<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
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. / /
---------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Proposed Maximum Amount of
of Securities to Aggregate Offering Registration
be Registered Price(1) Fee
<S> <C> <C>
Common stock, $0.01 par value..................................................... $69,000,000 $19,182
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
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 April 27, 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>
Shares
TRAVELSCAPE.COM, INC. [LOGO]
Common Stock
$ per share
- ----------------------------------------------------------------------
- - Travelscape.com, Inc. is offering shares.
- - We anticipate that the initial public offering price will be between $ and
$ 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 6.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 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.
U.S. Bancorp Piper Jaffray CIBC World Markets
Joint Lead Managers
The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary................................................................................ 3
Risk Factors........................................................................... 6
Forward Looking Statements............................................................. 20
Use of Proceeds........................................................................ 21
Dividend Policy........................................................................ 21
Capitalization......................................................................... 22
Dilution............................................................................... 23
Selected Combined and Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 26
Business............................................................................... 36
Management............................................................................. 48
Certain Transactions................................................................... 55
Principal Stockholders................................................................. 56
Description of Capital Stock........................................................... 57
Shares Eligible for Future Sale........................................................ 60
Underwriting........................................................................... 61
Legal Matters.......................................................................... 63
Experts................................................................................ 63
Where You Can Find More Information.................................................... 63
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.
Information contained on Travelscape.com's web sites do 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.
2
<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. We currently have 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 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 66% of gross
bookings for the three months ended March 31, 1999, based on the aggregate
retail value of the travel booked.
Travel and tourism represents one of the largest consumer markets in the United
States. The Travel Industry Association of America, or TIAA, 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. TIAA also estimates that 76% of all trips taken in 1997 were for
leisure travel. 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 travel services than is generally available
from retail travel agencies. 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 negotiated rate agreements for discount airfares
with American Airlines, America West Airlines and Reno Air, and a route-specific
negotiated rate agreement with Delta Airlines. We believe that by offering
wholesale pricing of travel services directly to consumers, we are able to
maintain better 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.
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. 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.
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3
<PAGE>
- --------------------------------------------------------------------------------
The Offering
<TABLE>
<S> <C>
Common stock offered by Travelscape.com, Inc....... shares
Common stock outstanding after the offering........ shares(1)
Offering price..................................... $ 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.
Proposed Nasdaq National Market symbol............. RSVN
</TABLE>
- ------------------------------------
Summary Combined and Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999(2)
--------- --------- --------- --------- ---------- --------- ---------
(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 revenues................................... 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(3)........................ 1,391 2,047 3,019 4,171 10,427 1,257 7,497
Operating income (loss)............................ 140 202 324 61 (4,246) (274) (5,047)
--------- --------- --------- --------- ---------- --------- ---------
Net income (loss).................................. $ 263 $ 159 $ 336 $ 2 $ (4,427) $ (294) $ (5,406)
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
Pro Forma Statement of Operations Data(4):
Pro forma net loss................................. $ (4,513) $ (5,413)
Pro forma net loss per share(5):
Basic and Diluted.................................. $ (0.30) $ (0.36)
Weighted average shares outstanding(5):
Basic and Diluted.................................. 15,000 15,000
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
--------------------------
As
Actual Adjusted(6)
----------- -------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Net working capital (deficit)..................................................... $ (2,407)
Total assets...................................................................... 12,785
Long-term debt, including current portion(7)...................................... 4,525
Net stockholders' equity (deficiency)(7).......................................... (802)
</TABLE>
- ------------------------------------
(1) Excludes 2,190,750 shares of common stock subject to outstanding options at
March 31, 1999 and 150,000 shares of common stock subject to options granted
after March 31, 1999. Also excludes 527,752 shares of common stock subject
to outstanding warrants at March 31, 1999, all of which we expect to issue
within 30 days of the completion of this offering. See "Description of
Capital Stock--Options and Warrants."
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
(2) On January 21, 1999, Travelscape.com, Inc., a Delaware corporation, or
Travelscape.com, was formed for the purpose of completing an organizational
restructuring. Concurrent with its formation, all of the outstanding common
stock of Las Vegas Reservation Systems, Inc., Travelscape.com, Inc., or Old
Travelscape, and Professional Travel Services, Inc. (each a Nevada
corporation) was contributed to Travelscape.com in exchange for an aggregate
of 15,000,000 shares of common stock of Travelscape.com. As a result, Las
Vegas Reservation Systems, Old Travelscape and Professional Travel Services
became wholly-owned subsidiaries of Travelscape.com. Statement of operations
and balance sheet data are presented on a combined basis through January 22,
1999 and on a consolidated basis thereafter.
(3) In the three months ended March 31, 1999, includes approximately $1.8
million in stock compensation expense.
(4) Represents pro forma information as if the organizational restructuring
described in note 1 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 as the pro forma income tax
provision would be zero.
(5) 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.
(6) As adjusted to give effect to this offering and the application of the
proceeds therefrom.
(7) 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.
ALL INFORMATION IN THE 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 THAT WILL BE COMPLETED
PRIOR TO THE OFFERING. 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.
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.
- --------------------------------------------------------------------------------
5
<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, which we started in March
1998. Because we are investing to grow our online sales, we expect to experience
net losses for the foreseeable future.
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.
- 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.
- 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.
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 plan to continue to invest heavily in growing our online
operations. In addition we expect to recognize significant non-cash expenses in
the future, including interest expense of approximately $5.3 million in the
quarter in which this offering is completed as a result of repayment of our
senior notes, stock compensation expense of approximately $600,000 in the three
months ending June 30, 1999, and stock compensation expense of approximately
$400,000 per quarter thereafter, based on stock options granted to date. As a
result of the foregoing factors, we expect to continue to experience substantial
additional losses in the foreseeable future. We cannot assure you when, if ever,
we will be profitable. In evaluating these risks and uncertainties, you should
also consider the risks, expenses and difficulties companies frequently
encounter in an early stage of development, particularly companies engaged in
new and rapidly evolving markets such as e-commerce. We do not know if we will
be successful in addressing these risks or in executing our business strategy.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
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
6
<PAGE>
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 Internet brownouts;
- 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.
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.
The value of your investment depends on our ability to successfully replicate
our business model in new markets.
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
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
7
<PAGE>
terms are expected to adversely affect gross margins. 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. See "Business -- Strategy."
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 over 12 months 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 over the next 12
months. We plan 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. See "Business --
Strategy" and "-- Online Marketing."
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 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.
As the market for online travel services grows, we believe that companies
already involved in the online travel services industry will increase their
investment in 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.
8
<PAGE>
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. 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. See "Business --
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 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 negotiated rate agreements with RenoAir and America
West Airlines, and a negotiated rate agreement for routes to and from Las Vegas
with another major airline. 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 future operating
results 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.
See "Business -- Strategic Travel Relationships."
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 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 14.8%, respectively, of our
total revenue. No other single supplier accounted for more than 10% of total
revenue in 1997 or 1998. In addition, our top ten hotel suppliers accounted for
approximately 68.5% of total revenue in 1998. The loss of one of these top ten
supplier relationships, or any substantial reduction in
9
<PAGE>
the room blocks available to us from these suppliers would have an immediate and
adverse affect on our operating results and stock price. See "Business --
Strategic Travel Relationships."
We may be unable to protect our intellectual property, including our trademarks,
which could affect our operating results.
We regard our trademarks, domain names, service marks, trade dress, trade
secrets, copyrights and similar intellectual property as critical 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 PTO, 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 PTO. 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
PTO. 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. In either case, 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
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.
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.
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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.
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 84%, respectively, of our total revenue 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;
- 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.
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Our productivity and operating results will be negatively affected if we are
unable to manage growth effectively. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business -- Strategy," "--
Employees" and "Management."
Our operating results vary depending on the mix of travel services sold and
channels through which we sell.
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
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;
- increase our investment in sales and marketing, including
increasing our advertising commitments and customer service
operations;
- further develop our technology and transaction-processing systems;
and
- begin offering international travel services.
We expect that these investments will cause us to experience 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 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. See
"Business -- Strategy."
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.
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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. See "Business -- 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 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. See "Business
- -- Strategic Travel Relationships" and "-- Technology."
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
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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. See "Business -- 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. We do not have
long-term employment agreements with any of our 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, neither of which are 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 business.
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 systems.
Failure to retain and attract necessary technical, managerial, marketing and
customer service personnel would have a negative effect on our business. See
"Business -- Employees" and "Management."
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 may affect our revenue.
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
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<PAGE>
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 of insurance coverage, could have a
damaging effect on our reputation, operating results and financial condition.
See "Business -- Travelscape.com Services."
Our business could be hurt if we make acquisitions that are unsuccessful.
We may in the future 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:
- 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.
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<PAGE>
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. See "Business -- Strategy."
Evolving government rules and regulations may negatively affect us.
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, or DOT, regulations prohibiting unfair and
deceptive practices. In addition, DOT 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. In California, under the Seller
of Travel Act, we are required to register as a seller of travel, comply with
certain disclosure requirements and participate in the state's restitution fund.
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.
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 business.
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
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tickets. The tax is based upon a percent of the cost of transportation, which is
8% until October 1, 1999 and 7.5% thereafter. Pursuant to 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. 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 certain 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 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 hurt our business.
Our management has broad discretion over how we allocate our proceeds.
The net proceeds of this offering are estimated to be approximately $
million (approximately $ million if the underwriters' over-allotment
option is exercised in full) at an assumed initial public offering price of
$ 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 approximately $ million of the net proceeds of this offering. See
"Use of Proceeds."
Because ownership of our stock is concentrated, 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
% ( % 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. See "Principal
Stockholders."
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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, disruptions in other industries and market segments may hurt our
business. Finally, Year 2000 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure".
Certain of our charter and bylaw provisions could limit another party's ability
to acquire us.
Certain provisions of Delaware law and our Certificate of Incorporation and
Bylaws could have the effect of delaying or preventing a change of ownership or
voting control of Travelscape.com. See "Description of Capital Stock."
We expect that the market price for our common stock may be volatile.
The value of your investment could decline due to the impact of any of the
following factors, among others, upon the market price of our common stock:
- variations in our actual and anticipated operating results;
- 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;
- announcements of technological innovations or new services by us or
our competitors;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major travel service supplier, such as an airline, major
hotel or hotel chain;
- changes in the status of our intellectual property rights;
- announcements by third parties of significant claims or proceedings
against us;
- additions or departures of key personnel; and
- lack of liquidity.
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
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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 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. See "Description of Capital Stock--Options and Warrants."
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 "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 2,340,750 shares of common
stock issuable under our 1998 Stock Plan, 2,000,000 shares of common stock
issuable under 1999 Stock Plan and 500,000 shares of common stock issuable under
our 1999 Stock Purchase Plan. See "Description of Capital Stock" and "Shares
Eligible for Future Sale."
Our common stock is subject to dilution, which will diminish the value of your
investment.
We expect that the public offering price will be substantially higher than the
book value per share of our outstanding common stock. Investors purchasing
shares of common stock in the offering at an assumed offering price of
$ will therefore incur immediate, substantial dilution in the
amount of $ per share. In addition, asuming the issuance of the
527,752 shares pursuant to the exercise of warrants priced at $0.01 per share
within 30 days after the closing of this offering, investors purchasing shares
in the offering will experience total dilution in the amount of $ per share.
Investors purchasing shares of common stock in the offering will incur
additional dilution to the extent outstanding options are exercised. See
"Dilution."
19
<PAGE>
You should not rely on our 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."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
offered by us at an assumed initial public offering price of $ per share
are estimated to be approximately $ , after deducting the
underwriting discount and estimated offering expenses (approximately $
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% prior
to February 2000 and 12% thereafter. The maturity of these notes will be
accelerated by the completion of this offering. The balance of the net proceeds
of the offering will be used for advertising and brand development, working
capital, general corporate purposes and potential strategic investments or
acquisitions that complement our products, services, technologies or
distribution channels. 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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Travelscape.com at March
31, 1999 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
3-for-2 stock split to be completed prior to the offering and (iii) pro forma,
as adjusted to give effect to Travelscape.com's receipt of the estimated net
proceeds from the sale of shares of common stock offered by
Travelscape.com at an assumed initial public offering price of $
per share and the application of the net proceeds therefrom.
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. See
"Description of Capital Stock--Options and Warrants."
The outstanding share information also excludes 2,340,750 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 $2.98 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
- 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. See
"Management--Incentive Stock Plan."
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 thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
---------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.................................................. $ 6,335 $ 6,335 $
---------- ---------- -----------
---------- ---------- -----------
Long-term debt, including current portion(1)............................... $ 4,525 $ 4,525 $
Stockholders' equity (deficiency):
Preferred stock: $0.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding, actual and as adjusted......................... 0 0
Common stock: $0.01 par value, 50,000,000 shares authorized; 10,000,000
shares issued and outstanding, actual; 15,000,000 shares issued and
outstanding, pro forma; shares issued and outstanding, pro
forma, as adjusted..................................................... 100 150
Additional paid-in capital................................................. 15,586 15,536
Deferred stock compensation................................................ (4,810) (4,810)
Stockholder loans.......................................................... (83) (83)
Accumulated deficit........................................................ (11,595) (11,595)
---------- ---------- -----------
Net stockholders' equity (deficiency).................................. (802) (802)
---------- ---------- -----------
Total capitalization................................................... $ 3,723 $ 3,723 $
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------------------
(1) The long-term debt is recorded net of original issuance discount of $5.1
million. See note 6 to the unaudited combined and consolidated financial
statements.
22
<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 shares of common stock offered by Travelscape.com hereby
at an assumed initial public offering price of $ 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 $ million, or
approximately $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an
immediate dilution in net tangible book value of $ per share to new
investors of common stock in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $
Net tangible book value per share as of March 31, 1999.................... ($ 0.14)
Increase per share attributable to new investors..........................
---------
Net tangible book value per share after this offering.......................
---------
Dilution per share to new investors......................................... $
---------
---------
</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 $ 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 % $ 2,668,305 % $ 0.18
New investors..................................
------------ ---------- ------------ ---------- -----
Total...................................... % $ % $
------------ ---------- ------------ ---------- -----
------------ ---------- ------------ ---------- -----
</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 $ , and the average price per share for all outstanding shares would
equal $ .
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.
See "Management--Incentive Stock Plans," "Description of Capital Stock--Options
and Warrants" and note 8 to our combined and consolidated financial statements.
23
<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.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999(1)
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <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 $ 7,603
Airfare sales................................... 50 129 178 716 2,027 439 472
--------- --------- --------- --------- --------- --------- ---------
Total revenues................................ 3,720 5,090 8,256 12,432 20,879 3,340 8,075
Cost of sales..................................... 2,189 2,841 4,913 8,200 14,698 2,357 5,625
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 1,531 2,249 3,343 4,232 6,181 983 2,450
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
General and administrative...................... 1,187 1,575 2,087 3,066 5,421 853 2,188
Sales and marketing............................. 204 472 797 990 4,109 383 3,194
Systems development............................. -- -- 135 115 897 21 288
Stock compensation(2)........................... -- -- -- -- -- -- 1,827
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses...................... 1,391 2,047 3,019 4,171 10,427 1,257 7,497
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................... 140 202 324 61 (4,246) (274) (5,047)
--------- --------- --------- --------- --------- --------- ---------
Other income (expense):
Interest expense, net........................... 1 (43) (4) (77) (184) (28) (360)
Other income.................................... 122 -- 16 18 3 8 1
--------- --------- --------- --------- --------- --------- ---------
Total other income (expense).................. 123 (43) 12 (59) (181) (20) (359)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................. $ 263 $ 159 $ 336 $ 2 $ (4,427) $ (294) $ (5,406)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma Statement of Operations Data(3):
Pro forma net loss................................ $ (4,513) $ (5,413)
Pro forma net loss per share(4):
Basic and diluted............................... $ (0.30) $ (0.36)
Weighted average shares outstanding(4):
Basic and diluted............................... 15,000 15,000
Balance Sheet Data:
Net working capital deficit....................... $ (362) $ (511) $ (1,241) $ (2,580) $ (5,032) $ (2,922) $ (2,407)
Total assets...................................... 542 577 718 2,507 3,844 2,970 12,785
Long-term debt, including current portion(5)...... 173 142 78 1,568 2,235 1,577 4,525
Net stockholders' deficiency...................... (59) (503) (926) (1,716) (3,606) (2,131) (802)
</TABLE>
- ------------------------------------
(1) On January 21, 1999, Travelscape.com, Inc., a Delaware corporation, or
Travelscape.com, was formed for the purpose of completing an organizational
restructuring. Concurrent with its formation, all of the outstanding common
stock of Las Vegas Reservation Systems, Inc., Travelscape.com, Inc., or Old
Travelscape, and Professional Travel Services, Inc. (each a Nevada
24
<PAGE>
corporation) was contributed to Travelscape.com in exchange for an
aggregate of 15,000,000 shares of common stock of Travelscape.com. As a
result, Las Vegas Reservation Systems, Old Travelscape and Professional
Travel Services became wholly-owned subsidiaries of Travelscape.com.
Statement of operations and balance sheet data are presented on a combined
basis through January 22, 1999 and on a consolidated basis thereafter.
(2) During the three months ended March 31, 1999, we recorded a non-cash charge
for stock compensation expense of $1.8 million relating to the granting of
stock options at prices below the deemed fair market value of the common
stock on the date of grant to employees and the fair value of options to
purchase common stock granted to non-employees.
(3) Represents pro forma information as if the organizational restructuring
described in note 1 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.
(4) 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.
(5) 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 $.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 notes payable and additional paid-in capital.
25
<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 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, 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. We currently have 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 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, Inc., or LVRS, Professional Travel
Services, Inc., or PTS, and Travelscape.com, Inc, Old Travelscape, as wholly
owned subsidiaries of Travelscape.com. LVRS, PTS 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
66% 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 16% 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
26
<PAGE>
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 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 recognized at the time the commission is received from
the travel supplier, and averages 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. 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. 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. See note 8 to our combined and
consolidated financial statements.
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
27
<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 LVRS, PTS and Old Travelscape, LVRS and PTS
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 27.1
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 92.8
--------- --------- --------- --------- ---------
Operating income (loss)......................................... 3.9 0.5 (20.3) (8.2) (62.5)
--------- --------- --------- --------- ---------
Other income (expense):
Interest expense, net......................................... 0.0 (0.6) (0.9) (0.9) (4.5)
Other income.................................................. 0.2 0.1 0.0 0.3 0.1
--------- --------- --------- --------- ---------
Total other income (expense).............................. 0.2 (0.5) (0.9) (0.6) (4.4)
--------- --------- --------- --------- ---------
Net income (loss)............................................... 4.1% 0.0% (21.2)% (8.8)% (66.9)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 primarily 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 increase is also partially
attributable to the success of our online marketing activities. The additional
28
<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
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
and corporate overhead. General and administrative expense increased $1.3
million, or 156.6%, 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 27.1% in the three months ended
March 31, 1999 from 25.5% in the prior year period. The increase in general and
administrative expense in both absolute dollars and as a percentage of total
revenue was primarily attributable to increased staffing related to efforts to
increase our contracted room allotments and to the expansion of our call center.
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. We entered into substantial new
advertising commitments with DoubleClick and MapQuest in the three months ended
March 31, 1999 and 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. The increase in systems development expense in both
absolute dollars and as a percentage of total revenue was primarily attributable
to additional expenditures made to further develop our web sites and to expand
our in-house technical staff. We expect systems development expense to continue
to increase in absolute dollars for the foreseeable future.
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 $400,000 in
stock compensation expense each quarter thereafter through the first quarter of
2002.
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<PAGE>
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. See
"-- Overview."
Comparison of Fiscal Years Ended December 31, 1998 and 1997
ROOM SALES. Room sales increased $7.1 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. The increase in room sales was
primarily attributable to the launch of our web sites and the success of our
online advertising efforts. Other factors contributing to increased room sales
were increased sales through our call center and growth in our contracted room
allotment. 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 partially 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. In addition, we also experienced increased sales of
non-published airfares, which produce lower gross margins than room sales. 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 $2.4 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. The increase in general and
administrative expense both in absolute dollars and as a percentage of total
revenue was primarily attributable to increased staffing related to the
expansion of our call center and 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 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. The increase in systems development expense in both absolute
dollars and as a percentage of total revenue was primarily attributable to
additional expenditures made to develop our web sites and to expand our in-house
technical staff.
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<PAGE>
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.
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
primarily attributable to growth in our customer base and contracted room
allotment and 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 the
introduction of non-published airfare sales, a decrease in the sale of published
airfares and declining margins on room sales due to aggressive pricing.
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 $193,000, or
24.2%, to $991,000 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.
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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 revenues.......... 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....... (0) (1) (7) (68) (28) (26) (69) (60)
Other income................ -- -- 18 -- 8 3 (10) 1
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total other income
(expense)............. (0) (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
--------------------------------------------------------------------------------------------
Revenues
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 revenues............ 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....... 0.0 0.0 (0.2) (1.9) (0.9) (0.5) (1.3) (0.9)
Other income................ 0.0 0.0 0.6 0.0 0.3 0.1 (0.2) 0.0
----------- --------- --------- ----------- ----------- --------- --------- ---------
Total other income
(expense)............... 0.0 0.0 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 revenues.......... 8,075
Cost of sales................. 5,625
---------
Gross profit.................. 2,450
---------
Operating expenses:
General and
administrative............ 2,188
Sales and marketing......... 3,194
Systems development......... 288
Stock compensation.......... 1,827
---------
Total operating
expenses.............. 7,497
---------
Operating income (loss)....... (5,047)
---------
Other income (expense):
Interest expense, net....... (360)
Other income................ 1
---------
Total other income
(expense)............. (359)
---------
Net income (loss)............. $ (5,406)
---------
---------
Revenues
Room sales.................. 94.2%
Airfare sales............... 5.8
---------
Total revenues............ 100.0
Cost of sales................. 69.7
---------
Gross profit.................. 30.3
---------
Operating expenses:
General and
administrative............ 27.1
Sales and marketing......... 39.5
Systems development......... 3.6
Stock compensation.......... 22.6
---------
Total operating
expenses................ 92.8
---------
Operating income (loss)....... (62.5)
---------
Other income (expense):
Interest expense, net....... (4.5)
Other income................ 0.1
---------
Total other income
(expense)............... (4.4)
---------
Net income (loss)........... (66.9)%
---------
---------
</TABLE>
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<PAGE>
Seasonality and Quarterly Financial Information
The travel industry is subject to seasonal fluctuations dependent on business
and leisure travel patterns. 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 is 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 the value of your stock.
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, capital
expenditure and debt service requirements for at least 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.
Cash provided by (used in) operating activities was ($732,000) for the three
months ended March 31, 1999, compared to $335,000 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 provided by (used in) operating activities during 1998,
1997 and 1996 was ($2.2) million, $1.3 million and $758,000, respectively. Such
amounts primarily reflect net income (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
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.
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<PAGE>
Cash provided by (used in) financing activities was $7.0 million for the three
months ended March 31, 1999, compared to ($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 (used in) financing activities during 1998, 1997 and 1996 was
$2.5 million, $704,000 and ($618,000), respectively. 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 were
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 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
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<PAGE>
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. 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 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 on our business.
Finally, Year 2000 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 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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<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION OF OUR BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE, WHICH 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 SET FORTH UNDER "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. We currently have 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 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 66% 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 TIAA, 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. TIAA 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. TIAA 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, or GDS, 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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<PAGE>
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, or IDC, estimates that the number of users worldwide with
access to the Internet will increase to over 319 million in 2002 from 97 million
in 1998, representing a compound annual growth rate of approximately 35%. 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. IDC estimates that the volume of goods and
services purchased over the Internet will increase to $425 billion in 2002 from
$32 billion in 1998, representing a compound annual growth rate in excess of
90%.
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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 traditional retail travel
agency model and are dependent upon published rates and fares
quoted through GDS systems. Comparison shopping by consumers is
slow and complicated because GDS systems are not configured for
simultaneous display of multiple hotel options or hotel/air
packages. 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 exclude all but 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 depth and
breadth of 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 GDS system. 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.
Travelscape.com Solution
Travelscape.com is a leading consumer-direct online travel wholesaler serving
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.
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We have successfully operated as a consumer-direct travel wholesaler since 1990,
and extended our business to the Internet in 1998. We have established strategic
relationships with travel service suppliers, including leading hotels and
airlines, and are leveraging our Internet presence to enable these partners 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 establishing 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 travel
services than is generally available from retail travel agencies. 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 cities.
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.
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. We currently have
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.
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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 offering customers recommended
properties that meet our quality standards, we increase the probability that our
hotel partners will achieve increased revenue through online distribution while
helping customers find hotels that meet their needs.
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 to date, 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.
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
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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. 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 and SABRE GDS systems 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 GDS system to locate
the best prices possible for the desired travel. Our relational database and
proprietary SABRE GDS 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.
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.
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- "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. Travelscape.com has 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. We have entered into rate and inventory
agreements with each hotel in this 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 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 entered into negotiated rate agreements with
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Reno Air and America West Airlines for their entire systems, and
with another major airline for travel 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 GDS system,
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 GDS system 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 GDS system on a
commission 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 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 its preferred hotel reservation service
provider. 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 alone, according to Media Metrix, and has
committed to deliver 90 million impressions per month to
Travelscape.com under a series of agreements. In return, we will
pay MapQuest a total $2.1 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,
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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 66% 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.
Competition
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 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
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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 GDS
system 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 GDS system 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 GDS system. 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.
Proprietary Rights
We regard our trademarks, domain names, service marks, trade dress, trade
secrets, copyrights and similar intellectual property as critical 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 PTO, 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 PTO. 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
PTO. 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
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another party could claim that our use of the name infringes their rights. In
either case, 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
trademarks, copyrights, trade dress and similar proprietary rights. In the
future, litigation may be necessary to enforce our intellectual property and
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 to pay damages. Such
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
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 United States Department of
Transportation, or DOT, regulations prohibiting unfair and deceptive practices.
In addition, DOT regulations concerning the display and presentation of
information that are currently applicable to the GDS systems we access could be
extended to us in the future, as well as other laws and regulations aimed at
protecting consumers. In California, under the Seller of Travel Act, we are
required to register as a seller of travel, comply with certain disclosure
requirements and participate in the State's restitution fund.
We are also subject to regulations applicable to businesses generally and laws
or regulations directly applicable to access to e-commerce. Although there are
currently few laws and regulations directly applicable to online services, it is
possible that a number of laws and regulations may be adopted with respect to
online services covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of products
and services. 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 decrease the growth of online
services, 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 online services 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 online services could have a
material adverse effect on our business, operating results and financial
condition.
46
<PAGE>
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 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.
47
<PAGE>
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...................... 41 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 in various technical
positions, including Senior Corporate Director of New Technology and Senior
Director of International Systems, with Carlson Marketing Group. Ms. Decker
holds a bachelors degree from Slippery Rock State University in Computer
Technology and an MBA from Youngstown State University.
48
<PAGE>
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
the 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 of
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
49
<PAGE>
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 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 or directors of 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.
50
<PAGE>
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 $100,000 for services rendered to Travelscape.com in
all capacities during 1998, who are collectively, the named executive officers.
Fiscal 1998 Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other
Annual
Salary Bonus Compensation
Name and Principal Position ($) ($) ($)(1)
- ------------------------------------------------------------------------------ --------- --------- ---------------
<S> <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 0
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................ 0 0% 0 0 0 0
Thomas C. Breitling.............. 0 0% 0 0 0 0
Jeffrey A. Marquis............... 345,000 33.6% $ 1.33 7/1/08 288,568 731,288
</TABLE>
51
<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 certain 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 $ 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......................................... 0 0
Thomas C. Breitling....................................... 0 0
Jeffrey A. Marquis........................................ 0 345,000
</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 2,340,750 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 , 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 (i) 500,000 shares, (ii) 2% of the
outstanding shares or (iii) a lesser amount determined by the Board.
The 1999 Stock Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains successive six-month offering periods. The
offering periods generally start on the first trading day on or after January 1
and July 1 of each year, except for the first such offering period which
52
<PAGE>
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 December 31, 1999.
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 (i) 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 (ii) 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 be 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
shares.
Amounts deducted and accumulated by the participant are used to purchase shares
of common stock at the end of each offering 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 or end of the offering 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 a
sale of 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, or SPRs, to employees, directors and
consultants. The 1999 Plan was approved by the board of directors in April 1999
and by the stockholders in , 1999. Unless terminated sooner, the
1999 Plan will terminate automatically in 2009. A total of 2,000,000 shares of
common stock have been reserved for issuance pursuant to the 1999 Plan, plus
annual increases equal to the lesser of (i) 1,000,000 shares, (ii) 3% of the
outstanding shares on such date or (iii) 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 SPRs
granted, including the exercise price, the number of shares
53
<PAGE>
subject to each option or SPR, 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 SPRs granted under the 1999 Plan are not generally transferable by
the optionee, and each option and SPR 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 SPRs, 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 SPRs 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 at least be equal to 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.
Employment Agreements
Travelscape.com does not have employment agreements with any of its named
executive officers other than Jeffrey Marquis. The agreement with Mr. Marquis
provides for, among other things:
- at-will employment;
- termination by Travelscape.com upon permanent disability as defined
in the agreement;
- employee's exclusive services to be rendered to Travelscape.com;
- participation in all employee benefit programs; and
- confidential information to be kept by the employee as such.
Mr. Marquis's employment agreement provides for a base salary of $150,000 per
year, an option to purchase up to 345,000 shares of our common stock and an
annual bonus ranging from 0-100% of his base salary. Our agreement with Mr.
Marquis also provides for six months severance pay if he is terminated without
cause and one year severance upon a change in control.
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<PAGE>
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 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
- 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.
CERTAIN TRANSACTIONS
During the last three fiscal years, Victoria Partners has loaned money to Mr.
Timothy N. Poster and Las Vegas Reservation Systems, as listed below. Mr.
Lorenzo J. 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 N. 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 C. Breitling. The loan accrues interest at the 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 N. Poster, Jeffrey A. Marquis and Thomas C.
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.
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<PAGE>
In June 1998, Mr. Lorenzo J. Fertitta purchased 1,000,000 shares of common stock
of our predecessor, Travelscape.com, Inc., a Nevada corporation for $1.5
million.
In April 1998, we granted to each of our non-employee directors, Messrs. Lorenzo
J. Fertitta, Tobin J. Corey and Michael J. 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
our common stock as of April 26, 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
April 26, 1999 and 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
Thomas C. Breitling(3)........................................ 6,033,000 40.2 6,033,000
Lorenzo J. Fertitta(4)........................................ 1,512,500 10.1 1,512,500
Zucchero, LLC(4).............................................. 1,500,000 10.0 1,500,000
Jeffrey A. Marquis(3)......................................... 450,000 3.0 450,000
Michael J. Conway(5).......................................... 12,500 * 12,500 *
Tobin J. Corey(6)............................................. 12,500 * 12,500 *
All directors and executive officers as a group (12
persons)(7)................................................. 14,989,250 99.7 14,989,250
------------ --- ------------ ---
</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. See "Certain Transactions."
56
<PAGE>
(4) 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, Zucchero, LLC 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 subject to options
exercisable within 60 days of the date of this table.
(5) Includes 12,500 shares of common stock subject to options held by Mr.
Conway exercisable within 60 days of the date of this table.
(6) Includes 12,500 shares of common stock subject to options held by Mr. Corey
exercisable within 60 days of the date of this table.
(7) Includes 37,500 shares of common stock subject to options exercisable
within 60 days of the date of this table.
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 shares of common stock outstanding and no
shares of preferred stock will be issued and outstanding. In addition, based on
options granted to date, 2,340,750 shares of common stock will be issuable upon
exercise of outstanding options upon completion of the offering.
The following description of our capital stock 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 twelve 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
57
<PAGE>
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 2,340,750 shares were
outstanding, with exercise prices ranging from $1.33 to $6.00 per share. Of
these outstanding options, all shares are subject to options under the 1998
Option Plan and no shares are subject to options under the 1999 Plan. See
"Management -- Stock Plans."
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. See "Shares Eligible for
Future Sale."
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. See "Management -- Classified Board." In addition, our Amended and
Restated Certificate of Incorporation eliminates the ability of stockholders to
take actions by written consent and allows for the Board to designate and issue
preferred stock without further stockholder approval. Either 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 (i) permit only a majority of the board of
directors or the Chief Executive Officer to call a special meeting of the
stockholders, (ii) require prior notice of matters to be brought before meetings
of the stockholders, and (iii) provide that, upon the completion of this
offering, stockholders can take action only at a duly called annual or special
meeting of stockholders. Accordingly, our stockholders will not be able to take
action by written consent in lieu of a meeting.
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.
58
<PAGE>
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 any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (i) 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; (ii) 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 employee 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; or (iii) 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: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; or
(iv) 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.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Travelscape.com will have outstanding
shares of common stock based upon shares outstanding at March 31,
1999 (assuming no exercise of the underwriters' over-allotment option).
Excluding the 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. See
"Description of Capital Stock--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 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: (i) one percent of the number of shares of
common stock then outstanding (which will equal approximately shares
immediately after this offering); or (ii) 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 2,340,750 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 and directors, stockholders, optionholders and warrant holders 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.
60
<PAGE>
UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray Inc. and CIBC
Oppenheimer 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 Oppenheimer Corp..............................................................
Total........................................................................
-----------
-----------
</TABLE>
The underwriters have advised us that they propose to offer the shares to the
public at $ 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.
Of the shares of common stock offered by us, up to shares will
be reserved for sale to persons designated by us. 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
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.
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.
61
<PAGE>
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. 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.
62
<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.
63
<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............................................. -- -- 1,300,000
------------- ------------- --------------
$ 2,506,693 $ 3,843,716 $ 12,785,075
------------- ------------- --------------
------------- ------------- --------------
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,
10,000,000 shares issued and outstanding....................... -- -- 100,000
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 15,586,277
Deferred stock compensation...................................... -- -- (4,810,045)
Stockholder loans (note 4)....................................... -- (91,786) (83,345)
Accumulated deficit.............................................. (1,756,194) (6,182,834) (11,594,662)
------------- ------------- --------------
Net stockholders' deficiency................................... (1,716,194) (3,606,315) (801,775)
------------- ------------- --------------
Commitments and contingencies (notes 3 and 7)...................... $ 2,506,693 $ 3,843,716 $ 12,785,075
------------- ------------- --------------
------------- ------------- --------------
</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 2,188,247
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 7,497,133
--------- ---------- ---------- --------- ----------
Operating income (loss)......... 323,531 60,523 (4,245,575) (274,182) (5,047,041)
--------- ---------- ---------- --------- ----------
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) $(5,405,828)
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</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).................. -- -- -- (5,405,828) (5,405,828)
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)......................... 1,300,000 -- -- -- 1,300,000
Distributions (unaudited) -- -- -- (6,000) (6,000)
------------- ------------- ----------- -------------- -------------
Balance at March 31, 1999
(unaudited)......................... $ 15,686,277 $(4,810,045) $ (83,345) $ (11,594,662) $ (801,775)
------------- ------------- ----------- -------------- -------------
------------- ------------- ----------- -------------- -------------
</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) $(5,405,828)
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 93,288
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 (repayments of) notes payable............... -- 1,470,390 (37,940) 10,362 7,028,158
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......................................... $ -- $ -- $ -- $ -- $1,300,000
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</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 $1,300,000, 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
Revenues 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. Revenues 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 revenues 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 is necessary. 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 for 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 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 $ 791,201
----------- -----------
----------- -----------
</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 is 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, net of discount, at
an interest rate of 10 % for initial 12
months and 12 % for the subsequent 12
months, maturity date in February,
2001, unsecured (1).................... -- -- 2,167,889
--------- --------- ---------
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. 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.
The aforementioned share numbers have been adjusted to give effect to a
3-for-2 split of our common stock, which we will complete prior to this
offering.
(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 1,027,500 options to purchase 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, 1,027,500 options to purchase 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. The aforementioned share data have been adjusted to reflect a 3-for-2
split of the Company's common stock, which will be completed prior to this
offering.
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
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)
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.
Subsequent to December 31, 1998, 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. The aforementioned share data have been adjusted to reflect a 3-for-2
split of the Company's common stock, which will be completed prior to this
offering.
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 $1,300,000. 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........................ $ 4,513,306 $ 5,413,050
------------- -------------
------------- -------------
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 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 $1,200,000 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................... -- 1,300,000 1,300,000 1,300,000 -- 1,300,000
---------- ------------ ------------ ----------- ------------ ------------
$3,843,716 $1,300,000 $5,143,716 $12,785,075 $ -- $12,785,075
---------- ------------ ------------ ----------- ------------ ------------
---------- ------------ ------------ ----------- ------------ ------------
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,
10,000,000 shares issued and
outstanding, actual; 15,000,000
shares issued and outstanding,
pro forma....................... 45,000 55,000(1) 100,000 100,000 50,000(3) 150,000
Additional paid-in capital........ 2,623,305 1,245,000( (2) 3,868,305 15,586,277 (50,000)(3) 15,536,277
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) (11,594,662) -- (11,594,662)
---------- ------------ ------------ ----------- ------------ ------------
Net stockholders' deficiency.... (3,606,315) 1,300,000 (2,306,315) (801,775) -- (801,775)
---------- ------------ ------------ ----------- ------------ ------------
$3,843,716 $1,300,000 $5,143,716 $12,785,075 $ -- $12,785,075
---------- ------------ ------------ ----------- ------------ ------------
---------- ------------ ------------ ----------- ------------ ------------
</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 -- 5,420,838 2,188,247 -- 2,188,247
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
Amortization of
goodwill............... -- 86,666(2) 86,666 -- 7,222(2) 7,222
Stock compensation....... -- -- -- 1,827,430 -- 1,827,430
---------- ----------- ----------- ---------- ----------- -----------
Total operating
expenses............. 10,426,696 86,666 10,513,362 7,497,133 7,222 7,504,355
---------- ----------- ----------- ---------- ----------- -----------
Operating loss............. (4,245,575) (86,666) (4,332,241) (5,047,041) (7,222) (5,054,263)
---------- ----------- ----------- ---------- ----------- -----------
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) $ (86,666) ($4,513,306) $(5,405,828) $ (7,222) ($5,413,050)
---------- ----------- ----------- ---------- ----------- -----------
---------- ----------- ----------- ---------- ----------- -----------
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 $1,300,000, 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 $1,300,000 is being amortized over 15 years.
(3) Reflects the 3-for-2 stock split that will be completed prior to this
offering.
F-20
<PAGE>
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
, 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........................................ *
Printing Costs............................................................ 125,000
Legal Fees and Expenses................................................... *
Accounting Fees and Expenses.............................................. *
Blue Sky Fees and Expenses................................................ *
Transfer Agent and Registrar Fees......................................... *
Director and Officer Liability Insurance.................................. *
Miscellaneous............................................................. *
Total................................................................. $ *
</TABLE>
* To be supplied by amendment.
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:
1. In May 1998 Travelscape.com, Inc. a Nevada corporation, or Old
Travelscape, issued 1,000,000 shares of common stock to Thomas Breitling,
1,700,000 shares of common stock to Las Vegas Reservation Systems, Inc., a
Nevada corporation and 380,000 shares of common stock to Jeffrey Marquis for an
aggregate consideration of $234,500.
2. In June 1998, Old Travelscape issued 1,000,000 shares of common stock to
the Fertitta 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
5,000,000 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 200,000
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 6,500,000 shares of
common stock of the Registrant, and (v) 1,700,000 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 2,159,750
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(5) 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(4)
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 (to be filed with the
Delaware Secretary of State prior to the closing of the offering covered by this
Registration Statement)
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 Employee Stock Option Plan
10.3* 1999 Employee Stock Option Plan
10.4* 1999 Employee Stock Purchase Plan
10.5* Advertising Agreement with Mapquest.com Inc.
10.6* Advertising Agreement with DoubleClick Inc.
10.7* Wholesale Agreement with Luxor Hotel/Casino
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.8* Bulk Fare and Marketing Agreement with American Airlines
10.9* Voting Agreement by and among Timothy Poster, Thomas Breitling and Jeffrey Marquis
10.10* Form of Promissory Note from the February 1999 private placement of units
10.11* Form of Warrant from the February 1999 private placement of units
11.1* Statement regarding computation of per share earnings
12.1* Statement regarding computation of ratios
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>
- ------------------------------------
* to be filed by amendment
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 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Las Vegas, State of
Nevada on April 26, 1999.
By: /s/ JEFFREY A. MARQUIS
-----------------------------------
Jeffrey A. Marquis
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, each of Timothy N. Poster and Jeffrey A.
Marquis, as his attorney-in-fact, with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this registration
statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by either said attorney to any and all
amendments to said registration statement.
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 April 26, 1999
Timothy N. Poster Officer)
/s/ JEFFREY A. MARQUIS Chief Financial Officer
- ------------------------------ (Principal Financial and April 26, 1999
Jeffrey A. Marquis Accounting Officer)
/s/ THOMAS C. BREITLING
- ------------------------------ Director and Chief April 26, 1999
Thomas C. Breitling Operating Officer
/s/ LORENZO J. FERTITTA
- ------------------------------ Director April 26, 1999
Lorenzo J. Fertitta
/s/ MICHAEL J. CONWAY
- ------------------------------ Director April 26, 1999
Michael J. Conway
/s/ TOBIN J. COREY
- ------------------------------ Director April 26, 1999
Tobin J. Corey
</TABLE>
II-4
<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.
Las Vegas, Nevada
April 26, 1999
