ITEM 1. BUSINESS
ACQUISITION OF THE COMPANY BY AIRTOURS PLC
On February 21, 2000, Travel Services International, Inc., (the "Company") entered into an Agreement and Plan of Merger with Blue Sea Florida Acquisition Inc. ("Blue Sea") and Airtours plc ("Airtours") with respect to the acquisition of the Company. Pursuant to such agreement, Blue Sea Florida Acquisition Inc., an indirect, wholly-owned, subsidiary of Airtours, completed its tender offer for the shares of the Company at a price of $26 per share in cash. As of March 29, 2000 Blue Sea is the owner of approximately 95% of the outstanding shares of the Company. The Company and Blue Sea expect to be merged on or about May 1, 2000. Upon such merger, all remaining outstanding shares of the Company not currently held by Blue Sea will be converted into the right to receive $26 per share in cash and the Company will become a wholly-owned subsidiary of Airtours. Following the merger, the Company's shares will cease to be quoted on the Nasdaq Stock Market and the Company will no longer file public reports with the Securities and Exchange Commission.
GENERAL
The Company is a leading specialized distributor of travel products including cruise vacations, vacation packages, domestic and international airline tickets and European auto rentals, and is a leading provider of travel services such as electronic hotel reservation services, specialized hotel programs and services and incentive travel programs. The Company provides its services to both travel agents and travelers, offering a combination of specialized expertise, the ability to compare travel options from multiple travel providers and competitive prices. Unlike traditional travel agents who often lack extensive knowledge about the specific services being offered, the sales agents of specialized distributors focus their efforts on certain segments of the travel service industry and thus provide a greater level of expertise and service with respect to their segments. The Company's ability to provide in-depth knowledge about alternative products from multiple travel providers also differentiates it from the internal sales departments of travel providers, who offer only that provider's services. Recognizing the ability of specialized distributors to sell a significant amount of travel capacity, as well as their in-depth knowledge, travel providers utilize specialized distributors as a preferred source of distribution. The Company often has preferred pricing and access to inventory through its negotiated arrangements with leading airline, cruise line and European auto rental travel providers.
The Company commenced operations in July 1997 concurrently with its initial public offering and the acquisition of five specialized travel distributors, and has since acquired an additional 17 operating companies and a software development company. Through 1998, the Company focused its acquisitions primarily on distributors of cruise vacations to take advantage of recognized growth opportunities in that segment. The Company has also looked for opportunities to expand into new segments of the leisure travel industry that are complementary to its other lines of business. In June 1998, the Company entered the lodging travel services segment with the acquisition of Lexington Services, which the Company believes is the largest electronic hotel reservation services company in the United States, and the second largest in the world. The Company strengthened its presence in the lodging segment with the purchase in July 1998 of ABC Corporate Services, a developer of a hotel program, publisher of a related hotel guide and provider of after-hours travel services. In February 1999, the Company continued its expansion of product offerings with the acquisitions of AHI International Corporation, a distributor of packaged vacation products to university alumni associations, and Lifestyle Vacation Incentives, Inc., a marketer of incentive and promotional travel products.
Development of technology applications that facilitate and enhance the selling process for the Company's sales agents has become a significant focus for the Company. During 1999, the Company continued to make substantial investments in its technology applications. The Company's air reservation application, known as Flight Attendant, is currently in use in the Company's 1-800-FLY-CHEAP and 1-800-FLY-EUROPE operations. The cruise application, known as Cruise Control, is currently in use in two of the Company's cruise call centers. Each of the applications developed by the Company use web-based technologies, thereby allowing the Company to make the systems available to travel agents and travelers over the Internet.
The Company currently utilizes four distinct channels of distribution: (i) call centers staffed with trained sales personnel; (ii) home-based agents (including franchisees) who service their local markets; (iii) traditional travel agents; and (iv) the Internet. Marketing of the products and services sold directly to consumers is accomplished primarily
through newspaper, magazine and television advertisements and direct mail promotions; marketing to travel agents and independent hotels is managed primarily through sales forces dedicated to those efforts. The Company also markets its services over the Internet, using both the Company's own websites, www.mytravelco.com, www.flycheap.com and www.autoeurope.com, and links through other Company-owned and third party sites. Beginning in late 1998, the Company launched a new brand name, "The Travel Company". The Company has discontinued promotional use of The Travel Company brand in favor of certain traditional brand names used by the Company's subsidiaries, as well as the mytravelco.com trademark.
Currently, the Company does not have any material portion of its assets, operations or customers located outside of the United States. Substantially all of the Company's revenues are from customers based within the United States, where all of the Company's services are provided.
INDUSTRY OVERVIEW
Domestic travel and tourism spending by U.S. travelers was an estimated $408 billion in 1997 and was forecasted to increase at a compound annual growth rate of 6.7% through the year 2000. The market for specialized distributors of leisure travel services is highly fragmented. Many of these specialized distributors are small and generally have made little investment in technology to improve their selling effectiveness, efficiencies and access to information. Furthermore, most of these companies lack the volume and financial security necessary to obtain preferential pricing and inventory from travel providers or to create effective national marketing campaigns.
CRUISE INDUSTRY. The number of North American cruise passengers is expected to increase from 5.1 million in 1997 to 7.0 million by the year 2000, an 11.5% compound annual growth rate. In addition, industry analysts forecast a 10.3% compound annual growth rate in capacity over the same period, with a total of 40 new vessels, contracted or planned, adding a net supply of approximately 40,000 berths. The character of a cruise varies significantly among the different cruise lines and cruise ships. In addition, a cruise vacation, which consists of lodging, entertainment, dining and travel, typically represents a large portion of a traveler's vacation budget. As a result, cruise sales require significant marketing time and effort in comparison with sales of other travel products. Cruise lines traditionally have relied primarily on third party distributors to sell virtually all of their berth capacity. It is estimated that 6% of cruise vacations are sold directly by the internal sales departments of the cruise lines. While travel agents remain an important channel of distribution for cruise lines, specialized cruise vacation distributors have become an increasingly significant source of capacity utilization and, accordingly, may be given preferential pricing, cooperative advertising dollars and access to preferred berth inventory and locations. In contrast to most traditional travel agents, specialized cruise distributors often offer travelers extensive knowledge of cruise options available and are able to provide more detailed information with respect to daily excursions and other amenities.
AIRLINE INDUSTRY. The number of passengers carried by the major U.S. based airlines increased 2.9% to 542 million in 1997 from 526 million in 1996, with domestic and international passenger growth of 2.8% and 4.1%, respectively. Airlines rely heavily on travel agents and specialized distributors to supplement their own internal marketing efforts. Given their focus on air travel and their corresponding large volumes of reservations, specialized distributors often receive preferential pricing or controlled access to capacity at discounted prices through the use of negotiated rate fare contracts. Airlines typically issue these contracts to a limited number of specialized distributors in order to increase capacity utilization without disrupting their overall pricing strategy. These specialized distributors are then able to offer non-published discounted fares for domestic and international flights to both travel agents and travelers.
EUROPEAN AUTO RENTAL INDUSTRY. U.S. citizen departures to Europe increased 11.1% to 10.1 million in 1997 from 9.0 million in 1996. Unlike domestic auto rental providers which, to a large extent, market directly to travelers in the U.S., European auto rental providers rely heavily on third party distributors to market to U.S. customers traveling abroad. As in the U.S., European auto rental providers focus on business traveler segment which peaks in the spring and fall seasons. As a result, specialized distributors in the U.S. serve an important role to these European auto rental providers by supplementing their sales efforts during non-peak periods. In addition, these specialized distributors serve as a centralized and efficient source of information on pricing and availability of reservations to travel agents in the U.S.
LODGING INDUSTRY. Average daily room rates in the U.S. lodging industry increased 6.2% to $75.16 in 1997 from $70.81 in 1996. Average daily room nights sold increased 2.3% to 2.3 million in 1997 from 2.2 million in 1996. Average daily rates and average daily rooms sold are expected to increase 5.3% and 2.2%, respectively, in 1998.
VACATION AND TOUR PACKAGES INDUSTRY. Sales of vacation and tour packages is estimated to be a $20 billion market in 1997. In 1997, 104.2 million U.S. adults traveled with other family members, an increase of 11% over the prior year. The market is expected to grow at 6% a year for the next several years. Vacation packages include a combination of two or more travel services (e.g. hotel accommodations, ground transportation, air transportation, cruises) that are offered at a package price. Many vacation packages offer a choice of components and options, thereby enabling the customer to customize the package.
INCENTIVE TRAVEL PROGRAMS INDUSTRY. The travel incentive industry is estimated to be a $6 billion market. Travel promotion agencies range from sophisticated companies offering a broad range of service to boutique shops, specializing in one or few specific types of promotions. The industry is fragmented, with over 1000 travel promotion companies; however less than 100 companies are believed to have sales in excess of $1 million.
OPERATING STRATEGY
The Company seeks to provide comprehensive, quality leisure travel products and services, while improving efficiencies in its operations. The primary components of the Company's operating strategy include the following:
PROVIDE EXTENSIVE EXPERTISE IN SPECIFIC TRAVEL SEGMENTS. The Company, through its operating companies, is a specialist in several leisure travel products and services. By leveraging this specialized knowledge, the Company aims to provide a higher level of expertise and information for a broader array of travel products and services than may be available through traditional distribution channels.
UTILIZE TECHNOLOGY TO IMPROVE THE SELLING PROCESS. The Company continues to make significant investments in development of technology that is expected to improve and enhance the ability of its sales agents to convert travel inquiries into sales and make the selling and service processes more efficient. In addition, the technology reduces new agent training time from several weeks currently to less than one week. The technology applications being developed by the Company are web-based.
MAINTAIN AND ENHANCE STRONG STRATEGIC RELATIONSHIPS WITH TRAVEL PROVIDERS. The Company believes that its relationships with travel providers are integral to the Company's success. The Company has negotiated with many travel providers for pricing that is often lower than published fares and for preferred access to capacity. These strategic relationships enable the Company to access multiple providers within each travel segment and to offer value and service that is generally better than would be available to travelers through travel agents.
MARKET THROUGH MULTIPLE DISTRIBUTION CHANNELS. The Company believes that utilizing multiple distribution channels provides it with additional sales opportunities, decreases its reliance on any one channel and differentiates it from competitors who offer their products through a single channel.
OFFER HIGH LEVELS OF CUSTOMER SERVICE. The Company believes that maintaining high levels of customer service is essential to its ability to generate significant repeat business. In addition to the Company's competitive prices, customer service is an important differentiating factor to the leisure traveler who is making a significant investment in a vacation, the travel agent who is seeking the ability to make travel arrangements with greater ease, the independent hotel seeking to distribute its product efficiently through global distribution systems, and the corporation looking for innovative and turn-key travel incentive products to stimulate its sales.
CAPITALIZE ON MANAGEMENT EXPERTISE. The Company's executive management personnel have had many years of experience in various segments of the travel industry. In addition, the Company believes the experienced local management teams at its operating companies have an in-depth understanding of their respective markets and businesses, have built strong relationships with travel providers and customers and are important to managing the day-to-day operations and human resources at their respective locations.
GROWTH STRATEGY
Strong internal revenue growth is the core of the Company's growth strategy. Key elements of the Company's growth strategy include the following:
INVESTMENT IN TECHNOLOGY. The Company is continuing its development of information and telecommunications technologies and strategies for use by the Company, as well as by travel agents and travelers
through the Internet. Through 1999, the Company has invested approximately $17.3 million on its strategic software applications, and intends to invest approximately $5 million more to complete the development of its technology software applications primarily for cruise and air operations.
CAPITALIZE ON THE INTERNET. The Company plans to capitalize on the Internet as a major distribution channel for its products and services. The Internet represents a substantial opportunity as an important distribution channel for leisure travel today and in the future. The Company promotes itself and the www.mytravelco.com website through advertising and promotional alliances on the Internet. Several of the Company's operating companies also market through specialized websites, such as www.flycheap.com and www.autoeurope.com. The Company has dedicated agents to handle Internet sales leads and inquiries, as well as management personnel who have experience in the areas of e-commerce and Internet marketing.
DEVELOPMENT OF CONSUMER BRANDS. The Company seeks to build nationally recognized and respected consumer brands. Promotion of the brands is expected to be through traditional marketing and sales initiatives, as well as through opportunities that may arise in other businesses of the Company.
CAPITALIZE ON CROSS-SELLING, ECONOMIES OF SCALE AND BEST PRACTICES. The Company seeks to take advantage of significant cross-selling opportunities to further enhance revenue growth. The Company believes that it can achieve economies of scale and that its sales volumes and relationships with travel providers may enable it to obtain preferential pricing and preferred access to travel provider inventories. The Company believes it can also benefit from greater purchasing power in certain important expense areas, as well as reduce total operating expenses by consolidating certain duplicative back-office and administrative functions. During 1998 and 1999, the Company began to implement some of these economies, such as consolidating the purchasing of telecommunications services, advertising, insurance and credit card merchant services, and is creating a shared services center for fulfillment and accounting of cruise reservations. In addition, the Company has identified certain best practices, including marketing techniques, revenue management processes, operations and call center management strategies and cost efficiencies, that can be implemented in order to generate incremental revenue and enhance profitability.
ACQUISITIONS
Since the Company's initial public offering in July 1997, the Company has acquired 22 operating companies and a software development company. Through 1998, the Company focused its acquisitions primarily on distributors of cruise vacations. The Company entered the lodging travel services segment with the acquisition of Lexington Services in June 1998 and ABC Corporate Services in July 1998. In February 1999, the Company continued its expansion of product offerings with the acquisitions of AHI International Corporation and Lifestyle Vacation Incentives, Inc.
The Company has relied on the industry experience of its senior management, particularly Joseph Vittoria, the Executive Chairman, who is the former Chief Executive Officer of Avis, Inc. Mr. Vittoria sits on industry boards including the World Travel and Tourism Council, of which he is a founding member, and the Travel Industry Association. The Company also believes that the experience, reputation and relationships of the operating companies' management has been of value in the Company's efforts to acquire other specialized distributors of travel services. As consideration for acquisitions, the Company has used various combinations of Common Stock and cash. The Company registered under the Securities Act certain shares of its Common Stock that have been issued in connection with acquisitions.
The following table sets forth certain information with respect to the Company's acquisitions:
The following is a summary of the strategy underlying the Company's acquisitions since the Company's initial public offering:
o Lexington Services and ABC Corporate Services--enabled the Company to enter into the lodging travel services segment.
o The Cruise Line Inc. and Gold Coast Cruises--significantly bolstered the Company's presence in the cruise segment, particularly in South Florida.
o Ship 'N' Shore--provided Alaska land tour operations and expertise in the Alaska cruise market.
o CruiseMasters, Cruise Fairs of America and The Travel Company--provided a West Coast presence for the distribution of cruise vacations and added specific marketing expertise.
o CruiseOne--added a cruise franchise distribution system consisting of more than 350 franchisees.
o CruiseWorld--provided cruise distribution in the New York Tri-State area.
o Landry & Kling--provided expertise in cruise charters and corporate incentive marketing.
o Diplomat Tours and AutoNet International--expanded presence in European airline tickets and auto rental markets and bolstered relationships with travel agents.
o Trax Software--accelerated the development of the Company's Flight Attendant reservation system.
o Cruise Outlet of the Carolinas--expanded the Internet marketing capabilities of the cruise segment.
o 1-800-CRUISES--provided a marketing tool for national branding of the cruise segment.
o Lifestyle Vacation Incentives--expanded expertise in corporate incentive marketing and travel clubs.
o AHI International--expanded international packaged vacation offerings and added university alumni associations as a new marketing channel.
PRODUCTS AND SERVICES
The Company currently provides its products and services nationwide primarily through the use of toll-free telephone numbers, home-based agents, global distribution systems and the Internet. Product information and the ability to communicate with customers via email is also provided through the Company's website, www.mytravelco.com. Typically, potential customers call the Company, often in response to an advertisement or other promotion or in response to information seen on the Internet. The Company's sales personnel assist potential customers, whether travel agents or travelers, in selecting the appropriate travel arrangement and making the reservation. Customers may also book domestic air tickets directly on the Internet.
CRUISE. The Company is believed to be the largest distributor of cruises in the world, selling cruises on all major cruise lines. Typically, berths are booked on behalf of customers at specified discounts from the published cruise line prices. In addition, the Company is permitted to reserve more desirable berths on a number of cruises, which gives the Company an "exclusive" right to sell these berths for a period of time. If the Company does not sell these reserved berths, they are returned to the cruise lines at a specified time, generally 90 to 150 days prior to sailing, at no cost to the Company. The Company also advises large groups, such as affinity groups, corporate groups and business seminars, in selecting the appropriate cruise and sells Alaskan land tour packages directly to travelers and to travel agents.
The Company advises travelers and assists them in selecting the cruise that best fits their particular needs and desires. This requires the Company's sales personnel to have extensive knowledge about the character of the various cruise lines and the differences in their ships and cruises offered. The Company's sales personnel undergo in-house training, participate in seminars conducted by cruise lines and may receive complementary passes for cruises that provide the agent direct cruise line experience. Through the Company's new cruise reservation technology, detailed information about ships, itineraries, destinations and other data will be available to sales personnel at their desktops and to consumers on the Internet. Sales personnel endeavor to develop relationships with travelers in order to encourage repeat and referral business. The Company provides extensive services to its cruise customers in the form of information provided on its website, periodic mailings of information, reviews of various cruises and ships, advice regarding planning for the specific cruise and assistance in preparing the necessary travel documents. In addition to reserving a berth on a cruise, reservation agents can give customers information about the activities, shopping, sightseeing and restaurants available at the various ports at which the cruise stops and can make reservations for these activities.
DOMESTIC AND INTERNATIONAL AIR TRAVEL. The Company sells both domestic and international airline tickets. Through relationships with most major airlines, the Company is generally able to offer fares below published rates. The Company sells airline tickets to travelers relying primarily on its reputation and telephone numbers such as 1-800-FLY-CHEAP, 1-800-LOW-FARE and 1-800-FLY-EUROPE to attract business. The Company sells international airline tickets primarily to travel agents utilizing multiple fax distribution technology and a field sales force to advise travel agents of special fares and promotions. In August 1999, the Company also began selling domestic airline tickets over the Internet, on its www.flycheap.com website.
EUROPEAN AUTO RENTAL. The Company provides reservations for U.S. and Canadian travelers for auto rentals in Europe. The Company has agreements with a number of auto rental travel providers that operate in Europe, such as Avis Europe Limited and Europcar International S.A. The Company's European auto rental customers are primarily travel agents. The Company's field sales representatives establish and maintain relationships with a majority of the travel agents located in the U.S. Auto rentals in Europe pose a number of challenges for a U.S. traveler. In addition to costs such as drop off fees and airport levies, travelers run the risk of additional costs associated with currency fluctuations and rate changes if they do not pre-pay in U.S. dollars. Travelers are also faced with age restrictions, lack of flexibility in drop off and pick up and insurance complications. Further, the difficulty obtaining air conditioned, automatic transmission cars makes the European auto rental process difficult for travelers. The Company is able to simplify the process and overcome many of these challenges for travel agents and travelers. The Company maintains 24-hour toll-free numbers connected directly to its customer service department in the U.S. from which its customers in Europe can obtain emergency assistance. These toll-free numbers provide the customer with an English speaking contact with
access to the appropriate emergency roadside assistance in the relevant foreign location. European auto rentals are also now offered by the Company on its www.autoeurope.com website.
LODGING. The Company provides electronic reservation services to over 3,300 independent and chain hotels located in 70 countries worldwide. The Company's lodging service revenues are generally commission based and, therefore, largely depend on the volume of reservations processed on behalf of its hotel customers. The Company generally processes hotel reservations through the major computerized central reservation systems, including SABRE Group and Amadeus, through Internet sites such as TravelWeb and Expedia and through its call center. The Company also publishes a hotel directory featuring over 5,300 participating hotels worldwide through which travel agencies obtain special rates, access to block space and other benefits at these listed hotels, and provides after-hours travel services to travel agents.
VACATIONS AND TOUR PACKAGES. The Company sells vacation packages primarily to Alaska and Europe. One of the operating companies within the cruise segment operates land tours in Alaska in connection with Alaska cruises and also sells cruise/tour products to Europe and South America. Auto Europe also sells vacation packages to Europe under the trade name Destination Europe. AHI International Corporation develops, markets and sells packaged European vacations primarily to individuals that are members of over 240 university and college alumni associations, and also is a long standing provider of alumni tour packages to college bowl games. Many of the European packages include riverboat cruises.
INCENTIVE TRAVEL PROGRAMS. The Company provides incentive travel promotion services primarily to corporations. One of the Company's operating companies sells incentive cruises to Fortune 500 and other corporations, often as an incentive award for their top sales people. Another operating company specializes in corporate sales promotion and fulfillment, providing structured discounts to consumers for various forms of leisure travel. In addition, the Company manages the fulfillment of travel arrangements arising from such promotions.
INFORMATION TECHNOLOGY
The Company has adopted an information technology strategy focused on delivering value to the Company's customers, sales agents and travel providers, while enabling efficient and effective back office processes and providing necessary management information.
The core of the Company's information technology strategy is the "Universal Technology" platform, a series of applications and their supporting infrastructure that enable the sale and fulfillment of the travel products and services the Company sells. The Universal Technology environment includes: (i) web-based applications that take advantage of thin client processing structures; (ii) a multi-tier architecture for easy changes, enhancements and maximum reuse potential; (iii) Microsoft standard development tools, including XML-based message exchange architectures; (iv) the Microsoft Windows NT operating system for the applications environment; and (v) an Oracle relational database management system operating in the SUN/UNIX environment.
The Universal Technology is expected to contribute to the Company's efforts to increase productivity and net revenue per transaction by: (i) allowing Company agents to process reservations on-line in a more efficient fashion than the current manually-intensive processes employed; (ii) enabling Company agents to offer customers more comprehensive product information and automated access to special pricing and inventory opportunities; (iii) providing Company agents additional up-selling and cross-selling capabilities; (iv) allowing Company agents real time access to customer information via an on-line database facility; (v) capitalizing on revenue management opportunities; (vi) using the Internet to provide information and book reservations; and (vii) enabling consolidation of cruise back office functions, including reconciliation, accounting, documents management and financial reporting.
Several releases of the Universal Technology applications are currently in production; some software is still in development or testing phases. For example, Flight Attendant Release 2.4, the application for air reservations, is now in production in the San Diego, California, Albuquerque, New Mexico, and Portland, Maine, call centers. Cruise Control Release 3.0, the application for cruise sales, service and fulfillment, is currently in use in two of the cruise call centers and is expected to be implemented in all call centers in 2000.
The Flight Attendant application has been built to enable sales agents to more effectively sell a greater volume of airline reservations faster and with greater accuracy. These objectives are accomplished by use of the unique features of Flight Attendant, which include: (i) integration of discount, net, and published fares and flights on one screen. Flight
Attendant searches multiple global distribution systems, such as SABRE and Amadeus, and the Company's own fare database to find the lowest fare available and presents the information in one concise display; (ii) parallel access to on-line airline systems and databases for faster response time; (iii) unique "flexing" logic, which allows the agent to "coach" the customer toward lower fares that are available if the customer has the flexibility to change dates and/or times of travel; (iv) real time price management, which maximizes profit opportunity by dynamically adjusting the airfare price in response to market demands; (v) elimination of errors that can occur at the point-of-sale because of the need to interpret complex airline rules; and (vi) reduced training time from several weeks to less than one week.
The Cruise Control application has been designed and developed with the following core features and functions: (i) a sophisticated booking engine to enable the seamless processing of cruise reservations and bookings; (ii) on-line access to individual, group and block inventory and pricing; (iii) a comprehensive database of cruise ships and sailing information, including itineraries, destinations, pricing, deck plans, public rooms and amenities; (iv) electronic interfaces to cruise lines' and other third-party systems; (v) revenue management capabilities; and (vi) extensive back-office capabilities including reconciliation, accounting, documents management and financial reporting.
Among the Company's goals is the desire to own the most comprehensive collection of customer information in the leisure travel industry. Access to this information will enable the customer relationship model that is key to direct mail, advertising and other marketing activities. Accordingly, the Universal Technology includes a comprehensive customer information database, which includes extensive customer data such as profiles, preferences, travel history, memberships, passport information, and future travel desires. The customer information database is a common repository, shared across all Universal Technology applications. This is expected to allow the Company to acknowledge a customer's buying patterns across travel segments.
The Company invested an aggregate of approximately $17 million through 1999 and plans to spend an additional $5 million in 2000 for the development of the Universal Technology applications.
INTERNET DISTRIBUTION CHANNEL
The Company seeks to capitalize on the Internet as a major distribution channel for its products and services. On-line travel accounted for approximately one percent of the $101 billion of travel products sold by travel agents and specialized distributors in 1997, with 84% of on-line travel transactions being airline tickets. With over 43 million U.S. households owning a personal computer and with over 22 million households on-line in 1998, the new digital economy is growing at double the rate of the overall economy. According to Forrester Research, the on-line travel market is the second largest by dollar volume and the fastest growing area of Internet commerce. The Company believes that the Internet represents an important distribution channel for leisure travel in the future.
The Company currently markets on the Internet in several ways. Mytravelco.com provides information on air, lodging, auto and vacation products, and particularly in-depth information on cruises, offered by the Company. For example, the cruise section of the site includes pages on hot deals, cruise quotes, ships, cruise lines and cruise reviews. There is also a feature to request cruise information and quotes on-line and to engage in on-line chat, post messages and photos and view virtual tours of cruise ships. The air section features a link to flycheap.com where a consumer can book an airline reservation on line. The toll free phone numbers for the Company's products are promoted on each page. In addition, the Company promotes itself and the www.mytravelco.com website through advertising and promotional alliances on the Internet and promotes its website in its other advertising media. Several of the Company's operating companies also market through specialized websites including www.autoeurope.com, www.cruises.com, www.flycheap.com and www.lifestylevacations.com. The Company has dedicated agents to handle Internet sales leads and inquiries, as well as management personnel who have experience in the areas of e-commerce and Internet marketing.
The Company's technology employs a thin client, web-based architecture appropriate for the Internet. The Company implemented on-line booking capabilities for air in 1999 and expects to do so for cruise in 2000.
SALES AND MARKETING
The Company utilizes a multi-faceted marketing and sales approach depending on the particular travel products and services being promoted and depending on the type of customer being targeted. In addition, the Company markets its other national brands, such as 1-800-FLY-CHEAP, Auto Europe and Lexington Services, to consumers, travel agents and independent hotels, respectively.
The Company markets cruises to consumers in a variety of ways, including newspaper and magazine advertisements, television commercials, e-mail and direct mail, each of which contain extensive product offerings and special travel offers and which highlight toll-free numbers, including 1-800-CRUISES. The Company operates several call centers to respond to these calls. The Company also has a network of over 700 home-based agents, including franchisees and independent contractors, who actively market and sell cruises in their local areas. Direct mail campaigns include brochure and vacation directory mailings to existing and new customers. Point of purchase sales promotions include tie-ins with other retailers such as fast food chains and supermarkets. Extensive cruise information and automated requests for information are available to consumers by accessing the Company's website, www.mytravelco.com. In addition, the Company promotes its cruise offerings through advertising and promotional alliances on the Internet.
The Company markets European auto rentals and international air tickets primarily to travel agents through a variety of methods including a dedicated sales force, trade advertising, direct mail, fax distribution technology and the Internet. Incoming calls are handled at three call centers. European vacation package concepts are marketed to over 240 alumni associations using a dedicated sales force, and the packages are then marketed to alumni via extensive direct mail offerings produced in cooperation with the alumni associations.
The Company markets its electronic hotel reservation services to independent hotels through a dedicated business development sales force, extensive public relations activities and industry trade events. The Company markets its special hotel programs and its after-hours travel services to travel agents primarily through a dedicated sales force.
The Company markets domestic airline tickets to consumers primarily through newspaper and yellow page advertising, through word of mouth exposure of the easy to remember toll free number, 1-800-FLY-CHEAP, and on the Internet. Calls are currently taken at two call centers. On-line booking is also promoted on the Company's website, www.flycheap.com.
The Company markets incentive cruises to corporations through a dedicated sales force and through industry events. For the travel incentive promotions business, the Company markets to corporations primarily through independent sales representatives, the Internet, and industry trade events.
TRAVEL PROVIDER RELATIONSHIPS
The Company receives from certain travel providers pricing that is preferential to published fares, which enables the Company to offer prices which are often lower than would be generally available to travelers and travel agents. The Company's agreements with travel providers are generally short-term agreements that are cancelable on relatively short notice and, therefore, travel providers can, and often do, modify the terms of contracts as industry conditions change, including terms relating to commissions, access to inventory and pricing. Such agreements generally permit the Company and its subsidiaries to sell the travel products at either preferred prices or with preferred commission structures because of the Company's and its subsidiaries' reputation, historical relationships, expertise, and substantial volume of business conducted with the travel providers; however, such contracts generally do not create commitments by the travel providers for fixed capacity or inventory. Other distributors, including the Company's competitors, may have similar arrangements with travel providers, some of which may provide better availability or more competitive pricing than that offered by the Company.
In 1999, the Company consolidated its travel provider contracts in the cruise segment. In other segments, however, the Company may still operate with more than one agreement with travel providers. Although the Company's agreements with its travel providers in the aggregate are important to the Company's success, the Company does not believe that cancellation of any one of these agreements would have a material adverse effect on the Company's business or results of operations. Nevertheless, there can be no assurance that cancellation of one or more of such agreements would not result in such a material adverse effect.
Six cruise lines each in 1997 and 1998 and four cruise lines each in 1999 represented greater than 10% of cruise segment net revenues and represented in the aggregate approximately 74%, 85% and 70%, respectively, of the Company's cruise net revenues in 1997, 1998 and 1999. Two auto rental travel providers each represented greater than 10% of outbound segment net revenues and represented in the aggregate approximately 87%, 84% and 77%, respectively, of the Company's net revenues from European auto rentals in 1997, 1998 and 1999. Three airlines each represented greater than 10% of the other segment's net revenues and represented in the aggregate approximately 63%,
51% and 55%, respectively, of the Company's net revenues from domestic airline tickets in 1997, 1998 and 1999. Carnival Cruise Line and Europcar International, S.A. were travel providers for approximately 7% and 8%, respectively, of the Company's consolidated net revenues in 1999.
COMPETITION
The travel service industry is extremely competitive and has traditionally had low barriers to entry. The Company competes with other distributors of travel services, travel providers, travel agents, tour operators, group travel sponsors, Internet companies, and global distribution system providers, some of which have greater experience, brand name recognition and/or financial resources than the Company. The Company competes for customers based upon service, price, specialized in-depth knowledge and, with respect to sales to travel agents, attractive commission structures. Travel providers may decide to compete more directly with the Company and restrict the availability and/or preferential pricing of their capacity. In addition, other distributors may have relationships with certain travel providers, providing better availability or more competitive pricing than that offered by the Company. Furthermore, some travel agents and group travel sponsors have a strong presence in their geographic area, which may make it difficult for the Company to attract customers in those areas.
EMPLOYEES
As of December 31, 1999, the Company had 2,142 full-time employees, of whom 807 were employed in connection with the cruise reporting segment, 466 were employed in connection with the outbound reporting segment, 259 were employed in connection with the lodging reporting segment, 482 were employed in connection with the other reporting segment and 128 were employed at the Company's corporate headquarters. In addition, the Company had contracts with 197 independent contractors and 400 franchisees, and used temporary employees, contractors and consultants as required to meet the needs of seasonal demand and technology and other projects. The Company believes that its relations with its employees, independent contractors and franchisees are good.
QUALIFICATION OF FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, experience and the performance or achievements of the Company to be materially different from those anticipated, expressed or implied by the forward-looking statements. In evaluating the Company's business, the following factors, in addition to the Risk Factors set forth below and other information set forth herein, should be carefully considered: successful deployment and integration of systems; factors affecting internal growth and management of growth; the Company's ability to implement its technology strategy; success of marketing, integration and operational initiatives, including Internet marketing initiatives; dependence on technology; labor and technology costs; cost and availability of advertising and promotional efforts; success of the acquisition strategy and availability of acquisition financing; success in entering new segments of the travel market and new geographic areas; dependence on travel providers; risks associated with the travel industry generally; seasonality and quarterly fluctuations; competition; and general economic conditions. In addition, the Company's operating strategy and growth strategy involve a number of risks and challenges, and there can be no assurance that these risks and other factors will not have a material adverse effect on the Company.
RISK FACTORS
LIMITED COMBINED OPERATING HISTORY; RISKS OF INTEGRATION. Travel Services International, Inc. was founded in April 1996 but conducted no operations and generated no revenues prior its initial public offering in July 1997, when it acquired the five Founding Companies. Subsequent to July 1997, the Company acquired an additional 17 operating companies and one software development company. Currently, the Company relies on the existing reporting systems of the operating companies for financial reporting. There can be no assurance that the Company will be able to successfully integrate the operations of these businesses or institute the necessary Company-wide systems and procedures to successfully manage the combined enterprise on a profitable basis. Also, there can be no assurance that the management group will be able to effectively manage the combined entity or effectively implement and carry out the Company's internal growth strategy, operating strategy or technology strategy. The consolidated financial statements cover certain periods when the operating companies were not under common control or management and, therefore, may not be indicative of the Company's future financial or operating results. The inability of the Company to successfully integrate the operating companies, and future acquisitions, would have a material adverse effect on the Company's business, financial condition, and results of operations, and would make it unlikely that the Company's acquisition program will continue to be successful.
A number of the operating companies offer different travel services, utilize different capabilities and technologies and target different client segments. While the Company believes that there are substantial opportunities to cross-market and integrate these businesses, these differences increase the risk inherent in successfully completing such integration. Further, there can be no assurance that the Company's strategy to be the leading specialized distributor of leisure travel services will be successful, or that the travelers or travel providers will accept the Company as a distributor of a variety of specialized travel services.
MANAGEMENT OF GROWTH; FACTORS AFFECTING INTERNAL GROWTH. The Company expects to spend significant time and effort expanding and integrating existing businesses. There can be no assurance that the Company's systems, procedures or controls will be adequate to support the Company's operations as they expand. Any future growth also will impose significant added responsibilities on members of senior management, including the need to identify, recruit and integrate new senior level managers and executives. There can be no assurance that such additional management will be identified or retained by the Company. To the extent that the Company is unable to manage its growth efficiently and effectively, or is unable to attract and retain qualified management, the Company's business, financial condition and results of operations could be materially adversely affected. There can be no assurance that the Company will experience internal growth. From time to time, certain of the operating companies have been unable to hire and train the number of qualified sales personnel needed to meet the demands of their businesses. Factors affecting the ability of the Company to continue to experience internal growth include, but are not limited to, the ability to expand the travel services offered, the continued relationships with certain travel providers and travel agents, the public's acceptance of and response to the Company's brand names, the ability to recruit and retain qualified sales personnel, the ability to cross-sell services within the Company, continued access to capital and increased competition.
DEPENDENCE ON TRAVEL PROVIDERS. The Company is dependent upon travel providers for access to their products. The Company receives from certain travel providers pricing and capacity that is preferential to published fares which enables the Company to offer consistently competitive products and services. Other distributors may have similar arrangements with travel providers, some of which may provide better availability or more competitive pricing than that offered by the Company. The Company anticipates that a significant portion of the Company's revenues will continue to be derived from the sale of capacity for relatively few travel providers. In addition, travel providers may expand their direct marketing efforts and reduce the capacity offered to distributors.
Six cruise lines each in 1997 and 1998 and four cruise lines each in 1999 represented greater than 10% of cruise segment net revenues and represented in the aggregate approximately 74%, 85% and 70%, respectively, of the Company's cruise net revenues in 1997, 1998 and 1999. Two auto rental travel providers each represented greater than 10% of outbound segment net revenues and represented in the aggregate approximately 87%, 84% and 77%, respectively, of the Company's net revenues from European auto rentals in 1997, 1998 and 1999. Three airlines each represented greater than 10% of the other segment's net revenues and represented in the aggregate approximately 63%, 51% and 55%, respectively, of the Company's net revenues from domestic airline tickets in 1997, 1998 and 1999. Carnival Cruise Line and Europcar International, S.A. were travel providers for approximately 7% and 8%, respectively, of the Company's consolidated net revenues in 1999.
The Company's agreements with its travel providers can generally be cancelled or modified by the travel provider upon relatively short notice. The loss of a contract, changes in the Company's pricing agreements, commission schedules, or cooperative marketing arrangements or more restricted access to travel providers' capacity could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the lodging industry recently has witnessed a period of consolidation. Continued consolidation could reduce the Company's electronic hotel reservation services customer base which could, in turn, have a material adverse effect on the Company's financial condition and results of operations.
DEPLOYMENT OF NEW TECHNOLOGY. The Company is in the process of, and expects that it will continue over the coming years, replacing many of the existing computer systems at the operating companies and implementing its new "Universal Technology" architecture. There can be no assurance that these new systems will be successfully completed, installed according to the expected time frame or within the anticipated budget, implemented without any disruption to the Company's business or result in the intended operational benefits and cost efficiencies.
DEPENDENCE UPON TECHNOLOGY. The Company's business is currently dependent upon a number of different information and telecommunication technologies to facilitate its access to information and manage a high volume of inbound and outbound calls. Any failure of this technology would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company is dependent upon certain third party vendors, including central reservation systems, such as SABRE Group, Amadeus and THISCO for access to certain information. Any failure of these systems or restricted access by the Company would have a material adverse effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH THE TRAVEL INDUSTRY; GENERAL ECONOMIC CONDITIONS. The Company's results of operations are dependent upon factors generally affecting the travel industry. The Company's revenues and earnings are especially sensitive to events that affect domestic and international air travel, cruise travel, auto rentals in Europe and hotel room nights. A number of factors could result in an overall decline in demand for travel, including political instability, armed hostilities, international terrorism, extreme weather conditions, a rise in fuel prices, a decline in the value of the U.S. dollar, labor disturbances, excessive inflation, a general weakening in economic activity and reduced employment in the U.S. These types of events could have a material adverse effect on the Company's business, financial condition and results of operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS. The domestic and international leisure travel industry is seasonal. The results of each of the operating companies have been subject to quarterly fluctuations caused primarily by the seasonal variations in the travel industry, especially the leisure travel segment. Seasonality depends on the particular leisure travel product or service sold. The Company expects seasonality to continue in the future on a combined basis. The Company's quarterly results of operations may also be subject to fluctuations as a result of changes in the mix of services offered by the Company as a result of acquisitions, internal growth rates among various travel segments, fare wars by travel providers, changes in relationships with certain travel providers, the timing of the payment of overrides by travel providers, extreme weather conditions or other factors affecting travel and the timing and cost of acquisitions.
SUBSTANTIAL AMOUNT OF GOODWILL. Approximately $142 million, or 61%, of the Company's total assets as of December 31, 1999, is goodwill, which represents the excess of consideration paid over the estimated fair market value of net identifiable assets acquired in business combinations accounted for under the purchase method. The Company generally amortizes goodwill on a straight line method over a period of 35 years, the approximate useful life of acquired intangible assets, with the amount of goodwill amortized in a particular period constituting a non-cash expense that reduces the Company's net income. Amortization of goodwill resulting from certain past acquisitions, and additional goodwill recorded in certain future acquisitions may not be deductible for tax purposes. In addition, the Company will be required periodically to evaluate the recoverability of goodwill by reviewing the anticipated undiscounted future cash flows from operations and comparing such cash flows to the carrying value of the associated goodwill. If goodwill becomes impaired, the Company would be required to write down the carrying value of the goodwill and incur a related charge to its income. A reduction in net income resulting from a write down of goodwill would currently affect financial results.
SUBSTANTIAL COMPETITION. The travel service industry is extremely competitive and traditionally has low barriers to entry. The Company competes with other distributors of travel services, travel providers, travel agents, tour operators, Internet companies and central reservation service providers, some of which have greater experience, brand name recognition and/or financial resources than the Company. Travel providers may decide to compete more directly
with the Company and restrict the availability and/or preferential pricing of their capacity. In addition, other distributors may have relationships with certain travel providers providing better availability or more competitive pricing than that offered by the Company. Furthermore, some travel agents have a strong presence in their geographic area which may make it difficult for the Company to attract customers or employees in those areas.
RELIANCE ON KEY PERSONNEL. The Company's operations are dependent on the efforts and relationships of Joseph V. Vittoria and the other executive officers as well as the senior management of the operating companies. If any of these individuals become unable to continue in their role the Company's business or prospects could be adversely affected. Although the Company has entered into an employment agreement with each of the Company's executive officers and the executive officers of each operating company, there can be no assurance that such individuals will continue in their present capacity for any particular period of time. The Company does not maintain key man life insurance covering any of its executive officers or other members of senior management.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. Acquisitions involve a number of special risks, including possible adverse effects on the Company's operating results, diversion of management's attention, failure to retain key personnel, risks associated with unanticipated events or liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. Customer dissatisfaction or performance problems at a single acquired company could also have an adverse effect on the reputation of the Company. Further, there can be no assurance that businesses acquired will achieve anticipated revenues and earnings. In addition, to the extent that the Company intends to increase its revenues, expand the markets it serves and increase its service offerings through the acquisition of additional operating companies, there can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Increased competition for acquisition candidates may also develop, in which event there may be fewer acquisition opportunities available to the Company, as well as higher acquisition prices. The Company may also seek international acquisitions that may be subject to additional risks associated with doing business in foreign countries. The Company continually reviews various strategic acquisition opportunities and has held discussions with a limited number of such acquisition candidates. As of the date of this Report, the Company is not party to a binding agreement with respect to any material acquisition.
RISKS RELATED TO POSSIBLE NEED FOR ADDITIONAL CAPITAL. If the Company has insufficient cash resources, its growth could be limited unless it is able to obtain additional capital. There can be no assurance that the Company's Credit Facility will be sufficient or that other financing will be available on terms the Company deems acceptable. If the Company is unable to generate cash or obtain financing sufficient for its needs, it may be unable to fully carry out its strategies. If funding is insufficient, the Company may be required to delay, reduce the scope of or eliminate some or all of its expansion programs.
CONTROL BY AIRTOURS; ILLIQUID MARKET FOR COMMON STOCK. As of March 29, 2000, Airtours beneficially owned shares of Common Stock representing 95% of the total voting power of the Common Stock. Accordingly, Airtours is able to exercise control over the Company's affairs and is able to elect the entire Board of Directors and to control the disposition of any matter submitted to a vote of shareholders. Further, there is unlikely to be an active trading market for the Common Stock.
ITEM 2.
ITEM 2. PROPERTIES
As of March 31, 2000, the Company had 39 office facilities, two of which it owns and 37 of which are leased. As the Company continues to implement its growth strategy, certain changes are possible, such as combinations of facilities, expansion of other facilities, and the implementation of new call centers or shared services centers. The Company's facilities are set forth in the table below.
- ------------------- (1) Subject to a mortgage. (2) Contained within Auto Europe's corporate headquarters. (3) Location continues to be occupied on a month-to-month basis, with the consent of the landlord.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal claims and actions arising in the ordinary course of business. The Company believes that none of these actions will have a material adverse effect on its business, financial condition and results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fiscal quarter ended December 31, 1999.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol "TRVL." The following table sets forth the high and low closing prices for each quarter (or partial quarter) in 1999 and 2000, as quoted on The Nasdaq Stock Market:
1999 HIGH LOW ---- ---- --- First Quarter 31-1/2 9-1/16 Second Quarter 12-5/8 6-3/8 Third Quarter 14-5/8 10-13/16 Fourth Quarter 12-1/2 8-3/4
---- First Quarter 26 9 Second Quarter (through April 10, 2000) 26 25-7/8
The closing price of the Company's Common Stock, as reported by The Nasdaq Stock Market, on March 31, 2000 was $25-7/8. The approximate number of record holders of the Common Stock as of March 31, 2000 was 46. The Company believes that a large number of beneficial owners hold such shares in depository or nominee form.
The Company does not anticipate paying any cash dividends on its Common Stock in the near term. The Company's line of credit includes restrictions on the ability of the Company to pay cash dividends without the consent of the lender.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
On July 28, 1997, the Company consummated its initial public offering and acquired the Founding Companies (the "Combinations") in transactions accounted for using the purchase method of accounting. Financial statements do not include the operating results of the Founding Companies (other than Auto Europe, the "accounting acquiror") prior to July 1997. Financial statements for the years ended December 31, 1997, 1998 and 1999 include the operating results of eight additional specialized distributors of cruise reservation services acquired from November 1997 through December 1998 under transactions accounted for using the pooling of interests method of accounting (the "Pooling Acquisitions"). The financial statements also do not include the operating results of five specialized distributors (one airline, three cruise, and one auto rental) (the "Purchase Acquisitions"), an electronic hotel reservation service company ("Lexington"), a provider of services to independent travel agencies ("ABC"), a package tour provider to members of university and college alumni associations ("AHI") and a provider of incentive programs for structured travel discounts to consumers ("LVI"), acquired under transactions accounted for using the purchase method of accounting, prior to their respective dates of acquisition. Accordingly, the financial data for each year presented represent those of Auto Europe and the Pooling Acquisitions, and include the operations of the other four Founding Companies and the Company only since July 28, 1997 and the Purchase Acquisitions, Lexington, ABC, AHI, and LVI from date of acquisition through December 31, 1999.
The financial data of the Company for each of the five years ending December 31, 1995, 1996, 1997, 1998 and 1999 and as of December 31, 1998 and 1999 have been derived from the audited consolidated financial statements of the Company included elsewhere herein. The information contained in these tables should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
The financial statements do not include the operating results of the Founding Companies (other than Auto Europe, the "accounting acquiror") Lexington, ABC, AHI, or LVI prior to their respective dates of acquisition.
STATEMENT OF OPERATIONS DATA: (in thousands, except share and per share data)
BALANCE SHEET DATA (in thousands): DECEMBER 31, 1998 1999 ---------------- ---------------
Working capital $22,728 $10,918 Total assets $180,129 $231,484 Long-term debt $2,888 $17,323 Stockholders' equity $145,297 $162,539
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial Data" and the Company's Consolidated Financial Statements and related Notes thereto appearing elsewhere herein.
INTRODUCTION
The Company is a leading specialized distributor of leisure travel products including cruise vacations, vacation packages, domestic and international airline tickets and European auto rentals, and is a leading provider of travel services such as electronic hotel reservation services, specialized hotel programs and services and incentive travel programs. The Company does not record the gross amount of the travel products and services sold to consumers and travel agents, but rather records the commission and fee revenue received by the Company from travel providers.
The Company, following its initial public offering and the Combinations of the Founding Companies in July 1997, focused for the remainder of 1997 on forming a corporate headquarters, developing a technology strategy and acquiring operating companies. During 1998, the Company focused on developing strategic software applications, creating a marketing and branding strategy, expanding call centers for cruise and domestic air operations, centralizing certain activities at corporate headquarters and acquiring additional operating companies. During 1999, the Company focused on expanding its presence and on-line booking capabilities on the Internet, further developing and rolling out its strategic software applications, integrating its cruise segment call center operations, maximizing revenue opportunities and improving call center operations. In addition, the Company anticipates making certain investments and further integrating its operations to strategically position the Company for the future.
The Company operates and reports under the following segments: cruise, outbound, lodging and other.
The cruise segment is comprised of operating companies distributing cruises through call centers, home-based agents and the Internet. Net revenues include commissions and markups, volume override commissions, and royalty fees and franchise fees from franchisees. The Company records net revenue when the customer is no longer entitled to a full refund of the cost of the cruise, which is generally 45 to 90 days prior to the cruise departure date. The Company provides an allowance for cancellations and reservation changes, which is based on historical experience.
The outbound segment is comprised of operating companies distributing European auto rentals, international airline tickets and international vacation packages. Net revenues include commissions and markups. The Company records net revenue when the reservation is booked and ticketed except for international tour packages for which net revenue is recorded when the tour departs. The Company provides an allowance for cancellations, reservation changes and currency exchange guarantees, which is based on historical experience.
The lodging segment is comprised of operating companies providing electronic hotel reservation services to independent hotels and specialized hotel programs and other reservation and after-hours travel services to travel agencies. Net revenues include commissions and fees for reservation services, and fees for subscriptions and advertising related to the hotel programs. The Company records net revenue at the time the traveler checks out of the hotel for hotel reservation services, when service is provided for after-hours travel services to travel agencies, over the subscription period for hotel program subscriptions, and when the hotel program publication is mailed for advertisement fees. The Company provides an allowance for cancellations, reservation changes and "no shows", which is based on historical experience.
The other segment is comprised of operating companies providing domestic airline tickets and incentive travel programs. Net revenues include commissions, markups, volume overrides and segment, processing and delivery fees. The Company records net revenue when the reservation is booked and ticketed for domestic airline tickets and when the customer is no longer entitled to a full refund of the cost of the incentive cruise, which is generally 45 to 90 days prior to the cruise departure date, and ratably over estimated economic lives of incentive travel programs. The Company provides an allowance for cancellations, which is based on historical experience.
For each segment, operating expenses include compensation of sales and sales support personnel, commissions and remuneration paid to travel agents and alumni associations, credit card merchant fees, telecommunications, mail, courier, marketing and other expenses that generally vary with revenues. Commissions and remuneration to travel
agents and alumni associations, respectively, are typically based on a percentage of the gross amount of the travel services sold. The Company's sales personnel are compensated either on an hourly basis, a commission basis or a combination of the two, with the majority of agents receiving a substantial portion of their compensation based on sales generated. The Company's independent contractors selling cruises receive a portion of the commissions earned by the Company. Conversely, the Company receives as a royalty a portion of commissions earned by its franchisees selling cruises. General and administrative expenses include compensation and benefits to management, professional and administrative employees, fees for professional services, rent, information services, depreciation, travel and entertainment, office services and other overhead costs.
The financial results presented by reporting segment represent the historical information of the Company in the manner in which the Company's management internally disaggregates financial information for the purpose of assisting in making operational decisions. Excluded from the four reporting segments are goodwill amortization, software amortization and support expenses, expenses of corporate headquarters, interest expense, income taxes and certain other expenses controlled by and recorded at corporate headquarters.
The Company's business and growth strategies encompass many components, including providing extensive expertise in specific travel segments and high levels of customer service, embracing multiple selling models and distribution channels, including the Internet, implementing cross selling opportunities across travel segments, implementing state-of-the-art technology infrastructure, and pursuing selected strategic acquisitions.
CONSOLIDATED FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as a percentage of net revenues, for the years indicated (dollars in thousands, except per share data):
The Company reported net income of $7.4 million, or $0.53 diluted earnings per share, in 1999, compared to net income of $12.4 million, or $0.99 diluted earnings per share, in 1998 and net income of $3.5 million, or $0.53 diluted earnings per share, in 1997. The increases from 1997 to 1998 were primarily the result of increased sales volume, increased gross profit margins, the Combinations and acquisitions. Net revenues increased 106.7% in 1998, primarily the result of increased sales volume, the Combinations and acquisitions. The decrease in income before taxes from 1998 to 1999 was related to declining profits in the cruise segment. Overall, net revenues increased 66.8% in 1999, primarily as the result of increased sales volume in the outbound and other segments and acquisitions.
Gross profit margins improved in 1998 because certain operating costs decreased as a percentage of net revenue primarily as a result of realizing higher net revenues per transaction and the semi-variable nature of certain expenses classified as operating expenses. In 1999, however, gross profit margins declined as a result of the cruise segment due to lower commission deals and increased operating costs, in particular, advertising resulting in lower gross profit margins.
General and administrative expenses increased $20.8 million, or 60.3%, in 1999, of which $8.2 million was attributable to expenses associated with corporate headquarters and $12.6 million was costs incurred by operating companies. Of the $8.2 million increase at corporate headquarters, $7.5 million resulted from increases in operating expenses for capitalized software now in production and increased staff. Of the $12.6 million increased costs incurred by operating companies, $4.4 million was due to the AHI and LVI acquisitions that took place in 1999. General and administrative expenses increased $15.3 million, or 79.9%, in 1998, of which $6.9 million was attributable to expenses associated with corporate headquarters and $8.4 million was costs incurred by operating companies. The increase at corporate headquarters was the result of operating the headquarters for all of 1998 compared to five months in 1997, various centralization initiatives introduced at corporate headquarters over the course of 1998, bonuses accrued for executives at headquarters and operating companies and non-capitalizable operating costs associated with technology and telecommunications initiatives totaling $1.5 million in 1998. The Company expects its expenses associated with technology will increase in 2000 as more systems are rolled out and once capitalized software costs are amortized as particular software releases are ready for their intended use.
Goodwill amortization increased $1.6 million and $2.1 million respectively in 1999 and 1998 as a result of the Combinations and several acquisitions accounted for under the purchase method of accounting.
Provision for income taxes, as a percentage of income before provision for income taxes, was 40.0% in 1999, 42.8% in 1998, and 18.1% in 1997. Fluctuations in the effective tax rates from 1997 to 1998 were the result of the impact of a deferred tax benefit recorded in 1997 by Auto Europe, the accounting acquiror, and the impact of varying historical effective tax rates and tax structures of acquired companies accounted for using the pooling of interests method of accounting. In 1999, the Company undertook certain corporate restructuring initiatives, which reduced the Company's effective tax rate.
CRUISE REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as a percentage of net revenues, for the years indicated (dollars in thousands):
(1) Excludes goodwill amortization, software amortization and support expenses, expenses of corporate headquarters, interest expense, income taxes and certain other expenses controlled and recorded at corporate headquarters.
Cruise reporting segment reported income before taxes of $503,000 in 1999, compared to $17.9 million in 1998, and $4.1 million in 1997. The 1998 increase was primarily the result of increased sales volume, increased gross profit margins, operating leverage, the Combinations and acquisitions. The 1999 decrease in profitability was the result of a decline in the gross profit margin and increased general and administrative expenses. Net revenues increased 149.3% and 2.9%, respectively, in 1998 and 1999, primarily because of the Combinations, acquisitions, and increases in volume. Companies acquired under the pooling of interests method of accounting (and which are included in net revenues for the three years) contributed 36.2% of 1998 net revenues; net revenues for these companies increased 35.7% in 1998, as a result of a 14.7% increase in passengers and an increase in net revenue per transaction.
Gross profit margins decreased in 1999 as a result of increased marketing, compensation and other operating costs and a lower effective commission rate. The Company, based in part on significant internal growth experienced in 1998, substantially increased marketing expenditures and the number of sales personnel at its cruise call centers during late 1998 and early 1999. Despite these initiatives, cruise transaction volumes during 1999 were significantly lower than expected. Accordingly, gross profit margins were eroded. The Company believes the decreased growth rate in the
cruise reporting segment resulted primarily from lower than expected consumer acceptance of the new Company marketing programs including a new brand name introduced in the first quarter. In response, the Company adjusted the number of sales personnel during the second quarter and, commencing in May 1999, began making several changes to its marketing program, including refocusing on its formerly successful cruise brand names such as Cruises Only, Gold Coast Cruises and Cruises Inc.
General and administrative expenses increased $3.8 million, or 26.8%, in 1999 and increased as a percentage of net revenues primarily as a result of a lower revenue base per general and administrative dollar due to earning less net revenues per transaction. Cruise line contracts for 1999 provided for a base commission, in some cases, of one to two percent less than in effect for 1998; this decrease in base commission was offset by incremental override commissions, however, none of these were achieved in 1999. In addition, increased overhead resulted due to a buildup of operations to handle excepted business growth. These costs included, for example, rent for expanded call centers. General and administrative expenses increased $6.5 million, or 84.1%, in 1998 and decreased as a percentage of net revenues primarily as a result of the impacts of centralizing certain marketing and revenue management functions at corporate headquarters in the second half of 1998 and spreading remaining expenses over a larger revenue base.
OUTBOUND REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain historical financial data, also stated as a percentage of net revenues, for the years indicated (dollars in thousands):
(1) Excludes goodwill amortization, software amortization and support expenses, expenses of corporate headquarters, interest expense, income taxes and certain other expenses controlled and recorded at corporate headquarters.
Outbound reporting segment reported income before taxes of $24.5 million in 1999, compared to $11.5 million in 1998 and $2.5 million in 1997. Operating results for the first seven months of 1997 include only the results of Auto Europe, the accounting acquiror, and do not reflect the impact of contractual decreases in salaries, bonuses and benefits to former owners and key management of Auto Europe (the "Compensation Differential"). Increases in reported income before taxes in 1998 and 1999 were primarily the result of increased sales volume, increased gross profit margins, operating leverage, the Compensation Differential and acquisitions.
Net revenues increased in 1998 and 1999 due to increased sales volume and acquisitions.
The gross profit margins improved in 1998 and 1999 as a result of lower commissions, salaries, advertising and telephone costs per transaction. Commission expense decreased because of increased sales directly to consumers and a portion of the international airline tickets being sold to travel agents at a net fare rather than for a commission in 1998. Salaries and advertising costs as a percentage of revenues decreased due to spreading these costs over a larger revenue base. Telephone costs as a percentage of net revenues decreased in 1998 due primarily to lower rates.
In February 1999, the Company acquired AHI International Corporation, a company specializing in distributing European vacation packages through university alumni associations. During 1999, this operating company was included in the outbound reporting segment. AHI experiences a greater gross profit margin than the other companies in the outbound segment due to selling directly to consumers thus avoiding the travel agent commission expense.
General and administrative expenses decreased $1.9 million, or 25.8%, in 1998, primarily as a result of Compensation Differential of Auto Europe and the International Air Companies. General and administrative expenses increased $3.7 million in 1999, of which $3.2 million was a result of the acquisition of AHI.
LODGING REPORTING SEGMENT FINANCIAL REVIEW
The following table sets forth certain financial data, also stated as a percentage of net revenues, for the years indicated (dollars in thousands):
(1) Excludes goodwill amortization, software amortization and support expenses, expenses of corporate headquarters, interest expense, income taxes and certain other expenses controlled and recorded at corporate headquarters.
Other reporting segment reported income before taxes of $5.7 million in 1999, compared to $1.8 million in 1998 and $398,000 in 1997.
Net revenues increased 109.6% and 173.3% in 1999 and 1998, respectively. The increases were the result of increased sales volume, revenue per transaction, and acquisitions. Of the $14.5 million increase in 1999, $8.9 million was attributable to Travel 800 and related volume increases.
Gross profit margins increased in 1999 primarily as a result of LVI. LVI, acquired in February 1999, experienced a greater gross profit percentage than the other companies in the segment. The decrease in 1998 was primarily as a result of lower net revenue per domestic air ticket sold and increased compensation, shipping and credit card merchant fees (operating costs) per ticket.
General and administrative expenses increased $1.2 million, or 65.5%, in 1998 and $2.1 million or 71.2% in 1999. The increase in 1998 was due to Travel 800, which was acquired as part of the Founding Companies in 1997 and was included for five months in 1997 as compared to twelve months in 1998. The increase in 1999 was due to LVI, an acquisition that took place in February 1999 and accounted for using the purchase method of accounting. In addition, Travel 800 overhead base increased in 1999 due to expansion into a second call center in Albuquerque, New Mexico.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS, INCLUDING ACQUISITIONS
The Company's three primary sources of liquidity and capital resources are cash flow from operating activities, borrowings under its Credit Facility and issuance of Common Stock.
For the years ended December 31, 1998 and 1999, net cash provided by operating activities was approximately $14.8 million and $16.0 million, respectively, capital expenditures were $11.1 million and $16.0 million, respectively, borrowings under the Credit Facility, Term Loan and other loans were $30.7 million and $24.0 million, respectively, and repayment of debt was $32.4 million and $9.6 million, respectively.
The Company issued 538,928 shares of common stock and paid $25.6 million (net of cash acquired) cash consideration in 1999 in connection with two acquisitions consummated during the period. Both acquisitions were accounted for using the purchase method of accounting.
The Company spent an aggregate of $16.0 million during 1999 for capital expenditures, including approximately $10.4 million for development of "Universal Technology" software applications for internal use. The remainder of the 1999 capital expenditures related to purchases of computer hardware and personal computers, telecommunications equipment, leasehold and building improvements and furniture and fixtures. In addition, the Company expects to spend approximately $9.7 million for all capital expenditures in 2000, including approximately $5.7 million for development of Universal Technology software applications for internal use.
LONG-TERM DEBT AND CREDIT FACILITY
The Company is a party to a credit facility agreement with NationsBank, N.A. ("NationsBank") that provides a $35.0 million revolving line of credit (the "Credit Facility") and a term loan facility of $1.9 million (the "Term Loan"). Borrowings under the Credit Facility and Term Loan are due October 15, 2001. The Credit Facility may be used for acquisitions, general corporate purposes and letters of credit. Letters of credit issued under the Credit Facility may not exceed $15.0 million in the aggregate. As of December 31, 1999, there were outstanding borrowings of $14.7 million and letters of credit totaling $11.1 million under the Credit Facility. All amounts repaid under the Credit Facility may be reborrowed. Interest on outstanding balances of the Credit Facility and Term Loan are computed based on the Eurodollar Rate plus a margin ranging from 1.25% to 2.0%, depending on certain financial ratios. During 1998 and 1999 the margin was 1.25%. As of December 31, 1999, the Company had interest rate swap hedge agreements totaling $16.4 million that mature in October 2000 which were entered into as a requirement of the previous credit facility. These agreements exchange floating rate obligations for fixed rates. On March 20, 2000, the Company canceled the hedge agreements.
The Credit Facility is secured by substantially all the assets of the Company, is guaranteed by all its subsidiaries, and requires the Company to comply with various loan covenants, including maintenance of certain financial and coverage ratios and restrictions on additional indebtedness, liens, guarantees, advances, capital expenditures, sale of assets and dividends. At December 31, 1999, the Company was in compliance with the loan covenants.
The Company believes that the current cash balances of the Company, together with cash flow from operating activities and borrowings under its Credit Facility, should be adequate to meet the Company's capital requirements over the next 12 months. However, future modifications to the Company's strategies may affect the Company's liquidity and capital requirements.
YEAR 2000 PREPAREDNESS
The Company suffered no material adverse effects from the Year 2000 problem either as a result of the Company's own systems or those of any third party. However, due to the pervasive nature of the Year 2000 problem, the Company can give no assurance that third parties did not experience problems not currently known to it which could impact its business, financial condition or results of operations in the future.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The results of the Company are subject to quarterly fluctuations caused primarily by the seasonal variations in the travel industry, especially the leisure travel segment. Seasonality also varies depending on the nature of the travel products and services. Net revenues and operating income of the outbound reporting segment are generally higher in the first and second quarters; net revenues and operating income of the cruise reporting segment are generally higher in the second and third quarters; and net revenues and operating income of the lodging segment are generally higher in the third and fourth quarters. The Company expects the seasonality and quarterly fluctuations to continue.
The Company's quarterly results of operations may also be subject to fluctuations as a result of changes in the mix of services offered by the Company, fare wars by travel providers, net daily rates charged to travelers by hotels, changes in relationships with certain travel providers (including commission rates and programs), changes in the timing and payment of overrides by travel providers, extreme weather conditions or other factors affecting travel or the economy, and the timing and cost of acquisitions.
The following table represents summary data basis for each of the most recent quarterly periods (dollars in thousands, except per share data):
ACCOUNTING STANDARDS AND POLICIES
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes standards of accounting for derivative instruments including specific hedge accounting criteria. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, although earlier adoption is allowed. We have not yet quantified the impacts of adopting SFAS No. 133 and have not determined when we will adopt SFAS No. 133. However, as we do not presently have derivative instruments, we do not expect SFAS No. 133 to have a material impact on us.
In December 1999, the U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The Company believes its revenue recognition practices are in conformity with the guidelines prescribed in SAB 101.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and foreign currency fluctuations. In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rate and fluctuations in the value of foreign currencies using a variety of financial instruments.
The Company has utilized derivative financial instruments to reduce financial market risks. The Company has managed its interest rate risk on its Credit Facility through use of interest rate swaps pursuant to which the Company exchanges its floating rate interest obligations for fixed rates for at least 50% of the outstanding borrowings. The fixing of the interest rates offsets the Company's exposure to the uncertainty of floating interest rates during the term of the Credit Facility and Term Loan.
The Company has foreign currency denominated liabilities and reservation commitments to foreign travel providers. To mitigate potential adverse trends, the Company's operating strategy takes into account changes in exchange rates over time. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency denominated liabilities and commitments. The principal currencies hedged are Italian Lira, Deutsche Marks, British Pounds and French Francs.
It is the Company's policy to enter into foreign currency and interest rate transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency or interest rate transactions for speculative purposes; however, interest rate swaps entered into in connection with borrowings under the Credit Facility may remain outstanding if such borrowings are repaid, and in that instance are recorded at the prevailing market rate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA; INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TRAVEL SERVICES INTERNATIONAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Travel Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Travel Services International, Inc., and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of three years ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Travel Services International, Inc., and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years ended December 31, 1999, in conformity with accounting standards generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
West Palm Beach, Florida February 8, 2000 (except with respect to the matters discussed in Note 9 and 16, as to which the date is March 29, 2000).
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION: --------------
Travel Services International, Inc. (the "Company") and subsidiaries provide specialized distribution of leisure travel products and services. The Company was founded in Delaware in April 1996. On July 28, 1997, the Company consummated its initial public offering of common stock and acquired five specialized distributors of travel services (the "Founding Companies") in separate combination transactions accounted for using the purchase method of accounting (the "Combinations"). Effective December 31, 1998, the Company changed its state of incorporation from Delaware to Florida.
Auto Europe, one of the Founding Companies, was designated as the "accounting acquiror" for financial statement presentation purposes in accordance with SEC Staff Accounting Bulletin No. 97, which states that the combining company which receives the largest portion of voting rights in the combined corporation is presumed to be the acquiror for accounting purposes. Accordingly, the historical financial statements for each year presented represent those of Auto Europe and companies acquired in 1997 and 1998 under transactions accounted for using the pooling of interests method of accounting (the "Pooling Acquisitions"), as well as balances and transactions of the Company and four other Founding Companies since July 28, 1998 and other companies acquired and accounted for using the purchase method of accounting subsequent to the date of acquisition.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: --------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company's revenues are derived primarily from selling travel products, including cruise vacations, airline tickets, European auto rentals, by providing electronic hotel reservation services to independent hotels, by providing various programs and services to independent travel agencies, by providing travel incentive programs for structured discounts to consumers for various forms of leisure travel, and by selling packaged vacations to individuals that are members of university alumni associations. Revenues primarily consist of commissions and markups on travel products sold and fees for services including processing and delivering tickets, franchisee support, hotel reservations, after hours travel reservation services and hotel guide publication.
The Company records net revenues when earned as follows: for cruise bookings when the customer is no longer entitled to a full refund of the cost of the cruise, which is generally 45 to 90 days prior to the cruise departure date, for airline tickets and car rentals at the time a reservation is booked and ticketed, for hotel reservation services at the time the traveler checks out of the hotel, packaged vacations at time of departure and for other services when the service is provided. The Company recognizes revenues from franchise fees when the Company has fulfilled all contractual obligations required by the agreements signed with the franchisees. The Company defers franchise renewal fees and amortizes those fees to revenues over the applicable one-year period.
The Company provides allowances for cancellations, reservation changes, "no-shows" and currency exchange guarantees based on historical experience. The allowances provided as reduction of net revenues are not material in the three years ended December 31, 1999. However, actual cancellations and reservation changes could vary significantly based upon changes in economic and political conditions that may impact leisure travel patterns. The Company has also recorded an allowance for doubtful accounts receivable totaling $1,443,000 and $2,102,000 at December 31, 1998 and 1999, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes standards of accounting for derivative instruments including specific hedge accounting criteria. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000 although earlier adoption is allowed. We have not yet quantified the impacts of adopting SFAS No. 133 and have not determined when we will adopt SFAS No. 133. However, as we do not presently have derivative instruments, we do not expect SFAS No. 133 to have a material impact on us.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The Company believes its revenue recognition practices are in conformity with the guidelines prescribed in SAB 101.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant accounting estimates include allowances for doubtful accounts receivable, cancellations, reservation changes, "no shows" and currency exchange guarantees.
SEGMENTS OF AN ENTERPRISE
The Company has adopted Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way information about operating segments is reported in financial statements and establishes standards for related disclosures about product and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company's reportable operating segments include cruise, outbound, lodging and other. Refer to Note (5) for information and disclosures regarding reporting segments.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents at December 31, 1998 and 1999 include interest bearing demand deposits and highly liquid investments of $24,878,000 and $14,491,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, receivables, trade payables, and debt are reflected in the accompanying consolidated financial statements at cost, which approximates fair value. All long-term receivables and debt obligations bear interest.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company principally in the management of its interest rate and foreign currency exposure.
As of December 31, 1999, the Company had outstanding interest rate swap hedge agreements totaling $16.4 million that mature in October 2000 which were entered into as a requirement of the previous credit facility. These agreements exchange floating rate obligations for fixed rates.
Foreign currency forward purchase contracts are entered into to hedge substantially all of its foreign currency denominated liabilities and reservation commitments to foreign travel providers. The hedging minimizes the impact of foreign exchange rate movements on the Company's operating results because gains and losses on these contracts generally offset losses and gains on the liabilities being hedged. At December 31, 1998 and 1999, the Company had outstanding forward purchase contracts of $2.1 million and $4.1 million, respectively. The average maturity of these purchase contracts was 58 days. The risk of loss on liabilities not hedged is not considered significant.
CAPITALIZED SOFTWARE COSTS
Pursuant to American Institute of Certified Public Accountants Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", once the preliminary project stage has been completed, the Company capitalizes certain direct costs related to strategic systems development projects during the application development stage. Software development costs incurred during the preliminary project stage are charged to expense as incurred.
Capitalized software development costs are reported at the lower of unamortized costs or net realizable value and are included as a component of property and equipment. Once the software reaches the stage for its intended general use for each significant release of each software applications, applicable costs are amortized based on the straight-line method over the estimated useful life. Accumulated amortization at December 31, 1998 and 1999 was $74,000 and $606,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over estimated useful lives of the respective assets on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over periods not exceeding the respective terms of the leases.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, that extend the useful lives of existing equipment are capitalized and depreciated. Upon retirement or disposition of property and equipment, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of income.
INTANGIBLE ASSETS AND AMORTIZATION
The Combinations and certain other acquisitions were accounted for using the purchase method of accounting. The cost of the acquisition is first allocated to all identifiable assets acquired and to the liabilities assumed, at their estimated fair values at the date of acquisition. The excess of the cost of the acquired business over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed is recorded as goodwill.
In most cases, because of the nature of the operations of the business acquired, including its customers base, and because of the short-term duration of the businesses' contracts, intangible assets such as customer lists, distribution agreements, employee workforce, computer systems, franchisee agreements and trademarks are not separately identified for allocation of acquisition costs.
At the time of an acquisition accounted for using the purchase method of accounting, allocations of purchase price are initially assigned and recorded based on preliminary estimates of fair value and may be revised as additional information concerning valuation of such assets and liabilities become available, normally within one year of the date of the acquisition. Additional information necessary for certain acquisitions may include final determinations of such matters as the amount of income taxes reimbursable to sellers, the amount of contingent consideration related to the acquisition, and total legal and accounting costs associated with the acquisitions. The Company does not believe there will be any material change to allocations of purchase prices as of December 31, 1999.
Goodwill is being amortized on a straight-line basis generally over 35 years (5 years for goodwill related to an acquired software development business), representing the approximate useful life of acquired intangible assets. Accumulated amortization totals $3,141,000 and $7,455,000 at December 31, 1998 and 1999, respectively. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed", subsequent to an acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining net book value may warrant revision or may not be recoverable. If factors indicate that the net book value of any acquisitions should be evaluated for possible impairment, the Company
in measuring whether such cost is recoverable will use an estimate of the acquired business's undiscounted operating income in excess of net assets of the acquired businesses.
INCOME TAXES
The Company follows Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109") for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires adoption of a fair value method of accounting for stock-based compensation plans for non-employees and permits continuation of accounting using the intrinsic value based method under Accounting Principals Board ("APB") Opinion No. 25, "Accounting for Stock issued to Employees", for stock options granted to employees.
The Company has chosen to account for stock options issued to employees using the intrinsic value based method prescribed in APB Opinion No. 25 and, accordingly, does not recognize compensation expense for these stock option grants made at an exercise price equal to or in excess of the fair market value of the stock at the date of grant. Pro forma net income and earnings per share amounts are presented in Note (12) as if the fair value method had been adopted.
COMPREHENSIVE INCOME
The Company follows Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. For all periods presented, there were no differences between reported net income and comprehensive income.
EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per common share ("EPS") calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding (all related to outstanding stock options discussed in Note (12).
A reconciliation of shares used in the calculation of basic and diluted earnings per share for 1997, 1998 and 1999 is as follows:
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, although earlier adoption is allowed. The Company will be required to adopt SFAS No. 133 for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under SFAS No. 133, all derivative instruments must be
recognized as either an asset or liability measured at its fair value. Management believes the impact of adopting this statement will not have a material effect upon the Company's results of operations or financial position.
(3) ACQUISITIONS: -------------
As a result of the Combinations which were consummated on July 28, 1997, the Company acquired the outstanding capital stock of the Cruises, Inc. ("Cruises Inc.") and D-FW Tours, Inc. and D-FW Travel Arrangements, Inc. (collectively, "D-FW Tours"), and acquired substantially all of the assets of Auto Europe, Inc. (Maine) ("Auto Europe"), Cruises Only, Inc. ("Cruises Only") and 800-Ideas, Inc. ("Travel 800"), each a Founding Company. The consideration for the Combinations consisted of cash of $29.1 million (including $5 million paid to the former stockholder of Auto Europe, the accounting acquiror, and working capital adjustments and estimated reimbursements to stockholders of three of the Founding Companies that had elected S Corporation status under the Internal Revenue Code for certain taxes that will be incurred by them in connection with the Combinations) and 3,422,225 shares of common stock.
Since November 1997, the Company has acquired eight operating companies under transactions accounted for using the pooling of interests method of accounting, (collectively, the "Pooling Acquisitions"). Accordingly, the consolidated financial statements for the periods presented have been restated to include the Pooling Acquisitions.
On November 19, 1997, the Company acquired all of the outstanding capital stock of CruiseOne, Inc., Cruise World, Inc., and The Anthony Dean Corporation (d/b/a Cruise Fairs of America). The aggregate consideration paid was 880,196 shares of common stock. On November 21, 1997, the Company acquired all of the outstanding capital stock of Ship 'N' Shore Cruises, Inc., Cruise Time, Inc., SNS Coachline, Inc., Cruise Mart, Inc. and SNS Travel Marketing, Inc. The aggregate consideration paid was 471,508 shares of common stock.
On March 31, 1998, the Company acquired all of the outstanding capital stock of CruiseMasters, Inc. The aggregate consideration paid was 152,835 shares of common stock. On May 21, 1998, the Company acquired all of the outstanding capital stock of Landry & Kling, Inc. The aggregate consideration was 163,078 shares of common stock.
On May 31, 1998, the Company acquired all of the outstanding capital stock of Goodfellow Enterprises, Inc. The aggregate consideration paid was 179,727 shares of common stock.
On August 31, 1998, the Company acquired all of the outstanding capital stock of Cruise Outlets of the Carolinas, Inc. The aggregate consideration paid was 150,000 shares of common stock.
Aggregate net revenues and income before provision for income taxes generated by the Pooling Acquisitions prior to the date of acquisition and included in the accompanying consolidated statements of income were as follows:
1997 1998 ---- ----
Net revenues $ 18,483,000 $ 2,983,000 ============ ==============
Income before provision for income taxes $ 1,125,000 $ 949,000 ============= ===============
Since December 1997, in addition to the Combinations, the Company has acquired one software development company and seven operating companies under transactions accounted for using the purchase method of accounting. Accordingly, the financial results of these operating companies have been included in the accompanying consolidated financial statements from the date of acquisition. Except for Lexington and AHI International Corporation ("AHI"), the historical operations of these operating companies are not individually significant when compared to the historical operations of the Company.
On December 2, 1997, the Company acquired all of the outstanding capital stock of Trax Software, Inc. ("Trax"). The aggregate consideration paid was 32,985 shares of common stock. Trax developed software products designed for specialized distributors of leisure travel services. This software is the foundation of the booking functionality of the Company's air reservations system under development.
On January 20, 1998, the Company acquired substantially all of the assets and assumption of substantially all of the liabilities of Diplomat Tours, Inc. and International Airline Consolidators (collectively, "Diplomat"). The aggregate consideration paid for was 21,821 shares of common stock and $2.0 million in cash. Diplomat is a specialized distributor of international airline reservations and had net revenues of approximately $2.0 million in 1998.
On February 9, 1998, the Company acquired all of the outstanding capital stock of Gold Coast Travel Agency Corporation, Inc. ("Gold Coast"). The aggregate consideration paid was 163,755 shares of common stock and $7.25 million in cash, including $1 million of contingent consideration paid in February 1999. Gold Coast is a specialized distributor of cruise reservations and had net revenues of approximately $7.7 million in 1998.
Effective April 1, 1998, the Company acquired all of the outstanding capital stock of The Cruise Line, Inc. ("Cruise Line Inc.") from another corporation. The aggregate consideration paid was $12.5 million in cash. Cruise Line Inc. is a specialized distributor of cruise reservations and had net revenues of approximately $7.3 million in 1998.
Effective June 1, 1998, the Company acquired all of the outstanding partnership interests of Lexington. The aggregate consideration paid was 283,990 shares of common stock and $24.0 million in cash, including $4.0 million in contingent consideration paid in 1998. Lexington is an electronic hotel reservation services company and had 1998 net revenues of approximately $13.5 million. The historical operations of Lexington are significant when compared to the historical operations of the Company.
Effective July 1, 1998, the Company acquired substantially all of the assets of ABC Corporate Services ("ABC") from another corporation. The aggregate consideration paid was $4.25 million in cash. ABC had net revenues of approximately $6.1 million in 1998. ABC is a leading provider of services to independent travel agencies, including the publication of a hotel guide and after-hours travel services for certain travel agencies' corporate accounts.
On August 7, 1998, the Company acquired all of the outstanding capital stock of 1-800-CRUISES, Inc. and Jubilee Enterprises, Inc. (collectively "1-800-CRUISES"). The aggregate consideration paid consisted of 36,546 shares of common stock and $500,000 in cash. Among the assets acquired were toll-free telephone numbers 1-800-CRUISES and 1-800-CRUISING and the website address, www.1-800-CRUISES.com. In addition, the entities operate a small cruise reservation call center and had net revenues of approximately $327,000 in 1998.
Effective February 1, 1999, the Company acquired all of the outstanding capital stock of AHI International, Inc. ("AHI"). The aggregate consideration paid was 145,400 shares of common stock and $24.0 million in cash. AHI develops markets and sells packaged European vacations to individuals that are members of over 200 university and college alumni associations. AHI is also a longstanding provider of alumni tour packages to college bowl games. The acquisition was accounted for using the purchase method of accounting. AHI had net revenues of approximately $15.8 million in 1998. The historical operations of AHI are significant when compared to the historical operations of the Company.
Effective February 1, 1999, the Company acquired all of the outstanding capital stock of Lifestyle Vacation Incentives, Inc. and All Seasons Smart Traveler, Inc., an affiliated company (collectively, "LVI"). The aggregate consideration paid was 248,600 shares of common stock and $6.25 million in cash paid at closing and, pursuant to an amendment to the merger agreement, 144,928 shares of common stock and $750,000 in cash paid in August 1999. The additional purchase consideration was not met and no further consideration is due to former LVI stockholders. LVI's proprietary travel incentive programs provide structured discounts to consumers for various forms of leisure travel, including airline tickets, cruise vacations, rental cars, hotel rooms and vacation packages. The acquisition is accounted for using the purchase method of accounting. The historical operations of LVI when compared to the historical operations of the Company are not significant.
(4) PRO FORMA RESULTS AND EARNINGS PER SHARE: -----------------------------------------
Pro forma operating results and pro forma diluted earnings per share presented below for the Company give effect to results of the Company combined with the Founding Companies as if the initial public offering, the Combinations, and the acquisition of Lexington had occurred on January 1, 1997, and as if the acquisition of AHI had occurred on January 1, 1998, along with certain adjustments associated with the Combinations, Lexington and the Pooling Acquisitions.
The pro forma results include the effects of: (i) the Combinations, Lexington and AHI; (ii) amortization of goodwill resulting from the Combinations, Lexington, and AHI; (iii) certain adjustments to salaries, bonuses, and management fees and benefits to former owners and key management of the Founding Companies, Lexington, AHI and the Pooling Acquisitions, to which such persons have agreed prospectively ("Compensation Differential"); (iv) reversal of acquisition costs associated with Pooling Acquisitions; and (v) provision for income taxes as if pro forma income was subject to corporate federal and state income taxes during the periods.
These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the Founding Companies, Lexington and AHI been under common control prior to the Combinations and the acquisition of Lexington and AHI, or which may result in the future.
Pro forma operating results and diluted pro forma earnings per share follow:
(5) REPORTING SEGMENTS:
The Company's reporting operating segments are cruise, outbound, lodging and other. The cruise segment is comprised of operating companies distributing cruises through call centers, home-based agents and the Internet, directly to consumers in the United States. The outbound segment is comprised of operating companies distributing European auto rentals, international airline tickets and international vacation packages through travel agencies and directly to consumers, primarily in the United States. The lodging segment is comprised of operating companies providing electronic hotel reservation services to independent hotels and other specialized hotel programs and services to travel agencies, primarily in the United States. The other segment is comprised of an operating company providing domestic airline tickets through a call center directly to consumers in the United States, an operating company providing incentive cruise programs to corporations in the United States and an operating company that provides travel incentive programs for structured discounts.
The accounting policies of the reporting operating segments are the same as those described in the summary of significant accounting policies, except for goodwill amortization and software amortization and support expenses which are recorded at the corporate level and which are not allocated to reporting operating segments. This is consistent with the basis and manner in which the Company's management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. The Company evaluates performance based on aggregated reporting operating segment income before taxes and excluding goodwill amortization, software amortization and support expenses, expenses of corporate headquarters, interest expense, income taxes and other expenses controlled by and recorded at corporate headquarters.
Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
The Company does not currently have any material portion of its assets or operations outside the United States. Financial results for reporting operating segments, including a reconciliation of the totals reported to the applicable line items in the consolidated financial statements, are as follows (in thousands):
(1) Adjusting and reconciling items includes goodwill amortization, software amortization and support expenses, expenses of corporate headquarters, interest expense, income taxes and other expenses controlled and recorded at corporate headquarters. On a consolidated basis, inter-segment sales were immaterial.
(6) CONCENTRATIONS OF RISK: -----------------------
TRAVEL SERVICE PROVIDERS
Within the cruise segment, the Company markets and provides reservation services for a variety of cruise lines. Six cruise lines in 1997 and 1998, and four cruise lines in 1999, each represented greater than 10% of cruise segment net revenues and represented in the aggregate approximately 74%, 85% and 70%, respectively, of the Company's cruise net revenues in 1997, 1998 and 1999.
Within the outbound segment, the Company markets and provides reservation services for rental car companies located in various European countries. Two auto rental travel providers each represented greater than 10% of outbound segment net revenues and represented in the aggregate approximately 87%, 84% and 77%, respectively, of the Company's net revenues from European auto rentals in 1997, 1998 and 1999.
Within the other segment, the Company sells domestic airline tickets. Three airlines each represented greater than 10% of the other segment's net revenues and represented in the aggregate approximately 63%, 51% and 55% respectively, of the Company's net revenues from domestic airline tickets in 1997, 1998 and 1999.
GEOGRAPHICAL
The table below provides information on the percentage of the Company's total auto rentals occurring in significant geographical regions for the three years ended December 31, 1999:
1997 1998 1999 ---- ---- ----
Germany 18% 18% 17% United Kingdom 20% 19% 19% France 17% 16% 17% Italy 13% 13% 15%
(7) PROPERTY AND EQUIPMENT: -----------------------
Property and equipment consists of the following:
Long-term debt, net of current portion $ 2,888,000 $ 17,323,000 =============== ==============
At December 31, 1999, maturities of long-term debt were as follows:
2000 $ 264,000 2001 16,510,000 2002 83,000 2003 83,000 2004 83,000 Thereafter 564,000 ------------- $ 17,587,000 =============
On July 30, 1999, the Company closed on an amended and restated credit facility agreement effective June 30, 1999 with Bank of America N.A. d/b/a NationsBank, N.A. ("NationsBank") with respect to an increase in the revolving line of credit to a maximum of $35.0 million (the "Credit Facility") and the continuation of a term loan facility of $1.9 million (the "Term Loan"). Borrowings under the Credit Facility and the Term Loan are due October 15, 2001. The Credit Facility may be used for acquisitions, general corporate purposes and letters of credit. Letters of credit issued under the Credit Facility may not exceed $15.0 million in the aggregate. As of December 31, 1999, there were outstanding borrowings of $14.7 million and letters of credit totaling $11.1 million under the Credit Facility. At June 30, 1999, the Company wrote-off $337,000 of deferred financing costs related to the prior credit facility. All amounts repaid under the Credit Facility may be reborrowed. Interest on outstanding balances of the Credit Facility and the Term Loan are computed based on the LIBOR Rate plus a margin ranging from 1.25% to 2.0%, depending on certain financial ratios. During 1998 and 1999, the margin was 1.25%. As of December 31, 1999, the Company had outstanding interest rate swap hedge agreements totaling $16.4 million that mature in October 2000 which were entered into as a requirement of the previous credit facility. On March 20, 2000, the Company canceled the hedge agreements.
The Credit Facility is secured by substantially all the assets of the Company, is guaranteed by all its subsidiaries, and requires the Company to comply with various loan covenants, including maintenance of certain financial and coverage ratios and restrictions on additional indebtedness, liens, guarantees, advances, capital expenditures, sale of assets and dividends. At December 31, 1999, the Company was in compliance with the loan covenants.
On March 30, 1998, $3 million previously pledged to Barnett Bank was released in exchange for a guarantee by the Company of outstanding debt of one of the Founding Companies. Such debt, totaling $3,141,241, was repaid on April 28, 1998, including $1,901,838, which was refinanced using the proceeds of the Term Loan.
(10) INCOME TAXES: -------------
Prior to July 28, 1997, Auto Europe, the accounting acquiror, had elected S Corporation status as defined by the Internal Revenue Code and was not subject to taxation for federal purposes. Upon the consummation of the Combinations, Auto Europe adopted SFAS No. 109 and recorded a deferred tax asset and a corresponding reduction of income tax expense of $543,000, representing the net deferred taxes at July 28, 1997 which were not previously recorded because of Auto Europe's previous tax status.
The provision for income taxes consists of the following:
1997 1998 1999 ---- ---- ---- Federal $ 628,000 $ 7,215,000 $ 4,409,000 State 142,000 2,095,000 494,000 --------- ----------- ----------- $ 770,000 $ 9,310,000 $ 4,903,000 ========= =========== ===========
Current $ 735,000 $ 5,706,000 $ 452,000 Deferred 35,000 3,604,000 4,451,000 --------- ----------- ----------- $ 770,000 $ 9,310,000 $ 4,903,000 ========= =========== ===========
A reconciliation of the difference between the expected provision for income taxes using the federal statutory tax rate and the Company's actual provision is as follows:
Cash paid by the Company for income taxes excluding cash paid by subsidiaries prior to dates of acquisition was $823,000 in 1997, $7,627,000 in 1998 and $3,770,000 in 1999.
(11) STOCKHOLDERS' EQUITY: ----------------------
In May 1997, the Company effected a 5,444.45-for-one stock split of its common shares. In addition, the Company increased the number of authorized shares of common stock to 50,000,000 and authorized 1,000,000 shares of $.01 par value preferred stock. The effects of the common stock split and the increase in the shares of authorized common stock have been retroactively reflected in the accompanying consolidated financial statements for all periods presented.
In May 1997, the stockholders exchanged 2,484,501 shares of common stock for an equal number of shares of restricted voting common stock. Common stock and the restricted common stock are identical except that the holders of restricted common stock are only entitled to four-tenths of one vote for each share on all matters.
On July 28, 1997, the Company issued an aggregate of 6,297,225 shares of Common Stock in connection with the Combinations (3,422,225 shares) and the initial public offering (2,875,000 shares). Shares issued in connection with the initial public offering were sold to the public at $14.00 per share. The net proceeds to the Company from the initial public offering (after deducting underwriting discounts, commissions and estimated offering expenses) were approximately $33.2 million. Of this amount, $29.1 million represents the cash portion of the purchase price relating to the Combinations. The remaining $4.1 million has been used for general corporate purposes.
On July 21, 1998, the Company consummated a secondary stock offering. An aggregate of 4,025,000 shares of Common Stock were registered and sold, including 2,025,000 shares sold by the Company and 2,000,000 shares sold by certain selling stockholders. All of the shares were sold to the public at a price of $34.50 per share. Net proceeds to the Company from the secondary stock offering (after deducting underwriting discounts and commissions and estimated
offering expenses) were approximately $65.6 million, of which $28.6 million was used to repay borrowings under the Credit Facility. The Company did not receive any proceeds from shares sold by selling stockholders.
Effective December 31, 1998, the Company changed its state of incorporation from Delaware to Florida.
On January 28, 1999, the Company adopted a Share Purchase Rights Plan (the "Rights Plan"), and in connection therewith, declared a dividend distribution of one Common Stock Purchase Right on each outstanding share of the Company's common stock. The dividend distribution was made on February 5, 1999 to shareholders of record on January 28, 1999. The Rights Plan is intended to enable the Company's stockholders to realize the long-term value of their investment in the Company. It will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Company's board of directors prior to attempting a takeover.
Other transactions related to the Company's common stock are discussed in Notes (1), (3) and (12).
(12) STOCK OPTION PLANS: -------------------
In May 1997, the Company adopted two stock option plans (the "Plans"). Under the Long Term Incentive Plan (the "Incentive Plan"), as subsequently amended and restated, the maximum number of common shares that may be subject to outstanding awards, determined immediately after the grant of any award, may not exceed 18% of the aggregate number of shares of Common Stock outstanding. Options may be granted to directors, officers, employees, consultants, and independent contractors. Individual awards under the Plan may take the form of one or more of: (i) either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred stock; (iv) dividend equivalents; and (v) other awards not otherwise provided for, the value of which is based in whole or in part upon the value of the Common Stock.
Pursuant to the Non-Employee Directors' Stock Plan (the "Directors' Plan"), each non-employee director and advisory director is automatically granted an option to purchase 10,000 shares upon such person's initial election as a director. In addition, the Directors' Plan provides for an automatic annual grant to each Participant of an option to purchase 5,000 shares at each annual meeting of stockholders. The Directors' Plan also permits participants to elect to receive, in lieu of cash directors fees, shares or credits representing deferred shares that may be settled at future dates as elected by the parties. The Company has reserved 200,000 shares of Common Stock for issuance under the Directors' Plan.
The price at which the Company's options are granted under the plans are equal to or in excess of the fair market value of the stock at the date of grant. Generally, options granted under the Incentive Plan may remain outstanding and may be exercised at any time up to three months after the person to whom such options were granted is no longer employed or retained by the Company. Options granted under the Directors' Plan may remain outstanding and may be exercised at any time up to one year after termination of service as a director or advisor. Substantially all of the outstanding options under the Incentive Plan vest at the rate of 25% per year and options under the Directors' Plan are immediately exercisable. Options granted under the Plans have maximum terms of not more than 10 years.
A summary of the status of the Company's two stock option plans at December 31, 1998 and 1999 and changes during the years then ended is presented in the table and narrative below:
Of the 2,112,000 options outstanding at December 31, 1999, 536,000 options, or 25.4%, are exercisable and have exercise prices between $10.375 and $50.00, with a weighted average exercise price of $19.95 and a weighted average remaining life of seven years and ten months. The remaining 1,576,000 options are not exercisable and have exercise prices between $8.75 and $37.00, with a weighted average exercise price of $14.49 and weighted average remaining contractual life of eight years and ten months.
The Company applies APB Opinion No. 25 and related interpretations in accounting for options granted to employees and directors. Accordingly, no compensation cost has been recognized related to such grants. Had compensation cost been recorded for the Company's awards under the Plans based on fair value at the grant dates consistent with the methodologies of SFAS No. 123, the Company's 1998 and 1999 reported actual net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1998 1999 ---- ---- ----
Net Income: As Reported $ 3,481,000 $12,419,000 $ 7,355,000 Pro Forma $ 2,861,000 $10,326,000 $ 4,753,000
Basic EPS: As Reported $0.54 $1.03 $0.53 Pro Forma $0.45 $0.86 $0.34
Diluted EPS: As Reported $0.53 $0.99 $0.53 Pro Forma $0.45 $0.84 $0.34
Under SFAS No. 123, the fair value of each option granted is estimated on the date of grant using the Black-Scholes model with the following assumptions for grants in 1997, 1998 and 1999: expected volatility of 70%, risk-free interest rate of 7.5%, expected dividends of $0 and expected term of four years.
The Company recorded expense of $10,000, $31,000 and $31,000 in 1997, 1998 and 1999, respectively, related to 10,000 options granted to a non-employee of the Company. In determining the expense to be recorded, the Company applied the Black-Scholes model using the same assumptions described above, including expected term of four years.
(13) BENEFIT PLANS: -------------- The Company established a new 401(k) Plan effective July 1, 1998 under which eligible employees of all Company subsidiaries may participate. Contributions to the Plan are at the discretion of the Company's board of directors. At December 31, 1999, the Company had one 401(k) plan. At December 31, 1998 the Company had, three 401(k) plans, one simple 401(k) retirement plan, and two simple IRA plans. Contributions under the benefit plans were approximately $99,000 in 1997, $283,000 in 1998 and $473,000 in 1999.
(14) RELATED PARTY TRANSACTIONS: --------------------------- Included in assets at December 31, 1999 is a note receivable from an affiliate with an outstanding balance of $138,000, which bears interest at 6% and is due upon demand, and other notes receivable from three employees for an aggregate balance of $346,000, which bear interest at 6% to 8%, with maturities in 2001 and 2002.
The Company leases office space from an employee under a lease that expires November 2002. Total payments were approximately $106,000, $158,000 and $155,000, respectively, in 1997, 1998 and 1999.
The Company leases office space from the brother of an affiliate under a lease that expires February 2006. Payments were $201,000, $213,000 and $196,000 in 1997, 1998, and 1999, respectively.
The Company had a management service agreement with a company controlled by an employee which was cancelled effective January 1, 1999. Total payments were approximately $2,335,000 in 1998. In addition, the Company received $29,000 in rent under a facilities agreement with this company.
The Company purchased $134,000 worth of computer equipment from a company controlled by an affiliate in 1997.
(15) COMMITMENTS AND CONTINGENCIES: ------------------------------ OPERATING LEASES
The Company leases office space, vehicles and office equipment under operating leases. The Company incurred approximately $1,795,000, $3,183,000 and $5,599,000 in rental expense under noncancellable operating leases in 1997, 1998 and 1999, respectively.
Minimum annual commitments under operating leases at December 31, 1999 are as follows:
2000 $ 5,656,000 2001 5,439,000 2002 4,978,000 2003 4,095,000 2004 2,410,000 Thereafter 542,000 --------- $ 23,120,000 ============
INSURANCE
The Company carries a broad range of insurance coverage, including directors and officers, prospectus liability, professional liability, general and business liability, commercial property, workers' compensation, and general umbrella policies. The Company has not incurred significant claims or losses on any of its insurance policies during the periods presented in the accompanying financial statements.
LETTERS OF CREDIT
The Company had outstanding irrevocable letters of credit totaling $11,180,000 at December 31, 1999. These letters of credit, which have terms of one year or less, collateralize the Company's obligations to third parties for payment of travel obligations. At December 31, 1999, letters of credit issued under the Credit Facility totaled approximately $11.1 million.
LITIGATION
The Company is involved in various legal claims and actions arising in the ordinary course of business. The Company believes that none of the claims and actions currently pending will have a material adverse effect on its business, financial condition or results of operations.
(16) SUBSEQUENT EVENTS: ------------------
On February 21, 2000, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Airtours plc, a corporation organized under the laws of England ("Airtours"), and Blue Sea Florida Acquisition Inc., an indirect wholly-owned subsidiary of Airtours (the "Purchaser"), pursuant to which the Purchaser has completed a tender offer (the "Offer") to purchase all of the outstanding shares of the Company's common stock, par value $0.01 per share, and the associated common share purchase rights (and together with the Common Stock, the "Shares"), for a cash price of $26.00 per Share as of March 29, 2000. The validly tendered and not withdrawn shares constitute 95% of the outstanding common stock of the Company. The Merger Agreement provides that as soon as practicable following the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Purchaser will be merged (the "Merger") with and into the Company, and those Shares that were not acquired in the Offer will be converted into the right to receive $26.00 per Share in cash. The Merger is expected to occur on or about May 1, 2000.
In March 2000, the Company agreed to a cash settlement of $2.0 million for a legal dispute. No provision has been made in the accompanying financial statements for this matter, as the event leading to this settlement occurred after December 31, 1999.
TRAVEL SERVICES INTERNATIONAL, INC. AND SUBSICIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth information concerning the Company's directors and executive officers.
- ------------------- (1) Member of Audit Committee (2) Member of Compensation Committee
JOSEPH V. VITTORIA became Executive Chairman of the Company in April 2000. He was Chairman and Chief Executive Officer of the Company from July 1997 to March 2000. From September 1987 to February 1997, Mr. Vittoria was the Chairman and Chief Executive Officer of Avis, Inc., a multinational auto rental company where he was employed for over 26 years. Mr. Vittoria was responsible for the purchase of Avis, Inc. by creating one of the world's largest Employee Stock Ownership Plans in 1987. He is a founding member of the World Travel and Tourism Council, a global organization of the chief executive officers of companies engaged in all sectors of the travel and tourism industry. He serves on the board of Travel Industry International. He has been named travel executive of the year several times by various travel media, including BUSINESS TRAVEL NEWS, TRAVEL WEEKLY, TRAVEL AGENT TOUR AND TRAVEL NEWS-NORTH AMERICA. Mr. Vittoria serves on the Board of Directors of Transmedia Europe, Transmedia Asia, Carey International, Inc., ResortQuest International, Inc., Puradyn Filter Technologies, Inc., CD Radio, Inc. and various non-profit associations.
PETER T. MCHUGH became the President and Chief Executive Officer of the Company in April 2000. From January 1996 to October 1999, Mr. McHugh was the President and Chief Operating Officer of Holland America Westours, Inc. From March 1988 to December 1995, he was Chief Operating Officer of Pan American World Airlines. Prior to that he held various senior positions at TWA. Mr. McHugh has over 25 years of experience in the travel industry.
PATRICK DOYLE became Senior Vice President and Chief Financial Officer in October 1999. Mr. Doyle has served for the past ten (10) years as Senior Vice President and Chief Financial Officer of Effjohn North America, a multinational firm and subsidiary of Neptun Maritime, whose business included the operation of two cruise lines. Mr.
Doyle has significant experience in financial planning and analysis, contract negotiations and reporting and accounting systems. He is a certified public accountant and previously served as a senior manager at KPMG.
SUZANNE B. BELL became Senior Vice President, General Counsel and Secretary of the Company in July 1997. From July 1996 to July 1997, Ms. Bell was an attorney at Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. From September 1991 to July 1996, she was an attorney at Morgan, Lewis & Bockius LLP. Ms. Bell concentrated her law practice in the areas of mergers and acquisitions and securities laws, representing both public and private companies.
TIMOTHY COLEMAN became Senior Vice President of Technology and Operations of the Company in September 1999. Most of Mr. Coleman's career has been spent with United Airlines and Westin Hotels and Resorts. At United Airlines, he was responsible for the development and implementation of corporate strategies for route planning, electronic distribution and loyalty marketing. At Westin, he was responsible for worldwide reservations, global distributions systems, frequent guest programs, travel industry marketing alliances, pricing, revenue management and management and market research. Most recently, Mr. Coleman owned his own consulting firm, working with several major hotel chains in e-commerce, distribution, and revenue management.
JOHN C. DELANO became Senior Vice President, Operations, of the Company in January 1998 and Senior Vice President, Internet Operations, in 1999. Mr. DeLano spent nearly twenty years in the auto rental industry, and from 1991 to 1997 he served as Managing Director and National Operations Manager for Avis Australia, where he coordinated the marketing, operations, human resources, information technology, sales, fleet, accounting and field management functions. In 1992, while under Mr. DeLano's supervision, Avis Australia was awarded the prestigious Australian Quality Award (similar to the Malcolm Baldridge Award in the U.S.) and the 1996 Australian Customer Service Award.
MELVILLE W. ROBINSON became Vice President, Corporate Development of the Company in July 1997. From 1994 to July 1997, Mr. Robinson served as the Chief Financial Officer of Cruises Only, one of the Founding Companies. From 1989 until 1993, Mr. Robinson was the President and Chief Financial Officer of the Gale Group, a U.S. based consumer products manufacturing firm. From 1986 to 1989, Mr. Robinson was a Managing Director at PNC Merchant Banking Corp., where he founded and managed the Growth Capital Group. From 1983 to 1986, Mr. Robinson was the Chief Financial Officer of Drug Emporium Inc., a publicly-traded discount drugstore chain.
GEORGE DEL PINO became Corporate Controller of the Company in August 1997, and was promoted to Vice President and Corporate Controller in July 1998. From 1996 to 1997, Mr. Del Pino served as Controller of G.L. Homes of Florida, one of Florida's largest real estate developers / homebuilding companies. From 1992 to 1996, Mr. Del Pino held various positions at Certified Vacations, including Senior Director of Product Development (1995-1996), Director of Corporate Accounting and Controller (1993-1995), and Chief Financial Officer and Treasurer of The Travel Difference (a subsidiary of Certified Vacations) (1992-1993). From 1985 to 1992, Mr. Del Pino held various positions at KPMG, specializing in auditing travel companies. Mr. Del Pino is a certified public accountant.
WAYNE HELLER became a director of the Company in July 1997. Mr. Heller has served as the Chief Executive Officer of Cruises Only since its founding in 1985 and was previously employed with Norwegian Cruise Lines from 1980 to 1984. Mr. Heller is a member of ASTA, NACOA and CLIA.
ELAN J. BLUTINGER has been a director of the Company since October 1996. Mr. Blutinger is a Managing Director of Alpine Consolidated LLC, a consolidator of highly fragmented businesses. From 1987 to 1995, he was the Chief Executive Officer of Shoppers Express, Inc., an electronic retailing service, which he founded. From 1983 to 1986, Mr. Blutinger was the Chairman and Chief Executive Officer of DSI, a wholesale distributor for the personal computer industry until its acquisition in 1986 by Independent Distribution Incorporated. Mr. Blutinger is also a director and co-founder of ResortQuest International, Inc.
TOMMASO ZANZOTTO became a director of the Company in July 1997. Mr. Zanzotto is the President of Toscana Ville E Castelli, a real estate development company which owns and operates residential and commercial properties in the lodging and hotel industry. From 1994 to 1996, he was the Chairman and Chief Executive Officer of Hilton International. From 1969 to 1993, Mr. Zanzotto held various positions with American Express Travel Related Services including President International, American Express Financial and Travel Services (1990-1993); President, American Express Corporate Card Division (1987-1990); President, American Express Travelers Cheques (Europe, Africa, Middle
East). Mr. Zanzotto is a member of the World Travel and Tourism Council, and a Governor of the Transportation and Travel Committee of the World Economic Summit. Mr. Zanzotto is also a director of Compass International Services Corporation.
TIMOTHY RUSSELL BYRNE became a director of the Company in March 2000 upon completion of the tender offer. Mr. Byrne has been Group Managing Director of Airtours plc since March 2000. He has served as Group Finance Director of Airtours plc from December 1997 to March 2000. Prior to that, Mr. Byrne served as Group Financial Controller of Airtours plc from 1993 to 1997.
JAMES SCOTT JENNINGS became a director of the Company in March 2000 upon completion of the tender offer. Mr. Jennings has served as a Director and Vice President of Blue Sea Florida Acquisition Inc. since formation in February, 2000, and as Director of Corporate Development of Airtours plc since November 1996. Previously, Mr. Jennings served as Director of Corporate Finance of Rickitt Mitchell & Partners Limited from 1994 to 1996.
MICHAEL CHARLES LEE became a director of the Company in March 2000 upon completion of the tender offer. Mr. Lee has served as a Director of Airtours plc since 1993 and as Chairman of the Aviation Division of Airtours since October 1998. Mr. Lee served as Chief Executive of Airtours International Airways Limited from 1990 to 1998.
PETER FRANCIS ROTHWELL became a director of the Company in March 2000 upon completion of the tender offer. Mr. Rothwell has served as a Director of Airtours plc since November 1999 and as Chief Executive of the UK Leisure Group of Airtours since May 1998. Prior to that, Mr. Rothwell served as Managing Director of Airtours Holidays Limited from 1995 to 1998.
LARS THUESEN became a director of the Company in March 2000 upon completion of the tender offer. Mr. Thuesen has served as a Director of Airtours plc since May 1998 and as Chairman of the European Leisure Group of Airtours and Accommodation Division of Airtours since November 1999. Mr. Thuesen previously served as Chairman of the UK Leisure Group and the West European Leisure Group of Airtours from 1997 to 1999. Prior to that, Mr. Thuesen served as Deputy Chief Executive Officer and Chief Financial Officer of the Scandinavian Leisure Group of Airtours from 1994 to 1997.
GREGORY JOSEPH McMAHON became a director of the Company in March 2000 upon completion of the tender offer. Mr. McMahon has served as Group Company Secretary and Head of Legal Services of Airtours, since September 1998. Mr. McMahon was a Partner in Garretts from 1995 to 1998. Prior to that, Mr. McMahon was a Partner in Addleshaw Sons & Latham from 1991 to 1995.
CHRISTOPHER ALAN LEIGH MOTTERSHEAD became a director of the Company in March 2000 upon completion of the tender offer. Mr. Mottershead has served as Director and President of Blue Sea Florida Acquisition Inc. since formation in February 2000 and as President and Chief Executive Officer of North American Leisure Group of Airtours since January 2000. Previously, Mr. Mottershead served as Director of Airtours Holidays Limited from 1994 to 1999. Mr. Mottershead served as Managing Director of Airtours Holidays Limited from May 1998 to December 1999.
LORRIE LYNN KING became a director of the Company in March 2000 upon completion of the tender offer. Ms. King has served as a Director and Secretary of Blue Sea Florida Acquisition Inc. since formation in February 2000 and as Executive Vice President, Strategic and Business Development of North American Leisure Group of Airtours since October 1999. Ms. King served as Chief Financial Officer of North American Leisure Group of Airtours from 1998 to 1999. Previously, Ms. King was a Partner with Arthur Andersen, from 1997 to 1998, and Senior Manager prior to that time.
BOARD OF DIRECTORS
The Board of Directors of the Company currently consists of 12 directors. Upon the merger of Blue Sea Florida Acquisition Inc. with and into the Company, it is expected that the Board will be modified. The Board of Directors has established an Audit Committee and Compensation Committee and may establish other committees from time to time as the Board may determine.
The Audit Committee consists of three members, two of whom are independent directors. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and the results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, reviews recommendations regarding the Company's accounting methods and the adequacy of its systems of internal accounting controls, and reviews and approves financial press releases and reports.
The Compensation Committee consists of two members, each of whom is a "disinterested director," as defined in the rules promulgated by the Securities and Exchange Commission pursuant to the Exchange Act, and an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code. The Compensation Committee reviews and determines compensation for the Company's executive officers, administers the Company's Long Term Incentive Plan and makes recommendations to the Board of Directors with respect to the Company's compensation policies.
The Board of Directors does not have any other committees at this time, although additional committees may be formed in the future. All officers serve at the discretion of the Board of Directors, subject to the terms and conditions of such officer's employment agreements with the Company. Airtours plc, as the beneficial owner of 95% of the Company's common stock, has the ability to control the designation of the members of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission thereunder requires the Company's officers and directors and persons who own more than ten percent (10%) of the Company's Common Stock, as well as certain affiliates of such persons, to file initial reports of ownership on Form 3 and changes of ownership on Form 4 and Form 5 with the Securities and Exchange Commission and The Nasdaq Stock Market. Such persons are also required to furnish the Company with a copy of all such forms filed.
Based solely on its review of copies of such reports or written representations from or on behalf of certain reporting persons that no other reports were required for those persons, the Company believes that, during the year ended December 31, 1999, all Section 16(a) filing requirements applicable to such persons were satisfied.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid to the Company's Chief Executive Officer and four of the Company's other most highly compensated executive officers whose total annualized salary and bonus was $100,000 or more (the Chief Executive Officer and such other executive officers are sometimes referred to herein as the "Named Executive Officers") with respect to the years ended December 31, 1997, 1998 and 1999:
SUMMARY COMPENSATION TABLE
- -------------------
(1) With the exception of Mr. Coleman who commenced employment with the Company in September 1999, each of the Named Executive Officers commenced employment with the Company upon consummation of the initial public offering (July 28, 1997). Annual salaries for 1997 were as follows: $200,000 for Mr. Vittoria; $125,000 for Ms. Bell; $105,000 for Mr. Del Pino; $125,000 for Mr. Robinson; and $150,000 for Ms. Vales. (2) Mr. Vittoria chose to forego his bonus earned in 1998 in order to make funds available for payments to other executives of the Company. (3) Mr. Coleman joined the Company on September 1, 1999. Bonus paid in 1999 represents a signing bonus. (4) Consists of relocation expenses paid during the year. (5) Effective October 10, 1999, Ms. Vales resigned from her positions with the Company. (6) Consists of consulting fees paid in 1997 prior to the consummation of the Company's initial public offering. (7) Represents an accrual made at December 31, 1999 for severance payments, including accrued vacation, to be made to Ms. Vales through September 29, 2000.
The following table sets forth the stock options granted to the Named Executive Officers during the year ended December 31, 1999:
STOCK OPTION GRANTS
(1) Calculated using the Black-Scholes valuation method.
Each of the options set forth in the table above will vest in equal installments on each of the first through four anniversaries of the grant date.
There were no stock options exercised by the Named Executive Officers during the year ended December 31, 1999.
DIRECTOR COMPENSATION; NON-EMPLOYEE DIRECTORS' STOCK PLAN
Directors who are also employees of the Company or one of its subsidiaries do not receive additional compensation for serving as directors. During 1999, each director who was not an employee of the Company or one of its subsidiaries received a fee of $2,000 for attendance at each Board of Directors' meeting and $1,000 for attendance at each committee meeting. Directors are also reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof incurred in their capacity as directors.
The Company's Non-Employee Directors' Stock Plan (the "Directors' Plan"), which was adopted by the Board of Directors, approved by the Company's shareholders in 1997 and amended in 1999, provides for: (i) the automatic grant to each non-employee director and Advisory Director (referred to herein as a "Participant" or "Non-Employee Director") serving at the commencement of the initial public offering of an option to purchase 10,000 shares of Common Stock or such other securities as may be substituted for such shares of Common Stock of the Company as stipulated in the Directors' Plan; and thereafter (ii) the automatic grant to each Participant of an option to purchase 10,000 shares upon such person's initial election as a director or appointment as an Advisory Director. In addition, the Directors' Plan provides for an automatic annual grant to each Participant of an option to purchase 5,000 shares at each annual meeting of shareholders; provided, however, that if the first annual meeting of shareholders following a person's initial election as a non-employee director or appointment by the Board as an Advisory Director is within three months of the date of such election or appointment, such person will not be granted an option to purchase 5,000 shares of Common Stock at such annual meeting. These options will have an exercise price per share equal to the fair market value of a share at the date of grant. Options granted under the Directors' Plan will expire at the earlier of 10 years from the date of grant or one year after termination of service as a director or advisor, and options will be immediately exercisable. In addition, the Directors' Plan permits Participants to elect to receive, in lieu of cash directors' fees, shares or credits representing "Deferred Shares" that may be settled at future dates, as elected by the Participants. The number of shares or Deferred Shares received will be equal to the number of shares which, at the date the fees would otherwise be payable, will have an aggregate fair market value equal to the amount of such fees. The Company reserved 200,000 shares of Common Stock for use in connection with the Directors' Plan. Messrs. Blutinger and Zanzotto, and Fraser Bullock and Leonard Potter each received options to purchase 10,000 shares upon consummation of the initial public offering and 5,000 shares following each of the 1998 and 1999 Annual Meeting of Shareholders. In 1999, each Participant elected to
receive shares in lieu of cash directors' fees. The Company expects to terminate the Directors' Plan upon consummation of the merger with Blue Sea Florida Acquisition Inc.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was initially incorporated in Delaware in April 1996, however, it did not conduct operations or generate revenue and did not pay any of its executive officers compensation as employees until July 1997. The Company changed its state of incorporation to Florida effective January 1, 1999. During 1999, its most highly compensated executive officers were Messrs. Vittoria, Coleman, Del Pino, Robinson and Ms. Bell.
Mr. Vittoria has entered into an employment agreement with the Company providing for an annual base salary of $200,000. Mr. Coleman, Mr. Del Pino, Mr. Robinson and Ms. Bell each have entered into an employment agreement with the Company providing for an annual base salary of $140,000, $125,000, $125,000 and $125,000, respectively. Each of these agreements is for a term of three years, commencing July 28, 1997 for Mr. Vittoria, Mr. Del Pino, Mr. Robinson and Ms. Bell, and September 1, 1999 for Mr. Coleman. In addition, certain executive officers of the operating companies, including Mr. Heller, a member of the Board, have entered into employment agreements effective July 28, 1997. Mr. Heller's employment agreement is for a term of three years (the "Initial Term"). Each employment agreement contains a covenant not to compete (the "Covenant") with the Company for a period of two years immediately following termination of employment or, in the case of a termination by the Company without cause in the absence of a change in control, for a period of one year following termination of employment. Under the Covenant, the executive officer is prohibited from: (i) engaging in any travel service business in direct competition with the Company within defined geographic areas in which the Company or its subsidiaries does business; (ii) enticing a managerial employee of the Company away from the Company; (iii) calling upon any person or entity which is, or has been, within one year prior to the date of termination, a customer of the Company; or (iv) calling upon a prospective acquisition candidate which the employee knew was approached or analyzed by the Company, for the purpose of acquiring the entity. The Covenant may be enforced by injunctions or restraining orders and shall be construed in accordance with the changing activities, business and location of the Company. Each agreement with respect to the acquisition by the Company of an Operating Company also contains a similar covenant prohibiting sellers from competing with the Company for periods following the consummation of the respective acquisition.
Each of these employment agreements provides that, in the event of a termination of employment by the Company without cause during the Initial Term the employee will be entitled to receive from the Company an amount equal to his or her then current salary for the remainder of the Initial Term or for one year, whichever is greater. In the event of a termination of employment without cause after the Initial Term of the employment agreement, the employee will be entitled to receive an amount equal to his or her then current salary for one year. In either case, payment is due in one lump sum on the effective date of termination. With the exception of Mr. Coleman's agreement which does not contain such provisions, the agreements also provide that in the event of a change in control of the Company (as defined in the agreements) during the Initial Term, if the employee is not given at least five days' notice of such change in control and the successor's intent to be bound by such employment agreement, the employee may elect to terminate his or her employment and receive in one lump sum three times the amount he or she would receive pursuant to a termination without cause during the Initial Term. The employment agreement of Mr. Heller also states, that in the event of a termination without cause by the Company or a change in control, the employee may elect to waive the right to receive severance compensation and, in such event, the noncompetition provisions of the employment agreement will not apply. In the event the employee is given at least five days' notice of such change in control, the employee may elect to terminate his or her employment agreement and receive in one lump sum two times the amount he or she would receive pursuant to a termination without cause during the Initial Term. In such an event, the noncompetition provisions of the employment agreement would apply for two years from the effective date of termination. The employees have been provided notice of a pending change of control. Mr. Heller has provided the Company with notice of his intent to terminate his contract upon the change of control of the Company.
Effective April 12, 1999, the Company appointed John B. Balson to the positions of President and Chief Operating Officer. Mr. Balson has provided the Company with notice of his intent to terminate his contract upon the change of control of the Company. On April 28, 1999, Maryann Bastnagel resigned from her position as Senior Vice President and Chief Information Officer of the Company. Pursuant to a separation agreement with the Company, Ms. Bastnagel received a $75,000 severance payment, representing six months salary, in addition to payment of all accrued vacation time. On October 10, 1999, Ms. Vales resigned from her position as Senior Vice President and Chief Financial Officer of the Company. Pursuant to a separation agreement with the Company, Ms. Vales will receive $150,000,
payable in installments through September 29, 2000. Ms. Vales also received payment of accrued vacation time and will be reimbursed for COBRA payments through September 29, 2000.
INDEMNIFICATION AGREEMENTS
In 1997, the Company entered into indemnification agreements with each of the Company's initial directors and executive officers. The indemnification agreements require, among other things, that the Company indemnify its directors and executive officers to the fullest extent permitted by law, and advance to the directors and executive officers all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. The Company must also indemnify and advance all expenses incurred by directors and executive officers seeking to enforce their rights under the Company's directors' and officers' liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by provisions in the Charter and Bylaws, it provides greater assurance to directors and executive officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Directors or by the shareholders to eliminate the rights it provides. The Company also maintains directors and officers liability insurance.
The Company has authority under Section 607.0850 of the Florida Business Corporation Act to indemnify its directors and officers to the extent provided in such statute. In general, Florida law permits a Florida corporation to indemnify its directors, officers, employees and agents, and persons serving at the corporation's request in such capacities for another enterprise, against liabilities arising from conduct that such persons reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful.
The provisions of the Florida Business Corporation Act that authorize indemnification do not eliminate the duty of care of a director, and in appropriate circumstances equitable remedies such as injunctive or other forms of nonmonetary relief will remain available under Florida law. In addition, each director will continue to be subject to liability for (a) violations of the criminal law, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) deriving an improper personal benefit from a transaction; (c) voting for or assenting to an unlawful distribution; and (d) willful misconduct or a conscious disregard for the best interests of the Company in a proceeding by or in the right of the Company to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. The statute does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.
Article Seven of the Company's articles of incorporation (the "Florida Articles") states that: "A director shall not be personally liable to the Corporation or the holders of shares of capital stock or any other person for monetary damages for any statement, vote, decision, act or failure to act, for which such liability is precluded or otherwise eliminated under Section 607.0831 or otherwise under the Florida Business Corporation Act. If the Florida Business Corporation Act is hereafter amended to authorize the further or broader elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Florida Business Corporation Act, as so amended. No repeal or modification of this Article VII shall adversely affect any right of or protection afforded to a director of the Corporation existing immediately prior to such repeal or modification. Article Eight of the Company's Florida Articles states that: "The Corporation shall indemnify and may advance expenses to, and may purchase and maintain insurance on behalf of, its officers and directors to the fullest extent permitted by law as now or hereafter in effect. Without limiting the generality of the foregoing, the Bylaws may provide for indemnification and advancement of expenses to officers, directors, employees and agents on such terms and conditions as the Board may from time to time deem appropriate or advisable." In addition, the Company's Bylaws further provide that the Company shall indemnify its officers, directors, advisory directors and employees to the fullest extent permitted by law.
LONG-TERM INCENTIVE PLAN
In May 1997, the Board of Directors and the Company's shareholders approved the Company's 1997 Long-Term Incentive Plan, which was later amended and restated effective July 28, 1998 and again amended and restated effective September 28, 1999 (as amended and restated, the "Plan"). The purpose of the Plan is to provide officers, employees, directors who are also employees, consultants and independent contractors of the Company or any of its subsidiaries, with additional incentives by increasing their ownership interests in the Company. Individual awards under the Plan may take the form of one or more of: (i) either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred stock; (iv) dividend equivalents; and (v) other awards not otherwise provided for, the value of which is based in whole or in part upon the value of the Common Stock. The Compensation Committee of the Board of Directors administers the Plan and generally selects the individuals who will receive awards and the terms and conditions of those awards. The number of shares available for use in connection with the Plan may not exceed 18% of the aggregate number of shares of Common Stock outstanding prior to the date of grant.
As of December 31, 1999, 2,513,175 shares were reserved for issuance in connection with the Plan, of which 2,028,737 shares had been granted and were outstanding. Shares of Common Stock which are attributable to awards which have expired, terminated or been canceled or forfeited are available for issuance or use in connection with future awards. All options, except for certain premium-priced options granted to the Chief Executive Officer, were granted with exercise prices equal to the fair market value at the time of grant. In December 1998, the Compensation Committee of the Board of Directors granted Mr. Vittoria "premium-priced" options to purchase 150,000 shares at an exercise price of $50, which price was in excess of the fair market value of the Common Stock on the grant date. The vesting of these options will occur over four years, subject to acceleration based upon thresholds of $50, $75 and $100 for the share price of the Common Stock.
The Plan will remain in effect until terminated by the Board of Directors. The Plan may be amended by the Board of Directors without the consent of the shareholders of the Company, except that any amendment, although effective when made, will be subject to shareholder approval if required by any Federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. Pursuant to the merger agreement with Airtours and Blue Sea, the Company is not permitted to grant additional options under the Plan.
401(K) PLAN
The Company established a 401(k) Plan effective July 1, 1998. Similar plans existing at certain operating companies are either being suspended or rolled into the Company's Plan. All employees of the Company, meeting certain minimum eligibility requirements, are eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each participant may contribute up to 20% of his or her pre-tax gross compensation (but not greater than a statutorily prescribed annual limit). The percentage elected by certain highly compensated participants may be required to be lower. The 401(k) Plan permits, but does not require, additional contributions to the 401(k) Plan by the Company. All amounts contributed by employee participants in conformance with Plan requirements and earnings on such contributions are fully vested at all times. For the year ended December 31, 1999, the Company accrued an aggregate matching contribution to the Plan of $450,000, based on a match of 25% of employee contributions, up to a maximum of 6% of compensation. The Board of Directors will determine on an annual basis whether a matching contribution will be made and, if so, at what level of contribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the Compensation Committee was composed of Tommaso Zanzotto and Elan Blutinger. None of the members of the Compensation Committee was an officer or an employee of the Company or any of its subsidiaries in 1999, was formerly an officer of the Company or any of its subsidiaries, other than Mr. Blutinger, who was an officer of the Company prior to the Company's initial public offering, or had any relationship requiring disclosure by the Company under the section Certain Relationships And Related Transactions.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of April 10, 2000 by: (i) each person known to beneficially own more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; (iii) each Named Executive Officer; and (iv) all executive officers and directors as a group. All persons listed have sole voting and investment power with respect to their shares, unless otherwise indicated. The Company is not aware of any beneficial owner of more than five percent of the outstanding shares of Common Stock of the Company other than as set forth in the following table.
- ------------------ * Less than 1.0% (1) Unless indicated otherwise, the address of the beneficial owners is, c/o Travel Services International, Inc., 220 Congress Park Drive, Delray Beach, Florida 33445. (2) Includes the following options that are currently exercisable or exercisable within the next 60 days: 112,500 shares for Mr. Vittoria; 22,500 for Ms.Bell; 15,000 shares for Mr. Del Pino; and 35,000 shares for Mr. Robinson. (3) Includes 20,000 shares which may be acquired upon the exercise of exercisable options. Also, includes the following shares which are held in a deferred stock account for the benefit of these directors, pursuant to the Directors' Plan: 2,600 shares for Mr. Blutinger; 2,213 shares for Mr. Bullock; and 2,963 shares for Mr. Zanzotto. (4) The business address of such individual is c/o Airtours plc, Parkway One, Parkway Business Centre, Manchester M14 7QU, United Kingdom. (5) The business address of such individual is c/o North American Leisure Group, 130 Merton Street, Toronto, Ontario M4S 1A4, Canada. (6) Blue Sea Florida Acquisition Inc., an indirect wholly-owned subsidiary of Airtours plc, is the record holder of these shares. Carnival Corporation, a corporation organized under the laws of the Republic of Panama, owns approximately 26% of the outstanding voting equity securities of Airtours plc. Mr. Micky Arison, the Administrators of the Estate of Ted Arison and Ms. Shari Arison, through various corporations, partnerships and trusts, beneficially own approximately 45% of the outstanding voting equity securities of Carnival Corporation. (7) Includes 268,750 shares that may be acquired upon the exercise of options.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Included in assets at December 31, 1999 is a note receivable from Imad Khalidi, a former director of the Company and executive officer of a subsidiary of the Company, with an outstanding balance of $138,000, which bears interest at 6% and is due upon demand.
The Company leases office space from the brother of Robert G. Falcone, a former director of the Company and executive officer of a subsidiary of the Company, under a lease that expires February 28, 2006. Payments were $201,000, $213,000 and $196,000 in 1997, 1998, and 1999, respectively.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
Reference is made to the index set forth on page 24 of this Report.
2. FINANCIAL STATEMENT SCHEDULES:
Reference is made to the schedule set forth on page 56 of this Report.
3. EXHIBITS:
EXHIBIT NUMBER DESCRIPTION -------------- -----------
2.1 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, Auto-Europe, Inc. (Maine), Imad Khalidi, Alex Cecil and Wilfred Diller, as trustee for Thurston Cecil and Lila Cecil.(1)
2.2 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, Cruises Only, Inc., Wayne Heller and Judy Heller.(1)
2.3 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, 800-Ideas, Inc. and Susan Parker.(1)
2.4 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, Cruises, Inc., Robert G. Falcone, Judith A. Falcone and Pamela C. Cole.(1)
2.5 Agreement and Plan of Organization, dated as of May 9, 1997, among the Registrant, D-FW Tours, Inc., D-FW Travel Arrangements, Inc., John W. Przywara and Sharon S. Przywara.(1)
2.6 First Amendment to Agreement and Plan of Organization among the Registrant, Auto-Europe, Inc. (Maine), Imad Khalidi Alex Cecil and Wilfred Diller, as trustee for Thurston Cecil and Lila Cecil.(2)
2.7 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among the Registrant, Cruises, Inc., Robert G. Falcone, Judith A. Falcone, and Pamela C. Cole.(2)
2.8 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among the Registrant, Cruises Only, Inc., Wayne Heller and Judy Heller.(2)
2.9 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among the Registrant, D-FW Travel Arrangements, Inc., John W. Przywara and Sharon Scott Przywara.(2)
2.10 First Amendment to Agreement and Plan of Merger, dated as of June 30, 1997, by and among the Registrant, 800-Ideas, Inc. and Susan Parker.(2)
2.11 Agreement and Plan of Merger, dated as of October 29, 1998, by and between the Registrant and the predecessor company to the Registrant.(10)
2.12 Merger Agreement, dated as of February 21, 2000, among Airtours plc, Blue Sea Florida Acquisition Inc. and the Registrant.(14)
3.1 Articles of Incorporation of the Registrant.(13)
3.2 Bylaws of the Registrant.(11)
4.1 Rights Agreement, dated as of January 28, 1999, between the Registrant and American Stock Transfer & Trust Company.(11)
4.2 Form of Restriction and Registration Rights Agreement, dated as of July 28, 1997, between the Registrant and the each of the persons listed on the schedule thereto.(4)
4.3 Amendment to the Share Purchase Rights Plan, dated as of February 21, 2000, between Registrant and American Stock Transfer & Trust Company, as Rights Agent.(14)
10.1 Amended and Restated Employment Agreement, dated as of July 22, 1997, between the Registrant and Joseph V. Vittoria.(4) Amended and Restated Employment Agreement, dated as of May 12, 1997, between the Registrant and Jill M. Vales.(4) Amended and Restated Employment Agreement, dated as of June 6, 1997, between the Registrant and Michael J. Moriarty.(4) Employment Agreement, dated July 22, 1997, between the Registrant and Mel Robinson.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Auto Europe, LLC and Imad Khalidi.(4) Employment Agreement, dated July 18, 1997, among the Registrant, Auto Europe, LLC and Alex Cecil.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Cruises, Inc. and Robert Falcone.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Cruises, Inc. and Judith Falcone.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Cruises, Inc. and Holley Christen.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Cruises Only, LLC and Wayne Heller.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Cruises Only, LLC and Judy Heller.(4) Employment Agreement, dated July 22, 1997, among the Registrant, Travel 800, LLC and Susan Parker.(4)
10.2 Form of Indemnification Agreement, dated July 28, 1997, between the Registrant and each of the persons set forth on the schedule thereto.(4)
10.3 1997 Long Term Incentive Plan.(3)
10.4 Non-Employee Directors' Stock Plan.(3)
10.6 Employment Agreement, dated July 25, 1997, between the Registrant and Suzanne B. Bell.(4)
10.7 Employment Agreement, dated as of July 25, 1997, between the Registrant and Maryann Bastnagel.(4)
10.8 Credit Agreement, dated as of October 15, 1997, by and between the Registrant and NationsBank, N.A.(4)
10.9 Stock Purchase Agreement, dated as of October 28, 1997, among the Registrant, CruiseOne, Inc., Anthony J. Persico and Charlotte Luna, as amended.(5)
10.10 Stock Purchase Agreement, dated as of October 28, 1997, among the Registrant, Cruise World, Inc., and the sellers named therein, as amended.(5)
10.11 Stock Purchase Agreement, dated as of October 28, 1996, among the Registrant, Ship 'N' Shore Cruises, Inc., Cruise Time, Inc., SNS Coachline, Inc., Cruise Mart, Inc., SNS Travel Marketing, Inc. and Natalee Stutzman, as amended.(5)
10.12 Asset Purchase Agreement, dated as of February 9, 1998, among the Registrant, Gold Coast Travel Agency Corporation, Inc. and Rhea Sherota.(6)
10.13 Employment Agreement, dated as of January 19, 1998, between the Registrant and John C. De Lano.(7)
10.14 Stock Purchase Agreement, dated March 31, 1998, among the Registrant, The Cruise Line, Inc. and the shareholders named therein.(8)
10.15 Employment Agreement, dated as of April 1, 1998, among the Registrant and Spencer Frazier.(9)
10.16 Purchase Agreement by and among the Registrant and Lexington Services Associates, Ltd., a Texas limited partnership (the "Partnership"), and the Partnership's partners dated as of June 1, 1998.(9)
10.17 Employment Agreement, dated as of July 25, 1998, between the Registrant and George Del Pino(10)
10.18 Purchase Agreement, dated as of January 8, 1999, among the Registrant, AHI International Corporation, Richard D. Small and Arlene P. Small (12)
10.19 Employment Agreement, dated April 30, 1999 between the Registrant and John Balson.(15) 10.20 Amended and Restated Credit Agreement, dated June 30, 1999, between the Registrant, as Borrower, and Bank of America, N.A. d/b/a NationsBank, N.A., as Lender.(16)
10.21 Employment Agreement, dated September 1, 1999, between the Registrant and Timothy M. Coleman.(17) 10.22 Employment Agreement, dated October 11, 1999, between the Registrant and Patrick Doyle.(17)
11 Schedule of Computations of Earnings Per Share.(18)
21 Subsidiaries of the Registrant.(14)
23.1 Consent of Arthur Andersen LLP.(18)
27 Financial Data Schedule.(18)
99.1 The Registrant's Registration Statement on Form S-1 (File No. 333-56567).(13)
99.2 The Registrant's Proxy Statement for the 1998 Annual meeting of Shareholders of the Registrant held on July 28, 1998.(13)
99.3 The Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.(13)
99.4 The Registrant's Registration Statement on Form S-3 (File No. 333-61337).(13)
- --------------------- (1) Incorporated by reference to the same Exhibit number filed on May 14, 1997, with the Registrant's Registration Statement on Form S-1 (File No. 333-27125).
(2) Incorporated by reference to the same Exhibit number filed on July 1, 1997 with the Registrant's Registration Statement on Form S-1 (File No. 333-27125).
(3) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(4) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report for the quarter ended September 30, 1997.
(5) Incorporated by reference to the exhibit filed on November 19, 1997 with the Registrant's Form 8-K.
(6) Incorporated by reference to the exhibit filed on February 9, 1998 with the Registrant's Form 8-K.
(7) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
(8) Incorporated by reference to the exhibit filed on March 31, 1998 with the Registrant's Form 8-K.
(9) Incorporated by reference to the same exhibit number filed with the Registrant's Registration Statement on Form S-1 (File No. 333-56567).
(10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(11) Incorporated by reference to the exhibit filed on February 1, 1999 with the Registrant's Form 8-K.
(12) Incorporated by reference to the exhibit filed on February 16, 1999 with the Registrant's Form 8-K.
(13) Incorporated by reference to the same exhibit number filed with the Registrant's Registration Statement on Form 10-12g (File No. 001-13155).
(14) Incorporated by reference to the same Exhibit number filed on February 22, 2000 with the Registrant's current report on Form 8-K.
(15) Incorporated by reference to the same Exhibit number filed on May 17, 1999 with the Registrant's quarterly report on Form 10-Q.
(16) Incorporated by reference to the same Exhibit number filed on August 13, 1999 with the Registrant's quarterly report on Form 10-Q.
(17) Incorporated by reference to the same Exhibit number filed on November 15, 1999 with the Registrant's quarterly
(18) Filed herewith.
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on October 12, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Delray Beach, State of Florida, on the 14th day of April, 2000.
TRAVEL SERVICES INTERNATIONAL, INC.
By: /s/ JOSEPH V. VITTORIA ---------------------------------------- Joseph V. Vittoria, Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Exhibit Index
Exhibit No Description
11 Schedule of Computations of Earnings Per Share.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.