1 million in 1996.
As a percentage of total revenue, general and administrative expense remained
essentially flat at 24.7% in 1997 and 25.3% in 1996. The dollar increase in
general and administrative expense was primarily attributable increased staffing
related to the expansion of our call center.
SALES AND MARKETING EXPENSE. Sales and marketing expense increased $194,000, or
24.2%, to $990,000 in 1997 from $797,000 in 1996. As a percentage of total
revenue, sales and marketing expense decreased to 8.0% in 1997 from 9.7% in
1996. The dollar increase in sales and marketing expense was attributable to
increases in advertising expenditures to build market share.
SYSTEMS DEVELOPMENT EXPENSE. Systems development expense decreased $20,000, or
14.7%, to $115,000 in 1997 from $135,000 in 1996. As a percentage of total
revenue, systems development expense decreased to 0.8% in 1997 from 1.6% in
1996. Systems development expense decreased due to the completion of our
proprietary reservations system in early 1997.
OTHER INCOME (EXPENSE). We had other expense of $59,000 in 1997, compared to
other income of $13,000 of income in 1996. The increase in other expense
resulted primarily from interest expense on the mortgage on our newly built
headquarters facility.
NET INCOME. Net income decreased $334,000, or 99%, to $2,000 in 1997 from
$336,000 in 1996. The decrease in net income was primarily attributable to
increased staffing, advertising and interest expense.
33
<PAGE>
Selected Unaudited Historical Quarterly Results of Operations
The following tables set forth selected unaudited combined statement of
operations data for Travelscape.com for the eight quarters ended December 31,
1998 and consolidated statement of operations data for the quarter ended March
31, 1999 in absolute dollars and as a percentage of total revenue. This data
should be read in conjunction with our combined and consolidated financial
statements for 1997 and 1998 and consolidated financial statements for the three
months ended March 31, 1999 and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- --------- --------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room sales.................. $ 2,792 $ 3,070 $ 2,594 $ 3,260 $ 2,901 $ 4,731 $ 4,951 $ 6,269
Airfare sales............... 38 49 365 264 439 699 549 340
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total revenue............. 2,830 3,119 2,959 3,524 3,340 5,430 5,500 6,609
Cost of sales................. 1,845 1,996 2,016 2,343 2,357 3,886 3,899 4,556
----------- --------- --------- ----------- ----------- --------- --------- ---------
Gross profit.................. 985 1,123 943 1,181 983 1,544 1,601 2,053
----------- --------- --------- ----------- ----------- --------- --------- ---------
Operating expenses:
General and
administrative............ 640 660 723 1,043 853 1,147 1,422 1,999
Sales and marketing......... 259 211 238 283 383 637 1,047 2,042
Systems development......... 29 28 29 29 21 125 420 331
Stock compensation.......... -- -- -- -- -- -- -- --
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total operating
expenses................ 928 899 990 1,355 1,257 1,909 2,889 4,372
----------- --------- --------- ----------- ----------- --------- --------- ---------
Operating income (loss)....... 57 224 (47) (174) (274) (365) (1,288) (2,319)
----------- --------- --------- ----------- ----------- --------- --------- ---------
Other income (expense):
Interest expense, net....... -- (1) (7) (68) (28) (26) (69) (60)
Other income................ -- -- 18 -- 8 3 (10) 1
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total other income
(expense)............... -- (1) 11 (68) (20) (23) (79) (59)
----------- --------- --------- ----------- ----------- --------- --------- ---------
Net income (loss)............. $ 57 $ 223 $ (36) $ (242) $ (294) $ (388) $ (1,367) $ (2,378)
----------- --------- --------- ----------- ----------- --------- --------- ---------
----------- --------- --------- ----------- ----------- --------- --------- ---------
As a Percentage of Total Revenue
--------------------------------------------------------------------------------------------
Revenue:
Room sales.................. 98.7% 98.4% 87.7% 92.5% 86.9% 87.1% 90.0% 94.9%
Airfare sales............... 1.3 1.6 12.3 7.5 13.1 12.9 10.0 5.1
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total revenue............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales................. 65.2 64.0 68.1 66.5 70.6 71.6 70.9 68.9
----------- --------- --------- ----------- ----------- --------- --------- ---------
Gross profit.................. 34.8 36.0 31.9 33.5 29.4 28.4 29.1 31.1
----------- --------- --------- ----------- ----------- --------- --------- ---------
Operating expenses:
General and
administrative............ 22.6 21.2 24.5 29.6 25.5 21.1 25.9 30.2
Sales and marketing......... 9.2 6.7 8.0 8.0 11.5 11.7 19.0 30.9
Systems development......... 1.0 0.9 1.0 0.8 0.6 2.3 7.6 5.1
Stock compensation.......... -- -- -- -- -- -- -- --
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total operating
expenses................ 32.8 28.8 33.5 38.4 37.6 35.1 52.5 66.2
----------- --------- --------- ----------- ----------- --------- --------- ---------
Operating income (loss)....... 2.0 7.2 (1.6) (4.9) (8.2) (6.7) (23.4) (35.1)
----------- --------- --------- ----------- ----------- --------- --------- ---------
Other income (expense):
Interest expense, net..... -- -- (0.2) (1.9) (0.9) (0.5) (1.3) (0.9)
Other income................ -- -- 0.6 -- 0.3 0.1 (0.2) --
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total other income
(expense)............... -- -- 0.4 (1.9) (0.6) (0.4) (1.5) (0.9)
----------- --------- --------- ----------- ----------- --------- --------- ---------
Net income (loss)........... 2.0% 7.2% (1.2)% (6.8 )% (8.8 )% (7.1)% (24.9)% (36.0)%
----------- --------- --------- ----------- ----------- --------- --------- ---------
----------- --------- --------- ----------- ----------- --------- --------- ---------
<CAPTION>
Mar. 31,
1999
---------
<S> <C>
Revenues:
Room sales.................. $ 7,603
Airfare sales............... 472
---------
Total revenue............. 8,075
Cost of sales................. 5,625
---------
Gross profit.................. 2,450
---------
Operating expenses:
General and
administrative............ 2,209
Sales and marketing......... 3,194
Systems development......... 288
Stock compensation.......... 1,827
---------
Total operating
expenses................ 7,518
---------
Operating income (loss)....... (5,068)
---------
Other income (expense):
Interest expense, net....... (360)
Other income................ 1
---------
Total other income
(expense)............... (359)
---------
Net income (loss)............. $ (5,427)
---------
---------
Revenue:
Room sales.................. 94.2%
Airfare sales............... 5.8
---------
Total revenue............. 100.0
Cost of sales................. 69.7
---------
Gross profit.................. 30.3
---------
Operating expenses:
General and
administrative............ 27.4
Sales and marketing......... 39.5
Systems development......... 3.6
Stock compensation.......... 22.6
---------
Total operating
expenses................ 93.1
---------
Operating income (loss)....... (62.8)
---------
Other income (expense):
Interest expense, net..... (4.4)
Other income................ --
---------
Total other income
(expense)............... (4.4)
---------
Net income (loss)........... (67.2)%
---------
---------
</TABLE>
34
<PAGE>
Seasonality and Quarterly Financial Information
The travel industry is subject to seasonal fluctuations dependent on business
and leisure travel patterns. If seasonality in the travel industry causes
quarterly fluctuations, there could be a material adverse effect on our business
and the value of your stock. Please see "Risk Factors--We experience seasonality
in customer travel that may affect our revenue" for a more detailed explanation
of how seasonal fluctuations might affect our operating results.
Liquidity and Capital Resources
In February 1999, we completed a private senior note offering which resulted in
net proceeds to us of $6.5 million. We have also financed our activities through
cash provided by operations, a private issuance of $1.5 million of equity in
June 1998, equipment financing and various lines of credit.
We currently anticipate that the net proceeds from this offering, together with
our current cash and cash equivalents and anticipated cash flow from operations
will be sufficient to meet our presently anticipated working capital and capital
expenditure requirements for at least the next 12 months. Specifically, we
currently have advertising commitments through June 2000 totalling over $15.0
million, which we expect to fund out of the proceeds of this offering and cash
flows from operations. We currently have no material capital expenditure
commitments, and our anticipated debt service requirements after this offering
are immaterial. We also currently anticipate that available sources of liquidity
will be sufficient to meet working capital and capital expenditure requirements
well beyond the next 12 months. However, we may need to raise additional funds
in order to support more rapid expansion, develop new or enhanced services,
respond to competitive pressures, acquire complementary business or technologies
or take advantage of unanticipated opportunities. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
stockholders will be reduced, our stockholders may experience additional
dilution in net book value per share or such securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
There can be no assurance that additional financing will be available when
needed on terms favorable to us or at all. If adequate funds are not available
on acceptable terms, we may be unable to develop or enhance our services and
products, take advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on our business,
financial condition and operating results.
At March 31, 1999, we had a net working capital deficit of $2.4 million. We have
historically operated with a net working capital deficit due to the fact that we
have invested working capital assets in operating expenses, investments and
fixed assets. Our net working capital deficit has not historically negatively
affected our ability to operate or meet our obligations as they come due. After
the net proceeds of this offering, we expect to have significant positive net
working capital.
Cash used in operating activities was $732,000 for the three months ended March
31, 1999, compared to $335,000 provided by operations in the prior year period.
The increase in cash used in operating activities in the three months ended
March 31, 1999 was primarily the result of significantly increased sales and
marketing expenditures relative to the prior period. Partially offsetting these
expenditures was the substantial increase in current liabilities resulting from
increased bookings. Cash used in operating activities during 1998 was $2.2
million, and cash provided by operations in 1997 and 1996 was $1.3 million and
$758,000, respectively. Such amounts primarily reflect net income or net loss
for the respective periods in addition to increases in working capital
liabilities resulting from increased bookings in the respective periods.
Cash used in investing activities was $172,000 for the three months ended March
31, 1999, compared to $43,000 for the prior year period. The increase in cash
used in the three months ended March 31, 1999 was primarily the result of
additional technical hardware being purchased in the period. Cash used in
35
<PAGE>
investing activities during 1998, 1997 and 1996 was $67,000, $2.0 million and
$145,000, respectively. Cash used in investing activities in the 1998 period was
in addition to $711,000 of purchases made pursuant to capital lease obligations
which are recorded as non-cash capital expenditures. Cash used in investing
activities in the 1997 period was primarily comprised of our purchase of our
headquarters facility for $1.9 million.
Cash provided by financing activities was $7.0 million for the three months
ended March 31, 1999, compared to cash used in financing activities totaling
$111,000 for the prior year period. The increase in cash provided by financing
activities was primarily due to the net proceeds of $6.5 million from our
issuance of senior notes in February 1999. Cash provided by financing activities
during 1998 and 1997 was $2.5 million and $704,000, respectively, compared to
cash used in financing activities totaling $618,000 in 1996. Cash provided by
financing activities in the 1998 period was primarily comprised of a $1.5
million private issuance of equity and net capital contributions of $1.0 million
by our Chairman of the Board. Cash provided by financing activities in the 1997
period was comprised of $1.5 million of loan proceeds from the mortgage on our
headquarters facility offset by $792,000 of distributions to our Chairman of the
Board. Cash used in financing activities in the 1996 period was primarily
comprised of $759,000 of distributions to our Chairman of the Board.
Market Risks
We currently have no significant floating rate indebtedness, hold no derivative
instruments and do not earn income denominated in foreign currencies.
Accordingly, changes in interest rates do not generally have a direct effect on
our financial position. However, to the extent that changes in interest rates
and currency exchange rates affect general economic conditions, we would be
affected by such changes. All of our revenue is recognized in dollars and almost
all of our revenue is from customers in the United States. Therefore, we do not
believe we have any significant direct foreign currency exchange risk and do not
hedge against foreign currency exchange rate changes.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position, and is effective for financial statements issued for fiscal years
beginning after December 15, 1997. Our comprehensive income (loss) is the same
as net income (loss). Accordingly, SFAS No. 130 did not have a material impact
on the combined and consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 establishes standards for the way public business enterprises are to report
selected information about operating segments. The determination of an entity's
operating segments is based upon a management approach, including the way
management organizes the segments within the enterprise for making operating
decisions and assessing performance. Management currently reviews financial data
at the highest level, the sale of travel services. Therefore, under the
management approach of SFAS No. 131, we have only one operating segment.
Accordingly, SFAS No. 131 did not have a material impact on the combined and
consolidated financial statements.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position, or SOP, No. 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. The provisions of SOP 98-1 are effective for fiscal years beginning after
December 15, 1998 and require that certain direct costs associated with such
development are
36
<PAGE>
capitalized and amortized and all remaining costs must be expensed when
incurred. Management is currently evaluating the impact of SOP No. 98-1.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept only two digit entries to denote the year in the date code field.
Beginning in the Year 2000, these code fields will be required to accept four
digit entries to distinguish 21(st) century dates from 20(th) century dates. As
a result, computer systems and/or software products used by many companies may
need to be upgraded to comply with such Year 2000 requirements.
STATE OF READINESS OF OUR INTERNALLY-CREATED SYSTEMS
Our web sites and supporting tools and infrastructure were initially designed
and developed in 1998 to be Year 2000 compliant. We do not anticipate that any
of the products we have developed internally will experience operational
difficulties related to the Year 2000.
STATE OF READINESS OF THE THIRD-PARTY SYSTEMS USED BY TRAVELSCAPE.COM
We may be affected by Year 2000 issues related to non-compliant systems
developed by third-party vendors. We currently have two types of computer
systems or programs which may be affected. They include: (1) reservation
database systems and (2) non-information technology, or non-IT, systems. The
reservation database systems involve the computer programs and products
responsible for airline and hotel reservations and other transactional systems.
Non-IT systems include systems or hardware containing embedded technology such
as micro-controllers and building security systems.
The main supplier of our air reservation database system is the SABRE Group.
Currently, substantially all of our air transactions are processed through the
SABRE system. Although SABRE has not provided us with any written assurances as
to its readiness for the year 2000, as of February 1999, reservation agents have
been booking reservations on the SABRE system for travel in the Year 2000 and
have not encountered any difficulties caused by Year 2000 issues. We do not
anticipate that Year 2000 issues will cause the SABRE system or any of the other
reservation database systems used by us to have more difficulties after the Year
2000 than have occurred since SABRE began booking travel into Year 2000.
We also currently rely on Norwest Bank to process credit card transactions. We
have not received any written assurances from Norwest Bank as to its readiness
for the Year 2000.
Because we have not received written assurances from either the SABRE Group or
Norwest Bank, we have assumed that neither will be ready for the Year 2000
before January 1, 2000, and that both the SABRE global distribution service and
Norwest Bank's credit card processing capabilities will fail at that time. Based
on this assumption, we believe such failures would be the most reasonably likely
worst case Year 2000 scenario.
If the SABRE global distribution service fails, we would be unable to query the
service to retrieve published airfares and room rates, but it would not affect
our ability to sell hotel rooms at wholesale rates from our own database. In
addition, we would log incoming calls regarding airfares, and return the calls
once the global distribution service has been restored. If service is not
restored promptly, we could switch to another global distribution service, which
we believe would require approximately 60 days. During the transition to a new
service, sales of airfares would be severely disrupted.
If the Norwest Bank credit card processing capabilities fail, we would complete
credit card transactions manually using temporary staff. If Norwest Bank were
unable to restore service promptly, we believe
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switching to another financial institution for automated credit card processing
would require approximately five days.
We are not currently aware of any Year 2000 problem relating to any of our
material internal non-IT systems. We plan to test all such systems for Year 2000
compliance by June 30, 1999.
COSTS
Based on the steps being taken and progress to date, management estimates that
the expenses for ensuring Year 2000 compliance of our computer products and
systems will not have a material adverse effect on operations or earnings, and,
to the extent they exist, can be financed out of cash flow from operations. We
do not track Year 2000 readiness expenses separately from other expenses.
RISKS
Despite such plans and our assessment of current hardware and software, our
assessment of our current state of compliance may not be fully accurate. In
certain cases, we have relied in good faith on representations and warranties
regarding Year 2000 compliance provided to us by third-party vendors of hardware
and software and the advice and assessment of our consultants, and we have not
independently verified such representations and warranties. Such representations
and warranties may not be accurate in all material respects and the advice or
assessments of our consultants may not be reliable. If third parties are not
able to make their systems Year 2000 compliant in a timely manner, it could
adversely affect our business.
Finally, Year 2000 issues may impact other entities with which we do business,
including those responsible for maintaining telephone and online communications.
Accordingly, we cannot predict the effect of the Year 2000 problem on such
entities. If these other entities fail to take preventative or corrective
actions in a timely manner, the Year 2000 issue could have a negative effect on
our business.
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BUSINESS
THE FOLLOWING DISCUSSION OF OUR BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
Travelscape.com is a leading consumer-direct online travel wholesaler serving
popular destination markets across the United States, including Las Vegas,
Orlando, New York, San Francisco and Hawaii. Through our relationships with
selected travel service suppliers, we provide low prices on a wide range of
accommodation and transportation alternatives to meet a variety of consumer
travel preferences and budgets. At March 31, 1999, we had wholesale supply
agreements with over 335 hotels in 35 destination markets and negotiated rate
agreements for discount airfares with major airlines that enable us to offer our
customers hotel or hotel/air packages at significant discounts from published
rates and fares. Visitors to our web sites at WWW.TRAVELSCAPE.COM and
WWW.LVRS.COM have immediate access both to our easy to use proprietary booking
engine to compare travel options, rates and availability, and to detailed hotel
information and destination guides. Customers may book and purchase travel
services, 24 hours a day, 7 days a week, in a few easy steps, either online or
through our toll-free call center at (888) 335-0101. From 1996 to 1998, our
annual revenue grew from $8.3 million to $20.9 million, a compound annual growth
rate of 59%. We launched our Internet operations in March 1998, and Internet
sales have grown from approximately 30% of gross bookings in 1998 to
approximately 65% of gross bookings for the three months ended March 31, 1999,
based on the aggregate retail value of the travel booked.
Industry Background
THE TRAVEL INDUSTRY
Travel and tourism represents one of the largest consumer markets in the United
States. The Travel Industry Association of America, or the Travel Industry
Association, estimates that in 1997, domestic travel expenditures totaled $482
billion, with spending on airfares and hotels comprising approximately $79.5
billion and $62.5 billion, respectively. The Travel Industry Association also
estimates that 76% of all trips taken in 1997 were for leisure travel. The
distribution channels for leisure travel are highly fragmented. Travel service
suppliers, such as hotels, airlines and rental car companies, sell travel
services directly to consumers and indirectly through retail travel agencies and
travel wholesalers. The Travel Industry Association estimates that travel
agencies alone generated approximately $126 billion in total sales in 1997. In
addition, the Airlines Reporting Corporation estimates that there are
approximately 32,540 travel agency locations in the United States. The principal
distribution channels for leisure travel services to consumers include:
DIRECT SALES. Travel service suppliers typically sell their services directly
to consumers through call centers and, more recently, through their own web
sites. These suppliers generally offer only their own services, or offer their
services in conjunction with partners from other areas of the travel industry,
such as in hotel/airfare packages. Bookings are generally made at retail, or
"published," rates that suppliers have difficulty deviating from due to
competitive constraints.
RETAIL TRAVEL AGENCIES. Retail travel agencies offer consumers travel services
at published rates and fares through global distribution services, such as those
offered by Pegasus Systems and the SABRE Group, as well as discount, or
"non-published," fares through travel wholesalers. Retail travel agencies
receive commissions and incentives on gross bookings that typically average
5-10%. As travel service suppliers have increasingly sought to cut costs and
drive more traffic through their own booking channels in recent years, retail
travel agencies have experienced shrinking or capped commissions and increased
competition from travel service suppliers selling directly to consumers.
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TRAVEL WHOLESALERS. Travel wholesalers purchase hotel, airline and car rental
capacity directly from travel service suppliers at discounts substantially in
excess of commissions paid on published rates, and generally resell this
capacity individually or in packages through travel agencies.
THE WHOLESALE TRAVEL BUSINESS MODEL
Travel wholesalers provide travel service suppliers with a supplemental
distribution channel to assist them in achieving "yield optimization." Yield
optimization is the process of maximizing revenue by minimizing levels of excess
capacity, such as hotel rooms or airplane seats, while maximizing average
revenue per unit of capacity. Travel service suppliers employ two pricing
mechanisms to influence their yield optimization. First, to maximize revenue,
travel service suppliers maintain full fares and rates targeted at business
travelers, who may have little choice and limited flexibility with their travel
plans and cannot tolerate restrictions. Second, to minimize excess capacity,
travel service suppliers provide economy fares and rates to leisure travelers
whose travel decisions are primarily influenced by price. The following
illustrates some of the ways in which airlines and hotel operators engage travel
wholesalers to optimize their yield:
- AIRLINES. Airlines optimize yield at the system level by imposing
no restrictions on full fares, while imposing advance purchase and
Saturday stay requirements, change restrictions and cancellation
penalties on economy fares. Airlines further reduce excess capacity
by granting travel wholesalers access to non-published discount
rates, which allows the airlines to maintain published rates and
avoid fare wars.
- HOTELS. Hotels are generally unable to differentiate between
business and leisure travelers, except by charging lower weekend
rates. To minimize excess capacity while maintaining published
rates, hotel operators contract room blocks at discount rates to
travel wholesalers who generally package these rooms with discount
airfares for the leisure market. In addition, hotel operators
sometimes face unexpected large cancellations or declines in
reservations that leave them with unfilled, or "distressed,"
inventory. Travel wholesalers help alleviate distressed inventory
by passing on deep promotional discounts through their channels.
Travel wholesalers generally rely on retail travel agencies to sell their
products and services, and lack the infrastructure and expertise to interact
directly with consumers. In return for their services, retail travel agencies
typically receive a 5-10% commission, which results in higher prices for
consumers and reduced margins for wholesalers. In addition, travel wholesalers
must publish and disseminate rate and availability data to their travel agency
networks in advance, which restricts wholesalers' ability to adjust prices in
response to distressed inventory. Despite potential advantages for travel
wholesalers of selling directly to consumers, we believe that they are generally
reluctant to develop this channel because doing so could jeopardize their
relationships with the retail distribution networks that generate most of their
sales.
THE EMERGENCE OF E-COMMERCE AND ONLINE DISTRIBUTION OF TRAVEL SERVICES
The Internet has emerged as a global medium for communication, content delivery
and e-commerce, and Internet use continues to increase rapidly. International
Data Corporation, estimates that the number of users worldwide with access to
the Internet will increase to 320 million in 2002 from 100 million in 1998,
representing a compound annual growth rate of approximately 34%. As consumers
have become increasingly adept at using the Internet for evaluating and
purchasing a wide variety of goods, the dollar volume of online commerce
transactions has risen dramatically. International Data Corporation estimates
that the volume of goods and services purchased over the Internet will increase
to $400 billion in 2002 from $32 billion in 1998, representing a compound annual
growth rate in excess of 88%.
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Online sales of travel services have expanded dramatically in recent years due
to the substantial benefits of e-commerce to both travel service suppliers and
consumers. By moving their travel services online, travel service suppliers,
retail travel agencies and travel wholesalers can reach a global customer base
from a central location. Furthermore, both the low cost of customer interaction
and the automation of processing and fulfillment functions supported by Internet
sales allow online travel service providers the potential to maintain lower
operating expenses. Consumers benefit from convenient access to a range of
travel options and information regarding available travel services and products.
According to Forrester Research, online travel bookings are expected to grow to
$29.5 billion in 2003 from $3.1 billion in 1998, representing a compound annual
growth rate of 57%.
A number of approaches have emerged to address the online travel market,
including:
- ONLINE TRAVEL RESERVATION SERVICES. Online travel reservation
services generally have adopted the retail travel agency model and
sell published rates and fares quoted through global distribution
systems on a commission basis. Because global distribution services
are not configured for simultaneous display of multiple hotel
options or hotel/air packages, comparison shopping for these travel
services can be time consuming. A small number of these online
travel reservation services also resell travel packages provided by
wholesalers.
- DIRECT ONLINE SALES BY SUPPLIERS. Airlines, hotels and car rental
companies have begun offering their services online through their
own web sites. These web sites frequently access only published
rates for the hosts' or their partners' travel services, thereby
limiting consumer choice and prohibiting convenient comparison
shopping.
- ONLINE TRAVEL WHOLESALERS. A small number of travel wholesalers
have begun offering consumer-direct wholesale travel services
online. These providers typically focus almost exclusively on a
single service, primarily air travel, and lack the strategic
relationships needed to effectively service leisure travel to
destination markets.
In addition, many online travel service providers require consumers to register
by providing personal information prior to searching for travel options. These
registration requirements often make these web sites cumbersome to use and may
give rise to security concerns.
As the online travel services industry continues to evolve and mature, we
believe consumers will increasingly demand an easy to use web site that provides
a broad range of travel services, including transportation, accommodations,
activities and travel-related content and the ability to comparison shop for
preferred suppliers, price levels, destinations and packages. To offer consumers
maximum value and competitive prices, the web site must have access to wholesale
travel pricing in addition to published rates and fares through a global
distribution service. In addition, we believe travel service suppliers will seek
online distribution partners that combine extensive wholesale travel experience
with aggressive online marketing to provide an effective distribution channel
that helps minimize excess capacity and responds quickly to distressed
inventory, while also allowing suppliers to maintain published rates and fares
and avoid fare wars.
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Travelscape.com Solution
Travelscape.com is a leading consumer-direct online travel wholesaler serving
popular destination markets across the United States. We believe we have
overcome many of the shortcomings of the traditional and online travel service
distribution channels by simultaneously addressing needs of both suppliers and
consumers. We believe that by offering wholesale pricing of travel services
directly to consumers, we are able to maintain better margins than are available
to either retail travel agencies or the travel wholesalers that rely on them.
We have successfully operated as a consumer-direct travel wholesaler since 1990,
and were profitable through the end of 1997. In 1998, we began investing heavily
to extend our business to the Internet, and as a result we experienced net
losses in 1998 and the three months ended March 31, 1999. We have established
strategic relationships with travel service suppliers, including leading hotels
and airlines, and by featuring these partners on our web sites, we enable them
to optimize yield, increase profits and enhance product and service
distribution. We intend to replicate the model we have developed in destination
markets across the United States and around the world. We leverage our strong
travel service supplier relationships to provide online consumers with low
prices on a wide range of accommodation and transportation alternatives that
meet a variety of travel preferences and budgets. We are building brand
awareness and increasing traffic on our web sites by establishing strategic
online relationships with advertising representatives, content providers,
Internet service providers and portals. We provide consumers with fast,
intuitive and easy to use web sites that are supported 24 hours a day, 7 days a
week by our call center. The Travelscape.com business model provides the
following benefits:
BENEFITS TO CONSUMERS
BETTER PRICING AND PACKAGING OPPORTUNITIES. As a consumer-direct travel
wholesaler, we offer consumers access to a lower rate structure for hotels and
hotel/air packages than is generally available from online travel services. We
have established relationships with hotels and airlines that give us access to
discount prices and other terms that are of value to our clients. We actively
pass part of these savings and the benefit of these terms on to our customers.
In addition, our hotel and airline relationships allow us to provide attractive
travel packages to our destination markets.
INFORMATIVE CONTENT AND CHOICE. We have developed strategic relationships with
a broad range of travel suppliers to offer our customers travel alternatives
that fit their preferences and budget constraints. Multiple accommodation and
transportation options and packages are displayed simultaneously to assist in
comparison shopping, unlike most other online travel sites that display only one
package or hotel at a time. We provide options tailored to a variety of customer
needs, include detailed descriptions of our featured hotel properties and
package hotel and air options for maximum discounts. Customers browsing for
travel values can also review online brochures from travel service suppliers and
detailed information about the destination market.
CONVENIENT SHOPPING EXPERIENCE. We have leveraged our experience in the travel
industry to create an online shopping experience that anticipates our customers'
questions and concerns. Our web sites are designed for intuitive operation and
include helpful guidance to "walk" consumers through each step of booking travel
and completing an online transaction. Unlike many other online travel sites, we
do not require customers to pre-register by providing detailed personal
information, which allows for more convenient travel searches and reduces
customer concerns about online privacy.
CONTINUOUS CUSTOMER SUPPORT. Our call center assists online customers 24 hours
a day, 7 days a week in using our web sites and finding travel options. In
addition, our call center offers an alternative for completing transactions for
customers who are uncomfortable with e-commerce or who prefer to purchase over
the telephone.
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BENEFITS TO TRAVEL SUPPLIERS
PROVEN WHOLESALE PARTNER. We developed and demonstrated the effectiveness of
our wholesale travel business model in the Las Vegas market, the number one
travel destination in the United States. We have established strong
relationships with leading travel suppliers in Las Vegas and we are now seeking
to replicate our model in other popular destination markets. At March 31, 1999,
we had wholesale supply agreements with over 335 hotels in 35 markets, including
Las Vegas, Orlando, New York, San Francisco and Hawaii. We believe that the
extensive and close relationships with hotel operators required for success in
the wholesale travel market can be established only through consistent
performance over time. Furthermore, we believe the desire of property managers
to deal with a limited number of proven distributors restricts entry into this
market.
YIELD OPTIMIZATION. We enable hotel operators and airlines to improve their
yield by providing them with an efficient and flexible distribution platform. We
have a proven record of selling substantial hotel inventory and helping our
hotel partners optimize yield through flexible pricing and the ability to move
distressed inventory rapidly with "last minute" offers. Similarly, we help our
airline partners sell excess capacity at discounted prices while maintaining
their published rate structures and avoiding fare wars.
INCREASE ONLINE SALES FOR STRATEGIC HOTEL SUPPLIERS. We select and feature a
limited number of hotels in the economy, mid-price and luxury price ranges in
each market we serve, unlike many other online travel services that simply offer
the entire universe of hotel choices. By pre-selecting and screening our hotel
partners, we present our customers with a manageable selection of hotels
designed to meet a variety of preferences and budget constraints. At the same
time, by featuring a limited number of properties in each destination market, we
increase the probability that our hotel partners will achieve increased revenue
through online distribution.
ONLINE BRAND EXPOSURE. We provide our suppliers with high profile online brand
exposure and advertising presence that they would otherwise have difficulty
attaining. When featured on our web sites, travel service suppliers benefit from
our extensive online marketing strategy, which may be uneconomical for them to
replicate on their own. In addition, by bringing together multiple air and hotel
options on our web sites, we are able to generate greater consumer interest and
web site traffic than many individual travel service suppliers would be capable
of on their own.
Strategy
Travelscape.com's objective is to be the premier consumer-direct online travel
wholesaler for leisure travel, and to be the wholesaler of choice for leading
travel service suppliers. The principal elements of our business strategy are
to:
ENHANCE THE CONSUMER VALUE PROPOSITION. We intend to increase value for
consumers by broadening the range of destination markets served by our web sites
and offering a complete travel planning solution, including hotel
accommodations, air travel, and, in the future, rental cars and other travel
related products and services, while attempting to offer the lowest possible
prices. In addition, we plan to enhance our ability to proactively communicate
with our customers by utilizing customer profile information, personalizing the
shopping experience and creating a Travelscape.com community through travel
bulletin boards and chat rooms.
STRENGTHEN AND EXPAND STRATEGIC HOTEL RELATIONSHIPS. We plan to strengthen and
expand our leadership position as a strategic partner in hotel yield
optimization by increasing our room blocks under existing relationships and
establishing new hotel relationships in key destination markets. We plan to
continue to identify and enter into relationships with leading hotels in the
economy, mid-price and luxury range in each market we serve. From the beginning
of 1998 through March 31, 1999, we substantially increased our inventory of
wholesale rooms by expanding our existing relationships and entering into
agreements with over 290 hotels in 34 new destination markets in the United
States. In 1999, we plan to increase our inventory in U.S. markets, and to begin
serving new international destination markets, including the Caribbean, Latin
America and Europe.
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AGGRESSIVELY DEVELOP BRAND. Travelscape.com's strategy is to promote, advertise
and increase the value and visibility of our brand through high quality service,
active marketing and promotional programs. These programs include advertising on
leading web sites and other media, conducting an ongoing public relations
campaign and developing business alliances and partnerships. We plan to increase
awareness of our brand by entering into additional online marketing
relationships with advertising representatives, content providers, Internet
service providers and portals. We believe that strong brand recognition is
increasingly important in e-commerce to attract customers and promote consumer
trust and loyalty in the absence of face-to-face relationships.
INCREASE AIRFARE SALES AND PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We intend
to increase airfare sales, both in connection with room sales and on a stand
alone basis, by entering into new and enhanced relationships with major
airlines. In addition, we plan to pursue other incremental revenue opportunities
by expanding the range of products and services we offer, including the addition
of rental cars, cruises and tours, and by selling advertising space.
INVEST IN LEADING TECHNOLOGY. We intend to continue to invest in the
implementation of technology-driven enhancements to our web sites,
transaction-processing systems and call center. In addition, we intend to
develop tighter integration with the booking systems of our travel suppliers to
ensure that our customers are exposed to special promotional discounts as soon
as these discounts are initiated to help suppliers optimize their yields.
PURSUE STRATEGIC ACQUISITIONS. We intend to expand the travel content and
features of our web sites, build brand recognition and increase traffic volume
on our web sites both through investment in our existing operations and through
strategic acquisitions of complementary businesses and technologies.
Travelscape.com Services
Travelscape.com provides consumers with content-rich, value-added travel
services at significant discounts. Visitors to our sites at WWW.TRAVELSCAPE.COM
and WWW.LVRS.COM have immediate access to our easy to use proprietary booking
engine. Unlike many other travel web sites, we do not require customers to
pre-register or provide personal information prior to searching our database for
travel options. Visitors simply type in their desired destination and itinerary,
and the booking engine simultaneously displays a range of travel options, rates
and availability for the visitor to compare. At any time, visitors can review
detailed information about each of our destination markets, including in-depth
hotel, shopping and dining information, local news and events and other travel
planning information. We provide customer support through our call center 24
hours a day, 7 days a week to answer customer questions and assist in finding
the best travel value for their needs. Customers can either complete travel
purchases in a few easy steps online, or call our call center to purchase travel
offline.
THE TRAVELSCAPE.COM BOOKING PROCESS. At March 31, 1999, Travelscape.com's
travel inventory includes reserved blocks of hotel rooms at wholesale prices
from over 335 hotels in 35 destination markets and access to wholesale airfares
with several major airlines. In addition to our own inventory, we have access to
over 28,000 hotels and 400 airlines through the Pegasus Systems electronic
distribution service and the SABRE global distribution service at published
rates and fares. Visitors can choose to search for hotel, air or hotel/air
packages. Once a visitor initiates a search, our booking engine searches our
wholesale inventory and published airfares quoted through the SABRE global
distribution service to locate the best prices possible for the desired travel.
Our relational database and proprietary SABRE global distribution service
interface enables simultaneous presentation of numerous options that meet the
customer's requests to allow easy comparison shopping. To complete a purchase,
customers select the hotel and/or airline of their choice and supply basic
identification and credit card information. Once the order is submitted, the
customer receives instant online confirmation that travel has been booked and a
subsequent e-mail to verify the transaction. We also provide our customers with
the option to complete travel purchases quickly and efficiently through our call
center. Fulfillment is completed with e-tickets, whenever possible, or printed
tickets sent to the customer by second day air.
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DESTINATION GUIDES. Travelscape.com customers can view detailed information on
hotel options and destination markets at any time while shopping for travel
values, all without leaving the convenience of our web sites.
- HOTEL CONTENT. In addition to rates and availability, we provide
in-depth content on the hotels featured on our web sites, including
pictures of properties and rooms, descriptions of amenities and
locations, our own five star rating system and directions to the
hotel. By selecting and featuring a limited number of hotels in the
economy, mid-price and luxury price ranges in desirable areas of
each market we serve, we assist our customers in finding the
properties best suited to their individual preferences and budget
constraints.
- "HOT DEALS." The Travelscape.com home and destination pages feature
multiple "hot deals" in cooperation with our strategic partners in
each market we serve by offering deeper than usual promotional
discounts for a select number of hotels and hotel/air packages.
- LOCAL EVENTS AND ATTRACTIONS. Travelscape.com offers extensive
information on local events and attractions by providing access to
local content providers in each of our destination markets.
- RESTAURANT GUIDE. Travelscape.com allows customers to view dining
alternatives by featuring local restaurant guides.
- GROUND TRANSPORTATION. Travelscape.com offers access to rental car
reservations and other local transportation options, such as taxi,
limousine and shuttle services.
- MAPS. As part of our strategic online relationship with MapQuest,
Travelscape.com provides customers access to detailed and accurate
maps that pinpoint and provide directions to local attractions,
businesses and other addresses requested by the customer.
- WEATHER REPORTS. Travelscape.com provides access to current weather
information for planning future travel.
CUSTOMER SERVICE. Travelscape.com believes that its customer support service is
unparalleled in the online travel industry. We maintain a 90-station call
center, 24 hours a day, 7 days a week, to assist customers in using our web
sites. The call center also receives and processes orders for customers more
comfortable with that medium, and assists customers in changing or canceling
travel arrangements prior to the dates of travel. In addition, if a customer
purchases hotel accommodations at one of our strategic hotel partners through us
and finds a lower rate for the same property and dates elsewhere, we will refund
the difference to the customer upon verifying the lower rates.
Strategic Travel Relationships
Travelscape.com pursues strategic relationships with premier travel service
suppliers to provide the greatest travel value to its customers. Our strategic
travel relationships include:
- HOTELS. At March 31, 1999, Travelscape.com had established a
network of over 335 hotels in 35 destination markets nationwide,
including Las Vegas, Orlando, New York, San Francisco and Hawaii.
Hotels in the network include a wide range of independent hotels
and hotels in national chains, such as Doubletree, Hilton,
Marriott, Westin, Loews, Best Western and Hampton Inn. Sales of
rooms at the Luxor Hotel/Casino in Las Vegas accounted for 18.7% of
our gross hotel bookings in 1997 and 14.5% of our gross hotel
bookings in 1998. Our agreement with Luxor is non-exclusive, its
term runs for the calendar year and it is subject to renegotiation
each year upon expiration. No other supplier accounted for more
than 10% of our gross hotel bookings in 1997 and
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1998. We have entered into rate and inventory agreements with each
hotel in our network that allow us to purchase rooms at wholesale
prices. We resell these rooms at marked-up prices, while still
offering attractive discounts to consumers. By establishing
relationships with selected hotels in each destination market, we
are able to provide value-added advice to help customers decide on
accommodations and help our strategic hotel partners achieve higher
occupancy levels while maintaining their published rate structure.
- AIRLINES. Travelscape.com has entered into a non-exclusive
negotiated rate agreement with American Airlines for its entire
domestic system. Under the negotiated rate agreement, American
Airlines allows us access to airfares at wholesale prices on all
available domestic flights, provided we resell the fare in
combination with a hotel room. By combining discount air and hotel
prices, we offer customers extremely attractive package rates. In
addition, the negotiated rate agreement allows Travelscape.com to
offer consumers lower fares with less restrictive advance purchase
and weekend stay requirements than are generally available, even on
short notice. We have also entered into a non-exclusive negotiated
rate agreement with Reno Air for its entire domestic systems and
have similar arrangements in place with other airlines for routes
to and from Las Vegas.
- GLOBAL DISTRIBUTION SERVICES. 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. Through the SABRE global
distribution service, Travelscape.com offers published airfares
from more than 400 airlines, including those of all major domestic
and international commercial airlines. In addition, SABRE's
electronic booking system and database hosts our non-published fare
information through a unique arrangement that permits
Travelscape.com to integrate our non-published fares with published
fares in a dedicated area of the SABRE global distribution service
to which only we have access. This system automatically sorts
through millions of fares, including our own non-published fares,
to identify the lowest fare available for the desired itinerary. In
addition, we offer reservations for hotels outside of our networks
through the Pegasus Systems electronic distribution service on a
commision basis.
Online Marketing
Travelscape.com's marketing strategy is to strengthen our brand name, enhance
customer awareness of our services and attract new customers through online
banner advertising, web site sponsorship arrangements, co-branding relationships
and, to a lesser extent, print and broadcast media advertising. Travelscape.com
markets its wholesale travel services directly to consumers by entering into
strategic marketing relationships with online advertising representatives,
Internet service providers, portals and content providers. Our online marketing
relationships include:
- DOUBLECLICK. Effective March 1999, Travelscape.com entered into a
strategic relationship with DoubleClick, a leading provider of
online advertising solutions, to heighten visibility and brand
awareness of the Travelscape.com name and increase the volume of
traffic to our web sites. Under the one year agreement, DoubleClick
promises to deliver 327 million advertisements on other web sites
that link to our web sites, or impressions, per quarter that
include Travelscape.com text or graphic links. DoubleClick delivers
impressions to Travelscape.com primarily through ad placements on
web sites in the DoubleClick Network, including permanent text
links, rotating graphics links, banner ads and, in certain cases,
custom integration of Travelscape.com features and services on web
sites in the DoubleClick Network. DoubleClick features
Travelscape.com as the preferred hotel reservation service provider
on specified web sites on the DoubleClick
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Network. In return, Travelscape.com has agreed to pay DoubleClick
approximately $6.5 million in service fees over the term of the
contract, plus a share of revenue in certain circumstances. The
agreement is subject to re-negotiation after the term has expired.
- MAPQUEST. Travelscape.com and MapQuest, a leading online provider
of mapping and destination information, have entered into a
strategic relationship pursuant to which we are the preferred hotel
reservation service provider on the MapQuest site. MapQuest
includes permanent graphic and text links and rotating banner ads
for our web sites on its web site. MapQuest also has embedded the
Travelscape.com hotel booking engine directly into its web site.
MapQuest had an estimated 3.1 million unique visitors to its web
site in March 1999, according to Media Metrix, and has committed to
deliver 40 million impressions per month to Travelscape.com under a
series of agreements. In return, we will pay MapQuest a total $1.9
million through May 2000. Our agreements with MapQuest are subject
to re-negotiation after their terms have expired.
- INTERNET PORTALS AND INTERNET SERVICE PROVIDERS. Travelscape.com is
a featured travel service provider on the web sites of a wide range
of leading portals and Internet service providers, including Yahoo,
the Go2Net Network's Metacrawler, America Online, Earthlink,
Encompass and AT&T Worldnet Service. Advertising on these sites
allows Travelscape.com to reach potential customers at the point
where they access the Internet or begin to search for travel
information. These ads take a variety of forms, including rotating
banner ads and graphic links with minimum impressions requirements
per month, permanently installed text and graphic links and custom
integration of the Travelscape.com booking engine in the travel
sections of these sites. In exchange, we generally pay a set fee
per year ranging from approximately $200,000 to approximately $1.5
million, and in certain instances we pay a percentage of the
revenue generated by the ads in excess of target levels. These
arrangements are generally negotiated on a year to year basis.
- TRAVEL RELATED SITES. Travelscape.com is the preferred travel
service provider or hotel reservation service on a variety of
travel related web sites. For example, our hotel booking engine is
embedded as the discount hotel solution on WWW.ORLANDO.COM and
WWW.LASVEGAS.COM, leading destination-focused web sites in their
respective markets. In addition, our permanent graphic links are
the travel booking systems in the travel sections of regional
newspaper web sites including WWW.WASHINGTONPOST.COM and
WWW.SFGATE.COM. In exchange, we generally pay a set fee per year
ranging from $50,000 to $200,000, and in certain instances we pay a
percentage of the revenue generated by the ads. These arrangements
are generally negotiated on a year to year basis.
A key element of the Travelscape.com strategy is to aggressively develop our
brand recognition. We plan to increase online awareness of our brand by entering
into agreements with additional Internet service providers, portals and travel
related sites and by expanding our use of online advertising representatives and
co-branded sites.
OFFLINE MARKETING. In addition to our online marketing strategy, we continue to
advertise Las Vegas travel packages for sale directly from our call center in
regional newspapers including the LOS ANGELES TIMES, ORANGE COUNTY REGISTER, SAN
DIEGO UNION TRIBUNE and ARIZONA REPUBLIC.
Sales
From our inception in 1990 to 1997, we booked substantially all of our sales
through our call center. Since launching our web sites in 1998, our online sales
have steadily increased as a percentage of gross bookings. Internet sales
represented 30% of gross bookings in 1998 and 65% of gross bookings in the first
quarter of 1999. As online sales increase, our call center is increasingly
providing customer support for the online operations, while also offering an
alternative sales channel for customers more comfortable with that medium.
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<PAGE>
Competition
The online travel services market is new, rapidly evolving, intensely
competitive and has relatively low barriers to entry. We believe that
competition in the online travel services market is based predominantly on:
- price;
- selection and availability of hotel rooms and airfares;
- selection of destination markets;
- ease of use of online booking service;
- customer service;
- reliability; and
- travel related content.
We compete primarily with online travel reservation services such as Preview
Travel, Expedia Travel and Travelocity, as well as online travel wholesalers
such as Cheap Tickets, Hotel Reservation Network, Lowestfare.com and
Priceline.com. In addition, and to a lesser extent, we compete with traditional
travel agencies such as American Express Travel Service, Carlson Wagonlit Travel
and Uniglobe Travel, individual airlines, hotels and car rental companies
selling directly to consumers and consolidators and wholesalers of airline
tickets and other travel products such as Global Vacation Group and 800 Travel
Systems.
As the market for online travel services grows, we believe that companies
already involved in the online travel services industry will increase their
efforts to develop services that compete with our services. Currently, most
travel suppliers sell their services through travel agencies, travel wholesalers
and directly to customers, mainly by telephone. Increasingly, major airlines and
hotels are offering travel products and services directly to consumers through
their own web sites. Some of these web sites also include travel products and
services of other travel suppliers. We believe that this trend will continue. We
also face potential competition from Internet companies not yet in the leisure
travel market and travel companies not yet operating online. We are unable to
anticipate which other companies are likely to offer competitive services in the
future. We cannot be sure that our web sites and toll-free call center will
compete successfully with any current or future competitors.
Technology
Travelscape.com has developed proprietary automated database applications to
manage its inventory of contracted wholesale hotel rooms and airline seats.
Customers access the database through our web site interface to search for rates
and availability on a desired travel itinerary, and can quickly vary travel
parameters to determine the lowest prices available within their travel
constraints. The web site interface allows customers to search the SABRE global
distribution service directly for published fares. With a single interface for
all transactions, the difference between wholesale transactions from inventory
and commission-based transactions through the SABRE global distribution service
is transparent to customers. When the customer places an online order, our
automated back office obtains credit card approval for the transaction, confirms
the bookings with the travel service providers, arranges for e-tickets, e-mails
confirmations and mails paper tickets to the customer when e-tickets are
unavailable.
Travelscape.com users are linked to our servers through a redundant
configuration of a T3 data communication line and two T1 data communication
lines. In addition, 56 Kbp leased lines are used for data communications between
the servers and the SABRE global distribution service. Travelscape.com has
significantly expanded its data communications capacities in recent months and
anticipates continuing to do so in the future to support increased growth.
Travelscape.com maintains an Internet firewall to protect its internal systems.
All credit card transactions are processed using encryption and authentication
technology, including public key cryptology technology and secure socket layer
technology.
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Proprietary Rights
We regard our trademarks, domain names, service marks, trade dress, trade
secrets, copyrights and similar intellectual property as important to our
success, and rely on trademark and copyright law, trade secret protection and
confidentiality to protect our proprietary rights. We are pursuing the
registration of our key trademarks in the United States and internationally.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available online. Failure to effectively protect our intellectual property could
adversely affect our business or result in erosion of our brand name.
Currently, the only registered trademark we own is "Travelscapes Vacations,"
which we acquired in April 1999. In addition, we have filed an application with
the United States Patent and Trademark Office, or the Trademark Office, for the
trademark "Travelscape.com," and that application is currently pending. We are
aware of two other applications for the trademark "Travelscape" that are under
rejection by the Trademark Office. We have obtained the rights to the first of
these applications from the party who filed it. We believe that our ownership of
the Travelscapes Vacations trademark and the rights to the first application for
Travelscape will be sufficient to allow us to register the trademark
"Travelscape.com" with the Trademark Office. However, we cannot assure you that
we are correct in this regard. Further, we are aware that there are a number of
other businesses using the name Travelscape or variations thereof in commerce.
We do not know when all of these companies started using the name. One or more
of these companies may have started using the name prior to the time the rights
we have acquired were established, and could have rights in the name that are
superior to ours. As part of our strategy to protect our trademarks, we plan to
contact these companies and take actions to cause them to stop using the name.
There is also the chance that another party could claim that our use of the name
infringes their rights. We have recently received a letter from a party claiming
rights in the Travelscape name and asking us to cease using the name, and we are
seeking further information from this party. As a result of our efforts to
protect our rights in the Travelscape name, we could become involved in
litigation, which would likely be expensive and time consuming, and could
distract management from the operations of the business. Furthermore, we cannot
be sure we would prevail in any such litigation. We also plan to apply for the
trademark "lvrs.com," which is the name of our Las Vegas focused web site. We
cannot be sure we will be successful with this application.
Government Regulation
The United States and foreign governments heavily regulate certain segments of
the travel industry, and accordingly some services we offer are affected by such
regulations. For example, we are subject to the United States Department of
Transportation, or the Transporation Department, regulations prohibiting unfair
and deceptive practices. In addition, Transportation Department regulations
concerning the display and presentation of information that are currently
applicable to the global distribution services we access could be extended to us
in the future, as well as other laws and regulations aimed at protecting
consumers. We are subject to regulation by a number of states that have "seller
of travel" acts. These acts require us to register as a seller of travel, comply
with certain disclosure requirements, post a bond or escrow funds and/or
participate in state restitution funds. We are in the process of obtaining bonds
in and making applications, as appropriate, in California, Florida, Hawaii,
Iowa, Ohio, Washington and Illinois. There is a possiblity that we may be
subject to fines or other sanctions upon us for any past failure to comply with
these requirements, although we do not expect the total amount of any such fines
to exceed $150,000, in the aggregate.
Employees
As of March 31, 1999, we had 148 employees, consisting of 119 reservation agents
and call center employees and 29 corporate and administrative staff. Our ability
to attract and retain highly qualified
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employees will be the principal determinant of our success. We provide
performance-based and equity-based compensation programs to reward and motivate
significant contributors among our employees. Competition for qualified
personnel in the industry is intense. There can be no assurance that our current
and planned staffing will be adequate to support our future operations or that
management will be able to hire, train, retain, motivate, and manage required
personnel. Although none of our employees is represented by a labor union, there
can be no assurance that our employees will not join or form a labor union. We
have not experienced any work stoppages and consider our relations with our
employees to be good.
Facilities
Our headquarters are in Las Vegas where we own a facility comprising an
aggregate of approximately 9,000 square feet of space, housing our
administrative, sales and marketing, customer service and computer and
communications systems facilities. All of operations are located at the Las
Vegas facility. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-ins
and similar events. We currently do not have redundant systems or a formal
disaster recovery plan and do not carry sufficient business interruption
insurance to compensate us for losses that may occur. Despite our implementation
of network security measures, our servers are vulnerable to computer viruses,
physical or electrical break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data, or the inability to accept and confirm
customer reservations.
Litigation
We are not presently involved in any material legal proceedings.
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MANAGEMENT
The following table sets forth certain information with respect to the executive
officers and directors of Travelscape.com as of the date of this prospectus.
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age Position with Travelscape.com
- ---------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Timothy N. Poster....................... 30 President, Chairman of the Board and Chief Executive
Officer
Thomas C. Breitling..................... 29 Chief Operating Officer and Director
Jeffrey A. Marquis...................... 30 Chief Financial Officer
Michelle K. Decker...................... 42 Chief Technology Officer
Michael Reichartz....................... 29 President, Las Vegas Reservation Systems
Erick A. Rodriguez...................... 30 Executive Vice President, Product Development
Steven C. Sarner........................ 40 Vice President, Business Development and Marketing
Jose L. Yofe............................ 46 Vice President, International Product Development
Edward L. Muncey........................ 28 Vice President, Domestic Product Development
Michael J. Conway....................... 53 Director
Tobin J. Corey.......................... 38 Director
Lorenzo J. Fertitta..................... 30 Director
</TABLE>
- ------------------------------------
TIMOTHY N. POSTER co-founded Travelscape.com in March 1998 and has served as its
Chairman of the Board and Chief Executive Officer since that time. In October
1990, Mr. Poster founded Las Vegas Reservation Systems and was President of that
company from October 1990 to January 1999. Mr. Poster holds a bachelors degree
from the University of Southern California in Business Administration.
THOMAS C. BREITLING co-founded Travelscape.com with Mr. Poster in March 1998 and
has served as its Chief Operating Officer since that time. From 1993 through
March 1998, Mr. Breitling served as the Executive Vice President for Las Vegas
Reservation Systems. Mr. Breitling currently manages the operations of both
Travelscape.com and Las Vegas Reservation Systems. Mr. Breitling holds a
bachelors degree from the University of San Diego in Communications.
JEFFREY A. MARQUIS joined Travelscape.com in April 1998. From September 1994 to
April 1998, Mr. Marquis was employed as an investment analyst and portfolio
manager at Fertitta Enterprises, a private equity fund. Prior to holding his
position with Fertitta Enterprises, from September 1991 to September 1994, Mr.
Marquis was employed with KPMG Peat Marwick as a Senior Auditor. Mr. Marquis is
a certified public accountant and a chartered financial analyst. Mr. Marquis
holds a bachelors degree from the University of San Diego in Accounting.
MICHELLE K. DECKER joined Travelscape.com in April 1999. From April 1998 to
April 1999, Ms. Decker was employed as the Senior Corporate Director of New
Technology at Lifetouch, a photography firm. Prior to holding her position with
Lifetouch, from 1988 to 1998 Ms. Decker was employed with Carlson Marketing
Group in various technical positions including Senior Corporate Director of New
Technology and Senior Director of International Systems. Ms. Decker holds a
bachelors degree from Slippery Rock State University in Computer Technology and
an MBA from Youngstown State University.
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MICHAEL REICHARTZ joined Las Vegas Reservation Systems in 1995. From June 1988
to May 1995, Mr. Reichartz was employed with the Las Vegas Hilton in various
positions, including Reservation Manager and International Sales Manager. Mr.
Reichartz's primary duties included managing and coordinating all travel agency
and tour operator relationships. Mr. Reichartz was named Chairman of the Las
Vegas Tourism Board in 1997. Mr. Reichartz's primary responsibilities at
Travelscape.com include managing Las Vegas operations. Mr. Reichartz holds a
bachelors degree from the University of Nevada, Las Vegas in Business
Administration.
ERICK A. RODRIGUEZ joined Travelscape.com in May 1998. From January 1993 to May
1998, Mr. Rodriguez was employed at Sprint in various positions including as
General Manager Sales and Service in the Hotel Industry and as a National
Account Manager. Mr. Rodriguez's primary responsibilities at Travelscape.com
include securing hotel contracts with Travelscape.com partners. Mr. Rodriguez
holds a bachelors degree from the University of San Diego in Business
Administration.
STEVEN C. SARNER joined Travelscape.com in July 1998. From July 1994 to July
1998, Mr. Sarner was employed at Reno Air as Vice President of Marketing and
Sales. Prior to holding his position with Reno Air, from June 1992 to July 1994,
Mr. Sarner was employed at Rosenbluth, the third largest travel management firm
in the nation, as Director of Sales, Western Region. Mr. Sarner has over 15
years experience in the airline/travel industry. Mr. Sarner's primary
responsibilities at Travelscape.com include securing wholesale airline contracts
and to secure distribution arrangements with web site partners. Mr. Sarner holds
a bachelors degree from the California State University, Long Beach in Business
Administration.
JOSE L. YOFE joined Travelscape.com in November 1998. From December 1995 to
October 1998, Mr. Yofe was employed in various positions at the SABRE Group
including as a Division Sales Manager and as an Account Executive. Prior to
being employed by the SABRE Group, Mr. Yofe was employed by Mirage Resorts as
General Manager for Airline Services. Mr. Yofe's primary responsibilities at
Travelscape.com include securing hotel agreements with international
Travelscape.com partners. Mr. Yofe holds a bachelors degree from Moreno College
in Argentina.
EDWARD L. MUNCEY joined Travelscape.com in May 1998. From December 1997 to May
1998, Mr. Muncey was employed by Mirage Resorts as Senior Travel Industry Sales
Manager. Prior to working for Mirage Resorts, from August 1994 to December 1997,
Mr. Muncey was employed as a Sales Manager by Circus Circus Enterprises. Mr.
Muncey's primary responsibilities at Travelscape.com include securing hotel
contracts with domestic Travelscape.com partners. Mr. Muncey holds a bachelor's
degree from San Diego State University in Business Administration with an
emphasis in marketing.
MICHAEL J. CONWAY became a director of Travelscape.com in April 1999. Since
April 1995, Mr. Conway has been employed as the President and Chief Executive
Officer of National Airlines. Prior to founding National Airlines, from 1994 to
1995, Mr. Conway was employed as an aviation consultant for financial investors
and foreign airlines. Mr. Conway was also a co-founder of America West Airlines.
TOBIN J. COREY became a director of Travelscape.com in April 1999. Mr. Corey
co-founded USWeb/CKS, an Internet consulting firm, in December 1995 and has
served as its President since June 1996 and as a Director since April 1998.
Prior to June 1996, Mr. Corey served as Executive Vice President, Marketing for
USWeb/CKS. From 1994 to December 1995, Mr. Corey served as Vice President of
Marketing for the NetWare Products Division of Novell, a computer software
company. From 1991 through 1994, Mr. Corey served as Director of Marketing for
the Desktop Division of Novell.
LORENZO J. FERTITTA became a director of Travelscape.com in April 1998. Since
December 1997, Mr. Fertitta has been employed as the President and Chief
Executive Officer of Gordon Biersch Brewing
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Company. Since 1993, Mr. Fertitta has also been an officer and director of
Fertitta Enterprises, Inc. and has been an officer and/or director of many
companies associated with Fertitta Enterprises. Mr. Fertitta holds a bachelors
degree from the University of San Diego and an MBA from New York University. Mr.
Fertitta is also a member of the board of directors of Station Casinos, Inc., a
gaming company, and several private companies.
Classified Board
Our Amended and Restated Certificate of Incorporation provides for a board of
directors consisting of three classes serving three-year staggered terms. Class
I consists of Thomas C. Breitling and Tobin J. Corey; Class II consists of
Michael J. Conway; and Class III consists of Timothy N. Poster and Lorenzo J.
Fertitta. The initial term of office of the Class I directors expires at the
annual meeting of stockholders in 2000. The initial term of office of the Class
II directors expires at the annual meeting of stockholders held in 2001. The
initial term of office of the Class III directors expires at the annual meeting
of stockholders held in 2002.
Board of Directors; Committees
Travelscape.com maintains two standing committees, an audit committee and a
compensation committee. We have no nominating committee or other committee
performing the functions of a nominating committee.
AUDIT COMMITTEE
In April 1999, the board of directors formed the audit committee for the purpose
of reviewing our internal accounting procedures and consulting with and
reviewing the services provided by our independent public accountants. Lorenzo
J. Fertitta, Michael J. Conway and Tobin J. Corey constitute the audit
committee.
COMPENSATION COMMITTEE
In April 1999, the board of directors formed the compensation committee. The
compensation committee reviews and recommends to the board the compensation and
benefits of all of our officers and reviews general policy relating to
compensation and benefits of our employees. The compensation committee also
administers our stock option plans and will administer our Employee Stock
Purchase Plan upon completion of this offering. Timothy N. Poster, Lorenzo J.
Fertitta and Michael J. Conway constitute the compensation committee.
Compensation Committee Interlocks and Insider Participation
Prior to April, 1999, our board of directors did not maintain a standing
compensation committee, and the entire board participated in all decisions
regarding compensation of our executive officers. In April 1999, the board
formed the compensation committee and appointed Messrs. Poster, Fertitta and
Conway as committee members. No executive officer of Travelscape.com serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
Director Compensation
Directors do not currently receive cash compensation for services rendered as
members of our board of directors. We do, however, reimburse our directors for
certain reasonable expenses incurred in connection with their attendance at
board and committee meetings. Outside directors are granted an option to
purchase 50,000 shares upon joining the board, of which 25% are immediately
vested and 25% vest each year thereafter for a period of three years. In
addition, each outside director is granted an option to purchase 7,500 shares of
common stock at the market price for each successive year after joining the
board.
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Executive Compensation
The following table summarizes the compensation paid to Travelscape.com's Chief
Executive Officer and the other executive officers of Travelscape.com whose
salary and bonus exceeded $100,000 for services rendered to Travelscape.com in
all capacities during 1998, who are collectively, the named executive officers.
Fiscal 1998 Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Other -------------
-------------------- Annual Securities
Salary Bonus Compensation Underlying
Name and Principal Position ($) ($) ($)(1) Options (#)
- -------------------------------------------------------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Timothy N. Poster ............................................ 205,769 50,000 19,296 --
Chairman of the Board and Chief Executive Officer
Thomas C. Breitling .......................................... 137,500 25,000 24,250 --
Chief Operating Officer
Jeffrey A. Marquis ........................................... 98,077 25,000 -- 345,000
Chief Financial Officer
</TABLE>
- ------------------------------------
(1) Represents personal car expenses paid by Travelscape.com.
Option Grants During Last Fiscal Year
The following table sets forth information with respect to stock options granted
to each of the named executive officers during 1998, including the potential
realizable value over the 10-year term of the options based on assumed rates of
stock appreciation of 5% and 10%, compounded annually. These assumed rates of
appreciation comply with the rules of the Securities and Exchange Commission and
do not represent our estimate of future stock price. Actual gains, if any, on
stock option exercises will be dependent on the future performance of our common
stock. In 1998, we (or our predecessors) granted options to acquire up to an
aggregate of 1,027,500 shares to employees and directors under the 1998 Plan and
all at an exercise price equal to not less than the fair market value of our
common stock on the date of grant as determined in good faith by the board of
directors. Optionees may pay the exercise price by cash, check, promissory note
(in special cases approved by the compensation committee), delivery of
already-owned shares of Travelscape.com's common stock or pursuant to a cashless
exercise procedure. Options under the 1998 Plan generally vest over three years
with 33% of the shares vesting on the first anniversary of the grant date, and
33% of the shares vesting on each anniversary thereafter.
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------------------ Annual Rates of
Number of Stock Price
Shares Percent of Total Appreciation for
Underlying Options Granted Options Term
Options to Employees in Exercise Price Expiration --------------------
Name Granted Fiscal 1998 ($/Share) Date 5% ($) 10% ($)
- --------------------------------- ----------- ----------------- --------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timothy N. Poster................ -- --% -- -- -- --
Thomas C. Breitling.............. -- --% -- -- -- --
Jeffrey A. Marquis............... 345,000 33.6% $ 1.33 7/1/08 288,568 731,288
</TABLE>
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<PAGE>
Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End
Option Values
No named executive officer exercised stock options during 1998. The following
table sets forth information regarding stock options held as of March 31, 1999
by the named executive officers. The "Value of Unexercised In-the-Money Options"
is based upon a value of $11.00 per share, the assumed initial public offering
price, minus the per share exercise price, multiplied by the number of shares
underlying the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at March 31, 1999 at March 31, 1999
-------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------- ----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Timothy N. Poster......................................... -- -- -- --
Thomas C. Breitling....................................... -- -- -- --
Jeffrey A. Marquis........................................ -- 345,000 -- $ 3,336,150
</TABLE>
Incentive Stock Plans
1998 STOCK OPTION PLAN. Travelscape.com's 1998 Stock Option Plan, or the 1998
Plan, provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code to our employees and nonstatutory stock
options to our employees, directors and consultants. The 1998 Plan was approved
by the board of directors and our stockholders in 1998, and until April 1999 was
administered by the board of directors. Since April 1999, the 1998 Plan has been
administered by the compensation committee. A total of 3,000,000 shares of
common stock have been reserved for issuance pursuant to the 1998 Plan. To date,
no shares had been issued upon the exercise of stock options granted under the
1998 Plan and 2,555,125 shares were subject to outstanding options. The board of
directors has determined that no further options will be granted under the 1998
Plan after the completion of this offering.
The exercise price of incentive stock options granted under the 1998 Plan must
be at least 100% of the fair market value of the common stock on the date of
grant. The exercise price of nonstatutory stock options must be at least 85% of
the fair market value of the common stock on the date of grant. In the case of
an incentive stock or nonstatutory stock option granted to a holder of more than
10% of the voting power of Travelscape.com, the exercise price must be at least
110% of such fair market value.
Options granted under the 1998 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1998 Plan must generally be
exercised within three months of the termination of optionee's service with us,
or within 12 months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's term. The board of
directors may amend or modify the 1998 Plan at any time, except that without the
consent of the option holders, no amendment or modification shall adversely
affect rights and obligations with respect to options at the time outstanding
under the 1998 Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN.
Our 1999 Employee Stock Purchase Plan, or the 1999 Stock Purchase Plan, was
adopted by the board of directors in April 1999 and by the stockholders in May
1999. A total of 500,000 shares of common stock have been reserved for issuance
under the 1999 Stock Purchase Plan, plus annual increases equal to the lesser
of:
- 500,000 shares;
- 2% of the outstanding shares; and
- a lesser amount determined by the board.
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<PAGE>
The 1999 Stock Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, is implemented by overlapping offering periods
generally consisting of 24 months each. The offering periods generally start on
the first trading day on or after February 1 and August 1 of each year, except
for the first such offering period which commences on the first trading day on
or after the effective date of this offering and ends on the last trading day on
or before July 31, 2001. Each offering period consists of four exercise periods,
generally of six months duration. However, the first exercise period in the
first offering period will begin on the first trading day on or after the
effective date of this offering and will end on the last trading day on or
before January 31, 2000.
Employees are eligible to participate if they are customarily employed by us or
any participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, any employee who immediately after grant
owns stock possessing 5% or more of the total combined voting power or value of
all classes of our capital stock, or whose rights to purchase stock under all
our employee stock purchase plans accrues at a rate which exceeds $25,000 worth
of stock for each calendar year may not be granted an option to purchase stock
under the 1999 Stock Purchase Plan. The 1999 Stock Purchase Plan permits
participants to purchase common stock through payroll deductions of up to 10% of
the participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings but exclusive of commissions, overtime,
bonuses and any other compensation. The maximum number of shares a participant
may purchase during a single offering period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase shares
of common stock at the end of each exercise period. The price of stock purchased
under the 1999 Stock Purchase Plan is generally 85% of the lower of the fair
market value of the common stock at the beginning of the offering period or the
end of the exercise period. If the fair market value of the common stock at the
end of an exercise period is lower than the fair market value of the common
stock at the beginning of the offering period, all employees in that offering
period will be automatically re-enrolled in the new offering period beginning
immediately after the end of the exercise period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
Rights granted under the 1999 Stock Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1999 Stock Purchase Plan. The 1999 Stock Purchase
Plan provides that, in the event we merge with or into another corporation or
sell substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new exercise date will be set.
The board of directors generally has the authority to amend or terminate the
1999 Stock Purchase Plan and the board of directors may terminate an offering
period on any exercise date if the board determines that the termination of the
1999 Stock Purchase Plan is in the best interests of Travelscape.com and its
stockholders. However, no such action, other than termination of the 1999
Purchase Plan, may adversely affect any outstanding rights to purchase stock
under the 1999 Stock Purchase Plan. The 1999 Stock Purchase Plan will terminate
in 2009, unless sooner terminated by the board of directors.
1999 STOCK PLAN.
Our 1999 Stock Plan, or the 1999 Plan, provides for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code, to
employees and for the grant of nonstatutory stock options and stock purchase
rights to employees, directors and consultants. The 1999 Plan was approved by
the board of directors in April 1999 and by the stockholders in May 1999. Unless
terminated sooner, the 1999 Plan will terminate automatically in 2009. A total
of 2,000,000 shares of common
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<PAGE>
stock have been reserved for issuance pursuant to the 1999 Plan, plus annual
increases equal to the lesser of:
- 1,000,000 shares;
- 3% of the outstanding shares on such date; and
- a lesser amount determined by the board.
The 1999 Plan may be administered by the board of directors or a committee of
the board (as applicable, or the Administrator), which committee shall, in the
case of options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Internal Revenue Code, consist of two or
more "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code. Currently, the compensation committee is the Administrator. The
Administrator has the power to determine the terms of the options or stock
purchase rights granted, including the exercise price, the number of shares
subject to each option or stock purchase right, the exercisability thereof, and
the form of consideration payable upon such exercise. In addition, the
Administrator has the authority to amend, suspend or terminate the 1999 Plan,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1999 Plan.
Options and stock purchase rights granted under the 1999 Plan are not generally
transferable by the optionee, and each option and stock purchase right is
exercisable during the lifetime of the optionee only by such optionee. Options
granted under the 1999 Plan must generally be exercised within three months of
the end of optionee's status as our employee, director or consultant, or within
12 months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's 10-year term. In the case of
stock purchase rights, unless the Administrator determines otherwise, shares of
stock will be sold pursuant to a restricted stock purchase agreement under which
we will reserve a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with us for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to a restricted stock purchase agreement shall be the original price
paid by the purchaser and may be paid in cash or by cancellation of any
indebtedness or other obligation of the purchaser to us. The repurchase option
shall lapse at a rate determined by the Administrator. The exercise price of all
incentive stock options granted under the 1999 Plan must be at least equal to
the fair market value of the common stock on the date of grant. The exercise
price of nonstatutory stock options and stock purchase rights granted under the
1999 Plan is determined by the Administrator. However, nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code must be granted at an
exercise price equal to at least the fair market value of the common stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any incentive stock option granted must equal to at
least 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1999 Plan may not exceed ten years.
Change in Control Arrangements
Under the 1998 Plan and the 1999 Plan, in the event of a change of control,
vesting of options and restricted stock issued under the 1998 Plan and the 1999
Plan will automatically accelerate such that options will become fully
exercisable, including with respect to shares for such options which would
otherwise be unvested, and any outstanding repurchase options relating to
restricted stock will lapse.
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<PAGE>
Employment Agreements
EMPLOYMENT AGREEMENT WITH TIMOTHY POSTER, CHIEF EXECUTIVE OFFICER
Our employment agreement with Mr. Poster provides for, among other things:
- at-will employment;
- membership on and Chairmanship of our board of directors;
- participation in all employee benefit programs; and
- an agreement not to compete with us, nor to solicit our employees
or customers for three years after termination of employment,
although we cannot assure you that the provisions will be
enforceable in all jurisdictions.
Mr. Poster's employment agreement provides for a base salary of $250,000 per
year and an annual bonus of up to 200% of his base salary based on our
performance. Our agreement with Mr. Poster also provides for one year severance
pay if he is terminated without cause or upon a change in control.
EMPLOYMENT AGREEMENT WITH THOMAS BREITLING, CHIEF OPERATING OFFICER
The agreement with Mr. Breitling provides for, among other things:
- at-will employment;
- membership on our board of directors;
- participation in all employee benefit programs; and
- an agreement not to compete with us, nor to solicit our employees
or customers for three years after termination of employment,
although we cannot assure you that these provisions will be
enforceable in all jurisdictions.
Mr. Breitling's employment agreement provides for a base salary of $175,000 per
year and an annual bonus of up to 100% of his base salary based on our
performance. Our agreement with Mr. Breitling also provides for one year
severance pay if he is terminated without cause or upon a change in control.
EMPLOYMENT AGREEMENT WITH JEFFREY MARQUIS, CHIEF FINANCIAL OFFICER
The agreement with Mr. Marquis provides for, among other things:
- at-will employment;
- participation in all employee benefit programs; and
- an agreement not to compete with us, nor to solicit our employees
or customers for three years after termination of employment,
although we cannot assure you that these provisions will be
enforceable in all jurisdictions.
Mr. Marquis's employment agreement provides for a base salary of $150,000 per
year, and an annual bonus of up to 100% of his base salary based on our
performance. Our agreement with Mr. Marquis also provides for one year severance
pay if he is terminated without cause or upon a change in control.
Limitations on Directors' Liability and Indemnification
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for
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<PAGE>
monetary damages for breach of their fiduciary duties as directors, except
liability for any of the following acts:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
- any transaction from which the director derived an improper
personal benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recission.
Our Certificate of Incorporation and Bylaws provide that we will indemnify our
directors and executive officers and may indemnify our other corporate agents to
the fullest extend permitted by law. We believe that indemnification under our
Bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our Bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the Bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for certain expenses; including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in our right arising out of such person's
services as a director or executive officer any subsidiary or any other company
or enterprise to which the person provided services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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<PAGE>
CERTAIN TRANSACTIONS
During the last three fiscal years, Victoria Partners has loaned money to Mr.
Timothy Poster and Las Vegas Reservation Systems, as listed below. Mr. Lorenzo
Fertitta, a director of Travelscape.com, is the president of the general partner
of Victoria Partners.
<TABLE>
<CAPTION>
Lender Borrower Loan Date Repay Date Amount Interest Rate
- ------------------ ---------------------------------------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Victoria Partners Timothy Poster 12/16/97 1/30/98 $ 150,000 Broker Call
Victoria Partners Las Vegas Reservation Systems 10/20/98 11/02/98 $ 314,000 Broker Call
</TABLE>
In April 1998, Travelscape.com made a secured loan in the principal amount of
$105,750 to Mr. Thomas Breitling. The loan accrues interest at a rate of 10% per
year and is currently in repayment. As of the date of this initial public
offering, $72,810 is outstanding on the loan.
In April 1998, Messrs. Timothy Poster, Jeffrey Marquis and Thomas Breitling
entered into a voting agreement pursuant to which they agreed to vote their
shares of Travelscape.com, Inc. in the manner specified by the holders of a
majority of the shares held among them. This voting agreement is binding until
Travelscape.com completes an initial public offering.
In June 1998, the Frank J. Fertitta and Victoria K. Fertitta Revocable Family
Trust (the "Trust") purchased 1,500,000 shares of common stock of our
predecessor, Travelscape.com, Inc., a Nevada corporation for $1.5 million. Frank
and Victoria Fertitta are the parents of Lorenzo Fertitta. In February 1999,
these shares were transferred to Zucherro, LLC, in which Lorenzo Fertitta holds
a 2.5% interest and of which Lorenzo Fertitta is the managing member.
In April 1998, we granted to each of our non-employee directors, Messrs. Lorenzo
Fertitta, Tobin Corey and Michael Conway, an option to purchase up to 50,000
shares of our common stock for $6.00 per share. The options are immediately
vested and exercisable as to 25% of the shares, and become vested with respect
to an additional 25% of the shares on the first, second and third anniversaries
of the date of grant.
In May 1999, we entered into employment agreements with each of Timothy Poster,
Thomas Breitling and Jeffrey Marquis. Please see "Management--Employment
Agreements" for a discussion of the terms of these agreements.
In 1998, Timothy Poster made a contribution of approximately $1.0 million to us
in connection with certain investing activities on behalf of Travelscape.com.
All future transactions, including any loans from Travelscape.com to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested members of the board of directors or if required by law, a
majority of disinterested stockholders.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
our common stock as of May 30, 1999 by the following individuals or groups: (i)
each person or entity who is known by us to own beneficially more than 5% of our
outstanding common stock, (ii) each of the Named Executive Officers, (iii) each
of our directors and (iv) all directors and executive officers as a group.
The address for each holder of more than 5% of Travelscape.com common stock is
c/o Travelscape.com, 8951 W. Sahara, Suite 100, Las Vegas, Nevada 89117. Except
as otherwise indicated, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock held by them. Applicable percentage ownership in the
following table is based on 15,000,000 shares of common stock outstanding as of
May 30, 1999 and 20,000,000 shares immediately following the completion of this
offering. To the extent that any shares are issued upon exercise of options,
warrants or other rights to acquire Travelscape.com's capital stock that are
presently outstanding or granted in the future or reserved for future issuance
under Travelscape.com's stock plans, there will be further dilution to new
public investors.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Prior to the Shares Beneficially
Offering(1) Owned After Offering(1)
--------------------------- ---------------------------
Name of Beneficial Owner Number Percent(2) Number Percent(2)
- -------------------------------------------------------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Timothy N. Poster(3).......................................... 6,975,000 46.5 6,975,000 34.9
Thomas C. Breitling(3)........................................ 6,033,000 40.2 6,033,000 30.2
Lorenzo J. Fertitta(5)........................................ 1,512,500 10.1 1,512,500 7.6
Zucchero, LLC(5).............................................. 1,500,000 10.0 1,500,000 7.5
Jeffrey A. Marquis(3)(4)...................................... 565,000 3.7 565,000 2.8
Michael J. Conway(6).......................................... 12,500 * 12,500 *
Tobin J. Corey(7)............................................. 12,500 * 12,500 *
All directors and executive officers as a group (12
persons)(8)................................................. 15,241,750 99.7 15,241,750 75.1
------------ --- ------------ ---
</TABLE>
- ---------------------------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting and
investment power with respect to securities.
(2) All shares subject to options or warrants that are exercisable within 60
days of the date of this table are deemed to be outstanding and to be
beneficially owned by the person holding such options or warrants for the
purpose of computing the percentage ownership of such person, but are not
deemed to be outstanding and to be beneficially owned for the purpose of
computing the percentage ownership of any other person. Assumes no exercise
of the Underwriters' over-allotment option.
(3) Mr. Poster, Mr. Breitling and Mr. Marquis have entered into a voting
agreement pursuant to which they have agreed to vote all of their shares in
accordance with the directions of the holders of a majority of the shares
held by them. As a group, Messrs. Poster, Breitling and Marquis hold a total
of 13,458,000 shares of common stock, or 89.7% of our common stock prior to
this offering. The voting agreement will terminate upon the completion of
this offering.
(4) Includes 115,000 shares of common stock subject to options held by Mr.
Marquis exercisable within 60 days of the date of this table.
(5) Includes 1,500,000 shares held in the name of Zucchero LLC. Mr. Fertitta
holds a 2.5% interest in, is the managing member of, and has voting and
dispository control of all of the shares held by Zucchero LLC. In the case
of Mr. Fertitta, includes 12,500 shares of common stock subject to options
exercisable within 60 days of the date of this table.
(6) Includes 12,500 shares of common stock subject to options held by Mr.
Conway exercisable within 60 days of the date of this table.
(7) Includes 12,500 shares of common stock subject to options held by Mr. Corey
exercisable within 60 days of the date of this table.
(8) Includes 290,000 shares of common stock subject to options exercisable
within 60 days of the date of this table.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Travelscape.com is authorized to issue up to 50,000,000 shares of common stock,
$.01 par value, and up to 5,000,000 shares of undesignated preferred stock, $.01
par value. Immediately after the completion of this offering, we estimate that
there will be an aggregate of 20,000,000 shares of common stock outstanding and
no shares of preferred stock will be issued and outstanding. In addition, based
on options granted to date, 2,555,125 shares of common stock will be issuable
upon exercise of outstanding options upon completion of the offering.
The following description of our capital stock summarizes material provisions
contained in our Amended and Restated Certificate of Incorporation and Restated
Bylaws, but does not purport to be complete and is subject to and qualified in
its entirety by our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws and by the provisions of applicable Delaware law.
Common Stock
As of March 31, 1999, there were 15,000,000 shares of common stock outstanding,
which were held by 12 stockholders. Holders of common stock are entitled to one
vote per share on all matters to be voted upon by the stockholders and do not
have cumulative voting rights. Therefore, holders of a majority of the shares
voting for the election of directors will be able to elect all of the directors.
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by the board of directors out of funds legally
available for the payment of dividends, subject to the terms of any existing or
future agreements between Travelscape.com and our debtholders. We have never
declared or paid cash dividends on our capital stock, expect to retain future
earnings, if any, for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable future. In the event
of the liquidation, dissolution or winding up of Travelscape.com, the holders of
common stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of preferred stock then outstanding.
Preferred Stock
Pursuant to our Amended and Restated Certificate of Incorporation, the board of
directors has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the designations, powers, preferences and privileges, relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the common stock. The board of directors, without stockholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay, or prevent a change in control of Travelscape.com or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and the other rights of the holders of common stock.
At present, there are no shares of preferred stock outstanding and we have no
plans to issue any of the preferred stock.
Options and Warrants
Based on options granted to date, options to purchase 2,555,125 shares were
outstanding, with exercise prices ranging from $1.33 to $6.00 per share. Of
these outstanding options, all shares are subject to
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<PAGE>
options under the 1998 Option Plan and no shares are subject to options under
the 1999 Plan. Please see "Management -- Stock Plans" for a more detailed
description of the options.
We have also issued warrants to purchase an aggregate of 527,752 shares at an
exercise price of $0.01 per share in connection with a private financing in
February 1999. We have the right to repurchase the warrants at the par value of
the shares subject to the warrants within 30 days after the closing of this
offering. However, the holders of the warrants may exercise the warrants pending
the closing of such repurchase. We intend to exercise our repurchase right, and
we expect that all warrant holders will exercise their warrants instead of
allowing us to repurchase them. As a result, we expect to issue up to 527,752
shares to the warrant holders within 30 days after the completion of this
offering. These shares will be "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, and will not be eligible for resale
into the public market prior to February 16, 2000. Please see "Shares Eligible
for Future Sale" for a more detailed description of the warrants.
Antitakeover Effects of Provisions of Our Certificate of Incorporation and
Bylaws
Travelscape.com's Amended and Restated Certificate of Incorporation provides
that the board of directors is classified into three classes of directors, each
with three-year terms. The term of one class of directors expires at each annual
meeting of stockholders. As a result, stockholders desiring to replace the
incumbent directors and gain control of the board would be required to win at
least two annual contests before their nominees constituted a majority of
directors. Please see "Management -- Classified Board" for a more detailed
description of the classified board. In addition, our Amended and Restated
Certificate of Incorporation eliminates the ability of stockholders to take
actions by written consent, allows for the Board to designate and issue
preferred stock without further stockholder approval and requires a 66 2/3% vote
of the stockholders to amend or repeal certain provisions of the Certificate of
Incorporation or Bylaws that may currently delay or inhibit an acquisition of
Travelscape.com. Any of these provisions may have the effect of delaying or
preventing a change of control of Travelscape.com without the approval of the
Board of Directors.
Our Amended and Restated Bylaws permit only a majority of the board of directors
or the Chief Executive Officer to call a special meeting of the stockholders and
require prior notice of matters to be brought before meetings of the
stockholders.
These provisions of our Amended and Restated Certificate of Incorporation and
Bylaws are intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and in the policies formulated by the
board of directors and to discourage certain types of transactions which may
involve an actual or threatened change of control of Travelscape.com. Such
provisions are designed to reduce the vulnerability of Travelscape.com to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of
Travelscape.com. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights. These provisions could, however, have the
effect of discouraging others from making tender offers for our shares and,
consequently, may also inhibit increases in the market price of our shares that
could result from actual or rumored takeover attempts. These provisions may also
have the effect of preventing changes in the management of Travelscape.com.
Effect of Delaware Antitakeover Statute
Travelscape.com is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with
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<PAGE>
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless:
- prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding, for purposes of determining the number of shares
outstanding, those shares owned (x) by persons who are directors
and also officers and (y) by employee stock plans in which
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a
tender or exchange offer; and
- on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least two thirds of the outstanding voting
stock which is not owned by the interested stockholder.
Prior to the offering made hereby, each stockholder that is an interested
stockholder of Travelscape.com became an interested stockholder in a transaction
approved by our board of directors. Therefore, Section 203 would not impose any
restrictions on a business combination between us and any of our existing
stockholders.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the
interested stockholder
- any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
- subject to exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; and
- the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
LIMITATION OF DIRECTOR AND OFFICER LIABILITY
Our Amended and Restated Certificate of Incorporation contains certain
provisions relating to the limitation of liability and indemnification of
directors and officers. Our Amended and Restated Certificate of Incorporation
provides Travelscape.com shall indemnify its directors and officers to the
fullest extent authorized by Delaware law.
Transfer Agent
The transfer agent and registrar for our common stock is Norwest Shareowner
Services, N.A.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Travelscape.com will have outstanding
20,000,000 shares of common stock based upon shares outstanding at March 31,
1999 (assuming no exercise of the underwriters' over-allotment option).
Excluding the 5,000,000 shares of common stock offered hereby and assuming no
exercise of the underwriters' over-allotment option, as of the effective date of
the registration statement, there will be 15,000,000 shares of common stock
outstanding, all of which are "restricted securities" under the Securities Act.
In addition, within 30 days after the completion of this offering, we expect to
issue up to 527,752 shares of common stock pursuant to the exercise of
outstanding warrants. These shares will also be restricted securities. Please
see "Description of Capital Stock--Options and Warrants" for a more detailed
description of the options and warrants. All restricted securities are subject
to lock-up agreements with the underwriters pursuant to which the holders of the
restricted securities have agreed not to sell, pledge or otherwise dispose of
their shares of common stock for a period of 180 days after the date of this
prospectus. U.S. Bancorp Piper Jaffray Inc. may release the shares subject to
the lock-up agreements in whole or in part at any time with or without notice.
However, U.S. Bancorp Piper Jaffray Inc. has no current plans to do so.
All of the 15,000,000 restricted shares currently outstanding will become
eligible for sale in the public market beginning on January 22, 2000 pursuant to
Rule 144. Of the 527,752 shares of common stock issuable upon exercise of
warrants, 164,250 and 363,502 will be eligible for resale in the public market
begining on February 16, 2000 and February 28, 2000, respectively, pursuant to
Rule 144. The general provisions of Rule 144 are described below.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted shares for at least
one year (including the holding period of any prior owner except an affiliate)
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of: (A) one percent of the number of shares of
common stock then outstanding (which will equal approximately 200,000 shares
immediately after this offering); or (B) the average weekly trading volume of
the common stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about
Travelscape.com.
To date, 3,000,000 shares of common stock have been reserved under the 1998
Plan, of which options to purchase 2,555,125 shares were then outstanding
although none of these options were then exercisable. In addition, we have
reserved 500,000 shares of common stock under the 1999 Stock Purchase Plan and
2,000,000 shares of common stock under the 1999 Plan, none of which are subject
to outstanding options. We intend to file, within 180 days after the date of
this prospectus, a Form S-8 registration statement under the Securities Act to
register all of the shares reserved under the 1998 Plan, the 1999 Stock Purchase
Plan and the 1999 Plan.
Lock-Up Agreements
All officers, directors, stockholders and holders of options and warrants
exercisable within 180 days of the date of this prospectus have agreed pursuant
to certain "lock-up" agreements, that they will not offer, sell, contract to
sell, pledge, grant any option to sell, or otherwise dispose of, directly or
indirectly, any shares of common stock or securities convertible or exchangeable
for common stock, or warrants or other rights to purchase common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of U.S. Bancorp Piper Jaffray Inc.
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<PAGE>
UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray Inc. and CIBC
World Markets Corp. are acting as representatives, have agreed to buy, subject
to the terms and conditions of the purchase agreement, the number of shares
listed opposite their names below. The underwriters are committed to purchase
and pay for all of the shares if any are purchased, other than those shares
covered by the over-allotment option described below.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
- ----------------------------------------------------------------------------------- -----------
<S> <C>
U.S. Bancorp Piper Jaffray Inc.....................................................
CIBC World Markets Corp............................................................
DLJdirect Inc......................................................................
Total........................................................................
-----------
-----------
</TABLE>
The underwriters have advised us that they propose to offer the shares to the
public at $11.00 per share. The underwriters propose to offer the shares to
certain dealers at the same price less a concession of not more than $
per share. The underwriters may allow and the dealers may reallow a
concession of not more than $ per share on sales to certain other
brokers and dealers. After the offering, these figures may be changed by the
representatives. An electronic prospectus is available on the web site
maintained by DLJdirect Inc.
Of the 5,000,000 shares of common stock offered by us, up to 475,000 shares will
be reserved for sale to persons designated by us. These shares will be offered
to the holders of our outstanding notes, to certain of our strategic partners
and to certain business acquaintances of our officers and directors. Shares not
sold to these persons will be reoffered immediately by the underwriters to the
public at the initial public offering price.
We have granted to the underwriters an option to purchase up to an additional
750,000 shares of common stock from us, at the same price to the public, and
with the same underwriting discount, as set forth in the table on the cover page
of this prospectus. The underwriters may exercise this option any time during
the 30-day period after the date of this prospectus, but only to cover
over-allotments, if any. To the extent the underwriters exercise the option,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of the additional shares as it was
obligated to purchase under the purchase agreement.
The following table shows the underwriting commissions to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the over-allotment option.
<TABLE>
<CAPTION>
Full
No Exercise Exercise
----------- ------------
<S> <C> <C>
Per Share......................................................... $ $
Total............................................................. $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect to those
liabilities.
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<PAGE>
The underwriters have informed us that neither they, nor any other underwriter
participating in the distribution of the offering, will make sales of the common
stock offered by this prospectus to accounts over which they exercise
discretionary authority without the prior specific written approval of the
customer.
The offering of our shares of common stock is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares in whole or
part.
We and each of our directors, executive officers, stockholders and option and
warrant holders have agreed to certain restrictions on our and their ability to
sell additional shares of our common stock for a period of 180 days after the
date of this prospectus. We and each of our directors, executive officers,
stockholders and option and warrant holders have agreed not to directly or
indirectly offer for sale, sell, contract to sell, grant any option for the sale
of, or otherwise issue or dispose of, any shares of common stock, options or
warrants to acquire shares of common stock, or any related security or
instrument, without the prior written consent of U.S. Bancorp Piper Jaffray Inc.
The agreements provide exceptions for (1) sales to underwriters pursuant to the
purchase agreement, (2) our sales in connection with the exercise of options
granted and the granting of options to purchase shares under our existing stock
option plans, (3) our issuance of up to 527,752 shares of common stock pursuant
to the exercise or conversion of warrants outstanding as of March 31, 1999 and
(4) other exceptions.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be negotiated by us and the underwriters. The
factors considered in determining the initial public offering price will include
the history of and the prospects for the industry in which we compete, our past
and present operations, our historical results of operations, our prospects for
future earnings, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
offering and other relevant factors. There can be no assurance that the initial
public offering price of the common stock will correspond to the price at which
the common stock will trade in the public market subsequent to this offering or
that an active public market for the common stock will develop and continue
after this offering.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during and
after the offering. Specifically, the underwriters may over-allot or otherwise
create a short position in the common stock for their own account by selling
more shares of common stock than have been sold to them by us. The underwriters
may elect to cover any such short position by purchasing shares of common stock
in the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock on the
open market and may impose penalty bids. If penalty bids are imposed, selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased, whether in connection with stabilization
transactions or otherwise. The effect of these transactions may be to stabilize
or maintain the market price of the common stock at a level above that which
might otherwise prevail in the open market. The imposition of a penalty bid may
also affect the price of the common stock to the extent that it discourages
resales of the common stock. The magnitude or effect of any stabilization or
other transactions is uncertain. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
67
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Travelscape.com by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters will be passed upon for the
underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The combined financial statements of Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc. and Professional Travel Services, Inc. as of December 31,
1997 and 1998 and for each of the years in the three-year period ended December
31, 1998 included herein and in the registration statement are included in
reliance upon the reports of KPMG LLP independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the stock we
are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at WWW.SEC.GOV. You may also read and copy any
document we file with the SEC at its public reference facilities at 450 Fifth
Street, NW, Washington, D.C., 20549, 7 World Trade Center, Suite 1300, New York,
New York, 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information about the public reference rooms. Information contained
on Travelscape.com's web site does not constitute part of this prospectus. Our
SEC filings are also available at the office of the Nasdaq National Market. For
further information on obtaining copies of our public filings at the Nasdaq
National Market, you should call (212) 656-5060.
------------------------------------
Information contained on Travelscape.com's web sites does not constitute part of
this prospectus.
Travelscapes Vacations is a registered trademark of Travelscape.com. In
addition, Travelscape.com and lvrs.com are trademarks of Travelscape.com. This
prospectus also contains trademarks and trade names of other companies.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES INC.
<TABLE>
<S> <C>
Page
---------
Report of Independent Auditors....................................................... F-2
Combined Balance Sheets of Las Vegas Reservation Systems, Inc., Travelscape.com, Inc.
and Professional Travel Services, Inc. as of December 31, 1997 and 1998 and March
31, 1999 (unaudited)............................................................... F-3
Combined Statements of Operations of Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc. and Professional Travel Services, Inc. for the years ended
December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited)................................................................... F-4
Combined Statements of Stockholders' Deficiency of Las Vegas Reservation Systems,
Inc., Travelscape.com, Inc. and Professional Travel Services, Inc. for the years
ended December 31, 1996, 1997 and 1998 and for the three months ended March 31,
1999 (unaudited)................................................................... F-5
Combined Statements of Cash Flows of Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc. and Professional Travel Services, Inc. for the years ended
December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited)................................................................... F-6
Notes to Combined Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc.,
and Professional Travel Services, Inc.:
We have audited the accompanying combined balance sheets of Las Vegas
Reservation Systems, Inc., Travelscape.com, Inc. and Professional Travel
Services, Inc. as of December 31, 1997 and 1998, and the related combined
statements of operations, stockholders' deficiency, and cash flows for each of
the years in the three year period ended December 31, 1998. The combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the combined 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Las Vegas
Reservation Systems, Inc., Travelscape.com, Inc. and Professional Travel
Services, Inc. as of December 31, 1997 and 1998, and the results of their
combined operations and their combined cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Las Vegas, Nevada
March 5, 1999, except for the fifth paragraph
of Note 9, which is as of April 24, 1999
F-2
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998
------------- ------------- March 31,
1999
--------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 63,494 $ 265,674 $ 6,335,428
Prepaid expenses................................................. 72,044 177,788 684,576
Other current assets............................................. 6,044 -- 26,246
------------- ------------- --------------
Total current assets........................................... 141,582 443,462 7,046,250
Property, plant and equipment, net (notes 2, 3 and 6).............. 2,029,879 2,647,401 2,917,762
Other assets (note 7).............................................. 335,232 752,853 1,521,063
Intangible assets, net............................................. -- -- 1,855,000
------------- ------------- --------------
$ 2,506,693 $ 3,843,716 $ 13,340,075
------------- ------------- --------------
------------- ------------- --------------
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable................................................. $ 1,427,447 $ 2,063,549 $ 1,729,229
Accrued room payable............................................. 286,237 660,571 1,175,702
Accrued expenses................................................. 95,056 461,072 455,761
Deferred revenue................................................. 777,702 1,983,472 5,654,421
Borrowings under lines of credit (note 5)........................ 97,580 91,144 89,932
Current portion of notes payable (note 6)........................ 37,940 32,926 33,605
Current portion of capital lease obligations (note 3)............ -- 182,274 314,221
------------- ------------- --------------
Total current liabilities...................................... 2,721,962 5,475,008 9,452,871
Notes payable, less current portion (note 6)....................... 1,432,450 1,399,524 3,558,192
Related party loan (note 4)........................................ 68,475 46,684 46,684
Capital lease obligations, less current portion (note 3)........... -- 528,815 529,103
------------- ------------- --------------
Total liabilities.............................................. 4,222,887 7,450,031 13,586,850
------------- ------------- --------------
Stockholders' deficiency:
Common stock, $0.01 par value. Authorized 50,000,000 shares,
15,000,000 shares issued and outstanding....................... -- -- 150,000
Common stock, no par value. Authorized 2,500 shares, 200 shares
issued and outstanding......................................... -- -- --
Common stock, $0.001 par value. Authorized 25,000,000 shares,
5,000,000 shares issued and outstanding........................ -- 5,000 --
Common stock, no par value. Authorized 2,500 shares, 1,000 shares
issued and outstanding......................................... 40,000 40,000 --
Additional paid-in capital....................................... -- 2,623,305 16,112,277
Deferred stock compensation...................................... -- -- (4,810,045)
Stockholder loans (note 4)....................................... -- (91,786) (83,345)
Accumulated deficit.............................................. (1,756,194) (6,182,834) (11,615,662)
------------- ------------- --------------
Net stockholders' deficiency................................... (1,716,194) (3,606,315) (246,775)
------------- ------------- --------------
Commitments and contingencies (notes 3 and 7)...................... $ 2,506,693 $ 3,843,716 $ 13,340,075
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Combined Statements of Operations
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Room sales.................... $8,078,290 $11,715,836 $18,851,718 $2,900,782 $7,603,443
Airfare sales................. 178,092 716,121 2,027,067 438,834 472,009
--------- ---------- ---------- --------- ----------
Total revenues.............. 8,256,382 12,431,957 20,878,785 3,339,616 8,075,452
Cost of sales................... 4,913,592 8,200,004 14,697,664 2,357,080 5,625,360
--------- ---------- ---------- --------- ----------
Gross profit.................... 3,342,790 4,231,953 6,181,121 982,536 2,450,092
--------- ---------- ---------- --------- ----------
Operating expenses:
General and administrative.... 2,087,220 3,065,933 5,420,838 852,687 2,209,247
Sales and marketing........... 797,413 990,601 4,109,105 383,038 3,193,719
Systems development........... 134,626 114,896 896,753 20,993 287,737
Stock compensation............ -- -- -- -- 1,827,430
--------- ---------- ---------- --------- ----------
Total operating expenses.... 3,019,259 4,171,430 10,426,696 1,256,718 7,518,133
--------- ---------- ---------- --------- ----------
Operating income (loss)......... 323,531 60,523 (4,245,575) (274,182) (5,068,041)
--------- ---------- ---------- --------- ----------
Other income (expense):
Interest expense, net......... (3,561) (76,602) (183,949) (28,441) (359,878)
Other income.................. 16,112 17,994 2,884 8,564 1,091
--------- ---------- ---------- --------- ----------
Total other income
(expense)................. 12,551 (58,608) (181,065) (19,877) (358,787)
--------- ---------- ---------- --------- ----------
Net income (loss)............... $ 336,082 $ 1,915 $(4,426,640) $(294,059) $(5,426,828)
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Combined Statements of Stockholders' Deficiency (Notes 8 and 9)
<TABLE>
<CAPTION>
Common
Stock/
Additional Deferred Net
Paid-in Stock Stockholder Accumulated Stockholders'
Capital Compensation Loans Deficit Deficiency
------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......... $ 40,000 $ -- $ -- $ (543,272) $ (503,272)
Net income............................ -- -- -- 336,082 336,082
Distributions......................... -- -- -- (758,513) (758,513)
------------- ------------- ----------- -------------- -------------
Balance at December 31, 1996.......... 40,000 -- -- (965,703) (925,703)
Net income............................ -- -- -- 1,915 1,915
Distributions......................... -- -- -- (792,406) (792,406)
------------- ------------- ----------- -------------- -------------
Balance at December 31, 1997.......... 40,000 -- -- (1,756,194) (1,716,194)
Net loss.............................. -- -- -- (4,426,640) (4,426,640)
Contributions......................... 2,628,305 -- (91,786) -- 2,536,519
------------- ------------- ----------- -------------- -------------
Balance at December 31, 1998.......... 2,668,305 -- (91,786) (6,182,834) (3,606,315)
Net loss (unaudited).................. -- -- -- (5,426,828) (5,426,828)
Contributions (unaudited)............. -- -- 8,441 -- 8,441
Deferred stock compensation
(unaudited)......................... 6,637,475 (4,810,045) -- -- 1,827,430
Stock warrants (unaudited)............ 5,080,497 -- -- -- 5,080,497
Reorganization adjustment
(unaudited)......................... 1,876,000 -- -- -- 1,876,000
Distributions (unaudited) -- -- -- (6,000) (6,000)
------------- ------------- ----------- -------------- -------------
Balance at March 31, 1999
(unaudited)......................... $ 16,262,277 $(4,810,045) $ (83,345) $ (11,615,662) $ (246,775)
------------- ------------- ----------- -------------- -------------
------------- ------------- ----------- -------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 336,082 $ 1,915 $(4,426,640) $(294,059) $(5,426,828)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 71,991 96,836 160,444 40,035 114,288
Amortization of debt discount and issuance costs........ -- -- -- -- 231,507
Stock compensation...................................... -- -- -- -- 1,827,430
Changes in operating assets and liabilities:
Decrease in related party receivables................. 351,495 23,336 -- -- --
Increase in prepaid expenses and other current
assets.............................................. (7,766) (54,818) (99,700) (346,548) (533,034)
Increase (decrease) in other assets................... (416,321) 175,415 (417,621) 66,773 (791,981)
Increase(decrease) in accounts payable and accrued
expenses............................................ 257,696 913,683 1,376,452 (436,075) 175,500
Increase in deferred revenue.......................... 164,741 169,581 1,205,770 1,304,948 3,670,949
--------- ---------- ---------- --------- ----------
Net cash provided by (used in) operating
activities........................................ 757,918 1,325,948 (2,201,295) 335,074 (732,169)
--------- ---------- ---------- --------- ----------
Cash flows from investing activities:
Acquisition of property and equipment..................... (112,941) (2,036,228) (66,877) (43,258) (172,276)
(Purchase) sale of investments............................ (32,310) 32,310 -- -- --
--------- ---------- ---------- --------- ----------
Net cash used in investing activities............... (145,251) (2,003,918) (66,877) (43,258) (172,276)
--------- ---------- ---------- --------- ----------
Cash flows from financing activities:
(Distributions to) contributions from stockholders, net... (758,513) (792,406) 2,536,519 (120,263) (6,000)
Proceeds from (repayments of) loan from stockholders...... 78,275 (9,800) (21,791) -- 8,441
Advances from (repayments of) line of credit, net......... 61,800 35,780 (6,436) (1,336) (1,212)
Proceeds from notes payable............................... -- 1,470,390 -- 10,362 7,028,158
Repayment of notes payable................................ -- -- (37,940) -- --
Repayments of capital lease obligations................... -- -- -- -- (55,188)
--------- ---------- ---------- --------- ----------
Net cash provided by (used in) financing
activities........................................ (618,438) 703,964 2,470,352 (111,237) 6,974,199
--------- ---------- ---------- --------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... (5,771) 25,994 202,180 180,579 6,069,754
Cash and cash equivalents:
Beginning of period....................................... 43,271 37,500 63,494 63,494 265,674
--------- ---------- ---------- --------- ----------
End of period............................................. $ 37,500 $ 63,494 $ 265,674 $ 244,073 $6,335,428
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
See accompanying notes to combined financial statements.
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 5,661 $ 8,722 $ 85,613 $ 7,724 $ 136,444
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Equipment acquired under capital lease.................... $ -- $ -- $ 711,089 $ -- $ 187,423
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Stockholder loan.......................................... $ -- $ -- $ 91,786 $ -- $ --
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Deferred compensation..................................... $ -- $ -- $ -- $ -- $6,637,475
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Original issue discount................................... $ -- $ -- $ -- $ -- $5,080,497
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Intangible assets......................................... $ -- $ -- $ -- $ -- $1,876,000
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
F-6
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
(1) Summary of Significant Accounting Policies
(A) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying combined financial statements include the accounts of
Las Vegas Reservation Systems, Inc. ("LVRS"), Travelscape.com, Inc. ("Old
Travelscape") and Professional Travel Services, Inc. ("PTS") (Nevada
Corporations) (collectively referred to as the "Company"). The entities
are owned and controlled principally by common ownership and management.
All intercompany transactions have been eliminated in combination.
LVRS, a Nevada Corporation, sells hotel room packages in Las Vegas, Reno,
Laughlin, and Lake Tahoe to individual and group customers. In the normal
course of business, certain hotel properties require cash deposits or
letters of credit to secure hotel room inventory.
In March 1998, LVRS established its web site WWW.LVRS.COM to sell rooms
over the Internet. The success of the web site prompted management to
begin an effort to replicate its Las Vegas based system across the United
States through Old Travelscape, which was created in April 1998. Old
Travelscape created its own web site WWW.TRAVELSCAPE.COM in which it
offers its services. The Internet offers the Company advertising and
distribution means to market and sell its rooms to a worldwide audience
in a cost-effective manner.
Effective September 30, 1998, LVRS was merged with Fort Apache, Inc.
whose principal business was to hold a building and land in Las Vegas.
Fort Apache, Inc. shares 100% common ownership with LVRS, accordingly,
the transaction was recorded as a reorganization of entities under common
control and the historical cost basis of the net assets of Fort Apache,
Inc. was carried over to LVRS. Prior year financial statements have been
restated to reflect this reorganization.
LVRS began making non-published airline reservations for its customers in
May 1997. The flights are often packaged together with hotel
reservations.
PTS operates a travel agency in Las Vegas. PTS provides transportation
arrangements primarily for business travel.
On January 22, 1999, the Company completed a reorganization whereby LVRS,
Old Travelscape and PTS became wholly owned subsidiaries of
Travelscape.com, Inc., a Delaware corporation. The transaction was
accounted for principally as a reorganization of entities under common
control. Accordingly, the combined financial statements of LVRS, Old
Travelscape and PTS for the years presented herein are predecessor
operations to the comparable entity which exists after January 21, 1999.
At the time of the reorganization, 20% of the common stock of Old
Travelscape was not owned by the common control group. Therefore, the net
assets of Old Travelscape were stepped up by $1,876,000, which represents
20% of the amount by which the fair value of the net assets of Old
Travelscape exceeded its historical net assets at the time of the
reorganization. The amount was allocated to goodwill in the accompanying
balance sheet. Amortization of goodwill is recorded on a straight-line
basis over 15 years.
F-7
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
The financial statements as of and for the three months ended March 31,
1999 are combined through January 22, 1999 (the date of the
organizational restructuring) and consolidated through and as of March
31, 1999.
(B) CASH EQUIVALENTS
Cash equivalents include highly liquid investments purchased with an
original maturity date of three months or less.
(C) PROPERTY, PLANT AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives ranging from 3-20
years. Expenditures for maintenance and repairs are expensed when
incurred. Property and equipment under capital leases are stated at the
present value of minimum lease payments.
Amortization of property and equipment held under capital leases and
leasehold improvements is computed on a straight-line basis over the
shorter of the lease term or estimated useful lives of the asset.
(D) INTERIM FINANCIAL DATA
The unaudited operating results have been prepared on the same basis as
the audited combined financial statements and, in the opinion of
management, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation for the periods presented.
The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of results to be achieved for the full fiscal
year. The unaudited financial statements should be read in conjunction
with the audited combined financial statements presented for the years
ended December 31, 1996, 1997 and 1998.
(E) REVENUE RECOGNITION
Revenue from sales of hotel rooms and airline tickets, as well as the
related cost of sales, including the associated taxes, and other travel
products and services for which the Company is the credit card merchant
of record, are recorded at the aggregate retail value upon booking. Such
revenues are deferred until the customer checks in to the hotel or
completes their air travel. Revenue earned from sales of travel products
and services in which the travel provider is the credit card merchant of
record are recognized upon receipt and are recorded at the commission
amount.
(F) SYSTEMS DEVELOPMENT
Systems development expenses are comprised primarily of compensation to
the Company's information systems and technical staff, payments to
outside contractors for information systems and technical services, data
communications lines, web hosting services and other expenses associated
with operating the Company's web sites.
F-8
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
(G) USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(H) INCOME TAXES
Prior to January 22, 1999, LVRS and PTS were taxed as S corporations
under provisions of the Internal Revenue Code. Under these provisions,
LVRS and PTS did not pay income tax on their income. Instead, the
stockholders of LVRS and PTS were liable for income tax on the taxable
income as it effects the stockholders' income tax returns. Accordingly, a
provision for income taxes has not been included in the accompanying
combined financial statements for LVRS and PTS.
Old Travelscape is a Nevada C corporation which is subject to federal
income tax. Old Travelscape accounted for income taxes under the asset
and liability method whereby deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in the tax rates is recognized in
income for the period that includes enactment date.
Old Travelscape recognized a taxable loss for the period ended December
31, 1998 and therefore no current tax provision was recorded. A net
deferred tax asset has been recognized by Old Travelscape, aggregating
$1,100,000, which consists primarily of net operating loss carryforwards.
A 100% valuation allowance has been provided against the net deferred tax
assets since the likelihood of taxable income sufficient enough to
realize the entire balance of the deferred tax assets in the future is
uncertain.
(I) START-UP COSTS
Start-up costs are expensed as incurred.
(J) ADVERTISING EXPENSES
The Company expenses advertising as incurred. Advertising expense
aggregated $797,413, $990,601 and $4,109,105 for the years ended December
31, 1996, 1997 and 1998 and $383,038 and $3,193,719 for the three months
ended March 31, 1998 and 1999, respectively.
(K) STOCK COMPENSATION
The Company has adopted Statement of Financial Accounting Standards
Statement, or SFAS, No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and
has elected to measure compensation
F-9
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
cost under Accounting Principles Board Opinion No. 25 and comply with the
pro forma disclosure requirements of SFAS No. 123, except for options and
warrants granted to non-employees, which are accounted for under SFAS No.
123.
(L) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires
companies to classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Our comprehensive income (loss)
is the same as net income (loss). Accordingly, SFAS No. 130 did not have
a material impact on the combined and consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 that establishes standards for the way public business
enterprises are to report selected information about operating segments.
The determination of an entity's operating segments is based upon a
management approach, including the way management organizes the segments
within the enterprise for making operating decisions and assessing
performance. Management currently reviews financial data at the highest
level, the sale of travel services. Therefore, under the management
approach of SFAS No. 131, we have only one operating segment.
Accordingly, SFAS No. 131 did not have a material impact on the combined
and consolidated financial statements.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position, or SOP, No.
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. The provisions of SOP 98-1 are effective for fiscal
years beginning after December 15, 1998 and require that certain direct
costs associated with such development are capitalized and amortized and
all remaining costs must be expensed when incurred. Management is
currently evaluating the impact of SOP No. 98-1.
(M) LONG-LIVED ASSETS
The Company accounts for long-lived assets at amortized costs. As part of
an ongoing review of the valuation and amortization of long-lived assets,
management assesses the carrying value of such assets if facts and
circumstances suggest that such assets may be impaired. If this review
indicates that the assets will not be recoverable, as determined by the
nondiscounted cash flow analysis over the remaining amortization period,
the carrying value of the assets would be reduced to its estimated fair
market value, based on discounted cash flows.
F-10
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
(2) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1997 1998 1999
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Land..................................... $ 408,000 $ 408,000 $ 408,000
Building and improvements................ 1,445,312 1,549,756 1,549,757
Computer hardware and software........... 171,714 729,807 1,052,787
Furniture and office equipment........... 147,668 263,817 300,955
--------- --------- ---------
2,172,694 2,951,380 3,311,499
Less accumulated depreciation and
amortization........................... 142,815 303,979 393,737
--------- --------- ---------
$2,029,879 $2,647,401 $2,917,762
--------- --------- ---------
--------- --------- ---------
</TABLE>
(3) Lease Commitments
The Company is obligated under various capital leases entered into during
1998, for certain office equipment, that expire at various dates through
2003. The gross amount of office equipment and related accumulated
depreciation capitalized and recorded under capital leases at December 31,
1998 were as follows:
<TABLE>
<CAPTION>
December March 31,
31, 1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Office equipment..................................... $ 517,519 $ 709,591
Less accumulated depreciation........................ 18,493 81,610
----------- -----------
$ 499,026 $ 627,981
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
Future minimum capital lease payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------- -----------
<S> <C> <C>
Years ending December 31:
1999.............................................................. $ 247,472 $ 15,179
2000.............................................................. 223,902 4,709
2001.............................................................. 163,424 674
2002.............................................................. 130,704 --
2003.............................................................. 108,920 --
---------- -----------
Net minimum lease payments.................................... 874,422 $ 20,562
-----------
-----------
Less amounts representing interest.................................... 163,333
----------
Present value of net minimum capital lease payments........... 711,089
Less current portion of obligations under capital leases.............. 182,274
----------
Obligations under capital leases excluding current portion.... $ 528,815
----------
----------
</TABLE>
The Company leases office equipment under operating leases, which expire in
2001. Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$16,059, $25,510 and $24,603, and for the three months ended March 31, 1998
and 1999 was $8,568 and $6,167, respectively.
The carrying amount of capital leases approximates fair value at December
31, 1998.
(4) Related Party Transactions
LVRS, Old Travelscape and PTS make payments on behalf of each other for
normal operating activity. All amounts were eliminated in combination.
At December 31, 1997 and 1998 and at March 31, 1999, PTS had loans from the
stockholders of $68,475, $46,684 and $46,684, respectively, for start-up
costs of the business. This is a noninterest-bearing loan with no fixed
repayment terms, however repayment is not expected during 1999, and
accordingly, this amount has been recorded as long-term in the accompanying
balance sheet. Old Travelscape has loaned $91,786 to officers of the Company
for the purchase of common stock as of December 31, 1998 of which $63,534 is
due within one year, with the remaining balance of $28,252 due in 2001. This
amount has been recorded as a reduction in net stockholders' deficiency.
F-12
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
(5) Borrowings Under Lines of Credit
Borrowings under unsecured lines of credit with various financial
institutions are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1997 1998 1999
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Wells Fargo Bank, interest is 11%, expires on
June 30, 1999................................ $ 47,580 $ 41,144 $ 39,932
Bank West of Nevada, interest is 11%, expires
on March 27, 1999............................ 50,000 50,000 50,000
--------- --------- -----------
$ 97,580 $ 91,144 $ 89,932
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Company's borrowing capacity available under each of these lines of
credit is $50,000.
(6) Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1997 1998 1999
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
First mortgage note payable in monthly
installments of $7,681, at an interest
rate of prime plus 1.5% (9.9% as of
December 31, 1998), maturity date of
June 30, 2017; secured by real
property............................... $ 822,345 $ 801,687 $ 797,683
First mortgage note payable in monthly
installments of $4,741, at an interest
rate of 6.85%, maturity date of
November 11, 2017; secured by real
property............................... 625,350 609,645 605,553
Second mortgage note payable in monthly
installments of $303, at an interest
rate of prime plus 1.5% (9.9% as of
December 31, 1998), maturity date of
June 30, 2007; secured by real
property............................... 22,695 21,118 20,672
Senior notes payable, at an interest rate
of 10 % for initial 12 months and 12 %
for the subsequent 12 months, maturity
date in February, 2001, unsecured...... -- -- 7,036,700
Less original issue discount (1)..... -- -- (4,868,811)
--------- --------- ---------
1,470,390 1,432,450 3,591,797
Less current portion..................... 37,940 32,926 33,605
--------- --------- ---------
$1,432,450 $1,399,524 $3,558,192
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 32,926
2000............................................................ 35,640
2001............................................................ 38,582
2002............................................................ 41,774
2003............................................................ 45,236
Thereafter...................................................... 1,238,292
---------
$1,432,450
---------
---------
</TABLE>
(1) During February 1999, Travelscape.com completed a private placement whereby
70.367 units of Travelscape.com's senior notes and common stock purchase
warrants were subscribed for a total value of $100,000 per unit or
$7,036,700. Each unit consists of a note with a face value of $100,000
bearing interest at 10% prior to February 2000 and 12% thereafter and a
warrant to purchase 7,500 shares of Travelscape.com's common stock, par
value $0.01 per share. The notes have a stated maturity of two years from
the date of issuance. The notes' maturity accelerates at a "trigger event,"
which is generally defined as either an initial public offering of the
Company's common stock or a sale of the Company. The fair value of the
warrants issued in connection with the private placement of $5,080,497 has
been allocated to a debt discount and will be amortized over the effective
interest method. As a result of the original issue discount, the effective
interest rate is estimated at 32%. The warrants are exercisable over three
years. Warrants for a total of 527,752 shares of common stock were issued in
connection with the private placement. The fair value of the warrants was
determined pursuant to Black-Scholes model for calculating the fair value of
equity instruments. The discount will be amortized to interest expense over
the term of the Senior notes using the effective interest method. Upon
repayment, any outstanding balance of the discount will be written off to
interest expense.
(7) Commitments and Contingencies
(A) LITIGATION
The Company is involved in legal proceedings from outside parties
involving routine business matters. Management believes that the ultimate
resolution of these matters will not have a material adverse affect on
the Company's financial condition or results of operations.
F-14
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
(B) ADVERTISING CONTRACTS
The Company has entered into several advertising contracts, including
with various Internet web sites, which run through the year 2000. The
agreements provide for monthly and quarterly payments and are summarized
as follows as of December 31, 1998:
<TABLE>
<S> <C>
Years ending December 31:
1999.......................................................... $5,020,000
2000.......................................................... 50,000
---------
$5,070,000
---------
---------
</TABLE>
(C) LETTERS OF CREDIT
The Company has an agreement with Bank West of Nevada to extend letters
of credit on behalf of the Company to certain hotel properties to secure
payment for the potential purchase of blocks of hotel rooms. Letters of
credit with Bank West of Nevada at December 31, 1998 were $1,000,000. The
letter of credit agreements require the Company to place approximately
67% of a required hotel deposit in a certificate of deposit with the
bank. If the Company were to default on the payment of a block of rooms,
the hotel would exercise the letter of credit. As of December 31, 1998,
the Company has placed $670,000 in a certificate of deposit under this
arrangement. These deposits are restricted and are included in other
assets.
(8) Stock Options
The Financial Accounting Standards Board issued SFAS No. 123 which defines a
fair value method of accounting for an employee stock option or similar
instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it allows an
entity to continue to measure the compensation cost for these plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion, or APB, No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net earnings and earnings per share, as
if the fair value based method of accounting defined in SFAS No. 123 had
been applied.
During 1998, Old Travelscape issued options to purchase 1,027,500 shares of
its common stock to certain key employees. Old Travelscape accounted for
these options pursuant to APB No. 25. These options were issued with an
option price substantially equal to the fair market value of the common
stock on the date of the grant. As of December 31, 1998, options to purchase
1,027,500 shares of common stock are outstanding at an exercise price of
$1.33 per share. The options vest over a three year period. No options were
exercisable at December 31, 1998.
Had the Company complied with SFAS No. 123 for financial reporting purposes,
the impact on net loss for the year ended December 31, 1998 would be to
increase the net loss to $6,043,240. The pro forma net loss is based on the
following assumptions: risk-free interest rate of 6.5%, volatility of 20%,
dividend yield of 0% and economic life of the option of three years.
F-15
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
In the three months ended March 31, 1999, Old Travelscape and the Company
granted 1,177,500 options to purchase its common stock at a price of $4.00
per share. As a result of these option grants, the Company recorded
compensation expense of $1,827,430 for the three months ended March 31, 1999
and will record deferred stock compensation expense of $4,810,045 over the
future vesting period of the options, calculated under APB No. 25 for
employees and SFAS No. 123 for non-employees. The deferred stock
compensation is recorded as a component of net stockholders' deficiency in
the accompanying balance sheet.
All outstanding options to purchase common stock prior to January 21, 1999
were assumed by Travelscape.com, Inc. and will retain all of the same terms
included in the initial grant.
(9) Reorganization
On January 22, 1999, Travelscape.com, Inc., a Delaware Corporation
("Travelscape.com"), entered into a organizational restructuring whereby
LVRS, Old Travelscape and PTS became wholly owned subsidiaries of
Travelscape.com. To execute this organizational restructuring, each of the
stockholders of LVRS, Old Travelscape and PTS exchanged their respective
shares for shares of Travelscape.com. All four entities are principally
under common management and control, and accordingly, the predecessor's
historical cost basis has been carried over to Travelscape.com at the same
values, except for 20% of Old Travelscape, which was owned by a minority
stockholder outside of the control group. As a result, the Company recorded
a step-up in the historical cost basis equal to 20% of the excess of fair
value over the net assets of Old Travelscape at the time of the
reorganization, aggregating $1,876,000. The step-up has been allocated to
goodwill.
The following pro forma statements of operations for the year ended December
31, 1998 and the three months ended March 31, 1999 reflect the results of
operations as if the aforementioned reorganization had occurred on the first
day of each of the periods presented and represents the results of
operations adjusted to reflect pro forma amortization of goodwill, which
gives effect to the acquisition of LVRS, Old Travelscape and PTS by
Travelscape.com. The Company incurred a net loss for the periods included
for the pro forma statement of operations and recorded a 100% valuation
allowance against all deferred tax assets at December 31, 1998 and March 31,
1999. Therefore no pro forma income tax provision has been provided. The
following pro forma balance sheet at December 31, 1998 and March 31, 1999
reflects the financial position as if the restructuring had occurred on
December 31, 1998 and March 31, 1999, respectively.
Pro forma income per share has been computed pursuant to the provisions of
SFAS No. 128, EARNINGS PER SHARE. Under SFAS No. 128, the Company must
present basic and diluted earnings per share on the face of the statement of
operations. Basic earnings per share includes only the weighted average
shares outstanding during each period. Pro forma basic income per share
reflects the issuance of shares for the acquisition of LVRS, Old Travelscape
and PTS by Travelscape.com and are considered outstanding for all periods
presented. Diluted loss per share is computed using the dilutive effect of
all options to purchase Travelscape.com's common stock.
F-16
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Notes to Combined Financial Statements (Continued)
Years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited)
The following is a reconciliation of the numerator and denominator for the
basic and diluted net loss per share.
<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, March 31,
1998 1999
------------- -------------
(unaudited)
<S> <C> <C>
Pro forma net loss used in basic and diluted loss per share........................ $ 4,551,706 $ 5,437,250
------------- -------------
------------- -------------
Shares of common stock and common stock equivalents:
Basic:
Shares issued for acquisition of LVRS, Old Travelscape and PTS................. $ 15,000,000 $15,000,000
Diluted:
Dilutive effect of stock options and warrants.................................. -- --
------------- -------------
$ 15,000,000 $15,000,000
------------- -------------
------------- -------------
Net loss per share:
Basic............................................................................ $ (0.30) $ (0.36)
------------- -------------
------------- -------------
Diluted.......................................................................... $ (0.30) $ (0.36)
------------- -------------
------------- -------------
</TABLE>
Effective April 24, 1999, Travelscape.com's Board of Directors approved an
increase in the number of authorized shares from 25,000,000 to 50,000,000
shares. The financial statements reflect this increase. The number of shares
outstanding of Travelscape.com common stock is on a pro forma basis giving
effect to a 3-for-2 split of common stock that will be completed prior to
the initial public offering. All references to the number of shares of
common stock have been retroactively adjusted to reflect this stock split.
All stock options and warrants to purchase common stock have been excluded
from the calculation of diluted loss per share as their impact is
anti-dilutive.
Effective with the reorganization, LVRS, Old Travelscape and PTS became
wholly-owned subsidiaries of Travelscape.com, and accordingly,
Travelscape.com recorded net deferred tax assets of $1,220,000 related to
the cumulative differences between the basis of certain assets and
liabilities for financial reporting and income tax purposes. Travelscape.com
recorded a corresponding 100% valuation allowance due to the uncertainty
regarding Travelscape.com's ability to utilize its deferred tax assets.
F-17
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Travelscape.com, Inc.
Pro Forma Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
-------------------------------------- ---------------------------------------
Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma
Combined Adjustments Consolidated Combined Adjustments Consolidated
---------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents......... $ 265,674 $ -- $ 265,674 $ 6,335,428 $ -- $6,335,428
Prepaid expenses.................. 177,788 -- 177,788 684,576 -- 684,576
Other current assets.............. -- -- -- 26,246 -- 26,246
---------- ------------ ------------ ----------- ------------ ------------
Total current assets............ 443,462 -- 443,462 7,046,250 -- 7,046,250
Property, plant and equipment,
net............................... 2,647,401 -- 2,647,401 2,917,762 -- 2,917,762
Other assets........................ 752,853 -- 752,853 1,521,063 -- 1,521,063
Intangible assets................... -- 1,876,000(1) 1,876,000 1,855,000 -- 1,855,000
---------- ------------ ------------ ----------- ------------ ------------
$3,843,716 $1,876,000 $5,719,716 $13,340,075 $ -- $13,340,075
---------- ------------ ------------ ----------- ------------ ------------
---------- ------------ ------------ ----------- ------------ ------------
Liabilities and Stockholders'
Deficiency
Current liabilities:
Accounts payable.................. $2,063,549 $ -- $2,063,549 $ 1,729,229 $ -- $1,729,229
Accrued room payable.............. 660,571 -- 660,571 1,175,702 -- 1,175,702
Accrued expenses.................. 461,072 -- 461,072 455,761 -- 455,761
Deferred revenue.................. 1,983,472 -- 1,983,472 5,654,421 -- 5,654,421
Borrowings under lines of
credit.......................... 91,144 -- 91,144 89,932 -- 89,932
Current portion of notes
payable......................... 32,926 -- 32,926 33,605 -- 33,605
Current portion of capital lease
obligations..................... 182,274 -- 182,274 314,221 -- 314,221
---------- ------------ ------------ ----------- ------------ ------------
Total current liabilities....... 5,475,008 -- 5,475,008 9,452,871 -- 9,452,871
Notes payable, less current
portion........................... 1,399,524 -- 1,399,524 3,558,192 -- 3,558,192
Related party loan.................. 46,684 -- 46,684 46,684 -- 46,684
Capital lease obligations, less
current portion................... 528,815 -- 528,815 529,103 -- 529,103
---------- ------------ ------------ ----------- ------------ ------------
Total liabilities............... 7,450,031 -- 7,450,031 13,586,850 -- 13,586,850
---------- ------------ ------------ ----------- ------------ ------------
Stockholders' deficiency:
Common stock, 0.01 par value.
Authorized 50,000,000 shares,
15,000,000 shares issued and
outstanding, actual............. 45,000 55,000(1) 100,000 150,000 150,000
Additional paid-in capital........ 2,623,305 1,821,000(1) 4,444,305 16,112,277 16,112,277
Deferred stock compensation....... -- -- -- (4,810,045) -- (4,810,045)
Stockholders' loan................ (91,786) -- (91,786) (83,345) -- (83,345)
Accumulated deficit............... (6,182,834) -- (6,182,834) (11,615,662) -- (11,615,662)
---------- ------------ ------------ ----------- ------------ ------------
Net stockholders' deficiency.... (3,606,315) 1,876,000 (1,730,315) (246,775) -- (246,775)
---------- ------------ ------------ ----------- ------------ ------------
$3,843,716 $1,876,000 $5,719,716 $13,340,075 $ -- $13,340,075
---------- ------------ ------------ ----------- ------------ ------------
---------- ------------ ------------ ----------- ------------ ------------
</TABLE>
F-18
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Travelscape.com, Inc.
Pro Forma Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Three Months Ended March 31, 1999
------------------------------------ ------------------------------------
Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma
Combined Adjustments Consolidated Combined Adjustments Consolidated
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Room sales............... $18,851,718 $ -- 1$8,851,718 $7,603,443 $ -- $7,603,443
Airfare sales............ 2,027,067 -- 2,027,067 472,009 -- 472,009
---------- ----------- ----------- ---------- ----------- -----------
Total revenues......... 20,878,785 -- 20,878,785 8,075,452 -- 8,075,452
Cost of sales.............. 14,697,664 -- 14,697,664 5,625,360 -- 5,625,360
---------- ----------- ----------- ---------- ----------- -----------
Gross profit............... 6,181,121 -- 6,181,121 2,450,092 -- 2,450,092
---------- ----------- ----------- ---------- ----------- -----------
Operating expenses:
General and
administrative......... 5,420,838 125,066(2) 5,545,904 2,209,247 10,422(2) 2,219,669
Sales and marketing...... 4,109,105 -- 4,109,105 3,193,719 -- 3,193,719
Systems development...... 896,753 -- 896,753 287,737 -- 287,737
Stock compensation....... -- -- -- 1,827,430 -- 1,827,430
---------- ----------- ----------- ---------- ----------- -----------
Total operating
expenses............. 10,426,696 125,066 10,551,762 7,518,133 10,422 7,528,555
---------- ----------- ----------- ---------- ----------- -----------
Operating loss............. (4,245,575) (125,066) (4,370,641) (5,068,041) (10,422) (5,078,463)
---------- ----------- ----------- ---------- ----------- -----------
Other income (expense):
Interest expense, net.... (183,949) -- (183,949) (359,878) -- (359,878)
Other income............. 2,884 -- 2,884 1,091 -- 1,091
---------- ----------- ----------- ---------- ----------- -----------
Total other income
(expense)............ (181,065) -- (181,065) (358,787) -- (358,787)
---------- ----------- ----------- ---------- ----------- -----------
Net loss................... $(4,426,640) $(125,066) ($4,551,706) $(5,426,878) $ (10,422) ($5,437,250)
---------- ----------- ----------- ---------- ----------- -----------
---------- ----------- ----------- ---------- ----------- -----------
Pro forma net loss per
share:
Basic and diluted........ $ (0.30) $ (0.36)
----------- -----------
----------- -----------
Pro forma weighted average
share of common stock
outstanding:
Basic and diluted........ 15,000,000 15,000,000
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. AND PROFESSIONAL TRAVEL SERVICES, INC.
Travelscape.com, Inc.
Notes to Pro Forma Financial Statements
(Unaudited)
(1) Reflects the conversion of equity accounts from the historical structure of
LVRS (a Nevada S corporation), Old Travelscape (a Nevada C corporation) and
PTS (a Nevada S corporation) on a combined basis, to Travelscape.com (a
Delaware C corporation) on a consolidated basis. This transaction was
principally accounted for as a reorganization of entities under common
control. Accordingly, the combined financial statements of LVRS, Old
Travelscape and PTS for the years presented herein are predecessor
operations to the comparable entity which exists after January 22, 1999. At
the time of the reorganization, 20% of the common stock of Old Travelscape
was not owned by the common control group. Therefore, the assets of Old
Travelscape were stepped-up by $1,876,000, which represents 20% of the
amount by which the fair value of the net assets of Old Travelscape exceeded
the historical net assets at the time of the reorganization.
(2) Reflects the amortization of goodwill as if the reorganization taken place
on the first day of the beginning of each of the periods presented. The
goodwill representing $1,876,000 is being amortized over 15 years.
F-20
<PAGE>
5,000,000 Shares
TRAVELSCAPE.COM, INC.
Common Stock
[LOGO]
--------------
PROSPECTUS
--------------
Until , all dealers that affect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
CIBC World Markets
----------------------
DLJDIRECT Inc.
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq/NMS listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 19,182
NASD Filing Fee......................................................... 7,400
Nasdaq National Market Listing Fee...................................... 30,000
Printing Costs.......................................................... 160,000
Legal Fees and Expenses................................................. 300,000
Accounting Fees and Expenses............................................ 175,000
Blue Sky Fees and Expenses.............................................. 20,000
Transfer Agent and Registrar Fees....................................... 15,000
Director and Officer Liability Insurance................................ 400,000
Miscellaneous........................................................... 123,418
---------
Total............................................................... $1,250,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article X of our Amended and
Restated Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of our
Amended and Restated Bylaws (Exhibit 3.2 hereto) which will be adopted and, as
necessary, filed upon completion of this offering, will provide for
indemnification of our directors, officers, employees and other agents to the
maximum extent permitted by Delaware law. In addition, we have entered into
Indemnification Agreements (Exhibit 10.1 hereto) with our officers and
directors. The Underwriting Agreement (Exhibit 1.1) also provides for
cross-indemnification among Travelscape.com and the Underwriters with respect to
certain matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since April 1996, we have sold and issued the following securities (as
adjusted to reflect the 3-for-2 split of common stock completed on June 18,
1999):
1. In May 1998 Travelscape.com, Inc. a Nevada corporation, or Old
Travelscape, issued 3,000,000 shares of common stock to Thomas Breitling,
2,550,000 shares of common stock to Las Vegas Reservation Systems, Inc., a
Nevada corporation and 450,000 shares of common stock to Jeffrey Marquis for an
aggregate consideration of $234,500.
2. In June 1998, Old Travelscape issued 1,500,000 shares of common stock to
the Frank J. Fertitta and Victoria K. Fertitta Revocable Family Trust for an
aggregate consideration of $1,500,000.
3. In January 1999, pursuant to an Agreement and plan of Reorganization,
(i) Thomas Breitling, the Fertitta Family Trust, Las Vegas Reservation Systems
and Jeffrey Marquis assigned to the Registrant all right and title to their
shares of Old Travelscape (as described above) in exchange for an aggregate of
7,500,000 shares of common stock of the Registrant; (ii) Timothy Poster and
Thomas Breitling assigned
II-1
<PAGE>
to the Registrant all right and title to their shares of Professional Travel
Service, Inc., a Nevada corporation in exchange for an aggregate of 300,000
shares of common stock of the Registrant; and (iii) Timothy Poster and Thomas
Breitling assigned to the Registrant, all right and title to their shares of Las
Vegas Reservation Systems in exchange for an aggregate of 9,750,000 shares of
common stock of the Registrant, and (v) 2,550,000 shares of common stock of
Travelscape.com, a Delaware corporation, owned by Las Vegas Reservation System,
a Nevada corporation, were canceled.
4. In February 1999, the Registrant issued units consisting of the
Registrant's notes in the aggregate principal amount of approximately $7.0
million and warrants to purchase up to 527,752 shares of common stock pursuant
to a Private Placement Memorandum dated January 26, 1999 for an aggregate
consideration of $7,036,700.
5. Since the incorporation of Old Travelscape, the Registrant has issued,
and there remain outstanding, options to purchase an aggregate of 2,555,125
shares of common stock with exercise prices ranging from $1.33 to $6.00 per
share.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances of securities described in Items 15(1) through 15(4) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) or Rule 506 of the Securities Act as transactions by an issuer not
involving a public offering. The issuances of securities described in Item 15(5)
were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) or Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
2.1** Agreement and Plan of Reorganization
3.1** Form of Amended and Restated Certificate of Incorporation filed with the Delaware
Secretary of State on June 18, 1999
3.2** Amended and Restated Bylaws
4.1** Form of Specimen Stock Certificate
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding
legality of the securities being issued
10.1** Form of Indemnification Agreement between the Registrant and each of its directors
and officers
10.2** 1998 Stock Plan
10.3** 1999 Stock Plan
10.4** 1999 Employee Stock Purchase Plan
10.5+** Campaign Insertion Order between Registrant and 24/7 Media dated August 28, 1998
(MapQuest Agreement #1).
10.6+** Campaign Insertion Order between Registrant and 24/7 Media dated January 19, 1999
(MapQuest Agreement #2).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.7+** Campaign Insertion Order between Registrant and 24/7 Media dated February 24, 1999
(MapQuest Agreement #3).
10.8+** Shopping and Services Program Merchant Agreement between the Registrant and
DoubleClick Inc., dated as of December 11, 1998.
10.9+** Luxor Las Vegas 1998 Wholesale Contract Agreement between the Registrant and
Ramparts, Inc. dated as of January 1, 1998.
10.10+** Luxor Las Vegas 1999 Wholesale Contract Agreement between the Registrant and
Ramparts, Inc. dated as of January 3, 1999.
10.11+** Contract Bulk Fare and Marketing Agreement between Registrant and American
Airlines, Inc. dated as of October 22, 1998.
10.12** Voting Agreement by and among Timothy Poster, Thomas Breitling and Jeffrey Marquis
10.13** Form of Promissory Note from the February 1999 private placement of units
10.14** Form of Warrant from the February 1999 private placement of units
10.15** Employment Agreement with Timothy Poster dated as of May 20, 1999.
10.16** Employment Agreement with Thomas Breitling dated as of May 20, 1999.
10.17** Employment Agreement with Jeffrey Marquis dated as of May 20, 1999.
10.18** Employment Agreement with Michelle Decker dated as of May 20, 1999.
10.19** Employment Agreement with Steven Sarner dated as of May 20, 1999.
10.20** Employment Agreement with Jose Yofe dated as of May 20, 1999.
10.21** Employment Agreement with Edward Muncey dated as of May 20, 1999.
10.22** Employment Agreement with Michael Reichartz dated as of May 20, 1999.
10.23** Employment Agreement with Erick Rodriguez dated as of May 20, 1999.
10.24** Director Stock Option Agreement with Michael Conway
10.25** Director Stock Option Agreement with Tobin Corey
10.26** Director Stock Option Agreement with Lorenzo Fertitta
23.1 Consent of KPMG LLP
23.2** Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (contained
in Exhibit 5.1)
24.1** Power of Attorney (contained in the signature page to this Registration Statement)
27.1** Financial Data Schedule
</TABLE>
- ------------------------------------
** filed previously
+ certain portions of the exhibit have been omitted based upon a request for
confidential treatment; the non-public information has been filed with the
Commission.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer
II-3
<PAGE>
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Las
Vegas, State of Nevada on June 21, 1999.
By: /s/ JEFFREY A. MARQUIS
-----------------------------------
Jeffrey A. Marquis
Chief Financial Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ TIMOTHY N. POSTER* Officer and Director
- ------------------------------ (Principal Executive June 21, 1999
Timothy N. Poster Officer)
/s/ JEFFREY A. MARQUIS Chief Financial Officer
- ------------------------------ (Principal Financial and June 21, 1999
Jeffrey A. Marquis Accounting Officer)
/s/ THOMAS C. BREITLING*
- ------------------------------ Director and Chief June 21, 1999
Thomas C. Breitling Operating Officer
/s/ LORENZO J. FERTITTA*
- ------------------------------ Director June 21, 1999
Lorenzo J. Fertitta
/s/ MICHAEL J. CONWAY*
- ------------------------------ Director June 21, 1999
Michael J. Conway
/s/ TOBIN J. COREY*
- ------------------------------ Director June 21, 1999
Tobin J. Corey
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JEFFREY A. MARQUIS
-------------------------
Jeffrey A. Marquis,
ATTORNEY IN FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
2.1** Agreement and Plan of Reorganization
3.1** Form of Amended and Restated Certificate of Incorporation filed with the Delaware
Secretary of State on June 18, 1999
3.2** Amended and Restated Bylaws
4.1** Form of Specimen Stock Certificate
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding
legality of the securities being issued
10.1** Form of Indemnification Agreement between the Registrant and each of its directors
and officers
10.2** 1998 Stock Plan
10.3** 1999 Stock Plan
10.4** 1999 Employee Stock Purchase Plan
10.5+** Campaign Insertion Order between Registrant and 24/7 Media dated August 28, 1998
(MapQuest Agreement #1).
10.6+** Campaign Insertion Order between Registrant and 24/7 Media dated January 19, 1999
(MapQuest Agreement #2).
10.7+** Campaign Insertion Order between Registrant and 24/7 Media dated February 24, 1999
(MapQuest Agreement #3).
10.8+** Shopping and Services Program Merchant Agreement between the Registrant and
DoubleClick Inc., dated as of December 11, 1998.
10.9+** Luxor Las Vegas 1998 Wholesale Contract Agreement between the Registrant and
Ramparts, Inc. dated as of January 1, 1998.
10.10+** Luxor Las Vegas 1999 Wholesale Contract Agreement between the Registrant and
Ramparts, Inc. dated as of January 3, 1999.
10.11+** Contract Bulk Fare and Marketing Agreement between Registrant and American
Airlines, Inc. dated as of October 22, 1998.
10.12** Voting Agreement by and among Timothy Poster, Thomas Breitling and Jeffrey Marquis
10.13** Form of Promissory Note from the February 1999 private placement of units
10.14** Form of Warrant from the February 1999 private placement of units
10.15** Employment Agreement with Timothy Poster dated as of May 20, 1999.
10.16** Employment Agreement with Thomas Breitling dated as of May 20, 1999.
10.17** Employment Agreement with Jeffrey Marquis dated as of May 20, 1999.
10.18** Employment Agreement with Michelle Decker dated as of May 20, 1999.
10.19** Employment Agreement with Steven Sarner dated as of May 20, 1999.
10.20** Employment Agreement with Jose Yofe dated as of May 20, 1999.
10.21** Employment Agreement with Edward Muncey dated as of May 20, 1999.
10.22** Employment Agreement with Michael Reichartz dated as of May 20, 1999.
10.23** Employment Agreement with Erick Rodriguez dated as of May 20, 1999.
10.24** Director Stock Option Agreement with Michael Conway
10.25** Director Stock Option Agreement with Tobin Corey
10.26** Director Stock Option Agreement with Lorenzo Fertitta
23.1 Consent of KPMG LLP
23.2** Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (contained
in Exhibit 5.1)
24.1** Power of Attorney (contained in the signature page to this Registration Statement)
27.1** Financial Data Schedule
</TABLE>
- ------------------------------------
** filed previously
+ certain portions of the exhibit have been omitted based upon a request for
confidential treatment; the non-public information has been filed with the
Commission.
<PAGE>
Exhibit 1.1
5,000,000 SHARES (1)
TRAVELSCAPE.COM, INC.
COMMON STOCK
PURCHASE AGREEMENT
June ___, 1999
U.S. BANCORP PIPER JAFFRAY INC.
CIBC WORLD MARKETS CORP.
As Representatives of the several
Underwriters named in Schedule I hereto
c/o U. S. Bancorp Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Travelscape.com, Inc., a Delaware corporation (the "Company"), proposes
to sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 5,000,000 authorized but unissued shares (the
"Firm Shares") of the Company's Common Stock, $0.01 par value per share (the
"Common Stock"). The Company has also granted to the several Underwriters an
option to purchase up to 750,000 additional shares of Common Stock on the
terms and for the purposes set forth in Section 3 hereof (the "Option
Shares"). The Firm Shares and any Option Shares purchased pursuant to this
Purchase Agreement are herein collectively called the "Securities."
The Company hereby confirms its agreement with respect to the sale of
the Securities to the several Underwriters, for whom you are acting as
Representatives (the "Representatives").
1. REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on
Form S-1 (File No. 333-77073) with respect to the Securities, including a
preliminary form of prospectus, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations ("Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission; one or more amendments to such registration
statement have also been so prepared and have been, or will be, so filed;
and, if the Company has elected to rely upon Rule 462(b) of the Rules and
Regulations to increase the
- ------------------------
(1) Plus an option to purchase up to 750,000 additional shares to cover
over-allotments.
<PAGE>
size of the offering registered under the Act, the Company will prepare and
file with the Commission a registration statement with respect to such
increase pursuant to Rule 462(b). Copies of such registration statement(s)
and amendments and each related preliminary prospectus have been delivered to
you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to
the registration statement and an amended prospectus (including a term sheet
meeting the requirements of Rule 434 of the Rules and Regulations). If the
Company has elected to rely upon Rule 430A of the Rules and Regulations, it
will prepare and file a prospectus (or a term sheet meeting the requirements
of Rule 434) pursuant to Rule 424(b) that discloses the information
previously omitted from the prospectus in reliance upon Rule 430A. Such
registration statement as amended at the time it is or was declared effective
by the Commission, and, in the event of any amendment thereto after the
effective date and prior to the First Closing Date (as hereinafter defined),
such registration statement as so amended (but only from and after the
effectiveness of such amendment), including a registration statement (if any)
filed pursuant to Rule 462(b) of the Rules and Regulations increasing the
size of the offering registered under the Act and information (if any) deemed
to be part of the registration statement at the time of effectiveness
pursuant to Rules 430A(b) and 434(d) of the Rules and Regulations, is
hereinafter called the "Registration Statement." The prospectus included in
the Registration Statement at the time it is or was declared effective by the
Commission is hereinafter called the "Prospectus," except that if any
prospectus (including any term sheet meeting the requirements of Rule 434 of
the Rules and Regulations provided by the Company for use with a prospectus
subject to completion within the meaning of Rule 434 in order to meet the
requirements of Section 10(a) of the Rules and Regulations) filed by the
Company with the Commission pursuant to Rule 424(b) (and Rule 434, if
applicable) of the Rules and Regulations or any other such prospectus
provided to the Underwriters by the Company for use in connection with the
offering of the Securities (whether or not required to be filed by the
Company with the Commission pursuant to Rule 424(b) of the Rules and
Regulations) differs from the prospectus on file at the time the Registration
Statement is or was declared effective by the Commission, the term
"Prospectus" shall refer to such differing prospectus (including any term
sheet within the meaning of Rule 434 of the Rules and Regulations) from and
after the time such prospectus is filed with the Commission or transmitted to
the Commission for filing pursuant to such Rule 424(b) (and Rule 434, if
applicable) or from and after the time it is first provided to the
Underwriters by the Company for such use. The term "Preliminary Prospectus"
as used herein means any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective under the Act and
any prospectus subject to completion as described in Rule 430A or 434 of the
Rules and Regulations. The Company hereby confirms that the Underwriters and
dealers have been authorized to distribute or cause to be distributed each
preliminary prospectus and are authorized to distribute the Prospectus (as
from time to time amended or supplemented if the Company furnishes amendments
or supplements thereto to the Underwriters).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which
they were made, not misleading; except that the foregoing shall not
apply to statements in or omissions from any Preliminary Prospectus
in reliance upon, and in conformity with, written
2
<PAGE>
information furnished to the Company by you, or by any Underwriter
through you, specifically for use in the preparation thereof.
(ii) As of the time the Registration Statement (or any
post-effective amendment thereto, including a registration statement
(if any) filed pursuant to Rule 462(b) of the Rules and Regulations
increasing the size of the offering registered under the Act) is or
was declared effective by the Commission, upon the filing or first
delivery to the Underwriters of the Prospectus (or any supplement to
the Prospectus (including any term sheet meeting the requirements of
Rule 434 of the Rules and Regulations)) and at the First Closing Date
and Second Closing Date (as hereinafter defined), (A) the
Registration Statement and Prospectus (in each case, as so amended
and/or supplemented) conformed or will conform in all material
respects to the requirements of the Act and the Rules and
Regulations, (B) the Registration Statement (as so amended) did not
or will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) the Prospectus
(as so supplemented) did not or will not include an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances in which they are or were made, not misleading;
except that the foregoing shall not apply to statements in or
omissions from any such document in reliance upon, and in conformity
with, written information furnished to the Company by you, or by any
Underwriter through you, specifically for use in the preparation
thereof. If the Registration Statement has been declared effective
by the Commission, no stop order suspending the effectiveness of the
Registration Statement has been issued, and to the Company's
knowledge, no proceeding for that purpose has been initiated or
threatened by the Commission.
(iii) The financial statements of the Company, together
with the notes thereto, set forth in the Registration Statement and
Prospectus comply in all material respects with the requirements of
the Act and fairly present the financial condition of the Company as
of the dates indicated and the results of operations and changes in
cash flows for the periods therein specified in conformity with
generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise stated therein);
and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein. The
selected and summary combined and consolidated financial and
operational data included in the Registration Statement present
fairly the information shown therein and have been compiled on a
basis consistent with the audited financial statements. No other
financial statements or schedules are required to be included in the
Registration Statement or Prospectus. KPMG LLP, which has expressed
its opinion with respect to the financial statements and schedules
filed as a part of the Registration Statement and included in the
Registration Statement and Prospectus, are independent public
accountants as required by the Act and the Rules and Regulations.
(iv) Each of the Company and its subsidiaries has been
duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation. Each of
the Company and its subsidiaries has full corporate power and
authority to own its properties and conduct its business as currently
being conducted and as described in the Registration Statement and
Prospectus, and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which it owns or
leases real property or in which the conduct of its business makes
such qualification necessary and in which the failure to so qualify
would have a material adverse effect upon its business, condition
(financial or otherwise) or properties, taken as a whole; and each of
the Company and its subsidiaries has all
3
<PAGE>
requisite corporate power and authority and all necessary
authorizations, approvals, consents, orders, licenses, certificates
and permits to enter into, deliver and perform this Agreement and to
issue and sell the Securities other than those required under the
Securities Act and state and foreign Blue Sky laws.
(v) Except as contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor
any of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any material
transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there
has not been any change in the capital stock (other than a change in
the number of outstanding shares of Common Stock due to the issuance
of shares upon the exercise of outstanding options or warrants), or
any material change in the short-term or long-term debt, or any
issuance of options, warrants, convertible securities or other rights
to purchase the capital stock, of the Company or any of its
subsidiaries, or any material adverse change, or to the Company's
knowledge, any development involving a prospective material adverse
change, in the general affairs, condition (financial or otherwise),
business, key personnel, property, prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole.
(vi) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Company, threatened or
contemplated, any action, suit or proceeding to which the Company or
any of its subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, which (i)
might result in any material adverse change in the condition
(financial or otherwise), business, prospects, net worth or results
of operations of the Company and its subsidiaries, taken as a whole,
(ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration
Statement or Prospectus and is not so disclosed.
(vii) The Company is not involved in any labor dispute
nor, to the knowledge of the Company, is any such dispute threatened,
which dispute would have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company.
(viii) There are no contracts or documents of the Company
or any of its subsidiaries that are required to be filed as exhibits
to the Registration Statement by the Act or by the Rules and
Regulations that have not been so filed. Each agreement listed in
the exhibits to the Registration Statement, other than agreements
that by their terms have expired or will expire upon the completion
of the transactions contemplated hereby, is in full force and effect
and is valid and enforceable by and against the Company or its
subsidiaries, and to the knowledge of the Company, the other parties
thereto, in accordance with its terms thereto.
(ix) This Agreement has been duly authorized, executed
and delivered by the Company, and constitutes a valid, legal and
binding obligation of the Company, enforceable in accordance with its
terms, except as rights to indemnity hereunder may be limited by
federal or state securities laws and except as such enforceability
may be limited by bankruptcy, insolvency, reorganization or similar
laws affecting the rights of creditors generally and subject to
general principles of equity. The execution, delivery and
performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any statute, any agreement or
4
<PAGE>
instrument to which the Company is a party or by which it is bound or
to which any of its property is subject, the Company's charter or
by-laws, or any franchise, license, permit, judgment, order, rule,
regulation or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its properties; no
franchise, license, permit, consent, approval, authorization or order
of, or filing with, any court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement or for the consummation of the transactions contemplated
hereby, including the issuance or sale of the Securities by the
Company, except such as may be required under the Act or state
securities or blue sky laws; and the Company has full power and
authority to enter into this Agreement and to authorize, issue and
sell the Securities as contemplated by this Agreement.
(x) All of the issued and outstanding shares of capital
stock of the Company are duly authorized and validly issued, fully
paid and nonassessable, have been issued in compliance with all
applicable federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the holders thereof are not
subject to personal liability by reason of being such holders; the
Securities which may be sold hereunder by the Company have been duly
authorized and, when issued, delivered and paid for in accordance
with the terms hereof, will have been validly issued and will be
fully paid and nonassessable, and the holders thereof will not be
subject to personal liability by reason of being such holders; and
the capital stock of the Company, including the Common Stock,
conforms to the description thereof in the Registration Statement and
Prospectus. Except as otherwise stated in the Registration Statement
and Prospectus, there are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or
transfer of, any shares of Common Stock pursuant to the Company's
charter, by-laws or any agreement or other instrument to which the
Company is a party or by which the Company is bound. Neither the
filing of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any rights
for or relating to the registration of any shares of Common Stock or
other securities of the Company. All of the issued and outstanding
shares of capital stock of each of the Company's subsidiaries have
been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise described in the Registration
Statement and Prospectus and except for any directors' qualifying
shares, the Company owns of record and beneficially, free and clear
of any security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of such stock.
Except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or
other rights in existence to purchase or acquire from the Company or
any subsidiary of the Company any shares of the capital stock of the
Company or any subsidiary of the Company. The Company has an
authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus.
(xi) Except as described in the Prospectus, the Company
and each of its subsidiaries holds, and has operated and is operating
in compliance in all material respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates
and orders of any governmental or self-regulatory body required for
the conduct of its business and all such franchises, grants,
authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect; and
the Company and each of its subsidiaries is in compliance in all
material respects with all applicable federal, state, local and
foreign laws, regulations, orders and decrees.
5
<PAGE>
(xii) The Company and its subsidiaries have good and
marketable title to all property described in the Registration
Statement and Prospectus as being owned by them, in each case free
and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Registration
Statement and the Prospectus; except as disclosed in the Registration
Statement and the Prospectus, neither the Company nor its
subsidiaries own, lease or license any asset or property or conduct
any businesses outside the United States of America; the property
held under lease by the Company and its subsidiaries is held by them
under valid, subsisting and enforceable leases with only such
exceptions with respect to any particular lease as do not interfere
in any material respect with the conduct of the business of the
Company or its subsidiaries; except as disclosed in the Registration
Statement and the Prospectus, and to the Company's knowledge, the
Company and each of its subsidiaries owns or possesses all patents,
patent applications, trademarks, service marks, tradenames, trademark
registrations, service mark registrations, Internet domain names,
copyrights, licenses, inventions, trade secrets and rights necessary
for the conduct of the business of the Company and its subsidiaries
as currently carried on and as described in the Registration
Statement and Prospectus; the expiration of any patents, patent
rights, trade secrets, trademarks, service marks, Internet domain
names, trade names or copyrights would not have a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company or its
subsidiaries; except as stated in the Registration Statement and
Prospectus, no name which the Company or any of its subsidiaries uses
and no other aspect of the business of the Company or any of its
subsidiaries will involve or give rise to any material infringement
of, or material license or similar fees for, any patents, patent
applications, trademarks, servic marks, tradenames, trademark
registrations, service mark registrations, Internet domain names,
copyrights, licenses, inventions, trade secrets or other similar
rights of others material to the business or prospects of the Company
and neither the Company nor any of its subsidiaries has received any
notice alleging any such infringement or fee.
(xiii) Neither the Company nor any of its subsidiaries is
in violation of its respective charter or by-laws.
(xiv) Neither the Company nor any of its subsidiaries is
in breach of or otherwise in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is subject or by
which any of them may be bound, or to which any of the material
property or assets of the Company or any of its subsidiaries is
subject, which breach or default would have a material adverse effect
on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company or its subsidiaries.
(xv) Except as described in the Prospectus, the Company
and its subsidiaries have filed all federal, state, local and foreign
income and franchise tax returns required to be filed and are not in
default in the payment of any material taxes which were payable
pursuant to said returns or any assessments with respect thereto,
other than any which the Company or any of its subsidiaries is
contesting in good faith.
(xvi) The Company has not distributed and will not
distribute any prospectus or other offering material in connection
with the offering and sale of the Securities other than any
Preliminary Prospectus or the Prospectus or other materials permitted
by the Act to be distributed by the Company.
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(xvii) The Securities have been conditionally approved for
listing on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market System and, on the date the
Registration Statement became or becomes effective, the Company's
Registration Statement on Form 8-A or other applicable form under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
became or will become effective.
(xviii) Other than the subsidiaries of the Company listed
in Exhibit 21 to the Registration Statement, the Company owns no
capital stock or other equity or ownership or proprietary interest in
any corporation, partnership, association, trust or other entity.
(xix) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xx) No transaction has occurred between or among the
Company and any of its officers or directors or any affiliate or
affiliates of any such officer or director that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
(xxi) The Company has not taken, nor will it take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of any of the Securities.
(xxii) Each officer and director of the Company and each
person set forth on Schedule II hereto, has agreed in writing that
such person will not, for a period of 180 days from the date that the
Registration Statement is declared effective by the Commission (the
"Restricted Period"), offer to sell, contract to sell or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common
Stock (collectively, "Company Securities") now owned or hereafter
acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, or (ii)
with the prior written consent of U.S. Bancorp Piper Jaffray Inc.
The foregoing restriction has been expressly agreed to preclude the
holder of the Company Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead
to or result in a disposition of Company Securities during the
Restricted Period, even if such Company Securities would be disposed
of by someone other than such holder. Such prohibited hedging or
other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option)
with respect to any Company Securities or with respect to any
security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value
from Company Securities. Furthermore, such person has also agreed
and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Company
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Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of
the Company and the number and type of securities held by each
securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and stockholders
have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its
officers, directors or other stockholders from any Lock-up Agreements
currently existing or hereafter effected without the prior written
consent of U.S. Bancorp Piper Jaffray Inc.
(xxiii) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or broker's
fee or agent's commission in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xxiv) The Company is not presently doing business with the
government of Cuba or to the Company's knowledge with any person or
affiliate located in Cuba.
(b) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
3. PURCHASE, SALE AND DELIVERY OF SECURITIES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company agrees to issue and sell 5,000,000 Firm Shares to the several
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto. The purchase price for each
Firm Share shall be $ per share. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraph (c) of this Section 3 and in Section 8 hereof, the agreement of
each Underwriter is to purchase only the respective number of Firm Shares
specified in Schedule I.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable
to the order of the Company, at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304, or such other
location as may be mutually acceptable, at 9:00 a.m. Central time on the
third (or if the Securities are priced, as contemplated by Rule 15c6-1(c)
under the Exchange Act, after 4:30 p.m. Eastern time, the fourth) full
business day following the date hereof, or at such other time and date as you
and the Company determine pursuant to Rule 15c6-1(a) under the Exchange Act,
such time and date of delivery being herein referred to as the "First Closing
Date" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in this
Agreement, the Representative may in their sole discretion, postpone the
First Closing Date until no later than two (2) full business days following
delivery of copies of the Prospectus to the Representatives. If the
Representatives so elect, delivery of the Firm Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives. Certificates representing the Firm
Shares, in definitive form and in such denominations and registered in such
names as you may request upon at least two business days' prior notice to the
Company, will be made available for checking and packaging not later than
10:30 a.m.,
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Central time, on the business day next preceding the First Closing Date at
the offices of U.S. Bancorp Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company hereby grants to the several Underwriters an option to purchase
all or any portion of the Option Shares at the same purchase price as the
Firm Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once)
within 30 days after the effective date of this Agreement upon notice
(confirmed in writing) by the Representatives to the Company setting forth
the aggregate number of Option Shares as to which the several Underwriters
are exercising the option, the names and denominations in which the
certificates for the Option Shares are to be registered and the date and
time, as determined by you, when the Option Shares are to be delivered, such
time and date being herein referred to as the "Second Closing" and "Second
Closing Date", respectively; provided, however, that the Second Closing Date
shall not be earlier than the First Closing Date nor earlier than the third
business day after the date on which the option shall have been exercised.
If the option is exercised, the obligation of each Underwriter shall be
several and not joint. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage of the total number of Option Shares
to be purchased by the several Underwriters as the number of Firm Shares to
be purchased by such Underwriter is of the total number of Firm Shares to be
purchased by the several Underwriters, as adjusted by the Representatives in
such manner as the Representatives deem advisable to avoid fractional shares.
No Option Shares shall be sold and delivered unless the Firm Shares
previously have been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable
to the order of the Company, as appropriate, at the offices of Wilson Sonsini
Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304, or
such other location as may be mutually acceptable at 9:00 a.m., Central time,
on the Second Closing Date. If the Representatives so elect, delivery of the
Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
Certificates representing the Option Shares in definitive form and in such
denominations and registered in such names as you have set forth in your
notice of option exercise, will be made available for checking and packaging
not later than 10:30 a.m., Central time, on the business day next preceding
the Second Closing Date at the office of U.S. Bancorp Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such
other location as may be mutually acceptable.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment to the Company, on behalf of any Underwriter for the
Securities to be purchased by such Underwriter. Any such payment by you
shall not relieve any such Underwriter of any of its obligations hereunder.
Nothing herein contained shall constitute any of the Underwriters an
unincorporated association or partner with the Company.
4. COVENANTS. The Company covenants and agrees with the several
Underwriters as follows:
(i) If the Registration Statement has not already been
declared effective by the Commission, the Company will use its best efforts
to cause the Registration Statement and any post-effective amendments thereto
to become effective as promptly as possible; the Company will notify
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you promptly of the time when the Registration Statement or any
post-effective amendment to the Registration Statement has become effective
or any supplement to the Prospectus (including any term sheet within the
meaning of Rule 434 of the Rules and Regulations) has been filed and of any
request by the Commission for any amendment or supplement to the Registration
Statement or Prospectus or additional information; if the Company has elected
to rely on Rule 430A of the Rules and Regulations, the Company will prepare
and file a Prospectus (or term sheet within the meaning of Rule 434 of the
Rules and Regulations) containing the information omitted therefrom pursuant
to Rule 430A of the Rules and Regulations with the Commission within the time
period required by, and otherwise in accordance with the provisions of, Rules
424(b), 430A and 434, if applicable, of the Rules and Regulations; if the
Company has elected to rely upon Rule 462(b) of the Rules and Regulations to
increase the size of the offering registered under the Act, the Company will
prepare and file a registration statement with respect to such increase with
the Commission within the time period required by, and otherwise in
accordance with the provisions of, Rule 462(b); the Company will prepare and
file with the Commission, promptly upon your request, any amendments or
supplements to the Registration Statement or Prospectus (including any term
sheet within the meaning of Rule 434 of the Rules and Regulations) that, in
your reasonable opinion (after consultation with your counsel), may be
necessary or advisable in connection with the distribution of the Securities
by the Underwriters; and the Company will not file any amendment or
supplement to the Registration Statement or Prospectus (including any term
sheet within the meaning of Rule 434 of the Rules and Regulations) to which
you shall reasonably object by notice to the Company after having been
furnished a copy a reasonable time prior to the filing.
(ii) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement,
of the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any proceeding
for any such purpose; and the Company will promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal if such a
stop order should be issued.
(iii) Within the time during which a prospectus (including any
term sheet within the meaning of Rule 434 of the Rules and Regulations)
relating to the Securities is required to be delivered under the Act, or any
of the Rules and Regulations, the Company will comply as far as it is able
with all requirements imposed upon it by the Act, as now and hereafter
amended, and by the Rules and Regulations, as from time to time in force, so
far as necessary to permit the continuance of sales of or dealings in the
Securities as contemplated by the provisions hereof and the Prospectus. If
during such period any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if during such period it is
necessary to amend the Registration Statement or supplement the Prospectus to
comply with the Act, or any of the Rules and Regulations, the Company will
promptly notify you and will amend the Registration Statement or supplement
the Prospectus (at the expense of the Company) so as to correct such
statement or omission or effect such compliance.
(iv) The Company will use its best efforts to qualify the
Securities for sale under the securities laws of such jurisdictions as you
reasonably designate and to continue such qualifications in effect so long as
required for the distribution of the Securities, except that the Company
shall not be required in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process in any
state.
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(v) The Company will furnish to the Underwriters copies of the
Registration Statement (three of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments
and supplements (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations) to such documents, in each case as soon as
available and in such quantities as you may from time to time reasonably
request.
(vi) During a period of five years commencing with the date
hereof, the Company will furnish to the Representatives, and to each
Underwriter who may so request in writing, copies of all periodic and special
reports furnished to the stockholders of the Company and all information,
documents and reports filed with the Commission, the National Association of
Securities Dealers, Inc., NASDAQ or any securities exchange.
(vii) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months
after the end of the Company's current fiscal quarter, an earnings statement
(which need not be audited) covering a 12-month period beginning after the
effective date of the Registration Statement that shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
(viii) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming
effective under the provisions of Section 9(a) hereof or is terminated, will
pay or cause to be paid (A) all expenses (including transfer taxes allocated
to the respective transferees) incurred in connection with the delivery to
the Underwriters of the Securities, (B) all expenses and fees (including,
without limitation, fees and expenses of the Company's accountants and
counsel but, except as otherwise provided below, not including fees of the
Underwriters' counsel) in connection with the preparation, printing, filing,
delivery, and shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits thereto), the
Securities, each Preliminary Prospectus, the Prospectus, and any amendment
thereof or supplement thereto, and the printing, delivery, and shipping of
this Agreement and other underwriting documents, including Blue Sky
Memoranda, (C) all filing fees and fees and disbursements of the
Underwriters' counsel incurred in connection with the qualification of the
Securities for offering and sale by the Underwriters or by dealers under the
securities or blue sky laws of the states and other jurisdictions which you
shall designate in accordance with Section 4(iv) hereof, (D) the fees and
expenses of any transfer agent or registrar, (E) the filing fees incident to
any required review by the National Association of Securities Dealers, Inc.
of the terms of the sale of the Securities, (F) listing fees, if any, and (G)
all other costs and expenses incident to the performance of its obligations
hereunder that are not otherwise specifically provided for herein. If the
sale of the Securities provided for herein is not consummated by reason of
action by the Company pursuant to Section 9(a) hereof which prevents this
Agreement from becoming effective, or by reason of any failure, refusal or
inability on the part of the Company to perform any agreement on its part to
be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled, the
Company will reimburse the several Underwriters for all out-of-pocket
disbursements (including fees and disbursements of counsel) reasonably
incurred by the Underwriters in connection with their investigation,
preparing to market and marketing the Securities or in contemplation of
performing their obligations hereunder. The Company shall not in any event
be liable to any of the Underwriters for loss of anticipated profits from the
transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of
the Securities to be sold by it hereunder for the purposes set forth in the
Prospectus and will file such reports with the Commission
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with respect to the sale of the Securities and the application of the
proceeds therefrom as may be required in accordance with Rule 463 of the
Rules and Regulations.
(x) The Company will not, without your prior written consent,
offer for sale, sell, contract to sell, grant any option for the sale of or
otherwise issue or dispose of any Common Stock or any securities convertible
into or exchangeable for, or any options or rights to purchase or acquire,
Common Stock, except to the Underwriters pursuant to this Agreement, to
holders of the Company's Stock Purchase Warrants, dated as of February 16,
1999 and February 28, 1999, pursuant to the Company's 1998 Stock Plan, 1999
Stock Plan or 1999 Employee Stock Purchase Plan, in connection with the
acquisition by the Company of the business of another corporation,
partnership, limited liability company or other entity, whether by means of a
merger, stock purchase or purchase of assets, or up to an aggregate of 95,000
shares of Common Stock or warrants therefor to be issued to one hotel
management company in connection with a distribution agreement, for a period
of 180 days after the commencement of the public offering of the Securities
by the Underwriters, provided that if the Company shall issue Common Stock
(A) in connection with the acquisition by the Company of the business of
another corporation, partnership, limited liability company or other entity,
whether by means of a merger, stock purchase or purchase of assets, or to (B)
a hotel management company in connection with a distribution agreement, the
persons to whom such Common Stock is issued shall be required to deliver a
letter to the Representatives stating that such person agrees that he or she
will not, without your prior written consent, offer for sale, sell, contract
to sell or otherwise dispose of any shares of Common Stock or rights to
purchase Common Stock for a period of 180 days after commencement of the
public offering of the Securities by the Underwriters.
(xi) The Company either has caused to be delivered to you or
will cause to be delivered to you prior to the effective date of the
Registration Statement a letter from each of the Company's directors and
officers and the stockholders listed on Schedule II hereto stating that such
person agrees that he or she will not, without your prior written consent,
offer for sale, sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to purchase Common Stock for a period of 180 days
after commencement of the public offering of the Securities by the
Underwriters.
(xii) The Company shall cause to be prepared and delivered, at
its expense, not later than one day after the time a Prospectus is required
to be filed pursuant to Rule 424(b), to the Representatives an "electronic
Prospectus" to be used by the Underwriters in connection with the offering
and sale of the Securities. As used herein, the term "electronic Prospectus"
means a form of Prospectus, and any amendment or supplement thereto, that
meets each of the following conditions: (i) it shall be encoded in an
electronic format, reasonably satisfactory to the Representatives, that may
be transmitted electronically by the Representatives to offerees and
purchasers of the Securities for at least the Prospectus delivery period;
(ii) it shall disclose the same information as the paper Prospectus and
Prospectus filed pursuant to EDGAR, except to the extent that graphic and
image material cannot be disseminated electronically, in which case such
graphic and image material shall be replaced in the electronic Prospectus
with a fair and accurate narrative description or tabular representation of
such material, as appropriate; and (iii) it shall be in or convertible into a
paper format or an electronic format, reasonably satisfactory to the
Representatives, that will allow investors to store and have continuously
ready access to the Prospectus at any future time, without charge to
investors (other than any fee charged for subscription to the system as a
whole and for on-line time). Such electronic Prospectus may consist of a
Rule 434 preliminary prospectus, together with the applicable term sheet,
provided that it otherwise satisfies the format and conditions described in
the immediately preceding sentence. The Company hereby confirms that it has
included or will include in the Prospectus filed pursuant to EDGAR or
otherwise with the Commission and in the Registration Statement at the time
it was declared effective an
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undertaking that, upon receipt of a request by an investor or his or her
representative within the Prospectus delivery period, the Company shall
transmit or cause to be transmitted promptly, without charge, a paper copy of
the Prospectus.
(xiii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities, and has not effected any sales of Common
Stock which are required to be disclosed in response to Item 701 of
Regulation S-K under the Act which have not been so disclosed in the
Registration Statement.
(xiv) The Company will not incur any liability for any finder's
or broker's fee or agent's commission in connection with the consummation of
the transactions contemplated hereby.
(xv) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(xvi) If at any time during the twenty-five (25) day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which
in your opinion the market price of the Common Stock has been or is likely to
be materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus), the
Company will, after written notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you and your counsel
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
(xvii) The Company will inform the Florida Department of Banking
and Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriters if it commences engaging in business directly
with the government of Cuba or to the Company's knowledge with any person or
affiliate located in Cuba. Such information will be provided within 90 days
after the commencement thereof or after a change occurs with respect to
previously reported information.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters hereunder are subject to the accuracy of, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as
if made at such Closing Date), in all material respects, all representations
and warranties of the Company contained herein, and to the compliance and
performance by the Company of its obligations and agreements hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Central time, on the date of this Agreement, or such
later time and date as you, as Representatives of the several Underwriters,
shall approve and all filings required by Rules 424, 430A and 434 of the
Rules and Regulations shall have been timely made; no stop order suspending
the effectiveness of the Registration Statement or any amendment thereof
shall have been issued; no proceedings for the issuance of such an order
shall have been initiated or threatened; and any request of the Commission
for additional information (to be included in the Registration Statement or
the Prospectus or otherwise) shall have been complied with to your
satisfaction.
(b) [Omitted]
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(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company and its subsidiaries, taken as a
whole, shall not have incurred any material liabilities or obligations,
direct or contingent, or entered into any material transactions, or declared
or paid any dividends or made any distribution of any kind with respect to
their capital stock; and there shall not have been any change in the capital
stock (other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding options
or warrants), or any material change in the short-term or long-term debt of
the Company, or any issuance of options, warrants, convertible securities or
other rights to purchase the capital stock of the Company or any of its
subsidiaries, or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the ordinary
course of business), in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a whole,
that, in your judgment, makes it impractical or inadvisable to offer or
deliver the Securities on the terms and in the manner contemplated in the
Prospectus.
(d) On each Closing Date, there shall have been furnished to you,
as Representatives of the several Underwriters, the opinions of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Company,
and Saul, Ewing, Remick & Saul L.L.P., special regulatory counsel to the
Company, each dated such Closing Date and addressed to you in the forms of
Exhibit A-1 and Exhibit A-2 hereto respectively.
In rendering such opinion, such counsel may rely (i) as to matters
of law other than in the case of Wilson Sonsini Goodrich & Rosati, P.C., the
laws of the State of California and the General Corporation Law of the State
of Delaware, in the case of Saul, Ewing, Remick & Saul, L.L.P., the laws of
the State of Maryland, and, in either case, federal law, upon the opinion or
opinions of local counsel reasonably acceptable to you, provided that the
extent of such reliance is specified in such opinion and that such counsel
shall state that such opinion or opinions of local counsel are reasonably
satisfactory to them and that they believe they and you are reasonably
justified in relying thereon and (ii) as to matters of fact, upon
certificates of officers of the Company and its subsidiaries provided that
the extent of such reliance is specified in such opinion.
(e) On each Closing Date, there shall have been furnished to you,
as Representatives of the several Underwriters, such opinion or opinions from
Gibson, Dunn & Crutcher LLP, counsel for the several Underwriters, dated such
Closing Date and addressed to you, with respect to the formation of the
Company, the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as you reasonably may request, and such
counsel shall have received such papers and information as they request to
enable them to pass upon such matters.
(f) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of KPMG LLP, dated such Closing
Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under
Rule 2-01 of Regulation S-X of the Commission, and setting forth their
opinion with respect to their examination of the balance sheet of the Company
as of December 31, 1997 and 1998 and related statements of operations,
stockholders' equity, and cash flows for the twelve (12) months ended
December 31, 1996, 1997 and 1998, stating that they have performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of KPMG LLP
as described in SAS 71 on the financial statements for the first-quarter
period ended March 31, 1999 (the "Quarterly Financial Statements"), and
stating, as of the date of such letter (or, with respect to matters involving
changes or
14
<PAGE>
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five days
prior to the date of such letter), the conclusions and findings of said firm
with respect to the financial information and other matters covered by its
letter delivered to you concurrently with the execution of this Agreement,
and the effect of the letter so to be delivered on such Closing Date shall be
to confirm the conclusions and findings set forth in such prior letter.
(g) On each Closing Date, there shall have been furnished to you,
as Representatives of the Underwriters, a certificate, dated such Closing
Date and addressed to you, signed by the chief executive officer and by the
chief financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, in all material respects, as if
made at and as of such Closing Date, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof
or the qualification of the Securities for offering or sale has been
issued, and no proceeding for that purpose has been instituted or, to
their knowledge, is contemplated by the Commission or any state or
regulatory body; and
(h) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or
they may have reasonably requested.
(i) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives and their counsel.
(j) The Company shall have made all filings required under
applicable securities laws and by the Nasdaq National Market (including any
required registration under the Exchange Act), and the Securities shall have
been approved for quotation upon notice of issuance.
All such opinions, certificates, letters and other documents will
be in compliance with the provisions hereof only if they are satisfactory in
form and substance to you and counsel for the Underwriters. The Company will
furnish you with such conformed copies of such opinions, certificates,
letters and other documents as you shall reasonably request.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, including the
information deemed to be a part of the Registration Statement at the time of
effectiveness pursuant to Rules 430A and 434(d) of the Rules and Regulations,
if applicable, any Preliminary Prospectus, the Prospectus, or any amendment
or supplement thereto (including any term sheet within the meaning of Rule
434 of the Rules and Regulations), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
15
<PAGE>
stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending
against such loss, claim, damage, liability or action; provided, however,
that (i) the Company shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation thereof
and (ii) the indemnity agreement contained in this paragraph (a) with respect
to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Securities which are the subject
thereof (or to the benefit of any person controlling such Underwriter) if
copies of the Prospectus were timely delivered to the Underwriters by the
Company pursuant to Section 4(v) and at or prior to the written confirmation
of the sale of such Securities a copy of the Prospectus (or the Prospectus as
amended or supplemented) was not sent or delivered to such person, if
required by law so to have been delivered, and the untrue statement or
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented)
unless the failure is the result of noncompliance by the Company with
paragraph (c) of Section 6 hereof.
In addition to its other obligations under this Section 6(a), the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based
upon any statement or omission, or any alleged statement or omission,
described in this Section 6(a), it will reimburse each Underwriter on a
monthly basis for all reasonable legal fees or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriter that
received such payment shall promptly return it to the Company, together with
interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
announced from time to time by Norwest Bank (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter within 30
days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement shall be in addition
to any liabilities which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto (including any term sheet within the meaning
of Rule 434 of the Rules and Regulations), or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by you, or by
such Underwriter through you, specifically for use in the preparation
thereof, and will reimburse the Company for any legal or other expenses
reasonably incurred
16
<PAGE>
by the Company in connection with investigating or defending against any such
loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any
liability that it may have to any indemnified party unless, and only to the
extent that, such omission has materially prejudiced the rights or defenses
available to the indemnifying party. In case any such action shall be
brought against any indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate in, and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall not
be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation;
provided, however, that if, the Representatives, have been advised by their
counsel that it is advisable for the Underwriters to be represented as a
group by separate counsel because there exists an actual or potential
material conflict of interest between the indemnifying party and the
indemnified party, the Representatives shall have the right to employ a
single counsel to represent the Representatives and all Underwriters who may
be subject to liability arising from any claim in respect of which indemnity
may be sought by the Underwriters under subsection (a) of this Section 6, in
which event the reasonable fees and expenses of such separate counsel shall
be borne by the indemnifying party or parties and reimbursed to the
Underwriters as incurred (in accordance with the provisions of the second
paragraph in subsection (a) above). An indemnifying party shall not be
obligated under any settlement agreement relating to any action under this
Section 6 to which it has not agreed in writing, such consent not to be
unreasonably withheld.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a) or (b)
above, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one hand
and the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bears to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relevant intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this subsection
(d) were to be determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method
17
<PAGE>
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this subsection (d). The amount paid by
an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending against any
action or claim which is the subject of this subsection (d). Notwithstanding
the provisions of this subsection (d), subject to the limitations set forth
in paragraph (c), above, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 6 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 6 shall be in addition to any
liability that the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each director of the Company
(including any person who, with his consent, is named in the Registration
Statement as about to become a director of the Company), to each officer of
the Company who has signed the Registration Statement and to each person, if
any, who controls the Company within the meaning of the Act.
7. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the several
Underwriters and the Company contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation made
by or on behalf of any Underwriter or any controlling person thereof or the
Company or any of its officers, directors, or controlling persons, and shall
survive delivery of, and payment for, the Securities to and by the
Underwriters hereunder.
8. SUBSTITUTION OF UNDERWRITERS.
(a) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters
to be purchased hereunder, upon tender of such Firm Shares in accordance with
the terms hereof, and the amount of Firm Shares not purchased does not
aggregate more than 10% of the total amount of Firm Shares set forth in
Schedule I hereto, the remaining Underwriters shall be obligated to take up
and pay for (in proportion to their respective underwriting obligations
hereunder as set forth in Schedule I hereto except as may otherwise be
determined by you) the Firm Shares that the withdrawing or defaulting
Underwriters agreed but failed to purchase.
(b) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters
to be purchased hereunder, upon tender of such Firm Shares in accordance with
the terms hereof, and the amount of Firm Shares not purchased aggregates more
than 10% of the total amount of Firm Shares set forth in Schedule I hereto,
and arrangements satisfactory to you for the purchase of such Firm Shares by
other persons are not made within 36 hours thereafter, this Agreement shall
terminate. In the event of any such termination the Company shall not be
under any liability to any Underwriter (except to the extent provided in
18
<PAGE>
Section 4(a)(viii) and Section 6 hereof) nor shall any Underwriter (other
than an Underwriter who shall have failed, otherwise than for some reason
permitted under this Agreement, to purchase the amount of Firm Shares agreed
by such Underwriter to be purchased hereunder) be under any liability to the
Company (except to the extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the
necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effected. As used
herein, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 8.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 8:30 a.m., Eastern
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of
the Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration
Statement is effective at the time this Agreement is executed, this Agreement
shall become effective at such time as you in your discretion shall first
release the Securities for sale to the public. For the purpose of this
Section, the Securities shall be deemed to have been released for sale to the
public upon release by you of the publication of a newspaper advertisement
relating thereto or upon release by you of telexes offering the Securities
for sale to securities dealers, whichever shall first occur. By giving
notice as hereinafter specified before the time this Agreement becomes
effective, you, as Representatives of the several Underwriters, or the
Company may prevent this Agreement from becoming effective without liability
of any party to any other party, except that the provisions of Section
4(a)(viii) and Section 6 hereof shall at all times be effective.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the First Closing Date, and the option
referred to in Section 3(b), if exercised, may be canceled at any time prior
to the Second Closing Date, if (i) the Company shall have failed, refused or
been unable, at or prior to such Closing Date, to perform any agreement on
its part to be performed hereunder, (ii) any other condition of the
Underwriters' obligations hereunder is not fulfilled, (iii) trading on the
New York Stock Exchange or the American Stock Exchange shall have been wholly
suspended, (iv) minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required, on the
New York Stock Exchange or the American Stock Exchange, by such Exchange or
by order of the Commission or any other governmental authority having
jurisdiction, (v) a banking moratorium shall have been declared by Federal,
New York or Nevada authorities, (vi) if on or prior to such date, any
domestic or international event or act or occurrence has materially disrupted
the securities markets, (vii) if there shall be such a material adverse
change in general financial, political or economic conditions or the effect
of international conditions on the financial markets in the United States is
such as to make it, in the judgment of the Representatives, inadvisable or
impracticable to market the Securities, or (viii) there has occurred any
material adverse change in the financial markets in the United States or an
outbreak of major hostilities (or an escalation thereof) in which the United
States is involved, a declaration of war by Congress, any other substantial
national or international calamity or any other event or occurrence of a
similar character shall have occurred since the execution of this Agreement
that, in your judgment, makes it impractical or inadvisable to proceed with
the completion of the sale of and payment for the Securities. Any such
termination shall be without liability of any party to any other party except
that the provisions of Section 4(a)(viii) and Section 6 hereof shall at all
times be effective.
19
<PAGE>
(c) If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section, the Company shall
be notified promptly by you by telephone or telegram, confirmed by letter.
If the Company elects to prevent this Agreement from becoming effective you
shall be notified by the Company by telephone or telegram, confirmed by
letter.
10. DEFAULT BY THE COMPANY. If the Company shall fail at the First
Closing Date to sell and deliver the number of Securities that it is
obligated to deliver hereunder, then this Agreement shall terminate without
any liability on the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve the Company
from liability, if any, in respect of such default.
11. INFORMATION FURNISHED BY UNDERWRITERS. The statements set forth in
the last paragraph of the cover page and under the caption "Underwriting" in
any Preliminary Prospectus and in the Prospectus constitute the only written
information furnished by or on behalf of the Underwriters referred to in
Section 2 and Section 6 hereof.
12. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to the Representatives c/o U.S.
Bancorp Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402, except that notices given to an Underwriter
pursuant to section 6 hereof shall be sent to such Underwriter at the address
stated in the Underwriters' Questionnaire furnished by such Underwriter in
connection with this offering; if to the Company, shall be mailed,
telegraphed or delivered to it at 8951 W. Sahara Avenue, Las Vegas, Nevada
89117 Attention: Chief Executive Officer; or in each case to such other
address as the person to be notified may have requested in writing. All
notices given by telegram shall be promptly confirmed by letter. Any party
to this Agreement may change such address for notices by sending to the
parties to this Agreement written notice of a new address for such purpose.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended or
shall be construed to give to any other person, firm or corporation any legal
or equitable remedy or claim under or in respect of this Agreement or any
provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Securities
from any of the several Underwriters.
14. GOVERNING LAW. This agreement shall be governed by and construed
in accordance with the laws of the State of New York.
[Signature Page Follows]
20
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
TRAVELSCAPE.COM, INC.
By:__________________________
President
Confirmed as of the date first
above mentioned, on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
U.S. BANCORP PIPER JAFFRAY INC.
By_____________________________
Managing Director
CIBC WORLD MARKETS CORP.
By_____________________________
Managing Director
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares (1)
----------- -------------------------
<S> <C>
-------------------------
Total . . . . . . . . . . . . .
-------------------------
-------------------------
</TABLE>
- --------------
(1) The Underwriters may purchase up to an additional 750,000 Option Shares, to
the extent the option described in Section 3(b) of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
<PAGE>
SCHEDULE II
Stockholders
All of the Company's Stockholders and each holder of options and warrants
exercisable within 180 days of the date of this Agreement
<PAGE>
EXHIBIT A-1
OPINION TO BE DELIVERED BY WILSON SONSINI GOODRICH & ROSATI
(i) Each of the Company and its subsidiaries has been
duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation. To our
knowledge, the Company has no subsidiary and does not control,
directly or indirectly, any corporation, partnership, joint venture,
association or other business organization other than the subsidiaries
set forth in Exhibit 21 to the Registration Statement. Each of the
Company and its subsidiaries has full corporate power and authority to
own its properties and conduct its business as currently being carried
on and as described in the Registration Statement and Prospectus, and
is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which it owns or leases real
property or to our knowledge in which the conduct of its business
makes such qualification necessary and in which the failure to so
qualify would have a material adverse effect upon the business,
condition (financial or otherwise) or properties of the Company and
its subsidiaries, taken as a whole.
(ii) The Company has authorized and issued capital stock
as set forth in the Registration Statement and the Prospectus; the
certificates evidencing the Securities are in due and proper legal
form and have been duly authorized for issuance by the Company; all of
the capital stock of the Company conforms as to legal matters to the
description thereof contained in the Prospectus under the caption
"Description of Capital Stock." All of the issued and outstanding
shares of the capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable, and the
holders thereof are not subject to personal liability by reason of
being such holders. The Securities to be issued and sold by the
Company hereunder have been duly authorized and, when issued,
delivered and paid for in accordance with the terms of the Purchase
Agreement, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders. Except as otherwise stated
in the Registration Statement and Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's charter, by-laws or any agreement or other
instrument known to us to which the Company is a party or by which the
Company is bound. To our knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by the Purchase Agreement gives rise to any rights for or
relating to the registration of any shares of Common Stock or other
securities of the Company.
(iii) All offers and sales of the Company's outstanding
capital stock by or on behalf of the Company of which we have
knowledge were at the time of issuance exempt from the registration
requirements of the Securities Act and were duly registered or the
subject of any available exemption from the requirements of the
applicable state securities or Blue Sky laws.
(iv) To our knowledge, no person has any registration or
other similar rights to have any securities registered by the Company
under the Securities Act.
(v) All of the issued and outstanding shares of capital
stock of each of the Company's subsidiaries have been duly and validly
authorized and issued and are fully paid and nonassessable, and, to
our knowledge, except as otherwise described in the Registration
Statement and Prospectus, the Company owns of record and beneficially,
free and clear of any
<PAGE>
security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of such stock.
To our knowledge, except as described in the Registration Statement
and Prospectus, there are no options, warrants, agreements, contracts
or other rights in existence to purchase or acquire from the Company
or any subsidiary any shares of the capital stock of the Company or
any subsidiary of the Company.
(vi) The Registration Statement has become effective
under the Act and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or, to our knowledge,
threatened by the Commission.
(vii) Other than with respect to "Risk Factors - Evolving
government rules and regulations may negatively affect us," "Risk
Factors - There are uncertainties regarding taxes that could have a
negative effect on us if unfavorable changes or determinations are
made," and "Business - Government Regulation" to which we express no
opinion, the descriptions in the Registration Statement and Prospectus
of statutes, legal and governmental proceedings, contracts and other
documents are accurate and fairly present the information required to
be shown; and we do not know of any statutes or legal or governmental
proceedings required to be described in the Prospectus that are not
described as required, or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus
or included as exhibits to the Registration Statement that are not
described or included as required.
(viii) The Company has full corporate power and authority
to enter into the Purchase Agreement, to issue and sell the Securities
and to otherwise consummate the transactions contemplated by the
Purchase Agreement. All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery and
performance of the Purchase Agreement and the issuance and sale of the
Securities. The Purchase Agreement has been duly and validly
authorized, executed and delivered by the Company and assuming the
Purchase Agreement is enforceable under New York law constitutes a
valid, legal and binding obligation of the Company enforceable in
accordance with its terms (except as rights to indemnity may be
limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors
generally and subject to general principles of equity);
(ix) The execution, delivery and performance of the
Purchase Agreement and the consummation of the transactions
contemplated therein will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, (1) any
statute, rule or regulation known to us, (2) any indenture, mortgage,
deed of trust, note or other agreement or instrument known to us to
which the Company is a party or by which it is bound or to which any
of its property is subject, (3) the Company's charter or by-laws, or
(4) any franchise, license, permit, judgment, order or decree known to
us of any court or governmental agency or body having jurisdiction
over the Company or any of its respective properties. No consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery
and performance of the Purchase Agreement or for the consummation of
the transactions contemplated hereby, including the issuance or sale
of the Securities by the Company, except such as may be required under
the Act or state securities laws.
(x) To our knowledge, the Company and each of its
subsidiaries holds, and is operating in compliance in all material
respects with, all franchises, grants, authorizations,
<PAGE>
licenses, permits, easements, consents, certificates and orders of any
governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid and
in full force and effect.
(xi) To our knowledge, neither the Company nor any of its
subsidiaries is in violation of its respective charter or by-laws. To
our knowledge, neither the Company nor any of its subsidiaries is in
breach of or otherwise in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture,
note, indenture, loan agreement or any other material contract, lease
or other instrument to which it is subject or by which any of them may
be bound, or to which any of the material property or assets of the
Company or any of its subsidiaries is subject.
(xii) To our knowledge, there is no litigation or
governmental or other proceeding or investigation before any court or
before or by any public body or board pending or threatened against,
or involving the assets, properties or businesses of, the Company or
its subsidiaries which would have a material adverse effect upon the
assets or properties, business, results of operations or condition
(financial or otherwise) of the Company or its subsidiaries.
(xiii) The statements in the Prospectus under the captions
"Management-Incentive Stock Plans," "Management-Change in Control
Arrangements," ," "Management-Employment Agreements,"
"Management-Limitations on Directors' Liability and Indemnification,"
"Certain Transactions," "Description of Capital Stock," "Shares
Eligible for Future Sale," insofar as such statements constitute a
summary of documents referred to therein or matters of law, are fair
summaries in all material respects and accurately present the
information called for with respect to such documents and matters. To
our knowledge, all contracts and other documents required to be filed
as exhibits to, or described in, the Registration Statement have been
so filed with the Commission or are fairly described in the
Registration Statement, as the case may be.
We have participated in conferences with officers and other
representatives of the Company, representatives of the Representatives and
representatives of the independent certified public accountants of the
Company, at which conferences the contents of the Registration Statement and
the Prospectus and related matters were discussed and, although we are not
passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus (except as specified in the foregoing opinion),
on the basis of the foregoing, no facts have come to our attention which lead
us to believe that the Registration Statement at the time it became effective
(except with respect to the financial statements and notes and schedules
thereto and other financial data, as to which we express no belief) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus as amended or supplemented (except with
respect to the financial statements and notes schedules thereto and other
financial data, as to which we express no opinion) on the date thereof
contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
<PAGE>
EXHIBIT A-2
OPINION TO BE DELIVERED BY SAUL, EWING, REMICK & SAUL LLP, SPECIAL REGULATORY
COUNSEL
(i) The statements in the Prospectus under the captions
"Risk Factors-Evolving government rules and regulations may negatively
affect us" and "Business-Government Regulation," insofar as such
statements constitute a summary of matters of law, are fair summaries
in all material respects, accurately present the information called
for with respect to such matters by the Securities Act of 1933 with
respect thereto, and do not contain any untrue statement of any
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(ii) The execution and delivery of the Purchase Agreement
by the Company and the consummation of the transactions contemplated
thereby does not, and the conduct of the Company's business as
described in the Prospectus does not and will not, violate or conflict
with any law or administrative regulation or ruling relating to travel
agents, sellers of travel related products and services or sellers of
products and services via the Internet. Other than the registrations
under various state seller of travel acts listed on Schedule 1 to this
opinion, no other licenses, permits, registrations, qualifications or
authorizations are required by any law or administrative regulation or
ruling relating to travel agents, sellers of travel related products
and services or sellers of products and services via the Internet.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc. and
Professional Travel Services, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading 'Experts' in the prospectus.
KPMG LLP
Las Vegas, Nevada
June 16, 1999
