-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7Rh+94Sg5ypMEIg+H9znPjUgx8h51cd3qtE97KgIsaCAmCM17cwS1VQmik/Jv1q IsOS7jKQmxJZmmFF4x7frA== 0000950134-97-004358.txt : 19970603 0000950134-97-004358.hdr.sgml : 19970603 ACCESSION NUMBER: 0000950134-97-004358 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19970602 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 800 TRAVEL SYSTEMS INC CENTRAL INDEX KEY: 0001039208 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-28237 FILM NUMBER: 97617727 BUSINESS ADDRESS: STREET 1: 4803 GUNN HIGHWAY CITY: TAMPA STATE: FL ZIP: 33624 MAIL ADDRESS: STREET 1: 4803 GUNN HIGHWAY CITY: TAMPA STATE: FL ZIP: 33624 SB-2 1 FORM SB-2 1 As filed with the Securities and Exchange Commission on June 2, 1997 Registration No. 33- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- 800 TRAVEL SYSTEMS, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) -------------- DELAWARE 4724 59-3343338 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
-------------- MARK D. MASTRINI PRESIDENT 800 TRAVEL SYSTEMS, INC. 4802 GUNN HIGHWAY 4802 GUNN HIGHWAY TAMPA, FLORIDA 33624 TAMPA, FLORIDA 33624 (813) 908-0404 (813) 908-0404 (Address, including zip code, and telephone (Name, address, including zip code, and number, including area code, of registrant's telephone number including area code of principal executive offices) agent for service)
--------------------------------- Copies of communications to: VINCENT J. MCGILL RICHARD F. DAHLSON PHILLIPS NIZER BENJAMIN KRIM & BALLON LLP JACKSON WALKER, L.L.P. 666 FIFTH AVENUE 901 MAIN STREET, SUITE 6000 NEW YORK, NEW YORK 10103-0084 DALLAS, TEXAS 75202-3797 TELEPHONE: (212) 977-9700 TELEPHONE: (214) 953-6000 TELECOPIER: (212) 262-5152 TELECOPIER: (214) 953-5822
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
================================================================================================================================= PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value............................. 2,070,000(2) $ 5.50 $11,385,000 $ 3,450 - --------------------------------------------------------------------------------------------------------------------------------- Common Stock Purchase Warrant............................ 2,070,000(3) $ .125 (8) (8) - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, Issuable Under Warrants(4)................. 2,070,000 $ 8.25 $17,077,500 $ 5,175 - --------------------------------------------------------------------------------------------------------------------------------- Representative's Common Stock(5)......................... 180,000 $ 6.60 $ 1,188,000 $ 360 - --------------------------------------------------------------------------------------------------------------------------------- Representative's Common Stock Purchase Warrants (6) 180,000 $ .15 (8) (8) - --------------------------------------------------------------------------------------------------------------------------------- Representative's Common Stock Issuable Under Representative's Common Stock Purchase Warrant(7)........ 180,000 $ 9.90 $ 1,782,000 $ 540 - --------------------------------------------------------------------------------------------------------------------------------- Common Stock to be sold by the Selling Shareholders...... 2,580,534 $ 5.50 $14,192,937 $ 4,300.89 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL ........................................ $13,825.89 =================================================================================================================================
(Footnotes on page 2) 2 (1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended. (2) Includes 270,000 shares of Common Stock issuable pursuant to the Representative's over-allotment option. (3) Includes 270,000 Warrants issuable pursuant to the Representative's over-allotment option. (4) Represents shares of Common Stock issuable upon exercise of the Warrants registered hereby together with such additional indeterminate number of shares as may be issued upon exercise of such Warrants by reason of the anti-dilution provisions contained therein. (5) Represents shares of Common Stock issuable upon exercise of the Representative's Warrant, together with such additional indeterminate number of shares of Common Stock as may be issued upon exercise of such Representative's Warrant by reason of the anti-dilution provisions contained therein. (6) Represents Common Stock Purchase Warrants issuable upon exercise of the Representative's Warrant, together with such additional indeterminate number of Warrants as may be issued upon exercise of such Representative's Warrant. (7) Represents shares of Common Stock issuable upon exercise of the Common Stock Purchase Warrants included within the Representative's Warrant, together with such additional indeterminate number of shares of Common Stock as may be issued upon exercise of such Warrants by reason of the anti-dilution provisions contained therein. (8) Pursuant to Rule 416 of the Securities Act of 1993, no separate registration fee is required because the Common Stock underlying the Common Stock Purchase Warrants is being registered in the same registration statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. THIS REGISTRATION STATEMENT CONTAINS A PROSPECTUS WITH RESPECT TO THE UNDERWRITTEN OFFERING OF 1,800,000 SHARES AND 1,800,000 COMMON STOCK PURCHASE WARRANTS TO BE SOLD BY THE COMPANY, AND A SUPPLEMENTARY PROSPECTUS WITH RESPECT TO THE SALE OF 2,580,534 SHARES BEING REGISTERED ON BEHALF OF THE SELLING STOCKHOLDERS. THE PROSPECTUS SUPPLEMENT HAS BEEN INCLUDED HEREIN IMMEDIATELY FOLLOWING THE PROSPECTUS WITH RESPECT TO THE SECURITIES BEING OFFERED BY THE COMPANY. =============================================================================== - 2 - 3 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED _________, 1997 800 TRAVEL SYSTEMS, INC. 1,800,000 SHARES OF COMMON STOCK 1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS -------------------- All of the 1,800,000 shares of Common Stock, par value $.01 per share (the "Common Stock") offered hereby and all of the 1,800,000 Redeemable Common Stock Purchase Warrants (the "Warrants") offered hereby are being sold by 800 Travel Systems, Inc., a Delaware corporation (the "Company"). The Common Stock and the Warrants (collectively, the "Securities") are being offered separately and not as units, and each is separately transferable. Prior to this Offering, there has been no public market for the Common Stock and the Warrants. It is estimated that the initial public offering price will be between $4.50 and 5.50 per share for the Common Stock (the "Share Offering Price") and $.125 per Warrant. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $ per share (150% of the Share Offering Price) during the five-year period commencing on the date of this Prospectus. The Warrants are redeemable by the Company for $.05 per Warrant on not less than 30 nor more than 60 days written notice if the closing price for the Common Stock for seven trading days during a 10 consecutive trading day period ending not more than 15 days prior to the date that the notice of redemption is mailed equals or exceeds $_____ per share (200% of the Share Offering Price), subject to adjustment under certain circumstances and provided there is then a current effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the issuance and sale of Common Stock upon the exercise of the Warrants. Any redemption of the Warrants during the one-year period commencing on the date of this Prospectus shall require the written consent of First London Securities Corporation, the representative of the Underwriters (the "Representative"). See "Description of Securities." The initial public offering prices of the Common Stock and Warrants and the exercise price and other terms of the Warrants have been determined through negotiations between the Company and the Representative and are not related to the Company's assets, book value, financial condition or other recognized criteria of value. Although the Company has applied for the inclusion of the Common Stock and the Warrants on the Boston Stock Exchange under the symbols "FLY" and "FLYW," respectively, and on the Nasdaq SmallCap Market under the symbols "IFLY" and "IFLYW", respectively, there can be no assurance that an active trading market in the Company's securities will develop or be sustained. The Registration Statement, of which this Prospectus forms a part, also covers the offering by selling securityholders (the "Selling Stockholders") of 2,580,534 shares of Common Stock (the "Selling Stockholders Shares"). 1,638,534 of the Selling Stockholders Shares may be sold immediately; 175,000 may be sold commencing 30-days after the date of this Prospectus; 665,000 of the Selling Stockholders Shares may be sold commencing 180 days after the date of this Prospectus and 102,000 of the Selling Stockholder Shares may be sold commencing one year from the date of this Prospectus, in all cases, subject to earlier release at the sole discretion of the Representative. Sales of the Selling Stockholders Shares or the potential of such sales at any time, may have an adverse effect on the market prices of the securities offered hereby. The Company will not receive any of the proceeds from the sale of the securities by the Selling Stockholders. All expenses of registration incurred in connection with this Offering are being borne by the Company, but all selling and other expenses incurred by Selling Stockholders will be borne by the Selling Stockholders. -------------------- THESE ARE SPECULATIVE SECURITIES, AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE OF THE COMMON STOCK AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGES ___ - ___ AND "DILUTION." -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================================================= UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3) - --------------------------------------------------------------------------------------------------------------------------------- Per Share of Common Stock................................. $_____ $_____ $_____ - --------------------------------------------------------------------------------------------------------------------------------- Per Warrant............................................... $_____ $_____ - --------------------------------------------------------------------------------------------------------------------------------- Total(3).................................................. $________ $________ $________ =================================================================================================================================
(See footnotes on the following page) 4 -------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR WARRANTS INCLUDING OVERALLOTMENT. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." ---------------------- FIRST LONDON SECURITIES CORPORATION ---------------------- The date of this Prospectus is , 1997 - 2 - 5 (1) Does not include additional underwriting compensation to be received by the Representative in the form of (i) a non-accountable expense allowance equal to 3% of the gross proceeds of this Offering, of which $25,000 has been paid to date, and (ii) a warrant issued to the Representative (the "Representative's Warrant") to purchase up to 180,000 shares of Common Stock and up to 180,000 Warrants exercisable for a four-year period commencing one year after the effective date of this Offering at an exercise price of 120% of the initial offering price of the Shares and Warrants (in each case subject to adjustment). In addition, the Company has granted to the Representative certain registration rights with respect to registration of the shares of Common Stock and the warrants underlying the Representative's Warrant (the "Underlying Warrants") and the shares of Common Stock issuable upon exercise of the Underlying Warrants. The Company has agreed to pay the Representative upon the exercise or redemption of the Warrants a fee equal to 5% of the gross proceeds received by the Company from the exercise of the Warrants and 5% of the aggregate redemption price for Warrants redeemed. Such fee will be paid to the Representative no sooner than 12 months after the effective date of this Offering. The Representative or its designee must be designated by the Warrant holder as having solicited the Warrant in order to receive the fee. The Company has agreed to indemnify the Underwriters against certain liabilities arising under the Securities Act. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $724,750 including the Representative's non-accountable expense allowance. (3) The Company has granted the Representative an option (the "Representative's Over-Allotment Option"), exercisable within 45 days from the date of this Prospectus, to purchase on the same terms as the Securities offered hereby up to 270,000 additional shares of Common Stock and up to 270,000 additional Warrants solely to cover over-allotments, if any. If the Representative's Over-Allotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $___, $___ and $___, respectively. See "Underwriting." The Securities offered by this Prospectus are being offered on a firm commitment basis by the Underwriters when, as and if delivered to and accepted by the Underwriters, subject to prior sale, and certain other conditions. The Representative reserves the right to withdraw, cancel or modify the Offering without notice and to reject any order, in whole or in part. It is expected that delivery of the certificates representing the shares will be made against payment therefor at the offices of First London Securities Corporation, Dallas, Texas on or about ______________, 1997. -------------------- - 3 - 6 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form SB-2 (the "Registration Statement"), pursuant to the Securities Act with respect to the securities offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. THE STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT OR OTHER DOCUMENT IDENTIFIED AS EXHIBITS IN THIS PROSPECTUS ARE NOT NECESSARILY COMPLETE, AND IN EACH INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH CONTRACT OR DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH STATEMENT BEING QUALIFIED IN ANY AND ALL RESPECTS BY SUCH REFERENCE. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and exhibits which may be inspected without charge at the Commission's principal office at Judiciary Plaza, 450 Fifth Street, NW, Washington, DC 20549. Upon consummation of this Offering, the Company will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its New York Regional Office, Room 1300, 7 World Trade Center, New York, New York 10048; and at its Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained from the Public Reference Section of the Commission at prescribed rates. The Company's Registration Statement on Form SB-2 as well as any reports to be filed under the Exchange Act can also be obtained electronically after the Company has filed such documents with the Commission through a variety of databases, including among others, the Commission's Electronic Data Gathering, Analysis And Retrieval ("EDGAR") program, Knight-Ridder Information, Inc., Federal Filings/Dow Jones and Lexis/Nexis. Additionally, the Commission maintains a Website (at http://www.sec.gov) that contains such information regarding the Company. The Company intends to furnish its shareholders with annual reports containing audited financial statements and such other reports as the Company deems appropriate or as may be required by law. - 4 - 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) and the pro forma financial information appearing elsewhere in this Prospectus. The consummation of the Offering will occur concurrently with, and is a condition precedent to, the consummation of the merger of The Joseph Stevens Group, Inc. ("Stevens") with and into the Company, with Company as the surviving corporation (the "Stevens Merger"). See "The Stevens Merger." Unless otherwise noted, all information in this Prospectus assumes (i) no exercise of the Representative's over-allotment option and (ii) the consummation of the Stevens Merger and the issuance of 300,000 shares of Common Stock in connection therewith. Unless the context otherwise requires, references in this Prospectus to the Company are to 800 Travel Systems, Inc. and to the businesses previously conducted by its predecessor, 1-800 Low-Air Fare, Inc., and by Stevens. THE COMPANY The Company is among the 100 largest independent travel agencies in the United States. The Company provides low-priced airline tickets for domestic and international travel to its customers through its easy-to-remember, toll-free numbers "1-800-LOW-AIR-FARE" (1-800-569-2473) and "1-800-FLY-4-LESS" (1-800-359-4537). The Company has 150 reservation agents and operates 365 days a year out of the Company's reservation centers in Tampa, Florida and San Diego, California. The Company strives to provide its customers with the lowest-priced airfare available for a particular travel route at the time of reservation by utilizing the SABRE travel reservation system developed by American Airlines, Inc. The SABRE system maintains over 50 million airfares, including those of all major U.S. and international commercial airlines, and is updated throughout the day to reflect the airlines' latest ticketing information. The Company estimates it receives an average of 20,000 calls per day (including repeat calls from callers unable to be serviced or calling to confirm reservations), of which the Company has the current capacity to answer only approximately 6,000. The Company has increased the number of its reservation agents from 13 in 1995 to 150 presently. The Company intends to use approximately $1.2 million of the proceeds of this Offering to expedite the training of additional reservation agents. The Company's operations generate revenues principally from (i) the commissions on air travel tickets, (ii) override commissions on air travel tickets the Company books on Continental, United, Northwest, TWA, Carnival, America West, America Trans Air, Trans Brazil, Mexicana and Korean airlines, (iii) segment incentives under its contract with SABRE, (iv) co-op promotions with other suppliers of travel-related products and services, such as long-distance telephone companies, car rental companies and hotels, and (v) service fees that it charges its customers. The Company markets its services primarily by advertising its various toll-free numbers in approximately 270 Yellow Pages directories covering a total population of 133 million people in those standard metropolitan areas in the continental United States ("SMA's") with populations whose general travel profiles are attractive to the Company. The Company also maintains a home page on the World Wide Web (www.lowairfare.com) which enables its customers to access its customized Turbo SABRE system through their personal computers. The Company's operating strategy is to (i) strive to provide its customers with the lowest-priced airfare available for a particular travel route at the time of reservation, (ii) focus on consumer air travel, which the Company believes is the most profitable segment of the travel industry, (iii) provide convenient, quick service to its customers, (iv) maintain low operating costs by utilizing only two operating facilities, (v) use state-of-the-art technology to maximize operating efficiencies, (vi) constantly review and update its relationships with the major airlines and SABRE to obtain favorable commission structures, and (vii) provide incentives to its sales force through a performance-based compensation structure. See "Business--Operating Strategy." 8 The Company's growth strategy is to (i) grow internally as quickly as practicable in order to be able to service the approximately 14,000 calls per day that the Company is not currently able to service, (ii) further penetrate existing markets and enter new markets by commencing marketing activities and (iii) make strategic acquisitions of other telemarketing travel companies with existing customer bases or valuable intellectual property. See "Business--Growth Strategy." The travel industry is one of the world's largest industries, with $3.4 trillion in sales in 1994 according to the World Travel Organization. According to the Travel Weekly 1996 U.S. travel agency survey (the "Travel Weekly Survey"), revenues for U.S. travel agencies in 1995 exceeded $100 billion, representing an increase of almost 100% since 1985 and 9% since 1993. The U.S. travel agency industry is a highly fragmented industry comprised of numerous small agencies, but trending towards large volume agencies, according to the Travel Weekly Survey. In contrast to 1985, when small agencies (those reporting between $1 million and $5 million in annual sales) were responsible for 62% of all U.S. travel agency revenues, in 1995 such agencies were responsible for only 41% of all U.S. travel agency revenues, even though they comprised 56% of all travel agency locations. The Company believes that only one other travel agency operates in a manner similar to the Company by emphasizing low-cost airfare, nationally advertising toll-free telephone numbers that spell out their respective advertising slogans and processing calls on such numbers at centralized reservation centers. The Company believes that operating in such manner distinguishes the Company and its competitor from other travel agencies as "telemarketing travel companies." See "Business--Industry Overview." On November 11, 1996, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Joseph Stevens Group, Inc. ("Stevens") and its sole shareholder, which agreement was amended and restated as of May 30, 1997. Stevens provides airline tickets for domestic and international travel to consumers through its "1-800-FLY-4-LESS" (1-800-359-4537) toll-free number out of its reservation center in San Diego, California. Pursuant to the Merger Agreement, the parties agreed that upon the closing of the Offering, Stevens will be merged with and into the Company, with the Company as the surviving corporation (the "Stevens Merger"). The Company believes that upon the consummation of the Merger, the combined company will be among the 100 largest travel agencies in the U.S. See "The Stevens Merger." The Company was incorporated in Delaware in November 1995. The Company's principal executive offices are located at 4802 Gunn Highway, Suite 140, Tampa, Florida 33624 and its telephone number is (813) 908-0404. - 2 - 9 THE OFFERING
Common Stock Offered...................... 1,800,000 shares Warrants Offered.......................... 1,800,000 Warrants Common Stock Outstanding: Prior to the Offering................... 5,650,600 shares (1) After the Offering...................... 7,807,129 shares (2)(3) Warrants Outstanding: Prior to the Offering................... none After the Offering...................... 1,800,000 (4) Estimated Net Proceeds.................... $7,577,750(5) Use of Proceeds........................... The Company intends to use the net proceeds of the Offering to repay indebtedness, including $1,000,000 of indebtedness incurred to redeem 250,000 shares of Common Stock; to redeem 540,029 shares of Common Stock, (exclusive of the 250,000 shares redeemed for the Company's $1,000,000 promissory note); to train additional reservation agents and for working capital and general corporate purposes. The Company will not receive any of the proceeds from the sale of securities by the Selling Stockholders. Proposed Trading Symbols(6): Boston Stock Exchange: Common Stock.......................... FLY Warrants.............................. FLYW Nasdaq SmallCap Market: Common Stock.......................... IFLY Warrants.............................. IFLYW Risk Factors:............................. The Common Stock and the Warrants offered hereby are speculative and involve a high degree of risk. Investors should carefully consider the risk factors enumerated herein before investing in the Common Stock and the Warrants. See "Risk Factors" and "Dilution."
-------------------- (1) Excludes (i) 300,000 shares of Common Stock issued in connection with the Stevens Merger and such additional shares as may be issued pursuant to make-whole provisions contained in the Merger Agreement, (ii) 300,000 shares issuable upon exercise of options granted to one of the Company's lenders, (iii) 50,000 shares of Common Stock issuable upon exercise of stock options granted pursuant to the Company's 1997 Stock Option Plan and (iv) 56,529 shares of Common Stock issuable to one of the Company's lenders upon completion of this Offering. (2) Excludes (i) the items referred to in items (ii) and (iii) of footnote 1, (ii) the 1,800,000 shares of Common Stock issuable upon the exercise of the Warrants offered hereby and (iii) the 360,000 shares of Common Stock issuable upon exercise of the Representative's Warrant and the Warrants therein. - 3 - 10 (3) Without giving effect to the redemption of the 540,029 shares of Common Stock to be redeemed with a portion of the proceeds of this Offering, including the 56,529 shares referred to in Note 2. (4) Excludes 300,000 warrants issuable in exchange for options issued to one of the Company's lenders. (5) After subtracting the underwriting discounts and commissions and estimated offering expenses by the Company, including a 3% non-accountable expense allowance to the Representative. (6) Boston Stock Exchange and the Nasdaq SmallCap Market symbols do not imply that an established public trading market will develop for any of these securities, or if developed, that any such market will be sustained. See "Risk Factors--Possible Applicability of Rules Relating to Low-Priced Stock; Possible Failure to Qualify for Boston Stock Exchange or Nasdaq SmallCap Market Listing." - 4 - 11 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
PREDECESSOR BUSINESS(1) THE COMPANY --------------------------------------- --------------------------------------- ELEVEN MONTHS YEAR ENDED ENDED MONTH ENDED YEAR ENDED DECEMBER 31, 1994 NOVEMBER 30, 1995 DECEMBER 31, 1995 DECEMBER 31, 1996 ----------------- ----------------- ----------------- ----------------- Consolidated Income Statement Data: Revenues ........................ $622,017 $1,090,938 $ 133,970 $ 3,235,777 Operating Expenses: Payroll, commissions and employee 790,259 1,115,403 175,604 2,490,770 benefits Telephone ....................... 165,979 392,869 14,527 539,118 Ticket Delivery Expense ......... -- 138,798 17,896 407,579 Advertising ..................... 459,657 333,520 437 137,223 General and Administrative ...... 1,053,530 1,156,777 53,869 1,768,058 Interest Expense ................ 46,417 168,857 4,017 1,114,298 Other Income ...................... -- 41,959 1,782 12,610 Net Loss .......................... (1,894,425) (2,173,327) (130,598) (3,208,659) Net Loss per Share ................ (.50) (.57) $ (.03) $ (.65) Weighted Average Number of Common Shares Outstanding ... 3,830,000 3,830,000 3,840,000 4,947,823 THE COMPANY ------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- 1996 1997 --------- ----------- Consolidated Income Statement Data: Revenues ........................ $ 364,393 $ 1,639,196 Operating Expenses: Payroll, commissions and employee 581,590 848,196 benefits Telephone ....................... 122,496 245,551 Ticket Delivery Expense ......... 51,422 178,967 Advertising ..................... 10,709 45,545 General and Administrative ...... 508,902 593,073 Interest Expense ................ 264,449 45,890 Other Income ...................... -- 2,646 Net Loss .......................... (1,175,175) (315,427) Net Loss per Share ................ $ (.29) $ (.05) Weighted Average Number of Common Shares Outstanding ... 4,116,875 6,251,209
YEAR ENDED DECEMBER 31, 1996 ----------------- Pro Forma Statement of Income Data (unaudited)(2): Commission Revenues................................. $4,900,736 Operating Expenses: General and Administrative.......................... 6,885,270 (2) Interest Expense.................................... 1,379,226 Amortization and Depreciation....................... 295,914 Other Income.......................................... 12,610 Net Loss.............................................. 3,647,064 Net Loss per Share.................................... (.69) Weighted Average Number of Common Shares 5,247,823 Outstanding...........................................
DECEMBER 31, ----------------------------- MARCH 31, 1997 (PRO FORMA 1995 1996 UNAUDITED)(2) ----------- ------------ ----------- Balance Sheet Data: Working Capital (DEFICIT)............................ $ (731,210) $ (199,449) $ 383,144 Total Assets......................................... 1,444,298 2,952,522 5,387,479 Long Term Debt....................................... 60,000 30,000 1,608,600 Total Stockholders' Equity........................... 613,882 1,664,218 - Pro forma Stockholders' Equity....................... - - 2,661,377
- ------------------------- (1) On December 1, 1995, the Company acquired certain of the assets and assumed certain liabilities of 1-800-Low Airfare, Inc. (the "Predecessor Business"). Pro forma results of operations as if the Company had acquired the Predecessor Business on January 1, 1995 would not be materially different and, accordingly, are not presented. (2) The unaudited Pro Forma Summary Combined Statement of Operations for the year ended December 31, 1996, gives pro forma effect to the Stevens Merger (and other adjustments described in these notes) as if the Stevens Merger occurred on January 1, 1996. The Pro Forma Consolidated Balance Sheet Data as of March 31, 1997 gives pro forma effect to the Stevens Merger as if it had occurred on that date. (3) Reflects the issuance of 300,000 shares of Common Stock in connection with the Stevens Merger as if it occurred on January 1, 1996. (4) Pursuant to the Interim Operating Agreement the Company assumed the operations of Stevens as of January 1, 1997 and, therefore, the Statement of Operations data of the Company reflects the combined operations of the Company and Stevens for the first quarter of 1997. - 5 - 12 RISK FACTORS The securities offered hereby are highly speculative and should be purchased only by persons who can afford to lose their entire investment in the Company. In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following factors in evaluating an investment in the securities offered hereby. HISTORY OF OPERATING LOSSES; FUTURE OPERATING RESULTS The Company has incurred losses and generated negative cash flows from continuing operations in each of the Company's fiscal years since inception. For the eleven months ended November 30, 1995, the one month ended December 31, 1995 and the year ended December 31, 1996, the Company's predecessor and the Company incurred losses of $2,173,327, $130,598 and $3,208,659, respectively. There can be no assurance that the Company will operate profitably in the future or that the Company will be successful in implementing and executing its operating and growth strategies. As of December 31, 1996, the Company had negative working capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Company's Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus. CAPITAL REQUIREMENTS The Company is dependent upon the proceeds of this Offering and the anticipated cash flow from operations to complete its current expansion plans. Should the Company's cash flow from operations fail to meet anticipated levels, or should its costs and capital expenditures exceed the amounts currently expected to be required, or should the Company be unable to obtain additional capital on acceptable terms, the Company could be required to seek unanticipated financing in the future. There can be no assurance that the Company will be able to raise such capital or financing when needed or on acceptable terms, and therefore, the Company may be unable to achieve its goals, including anticipated growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business--Operating Strategy." RAPID EXPANSION OF BUSINESS The Company's operations and business have expanded substantially, with a large increase in reservation agents and sales in a relatively short period of time. To properly manage its rapid growth, the Company has been and will be required to expend significant management and financial resources. There can be no assurance that the Company's management will be able to manage its growth and operate a larger organization efficiently or profitably. See "Business Operating Strategy." - 6 - 13 COMPETITION The travel agency business is characterized by intense competition. Many of the Company's competitors, which include local, regional and national travel agencies, possess significantly greater financial, personnel and other resources than the Company. Certain of the Company's competitors use a low-price discount strategy to expand their market share and a number of travel agencies use toll-free phone lines that compete with the Company's services. If any of the companies using a discount strategy were to focus their marketing efforts on the Company's telemarketing niche, the Company's results of operations could be adversely affected. In addition, the Internet permits consumers to have direct access to travel providers as well as distribution systems like the SABRE system, thereby by-passing both travel agents and global distribution systems. In recent years, airline ticket prices have decreased primarily as a result of lower costs and greater competition in the airline industry. The Company's revenues are based upon the number of tickets it sells and on a percentage of the price of such tickets and are therefore adversely affected by decreases in airline tickets. The Company believes that significant price-based competition will continue to exist in the airline industry and the Company's markets for the foreseeable future. Any significant decrease in airline ticket prices could adversely affect the Company's results of operations. The Company may experience increased competition in the future as its competitors combine to form larger companies. There can be no assurance that the Company will be competitive with larger travel agencies in the future or that the Company will maintain its size relative to its competitors. See "Business--Competition." RISKS RELATING TO OVERRIDE COMMISSIONS The Company is able to offer its customers attractive airfares in large part due to the favorable override commission arrangements it has obtained for selling tickets on Continental, United, Northwest, TWA, Carnival, America West, America Trans Air, Trans Brazil, Mexicana and Korean airlines. For example, the Company is able to offer attractive fares on TWA because of its override commission arrangement with a consolidator which sells tickets on TWA at a discount (the "TWA Discounter"). The Company estimates that the TWA Discounter will be able to continue selling tickets on TWA only until the year 2001. Moreover, there can be no assurance that the Company's agreement with the TWA Discounter will be extended beyond its current expiration date in February 1998. In addition, the override commission agreements with the other airlines are on a year-to-year basis. If and when the TWA Discounter is no longer able to sell TWA tickets, or such agreement otherwise expires, or if the Company is unable to extend its current override commission arrangements with other carriers or enter into similar arrangements with similar carriers, the Company could lose its competitive advantages and its business could be materially adversely affected. See "Business--Competition" and "--Operations." CHALLENGES OF BUSINESS INTEGRATION The full benefits of the combination of the Company and Stevens will require integration of each company's administrative, finance, sales and marketing organizations, the coordination of each company's sales and marketing efforts and the implementation of appropriate operational, financial and management systems and controls. This will require substantial attention from the senior management teams of the Company and Stevens, which have limited experience integrating the operations of companies of the size of the Company and Stevens and whose members have not previously worked together. The diversion of management attention, as well as any other difficulties which may be encountered in the transition and integration process, could have an adverse impact on the revenue and operating results of the Company. There can be no assurance that the Company will be able to integrate its operations and those of Stevens successfully. In addition, the Unaudited Pro Forma Combined Financial Information contains adjustments relating to the integration of Stevens' operations with those of the Company. Although these adjustments are based upon available information and certain assumptions the Company considers reasonable as of the date of this Prospectus, actual amounts could differ from those set forth therein. Moreover, no assurance can be given that the anticipated impact of the integration of Stevens upon the Company's financial condition and results of operations as presented in such pro forma information will be as presented. See "Unaudited Pro Forma Combined Financial Information." RISKS RELATING TO THE AIRLINE INDUSTRY Developments in the airline industry may result in a decrease in the price or number of tickets the Company sells. See "Business--Competition." Concerns about passenger safety may result in a decrease in passenger air travel and a consequent decrease in the number of tickets the Company sells. There can be no assurance that any such developments will not occur or that the Company will not be adversely affected by any such decrease in the level of passenger air travel. DEPENDENCE ON SABRE SYSTEM The Company's ability to quote air travel ticket prices, make reservations and sell tickets is dependent upon the performance of the SABRE electronic travel reservation system. If the SABRE system were to cease functioning, the Company would not be able to conduct operations until a replacement system were installed and became operational. There can be no assurance that a replacement system could be obtained or, if obtained, installed in time to successfully continue operations. During any interruption in the operation of SABRE, the Company would lose revenues. Other travel agencies using other travel reservation systems would not be subject to such interruption of their operations, and the Company may lose market share to such competitors. Upon the interruption of the - 7 - 14 operation of the SABRE system, the Company could decide to commence operations with another travel reservation system. See "Business--SABRE technology." Such a change in reservation systems could incur substantial expenses for acquiring the right to use such system and retraining its reservation agents. In addition, any impairment of the SABRE system which does not cause it to cease operations could, nevertheless, adversely affect the quality of the Company's services, resulting in lost revenues or market share and could require the Company to subscribe to a different travel reservation system. DEPENDENCE UPON KEY PERSONNEL The success of the Company is substantially dependent upon the continuing services of Mark D. Mastrini, Jerrold B. Sendrow and Biaggio Bellizzi, as well as other key personnel. While the Company has employed a number of executives with industry experience, the loss of Messrs. Mastrini, Sendrow or Bellizzi could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not maintain life insurance policies on the lives of Messrs. Mastrini, Sendrow or Bellizzi. See "Management." RISKS RELATING TO INTELLECTUAL PROPERTY The Company markets its services in the United States under the names, "1-800-LOW-AIR-FARE," "1-800-FLY-4-LESS" and "1-888-999-VUELA." "1-800-FLY-4-LESS," together with its logo, is a federally registered service mark in the name of the Company. The Company has filed an application to register the "1-800-LOW-AIR-FARE" name and logo and the Spanish language name, "1-888-999-VUELA," as federal service marks with the U.S. Patent and Trademark Office. There can be no assurance that such service marks will issue or of the effect such failure might have on the Company. CONTROL BY EXISTING STOCKHOLDERS Following the completion of this Offering, the existing stockholders of the Company will own in excess of 50% of the outstanding shares of Common Stock. As a result, these persons and entities effectively will be able to control all matters requiring approval of the stockholders of the Company, including the election of the entire Board of Directors. See "Principal Stockholders" and "Description of Securities." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS Certain provisions of the Company's Amended and Restated Certificate of Incorporation (the "Certificate") and Amended and Restated Bylaws ("Bylaws") may be deemed to have anti-takeover effects and may discourage, delay, defer or prevent a change in control of the Company. These provisions: (i) divide the Company's Board of Directors into three classes, each of which will serve for different three-year periods; (ii) provide that the stockholders may remove directors from office only for cause and by a supermajority vote; (iii) provide that special meetings of the stockholders may be called only by the Board of Directors or upon the written demand of the holders of not less than fifty percent of the votes entitled to be cast at a special meeting; and (iv) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at annual stockholders' meetings. In addition, certain provisions of the Delaware General Corporation Law also may be deemed to have certain anti-takeover effects. See "Description of Securities--Anti-takeover Effects of Certain Provisions of the Company's Certificate of Incorporation and Bylaws." PREFERRED STOCK The Certificate authorizes the issuance of 1,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of the holders of Common Stock. In the event of issuance, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control of - 8 - 15 the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurance that the Company will not do so in the future. See "Description of Securities." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 7,807,129 shares of Common Stock outstanding (8,077,129 if the Representative's over-allotment option is exercised in full), of which 1,800,000 shares of Common Stock are being offered by the Company and 2,580,534 shares of Common Stock are being offered by the Selling Stockholders (the "Registered Shares"). ____ shares of the previously issued and outstanding Common Stock will become available for resale 90 days after the effectiveness of this Offering, and all of the previously issued and outstanding the Common Stock will become available for resale within 6 months after the effectiveness of this Offering, subject in all events to the provisions of Rule 144 under the Securities Act ("Rule 144"). The holders of 2,334,466 shares, not included in the Registered Shares, have agreed not to Sell such shares for a period of two years after the effectiveness of this Offering. The Registered Shares will be freely transferable and tradable in the United States (except by "affiliates" of the Company) without restrictions or further registration under the Securities Act, immediately upon the effectiveness of this Offering. However, (i) holders of 175,000 Registered Shares have agreed not to offer, sell or otherwise dispose of ("Sell") such Registered Shares for a period of 30 days after the effectiveness of this Offering, (ii) the holders of 665,000 Registered Shares have agreed not to sell such shares for a period of 180 days after the date of this Prospectus, and (iii) holders of 102,000 Registered Shares have agreed not to Sell such shares for a period of one year after the effectiveness of this Offering. The Company is unable to predict the effect, if any, that sales of the Registered Shares or sales of shares under Rule 144 (or the potential for such sales) or otherwise may have on the market price of the Common Stock prevailing from time to time. Future sales of substantial amounts of Common Stock in the public market could impair the Company's ability to raise capital through an offering of securities and may adversely affect the market price of the Common Stock. See "Shares Eligible for Future Sale." ARBITRARY OFFERING PRICE AND EXERCISE PRICE OF WARRANTS The public offering price of the Common Stock and the Warrants and the exercise price of the Warrants, as well as the exercise price of the warrants underlying the Representative's Warrant, have been determined solely by negotiations between the Company and the Representative. Among the factors considered in determining these prices were the Company's current financial condition and prospects and the general condition of the securities market. However, the public offering price of the Common Stock and the Warrants and the exercise price of the Warrants and the warrants underlying Representative's Warrant do not necessarily bear any relationship to the Company's assets, book value, earnings or any other established criterion of value. See "Underwriting." DILUTION Assuming an initial offering price of $5.00 per share, investors purchasing shares of Common Stock in this offering will experience immediate dilution of $4.18 per share. See "Dilution." The Merger Agreement with Stevens provides that under certain circumstances the Company shall issue additional shares of Common Stock to the sole shareholder of Stevens on the second anniversary of the closing of the Offering. If the current market value on such date of the Common Stock issued to Stevens' sole shareholder on the closing of the Offering (the "IPO Share Value") is less than $2,571,429 million, then the Company shall issue to Stevens' sole shareholder additional shares of Common Stock with a current market value on such date equal to the difference between the IPO Share Value and $2,571,429 million. The IPO Share Value includes the aggregate amount of cash and the fair market value of any other assets received in connection with the sale of any Common Stock issued to Stevens' sole shareholder on the Closing. See "The Stevens Merger." NECESSITY TO MAINTAIN CURRENT PROSPECTUS AND REGISTRATION STATEMENT The Company must maintain an effective registration statement on file with the Commission before any Warrant may be redeemed or exercised. It is possible that the Company may be unable to cause a registration statement covering the Common Stock underlying the Warrants to be effective. It is also possible that the Warrants could be acquired by persons residing in states where the Company is unable to qualify the Common Stock underlying the Warrants for sale. In either event, the Warrants may expire, unexercised, which would result in the holders losing all the value of the Warrants. STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS Holders of the Warrants have the right to exercise the Warrants only if the underlying shares of Common Stock are qualified, registered or exempt from registration under applicable securities laws of the states in which the various holders of the Warrants reside. The Company cannot issue shares of Common Stock to holders of the Warrants in states where such shares are not qualified, registered or exempt. The Company has undertaken, however, to qualify the Warrants for listing on the Boston Stock Exchange which provides for blue sky registration in over 20 states. See "Description of Securities-- Warrants." - 9 - 16 REDEEMABLE WARRANTS AND IMPACT ON INVESTORS The Warrants are subject to redemption by the Company in certain circumstances. The Company's exercise of this right would force a holder of a Warrant to exercise the Warrant and pay the exercise price at a time when it may be disadvantageous for the holder to do so, to sell the Warrant at the then current market price when the holder might otherwise wish to hold the Warrant for possible additional appreciation, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrant in the event of a call for redemption. Holders who do not exercise their Warrants prior to redemption by the Company will forfeit their right to purchase the shares of Common Stock underlying the Warrants. The foregoing notwithstanding, the Company may not redeem the Warrants at any time that a current registration statement under the Securities Act covering the sale of the shares of Common Stock issuable upon exercise of the Warrants is not then in effect. See "Description of Securities--Warrants." REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET Although the Representative has advised the Company that it intends to make a market in the Common Stock and the Warrants, it will have no legal obligation to do so. The prices and the liquidity of the Common Stock and the Warrants may be significantly affected by the degree, if any, of the Representative's participation in the market. No assurance can be given that any market making activities of the Representative, if commenced, will be continued. See "Underwriting." POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCKS OR "PENNY STOCK"; POSSIBLE FAILURE TO QUALIFY FOR BOSTON STOCK EXCHANGE OR NASDAQ SMALLCAP MARKET LISTING The Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions. While the Company anticipates that the price at which the shares of Common Stock offered to the public pursuant to this Offering will be equal to or in excess of $5.00, the Warrants offered hereby will initially be "penny stocks" and become subject to rules that impose additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors, unless the Common Stock and the Warrants are listed on the Boston Stock Exchange. There can be no assurance that the Company will be able to satisfy the listing criteria of the Boston Stock Exchange or that the Common Stock or the Warrants will trade for $5.00 or more per security after the Offering. Consequently, the "penny stock" rules may restrict the ability of broker/dealers to sell the Company's securities and may affect the ability of purchasers in this Offering to sell the Company's securities in a secondary market. Although the Company has applied for listing of the Common Stock and the Warrants on the Boston Stock Exchange and the Nasdaq SmallCap Market, there can be no assurance that such application will be approved or that a trading market for the Common Stock and the Warrants will develop or, if developed, will be sustained. Furthermore, there can be no assurance that the securities purchased by the public hereunder may be resold at their original offering price or at any other price. In order to qualify for initial listing on the Boston Stock Exchange, a company must, among other things, have at least $3,000,000 in total assets (of which $2,000,000 are tangible assets), a public float of at least 750,000 shares (with an aggregate value of at least $1,500,000), a minimum of 600 beneficial public stockholders owners (exclusive of affiliates) and a minimum bid price for its securities of $2.00 per share. For continued listing on the Boston Stock Exchange, a company must maintain a public float of 150,000 shares (having a value of at least $500,000) and $1.0 million in total assets, 250 beneficial public stockholders, and stockholders' equity of $500,000. The failure to meet these and other maintenance criteria in the future may result in the discontinuance of the listing of the Common Stock and Warrants on the Boston Stock Exchange. In order to qualify for initial listing on the Nasdaq SmallCap Market, a company must, among other things, have at least $4,000,000 in total assets, $2.0 million of total capital and surplus, $1.0 million "public float," and a minimum bid price for its securities of $3.00 per share. For continued listing on the Nasdaq SmallCap Market, - 10 - 17 a company must maintain a $200,000 market value of the public float, $2.0 million in total assets and $1.0 million in total capital and surplus. In addition, continued inclusion requires two market makers and a minimum bid of $1.00 per share. The failure to meet these maintenance criteria in the future may result in the discontinuance of the listing of the Common Stock and Warrants on the Nasdaq SmallCap Market. If the Company is or becomes unable to meet the listing criteria (either initially or on a continued basis) of the Boston Stock Exchange or the Nasdaq SmallCap Market and is never traded or becomes delisted therefrom, trading, if any, in the Common Stock and the Warrants would thereafter be conducted in the over-the-counter market in the so-called "pink sheets" or, if then available, the "Electronic Bulletin Board" administered by the National Association of Securities Dealers, Inc. (the "NASD"). In such event, the market price of the Common Stock and the Warrants may be adversely impacted. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of the Common Stock and the Warrants. EXERCISE OF REPRESENTATIVE'S PURCHASE WARRANTS In connection with this Offering, the Company will sell to the Representative, for nominal consideration, a Representative's Warrant to purchase 180,000 shares of Common Stock and 180,000 Warrants from the Company. The Representative's Warrant will be exercisable for a four-year period commencing one year from the effective date of this Offering at an exercise price of 120% of the price at which the Common Stock and Warrants are sold to the public, subject to adjustment. The Representative's Warrant may have certain dilutive effects because the holders thereof will be given the opportunity to profit from a rise in the market price of the underlying shares with a resulting dilution in the interest of the Company's other shareholders. The terms on which the Company could obtain additional capital during the life of the Representative's Warrant may be adversely affected because the holders of the Representative's Warrant might be expected to exercise them at a time when the Company would otherwise be able to obtain comparable additional capital in a new offering of securities at a price per share greater than the exercise price of the Representative's Warrant. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES Prior to this Offering, there has been no public market for the Common Stock or the Warrants. Although the Company has applied to list the Common Stock and the Warrants on the Boston Stock Exchange and the Nasdaq SmallCap Market, there can be no assurance that a regular trading market will develop (or be sustained, if developed) for the Common Stock or the Warrants upon completion of this Offering, or that purchasers will be able to resell their Common Stock or Warrants or otherwise liquidate their investment without considerable delay, if at all. Recent history relating to the market prices of newly public companies indicates that, from time to time, there may be significant volatility in their market price. There can be no assurance that the market price of the Common Stock or the Warrants will not be volatile as a result of a number of factors, including the Company's financial results or various matters affecting the stock market generally. - 11 - 18 NO DIVIDENDS The Company has not declared or paid any cash dividends on its Common Stock since its inception. The Company currently intends to retain all earnings for the operation and expansion of its business and does not anticipate paying any dividends in the foreseeable future. See "Dividend Policy." FORWARD-LOOKING STATEMENTS This Prospectus includes "forward looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. The actual results of the Company may differ significantly from the results discussed in such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the factors discussed in this "Risk Factors" section. The safe harbors contained in Section 27A of the Securities Act and Section 21E of the Securities Act, which apply to certain forward-looking statements, are not applicable to this Offering. - 12 - 19 THE STEVENS MERGER On November 11, 1996, the Company entered into an Agreement and Plan of Merger with The Joseph Stevens Group, Inc. and its sole shareholder which Agreement was amended and restated in its entirety effective May 30, 1997. Pursuant to the Merger Agreement, as amended and restated (the "Merger Agreement"), upon the closing of the Offering, (i) Stevens will be merged with and into the Company, with the Company as the surviving corporation and (ii) the Company will issue an aggregate of 300,000 shares of Common Stock to Steven's sole stockholder in exchange for all of the outstanding capital stock of Stevens plus such additional shares of Common Stock as may be issued pursuant to make-whole provisions contained in the Merger Agreement. The Merger Agreement also provided for the escrow of the Company's cash in the amount of $46,665 and the issuance by the Company of a promissory note in the amount of $1,578,335 payable fifteen days after the date of this Prospectus. Upon consummation of this Offering, such cash and promissory note will be released to the sole shareholder of Stevens. The Merger Agreement also provides that if on the second anniversary of the date of the closing of this Offering the value of the portion of the 300,000 shares issued to the Stevens' shareholder, then held by the Stevens' shareholder, together with the fair market value of any consideration received in exchange for the shares no longer held by the Stevens' shareholder, is less than $2,571,429, the Company shall issue to the Stevens' shareholder such number of shares of the Company's Common Stock, based upon its then bid price, as is necessary to make-up any such deficiency. Stevens provides airline tickets for domestic and international travel to consumers through its "1-800-FLY-4-LESS" (1-800-359-4537) toll-free number. Stevens' 50 reservation agents provide reservations for airline tickets out of its reservation center in San Diego, California. The principal assets of Stevens are its federally registered service mark, "1-800-FLY-4-LESS," and the related toll-free telephone number, "1-800-359-4537," through which customers call its reservation center located in San Diego, California. In connection with the Merger Agreement, the Company and Stevens entered into an Interim Operating Agreement pursuant to which the Company has been operating Stevens' business effective January 1, 1997, until the closing of the Offering. In connection therewith, Stevens granted to the Company a license to use its service mark and toll free number, and the Company leased Stevens' equipment and reservation center for the period from January 1, 1997, until the closing of the Offering. In anticipation of the consummation of the Merger, the Company replaced Stevens' former reservation system with the Company's Turbo SABRE system and replaced Stevens' management with the Company's management. Upon consummation of the Offering, the Company's Tampa and San Diego reservation systems will continue to operate with the Company's Turbo SABRE system and under the Company's management. See "Business Operations." - 13 - 20 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Common Stock and Warrants offered hereby (assuming an initial public offering price of $5.00 per Share and $.125 per Warrant) are estimated to be approximately $7,577,750 (approximately $8,781,613 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds of the Offering as follows:
PERCENT OF USE DOLLAR AMOUNT NET PROCEEDS --- ------------- ------------ Payment of note issued in connection with the redemption of 250,000 shares of Common Stock ............ $1,000,000 13.20% Redemption of 540,029 shares of Common Stock .............. 2,000,000 26.40% Repay note issued in connection with the Stevens Merger................................................... 1,578,335 20.83% Repay note to Perry Trebatch............................... 250,000 3.30% Training reservation agents................................ 1,200,000 15.84% Advertising................................................ 1,000,000 13.20% Property and Equipment..................................... 50,000 .64% Working capital............................................ 499,415 6.59%
$1,000,000 of the net proceeds will be used to retire the Company's promissory note in such amount issued as consideration for the redemption of 250,000 shares formerly held by a stockholder of the Company. Such note was issued on June __, 1997, bears no interest and is due on the fifth day after the closing of this Offering. Approximately $2,000,000 of the net proceeds will be used to redeem 540,029 shares of the Company's Common Stock currently held by two stockholders. Approximately $1,578,335 of the net proceeds will be used to retire the Company's promissory note issued to the sole shareholder of Stevens in connection with the Merger, bearing interest at the prime rate reported in The Wall Street Journal as the base rate on corporate loans posted by at least 75% of the 30 largest banks in the United States (___ % at _________, 199__), and the principal and accrued and unpaid interest of which is payable on the 20th day after the closing of the Offering. Approximately $250,000 of the net proceeds will be used to retire the Company's promissory note to one of its stockholders in the principal amount of $225,000, bearing interest at the rate of 18% per annum, and the principal and accrued and unpaid interest of which is payable on July 31, 1997. If such note is not paid on its due date, it will become payable in twelve equal monthly installments commencing August 1, 1997. See "Certain Transactions." Approximately $1.2 of the net proceeds will be used to support the Company's training program for reservation agents. Approximately $1,000,000 of the net proceeds will be used for advertising and marketing purposes. The Company expects that with the proceeds of this Offering it will begin to expand its marketing programs beyond Yellow Pages Directories into selected print and media outlets. Approximately $50,000 of the net proceeds will be used to purchase property and equipment. Inasmuch as the Company's facilities are currently state-of-the art, it currently anticipates that it will spend only a small portion of the Offering proceeds to maintain its plant and equipment. The Company expects to use the approximately $499,415 balance of the net proceeds for working capital and general corporate purposes. Proceeds not immediately required for the purposes described above will be invested principally in United States government securities, short-term certificates of deposit, money market funds or other short-terms interest-bearing investments. DIVIDEND POLICY To date, the Company has neither declared nor paid any dividends on its Common Stock nor does the Company anticipate that such dividends will be paid in the foreseeable future. Rather, the Company intends to retain any earnings to finance the growth and development of its business. Any payment of cash dividends on its Common Stock in the future will be dependent, among other things, upon the Company's earnings, financial condition, capital requirements and other factors which the Board of Directors deems relevant. - 14 - 21 CAPITALIZATION The following table sets forth (i) the capitalization of the Company at March 31, 1997, (ii) the Pro Forma capitalization of the Company as of such date after giving effect to the Stevens Merger, and (iii) the Pro Forma capitalization of the Company as of such date after giving effect to the Stevens Merger and the sale by the Company of 1,800,000 shares of Common Stock and 1,800,000 Warrants offered hereby at an assumed initial public offering price of $5.00 per share of Common Stock and $0.125 per Warrant (after deduction of the underwriting discount and estimated offering expenses) and the application of the net proceeds as described under "Use of Proceeds." This table should be read in conjunction with Financial Statements of the Company, the Predecessor Business and Stevens, including notes thereto, included elsewhere herein.
March 31, 1997 ----------------- Pro Forma Actual(1) Pro Forma(2) As Adjusted(3) --------- ------------ -------------- Current Maturities of long term debt ............................................................ $ 280,750 280,750 -- Long-term debt .............................................................. 30,000 1,608,000 -- ----------- ----------- ----------- 310,750 1,888,750 -- =========== =========== =========== Preferred stock--$.01 par value; 1,000,000 shares authorized, none issued or outstanding ................................... -- -- -- Common stock--$.01 par value; 20,000,000 shares authorized, 5,951,209 shares issued and outstanding, 6,251,209 shares issued and outstanding Pro Forma and 7,261,180 shares outstanding Pro Forma, As Adjusted (4). ............................................................. 59,512(4) 62,512(5) 80,512(5) Additional Paid-In Capital................................................... 4,976,259 6,285,845 13,845,595 Stock Subscriptions Receivable............................................... (32,296) (32,296) (32,296) Retained Deficit............................................................. (3,654,684) (3,654,684) (3,654,684) ----------- ----------- ----------- Total Stockholders' Equity................................................... 1,348,791 2,661,377 10,239,127 ----------- ----------- ----------- Total capitalization............................................. 1,659,541 4,550,127 10,239,127 =========== =========== ===========
- ------------------------- (1) Reflects the actual short-term and long-term indebtedness and capitalization of the Company without giving effect to the Stevens Merger or the Offering contemplated hereby. (2) Reflects the pro forma short-term and long-term indebtedness and capitalization of the Company after giving effect to the consummation of the Stevens Merger as if it occurred on March 31, 1997. (3) Reflects the pro forma short-term and long-term indebtedness and capitalization of the Company after giving effect to the Stevens Merger as adjusted to give effect to the consummation of the Offering and the application of the estimated net proceeds as described under "Use of Proceeds." (4) Excludes (i) 300,000 shares of Common Stock issued in connection with the Stevens Merger, (ii) 300,000 shares issuable upon exercise of options granted to one of the Company's lender and (iii) 50,000 shares of Common Stock issuable upon exercise of stock options granted pursuant to the Company's 1997 Stock Option Plan, (iv) the 1,800,000 shares of Common Stock issuable upon the exercise of the Warrants offered hereby and (v) the 360,000 shares of Common Stock issuable upon exercise of the Representative's Warrant and the Warrants therein. (5) Excludes (i) 300,000 shares issuable upon exercise of options granted to one of the Company's lenders and (ii) 50,000 shares of Common Stock issuable upon exercise of stock options granted pursuant to the Company's 1997 Stock Option Plan, (iii) the 1,800,000 shares of Common Stock issuable upon the exercise of the Warrants offered hereby and (iv) the 360,000 shares of Common Stock issuable upon exercise of the representative's Warrant and the Warrants therein. - 15 - 22 DILUTION The difference between the initial public offering price per share of Common Stock and the pro forma net tangible book value per share after this Offering constitutes the dilution to investors in this Offering. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of outstanding shares of Common Stock. At March 31, 1997, the pro forma net tangible book value of the Company was $(985,384) or $(.16) per share, after giving effect to the consummation of the Stevens Merger and the issuance of 300,000 shares of Common Stock in connection therewith. Without taking into account any changes in net tangible book value attributable to operations after March 31, 1997, other than the issuance and sale by the Company of 1,800,000 shares of Common Stock offered hereby at an assumed public offering price of $5.00 per share and 1,800,000 Warrants offered hereby at the assumed offering price of $.125 per Warrant, and the application of the net proceeds as described under "Use of Proceeds," the pro forma net tangible book value of the Company as of December 31, 1997 would have been $6,592,366, or $.82 per share. This represents an immediate increase in net tangible book value of $.98 per share to the existing shareholders and an immediate dilution of $4.18 per share to new investors. The following table illustrates this dilution, on a per share basis: Assumed initial public offering price of Common Stock .......................... - $ 5.00 Net tangible book value as of March 31, 1997 .............................. $ .00 Pro forma net tangible book value after giving effect to the Stevens Merger (.16) Increase in net tangible book value attributable to new investors ......... .98 Pro forma net tangible book value after offering ............................... .82 -------- Total dilution to new investors ................................................ $ 4.18 ========
If the Representative's over-allotment option is exercised in full, the pro forma net tangible book value of the Company as of March 31, 1997 will be $7,796,229, or $ .94 per share. This represents an immediate increase in net tangible book value of $1.09 per share to the existing shareholders and an immediate dilution of $4.07 per share to new investors. The following table summarizes, as of March 31, 1997, the total number of shares of Common Stock purchased from the Company, the aggregate consideration paid and the average price per share paid (assuming an initial public offering price of $5.00 per share) by the existing shareholders and the new investors.
SHARES PURCHASED TOTAL CONSIDERATION ---------------------------- -------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------- ------------ ------------ ----------- -------------- Existing Shareholders............... 6,251,209 77.6% 2,481,404 21.6% $ .40 New Investors....................... 1,800,000 22.4% 9,000,000 78.4% $5.00 ------------- ------------ ----------- ----------- ----- Total............................ 8,051,209 100% $11,481,404 100% $1.43 ============= ============ =========== =========== =====
- -------------------- (1) The computation in both of the foregoing tables assume no exercise of the Representative's Warrant. See "Description of Securities." If the Underwriters' over-allotment option is exercised in full, the new investors will have paid $10,608,750 for 2,070,000 shares of Common Stock, representing 60.7% of the total consideration for 15.4% of the total number of shares outstanding. - 16 - 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of the financial condition and results of operations of the Company and should be read in conjunction with the financial statements of the Company and related notes thereto included elsewhere in this Prospectus. OVERVIEW The Company operates as a telemarketing travel agency, providing air transportation reservation services for domestic and international travel to customers through its easy to remember, toll-free numbers. The Company strives to provide its customers with the lowest-priced airfare available for a particular travel route at the time of reservation by utilizing the SABRE travel reservation system. The Company was formed in November 1995 to acquire certain assets of and assume certain liabilities of 1-800- Low Airfare, Inc. (the "Predecessor Business"). The acquisition was consummated on December 1, 1995. The Predecessor Business had commenced operations in 1993. To expand its operations, in November 1996 the Company entered into a Merger Agreement with Stevens and its sole shareholder. Stevens is one of the largest independent travel agencies in the United States specializing in the telemarketing of airline tickets. Pursuant to the Merger Agreement, simultaneously with the closing of this Offering, Stevens will be merged with and into the Company, with the Company as the surviving corporation. The Company's operating revenues presently consist, and for the immediate future will continue to consist, principally of (i) commissions on air travel tickets; (ii) override commissions on air travel tickets booked on airlines with which the Company has override agreements; (iii) segment incentives under the Company's agreement with SABRE; (iv) co-op promotions with suppliers of travel related products and services; and (v) service fees charged to customers. The Company's revenues are a function of the number and price of the tickets its sells and the percentage of the price of such tickets it retains as commissions and override commissions, as well as on the service charge imposed on customers. Although the Company entered into its first override agreement in December 1995, it only began to achieve the volume necessary to benefit from these agreements in the third quarter of 1996. The Company entered into an agreement with the TWA Discounter on March 1, 1996. As a result of its override agreements and its agreement with the TWA Discounter, the Company is able to charge its customers a $10 or $20 service charge, depending on the price of the ticket, while still offering low priced tickets. The Company only began to impose this service charge in January 1997. The Company anticipates that as the volume of tickets sold increases and the proportion of tickets sold which are subject to an override agreement increases, the percentage of the price of the tickets sold retained by the Company will increase. Set forth below are the gross dollar amounts of the reservations booked and commissions received for the periods indicated.
Eleven Months Quarter Year Ended Ended Month Ended Year Ended Ended December 31, November 30, December 31, December 31, March 31, 1994 1995 1995 1996 1997 ------------ ------------- ------------ ------------ --------- Revenues (including override) $ 622,017 $1,090,938 $ 133,970 $ 3,235,777 $ 1,639,196 Gross Reservations 5,294,310 9,647,090 1,609,426 23,590,782 11,165,266
The Company's operating expenses include primarily those items necessary to advertise its services, maintain and staff its travel reservation centers, including payroll, commissions and benefits; telephone; general and administrative expenses, including rent and computer maintenance fees; and, to date, interest, fees and expenses associated with the Company's financing activities. RESULTS OF OPERATIONS For purposes of the discussion below, the results of operations of the Predecessor Business for the period from January 1, 1995, through November 30, 1995, have been combined with the results of operation for the Company for the month of December 1995. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues for the year ended December 31, 1996 ("Fiscal '96") increased 164% to $3,235,777 compared to $1,222,683 for the year ended December 31, 1995 ("Fiscal '95"). The increased revenues reflect the growing consumer awareness of the services provided by the Company and an increase in the volume of calls handled as a result of the growth in the number of the Company's telephone reservation agents from approximately 13 as of December 31, 1995, to 150 as of December 31, 1996. Operating expenses for Fiscal '96 increased 81% to $6,457,046 compared to $3,572,574 for Fiscal '95. The increase in operating expenses resulted primarily from an increase in the Company's payroll, commissions and employee benefits expenses, which increased 92% to $2,490,770 in Fiscal '96 from $1,291,007 in Fiscal '95. Consistent with the increase in the volume of tickets sold by the Company, the Company also -17- 24 recorded increases in its telephone and ticket delivery expenses, though these increases were not proportional with the increase in the Company's volume. Also contributing significantly to the increase in the Company's operating expenses was an increase in the Company's interest expense by 544% to $1,114,298 in Fiscal '96 from $172,874 for Fiscal '95. A portion ($1,047,093) of the interest expense incurred during Fiscal '96 represents share issued as compensation for loans made to the Company. During 1996 the Company's operating loss, net of interest changes resulting from shares, was $2,161,566 as compared to an operating loss of $2,303,925 for Fiscal '95. The consistency of the Company's operating loss reflects the fact that while the volume of business increased, the Company's operating expenses, inclusive of interest charges, increased by an approximately equal amount. LIQUIDITY AND CAPITAL RESOURCES The Company commenced operations in December 1995 upon the acquisition of certain assets of the Predecessor Business for $1,407,008 of which $10,000 was paid in cash, $90,000 was paid by the delivery of the Company's Promissory Note; $720,480 was satisfied through the issuance of 600,400 shares of the Company's Common Stock and $586,528 was satisfied through the assumption of certain liabilities of the Predecessor Business. In addition, the Company agreed to issue 300,000 shares of its Common Stock to creditors of the Predecessor Business which elected to convert their claims against the Predecessor Business into stock at the rate of $10.00 per share. Pursuant to this Agreement, during Fiscal '96 the Company issued 153,934 shares of Common Stock to creditors of the Predecessor Business and 146,066 shares of its Common Stock to the Predecessor Business. To date the Company has financed its operations from capital contributions, net of related expenses, in the amount of $2,455,902; loans in the amount of $310,750; and through services provided by certain vendors to be paid out of future revenues. The Company, including its Predecessor, used $1,293,714 in operating activities in Fiscal '95 and $1,095,150 for operating activities in Fiscal '96. The decrease in cash used in operating activities reflects the fact that a significant portion of the Company's interest expense incurred during Fiscal '96 was satisfied through the issuance of shares of the Company's Common Stock. The Company anticipates that it will continue to use cash in its operating activities for the immediate future. During Fiscal '96 the Company's capital expenditures were approximately $371,000 primarily for leasehold improvements. Because the Company's computers and telephone switching equipment are already in place, the Company does not anticipate substantial capital expenditures during the current fiscal year. QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996 Revenue for the quarter ended March 31, 1997 increased 350% to $1,639,196 compared to $364,393 for the quarter ended March 31, 1996. The increase in revenue was the direct result of the increase in gross reservations booked of 195% in the quarter ended March 31, 1997 ($11,165,266) as compared to the quarter ended March 31, 1996 ($3,779,151). Approximately $5,858,000 of the gross reservation increase is applicable to the assumption of the operations of the Joseph Stevens Group, Inc. ("Stevens") in January 1997. In addition to the increase in revenue applicable to increased gross reservations, the commissions and fees earned increased to 14.7% of gross reservations for the quarter ended March 31, 1997 compared to 9.6% for the quarter ended March 31, 1996. This 53% increase in commissions and fee rates is the result of volume incentives provided by the airlines. Operating expenses for the quarter ended March 31, 1997 increased 50% to $1,911,379 compared to $1,275,119 for the quarter ended March 31, 1996. The operating expenses did not increase proportionate to revenues due to the fact that many expenses remain constant over broad ranges of revenue (i.e. office rent, utilities, management wages, etc.) and a new agreement with telephone service provider helped control the telephone expense. Interest expense declined by $218,000 in the quarter ended March 31, 1997 as compared to the quarter ended March 31, 1996, due to the fact that no penalty interest was due on outstanding notes at March 31, 1997. During the quarter ended March 31, 1997 the Company's operating loss declined to $315,427 from $1,175,175 for the quarter ended March 31, 1996. This decline was the result of revenue increasing faster than related expenses plus the decline in the interest expense. LIQUIDITY AND CAPITAL RESOURCES The Company used $288,159 of cash in operating activities during the quarter ended March 31, 1997 and used $757,566 of cash flows in operating activities during the quarter ended March 31, 1996. The 1996 operating activity use of cash was financed by the borrowing of $125,000 and the sale of common stock of $983,550. In subsequent quarters of 1996 the Company raised an additional $1,497,854 which was used to finance additional loss of cash flows from operating activities for the last three quarters of 1996 and the first quarter of 1997. In 1996 the Company's capital expenditures were $46,703. Because the Company's computers and telephone switching equipment are already in place, the Company does not anticipate substantial capital expenditures in the future. The Company anticipates that approximately $499,415 of the net proceeds of this Offering will be available to be used as working capital. In addition, approximately $1,200,000 of such net proceeds will be used to train reservation agents which should enable the Company to increase the number of calls answered each day and, consequently, the Company's revenues. In addition the Company intends to use $1,000,000 to expand its marketing activities to increase consumer awareness of its services. If the Company's revenues continue to increase as currently anticipated, the Company should not require any additional capital beyond that provided by this Offering to achieve its current business plans. If, however, the Company were to seek to expand its operations through acquisitions, the Company could require capital beyond that provided by this Offering. There can be no assurance that such capital will be available, or, if available, on terms acceptable to the Company. - 18 - 25 BUSINESS The Company is among the 100 largest independent travel agencies in the United States. The Company provides low-priced airline tickets for domestic and international travel to its customers through its easy-to-remember, toll-free numbers "1-800-LOW-AIR-FARE" (1-800-569-2473) and "1-800-FLY-4-LESS" (1-800-359-4537). The Company has 150 reservation agents and operates 365 days a year out of the Company's reservation centers in Tampa, Florida and San Diego, California. The Company strives to provide its customers with the lowest-priced airfare available for a particular travel route at the time of reservation by utilizing the SABRE travel reservation system. The SABRE system maintains over 50 million airfares, including those of all major U.S. and international commercial airlines, and is updated throughout the day to reflect the airlines' latest ticketing information. The Company estimates it receives an average of 20,000 calls per day (including repeat calls from callers unable to be serviced or calling to confirm reservations), of which the Company has the current capacity to answer only approximately 6,000. The Company has increased the number of its reservation agents from 13 in 1995 to 150 presently. The Company intends to use approximately $1.2 million of the proceeds of this Offering to expedite the training of additional reservation agents. The Company's operations generate revenues principally from (i) the commissions on air travel tickets, (ii) override commissions on air travel tickets the Company books on Continental, United, Northwest, TWA, Carnival, America West, America Trans Air, Trans Brazil, Mexicana and Korean airlines, (iii) segment incentives under its contract with SABRE, (iv) co-op promotions with other suppliers of travel-related products and services, such as long-distance telephone companies, car rental companies and hotels, and (v) service fees that it charges its customers. The Company markets its services primarily by advertising in approximately 270 Yellow Pages directories covering a total population of over 133 million people in those standard metropolitan areas in the continental United States ("SMA's") with populations whose general travel profiles are attractive to the Company. The Company also maintains a home page on the World Wide Web (www.lowairfare.com) which enables its customers to access its customized Turbo SABRE system through their personal computers. INDUSTRY OVERVIEW The travel industry is one of the world's largest industries, with $3.4 trillion in sales in 1994 according to the World Travel Organization (the "WTO"). According to the Travel Weekly 1996 U.S. travel agency survey (the "Travel Weekly Survey"), revenues for U.S. travel agencies in 1995 exceeded $100 billion, representing an increase of almost 100% since 1985 and 9% since 1993. The Air Transport Association (the "ATA") projects that 800 million U.S. passengers will purchase airline tickets in the year 2005. The Company believes that approximately 60% of the U.S. market for air travel is booked through travel agencies rather than directly through air carriers. The U.S. travel agency industry is a highly fragmented industry comprised of numerous small agencies, but trending towards large volume agencies, according to the Travel Weekly Survey. In contrast to 1985, when small agencies (those reporting between $1 million and $5 million in annual sales) were responsible for 62% of all U.S. travel agency revenues, in 1995 such agencies were responsible for only 41% of all U.S. travel agency revenues. The Company believes that only one other travel agency operates in a manner similar to the Company by emphasizing low-cost airfare, nationally advertising toll-free telephone numbers that spell out their respective advertising slogans and processing calls on such numbers at centralized reservation centers. The Company believes that operating in such manner distinguishes the Company and its competitor from other travel agencies as "telemarketing travel companies." - 19 - 26 OPERATING STRATEGY The Company's operating strategy is to (i) strive to provide its customers with the lowest-priced airfare available for a particular travel route at the time of reservation on those airlines whose tickets the Company sells, (ii) focus on consumer air travel, which the Company believes is the most profitable segment of the travel industry, (iii) provide convenient, quick service to its customers, (iv) maintain low operating costs by utilizing only two operating facilities, (v) use state-of-the-art technology to maximize operating efficiencies, (vi) constantly review and update its relationships with major airlines and SABRE to obtain favorable commission structures, and (vii) provide incentives to its sales force through a performance-based compensation structure. The Company believes that this strategy distinguishes it from most travel agencies in the United States, and that significant internal growth opportunities exist as (x) customers' demand for low-price air travel remains unsatisfied through traditional sources and (y) technological developments in the area of information processing enable increasingly efficient global distribution of travel information. Low-Priced Airfare on Major Airlines The Company strives to provide its customers with the lowest-priced airfare available for a particular travel route at the time of the reservation on those airlines whose tickets the Company sells (which includes most major U.S. and international airlines), using the comprehensive ticket information available on its customized Turbo SABRE system. The Company's SABRE system provides the operating reservation agent, within two or three seconds of a request for a particular route, up to 900 ticket options ranked in order of price. The reservation agent can then offer ticket options in ascending order of price until the customer chooses a suitable carrier and departure time. In contrast, airlines typically quote only their own fares and often quote highest fares first to avoid selling the lowest-priced tickets. The Company believes that most travel agents do not offer customers the lowest-priced airfare available because they either lack the technical capability or prefer to sell more expensive tickets and earn larger commissions. In contrast, the Company's operating strategy is based on generating large sales volume rather than on high margins on individual tickets. The Company's customers generally have one objective - lowest-priced airfares. As a result, the Company's strategy allows it to satisfy its customers' demands for low airfares while obtaining higher commissions and additional incentives for higher volumes. The Company believes that its ability to provide low-priced airfare on the airlines whose tickets it sells (which is almost always lower than the lowest fare published by that airline) provides a distinct competitive advantage in attracting and retaining customers. Sell Tickets of Almost All Major Airlines The Company sells tickets for a large number of major U.S. and international airlines. The Company is authorized to sell tickets on behalf of all major domestic airlines including Continental, United, Northwest, TWA and America West, but not U.S. Airways. To be authorized to sell tickets on behalf of U.S. Airways a travel agent which is not a public company must submit financial statments of its principal shareholders, which the Company is currently unable to do. The Company anticipates that shortly after the closing of this Offering it will become authorized to sell tickets of U.S. Airways. Because of Delta Airlines' pricing and commission policies, the volume of Delta tickets sold by the Company is not commensurate with Delta's position in the airline industry. The Company also does not sell tickets on smaller airlines, whose airfares and commission structures do not enable the Company to generate a profit on such sales. Where the fares of such airlines are available on the Company's SABRE system at a lower price, the Company's reservation agents direct the callers directly to such airlines. The Company constantly monitors and periodically revisits its existing relationships with individual airlines, and attempts to establish new relationships with other airlines, as part of its general strategy of keeping abreast of market conditions and industry trends. Focus on Consumer Air Travel The Company believes that consumer air travel is the most profitable segment of the travel industry, and that it can compete effectively in this segment because of its high technology, telemarketing approach to the consumer air travel business and the resulting efficiencies. The Company considers the consumer market to include any person who pays for his or her own travel expense, regardless of the purpose of the travel, as opposed to - 20 - 27 business travelers whose employers pay for their travel expenses. However, the Company does sell to certain customers who purchase air travel for business purposes which is paid for by their employers. The Company believes that its reservation agents require substantially less time to book reservations because (i) all the information they need is immediately available and the necessary steps can be conducted on their computer screens, and (ii) the Company's services are focused on air travel, which does not require research or follow-up work and can be completed in one phone call, in contrast to the more time-consuming arrangements for hotel and car-rental reservations. Consequently, the Company believes its average reservation agent can book an average of $265 in travel plans for customers per hour, compared to the industry average of $147 per hour. The Company strives to increase this average by rewarding reservation agents with commissions for weekly sales in excess of various levels. In addition, the Company believes that the fact that the majority of the most inexpensive air travel tickets are non-refundable increases the profitability of the consumer air travel market. Over 90% of the Company's ticket sales are non-refundable and, as a result, the value of tickets refunded each week is less than 1% of all tickets sold. Convenient Service The Company believes that a significant factor in a customer's decision to purchase air travel is the convenience of service. The Company believes that the convenience of its service compares favorably to that of its competitors because (i) its reservation agents provide immediate and comprehensive information, and (ii) if purchased early enough, tickets are delivered the next day. The Company's telemarketing service, coupled with its delivery of each ticket by next-day courier, eliminates the need for customers to visit a travel agency. The Company offers one source for the lowest-priced airfare available, thus eliminating the need for the customer to call several air carriers or travel agents. In addition, the easy-to-remember "1-800-LOW-AIR-FARE" and "1-800-FLY-4-LESS" names and associated numbers, "1-800-569-2473" and "1-800-359-4537" facilitate repeat calls from customers who may call on subsequent occasions from other locations where the area code may be different or where they may not have access to a Yellow Pages directory. See "Growth Strategy--Internal Growth." Low Operating Costs The Company seeks to have the lowest margin of operating costs in the travel agency industry. The Company minimizes its operating costs by processing all of its customer reservations and purchases through two centralized facilities, rather than duplicating its financial and management resources at a number of locations. Since its customers do not physically visit the Company's reservation centers in Tampa or San Diego, the Company does not need to construct and maintain the more expensive locations that traditional travel agents do. Similarly, the Company does not need to incur the expense of furnishing its reservation facilities to accommodate customers, but rather maintains functional reservation centers geared toward maximizing the number of reservation agents that can operate at any one time. The Company also minimizes its operating costs by basing its marketing strategy on advertising through Yellow Pages directories in those SMA's with populations whose general travel profiles are attractive to the Company, which the Company believes is the most cost-effective method of advertising available. See "--Marketing." The Company also minimizes its costs by contracting for employees at its Tampa reservation center through a professional employee leasing organization. [All] of the Company's workers at the Tampa facility (other than management) are retained on an hourly basis through such services. The Company is responsible for training and supervising the job performance of worksite employees. The Company has determined that it is more economical to contract with employee providers than to employ such hourly workers itself. State-of-the-Art Technology The Company uses state-of-the-art computer technology available to access all the major U.S. and international air carriers' routes and fares. Each of the Company's reservation agents operates a SABRE computer terminal and headset. The Company has significantly customized the Turbo SABRE system specifically for the Company's specific purposes and uses. As a result, the Company's reservation agents have fewer procedures to master and therefore are trained and become proficient on the Company's reservation system more quickly, thus - 21 - 28 incurring lower training expenses. In addition, the skills learned by the reservation agents on the Company's Turbo SABRE system are not transferable to other travel agencies, resulting in lower reservation agent turnover. Review and Update Relationships with Airlines The Company's management constantly reviews and updates its relationship with the major airlines and SABRE in order to obtain a favorable commission structure. The Company believes that as a result of such efforts, the Company has been able to obtain commission structures that are more favorable than those obtained by travel agents generally. See "-Operations; Standard Commissions" and "-; Override Commissions." Employee Incentives The Company's reservation agents are organized into teams of approximately 20 reservation agents under one supervisor. The reservation agents earn a base salary and commission, each of which is dependent upon the volume of sales generated by an agent within a moving, historic measuring period. The team supervisors, in turn, are paid based on the average sales of that supervisor's team. The Company believes that this performance based compensation structure enables it to retain and constantly motivate the best-performing reservation agents. GROWTH STRATEGY The Company has a three-point growth strategy: o Internal Growth The Company's Tampa and San Diego reservation centers are currently operating at less than maximum capacity because the Company can add up to 40 reservation agents a month while maintaining the quality of its customer service and operating efficiencies. Consequently, of the 20,000 calls per day (including repeat calls from callers unable to be serviced) the Company estimates it receives on average at both reservation centers, the Company's 150 reservation agents currently can only answer an average of approximately 6,000 calls. As a result, the Company believes it can grow substantially over the next twenty-four months as it adds additional personnel. The Company's Tampa and the San Diego facilities can accommodate a combined total of 1,300 reservation agents working in staggered shifts, or 565 working at any one time. The Company believes that it can achieve substantial growth by increasing the number of its reservation agents and consequently increasing its capacity to process the existing demand by potential customers who call its toll-free numbers daily. o Marketing The Company has already implemented a marketing strategy of focusing on advertising in Yellow Pages directories in the largest SMA's. The Company has advertisements of its "1- 800-LOW-AIR-FARE" name and "1-800-569-2473" toll-free number listed in over 236 directories reaching a population of over 88 million people and has entered into agreements for advertising in 73 additional directories reaching a population of over 31 million people. The Company has advertisements of its "1-800-FLY-4-LESS" name and "1-800-359-4537" toll-free number listed in over 115 directories reaching a population of over 102 million people. The Company intends to continue its current strategy of advertising in Yellow Pages, but intends to focus on directories in those SMA's with populations whose general travel profiles are attractive to the Company. Once the Company's ability to satisfy existing customer demand is addressed, the Company anticipates increasing consumer awareness of its easy-to-use, low-priced airfare approach to travel reservations through select print and radio advertising campaigns. See "Business--Marketing." o Strategic Acquisitions The Company believes that opportunities exist for it [to enter new geographic markets and] to expand its market share in existing markets through the - 22 - 29 acquisition of other telemarketing travel companies with valuable customer lists and intellectual property. The Company expects that such acquisitions would involve the purchase of the relevant names, service marks and telephone numbers, as well as any logos and other identifying features associated with them. The Stevens Merger is an example of one such strategic acquisition. See "The Stevens Merger" and "--Competition." SERVICES The primary service the Company offers to its customers who call its toll-numbers or access its Internet home page is a reservation service for domestic and international flights. The Company strives to provide its customers with the lowest-priced airfare available for a particular travel route at the time of the reservation on those airlines whose tickets the Company sells. The Company's Turbo SABRE system is customized to provide to the reservation agent within two or three seconds up to 900 ticket options, ranked in order of price. Once tickets are purchased, they are printed at the Company's Tampa reservation center and delivered by overnight courier to customers. The Company offers its reservation services through approximately 150 reservation agents and supervisors located at the Company's reservation centers in Tampa, Florida and San Diego, California. The reservation centers operate 16 hours a day, 365 days a year. Each reservation agent operates a computer terminal that accesses the SABRE travel reservation and information system. The Company adjusts the number of reservation agents serving customers on an hourly basis. At the peak hours of 11:30 a.m. through 4:30 p.m., Eastern time, the Company has the most reservation agents working. Currently, the average number of agents working during such peak hours is 85. During the hours of 1:00 a.m. through 6:00 a.m., Eastern time, the Company needs the least agents and staffs an average of 17 reservation agents. It is during the peak hours of 11:30 a.m. through 4:30 p.m. that the Company is not able to answer all of the calls it receives. Personalized Service The Company's customized Turbo SABRE system enables it to retain in its files individual travel preferences for its customers, such as seating, special meals and frequent flier numbers, which are automatically displayed when a customer's identifying information is input. This tailored information program personalizes the reservation process as well as reduces the time required to complete each reservation. Corporate Customers While the Company's current customers are predominantly individuals and the Company's operating strategy targets the consumer market, the Company offers certain services targeted at corporate customers. These services, however, are designed to be offered during the processing of a single telephone call, as with calls from individual customers. The Company's Turbo SABRE system enables it to program "pop-up-windows" specifying, for each corporate customer, its travel policy, preferred air carrier vendors, specially negotiated rates, handling instructions and emergency procedures. The "pop-up-window" for each corporate customer appears on the terminal screen and guides the reservation agent during the reservation process. Repeat Customers The Company believes that repeat customers are key to its ability to grow. The Company's "1-800-LOW-AIR-FARE" (1-800-569-2473) number has a rate of repeat customers (meaning customers who purchase at least one more ticket within a year) of approximately 38%, and the Company's "1-800-FLY-4-LESS" (1-800-359-4537) number has a repeat customer rate of approximately 50%. The Company believes that while customers are initially attracted by the low-price airfares made available by the Company, they become repeat customers because of their satisfaction not only with the prices but also the convenience of being able to book their reservations on one - 23 - 30 relatively brief and toll-free telephone call. The Company believes that it can generate internal growth by obtaining an even larger portion of the travel business of its existing customers and consequently increasing its repeat customer rates. OPERATIONS The Company's operations generate revenues principally from (i) the commissions on air travel tickets, (ii) override commissions on air travel tickets the Company books on Continental, United, Northwest, TWA, Carnival, America West, America Trans Air, Trans Brazil, Mexicana and Korean airlines, (iii) segment incentives under the SABRE contract, (iv) co-op promotions with other suppliers of travel-related products and services, such as long-distance telephone companies, car rental companies and hotels, and (v) service fees of $10 or $20 that it charges per ticket. The Company also earns a $5 shipping and handling fee (net of expenses) for delivering tickets to its customers. Standard Commissions In accordance with industry practice, the Company receives a commission of approximately 9.25% of the price of full-fare tickets and 11% for excursion tickets that it sells on air carriers for which the Company is authorized to sell air travel tickets. The Company is an authorized agent of all air carriers whose fares are quoted on SABRE, other than U.S. Airways. Most major U.S. airlines impose caps on such commissions of $25 dollars for one-way air travel tickets and $50 dollars for round-trip tickets. In 1996, such commissions accounted for more than 70% of the Company's gross revenues. The Company does not earn basic commissions on the 25% of airline tickets purchased from consolidators. See "--Agreements with Consolidators." From time to time, most of the major U.S. air carriers informally waive the commission cap for the Company and other large travel agencies. Such waivers generally apply to sales of tickets for travel on selected routes and are granted to provide an incentive to increase sales for those routes. In addition, the Company obtains higher commissions through the payment of override commissions in excess of the standard 9.25% and 11% commissions pursuant to agreements with most of the major U.S. airlines. Due to such override commissions and waivers of the commission cap and the Company's strategy of selling tickets on airlines with which it has override commission arrangements, the Company is rarely subject to the commission cap. See "--Override Commissions." Override Commissions The Company has entered into agreements with Continental, United, Northwest, TWA, Carnival, America West, America Trans Air, Trans Brazil, Mexicana and Korean airlines for the payment of override commissions above the standard commissions the Company receives. Under such agreements, additional commissions are generally awarded if the volume of tickets sales surpasses certain agreed upon thresholds based upon ticket sales as reported by the Airlines Reporting Corporation (the "ARC"), a corporation owned and established by the airlines to provide reporting, settlement and related services in connection with the sale of transportation by travel agencies in the U.S. Override commissions are generally paid quarterly and, depending upon the specific agreement with the air carrier, may be paid directly by check from the air carrier to the Company, by means of net payments by the Company to ARC with respect to amounts owed to the air carrier, or through ARC by means of a credit memo in favor of the Company. In 1996, override commissions accounted for approximately 15% of the Company's gross revenues. The Stevens Merger will enable the Company to obtain greater override commissions, since the volume of combined sales of the previously separate entities will be used to determine whether and when the agreed-to thresholds have been met. - 24 - 31 Segment Incentives under SABRE Contract The Company earns additional revenue from SABRE for each segment of air travel that it sells. A segment of air travel is non-stop air travel between two destinations. For each segment of air travel it sells, the Company receives $.50 from SABRE. In 1996, SABRE segment incentives accounted for less than 1% of the Company's gross revenues. Service Fee; Shipping and Handling The Company also charges the customer a service per airline ticket sold of $10 for tickets less than $250 and $20 for tickets equal to or greater than $250. These fees are already calculated into the cost of the ticket when quoted to the caller. Because of the Company's override commission structure, the price of the ticket (even inclusive of the service charge) is still generally lower than the lowest-priced published fare quoted by the airlines. The Company also earns $5.00 (net of expenses) from the shipping and handling fee it charges to its customers. Agreements with Consolidators The Company also sells air travel tickets offered by consolidators. Consolidators purchase large number of tickets directly from various air carriers for resale to the public. When the Company sells such tickets, the reservation is generally not booked through SABRE or settled through ARC, and the Company is paid its commission directly from the consolidator. The Company has entered into an agreement with a consolidator that sells tickets on TWA at a discount (the "TWA Discounter") pursuant to which it (i) solicits customers to purchase tickets for air travel on TWA at discounted fares from the TWA Discounter and (ii) solicits businesses to enter into agreements for the purchase of air travel on TWA from the TWA Discounter (the "TWA Agreement"). The TWA Agreement expires in February 1998 and is terminable before such date on 15 days' prior written notice by either party. The Company receives a 15% commission on each air travel ticket solicited by the Company or pursuant to an agreement solicited by the Company. Air travel tickets sold by the Company pursuant to the TWA Agreement, unlike sales from most other consolidators, are booked through SABRE and settled through ARC; however, the Company receives its commission directly from the TWA Discounter monthly. In 1996, commissions received under the TWA Agreement accounted for approximately 20% of the Company's gross revenues, and commissions received from other consolidators accounted for approximately 5% of the Company's gross revenues. The Company anticipates that its current arrangement with the TWA Discounter will expire in 2001, when the TWA Discounter will no longer be able to sell tickets on TWA; there can be no assurance, however, that the Company's TWA Agreement will be extended beyond its scheduled expiration date in February 1998. See "Risk Factors-Risks Relating to Override Commissions." World Wide Web Home Page In anticipation of future technological innovations and consumer demand for directly accessing information and making purchases on-line, the Company has launched its home page at www.lowairfare.com on the World Wide Web, which enables customers to access the Company's customized Turbo SABRE system through their personal computers. The Company believes that consumers who prefer to purchase travel and travel-related products and services on-line will choose to access the Company's customized Turbo SABRE system over other options. Through the Company's home page on the Internet, customers can access the Company's customized Turbo SABRE system, view all information on the system, make reservations and pay for their tickets by providing their major credit card number for payment. In this process, the customer operates the Turbo SABRE system in place of the reservation agent. As with purchases by telephone, tickets are issued at the Tampa facility and delivered by overnight courier. Commissions that the Company earns on transactions conducted through its Web page are split [equally] with American Airlines. Processing Reservations and Sales Each call that is processed by a reservation agent is handled in the following manner. First, a customer generally requests information about the airfare for a particular route. The reservation agent enters the relevant parameters into the Turbo SABRE system and initiates a search. Each search takes approximately two to three seconds to appear on the operator's monitor. The reservation agent then quotes the airfares as they appear on the - 25 - 32 terminal screen, in increasing order of price. A customer may request the most inexpensive airfare of all or the most inexpensive airfare of a particular carrier or type of carrier. The Company estimates that an average of approximately one in 10 callers who get through purchases an air travel ticket. If the customer decides to purchase a ticket, the reservation agent requests and records certain standard information such as name, address and telephone number. The Company only accepts major credit cards for purchases by telephone. The Company does accept cash payments from "walk-ins" to its Tampa facility (i.e. individuals who visit the reservation center), although such sales constitute less than 1% of its total sales. After a customer tells the reservation agent his or her credit card number, the reservation agent executes a command causing the credit card number to be verified with the credit card issuer, via the SABRE central information system. As a result, once approval is received electronically by the reservation agent at the Turbo SABRE terminal, the sale is complete and the credit card payment is settled in accordance with the procedures described below under "--Settlement of Accounts." After each sale is completed, instructions are automatically transmitted via the Turbo SABRE system from the reservation agent's terminal to the Tampa facility's ticket printing area. Tickets are printed along with an itinerary of the customer's travel arrangements. Tickets are printed on stock forms provided by ARC. ARC requires the Company and other travel agencies to implement various security measures in order to prevent theft of such stock. In addition, each air carrier that authorizes the Company to issue its tickets provides metal plates on which the Company's SABRE ticket printing machines print such carrier's tickets. Once printed, tickets and itineraries are placed inside a ticket envelope and a Federal Express package. Federal Express personnel pick up all such packages each evening, six days a week, and deliver them by Federal Express' standard next-morning delivery. Refunds, Chargebacks and the SABRE Credit Card Authorization Guarantee With the exception of sales to "walk-in" customers at the Tampa facility (which account for less than 1% of sales), all of the Company's sales are paid for by credit card. Once a sale is closed as described above under "--Reservation and Sale Sequence," it is subject only to refund or chargeback. Because the majority of the most inexpensive air travel tickets are non-refundable, only 5% of the tickets the Company sells are refundable, and the Company processes only an average of $1,000 worth of refunds a week, or .01% of sales. The Company recoups some of its costs associated with processing such refunds by imposing a $50 charge on each refund. Chargebacks similarly account for a small part of the Company's sales. A chargeback results from a customer who refuses to pay for a charge on his or her credit card statement. In such an instance, the Company generally must either return its commission to the relevant credit card issuer or seek recourse directly against the customer. Approximately 1% of the tickets sold by the Company result in chargebacks. None of the Company's credit card sales are subject to refusal by the relevant credit card issuer to remit payment to the Company. Since authorizations of credit card charges are effected electronically through the SABRE system, SABRE offers its subscribers a guarantee of such authorizations for a fee of $.50 per authorization. The Company pays this fee for all authorizations, and in return, SABRE pays the Company the amount of any commission or other payment refused by the relevant credit card issuer. Airlines Reporting Corporation All of the Company's sales of air travel tickets that are offered directly by air carriers are settled through the Airlines Reporting Corporation ("ARC"). Such sales account for approximately 75% of the Company's sales. For sales settled through ARC, all commissions and other amounts owed to the Company are also settled through ARC according to ARC's procedures, except that override commissions may also be paid directly by check or wire transfer from the relevant air carrier to the Company. See "--Override Commissions." The only sales of air travel that are not generally settled through ARC are air travel tickets offered by consolidators; however, some sales of air travel tickets by the Company that are offered by consolidators are settled through ARC. See "--Agreements with Consolidators." For sales of air travel offered by consolidators, all commissions and other - 26 - 33 amounts owed to the Company are generally paid directly by check or wire transfer directory from the relevant consolidator to the Company. As an ARC-affiliated travel agency, the Company is subject to all rules and procedures imposed by ARC. ARC screens applications of new travel agencies, initiates collection procedures against travel agencies in default of payment, provides ticket stock to the travel agencies and facilitates payment between travel agencies and airlines. Tickets purchased from the Company are reported through ARC in accordance with the Company's Standard Ticket and Area Settlement Plan ("ASP"). The ASP encompasses distribution and control of ARC air travel tickets and other ARC traffic documents and processing and settlement services in connection with the sale or issuance of such documents by the Company. ARC administers the Company's ASP on behalf of ARC carriers. Settlement of Accounts Pursuant to ARC guidelines, the Company is required to submit weekly sales reports to ARC each Tuesday with supporting documents for the week ended on the prior Sunday. On the eighth day after the Company has submitted its sales report to ARC (the second Wednesday thereafter), the Company's accounts are drafted by ARC via its settlement bank (the "designated area bank") for amounts owed to carrier airlines for tickets purchased, and the Company's accounts are credited by ARC, via the designated area bank, for commissions owed to the Company. On the same day, the designated area bank submits a draft to the Company's own bank account for any remaining amount due and provides the collected funds and related documents to the appropriate carrier. The designated area bank provides each carrier with a record of its own sales activity and sends all credit card charges to the appropriate credit card issuer or a merchant processor with an accompanying computer generated invoice. The credit card issuer or a merchant processor then pays each carrier directly for such billings minus the applicable commission of the credit card issuer. In connection with the settlement of the Company's accounts through ARC, if there are insufficient funds in the Company's account to make the necessary payments when due, the Company has 24 hours to make funds available. If such funds are not made available within such 24-hour period, the Company becomes a "defaulted agent." Pursuant to the terms of the Company's agreement with ARC, ARC may terminate the Company immediately. The Company then has ten days to appeal such termination to a special arbitration panel. If the agent is terminated, ARC repossesses all ticket stock and plates from the Company, and takes steps necessary to liquidate the surety bond in the amount of $20,000 that the Company was required to post in order to become an ARC affiliate. Any proceeds from liquidation of the surety bond are divided on a pro rata basis among all ARC member airlines with which the Company had debts outstanding. Toll-Free Telephone Numbers The Company has contractual rights customary to the industry to use each of the three toll-free numbers through which customers call its reservation centers. In addition, if the Company for any reason fails to pay its monthly fee for such number, the Company believes that it will have a cure period to pay all amounts outstanding. Should the Company not make such payments and consequently lose the right to use such number, the Company expects that a "cooling-off" period of 2 years will be imposed, during which no other party may use such number. MARKETING The Company markets its services primarily to individual customers who pay for their own tickets. The Company focuses its marketing efforts on placing advertisements listing its three easy-to-remember names and toll-free telephone numbers in Yellow Pages directories in those SMA's with populations whose general travel profiles are attractive to the Company. In order to evaluate the Company's media alternatives, the Company reviewed several marketing tests conducted during 1994 and the first quarter of 1995 in the New York market (cable TV, radio, newspaper, billboard - 27 - 34 and Yellow Pages advertising). Based on that review, the Company concluded that Yellow Pages directories generated the most calls and are the most cost-effective advertising medium. There are over 7,000 Yellow Pages directories published by the Baby Bell companies and approximately 5,000 directories published independently. The Company believes that consumers use the Yellow Pages when they are ready to purchase a good or service and that a high percentage respond by calling the businesses listed in the directory they consult. Given the broad distribution of Yellow Pages directories in metropolitan areas and other large markets, the Company's strategy is to place advertisements in directories of the largest SMA's, thereby reaching the greatest number of consumers with each advertisement. The Company currently has advertisements of its "1-800-LOW-AIR-FARE" name and "1- 800-569-2473" toll-free number listed in over 236 directories reaching a population of over 88 million people and has entered into agreements for advertisement in 73 additional directories reaching a population of over 31 million people in the next three months. The Company has advertisements of its "1-800-FLY-4-LESS" name and "1-800-359-4537" toll-free number listed in over 115 directories reaching a population of over 102 million people. The Company also has advertisements of its "1-888-999-VUELA" name and "1-888-999-8835" toll-free number listed in over 21 directories reaching a population of over 13 million people. The monthly cost incurred by the Company as of December 1996 to advertise in Yellow Pages directories was approximately $14,000. The Company's "1-800-FLY-4-LESS" name and number also appear (free of charge to the Company) in approximately 150 newspapers nationwide reaching a population of over 100 million people as part of a promotion campaign in which the Company provides such newspapers with the lowest-priced fares for selected routes. In addition, the Company advertises its "1-888-999-VUELA" name and number in the Spanish language radio and television markets of south Florida. SABRE TECHNOLOGY Global distribution systems are the principal means of air travel distribution in the United States and a growing means of air travel distribution internationally. The Company has chosen the SABRE system, which it believes is the best such system available. A typical SABRE transaction - consisting of an information request by a subscriber, a search in SABRE and a response to the subscriber - averages less than two seconds in elapsed time. SABRE's "one-stop- shopping" capabilities permit the Company to locate, price, compare and purchase the travel and travel-related products and services that best satisfy the traveler's requirements. SABRE was named the "World's Leading Computer Reservations System" for the third year in a row at the 1996 World Travel Awards. General SABRE is the largest global distribution system for electronic travel in the United States. SABRE was first developed in the 1960's and was one of the world's first electronic airline reservation systems. SABRE evolved from American Airlines' internal reservation system into a global distribution system when SABRE's content was expanded to include additional airlines and other travel providers. Computer reservation terminals were placed in travel agencies beginning in 1976, and consumer direct access to SABRE became available through computer on-line services in 1985 and on the Internet in 1996. Other global distribution systems include Amadeus/System One, Covia and Worldspan. Amadeus/System One is owned by Air France, Continental Airlines, Iberia and Lufthansa. Covia, formerly known as Galileo/Apollo, is owned by United Airlines, British Airways, Swissair, KLM Royal Dutch and USAir, among others, and the Canadian affiliate of Galileo/Apollo is owned by Air Canada. Worldspan is owned by Delta, Northwest and TWA and is affiliated with ABACUS, an Asian global distribution system. Each offers similar products and services. - 28 - 35 The SABRE system is able to perform high-volume, high-reliability, real-time transactions processing 24 hours a day, 365 days a year, thus enabling the creation of an efficient electronic marketplace for the sale and purchase of travel. The SABRE system maintains over 50 million airfares (updated throughout the day), processes an average of 93 million requests for information per day. Such frequent updates of airfares are essential for the Company to be able to strive to provide its customers with the lowest-priced airfares. Through SABRE, reservations may be booked on all major U.S. and international airlines, but generally not on charter companies or certain small airlines or on air travel offered for resale by consolidators. Consolidators purchase large numbers of tickets directly from air carriers for resale to the public. In certain cases, however, the tickets they sell may be booked through SABRE. See "Operations--Agreements with Consolidators." In addition to providing information to subscribers about airlines and other travel providers and their products and services, SABRE also allows travel agency subscribers to print airline tickets, boarding passes and itineraries and purchase travel insurance or book theater tickets or limousines. Additionally, SABRE provides subscribers with travel information on matters such as currency, health and visa requirements, weather and sightseeing. Through SABRE, subscribers - principally travel agencies but also business travel departments and individual consumers - can access information on, and book reservations with, airlines and other providers ("associates") of travel and travel-related products and services. In 1995, more than 600 associates displayed information about their travel and travel-related products and services through SABRE, and American Airlines has estimated that $40 billion in travel and travel-related products and services were reserved through SABRE in 1995. SABRE subscribers are able to book reservations with more than 350 airlines and to make reservations with more than 55 car rental companies and more than 190 hotel companies covering approximately 30,000 hotel properties worldwide. During 1995, more airline bookings in the United States were made through SABRE than through any other global distribution system. American Airlines has estimated that in 1995 over 40% of all airline bookings made through travel agencies in the United States were made through SABRE. In April 1996, the Company entered into a five-year agreement with American Airlines pursuant to which the Company subscribes to the SABRE system. Pursuant to the SABRE agreement, the Company is provided with the hardware, software, technical support and other services that it needs to access SABRE in return for fees that vary based on the number of bookings generated by the Company. These fees are reduced by the segment incentives offered by SABRE. See "--Operations--Segment Incentives under SABRE Contract." Turbo SABRE Because travel agencies have differing needs, based on, among other things, volume and location, the SABRE interface has been modified to meet the specific needs of different categories of travel agents. Travel agents can choose SABRE interfaces that range from simple text-based systems to feature-laden graphical interfaces. The Company has taken advantage of these options by choosing the Turbo SABRE system, an advanced point-of-sale interface that allows for screen customization and reservations/sales process structuring and eliminates SABRE-specific commands, thereby reducing keystrokes and training requirements for high-volume travel companies that need high levels of functionality. Turbo SABRE also provides data other than SABRE, such as back office hosts and local area network (LAN) databases. The Company has added a number of programs written and developed exclusively for the Company to its Turbo SABRE system. They include programs that generate "pop-up" windows to supply frequently requested or used information, as well as programs to alert reservation agents, supervisors and customer service agents using the system to errors frequently made by system operators. The Company believes that these customized features enhance the speed and efficiency of its operations and give it a competitive advantage over its competitors. INTELLECTUAL PROPERTY The Company markets its services in the United States under the names, "1-800-LOW-AIR-FARE," "1-800-FLY-4-LESS" and "1-888-999-VUELA." "1-800-FLY-4-LESS," together with its logo, is a federally registered service mark in the name of the Company. The Company has filed an application to register the "1-800-LOW-AIR- - 29 - 36 FARE" name and logo as a federal service mark with the U.S. Patent and Trademark Office. It has also filed an application to register the Spanish language name, "1-888-999-VUELA," and related logo as a federal service mark with the U.S. Department of Commerce. COMPETITION The travel agency industry is highly fragmented and characterized by intense competition. The Company competes with a variety of other providers of travel and travel-related products and services. Its principal competitors are (i) other telemarketing travel companies, (ii) traditional travel agencies, (iii) air carrier vendors, and (iv) various on-line services available on the Internet. The Company's competitors who are telemarketing travel companies and traditional travel agencies have access to the same technology that the Company uses and also to other global distribution systems of electronic travel. See "--SABRE Technology." Although distribution through travel agents continues to be the primary method of travel distribution, new channels of distribution are developing directly to businesses and consumers through computer on-line services, the Internet and private networks. In addition, individual consumers have access to other versions of SABRE technology and also to other global distribution systems of electronic travel permitting consumer-direct travel distribution via personal computer, cable television and other media. The Company faces competition in these channels not only from its principal competitors but also from possible new entrants in the sale of travel products and services and from travel providers that distributer their products and services directly. For example, in July 1996, American Express Co. and Microsoft Corp. announced an on-line travel booking service for corporations, which they have scheduled for release in the first half of 1997. [The Company expects that this on-line travel booking service, while only in the developmental stage, will eventually directly compete with the Company.] In addition, the Internet permits consumers to have direct access to travel providers, thereby by-passing both travel agents and global distribution systems such as SABRE. Further, some of the Company's competitors have significantly greater financial or marketing resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements than the Company. During periods of recession in the travel industry, the Company's competitive advantages with respect to quick, convenient processing of reservations and purchases of lowest-priced airfare may be of reduced importance. The Company's position in a recession may be more difficult than some of its competitors, since the Company targets the consumer market which may be the most adversely affected. See "Risk Factors--Risks Relating to the Airline Industry." The Company believes that its ability to compete depends upon a number of factors, including price, reliability, name and toll-free number recognition and speed of price quotations and reservations. There can be no assurance that the Company will be able to continue to compete successfully with respect to these or other factors. EMPLOYEES At December 31, 1996, the Company had 184 full-time worksite employees, of whom 6 served in management, 128 were reservation agents or supervisors, 3 were involved in sales and marketing and 47 served in various clerical and other administrative capacities at its Tampa and San Diego facilities. All of the Company's reservation agents, supervisors and other worksite employees at the Tampa reservation center are provided through a professional employee leasing organization (the "Employee Provider"). In November 1995, the Company entered into an agreement with a Payroll Transfers Interstate, Inc (the "Employee Provider"), pursuant to which the Employee Provider leases all of the Company's workers at the Tampa facility to the Company. The Employee Provider is responsible for its employees' benefits. The Company provides all necessary training and pays the Employee Provider an amount equal to 11.71% of the gross payroll of the employees provided by the Employee Provider. The services agreement between the Company and the Employee Provider may be terminated on 30 days' prior written notice. - 30 - 37 PROPERTIES The Company's corporate headquarters are located at its 33,000 square foot reservation center in Tampa, Florida. The Company also operates Stevens' 10,000 square foot reservation center in San Diego California. See "The Stevens Merger." The Company leases these properties on favorable terms and believes that its existing facilities are adequate for its current needs. LITIGATION The Company may be involved from time to time in routine litigation incidental to its business. However, the Company believes that it is not a party to any material pending litigation which is likely to have a significant negative impact on the business, income, assets or operation of the Company. - 31 - 38 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and certain information concerning them, are as follows:
NAME AGE POSITION - ---- --- -------- Mark D. Mastrini 33 President, Chief Operating Officer and Director Jerrold B. Sendrow 52 Chief Financial Officer, Vice President-Finance, Treasurer, Secretary and Director Biagio Bellizzi 57 Vice President-Marketing Pasquale Guadagno 39 Director Michael Gaggi 35 Chairman of the Board and Director
Mr. Mastrini has served as the Company's Chief Operating Officer since January 1996, and as the Company's President since January 1997. Prior to joining the Company, from October 1992 until October 1996, Mr. Mastrini was the founder and owner of One on One Consulting, a consulting firm in Pueblo, Colorado. From September 1992 until October 1994, Mr. Mastrini was owner of X-Press Printing, a printing business in Pueblo, Colorado. From October 1993 until December 1996, he was the owner and editor of Pueblo West Eagle Monthly Magazine. From May 1991 until June 1992, Mr. Mastrini was Vice President of Sales and Marketing at the Braniff Airlines in Dallas, Texas, an airline which subsequently filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court in the Eastern District of New York in July 1992. Mr. Sendrow has served as the Company's Chief Financial Officer, Vice President-Finance, Treasurer and Secretary and has been a director of the Company since its incorporation as 800 Travel Systems, Inc. in November 1995. From June 1994 through November 1995, Mr. Sendrow was employed by 1-800 Low-Air Fare, Inc., the Company's predecessor, in the same capacities. From March 1993 through June 1994, Mr. Sendrow was employed by MSW Columbia Travel Group, Inc. as vice president-finance. From December 1984 through March 1993, Mr. Sendrow was employed by Pisa Brothers, Inc. as controller. Mr. Sendrow has over 22 years experience in the travel industry. Mr. Bellizzi has served as the Company's Vice President-Operations since its incorporation as 800 Travel Systems, Inc. in November 1995. From June 1995 through November 1995, Mr. Bellizzi was employed by 1-800 Low-Air Fare, Inc., the Company's predecessor, as vice president-operations. From 1991 through June 1995, Mr. Bellizzi was employed by Thomas Cook Travel, Inc. as Director-Leisure Marketing from 1993 until 1995 and as Director - Retail Offices from 1991 to 1993. Mr. Bellizzi has over 30 years experience in the travel industry. Mr. Guadagno has served as a director of the Company since its incorporation as 800 Travel Systems, Inc. in November 1995. Mr. Guadagno has been a Senior Vice-President at M.S. Farrell, Inc., an investment banking firm, since December 1996. From 1993 until November 1996, Mr. Guadagno was Senior Vice President of Euro-Atlantic Securities, Inc., an investment banking firm in Boca Raton, Florida. From 1990 through 1993, Mr. Guadagno was employed as a Senior Vice President by Smith-Barney in New York City. Mr. Gaggi has served as a director of the Company since its incorporation as 800 Travel Systems, Inc. in November 1995. Mr. Gaggi is a senior vice president at Joseph Stevens & Company, L.P., an investment banking firm in New York City, and has held that position since 1994. From 1993 until 1994, Mr. Gaggi was employed as - 32 - 39 a vice president by Barington Capital. Mr. Gaggi has been a principal director of Upscale Eyeglass Boutiques Myoptics since 1990. Joseph Stevens & Company, L.P. is not affiliated with or related to the Joseph Stevens Group, Inc., the travel agency acquired by the Company in the Steven Merger. DIRECTOR COMPENSATION As compensation for services, non-employee directors are paid $2,500 per month. In addition, during 1996 the Company paid personal expenses of certain directors aggregating approximately $100,000, of such amount $65,750 was paid on behalf of Michael Gaggi and a $34,250 was paid on behalf of a former director of the Company. In addition, certain directors have received commissions in connection with private placement of the Company's securities. See "Certain Transactions." EXECUTIVE COMPENSATION The following table sets forth the compensation paid or payable in respect of the year ended December 31, 1996 to the Company's executive officers who earned over $100,000: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------------------------------------- ------------------------------------------------------- RESTRICTED SECURITIES NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER POSITION SALARY BONUS COMPENSATION AWARDS($)(1) OPTIONS/SARS COMPENSATION - -------------------- -------------- ---------------- --------------- --------------- -------------- ------------------ Mark Mastrini $70,200 $120,000(2) 25,000(2) President and Chief Operating Officer
(1) Represents 100,000 shares of Common Stock, valued at $1.20 per share. (2) Represents options to purchase 25,000 shares of Common Stock, exercisable at $5.00 per share. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each of Messrs. Mastrini, Sendrow and Bellizzi. Each of the employment agreements commenced on June 1, 1997, and terminates June 30, 2000. Pursuant to their respective agreements each of Messrs. Mastrini, Sendrow and Bellizzi has agreed to donate his entire working time and attention to the business of the Company. In addition, each of these individuals has agreed not to compete with the business of the Company for a period of ninety days following the termination of his employment with the Company. Pursuant to his agreement, Mr. Mastrini is entitled to receive a base salary initially at the rate of $89,000 per year. The base salary is to increase by 5% plus the annual increase in the consumer price index on each of July 1, 1998 and 1999. In addition to his base salary, Mr. Mastrini is to receive medical and disability insurance comparable to that provided to the Company's employees generally and a car allowance of $500 per month. As additional compensation for his services, the - 33 - 40 Company issued 100,000 shares of its Common Stock to Mr. Mastrini and options, exercisable at $5.00 per share, to purchase 25,000 shares of the Company's Common Stock. Pursuant to his agreement Mr. Sendrow is entitled to receive a base salary initially at the rate of $70,200 per year. Mr. Sendrow's base salary increases by 5% plus the annual increase in the consumer price index on each of July 1, 1998 and 1999. In addition to his base salary Mr. Sendrow is to receive medical and disability insurance comparable to that provided to the Company's employees generally and a car allowance of $350 per month. As additional consideration for his services, the Company issued 100,000 shares of its Common Stock to Mr. Sendrow and options, exercisable at $5.00 per share, to purchase 12,500 shares of the Company's Common Stock. Pursuant to his agreement, Mr. Bellizzi is entitled to receive a base salary initially at the rate of $45,000 per year. Mr. Bellizzi's base salary increases by 5% plus the annual increase in the consumer price index on each of July 1, 1998 and 1999. In addition to his base salary, Mr. Bellizzi is to receive medical and disability insurance comparable to that provided to the Company's employees generally. As additional for his services, the Company issued 50,000 shares of its Common Stock to Mr. Bellizzi and options, exercisable at $5.00 per share, to purchase 12,500 shares of the Company's Common Stock. CONSULTANT Lucien Bittar has been a consultant to the Company since January 1996, and receives a consulting fee at the rate of $6,000 per month. Mr. Bittar served as the Company's President and a director from its incorporation as 800 Travel Systems, Inc. in November 1995 until January 1996. Mr. Bittar served as the Vice-Chairman of the Board from April 1996 until February 1997. From August 1994 through November 1995, Mr. Bittar was president and a director of 1-800 Low-Air Fare, Inc., the Company's predecessor. Mr. Bittar founded Filigree, Inc., a travel consulting company, in May 1989 and served as its president and chief executive officer from that time until he joined 1-800 Low-Air Fare, Inc. in August 1994. Prior to 1989, Mr. Bittar was employed by Thomas Cook Travel, Inc. During that time he served as executive vice president responsible for all United States operations and a member of the Board of Directors. ADDITIONAL SERVICE PROVIDER Scott Spencer was engaged by the Company pursuant to a Services Agreement in November 1995 to assist the Company in locating sources of financing. Mr. Spencer's agreement, which by its terms expired on December 31, 1996, provided for a weekly fee of $2,500 and he currently receives a fee of $3,000 per week. In May 1996, in a proceeding captioned United States of America v. Scott Spencer USDC, EDNY, Mr. Spencer was convicted of one count of bankruptcy fraud and one count of conspiracy to commit bankruptcy fraud as a result of his activities in connection with Braniff Airlines and sentenced to 51 months in jail. Mr. Spencer has appealed his conviction and his sentence has been suspended pending the outcome of his appeal. From 1988 through 1989 Mr. Spencer served as a consultant to the corporate parent of Braniff Airlines, which filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in 1989 in the U.S. Bankruptcy Court, Eastern District of New York. From 1990 to June 30, 1991 Mr. Spencer served as president of Braniff Airlines which subsequently filed for bankruptcy in the Bankruptcy Court, Eastern District of New York, in July 1992 at which time it permanently ceased operations. STOCK OPTION PLAN Under the Company's 1997 Stock Option Plan (the "Stock Option Plan"), 250,000 shares of Common Stock have been reserved for issuance upon exercise of stock options. The Stock Option Plan is designed as a means to attract, retain and motivate qualified and competent persons who are key to the Company and its subsidiaries, including employees, officers and directors, and upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons. For purposes of this discussion, the term director includes directors of the Company and directors of any of its subsidiaries. - 34 - 41 The Compensation Committee of the Board of Directors or, in the absence of the appointment of a Committee, the Board of Directors (collectively referred to herein as the "Compensation Committee") administers and interprets the Stock Option Plan and is authorized to grant options thereunder to all eligible employees, officers and directors of the Company. The Stock Option Plan provides for the granting of both incentive stock options and nonqualified stock options. Options are granted under the Stock Option Plan on such terms and at such prices as determined by the Compensation Committee, except that the per share exercise price of incentive stock options cannot be less than the par value per share or the fair market value of the Common Stock on the date of grant. Each option is exercisable after the period or periods specified in the option agreement, but no option may be exercisable after the expiration of ten years from the date of grant. Incentive stock options granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of the Company must have an exercise price of at least 110% of the fair market value of the Common Stock on the date of grant and a term of no more than five years. No incentive stock option, and unless the Compensation Committee's prior written consent is obtained (which consent may be obtained at the time an Option is granted) and the transaction does not violate the requirements of Rule 16b-3 promulgated under the Exchange Act no nonqualified stock option, may be transferred other than by will or the laws of descent and distribution. Each option may be exercisable during the optionee's lifetime only by the optionee, or in the case of a nonqualified stock option that has been transferred with the Compensation Committee's prior written consent, only by the transferee consented to by the Compensation Committee. Unless the Compensation Committee's prior written consent is obtained (which consent may be obtained at the time an Option is granted) and the transaction does not violate the requirements of Rule 16b-3 promulgated under the Exchange Act, no shares of Common Stock acquired by an officer, as that term is defined under Rule 16b-3, of the Company or director pursuant to the exercise of an option may be transferred prior to the expiration of the six-month period following the date on which the option was granted. The Stock Option Plan also authorizes the Company to make or guarantee loans to optionees to enable them to exercise their options. Such loans must (i) provide for recourse to the optionee, (ii) bear interest at a rate no less than the prime rate of interest, and (iii) be secured by the shares of Common Stock purchased. The Board of Directors has the authority to amend or terminate the Stock Option Plan, provided that no such action may substantially impair any outstanding option without the written consent of the holder, and provided further that certain amendments of the Stock Option Plan are subject to shareholder approval. Unless terminated sooner, the Stock Option Plan will continue in effect until all options granted thereunder have expired or been exercised, provided that no options may be granted after 10 years from the date the Board of Directors adopted the Stock Option Plan. As of May 15, 1996, the Company had outstanding options to purchase an aggregate of 50,000 shares of Common Stock under the Plan at a weighted average exercise price of $5.00 per share. - 35 - 42 CERTAIN TRANSACTIONS The Company commenced operations in November 1995, upon the Company's purchase of certain assets and assumption of certain liabilities of 1-800 Low-Air Fare, Inc., a Delaware corporation, and its wholly-owned subsidiary S. Travel, Inc., a Delaware corporation (collectively, the "Predecessor Business"), pursuant to an Asset Purchase Agreement dated November 13, 1995 (the "Asset Purchase Agreement"). Under the Asset Purchase Agreement, the Company acquired all rights to the tradename "1-800 Low Air Fare" and the telephone number corresponding thereto, together with certain furniture, fixtures, equipment and other assets including the Predecessor Business' SABRE Subscription Agreement. In exchange, the Company paid the Predecessor Business $100,000, and assumed certain of its liabilities. Additionally, the Company issued 600,400 shares of its Common Stock and agreed to issue up to 300,000 shares of its Common Stock to the creditors of the Predecessor Business in exchange for forgiveness of the debt of the Predecessor Business, at the exchange rate of $10 of debt for each share of Common Stock. The creditors of the Predecessor Business elected to convert $1,664,340 of such indebtedness for 166,434 shares of Common Stock. The remaining 133,566 shares were issued to S. Travel, Inc. In 1996, the Company issued 100,000 shares of Common Stock to Mark D. Mastrini, the Company's Chief Operating Officer, as part of his compensation. In addition, the Company granted to Mr. Sendrow options to purchase 25,000 shares of Common Stock, exercisable at $5.00 per share. In 1995, the Company issued 100,000 shares of Common Stock to Jerrold B. Sendrow, the Company's Chief Financial Officer, for which he paid $1,000. In addition, the Company granted to Mr. Sendrow options to purchase 25,000 shares of Common Stock, exercisable at $5.00 per share. In 1996, the Company agreed to issue 50,000 shares of Common Stock to Biagio Bellizzi, the Company's Vice- President, Marketing. In addition, the Company granted to Mr. Bellizzi options to purchase 12,500 shares of Common Stock, exercisable at $5.00 per share. During 1996, the Company paid sales commissions to Messrs. Gaggi, Guadagno and a former director in connection with the private placement of the Company's securities in the amount of $10,000, $55,000 and $10,000 respectively. In addition, in connection with such private placement the Company paid commissions to Mark Mastrini and Jerold Sendrow of $2,000 each. Perry Trebatch, who beneficially owns more than 5% of the Company's outstanding capital stock, has purchased shares of the Company's Common Stock and loaned money to the Company on various occasions. In August 1995, Mr. Trebatch loaned $200,000 to the Predecessor Business for which he received notes bearing interest at the rate of 10% per annum. The obligation under these notes was assumed by the Company in connection with the acquisition of the assets of the Predecessor Business. In addition to its agreement to pay the principal and interest accrued, the Company issued 200,000 shares of its Common Stock to Mr. Trebatch in consideration for this loan. As a result of the Company's failure to timely repay these notes, in 1996, the principal amount thereof was increased to $300,000. As a result of the Company's failure to timely repay a portion of the principal amount of these notes, at the time a partial principal payment was made, the remaining principal balance of $200,000 was increased to $250,000. In April 1996, Mr. Trebatch purchased 100,000 shares of Common Stock at a price of $2.00 per share. In January 1997, Mr. Trebatch was issued 60,000 shares in consideration of his agreement to extend the due date of the Company's notes. Immediately prior to the filing of the Registration Statement of which this Prospectus is a part, the Company agreed to redeem 250,000 shares of Common Stock held by Mr. Trebatch for a promissory note in the amount of $1,000,000 payable within five (5) days of the closing of this Offering. In the redemption agreement the Company also agreed to register for sale in this Registration Statement 210,000 of the remaining shares of Common Stock held by Mr. Trebatch and granted to him options to purchase 300,000 shares of Common Stock at an exercise price of equal to 110% of the initial public offering price of the shares. At the election of Mr. Trebatch any time prior to the first anniversary of the date of this Prospectus, such options may be exchanged for 300,000 Warrants. In addition, notwithstanding the registration of the 210,000 shares of Common Stock, Mr. Trebatch agreed that 110,000 of such shares would remain subject to the lock-up provisions provided for in the Subscription Agreement pursuant to which such shares were acquired and with respect to the remaining 100,000 shares that he would sell no more than 10,000 of such shares within closing of this Offering and 20,000 shares during each consecutive 30-day period thereafter. Michael Cantor, who beneficially owns more than 5% of the Company's outstanding capital stock, has purchased shares of the Company's Common Stock and loaned money to the Company on various occasions. In October 1995, Mr. Cantor loaned the Predecessor Business $100,000. This obligation was assumed by the Company in connection with the acquisition of the assets of the Predecessor Business. As a result of the Company's failure to timely repay this amount, in June 1996 Mr. Cantor was issued 120,600 shares of Common Stock. In January 1996, Mr. Cantor loaned the Company $100,000. In addition to interest at the rate of 10% per annum, the Company issued Mr. Cantor 110,000 shares of Common Stock in consideration of this loan. The terms of his January 1996 loan agreement require that upon completion of this Offering the Company issue to Mr. Cantor such number of shares of Common Stock as is equal to 1.34% of the number of shares then outstanding. In addition, if the Company were to issue any additional shares during the 90-day period commencing upon completion of this Offering, Mr. Cantor would be entitled to receive a number of shares equal to 1.34% of such additional shares. On June __, 1997, the Company and Mr. Cantor agreed that upon completion of this Offering he would receive an additional 56,529 shares, 60,147 if the Representative's overallotment option is exercised in full. In addition, the Company agreed to redeem upon completion of this Offering all of the Common Stock held by Mr. Cantor for a redemption price equal to the initial public offering price of the shares less $1.25. On June __, 1997, the Company agreed to redeem upon completion of this Offering 72,500 shares held by Mr. Jose Colon for a redemption price equal to the initial public offering price of the shares less $1.25. The Company believes that each of the foregoing transactions was completed on terms at least as favorable to the Company as those which would have been obtained from an unaffiliated party. - 36 - 43 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of the Company's Common Stock by (a) each person who beneficially owns more than five percent of the Company's outstanding Common Stock, (b) each executive officer who owns beneficially any shares, and (c) all directors and executive officers of the Company as a group.
NAME AND NUMBER OF SHARES PERCENTAGE ADDRESS (1) BENEFICIALLY OWNED(1) BENEFICIAL OWNERSHIP(2) ----------- --------------------- ----------------------- BEFORE OFFERING AFTER OFFERING --------------- -------------- Michael Gaggi (3)(4) 670,000 11.7% 9.1% Pasquale Guadagno(4) 829,900 14.4% 11.3% Vito Balsami (4) 809,566 14.1% 11.0% Mark D. Mastrini 125,000 2.2% 1.7% Jerrold B. Sendrow 112,500 2.2% 1.7% Biagi Bellizzi 62,500 1.1% .8% Michael Cantor 431,000 7.6% 5.9% Perry Trebatch 480,000 8.5% 6.6% Mees Pierson (Bahamas) Ltd. 425,000 7.5% 5.8% Officers and Directors as a Group (5 persons) 1,799,900 31.8% 24.8%
- ---------------------- *Less than 1% (1) Unless otherwise indicated, the address of each of the beneficial owners identified is 4802 Gunn Highway, Suite 140, Tampa, Florida 33624. (2) Unless otherwise indicated, each person has sole voting and investment power with respect to all such shares. (3) Does not include 2,500 shares owned beneficially by Rose Gaggi, Mr. Gaggi's mother, as to which shares Mr. Gaggi disclaims beneficial ownership. (4) Includes 100,000 shares purchasable pursuant to options immediately exercisable at a price of $1.00 per share. (5) Includes 25,000 shares purchasable pursuant to options immediately exercisable at a price of $5.00 per share. (6) Includes 12,500 shares purchasable pursuant to options immediately exercisable at a price of $5.00 per share. (7) Excludes 56,529 shares issuable upon completion of this Offering. (8) Includes 350,000 shares purchasable pursuant to the options referred to in footnotes 4, 5, 6 and 7. - 37 - 44 CONCURRENT OFFERING The Registration Statement of which this Prospectus forms a part also includes the Prospectus Supplement with respect to an offering by the Selling Shareholders. The 2,580,534 Selling Shareholders Shares are being registered, at the Company's expense (except for legal fees and expenses for counsels to the Selling Shareholders), under the Securities Act and are expected to become tradeable on or about the date of this Prospectus, subject to lock-up agreements pursuant to which certain of the Selling Stockholders Shares may not be sold for varying periods after the date of this Prospectus without the Representative's prior consent. See "Shares Eligible for Future Sale." The Company will not receive any proceeds from the sale of the Selling Shareholders Shares. Sales of Selling Shareholders Shares or even the potential of such sales could have an adverse effect on the market prices of the Units, the Shares and the Warrants. Except with respect to Perry Trebatch, who is a principal shareholder of the Company, there are no material relationships between any holders of the Selling Stockholders Shares and the Company, nor have any such material relationships existed within the past three years. See "Principal Stockholders" and "Certain Transactions and Other Matters. The Company has been informed by the Representative that there are no agreements between the Representatives and any Selling Stockholders. See "Shares Eligible for Future Sales." The Selling Stockholders may from time to time sell all or a portion of their share of Common stock in the over-the-counter market or on any national securities exchange or automated interdealer quotation system on which the Common Stock may hereafter be listed or traded, in negotiated transactions or other wise, at prices then prevailing or related to the then current market price or at negotiated prices. The shares of Common Stock may be sold directly or through brokers or dealers or in a distribution by one or more underwriters on a firm commitment of best efforts basis. The methods by which the shares of Common Stock may be sold include (i) a block trade (which may involve crosses) in which the broker or dealer engaged will attempt to sell the shares of Common Stock as agent but may position and resell a portion of the block as principal to facilitate the transaction, (ii) purchases by a broker or dealer as principal and resales by such broker dealer for its account pursuant to this Prospectus Supplement and the accompanying Prospectus, (iii) ordinary brokerage transactions and transactions in which the broker solicits purchasers or to or through marketmakers, (iv) transactions in put or all options or other rights (whether exchange-listed or otherwise) established after the effectiveness of the Registration Statement of which this Prospectus is a part and (v) privately negotiated transactions. In addition, any of the shares of Common Stock that qualify for sale pursuant to Rule 144 under the Securities Act may be sold in transactions complying with such Rule, rather than pursuant to this Prospectus Supplement and the accompanying Prospectus. In the case of the sales of the shares of Common Stock effected to or through broker-dealers, such broker-dealer may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders or the purchasers of the shares of Common Stock, sold by or through such broker-dealers, or both. The Company has advised the Selling Stockholders that the anti-manipulative Regulation M under the Exchange Act may apply to their sales in the market and has informed them of the need for delivery of copies of this Prospectus Supplement and the accompanying Prospectus. The Company is not aware as of the date of this Prospectus Supplement of any agreements between any of the Selling Shareholders and any broker-dealers with respect to the sale of the shares of Common Stock. The Selling Stockholders and any broker-dealers or agents participating in the distribution of the Securities may be deemed to be "underwriters" within the meaning of the Securities Act and any commissions received by any such broker-dealers or agents and profit on any resale of shares of Common Stock may be deemed to be underwriting commissions under the Securities Act. The commissions received by a broker-dealer or agent may be in excess of customary compensation. The Company will receive no part of the proceeds from the sale of any of the shares of Common Stock by the Selling Shareholders. The Company will pay all costs and expenses incurred in connection with the registration under the Securities Act of the shares of Common Stock offered by the Selling Shareholders, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of counsel and accountants for the Company. Each Selling Shareholder will pay all brokerage fees and commissions, if any, incurred in connection with the sale - 38 - 45 of the shares of Common Stock owned by the Selling Stockholder. In addition, the Company has agreed to indemnify the Selling Shareholders against certain liabilities, including liabilities under the Securities Act. There is no assurance that any of the Selling Stockholders will sell any or all of the shares Common Stock offered by them. DESCRIPTION OF SECURITIES As of the date hereof, the authorized capital stock of the Company consists of (i) 20,000,000 shares of Common Stock, par value $.01 per share, 6,337,271 shares of which are issued and outstanding, and (ii) 1,000,000 shares of Preferred Stock, of which none are outstanding. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of the Company, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." COMMON STOCK Subject to the rights of the holders of any Preferred Stock which may be outstanding, each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor, and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of stockholders, including the election of directors. Holders of Common Stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities. There are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be when issued, fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized, without any action of the stockholders, to provide for the issuance of one or more series of Preferred Stock and to fix the designation, preferences, powers and relative, participating, optional and other rights, qualifications, limitations and restrictions thereof including, without limitation, the dividend rate, voting rights, conversion rights, redemption price and liquidation preference per series of Preferred Stock. Any series of Preferred Stock so issued may rank senior to the Common Stock with respect to the payment of dividends or amounts to be distributed upon liquidation, dissolution or winding up. There are no agreements or understandings for the issuance of Preferred Stock, and the Board of Directors has no present intent to issue any Preferred Stock. The existence of authorized but unissued Preferred Stock may enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal is not in the Company's best interests, the Board of Directors could cause shares of Preferred Stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquiror or insurgent stockholder or stockholder group. The issuance of shares of Preferred Stock pursuant to the Board of Directors' authority described above could decrease the amount of earnings and assets available for distribution to holders of Common Stock and adversely affect the rights and powers, including voting rights, of such holders and may have the effect of delaying, deferring or preventing a change in control of the Company. - 39 - 46 WARRANTS The Warrants will be issued in registered form pursuant to an agreement dated the date of this Prospectus (the "Warrant Agreement"), between the Company and American Stock Transfer Corporation, as Warrant Agent (the "Warrant Agent"). The following discussion of certain terms and provisions of the Warrants is qualified in its entirety by reference to the Warrant Agreement. A form of the certificate representing the Warrants which form a part of the Warrant Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Each of the Warrants entitles the registered holder to purchase one share of Common Stock. The Warrants are exercisable at a price equal to 150% of the Share Offering Price (which exercise price has been arbitrarily determined by the Company and the Representative) subject to certain adjustments. The Warrants are entitled to the benefit of adjustments in their exercise prices and in the number of shares of Common Stock or other securities deliverable upon the exercise thereof in the event of a stock dividend, stock split, reclassification, reorganization, consolidation or merger. The Warrants may be exercised at any time and continuing thereafter until the close of five years from the date hereof, unless such period is extended by the Company. After the expiration date, Warrant holders shall have no further rights. Warrants may be exercised by surrendering the certificate evidencing such Warrant, with the form of election to purchase on the reverse side of such certificate properly completed and executed, together with payment of the exercise price and any transfer tax, to the Warrant Agent. If less than all of the Warrants evidenced by a warrant certificate are exercised, a new certificate will be issued for the remaining number of Warrants. Payment of the exercise price may be made by cash, bank draft or official bank or certified check equal to the exercise price. Warrant holders do not have any voting or any other rights as shareholders of the Company. The Company has the right at any time beginning six months from the date hereof to redeem the Warrants, at a price of $.05 per Warrant, by written notice to the registered holders thereof, mailed not less than 30 nor more than 60 days prior to the Redemption Date. The Company may exercise this right only if the closing bid price for the Common Stock for seven trading days during a 10 consecutive trading day period ending no more than 15 days prior to the date that the notice of redemption is given, equals or exceeds $___ per share, subject to adjustment. If the Company exercises its right to call Warrants for redemption, such Warrants may still be exercised until the close of business on the day immediately preceding the Redemption Date. If any Warrant called for redemption is not exercised by such time, it will cease to be exercisable, and the holder thereof will be entitled only to the repurchase price. Notice of redemption will be mailed to all holders of Warrants of record at least 30 days, but not more than 60 days, before the Redemption Date. The foregoing notwithstanding, the Company may not call the Warrants at any time that a current registration statement under the Securities Act is not then in effect. Any redemption of the Warrants during the one-year period commencing on the date of this Prospectus shall require the written consent of the Representative. The Warrant Agreement permits the Company and the Warrant Agent without the consent of Warrant holders, to supplement or amend the Warrant Agreement in order to cure any ambiguity, manifest error or other mistake, or to address other matters or questions arising thereafter that the Company and the Warrant Agent deem necessary or desirable and that do not adversely affect the interest of any Warrant holder. The Company and the Warrant Agent may also supplement or amend the Warrant Agreement in any other respect with the written consent of holders of not less than a majority in the number of the Warrants then outstanding; however, no such supplement or amendment may (i) make any modification of the terms upon which the Warrants are exercisable or may be redeemed; or (ii) reduce the percentage interest of the holders of the Warrants without the consent of each Warrant holder affected thereby. In order for the holder to exercise a Warrant, there must be an effective registration statement, with a current prospectus on file with the Commission covering the shares of Common Stock underlying the Warrants, and the issuance of such shares to the holder must be registered, qualified or exempt under the laws of the state in which the holder resides. If required, the Company will file a new registration statement with the Commission with respect to the securities underlying the Warrants prior to the exercise of such Warrants and will deliver a prospectus - 40 - 47 with respect to such securities to all holders thereof as required by Section 10(a)(3) of the Securities Act. See "Risk Factors-- Necessity to Maintain Current Prospectus" and "State Blue Sky Registration Required to Exercise Warrants." SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Section 203 of the Delaware General Corporation Law prevents an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (as defined in Section 203) with a publicly-held Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation approved either the transaction in which the interested stockholder became an interested stockholder or the business combination; (ii) upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation or by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of the stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS Certain provisions of the Certificate and Bylaws of the Company summarized in the following paragraphs may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. Classified Board of Directors. The Certificate provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Moreover, under the Delaware General Corporation Law, in the case of a corporation having a classified board, stockholders may remove a director only for cause. This provision, when coupled with the provision of the Bylaws authorizing only the Board of Directors to fill vacant directorships, will preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. Special Meeting of Stockholders. The Certificate provides that special meetings of stockholders of the Company may be called only by the Board of Directors or the Company's Chief Executive Officer. This provision will make it more difficult for stockholders to take actions opposed by the Board of Directors. Advance Notice Requirements for Stockholder Proposals and Director Nominations. The Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder, to be timely, must be received no later than the close of business on the day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. - 41 - 48 LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS AND INDEMNIFICATION. The Company's Certificate of Incorporation eliminates, to the fullest extent now or hereafter permitted by Delaware law, liability of a director to the Company or its stockholders for monetary damages for a breach of such Director's fiduciary duty as a Director. The Delaware General Corporation Law presently permits such limitation of a Director's liability except where a Director (i) breaches his or her duty of loyalty to the Company or its stockholders, (ii) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (iii) authorizes payment of an unlawful dividend or stock repurchase, or (iv) obtains an improper personal benefit. This provision is intended to afford Directors additional protection, and limit their potential liability, from suits alleging a breach of the duty of care by a Director. The Company believes this provision will assist it in maintaining and securing the services of Directors who are not employees of the company. As a result of the inclusion of such a provision, stockholders may be unable to recover monetary damages against Directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct. The Company's Bylaws also provide that Directors and officers shall be indemnified against liabilities arising from their service as Directors or officers to the fullest extent permitted by law, which generally requires that the individual act in good faith and in a manner he or she reasonably believes to be in or not opposed to the Company's best interests. TRANSFER AGENT, REGISTRAR AND WARRANT AGENT The transfer agent and registrar for the Common Stock, and the Warrant Agent for the Warrants is American Stock Transfer & Trust Company. - 42 - 49 SHARES ELIGIBLE FOR FUTURE SALE GENERAL Upon the closing of this Offering, the Company will have 7,807,129 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option). Of these shares, the 1,800,000 shares being offered by the Company and the 2,580,534 shares being offered by the Stockholders will be freely tradeable without restriction (except as to affiliates of the Company) or registration under the Securities Act (collectively, the "Registered Shares"). The remaining 3,326,595 outstanding shares of Common Stock will be "restricted shares" as defined in Rule 144 under the Securities Act. ____ shares of the previously issued and outstanding Common Stock will become available for resale 90 days after the effectiveness of this Offering, and all of the previously issued and outstanding the Common Stock will become available for resale within 6 months after the effectiveness of this Offering, subject in all events to the provisions of Rule 144 under the Securities Act ("Rule 144"). The holders of 102,000 shares, not included in the Registered Shares have agreed not to Sell such shares for a period of two years after the effectiveness of this Offering. The Registered Shares will be freely transferable and tradable in the United States (except by "affiliates" of the Company) without restrictions or further registration under the Securities Act, immediately upon the effectiveness of this Offering. However, (i) holders of 175,000 Registered Shares have agreed not to offer, sell or otherwise dispose of ("Sell") such Registered Shares for a period of 30 days after the effectiveness of this Offering, (ii) the holders of 665,000 Registered Shares have agreed not to sell such shares for a period of 180 days after the date of this Prospectus, and (iii) holders of 102,000 Registered Shares have agreed not to Sell such shares for a period of one year after the effectiveness of this Offering. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Company's Common Stock (approximately 78,000 shares immediately after this Offering) or the average weekly trading volume of the Company's Common Stock on all exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sales provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the later of the date of acquisition of restricted shares from the Company or from any affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company has also agreed that, without the prior written consent of the Underwriters, it will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, for a period of 180 days after the effective date of this Prospectus, subject to certain limited exceptions. See "Underwriting." Since there has been no public market for shares of Common Stock of the Company, the Company is unable to predict the effect that sales made under Rule 144, pursuant to future registration statements, or otherwise, may have on any then prevailing market price for shares of the Common Stock. Nevertheless, sales of a substantial amount of the Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices. - 43 - 50 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, for whom First London Securities Corporation is acting as Representative, have severally agreed to purchase from the Company and the Participating Selling Shareholder an aggregate of 1,800,000 shares of Common Stock ("Shares") and 1,800,000 Warrants. The number of Shares and Warrants which each Underwriter has agreed to purchase is set forth opposite its name.
NAME OF UNDERWRITER NUMBER OF NUMBER OF - ------------------- --------- --------- SHARES WARRANTS ------ -------- First London Securities Corporation................................. Total............................................................... ====== =======
The Securities are offered by the Underwriters subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to approval of certain legal matters by counsel and certain other conditions. The Underwriters are committed to purchase all Securities offered by this Prospectus, if any are purchased. The Company and the Participating Selling Shareholder have been advised by the Representative that the Underwriters propose initially to offer the Securities offered hereby to the public at the offering price set forth on the cover page of this Prospectus. The Representative has advised the Company and the Participating Selling Shareholder that the Underwriters propose to offer the Securities through members of the NASD, and may allow a concession, in their discretion, to certain dealers who are members of the NASD and who agree to sell the Securities in conformity with the NASD Conduct Rules. Such concessions shall not exceed the amount of the underwriting discount that the Underwriters are to receive. The Company has granted to the Representative an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 270,000 Shares and an additional 270,000 Warrants at the public offering price less the underwriting discount set forth on the cover page of this Prospectus (the "Over-Allotment Option"). The Representative may exercise the Over-Allotment Option solely to cover over-allotments in the sale of the Securities being offered by this Prospectus. Officers and directors of the Company may introduce the Representative to persons to consider the Offering and purchase Securities either through the Representative, other Underwriters, or through participating dealers. In this connection, officers and directors will not receive any commissions or any other compensation. The Company and the Participating Selling Shareholder have agreed to pay the Representative a commission of 10% of the gross proceeds of the offering (the "Underwriting Discount"), including the gross proceeds from the sale of the Over-Allotment Option, if exercised. In addition, the Company and the Participating Selling Shareholder have agreed to pay to the Representative a non-accountable expense allowance of three percent (3%) of the gross proceeds of this Offering, including proceeds from any Securities purchased pursuant to the Over-Allotment Option. The Representative's expenses in excess of the non-accountable expense allowance will be paid by the Representative. To the extent that the expenses of the Representative are less than the amount of the non-accountable expense allowance received, such excess shall be deemed to be additional compensation to the Representative. The Company has also agreed to pay the Representative upon the exercise or redemption of the Warrants a fee equal to 5% of the gross proceeds received by the Company from the exercise of the Warrants and 5% of the aggregate redemption price for the Warrants redeemed. Additionally, the Representative shall have the right to nominate an Advisory Director to the Company's Board of Directors. The Advisory Director will have the same privileges as a normal director, including equal compensation, but will forfeit the right to vote on Board issues. The Representative has informed - 44 - 51 the Company that it does not expect sales to discretionary accounts to exceed 5% of the total number of Securities offered by the Company hereby. Prior to this Offering, there has been no public market for the Shares of Common Stock or Warrants of the Company. Consequently, the initial public offering price for the Securities, and the terms of the Warrants (including the exercise price of the Warrants), have been determined by negotiation between the Company and the Representative. Among the factors considered in determining the public offering price were the history of, and the prospect for, the Company's business, an assessment of the Company's management, its past and present operations, the Company's development and the general condition of the securities market at the time of this Offering. The initial public offering price does not necessarily bear any relationship to the Company's assets, book value, earnings or other established criteria of value. Such price is subject to change as a result of market conditions and other factors, and no assurance can be given that a public market for the Shares or Warrants will develop after the close of this Offering, or if a public market in fact develops, that such public market will be sustained, or that the Shares or Warrants can be resold at any time at the offering or any other price. See "Risk Factors." At the closing of this Offering, the Company will issue to the Representative or persons related to the Representative, for nominal consideration, a Representative's Warrant to purchase up to 180,000 Shares and 180,000 Warrants ("Underlying Warrants"). The Representative's Warrant will be exercisable for a four-year period commencing one year from the effective date of this Offering at an exercise price of 120% of the price at which the Common Stock and Warrants are sold to the public, subject to adjustment. Each Underlying Warrant will be exercisable for a four-year period commencing one year from the effective date of this Prospectus to purchase one share of Common Stock at an exercise price of $___ per share of Common Stock. (150% of the Offering Price of the Common Stock) The Representative's Warrant will not be transferable for one year from the date of this Prospectus, except (i) to officers of the Representative, other Underwriters, and officers and partners thereof; (ii) by will; or (iii) by operation of law. The Representative's Warrant contains provisions providing for appropriate adjustment in the event of any merger, consolidation, recapitalization, reclassification, stock dividend, stock split or similar transaction. The Representative's Warrant contain net issuance provisions permitting the holders thereof to elect to exercise the Representative's Warrant in whole or in part and instruct the Company to withhold from the securities issuable upon exercise, a number of securities, valued at the current fair market value on the date of exercise, to pay the exercise price. Such net exercise provision has the effect of requiring the Company to issue shares of Common Stock without a corresponding increase in capital. A net exercise of the Representative's Warrant will have the same dilutive effect on the interests of the Company's shareholders as will a cash exercise. The Representative's Warrant does not entitle the holders thereof to any rights as a shareholder of the Company until such Representative's Warrant is exercised and shares of Common Stock are purchased thereunder. The Company has granted to the holders of the Representatives' Warrants certain rights with respect to registration of the Shares, the Underlying Warrants and the Common Stock issuable upon exercise of the Representatives' Warrants (the "Registrable Securities") under the Securities Act. For a period of four years commencing one year following the date of this Prospectus, the holders representing more than 50% of the Registrable Securities may require the Company at the Company's sole expense to prepare and file one registration statement under the Securities Act with respect to the Registrable Securities. For a period of four years commencing one year following the date of this Prospectus, the holders representing more than 50% of the Registrable Securities also have the right at the Representatives' or holders' expense to require the Company to prepare and file one registration statement with respect to the Registrable Securities. In addition, subject to certain limitations, in the event the Company proposes to register any of its securities under the Securities Act during the seven year period following the date of this Prospectus, the holders of the Registrable Securities are entitled to notice of such registration and may elect to include the Registrable Securities held by them in such registration statement at the sole expense of the Company. The Company and the Participating Selling Shareholder have agreed to indemnify the Underwriters against any costs or liabilities incurred by the Underwriters by reasons of misstatements or omissions to state material facts in connection with the statements made in the Registration Statement and the Prospectus. The Underwriters have - 45 - 52 in turn agreed to indemnify the Company and the Participating Selling Shareholder against any liabilities by reason of misstatements or omissions to state material facts in connection with the statements made in the Prospectus, based on information relating to the Underwriters and furnished in writing by the Underwriters. To the extent that this section may purport to provide exculpation from possible liabilities arising from the federal securities laws, in the opinion of the Commission, such indemnification is contrary to public policy and therefore unenforceable. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement which are filed as exhibits to the Registration Statement. See "Available Information." DETERMINATION OF OFFERING PRICE Prior to the Offering, there has been no public market for the Common Stock or Warrants. The public offering price of the Common Stock and the Warrants and the exercise price of the Warrants, as well as the exercise price of the warrants underlying the Representative's Warrant, have been determined solely by negotiations between the Company and the Representative. Among the factors considered in determining these prices were the Company's current financial condition and prospects and the general condition of the securities market. However, the public offering price of the Common Stock and the Warrants and the exercise price of the Warrants and the warrants underlying Representative's Warrant do not necessarily bear any relationship to the Company's assets, book value, earnings or any other established criterion of value. LEGAL MATTERS The validity of the Securities offered hereby will be passed upon for the Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York. Certain legal matters with respect to the Securities offered hereby will be passed upon for the Underwriters by Jackson Walker, L.L.P., Dallas, Texas. EXPERTS The audited Financial Statements and schedules of the Company included in this Prospectus and elsewhere in the Registration Statement have been audited by Killman, Murrell & Company, P.C., independent certified public accountants, except with respect to the Statement of Operations, Statement of Stockholders' Equity (Deficit) and Statement of Cash Flows for the year ended December 31, 1994, which have been audited by Feldman Radin & Co., P.C., certified public accountants as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of such firms as experts in accounting and auditing in giving said reports. The audited Financial Statements and Schedules of Stevens included in this Prospectus and elsewhere in the Registration Statement have been audited by Accetta and Olmsted, Accountancy Corporation, certified public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of such firms as experts in accounting and auditing in giving said reports. - 46 - 53 800 TRAVEL SYSTEMS, INC. TABLE OF CONTENTS
Page Report of Independent Certified Public Accountants F-2 Report of Independent Certified Public Accountants F-3 Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (Unaudited) F-4 Statements of Operations for the Fiscal Year Ended December 31, 1994, Eleven Months Ended November 30, 1995, One Month Ended December 31, 1995, Fiscal Year Ended December 31, 1996, and Three Months Ended March 31, 1996 and 1997 (Unaudited) F-6 Statements of Stockholders' Equity (Deficit) for Fiscal Year Ended December 31, 1994, Eleven Months Ended November 30, 1995, One Month Ended December 31, 1995, Fiscal Year Ended December 31, 1996, and Three Months Ended March 31, 1997 (Unaudited)F-5 Statements of Cash Flows for the Fiscal Year Ended December 31, 1994, Eleven Months Ended November 30, 1995, One Month Ended December 31, 1995, Fiscal Year Ended December 31, 1996, and Three Months Ended March 31, 1996 and 1997 (Unaudited) F-8 Notes to Financial Statements F-10
F-1 54 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 800 Travel Systems, Inc. Tampa, Florida We have audited the accompanying balance sheets of 800 Travel Systems. Inc. (the Company) as of December 31, 1996 and 1995 and the related statements of operations, stockholders' equity and cash flows for the year ended December 31, 1996 and the one month ended December 31, 1995. We have also audited the consolidated statements of operations, stockholders' (deficit) and cash flows of 1-800-Low Airfare, Inc., and Subsidiary (Predecessor Business) for the eleven months ended November 30, 1995. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Company's financial statements referred to above present fairly, in all material respects, the financial position of 800 Travel Systems, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996 and the one month ended December 31, 1995, in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor Business' financial statements referred to above present fairly, in all material respects, the results of its operations, changes in its stockholders' (deficit) and its cash flows for the eleven months ended November 30,1995 in conformity with generally accepted accounting principles. Killman, Murrell & Company, P.C. Dallas, Texas April 20, 1997 F-2 55 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of 1-800-Low Airfare, Inc. We have audited the accompanying consolidated statement of operations, changes in stockholders' deficit and cash flows of 1-800-Low-Airfare, Inc. and Subsidiary for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of consolidated operations and consolidated cash flows of 1-800-Low-Airfare, Inc. and Subsidiary for the year ended December 31, 1994 in conformity with generally accepted accounting principles. FELDMAN RADIN & CO., P.C. /s/ Feldman Radin & Co., P.C. Certified Public Accountants New York, New York June 2, 1995 F-3 56 800 TRAVEL SYSTEMS, INC. BALANCE SHEETS ASSETS
December 31, -------------------------- March 31, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) CURRENT ASSETS Cash $ 19,593 $ 588,960 $ 243,720 Commissions Receivable 19,613 118,390 322,852 Receivable from AT&T -- 213,980 -- Prepaids -- 28,804 23,542 ----------- ----------- ----------- TOTAL CURRENT ASSETS 39,206 950,134 590,114 ----------- ----------- ----------- LEASEHOLD IMPROVEMENTS AND EQUIPMENT - NOTE 3 32,418 403,964 450,667 Less Accumulated Depreciation (733) (39,734) (52,448) ----------- ----------- ----------- Net Leasehold Improvements and Equipment 31,685 364,230 398,219 ----------- ----------- ----------- EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED Less accumulated amortization of $3,725, $ 48,425 and $59,600, respectively - Note 2 1,113,786 1,069,086 1,057,911 ----------- ----------- ----------- DEFERRED OFFERING COSTS 25,502 50,000 60,378 ----------- ----------- ----------- OTHER ASSETS Trademarks, net of accumulated amortization of $1,111, $15,276 and $18,861, respectively 198,889 199,724 196,139 Related Party Receivables 9,000 109,000 109,000 Bonds and Security Deposits 26,230 31,007 31,007 Merger Deposit and Deferred Acquisition Costs - Note 10 -- 99,341 99,341 Prepaid Rent - Note 5 -- 80,000 77,000 ----------- ----------- ----------- TOTAL OTHER ASSETS 234,119 519,072 512,487 ----------- ----------- ----------- TOTAL ASSETS $ 1,444,298 $ 2,952,522 $ 2,619,109 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. (Continued) F-4 57 800 TRAVEL SYSTEMS, INC. BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, -------------------------- March 31, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) CURRENT LIABILITIES Current Maturities of Long-Term Debt - Related Parties - Note 4 $ 431,750 $ 280,750 $ 280,750 Accounts Payable 96,056 641,592 534,149 Accrued Liabilities 242,610 227,241 280,575 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 770,416 1,149,583 1,095,474 DEFERRED RENT -- 108,721 144,844 LONG-TERM DEBT - Excluding Current Installments - Note 4 60,000 30,000 30,000 ----------- ----------- ----------- TOTAL LIABILITIES 830,416 1,288,304 1,270,318 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES - Notes 7 and 10 STOCKHOLDERS' EQUITY - NOTE 5 Preferred Stock, $100.00 par value, 400 shares authorized; none issued -- -- -- Common stock, $.01 par value, 10,000,000 shares authorized; 3,550,000 and 5,951,209 shares issued and outstanding, respectively 35,500 59,512 59,512 Additional Paid-in-Capital 741,276 4,976,259 4,976,259 Stock Subscriptions Receivable (32,296) (32,296) (32,296) Retained Deficit (130,598) (3,339,257) (3,654,684) ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 613,882 1,664,218 1,348,791 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,444,298 $ 2,952,522 $ 2,619,109 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 58 800 TRAVEL SYSTEMS, INC. STATEMENTS OF OPERATIONS
Predecessor Business The Company -------------------------- -------------------------------------------------------- Eleven Months One Month Three Months Ended Year Ended Ended Ended Year Ended March 31, December 31, November 30, December 31, December 31, -------------------------- 1994 1995 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) REVENUES Commissions $ 622,017 $ 898,479 $ 115,986 $ 2,814,237 $ 303,945 $ 1,338,935 Ticket Delivery Income -- 192,459 17,984 421,540 60,448 300,261 ----------- ----------- ----------- ----------- ----------- ----------- Total Revenues 622,017 1,090,938 133,970 3,235,777 364,393 1,639,196 ----------- ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES Payroll, commissions and employee benefits 790,859 1,115,403 175,604 2,490,770 581,590 848,243 Telephone 165,979 392,869 14,527 539,118 122,496 245,551 Ticket Delivery Expense -- 138,798 17,896 407,579 51,422 178,967 Advertising 459,657 333,520 437 137,223 10,709 45,545 General and administrative - Note 7 1,053,530 1,156,777 53,869 1,768,058 508,902 593,073 Interest expense 46,417 168,857 4,017 1,114,298 264,449 45,890 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 2,516,442 3,306,224 266,350 6,457,046 1,539,568 1,957,269 ----------- ----------- ----------- ----------- ----------- ----------- (LOSS) BEFORE OTHER INCOME (1,894,425) (2,215,286) (132,380) (3,221,269) (1,175,175) (318,073) OTHER INCOME -- 41,959 1,782 12,610 -- 2,646 ----------- ----------- ----------- ----------- ----------- ----------- NET (LOSS) $(1,894,425) $(2,173,327) $ (130,598) $(3,208,659) (1,175,175) (315,427) =========== =========== =========== =========== =========== =========== Weighted Average Number of Common Shares Outstanding 3,830,000 3,830,000 3,840,000 4,947,823 4,116,875 6,251,209 =========== =========== =========== =========== =========== =========== (Loss) Per Common Share $ (.50) $ (.57) $ (.03) $ (.65) $ (.29) $ (.05) =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 59 800 TRAVEL SYSTEMS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Stock ------------------------- Paid-in Subscriptions Shares Amount Capital Receivable Deficit Total ----------- ----------- ----------- ----------- ----------- ----------- PREDECESSOR BUSINESS BALANCE, JANUARY 1, 1994 751,702 $ 752 $ 205,748 $ -- $ (39,210) $ 167,290 Issuance of common stock 248,298 248 194,252 -- -- 194,500 Distribution (Note 5) -- -- -- -- (93,500) (93,500) Net Loss, year ended December 31, 1994 -- -- -- -- (1,894,425) (1,894,425) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1994 1,000,000 1,000 400,000 -- (2,027,135) (1,626,135) Net loss, eleven months ended November 30, 1995 -- -- -- -- (2,173,327) (2,173,327) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, NOVEMBER 30, 1995 1,000,000 $ 1,000 $ 400,000 $ -- $(4,200,462) $(3,799,462) =========== =========== =========== =========== =========== =========== THE COMPANY Issuance of common stock - Note 5 3,229,600 $ 32,296 $ -- $ (32,296) $ -- $ -- Issuance of common stock in connection with debt - Note 5 20,000 200 23,800 -- -- 24,000 Purchase of predecessor - Note 2 300,400 3,004 717,476 -- -- 720,480 Net loss, one month ended December 31, 1995 -- -- -- -- (130,598) (130,598) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1995 3,550,000 35,500 741,276 (32,296) (130,598) 613,882 Sale of common stock - net of expenses of $620,348 - Note 5 1,387,500 13,875 2,442,027 -- -- 2,455,902 Issuance of common stock in connection with debt issuance and services rendered - Note 5 1,013,709 10,137 1,458,581 -- -- 1,468,718 Issuance of options and warrants for services and interest -- -- 334,375 -- -- 334,375 Net loss, year ended December 31, 1996 -- -- -- -- (3,208,659) (3,208,659) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1996 5,951,209 59,512 4,976,259 (32,296) (3,339,257) 1,664,218 Net loss, three months ended March 31, 1997 (unaudited) -- -- -- -- (315,427) (315,427) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, MARCH 31, 1997 (UNAUDITED) 5,951,209 $ 59,512 $ 4,976,259 $ (32,296) $(3,654,684) $ 1,348,791 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-7 60 800 TRAVEL SYSTEMS, INC. STATEMENTS OF CASH FLOWS
Predecessor Business -------------------------- The Company Eleven Months -------------------------------- Year Ended Ended Year Ended December 31, November 30, One Month Ended December 31, 1994 1995 December 31, 1995 1996 ----------- ----------- ----------------- ---------- CASH FLOW FROM OPERATING ACTIVITIES Net (loss) $(1,894,425) $(2,173,327) $ (130,598) $(3,208,659) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and Amortization 9,606 6,752 5,569 97,866 Stock, options and warrants issued for expenses and debt redemption -- -- -- 1,803,093 Prepaid Rent Amortization -- -- -- 8,000 Changes in operating assets and liabilities, net of effects of acquisition: (Increase) decrease in receivables (10,782) 8,793 (17,764) (312,757) (Increase) decrease in prepaids and other assets (18,701) (8,055) -- (21,581) Decrease in deferred financing fees -- 92,833 -- -- Increase in related party receivables -- -- (5,000) (100,000) Increase (Decrease) in deferred rent liability -- (59,929) -- 108,721 Increase (Decrease) in accounts payable and accrued expenses 815,967 909,874 77,138 530,167 ----------- ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (1,098,335) (1,223,059) (70,655) (1,095,150) ----------- ----------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of leasehold improvements and equipment (22,846) (7,963) -- (371,546) Purchase of Trademark -- -- -- (15,000) Merger deposit and deferred acquisition costs -- -- -- (99,341) ----------- ----------- ----------- ----------- NET CASH FLOW USED BY INVESTING ACTIVITIES (22,846) (7,963) -- (485,887) ----------- ----------- ----------- ----------- The Company -------------------------- Three Months Ended March 31, -------------------------- 1996 1997 ----------- ----------- (Unaudited) (Unaudited) CASH FLOW FROM OPERATING ACTIVITIES Net (loss) $(1,175,175) $ (315,427) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and Amortization 16,523 27,474 Stock, options and warrants issued for expenses and debt redemption 171,000 Prepaid Rent Amortization -- 3,000 Changes in operating assets and liabilities, net of effects of acquisition: (Increase) decrease in receivables (37,172) 9,518 (Increase) decrease in prepaids and other assets (37,299) 5,262 Decrease in deferred financing fees Increase in related party receivables (62,355) -- Increase (Decrease) in deferred rent liability -- 36,123 Increase (Decrease) in accounts payable and accrued expenses 366,972 (54,109) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (757,506) (288,159) ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of leasehold improvements and equipment (5,500) (46,703) Purchase of Trademark (15,000) -- Merger deposit and deferred acquisition costs -- -- ----------- ----------- NET CASH FLOW USED BY INVESTING ACTIVITIES (20,500) (46,703) ----------- -----------
The accompanying notes are an integral part of these financial statements. (Continued) F-8 61 800 TRAVEL SYSTEMS, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
Predecessor Business The Company -------------------------- ----------------------------------------------------------- Eleven Months Three Months Ended Year Ended Ended Year Ended March 31, December 31, November 30, One Month Ended December 31, ------------------------- 1994 1995 December 31, 1995 1996 1996 1997 ----------- ----------- ----------------- ----------- ----------- ----------- (Unaudited) (Unaudited) CASH FLOW FROM FINANCING ACTIVITIES Deferred offering cost $ (97,833) $ -- $ (25,502) $ (50,000) $ -- (10,378) Proceeds from borrowings, net -- 1,202,250 125,750 -- 125,000 -- Principal payments on debt (18,944) -- -- (281,000) -- -- Issuance of common stock 194,500 -- -- 2,481,404 983,550 -- Proceeds from private placement, net 1,000,000 -- -- -- -- -- Acquisition of Predecessor Business -- -- (10,000) -- Capital distribution (93,500) -- -- -- -- -- ----------- ----------- -------------- ----------- ----------- ----------- NET CASH FLOW FROM FINANCING ACTIVITIES 984,223 1,202,250 90,248 2,150,404 1,108,550 (10,378) ----------- ----------- -------------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH (136,958) (28,772) 19,593 569,367 330,544 (345,240) CASH AT THE BEGINNING OF PERIOD 169,795 32,837 -- 19,593 19,593 588,960 ----------- ----------- -------------- ----------- ----------- ----------- CASH AT THE END OF PERIOD $ 32,837 $ 4,065 $ 19,593 $ 588,960 $ 350,137 $ 243,720 =========== =========== ============== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest Expense $ 46,417 $ 168,857 $ 4,017 $ 67,205 $ 11,449 $ 45,890 =========== =========== ============== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-9 62 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) DECEMBER 31, 1996 AND 1995 NOTE 1: BUSINESS AND BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 800 Travel Systems, Inc. (the "Company") is a telemarketing travel company which provides air transportation reservation services. The Company was formed in November 1995 to acquire certain of the assets and assume certain liabilities of 1-800-Low Airfare, Inc. (the Predecessor Business), which occurred December 1, 1995. The Company, and the Predecessor Business strive to furnish the lowest air fare available at the time of reservation within the parameters provided by a customer. The Company incorporated LAF Financial Services, Inc. ("LAF") on January 16, 1996, in the State of Delaware. At December 31, 1996, LAF had not issued any stock and had conducted no business activities. Leasehold Improvements and Equipment Leasehold improvements and equipment is stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets, five to ten years. Excess of Cost Over Fair Value of Net Assets The excess of cost over fair value of net assets acquired is amortized over a period of twenty-five (25) years. The Company periodically reviews the carrying amount of this asset and evaluates its recoverability based upon future estimated operating cash flows. Trademarks The cost of the trademarks is being amortized using the straight-line method over their useful estimated lives of fifteen (15) years. Revenue Recognition Revenues, which consist of commissions, are recognized when travel services are ticketed. Net Loss Per Common Share Net loss per common share is based on the weighted average number of common shares outstanding, as adjusted for the effects of the application of Securities and Exchange Commission Staff Accounting Bulletin (SAB) No.83 and unissued shares in connection with the purchase of the Predecessor Business (at December 31, 1995). At December 31, 1996 the Company had issued stock options for 300,000 shares of stock and stock warrants for 275,000 shares of stock, the earnings per share computation did not include the exercise of the stock options and warrants due to the antidilutive effect. The net loss per share computations for the period March 31, 1997 includes the 300,000 shares of stock to be issued to the Joseph Stevens Group, Inc. in 1997, subject to the successful completion of the proposed public offering. F-10 63 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 1: BUSINESS AND BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Loss Per Common Share (Continued) Pursuant to SAB No. 83, common stock issued by the Company at a price less than the initial public offering ("IPO") price during the twelve months immediately preceding the initial filing of this Prospectus, together with common stock purchase warrants and options issued during each period with an exercise price less than the IPO price, are treated as outstanding for all periods presented. Pro forma net loss per share is computed using the treasury stock method, under which the number of shares outstanding reflects an assumed use of the proceeds from the issuance of such shares and from the assumed exercise of such options (none) and warrants (none) to repurchase shares of the Company's common stock at the estimated IPO price of $5.00 per share. Taxes on Income The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which utilizes an asset and liability approach in determining income tax expense. Stock Based Compensation In October 1995, the Financial Accounting Standard Board issued Statement No.123, "Accounting for Stock Based Compensation." Statement No 123 established a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. The Company has recognized in the accompanying statements of operations the fair value amounts applicable to stock-based compensation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimated amounts. Reclassifications Certain prior year balances have been reclassified to conform with the current presentation. F-11 64 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 2: ACQUISITION The Company acquired certain of the assets and assumed certain liabilities of the Predecessor Business effective December 1, 1995. The $820,480 purchase price consisted of $10,000 in cash, $90,000 in notes payable and 600,400 shares of the Company's common stock (valued at $1.20 per share). The Company, acting on behalf of the Predecessor Business, agreed to issue 300,000 of the shares of common stock to those remaining creditors of the Predecessor Business who elected to convert their claim into stock at the rate of $10 per share. In 1996, the Creditors representing 153,934 shares of common stock have converted their claim into stock and 146,066 shares have been issued to the Predecessor Business. The Company assumed $536,253 of liabilities pursuant to the purchase agreement and has subsequently agreed to assume certain additional liabilities aggregating $50,275. Costs in excess of net assets acquired aggregated $1,117,511. Proforma results of operations as if the Company had acquired the Predecessor Business on January 1, 1995 would not have been materially different than the results of operations of the Predecessor for the eleven months ended November 30, 1995 and accordingly, are not presented. NOTE 3: LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment by major classification are as follows:
December 31, -------------------------- March 31, 1997 1995 1996 (Unaudited) ----------- ----------- ----------- Leasehold improvements $ -- $ 155,885 $ 155,885 Telephone Equipment -- 147,133 155,100 Furniture and fixtures 18,734 78,106 78,106 Computer equipment 7,703 14,858 14,858 Office equipment 5,981 7,982 7,982 Sabre Equipment -- -- 38,736 ----------- ----------- ----------- 32,418 403,964 450,667 Less accumulated depreciation (733) (39,734) (52,448) ----------- ----------- ----------- TOTAL LEASEHOLD IMPROVEMENTS AND EQUIPMENT $ 31,685 $ 364,230 $ 398,219 =========== =========== ===========
F-12 65 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 4: NOTES PAYABLE - RELATED PARTIES
December 31, ------------------------- March 31, 1997 1995 1996 (Unaudited) ----------- ----------- ----------- 10% purchase money notes, payable in three annual installments of $30,000 plus interest, due November 1998, unsecured $ 90,000 $ 60,000 $ 60,000 10% note payable, principal and interest due March 14, 1996, less unamortized discount of $29,000 attributable to issuance of 20,000 shares of common stock in 1995 21,000 -- -- 10% note payable, interest and principal due July 1, 1997 -- 250,000 250,000 10% note payable, interest and principal due February 28, 1996 100,000 -- -- 10% note payable, interest and principal due on demand 80,000 -- -- 10% note payable, interest and principal due December 31, 1996 100,000 -- -- 10% note payable, interest and principal due December 31, 1996 100,000 -- -- Other 750 750 750 ----------- ----------- ----------- 491,750 310,750 310,750 Less current maturities 431,750 280,750 280,750 ----------- ----------- ----------- $ 60,000 $ 30,000 $ 30,000 =========== =========== ===========
Approximate maturities of notes payable-related parties at December 31, 1996 are as follows: 1997 $280,750 1998 30,000 -------- $310,750 ========
F-13 66 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 5: STOCKHOLDERS' EQUITY In connection with the initial capitalization of the Company 3,229,600 shares of common stock were issued in exchange for subscriptions receivable of $32,296 (par value). The $32,296 had not been paid as of December 31, 1996. During February 1996, the Company initiated a private placement of shares of common stock. As of December 31, 1996, a total of 1,387,500 shares of common stock had been sold and issued. These shares carry certain resale restrictions. The total sales price of these shares was $3,076,250. Sales commissions amounting to $591,250 were paid to related parties. In February 1996, the Company issued 20,000 shares valued at $50,000 as a rollover of a past due note payable. During 1996, the Company issued 100,000 shares of stock to an officer of the Company as a bonus. An expense of $120,000 has been recognized in connection this transaction. A total of 180,000 shares have been issued in 1996, for consulting services for which an expense of $336,000 has been recognized. A total of 12,500 shares have been issued in connection with loans obtained. The value of $15,000 was amortized as additional interest expense over the term of the loans. During 1996, the Company issued 40,000 shares of common stock, valued at $100,000, to its landlord in connection with a lease. This amount will be amortized as additional rent expense at the rate of $1,000 per month. The $92,000 unamortized balance is included in prepaid expenses and other assets in the accompanying December 31, 1996 balance sheet. In connection with late penalties for past due loans, two related party creditors received during 1996, 361,209 shares of common stock valued at $847,718. In 1996, the Company issued 275,000 warrants to purchase 275,000 shares of the Company's common stock at a price of 110% of the public offering price. The warrants can be exercised beginning on the first anniversary date of the public offering. The fair value of the warrants was twelve and one half cents ($.125) per warrant (aggregate fair value $34,375). The warrants were issued as incentive to extend a certain note payable; therefore, the fair value was recognized as interest expense in 1996. In 1996, the Company issued options to purchase 300,000 shares of its common stock at a price of $1.00 per share. These options can be exercised beginning one year from date of grant. The fair value of the common stock at the date of issuance of the options was $2.00 per share; therefore, the accompanying statement of operations for the year ended December 31, 1996, recognized a consulting expense of $300,000 applicable to the difference between the option exercise price and the fair value of the shares at the date of the grant of the option. F-14 67 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 5: STOCKHOLDERS' EQUITY (CONTINUED) In May 1995, the Predecessor Business completed a Bridge Financing of units for a total of $800,000, in promissory notes and common stock purchase warrants. Each unit consisted of a $25,000 12% promissory note and warrants to purchase 6,250 shares of common stock at an exercise price of $5.00. In connection with this financing, various placement agents received an aggregate total of $90,000 in commissions and warrants to purchase 37,500 shares of stock. In April 1994, the Predecessor Business purchased all of the rights, title and interest in the telephone number 1-800-LOW-AIRFARE from a principal shareholder. The purchase price was $250,000 of which $93,500 was paid and accounted for as a dividend, with payment of the remaining balance contingent on the completion of a private placement of equity securities which did not occur. NOTE 6: INCOME TAXES The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
December 31, ---------------------- 1996 1995 --------- --------- Deferred Tax Assets: Net operating loss carryforwards $ 779,000 $ 44,300 Less valuation allowance (779,000) (44,300) --------- --------- NET DEFERRED TAX ASSET $ -- $ -- ========= =========
At December 31, 1996 and 1995, the Company has a tax net operating loss carryforward of approximately $2,423,000 and $132,000 respectively, to offset future taxable income. The tax net operating loss carryforwards begin to expire in 2010. Realization of any portion of the deferred tax asset resulting from the Company's net operating loss carryforward is not considered more likely than not. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. F-15 68 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 7: COMMITMENTS AND CONTINGENCIES The minimum future office rental commitment for leases approximates the following:
Year ending December 31, 1997 180,183 1998 196,877 1999 196,877 2000 213,571 2001 213,571 Thereafter 1,218,102 ---------- $2,219,181 ==========
Rent expense totaled approximately $109,000, $109,000, $5,000, $170,000 and $54,000 for the year ended December 31, 1994, the eleven months ended November 30, 1995, the one month ended December 31, 1995, the year ended December 31, 1996, and the three months ended March 31, 1997, respectively. The Company entered into a services agreement with a stockholder. The agreement expired on December 31, 1996, and required $3,000 payments per week plus expenses. This stockholder was paid services fees amounting to $152,700, a common stock bonus of 150,000 shares of common stock (fair market value of $300,000), commissions for sale of stock of $221,000, plus expenses of $199,853 for the year ended December 31, 1996, and $12,000 in services fees for the one month ended December 31, 1995. For the three month period ended March 31, 1997, the same stockholder was paid $40,800 as services fees, plus expenses of $65,898. This stockholder also received from the predecessor business services fees totaling $26,000 for the eleven months ended November 30, 1995. Additionally, certain stockholders received fees of $5,000, $3,500 and $37,900 for consulting services rendered during the one month ended December 31, 1995, the eleven months ended November 30, 1995 and the year ended December 31, 1994, respectively. The Predecessor Business is a defendant in various law suits. The Company has not contractually assumed any of the potential liabilities from the Predecessor Business' lawsuits and in management's opinion will not be affected by the outcome of these legal proceedings. The Company is dependent on two (2) airlines for approximately forty-five percent (45%) of its revenues, and the Company's ability to quote air travel ticket prices, make reservations and sell tickets is dependent upon the performance of SABRE electronic travel reservation system. F-16 69 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 8: SUPPLEMENTAL CASH FLOW INFORMATION For the one month ended December 31, 1995: 1) In connection for the acquisition of the asset and assumption of certain liabilities of the predecessor business, the Company issued a note payable of $90,000 and 300,400 shares of stock valued at $720,480 (an additional 300,000 shares was issued in 1996). The Company acquired assets totaling $89,499 and assumed liabilities of $586,825. Costs in excess of net assets acquired, aggregated $1,317,511. 2) The Company issued 20,000 shares of common stock valued at $24,000 in connection with the placement of debt. 3) A stock subscription receivable of $31,796 for the initial capitalization of the Company was issued. For the year ended December 31, 1996: 1) The Company issued 20,000 shares of common stock valued at $50,000 for a note payable. 2) The Company issued 12,500 shares of common stock for past due interest totaling $15,000 on two notes payable. 3) There were 40,000 shares of common stock issued to JFJ Realty as prepaid rent of $100,000. 4) Various creditors of the Predecessor Business and the Predecessor Business were issued 300,000 shares of common stock. 5) The Company issued 361,209 shares of common stock valued at $847,718 for two past due notes payable. 6) The Company issued 100,000 shares of common stock with a value of $120,000 as a bonus to the Company's President. 7) Two shareholders were issued 180,000 shares of common stock valued at $336,000 for services. 8) The Company issued 300,000 stock options with a fair value of $1.00 for consulting services. 9) The Company issued 275,000 warrants with a fair value of $.125 in recognition of a loan extension. NOTE 9: FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including commissions receivable, accounts payable, and debt approximated fair value due to the relatively short maturity. F-17 70 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) (CONTINUED) DECEMBER 31, 1996 AND 1995 NOTE 10: MERGER AGREEMENT In November, 1996, Company entered into a merger agreement with the Joseph Stevens Group, Inc. ("Stevens"). The agreement calls for all of the capital stock of Stevens to be acquired in exchange for shares of the Company's common stock and a note payable of $1,578,000 (subject to adjustment for assumed liabilities). The merger will become effective on the effective date of the Company's planned initial public offering. The Company has made an escrow payment of $46,665 to the seller in connection with the anticipated merger. In addition the Company has incurred costs and expenses associated with the merger of $52,676, which were deferred at December 31, 1996. Upon the effective date, the Company shall issue to the Selling Shareholder the greater of (i) 300,000 shares of the company's stock or (ii) that number of shares of the common stock having an aggregate value of $1,500,000 using the initial public offering price in calculating the per share value of the company stock. If, on the second anniversary date of the public offering, the value of the Company's shares then held by the Selling Shareholder, together with the aggregate amount of cash and the fair market value of any assets or properties received by the Selling Shareholder in connection with the sale prior to the second anniversary of the closing date of all or any of the shares received in the merger, is less than $2,571,429, then the Company shall issue to the Selling Shareholder, on the second anniversary of the public offering closing, additional shares of the Company, using the price of the Company's common stock on the second anniversary of the public offering closing and an appropriate number of additional common shares of the Company shall be issued to the Selling Shareholder based upon such price in order to make up any such deficiency. As part of the merger agreement, the Company entered into an operating agreement with Stevens, whereby, the Company assumed all operations of Stevens as of January 1, 1997, and assumed any economic gains or losses from these operating activities. The financial statement for the three months ended March 31, 1997, include the operations of Steven from January 1, 1997 to March 31, 1997. NOTE 11: GROSS RESERVATIONS For the various periods presented in the statements of operations, the gross dollar amounts for reservations of airline tickets were as follows:
Period Amount ------ ------ Three Months ended March 31, 1997 $11,165,266 =========== 1996 $ 3,779,151 =========== Year ended December 31, 1996 $23,590,782 =========== One month ended December 31, 1995 $ 1,609,426 =========== Eleven months ended November 30, 1995 $ 9,647,090 =========== Year ended December 31, 1994 $ 5,924,310 ===========
F-18 71 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS) DECEMBER 31, 1996 AND 1995 NOTE 12: INTERIM FINANCIAL DATA (UNAUDITED) The balance sheet of March 31, 1997, and the statements of operations and cash flows for the three month period ended March 31, 1997 and 1996, and the statement of stockholders' equity for the three month period ended March 31, 1997, are unaudited. The March 31, 1997 statements of operations include the operations of the Joseph Stevens Group, Inc. for the period January 1, 1997 to March 31, 1997. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and includes all adjustments, consisting only of normal recurring adjustments necessary to state fairly the information set forth therein. The data disclosed in the notes to financial statements for these periods are unaudited. Operating results for the three months ended March 31, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. F-19 72 800 TRAVEL SYSTEMS, INC. PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (UNAUDITED) In November 1996, 800 Travel Systems, Inc. ("Travel") entered into a merger agreement to acquire all the outstanding shares of Joseph Stevens Group, Inc. ("Group"), a provider of travel ticketing services and telemarketing services, for a note in the amount of $1,578,000 and approximately 300,000 shares of Travel. The acquisition of Group will be accounted for by Travel as a purchase whereby the basis for accounting for Group's assets and liabilities will be based upon their fair market values at the date of the acquisition (expected to be the date of the initial public offering of Travel). The unaudited Pro Forma Condensed Combined Statement of Operations (Pro Forma Statement of Operations) for the year ended December 31, 1996 gives pro forma effect to the acquition of Group (and other adjustments as described in the accompanying notes) as if it had occurred on January 1, 1996. The Pro Forma Statement of Operations is based on the historical results of operations of Travel and Group for the year ended December 31, 1996. The Pro Forma Condensed Combined Balance Sheet as of December 31, 1996 (Pro Forma Balance Sheet) gives pro forma effect to the acquisition of Group as if it had occurred on that date. The Pro Forma Statement of Operations and the Pro Forma Balance Sheet and the accompanying notes (Pro Forma Financial Information) should be read in conjunction with and are qualified by the historical financial statements of Travel included in its Form SB-2 as of May 30, 1997, and the historical financial statements of Group and notes thereto appearing elsewhere herein. The Pro Forma Information is intended for informational purposes only and is not necessarily indicative of the future financial position or results of operations of Travel after the acquisition of Group, or the financial position or the results of operations of Travel that would have actually occurred had the acquisition of Group been effected as of the date or for the period presented. F-20 73 800 TRAVEL SYSTEMS, INC. PRO FORMA BALANCE SHEETS DECEMBER 31, 1996 ASSETS
800 Travel Systems, Inc. 800 Travel Joseph Stevens Pro Forma on a Pro Systems, Inc. Group, Inc. Adjustments Forma Basis -------------- -------------- ----------- ------------- (A) CURRENT ASSETS Cash $ 588,960 $ 116,268 $ 705,228 Trade Commissions Receivable 118,390 151,761 270,151 Receivable from AT&T 213,980 - 213,980 Prepaids 28,804 62,790 91,594 ----------- ----------- ----------- TOTAL CURRENT ASSETS 950,134 330,819 1,280,953 ----------- ----------- ----------- LEASEHOLD IMPROVEMENTS AND EQUIPMENT 403,964 690,725 (190,725)(C) 903,964 Less Accumulated Depreciation (39,734) (321,580) 221,580 (D) (139,734) ----------- ----------- ----------- ----------- Net Leasehold Improvements and Equipment 364,230 369,145 30,855 764,230 ----------- ----------- ----------- ----------- EXCESS OF COST OVER FAIR - - 2,117,882 (B) - VALUE OF NET ASSETS ACQUIRED 1,069,086 - (84,715)(B) 3,102,253 ----------- ----------- ----------- ----------- DEFERRED OFFERING COSTS 50,000 - 50,000 ----------- ----------- ----------- OTHER ASSETS Related Party Receivables 109,000 - 109,000 Bonds and Security Deposits 31,007 28,640 59,647 Merger Deposit and Deferred Acquisition Costs 99,341 - 99,341 Prepaid Rent 80,000 - 80,000 Trademarks 199,724 158,600 41,400 (E) - - - (13,333)(E) 386,391 ----------- ----------- ----------- ----------- TOTAL OTHER ASSETS 519,072 187,240 28,067 734,379 ----------- ----------- ----------- ----------- TOTAL ASSETS $ 2,952,522 $ 887,204 $ 2,092,089 $ 5,931,815 =========== =========== =========== ===========
(Continued) F-21 74 800 TRAVEL SYSTEMS, INC. NOTES TO THE PRO FORMA BALANCE SHEET (UNAUDITED) (A) Represents the historical balance sheet information of Group. (B) Adjusts the assets acquired and liabilities assumed in the acquisition of Group to reflect the allocation of the estimated purchase price. The resulting goodwill was calculated as follows:
Estimated purchase price: Amount paid to be by Note $ 1,578,000 Issuance of 300,000 shares of Travel with a fair market value at the date of acquisition of $5.00 per share 1,500,000 Direct costs of acquistion 99,341 ----------- 3,177,341 Less assets acquired: Current assets (330,819) Other assets (728,640) Plus liabilities assumed: Current liabilities - Long-term debt - ----------- Goodwill $ 2,117,882 ===========
Goodwill will be amortized ratably over twenty-five (25) years. (C) Adjust Group's leasehold improvements and equipment to their fair market value of $500,000. (D) Adjustment to eliminate historical accumulated depreciation and to provide depreciation ratably over a five (5) year period for assets acquired from Group. (E) Adjust Group's trade mark to its $200,000 fair market value and to amortize the trade mark over a period of fifteen (15) years. (F) Adjustment to accrue one year interest on note at ten percent (10%). F-22 75 800 TRAVEL SYSTEMS, INC. PRO FORMA BALANCE SHEETS (Continued) DECEMBER 31, 1996 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
800 Travel Systems, Inc. 800 Travel Joseph Stevens Pro Forma on a Pro Systems, Inc. Group, Inc. Adjustments Forma Basis (A) ------------- -------------- ----------- -------------- CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 280,750 $ 779,995 $ (779,995)(B) $ 280,750 Accounts Payable and Accrued Expenses 868,833 362,257 (204,457)(F) 1,026,633 ----------- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 1,149,583 1,142,252 (984,452) 1,307,383 DEFERRED RENT 108,721 - - 108,721 LONG-TERM DEBT - Excluding Current Installments 30,000 1,054,195 523,805(B) 1,608,000 ----------- ----------- ----------- ----------- TOTAL LIABILITIES 1,288,304 2,196,447 (460,647) 3,024,104 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) Preferred Stock - - Common Stock 59,512 88,000 (85,000)(B) 62,512 Additional Paid-in-Capital 4,976,259 369,312 1,309,586(B) 6,655,157 Stock Subscriptions Receivable (32,296) - - (32,296) Retained Deficit (3,339,257) (1,766,555) 1,328,150(B) (3,777,662) ----------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 1,664,218 (1,309,243) 2,552,736 2,907,711 ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,952,522 $ 887,204 $ 2,092,089 $ 5,931,815 =========== =========== =========== ===========
F-23 76 800 TRAVEL SYSTEMS, INC. PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
800 Travel Systems, Inc. 800 Travel Joseph Stevens Pro Forma on a Pro Systems, Inc. Group, Inc. Adjustments Forma Basis -------------- -------------- ----------- -------------- (A) REVENUES $ 3,235,777 $ 1,664,959 $ - $ 4,900,736 ----------- ----------- ----------- ----------- OPERATING EXPENSES General and Administrative 5,244,882 1,640,388 - 6,885,270 Interest Expens 1,114,298 107,128 157,800(C) 1,379,226 Amortization and Depreciation 97,866 113,268 84,780(B) 295,914 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 6,457,046 1,860,784 242,580 8,560,410 ----------- ----------- ----------- ----------- (LOSS) BEFORE OTHER INCOME (3,221,269) (195,825) (242,580) (3,659,674) OTHER INCOME 12,610 - - 12,610 ----------- ----------- ----------- ----------- NET (LOSS) $(3,208,659) $ (195,825) $ (242,580) $(3,647,064) =========== =========== =========== =========== Weighted Average Number of Common Shares Outstanding 5,247,823(D) =========== (Loss) Per Common Share $ (.69) ===========
The accompanying notes are an integral part of these financial statements. F-24 77 800 TRAVEL SYSTEM, INC. NOTES TO THE PRO FORMA INCOME STATEMENT (UNAUDITED) (A) Represents the historical income statement information of Group. (B) Represent the amortization of goodwill on a straight line basis over 25 years, amortization of trade mark over fifteen (15) years and depreciation of assets over five (5) years. (C) Accrue interest on note payable at ten percent (10%). (D) Adjusted to reflect the issuance of the 300,000 shares issued in the acquisition of Group as if it occurred in the beginning of fiscal year 1996. F-25 78 JOSEPH STEVENS GROUP, INC. CONTENTS Report of Independent Certified Public Accountants F-27 Financial Statements Balance Sheets F-28 Statements of Operations F-30 Statements of Capital Deficit F-31 Statements of Cash Flows F-32 Notes to Financial Statements F-33 F-26 79 Report of Independent Certified Public Accountants To the Board of Directors and Stockholders JOSEPH STEVENS GROUP, INC. San Diego, California We have audited the accompanying balance sheets of JOSEPH STEVENS GROUP, INC. as of December 31, 1996 and 1995, and the related statements of operations, capital deficit, and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JOSEPH STEVENS GROUP, INC. as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the two years then ended, in conformity with generally accepted accounting principles. Accetta and Olmsted Accountancy Corporation Fountain Valley, California April 23, 1997 F-27 80 BALANCE SHEET JOSEPH STEVENS GROUP, INC. DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash $116,268 $ 60,346 Accounts receivable (Less allowance for doubtful accounts of $41,098, and $41,098 for 1996 and 1995, respectively) 151,761 80,707 Prepaid expenses 62,790 1,920 -------- -------- TOTAL CURRENT ASSETS 330,819 142,975 -------- -------- PROPERTY AND EQUIPMENT Furniture and fixtures 61,657 8,562 Office equipment 591,299 309,177 Automobiles 37,769 37,769 -------- -------- 690,725 355,508 Less accumulated depreciation (321,580) (215,313) -------- -------- TOTAL PROPERTY AND EQUIPMENT 369,145 140,195 -------- -------- OTHER ASSETS Trademarks (Net of amortization of $13,975 and $9,675 for 1996 and 1995) 158,600 162,315 Warranty -- Note A 28,640 -0- -------- -------- TOTAL OTHER ASSETS 187,240 162,315 -------- -------- TOTAL ASSETS $887,204 $445,485 ======== ========
F-28 81
1996 1995 ----------- ----------- LIABILITIES CURRENT LIABILITIES Accounts payable and accrued expenses $ 175,595 $ 230,247 Accrued interest payable 186,662 104,839 Current portion of long-term debt-Note C 779,995 383,760 --------- -------- TOTAL CURRENT LIABILITIES 1,142,252 718,846 --------- -------- LONG-TERM DEBT, LESS CURRENT PORTION-Note C 1,054,195 937,459 --------- -------- COMMITMENTS AND CONTINGENCIES-Note F CAPITAL DEFICIT-Note D Common stock, stated value .05 per share, 20,000,000 shares authorized; 1,760,000 shares issued and outstanding 88,000 88,000 Additional paid in capital 369,312 271,910 Deficit (1,766,555) (1,570,730) ----------- ---------- TOTAL CAPITAL DEFICIT (1,309,243) (1,210,820) ----------- ---------- TOTAL LIABILITIES AND CAPITAL DEFICIT $ 887,204 $ 445,485 =========== ==========
See accompanying notes F-29 82 STATEMENT OF OPERATIONS JOSEPH STEVENS GROUP, INC. DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- REVENUES $1,664,959 $ 876,739 ---------- ---------- OPERATING EXPENSES General and Administrative 1,639,588 1,164,933 Interest 107,128 94,883 Depreciation 113,268 69,026 ---------- ---------- TOTAL OPERATING EXPENSES 1,859,984 1,328,842 ---------- ---------- OTHER INCOME Liability Reduction -- Note E -0- 200,083 ---------- ---------- TOTAL OTHER INCOME -0- 200,083 ---------- ---------- (LOSS) BEFORE TAXES (195,333) (252,020) INCOME TAX BENEFITS (EXPENSE) -- Notes A and B (800) (2,579) ---------- ---------- NET (LOSS) $ (195,825) $ (254,599) ========== ==========
See accompanying notes F-30 83 STATEMENTS OF CAPITAL DEFICIT JOSEPH STEVENS GROUP, INC. YEARS ENDED DECEMBER 31, 1996 AND 1995
Paid in Capital -------------------- Common Common Common Stock Stock Stock Deficit Total ------- -------- ------- ----------- ----------- Balances at December 31, 1994 88,000 271,910 -- (1,316,131) (956,221) Net loss for 1995 -- -- -- (254,599) (254,599) ------- -------- ------- ----------- ----------- Balances at December 31, 1995 88,000 271,910 -- (1,570,730) (1,210,820) Issuance of Stock Warrants - Note D -- -- 97,402 -- 97,402 Net loss for 1996 -- -- -- (195,825) (195,825) ------- -------- ------- ----------- ----------- Balances at December 31, 1996 $88,000 $271,910 $97,402 $(1,766,555) $(1,309,243) ======= ======== ======= =========== ===========
See accompanying notes F-31 84 \ STATEMENT OF CASH FLOWS JOSEPH STEVENS GROUP, INC. YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 25,748,283 $ 16,484,303 Cash paid to suppliers (23,991,835) (15,451,991) Cash paid to employees (1,948,994) (1,312,647) Cash paid to interest (25,305) (16,294) Cash paid for income taxes (800) (2,579) ------------ ------------ NET CASH USED BY OPERATING ACTIVITIES (218,651) (299,208) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (48,815) (15,602) Trademark (585) -- ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (49,400) (15,602) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 381,977 362,691 Repayment of debt (58,006) (38,184) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 323,971 324,507 ------------ ------------ NET INCREASE IN CASH 55,920 9,697 CASH AT BEGINNING OF PERIOD 60,348 50,651 ------------ ------------ CASH AT END OF PERIOD $ 116,268 $ 60,348 ============ ============
F-32 85
1996 1995 ---------- ---------- NET LOSS $(195,825) $(254,599) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED BY OPERATING ACTIVITIES Depreciation & amortization 113,268 69,026 Change in assets and liabilities: (Increase) in accounts receivable (71,054) (27,787) (Increase) in other prepaid expenses (60,870) 4,306 (Increase) in prepaid warranty (28,640) -0- Increase in accrued interest 81,823 78,589 (Decrease) in accounts payable and accrued expenses (57,353) (168,743) --------- --------- TOTAL ADJUSTMENTS $ (22,826) $ (44,609) --------- --------- NET CASH USED BY OPERATING ACTIVITIES $(218,651) $(299,208) ========= ========= SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS Property and equipment acquired through financing agreements & stock warrants-Note D $ 286,402 $ -0-
See accompanying notes F-33 86 NOTES TO FINANCIAL STATEMENTS JOSEPH STEVENS GROUP, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Joseph Stevens Group, Inc. (the Company) was incorporated on January 8, 1990 in the state of California, under the name of Creative Telemarketing Concepts, Inc. On August 1, 1991, the Company changed its name to Joseph Stevens Group, Inc. The Company has two primary operating divisions. The first FLY-4-LESS, a travel agency, derives income for travel ticketing. The second division, Creative Telemarketing Concepts, derives income from fees charged for telemarketing services. Travel Ticket Revenue Recognition The Company derives a substantial portion of its income as a travel agency from travel ticketing. The full price of the travel ticket is reported as gross revenue. Additionally, the cost of the travel ticket is included in cost of sales. Property And Equipment Property and equipment are recorded at cost and depreciated or amortized utilizing the straight-line method or accelerated methods for all assets over their estimated useful lives as follows: Office equipment 5 years Furniture and fixtures 7-10 years Vehicles 5 years Expenditures that materially increase the asset life are capitalized, while ordinary maintenance and repairs are charged to operations as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss in included in earnings. Trademarks The cost of trademarks acquired are being amortized on the straight-line method over their estimated useful lives, 40 years. Warranty In 1996, the Company paid $28,640 for an extended warranty on the acquisition of an ACD switch. The equipment is warranted for three years. The extended warranty provides benefits in years four and five. The extended warranty will be amortized over 24 months beginning in 1999. Income Taxes Income taxes are accounted for in accordance with statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Texas, issued by the Financial Accounting Standards Board (FASB). Deferred income taxes have been provided for the timing differences between reporting methods for financial and tax purposes. The items which give rise to these differences are the use of Modified Accelerated Cost Recovery System (MACRS) for depreciation for federal income tax purposes, the timing of California Franchise taxes as a federal deduction, the use of bonus depreciation for California income tax purposes and net operating loss carry forwards for both Federal and California income tax purposes. F-34 87 NOTES TO FINANCIAL STATEMENTS -- continued JOSEPH STEVENS GROUP, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE B -- INCOME TAXES Income tax benefits (expense) consist of the following:
1996 1995 -------- -------- Federal Tax Benefit: Currently Payable $ -0- $ -0- Deferred Benefit 66,413 85,687 Valuation Allowance (66,413) (85,687) -------- -------- -0- -0- State Tax Benefit: Currently Payable (800) (2,579) Deferred Benefit 9,083 11,719 Valuation Allowance (9,083) (11,719) -------- -------- (800) (2,579) -------- -------- Income Tax Benefit (Expense) $ (800) $ (2,579) ======== ========
The deferred tax asset is due to the tax benefits to be derived form the net operating loss carry forwards. However, a valuation allowance has been provided as realization of the deferred tax asset is not considered more likely than not. The statutory rates used to calculate the deferred benefit were 34% Federal and 9.3% State. The State of California only allows 50% of losses to be carried forward. For tax return purposes, at December 31, 1996, the Company has total net operating loss carry forwards of approximately $1,698,093 for federal purposes and $852,680 for state purposes, which may be applied against future taxable income, expiring in the years 2006 through 2011 for federal and 1997 through 2001 for state. F-35 88 NOTES TO FINANCIAL STATEMENT - continued JOSEPH STEVENS GROUP, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE C - LONG-TERM LIABILITIES 1996 1995 ---- ---- A summary of long-term debt, less current maturities is as follows: Loan payable to GMAC, commenced September 29, 1992, principal and interest payable monthly at $283, effective interest rate 2.9%, secured by automobile, maturing August 29, 1996. $ 0 $ 2,236 Capitalized leases payable to finance companies, principal and interest payable monthly at $2,471, effective interest rates from 13% to 27.5%, secured by equipment, maturing March 25, 1999. 30,779 56,292 Note payable to Western Horizons, Ltd., (shareholder), commenced August 1, 1994, interest only payable monthly beginning June 1, 1995, effective interest rate 7%, balance due in full at maturity, July 31, 1999 900,000 900,000 Various notes payable to shareholders, commencing in 1995 and 1996, principal and interest due at maturity, effective interest rate 7.5%, maturing December 31, 1996. 635,191 312,691 Note payable to individual, commencing December 1995 and November 1996, principal and interest due at maturity, effective interest rate 7.5%, maturing June 30, 1996, and December 31, 1996. 100,000 50,000 Note Payable to related party, Trans West Communication Systems, Inc., commencing January 1996, principal and interest due monthly at $4,459, effective interest rate 17.9%, maturing April 1, 2001, with a residual payment of $28,640. 168,221 0 --------- --------- Total debt 1,834,191 1,321,219 Loss current maturities (779,995) (383,760) --------- --------- Long-term debt 1,054,196 937,459 ========== =========
The maturity of loans payable at December 31, 1997 is as follows: 1997 $ 779,995 1998 40,409 1999 937,618 2000 43,319 2001 32,850 Thereafter 0 ---------- Total $1,834,191 ==========
The company has not maintained the terms of the notes payable to Western Horizons, Ltd., shareholders, or individual. Per verbal agreement, Western Horizons, Ltd. is allowing for a deferral of interest payments. The company is currently negotiating a revised loan agreement. Per verbal agreement, the shareholders and individual lender have extended the terms on their notes. Management is currently negotiating revised maturity dates. F-36 89 NOTES OF FINANCIAL STATEMENTS - continued JOSEPH STEVENS GROUP, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE D - STOCK OPTIONS AND STOCK WARRANTS The Company has granted stock options to key members of management and to members of its Board of Directors. As of December 31, 1996, the Company has granted options for 64,000 shares of common stock. The exercise price of each option is $1.00 per share of common stock. The options do not have an expiration date. In connection with the financing of $286,402 of equipment, $97,402 was paid with the issuance of detachable stock warrants. Warrants to purchase 70,691 shares of common stock were issued. Upon surrender of a warrant, the holder is entitled to purchase common stock at $1.375 per share. The warrants expire December 31, 1999. NOTE E - LIABILITY REDUCTION In prior years, the Company had accrued for disputed liabilities existing with various vendors in the amount of $235,392. All amounts disputed were in regards to quality of services rendered to the Company. Due to negotiated agreements, vendor concessions, and lack of action from the vendors, management believes it is highly doubtful that these obligations exist. As a precaution, the Company has accrued for contingent liabilities of 15% of the originally accrued amount, $35,309. This is included in accounts payable and accrued expenses. The write-down of the accrued liability of $200,083, is reflected in earnings in 1995. NOTE F - COMMITMENTS AND CONTINGENCIES Lease Commitment The Company entered into a three year lease for its operating facility beginning December 20, 1994. The Company has also entered into a three year automobile lease beginning September 1, 1995. As of December 31, 1996, the future minimum rental payments pertaining to these leases are as follows:
Facility Automobile Total -------- ---------- ----- December 31, 1997 $69,744 $3,980 $73,724 December 31, 1998 -0- 2,653 2,653 Thereafter -0- -0- -0- ------- ------ ------- $69,744 $6,633 $76,377 ======= ====== =======
Rental expense for all operating leases for the year ended December 31, 1996 amounted to approximately $89,257. F-37 90 NOTES TO FINANCIAL STATEMENTS - continued JOSEPH STEVENS GROUP, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE G - SUBSEQUENT EVENTS Sale of Significant Assets On January 13, 1997, the Company sold significant assets to a related company for assumption of debt. The market value of the assets were less than the assumed debt by $700,000. Accordingly, as part of this transaction, the Company has entered into a promissory note payable to the related company. Management is still negotiating the terms of the note. Merger The Company is currently in negotiations with 800 Travel Systems, Inc. to perfect a type A merger. The Company will merge into 800 Travel Systems, Inc. Upon filing the Articles of Merger with the Department of the State of Delaware in accordance with the laws of the State of Delaware and the filing of the Certificate of Merger with the Secretary of State of California. On the merger becoming effective, the Company and 800 Travel Systems, Inc. shall become a single corporation with 800 Travel Systems, Inc. being the surviving corporation. At the effective date, all the shares of the capital stock of the Company issued and outstanding will be converted into shares of 800 Travel Systems, Inc. In return, the shareholders of the Company will receive the greater of 1) 300,000 shares of 800 Travel Systems, Inc. stock, or 2) the number of shares of 800 Travel Systems, Inc. having an aggregate total of $1,500,000, using the IPO opening price. Interim Operating Agreement The Company entered into an interim operating agreement with Joseph Stevens Group LLC, a California Limited Liability Company, and 800 Travel Systems, Inc., a Delaware Corporation, in January 1997. The terms of this agreement require 800 Travel Systems, Inc. to maintain the operation of the Joseph Stevens Group, Inc. until the merger. The interim operating entity will be required to keep separate books in accordance with generally accepted accounting principles. Termination of this agreement may only be made with cause as per Paragraph 3.2 of the interim operating agreement. NOTE H - RELATED PARTY TRANSACTIONS As detailed in Note C, the Company has borrowings from shareholders of $1,535,191 plus accrued interest as of December 31, 1996. Additionally, in 1996 the Company purchased equipment in the amount of $286,402 from Trans West Communication Systems, Inc. One of the owners of Trans West Communication Systems, Inc. is a member of the Company's Board of Directors and is a holder of stock options and stock warrants. F-38 91 ================================================================================ No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Selling Stockholders or any Underwriter. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Company since such date. -------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................... Risk Factors................................. The Stevens Merger........................... Use of Proceeds.............................. Dividend Policy.............................. Capitalization............................... Dilution..................................... Management's Discussion and Analysis of Financial Condition and Results of Operations........................... Business..................................... Management................................... Certain Transactions......................... Principal Stockholders....................... Concurrent Offering.......................... Description of Securities.................... Shares Eligible for Future Sale.............. Underwriting................................. Legal Matters................................ Experts...................................... Additional Information....................... Index to Financial Statements................
------------------- Until , 1997 (25 days after the date of this Prospectus) all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ 800 TRAVEL SYSTEMS, INC. 1,800,000 SHARES OF COMMON STOCK AND 1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS -------------- PROSPECTUS -------------- FIRST LONDON SECURITIES CORPORATION , 1997 =============================================================================== 92 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED _______________, 1997) SUBJECT TO COMPLETION, DATED _____________, 1997 800 TRAVEL SYSTEMS, INC. 2,580,534 Shares of Common Stock This Prospectus supplement relates to the offer and sale by certain selling securityholders ("Selling Shareholders") named herein under "Selling Shareholders" of up to 2,580,534 shares of common stock, $.01 par value per share ("Common Stock"), of 800 Travel Systems, Inc. (the "Company"). The Company will not receive any of the proceeds from the sale of securities by the Selling Shareholders. All expenses of registration incurred in connection with this Offering are being borne by the Company, but all selling and other expenses incurred by Selling Shareholders will be borne by the Selling Shareholders. None of the shares of Common Stock has been registered prior to the filing of the Registration Statement of which this Prospectus is a part. The outstanding shares of Common Stock were originally issued by the Company in private transactions. See "Selling Shareholders." The Selling Shareholders may from time to time sell all or a portion of their shares of Common Stock in the over-the-counter market or on any national securities exchange or automated interdealer quotation system on which the Common Stock may hereafter be listed or traded, in negotiated transactions or otherwise, at prices then prevailing or related to the then current market price or at negotiated prices. The shares of Common Stock may be sold directly or through brokers or dealers or in a distribution by one or more underwriters on a firm commitment or best efforts basis. Each Selling Shareholder and any agent or broker-dealer participating in the distribution of the Securities may be deemed to be an "underwriter" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Any commissions received by and any profit on the resale of the shares of Common Stock may be deemed to be underwriting commissions or discounts under the Securities Act. The Registration Statement, of which this Prospectus forms a part, also covers the offering by the Company of 1,800,000 shares of Common Stock and 1,800,000 Redeemable Common Stock Purchase Warrants (in each case without giving effect to the Representative's Over-Allotment Option) being sold by the Company. Brokers or dealers effecting transactions in the shares of Common Stock on behalf of the Selling Shareholders should confirm the registration thereof under the securities laws of the state in which such transactions occur or the existence of an exemption from registration. The Company has filed applications for listing of the Common Stock on the Nasdaq Small Cap Market System ("NASDAQ") and the Boston Stock Exchange. No assurance can be given that the applications will be approved. There is no current established market for the Common Stock. SEE "RISK FACTORS" ON PAGE ___ OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. _____________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus Supplement is __________________, 1997. 93 USE OF PROCEEDS The Company will not receive any of the proceeds from sales of any of the shares of Common Stock by the Selling Shareholders. SELLING SHAREHOLDERS The Prospectus Supplement relates to the offer and sale from time to time by certain stockholders of the Company of up to 2,580,534 outstanding shares of Common Stock. TRANSFER RESTRICTIONS Holders of 175,000 of the shares of Common Stock offered hereby (the "Registered Shares") have agreed with the representative of the underwriters of the offering of the Company's securities (the "Representative") not to offer, sell or otherwise dispose of ("Sell") such Registered Shares for a period of 30 days after the effectiveness of this Offering; holders of 665,000 Registered Shares have agreed with the Representative not to Sell any of such shares for a period of 180 days after the effectiveness of this Offering; and holders of 102,000 Registered Shares have agreed with the Representative not to Sell such shares for a period of one year after the effectiveness of this Offering. The Representative has no current plans or understandings to waive, shorten or modify the foregoing lock-up arrangements. The Company will (i) amend this Prospectus Supplement if these arrangements are waived for 10% or more of the shares of the Selling Shareholders, and (ii) sticker this Prospectus Supplement if these arrangements are waived for between 5% and 10% of the shares of the Selling Shareholders. IDENTITY AND OWNERSHIP OF SELLING SHAREHOLDERS The following table provides certain information with respect to the Selling Shareholders; and the number of shares of Common Stock owned, offered and to be owned after the offering by each Selling Shareholder, subject to certain transfer restrictions. See "-- Transfer Restrictions."
MAXIMUM NUMBER OF SHARES SHARES OF COMMON SHARES OF COMMON STOCK OF COMMON STOCK TO BE STOCK TO BE OWNED SELLING SHAREHOLDERS OWNED BEFORE OFFERING SOLD IN THE OFFERING AFTER THE OFFERING(1) -------------------- --------------------- -------------------- --------------------- Albert Wardi 42,000 42,000 0 Steven Clarke 20,000 40,000 0 Silver Ltd. 20,000 20,000 0 Perry Trebatch 200,000 200,000 30,000 Dr. Robert K. Horowitz 40,000 80,000 0 Thomas J. Stalzer 25,000 25,000 0 Gaetano Grasso 49,568 49,568 0 Casino Partners 40,000 40,000 0 Jerry Dowell 20,000 20,000 0 Scot Spencer 160,000 160,000 0 Kay Mahoney 20,000 20,000 0 Warren H. Smith 20,000 20,000 0 JFJ Real Estate LP 40,000 40,000 0 Stan Erickson 40,000 40,000 0 Michael Smith 50,000 50,000 0 SGII Corp 20,000 20,00 0
S-2 94
MAXIMUM NUMBER OF SHARES SHARES OF COMMON SHARES OF COMMON STOCK OF COMMON STOCK TO BE STOCK TO BE OWNED SELLING SHAREHOLDERS OWNED BEFORE OFFERING SOLD IN THE OFFERING AFTER THE OFFERING(1) -------------------- --------------------- -------------------- --------------------- Jack Threadgill 80,000 80,000 0 Barry Saunders 40,000 40,000 0 Rex Beall 20,000 20,000 0 Don Clancy 20,000 20,000 0 Andrew Shevins and Anita 40,000 40,000 0 Shevins, JTWS Mees Pierson (Bahamas) 425,000 425,000 0 Ltd. Romajo Partners Limited 50,000 50,000 0 Partnership Dr. Arthur A. Pava 40,000 40,000 0 George Fina 20,000 20,000 0 Joseph Smith 40,000 40,000 0 Herbert Wolas Ttee 40,000 40,000 0 Alfred and Luisa Angrisani 40,000 40,000 0 Alfred Angrisani 40,000 40,000 0 Charles H. Roeske 20,000 20,000 0 B.A. Bobanic 10,000 10,000 0 Edward G. Marini 20,000 20,000 0 Adam Spencer 9,566 9,566 0 Audrey Spencer 10,000 10,000 0 George Spencer 290,000 290,000 0 Jack Busselle 20,000 20,000 0 The Joseph Stevens Group 300,000 500,000 0 Eric Hamilton 40,000 40,000 0 Ernest Gottdiener 40,000 40,000 0 Harry Baron 40,000 40,000 0 Eng-chye Low 40,000 40,000 John Killick 40,000 40,000
(1) Assumes all shares registered herewith are sold by each Selling Shareholder. The referenced offering is not the underwritten public offering covered by the accompanying Prospectus. DESCRIPTION OF TRANSACTIONS Outstanding Common Stock. Immediately after the effective date of this Prospectus Supplement, the Company will have issued and outstanding 6,253,500 shares of Common Stock. S-3 95 In November and December 1995, the Company sold and issued 380,000 shares of Common Stock to various investors at a price per share of $1.25. The offering was made in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering, as the offering was made to a limited number of investors without general solicitation or advertisements. In December 1995 through January 1996, in connection with bridge financings, Company sold and issued 622,900 shares of Common Stock to various investors. The offering was made in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering, as the offering was made to a limited number of investors without general solicitation or advertisements. In June 1996, the Company sold and issued 1,435,00 shares of Common Stock to investors in a private placement conducted through various broker-dealers retained by LAF Financial Services, Inc., the placement agent and a wholly- owned subsidiary of the Company. The Common Stock was sold at a price per share of $2.50. The offering was made in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder, as an offering only to "accredited investors" (as such term is defined in Rule 501 of the Securities Act) without general solicitation or advertisements. PLAN OF DISTRIBUTION The Selling Shareholders may from time to time sell all or a portion of their shares of Common stock in the over-the-counter market or on any national securities exchange or automated interdealer quotation system on which the Common Stock may hereafter be listed or traded, in negotiated transactions or otherwise, at prices then prevailing or related to the then current market price or at negotiated prices. The shares of Common Stock may be sold directly or through brokers or dealers or in a distribution by one or more underwriters on a firm commitment or best efforts basis. The methods by which the shares of Common Stock may be sold include (i) a block trade (which may involve crosses) in which the broker or dealer engaged will attempt to sell the shares of Common Stock as agent but may position and resell a portion of the block as principal to facilitate the transaction, (ii) purchases by a broker or dealer as principal and resales by such broker dealer for its account pursuant to this Prospectus Supplement and the accompanying Prospectus, (iii) ordinary brokerage transactions and transactions in which the broker solicits purchasers or sales to or through marketmakers, (iv) transactions in put or call options or other rights (whether exchange-listed or otherwise) established after the effectiveness of the Registration Statement of which this Prospectus is a part and (v) privately negotiated transactions. In addition, any of the shares of Common Stock that qualify for sale pursuant to Rule 144 under the Securities Act may be sold in transactions complying with such Rule, rather than pursuant to this Prospectus Supplement and the accompanying Prospectus. In the case of the sales of the shares of Common Stock effected to or through broker-dealers, such broker- dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders or the purchasers of the shares of Common Stock, sold by or through such broker-dealers, or both. The Company has advised the Selling Shareholders that the anti-manipulative Regulation M under the Exchange Act may apply to their sales in the market and has informed them of the need for delivery of copies of this Prospectus Supplement and the accompanying Prospectus. The Company is not aware as of the date of this Prospectus Supplement of any agreements between any of the Selling Shareholders and any broker-dealers with respect to the sale of the shares of Common Stock. The Selling Shareholders and any broker-dealers or agents participating in the distribution of the Securities may be deemed to be "underwriters" within the meaning of the Securities Act and any commissions received by any such broker-dealers or agents and the profit on any resale of shares of Common Stock may be deemed to be underwriting commissions under the Securities Act. The commissions received by a broker-dealer or agent may be in excess of customary compensation. The Company will receive no part of the proceeds from the sale of any of the shares of Common Stock by the Selling Shareholders. The Company will pay all costs and expenses incurred in connection with the registration under the Securities Act of the shares of Common Stock offered by the Selling Shareholders, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of counsel and accountants for the Company. Each Selling Shareholder will pay all brokerage fees and commissions, if any, incurred in connection with the sale of the shares of S-4 96 Common Stock owned by the Selling Shareholder. In addition, the Company has agreed to indemnify the Selling Shareholders against certain liabilities, including liabilities under the Securities Act. There is no assurance that any of the Selling Shareholders will sell any or all of the shares Common Stock offered by them. LEGAL OPINIONS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York. S-5 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant has authority under Section 145 of the Delaware General Corporations Law to indemnify its directors and officers to the extent provided in such statute. The Registrant's Amended and Restated Certificate of Incorporation provides that the Registrant shall indemnify its executive officers and directors to the fullest extent permitted by law either now or hereafter. The Registrant has also entered into an agreement with each of its directors and certain of its officers wherein it has agreed to indemnify each of them to the fullest extent permitted by law. At present, there is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify the directors, officers and controlling persons of the Registrant against certain civil liabilities that may be incurred in connection with this Offering, including certain liabilities under the Securities Act. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses payable by the Registrant in connection with the offering described in this registration statement (other than underwriting discounts and commissions) will be as follows: Securities and Exchange Commission registration fee....................................................................... $ 14,000 NASD filing fee.............................................................................. 10,000 NASDAQ listing fee........................................................................... 10,000 Boston Stock Exchange Listing Fee............................................................ 10,000 Printing and engraving expenses.............................................................. 200,000 Accounting fees and expenses................................................................. 50,000 Legal fees and expenses...................................................................... 150,000 Fees and expenses (including legal fees) for qualifications under state securities laws................................................. ______ Registrar and Transfer Agent's fees and expenses............................................. ______ Miscellaneous................................................................................ 4,000 Total ....................................................................................... $448,000
All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and the NASDAQ listing fee and the Boston Stock Exchange listing fee are estimated. II-1 98 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. In December 1995, in connection with the purchase of assets of 1-800 Low-Airfare, Inc. and its wholly-owned subsidiary S. Travel, Inc. (collectively, the "Predecessor Business") and the assumption by the Company of certain of its liabilities, the Company agreed to issue an aggregate of 300,000 shares of Common Stock to creditors of the Predecessor Business who chose to convert debt held by them at the rate of $10.00 of such debt in the Predecessor Business per share of the Company's Common Stock. The creditors of the Predecessor Business elected to convert $1,664,340 of such indebtedness for 166,434 shares of Common Stock. The remaining 133,566 shares were issued to S. Travel, Inc. The offering was made in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering. In November and December 1995, the Company sold and issued 380,000 shares of Common Stock to various investors at a price per share of $1.25. The offering was made in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering, as the offering was made to a limited number of investors without general solicitation or advertisements. In December 1995 through January 1996, in connection with bridge financings, Company sold and issued 622,900 shares of Common Stock to various investors. The offering was made in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering, as the offering was made to a limited number of investors without general solicitation or advertisements. In 1996 the Company sold and issued 1,387,500 shares of Common Stock to investors in a private placement conducted through various broker-dealers retained by LAF Financial Services, Inc., the placement agent and a wholly-owned subsidiary of the Company. The Common Stock was sold at an average price per share of $2.22. The offering was made in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder, as an offering only to "accredited investors" (as such term is defined in Rule 501 of the Securities Act) without general solicitation or advertisements. During 1996, the Company issued a total of 280,000 shares to officers of and consultants to the Company. In June 1996, the Company issued 40,000 shares of Common Stock to its landlord, valued at the rate of $2.50 of indebtedness per share, in exchange for a portion of its obligations to the landlord under such lease. During 1996 the Company issued an aggregate of 361,209 shares of Common Stock to creditors of the Company for penalties for past due loans. Such issuances were made in reliance on Section 4(2) of the Securities Act as transactions not involving any public offerings, as such sales was made to a limited number of investors without general solicitation or advertisements. II-2 99 ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT DESCRIPTION ------- ----------- 1.1 Proposed form of Underwriting Agreement (1) 2.1 Asset Purchase Agreement dated as of November 13, 1995 among 1-800 Low-Air Fare, Inc., S. Travel, Inc. and the Company 2.2 Amended and Restated Agreement and Plan of Merger dated November 11, 1996 among the Company, The Joseph Stevens Group, Inc. and the Joseph Stevens Group LLC (1) 2.3 Interim Operating Agreement between the Company and Joseph Stevens Group, Inc. (1) 3.1 Registrant's Amended and Restated Certificate of Incorporation (1) 3.2 Registrant's Amended and Restated Bylaws (1) 4.1 Specimen Common Stock certificate (1) 4.2 Specimen Warrant Certificate (1) 5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the validity of the Common Stock being registered (1) 10.1 Form of Registrant's 1997 Stock Option Plan 10.2 Promissory Note of the Company dated November 7, 1995 in the amount of $30,000 to the order of S. Travel, Inc. due and payable November 7, 1997 10.3 Promissory Note of the Company dated November 7, 1995 in the amount of $30,000 to the order of S. Travel, Inc. due and payable November 7, 1998 10.4 Redemption Agreement between the Company and Michael Cantor 10.5 Redemption Agreement between the Company and Jose Colon(1) 10.6 Agreement between the Company and Perry Trebatch 10.7 Lease dated February 10, 1996 by and between JFJ Real Estate Limited Partnership and the Company 10.8 Airlines Reporting Corporation ("ARC") Agent Reporting Agreement 10.9 Letter dated March 6, 1996 from ARC approving change of ownership 10.10 Subscriber Service Agreement dated November 27, 1995 between the Company and Payroll Transfers Interstate, Inc. 10.11 Form of Employment Agreement between the Company and Mark D. Mastrini 10.12 Form of Employment Agreement between the Company and Jerrold B. Sendrow 10.13 Form of Employment Agreement between the Company and Biagio Belizzi 10.14 Form of Consulting Agreement between the Company and Lucien Bittar(1) 11.1 Statement regarding computation of per share earnings (1) 12.1 Statement regarding computation of ratios (1) 21.1 Subsidiaries of the Registrant (1) 23.1 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (to be included in its opinion to be filed as Exhibit 5.1) 23.2 Consent of Killman, Murrell & Company 23.3 Consent of Acetta and Olmstead, Accountancy Corporation 23.4 Consent of Feldman Radin & Co., P.C. 24.1 Reference is made to the Signatures section of this Registration Statement for the Power of Attorney contained therein
- --------------------- (1) To be filed by amendment. (b) Financial Statement Schedules: II-3 100 The following supplemental schedules can be found on the indicated pages of this Registration Statement. ITEM PAGE ---- ----
All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are not applicable, and therefore have been omitted. ITEM 28. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any additional or changed material information with respect to the plan of distribution not previously disclosed in the registration statement; and (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. (b) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 101 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Miami, State of Florida, on May 30, 1997. 800 TRAVEL SYSTEMS, INC. By:/s/ Mark D. Mastrini ----------------------------------- Mark D. Mastrini, President Chief Operating Officer and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark D. Mastrini and Jerrold B. Sendrow his true and lawful attorneys-in-fact, each acting alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments, including any post-effective amendments, to this registration statement, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Mark D. Mastrini President May 30, 1997 - ---------------------------- Chief Operating Officer Mark D. Mastrini and Director /s/ Jerrold B. Sendrow Vice President-Finance, Treasurer, May 30, 1997 - ---------------------------- Secretary and Director Jerrold B. Sendrow (principal accounting officer) /s/ Pasquale Guadagno Director May 30, 1997 - ---------------------------- Pasquale Guadagno /s/ Michael Gaggi Chairman of the Board May 30, 1997 - ---------------------------- Michael Gaggi
II-5 102 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 1.1 Proposed form of Underwriting Agreement (1) 2.1 Asset Purchase Agreement dated as of November 13, 1995 among 1-800 Low-Air Fare, Inc., S. Travel, Inc. and the Company 2.2 Amended and Restated Agreement and Plan of Merger dated November 11, 1996 among the Company, The Joseph Stevens Group, Inc. and the Joseph Stevens Group LLC (1) 2.3 Interim Operating Agreement between the Company and Joseph Stevens Group, Inc. (1) 3.1 Registrant's Amended and Restated Certificate of Incorporation (1) 3.2 Registrant's Amended and Restated Bylaws (1) 4.1 Specimen Common Stock certificate (1) 4.2 Specimen Warrant Certificate (1) 5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the validity of the Common Stock being registered (1) 10.1 Form of Registrant's 1997 Stock Option Plan 10.2 Promissory Note of the Company dated November 7, 1995 in the amount of $30,000 to the order of S. Travel, Inc. due and payable November 7, 1997 10.3 Promissory Note of the Company dated November 7, 1995 in the amount of $30,000 to the order of S. Travel, Inc. due and payable November 7, 1998 10.4 Redemption Agreement between the Company and Michael Cantor 10.5 Redemption Agreement between the Company and Jose Colon(1) 10.6 Agreement between the Company and Perry Trebatch 10.7 Lease dated February 10, 1996 by and between JFJ Real Estate Limited Partnership and the Company 10.8 Airlines Reporting Corporation ("ARC") Agent Reporting Agreement 10.9 Letter dated March 6, 1996 from ARC approving change of ownership 10.10 Subscriber Service Agreement dated November 27, 1995 between the Company and Payroll Transfers Interstate, Inc. 10.11 Form of Employment Agreement between the Company and Mark D. Mastrini 10.12 Form of Employment Agreement between the Company and Jerrold B. Sendrow 10.13 Form of Employment Agreement between the Company and Biagio Belizzi 10.14 Form of Consulting Agreement between the Company and Lucien Bittar(1) 11.1 Statement regarding computation of per share earnings (1) 12.1 Statement regarding computation of ratios (1) 21.1 Subsidiaries of the Registrant (1) 23.1 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (to be included in its opinion to be filed as Exhibit 5.1) 23.2 Consent of Killman, Murrell & Company 23.3 Consent of Acetta and Olmstead, Accountancy Corporation 23.4 Consent of Feldman Radin & Co., P.C. 24.1 Reference is made to the Signatures section of this Registration Statement for the Power of Attorney contained therein
- --------------------- (1) To be filed by amendment. EX-2.1 2 ASSET PURCHASE AGREEMENT 1 EXHIBIT 2.1 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into this [13]th day of November, 1995, by and among 1-800 LOW AIR FARE, INC. ("1-800"), a Delaware corporation and S. TRAVEL, INC. ("ST"), a Delaware corporation (together "Sellers"); and 800 TRAVEL SYSTEMS, INC., a Delaware corporation ("Purchaser"). NOW, THEREFORE, in consideration of the representations, warranties and covenants hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged, Sellers and Purchaser hereby agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS SECTION 1.1 ASSETS TO BE PURCHASED AND SOLD. (a) Description of Assets. At the Closing, Sellers shall sell, assign, transfer and convey to Purchaser, and Purchaser shall purchase and acquire from Sellers, all of the assets, rights and properties described on Exhibit A attached hereto, free and clear of liens, claims, charges and encumbrances of any nature except as otherwise specifically provided herein. The assets to be purchased hereunder are referred to herein as the "Assets." SECTION 1.2 PURCHASE PRICE; OPTION TO 1-800 AND ST CREDITORS. (a) Amount. The purchase price to be paid by Purchaser for the Assets (the "Purchase Price") shall be $100,000.00, plus Purchaser's assumption at Closing of the Assumed Obligations (hereinafter defined). (b) Allocation. The parties have agreed that the Purchase Price (without regard to the Assumed Obligations) shall be allocated between the Sellers in the manner set forth on Exhibit B hereto. (c) Option to 1-800 and ST Creditors. For a period of ninety (90) days after the date hereof, Purchaser will purchase from any creditors of 1-800 and/or ST the principal amount of any bona fide debt owed by 1-800 or ST to such creditor or creditors by issuing one share of the common stock of Purchaser for each $10.00 of such principal indebtedness owed by 1-800 or ST, up to an aggregate of 300,000 shares of Purchaser's common stock. For purposes of this Agreement, the phrase "bona fide debt owed by 1-800 and/or ST" shall mean the principal amount of any indebtedness acknowledged by, and reflected in the financial books and records of, 1-800 or 2 ST. The offer to purchase indebtedness pursuant to the provisions of this Section 1.2(c) shall not apply to any Assumed Obligations, notwithstanding any other provision to the contrary herein contained. If, at the end of the aforesaid 90-day period, less than 300,000 shares of common stock of Purchaser have been issued to acquire bona fide debt of 1-800 and/or ST under the provisions of this subsection, the difference between 300,000 shares and the number of shares actually issued hereunder to the holders of such debt shall, upon the expiration of such 90-day period, be issued to and in the name of ST. SECTION 1.3 PAYMENT OF PURCHASE PRICE. The Purchase Price (without regard to the Assumed Obligations) shall be payable by Purchaser in the following manner: (a) The amount of $10,000.00 shall be paid to 1-800 at Closing. (b) The total amount of $90,000.00 shall be paid to ST by delivery from Purchaser at Closing of an unsecured promissory note (the "Note") in substantially the form attached hereto as Exhibit C. SECTION 1.4 ASSUMPTION OF ASSUMED OBLIGATIONS. (a) Instrument of Assumption. At the Closing, Purchaser shall assume and agree to pay, perform and discharge, as and when they become due, all of the Assumed Obligations as herein defined. (b) Assumed Obligations Defined. As used in this Agreement, "Assumed Obligations" shall have the meaning set forth in Exhibit D hereto. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS To induce Purchaser to enter into this Agreement and to purchase the Assets, Sellers hereby jointly and severally represent and warrant that: SECTION 2.1 CORPORATE ORGANIZATION AND AUTHORITY. Each Seller is a corporation duly organized, validly existing and in good standing, with full corporate power and authority to conduct its business as now conducted, own and lease its assets and enter into and perform its obligations under this Agreement. Each Sellers execution, delivery and performance of this Agreement and the sale to Purchaser of the Assets hereunder have been duly 2 3 authorized by all requisite corporate action on the part of such Seller, and this Agreement constitutes, and all bills of sale, assignments, agreements and other instruments and documents to be executed and delivered by any Seller hereunder will constitute, such Seller's legal, valid and binding obligations, enforceable against such Seller in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and principles of equity. SECTION 2.2 ABSENCE OF CONFLICTS AND CONSENT REQUIREMENTS. Each Seller's execution and delivery of this Agreement and performance of its obligations hereunder, including the sale of the Assets hereunder, do not and will not conflict with, violate or result in any default under such Seller's articles of incorporation or bylaws or any mortgage, indenture, agreement, instrument or other contract applicable to its business, nor will they violate any judgment, order, decree, law, statute, regulation or other judicial or governmental, restriction applicable hereto. Each Seller's execution and delivery of this Agreement and performance of its obligations hereunder, including the sale of the Assets hereunder, do not and will not require the consent of, or any prior filing with or notice to, any governmental authority or other third party. SECTION 2.3 TITLE TO ASSETS. Sellers have good and marketable fee simple title to the Assets, free and clear of all liens, charges, security interests, reservations, restrictions, encumbrances and other defects in title (collectively "Encumbrances"), other than the Encumbrances set forth in Exhibit A hereto (the "Exceptions"), have the right to convey such Assets to Purchaser, at the Closing shall have conveyed to Purchaser good and marketable title to such Assets free and clear of all Encumbrances other than the Exceptions, and will warrant and defend the title to such Assets in Purchaser against the lawful claims of all person whomsoever, subject only to the Exceptions. SECTION 2.4 CONTRACT RIGHTS. The rights of Sellers under the contracts and agreements described or referred to in Exhibit A are valid and enforceable, except as such enforceability may be limited by applicable bankruptcy, insolvency or other similar laws affecting creditors' rights generally or by such principles of equity. Before the Closing, Sellers will provide Purchaser with true and correct copies of all contracts and agreements listed in Exhibit D that will be assumed by Purchaser. 3 4 SECTION 2.5 TAXES. (a) Returns and Payment of Taxes. All tax returns required to be filed on or prior to the Closing Date by Sellers have been or prior to the Closing Date will have been filed; and all taxes shown to be due and payable on such returns, all other taxes, duties and other governmental charges payable by any Seller and for the payment of which there may arise any lien upon the Assets sold hereunder subsequent to the Closing Date, and all deficiencies, assessments, penalties and interest with respect thereto due and payable on or before the Closing Date, notice of which has been received by any Seller, have been or prior to the Closing Date will have been paid. (b) Withholding of Taxes. There has been withheld or collected from each payment made to each employee of the Business the amount of all taxes (including without limitation federal income taxes, Federal Insurance Contributions Act taxes and state and local income, payroll and wage taxes) required to be withheld or collected therefrom and the same have been paid to the proper tax depositories or collecting authorities. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER To induce the Sellers to enter into this Agreement and to sell the Assets, Purchaser hereby represents and warrants that: SECTION 3.1 CORPORATE ORGANIZATION AND AUTHORITY. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to conduct its business as now conducted and enter into and perform its obligations under this Agreement. Purchaser's execution, delivery and performance of this Agreement and its acquisition of and payment for the Assets hereunder have been duly authorized by all requisite corporate action on the part of Purchaser, and this Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by Purchaser hereunder will constitute, Purchasers legal, valid and binding obligations, enforceable against Purchaser in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and principles of equity. SECTION 3.2 ABSENCE OF CONFLICTS AND CONSENT REQUIREMENTS Purchaser's execution and delivery of this Agreement and performance of its obligations hereunder, including the purchase of and payment for the Assets hereunder, do not and will not conflict 4 5 with, violate or result in any default under Purchaser's articles of incorporation or bylaws or any mortgage, indenture, agreement, instrument or other contract to which Purchaser is a party or by which Purchaser or its property is bound, nor will they violate any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which Purchaser is subject. Purchaser's execution and delivery of this Agreement and performance of its obligations hereunder, including the purchase of and payment for the Assets hereunder, do not and will not require the consent of, or any prior filing with or notice to, any governmental authority or other third party. SECTION 3.3 ABSENCE OF LITIGATION. No claim, action, proceeding or investigation is pending or, to the knowledge of Purchaser, threatened, which seeks to delay or prevent the consummation of the transactions contemplated herein. SECTION 3.4 INVESTIGATION. Purchaser acknowledges and agrees that it (a) has made its own inquiry and investigation into, and based thereon has formed an independent judgment concerning, the Assets and the Assumed Obligations, and (b) has been furnished with or given adequate access to such information about the Assets and the Assumed Obligations, as it has requested. Sellers acknowledge that the Purchaser's opportunity to inquire does not diminish its right to rely on Sellers' representations and warranties contained herein and in the Exhibits hereto. SECTION 3.5 CONFIDENTIALITY BY THE PURCHASER. Purchaser shall not disclose the terms of this Agreement after the date hereof to any person other than such officers, employees, independent contractors, agents, controlling persons, stockholders, or lenders to, Purchaser, or such other persons acting on behalf of or in the interest of the Purchaser, to whom disclosure of the terms of this Agreement is necessary in the reasonable opinion of the Purchaser. Purchaser may, however, disclose the terms of this Agreement to any person to the extent required by law or as may reasonably be required in the defense of Sellers or Purchaser in any action, arbitration, investigation or proceedings, or as may reasonably be required in connection with the performance or enforcement of any agreement or other obligation of Purchaser relating to or arising from this Agreement. SECTION 3.6 FURTHER ASSURANCES. Sellers and Purchaser each hereby covenants and agrees with the others that at any time and form time to time after the execution of this Agreement and after the Closing Date it will promptly execute and deliver such further assurances, instruments 5 6 and documents and take such further action as the others may reasonably request in order to carry out the full intent and purpose of this Agreement. SECTION 3.7 NO OTHER BROKERS. Sellers and Purchaser each represent and warrant to the others that no broker or finder has been involved or engaged by it in connection with the transactions contemplated hereby and each hereby agrees to indemnify and save harmless the other from and against any and all broker's or finder's fees, commissions or similar charges incurred or alleged to have been incurred by the indemnifying party in connection with the transactions contemplated hereby and any and all loss, liability, cost or expense (including reasonably attorneys' fees) arising out of any claim that the indemnifying party incurred any such fees, commissions or charges. SECTION 3.8 CONSENTS, WAIVERS AND APPROVALS. Sellers agree, at no expense to Purchaser, to use their reasonable best efforts to obtain the waivers, consents and approvals required for the transfer to the Purchaser of the contracts and agreements listed on Exhibit A hereto on such terms and conditions in all material respects as presently exist. Purchaser agrees to cooperate with Sellers in the transfer of such contracts, which cooperation shall include prompt response to reasonable requests for information regarding Purchaser by the other parties to such contracts. SECTION 3.9 CONVEYANCES. At the Closing, Sellers will execute and deliver to Purchaser any and all documents deemed necessary or desirable in the judgment of Purchaser's and Sellers' counsel to fully effectuate the conveyance to Purchaser of all the Sellers ownership interest in and to the Assets. ARTICLE IV CLOSING SECTION 4.1 TIME AND PLACE OF CLOSING. The consummation of the purchase and sale transaction contemplated hereby (the "Closing") shall be held at a mutually acceptable location commencing at 10:00 a.m. (New York Time) on the date hereof. The date on which the Closing occurs is referred to herein as the "Closing Date." At the Closing, subject to the fulfillment or waiver of the conditions set forth in this Article IV, Sellers shall convey the Assets to Purchaser by appropriate instruments of transfer, and Purchaser shall pay to l-800, as 6 7 herein provided, the cash portion of the Purchase Price in cash or equivalent, shall deliver the Note to ST, and shall assume the Assumed Obligations. ARTICLE V INDEMNIFICATION SECTION 5.1 INDEMNIFICATION BY SELLERS. Subject to the procedures and limitations set forth in this Article V, Sellers jointly and severally agree that they will indemnify and save harmless Purchaser from and against any and all Net Economic Loss (herein defined) incurred by Purchaser arising after the Closing out of (i) the breach of any representation or warranty made by either or both of the Sellers in this Agreement or in any instrument or documents required to be delivered by any Seller to Purchaser pursuant to this Agreement, (ii) any Seller's failure to duly perform any covenant or agreement to be performed by it under this Agreement or under any instrument or document required to be delivered by Sellers or any Seller to Purchaser pursuant to this Agreement, and (iii) any liabilities or obligations, contingent or otherwise, of any Seller which exist on the Closing Date and which are based upon any act, state of facts or condition which occurred or existed before the Closing Date, known or unknown, due or payable, except to the extent such liabilities and/or obligations are specifically assumed hereunder by Purchaser. SECTION 5.2 NET ECONOMIC LOSS DEFINED. As used in this Agreement, the term "Net Economic Loss" means the amount of any loss, liability, damage, cost or expense (including reasonably attorneys' fees) incurred by Purchaser arising out of the matters or circumstances referred to in Section 5.1 hereof, less the amount of the economic benefit (if any) received by Purchaser in connection with such loss, liability, damage, cost or expense (including without limitation benefits obtained under federal, state and local tax laws, amounts recovered under insurance policies net of deductibles and incidental expenses and premium increases resulting therefrom, recovery or potential recovery by setoffs or counterclaims, and other economic benefits). The amount of any such economic benefit received by Purchaser after the calculation of Net Economic Loss shall be subtracted from any amount payable by Sellers under this Article V or shall be payable to Sellers in reimbursement for amounts already paid by Sellers under this Article. In determining the amount of such economic benefit, due consideration shall be given to, among other things, appropriate discount for timing factors. 7 8 SECTION 5.3 INDEMNITY CLAIMS BY PURCHASER. (a) Notice of Claim. If any matter shall arise which, in the opinion of Purchaser, constitutes or may give rise to a Net Economic Loss subject to indemnification by Sellers as provided herein (an "Indemnity Claim"), Purchaser shall give written notice (the "Notice of Claim") of such Indemnity Claim to each Seller, setting forth the relevant facts and circumstances of each Indemnity Claim in reasonable detail and the amount of indemnity sought from Sellers with respect thereto, and shall give continuing notice promptly thereafter as to developments coming to Purchaser's attention materially affecting any matter relating to such Indemnity Claim. (b) Mitigation of Loss. Purchaser shall use reasonable efforts to mitigate its Net Economic Loss in connection with any Indemnity Claim, to the same extent as would a reasonable and prudent person to whom no indemnity were available. This Section 5.3(b) shall not apply with respect to a Third Party Claim (hereinafter defined) for which no Seller elected to assume the defense as provided in the following subsection (c). (c) Third Party Claims. If any Indemnity Claim is based upon any claim, demand, suit or action of any third party against Purchaser or the Assets (a "Third Party Claim"), then Purchaser, at the time it gives Sellers the Notice of Claim with respect to such Third Party Claim shall offer to Sellers the option to have Sellers or any Seller assume the defense of the Third Party Claim, which option may be exercised by any Seller(s) by written notice to Purchaser within fifteen (15) days after Purchaser gives written notice to Sellers thereof. If any Seller or Sellers so exercise the option (the defending Seller"), then the defending Seller shall at its own expense assume the defense of the Third Party Claim, shall upon the final determination thereof fully discharge at its own expense all liability of Purchaser with respect to the Third Party Claim, and shall be entitled, in its sole discretion and at its sole expense but without any liability of Purchaser therefor, to compromise or settle the Third Party Claim upon terms acceptable to the defending Seller. From the time the defending Seller so assumes such defense and while such defense is pursued diligently and in good faith, the defending Seller shall have no further liability for attorneys' fees or other costs of defense thereafter incurred by Purchaser in connection with such Third Party Claim. If no Seller exercises the opinion to defend such Third Party Claim, then Purchaser shall undertake to defend such Third Party Claim itself. Purchaser shall conduct such defense as would a reasonable and prudent person to whom no indemnity were available, shall permit Sellers (at Sellers' expense) to participate in (but not control) such defense, and shall not settle or compromise such Third Party Claim without Sellers consent (but such consent shall not of itself establish Sellers' indemnity liability therefor). 8 9 SECTION 5.4 INDEMNIFICATION BY PURCHASER. Purchaser agrees that it will indemnify and save harmless Sellers from and against any and all loss, liability, damages, cost or expense (including reasonable attorneys' fees) incurred by Sellers (net of any benefits to Sellers similar to those taken into account in determining "Net Economic Loss" as hereinabove defined) arising out of Purchaser's breach of any of its representations, warranties, covenants and agreements in this Agreement or in any documents delivered by Purchaser to Sellers hereunder, or Purchaser's failure to duly pay, perform or discharge any of the Assumed Obligations. SECTION 5.5 ARBITRATION. All claims, disputes, controversies and other matters in question between the parties to this Agreement, arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in Tampa, Florida, before a board of three (3) persons. Arbitration proceedings hereunder will be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Each party shall bear its own attorneys' and accountants' fees and charges in any such arbitration proceeding. ARTICLE VI MISCELLANEOUS SECTION 6.1 MERGERS. This Agreement contains the final, complete and exclusive statement of the Agreement between the parties with respect to the transactions contemplated herein and all prior or contemporaneous written or oral agreements with respect to the subject matter hereof are merged herein. SECTION 6.2 AMENDMENTS. No change, amendment, qualification or cancellation hereof shall be effective unless in writing and executed by all of the parties hereto by their duly authorized officers. SECTION 6.3 BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. All warranties, representations and indemnities set forth herein shall survive the Closing and the transactions contemplated hereby. 9 10 SECTION 6.4 NOTICES. All notices, requests, demands and other communications hereunder must be in writing and shall be deemed to have been duly given when personally delivered or when placed in the United States Mail, and forwarded by Registered or Certified Mail, return receipt requested, postage prepaid, addressed to the party to whom such notice is being given at the following addresses: AS TO EACH SELLER: 1-800 LOW-AIR FARE, INC. S. TRAVEL, INC. 3018 U.S. Highway 301 North Tampa, Florida 33619 Attention: Chief Financial Officer IF TO PURCHASER: 800 Travel Systems, Inc. c/o Michael Gaggi, President 33 Maiden Lane New York, New York 10038 Any party may change the address(es) to which notices to it are to be sent by giving notice of such change to the other parties in accordance with this Section. SECTION 6.5 CAPTIONS. The captions herein are for convenience of reference only and shall not be construed as a part of this Agreement. SECTION 6.6 GOVERNING LAW. This Agreement shall be construed, interpreted, enforced and governed by and under the laws of the State of Florida. SECTION 6.7 EXHIBITS. All of the Exhibits and other attachments thereto referred to in this Agreement are incorporated herein by reference and shall be deemed and construed to be a part of this Agreement for all purposes. SECTION 6.8 SEVERABILITY. The invalidity or unenforceability of any one or more phrases, sentences, clauses or provisions of this Agreement shall not affect the validity or enforceability of the remaining portions of this Agreement or any part thereof. SECTION 6.9 ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other party. 10 11 SECTION 6.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, Sellers and Purchaser have each caused this Agreement to be executed under seal by their respective duly authorized officers and have caused their respective corporate seals to be affixed hereto, as of the day and year first above written . "SELLERS" 1-800 LOW AIR FARE, INC. By: /s/ LUCIEN BITTAR ------------------------------ Its: President S. TRAVEL, INC. By: /s/ LUCIEN BITTAR ------------------------------ Its: President "PURCHASER" 800 TRAVEL SYSTEMS, INC. By:______________________________ Its: President 11 12 EXHIBIT A "Assets" 1. All furniture and fixtures currently located at the executive offices of the Sellers, including those described on Schedule 1 hereto. 2. All telephone equipment of each Seller, wherever located. 3. One (1) uninterrupted power supply unit. 4. Letter of credit and/or deposits provided by 1-800 to the ARC in the amount of $20,000. 5. All rights to the telephone number "1-800 LOW AIR FARE." 6. The trademark/service mark "1-800 LOW AIR FARE" and all goodwill associated therewith. 7. All deposits, if any, provided by the Sellers, or either of them, to others pursuant to the contracts or agreements described in Exhibit D hereto. 8. All rights arising under or pursuant to the contracts and agreements described in Exhibit D hereto. 12 EX-10.1 3 FORM OF REGISTRANT'S 1997 STOCK OPTION PLAN 1 EXHIBIT 10.1 PNBKB DRAFT 4/29/97 800 TRAVEL SYSTEMS, INC. 1997 STOCK OPTION PLAN 1. Purpose of the 1997 Stock Option Plan. 800 Travel Systems, Inc., a Delaware corporation (the "Corporation"), desires to attract and retain the best available employees and to encourage the highest level of performance. The 1997 Stock Option Plan (the "Stock Option Plan") is intended to contribute significantly to the attainment of these objectives, by (i) providing long-term incentives and rewards to all key employees of the Corporation (including officers and directors who are key employees of the Corporation and also including key employees of any subsidiary of the Corporation which may include officers or directors of any subsidiary of the Corporation who are also key employees of said subsidiary), and those directors and officers, consultants, advisers, agents or independent representatives of the Corporation or of any subsidiary (together, "Eligible Individuals"), who are contributing or in a position to contribute to the long-term success and growth of the Corporation or of any subsidiary, (ii) assisting the Corporation and any subsidiary in attracting and retaining Eligible Individuals with experience and ability, and (iii) associating more closely the interests of such Eligible Individuals with those of the Corporation's stockholders. 2. Scope and Duration of the Stock Option Plan. Under the Stock Option Plan, options ("Options") to purchase common stock, par value $.01 per share ("Common Stock"), may be granted to Eligible Individuals. Options granted to employees (including officers and directors who are employees) of the Corporation or a subsidiary corporation thereof, may, at the time of grant, be designated by the Corporation's Board of Directors as incentive stock options ("ISOs"), with the attendant tax benefits as provided for under Sections 421 and 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The aggregate number of shares of Common Stock reserved for grant from time to time under the Stock Option Plan is _____________________ shares of Common Stock, which shares of Common Stock may be authorized but unissued shares of Common Stock or shares of Common Stock which shall have been or which may be reacquired by the Corporation, as the Board of Directors of the Corporation shall from time to time determine. Such aggregate numbers shall be subject to adjustment as provided in Paragraph 11. If an Option shall expire or terminate for any reason without having been exercised in full, the shares of Common Stock represented by the portion thereof not so exercised or surrendered shall (unless the Stock Option Plan shall have been terminated) become available for other options under the Stock Option Plan. Subject to Paragraph 13, no Option shall be granted under the Stock Option Plan after [June] ___, 2007. The grant of an Option and/or a Right is sometimes referred to herein as an Award thereof. 2 3. Administration of the Stock Option Plan. This Stock Option Plan will be administered by the Board of Directors of the Corporation (the "Board of Directors"). The Board of Directors, in its discretion, may designate an option committee (the "Option Committee" or "Committee") composed of at least two members of the Board of Directors to administer this Stock Option Plan. Subject to the express provisions of this Plan, the Board of Directors or the Committee (hereinafter, the terms "Option Committee" or "Committee" shall mean the Board of Directors whenever no such Option Committee has been designated) shall have authority in its discretion, subject to and not inconsistent with the express provisions of this Stock Option Plan, to direct the grant of Options, to determine the purchase price of the Common Stock covered by each Option, the Eligible Individuals to whom, and the time or times at which, Options shall be granted and subject to the maximum set forth in Paragraph 4 hereof, the number of shares of Common Stock to be covered by each Option; to designate Options as ISOs; to interpret the Stock Option Plan; to determine the time or times at which Options may be exercised; to prescribe, amend and rescind rules and regulations relating to the Stock Option Plan, including, without limitation, such rules and regulations as it shall deem advisable, so that transactions involving Options may qualify for exemption under such rules and regulations as the Securities and Exchange Commission may promulgate from time to time exempting transactions from Section 16(b) of the Securities and Exchange Act of 1934, as amended; to determine the terms and provisions of and to cause the Corporation to enter into agreements with Eligible Individuals in connection with (Awards) Options granted under the Stock Option Plan (the "Agreements"), which Agreements may vary from one another as the Committee shall deem appropriate; and to make all other determinations it may deem necessary or advisable for the administration of the Stock Option Plan. Members of the Committee shall serve at the pleasure of the Board of Directors. The Committee shall have and may exercise all of the powers of the Board of Directors under the Stock Option Plan, other than the power to appoint a director to committee membership. A majority of the Committee shall constitute a quorum, and acts of a majority of the members present at any meeting at which a quorum is present shall be deemed the acts of the Committee. The Committee may also act by instrument signed by a majority of the members of the Committee. Every action, decision, interpretation or determination by the Committee with respect to the application or administration of this Stock Option Plan shall be final and binding upon the Corporation and each person holding any Option granted under this Stock Option Plan. 4. Eligibility: Factors in Granting Options and Designating ISOs (Awards). (a) Options may be granted only to (i) key employees (including officers and directors who are employees) of the Corporation or any subsidiary corporation thereof on the date of grant (Options so granted may be designated as ISOs), and (ii) directors or officers of the Corporation or a subsidiary corporation thereof on the date of grant, without regard to whether they are employees, and (iii) consultants or advisers to or agents or independent representatives of the Corporation or a subsidiary thereof. In determining the persons to whom Options (Awards) shall - 2 - 3 be granted and the number of shares of Common Stock to be covered by each Award, the Committee shall take into account the nature of the duties of the respective persons, their present and potential contributions to the Corporation's (including subsidiaries) successful operation and such other factors as the Board of Directors in its discretion shall deem relevant. Subject to the provisions of Paragraph 2, an Eligible Individual may receive Options (Awards) on more than one occasion under the Stock Option Plan. No person shall be eligible for an Option grant if he shall have filed with the Secretary of the Corporation an instrument waiving such eligibility; provided that any such waiver may be revoked by filing with the Secretary of the Corporation an instrument of evocation, which revocation will be effective upon such filing. (b) In the case of each ISO granted to an employee, the aggregate fair market value (determined at the time the ISO is granted) of the Common Stock with respect to which the ISO is exercisable for the first time by such employee during any calendar year (under all plans of the Corporation and any subsidiary corporation thereof) may not exceed $100,000. 5. Option Price. (a) The purchase price per share of the Common Stock covered by each Option shall be established by the Committee, but in no event shall it be less than the fair market value of a share of the Common Stock on the date the Option is granted. If, at the time an Option is granted, the Common Stock is publicly traded, such fair market value shall be the closing price (or the mean of the latest bid and asked prices) of a share of Common Stock on such date as reported in The Wall Street Journal (or a publication or reporting service deemed equivalent to The Wall Street Journal for such purpose by the Board of Directors) for any national securities exchange or other securities market which at the time is included in the stock price quotations of such publication. In the event that the Committee shall determine such stock price quotation is not representative of fair market value by reason of the lack of a significant number of recent transactions or otherwise, the Committee may determine fair market value in such a manner as it shall deem appropriate under the circumstances. If, at the time an Option is granted, the Common Stock is not publicly traded, the Committee shall make a good faith attempt to determine such fair market value. (b) In the case of an employee who, at the time an ISO is granted owns stock possessing more than 10% of the total combined voting power of all classes of the stock of the employer corporation or of its parent or a subsidiary corporation thereof (a "10% Holder"), the purchase price of the Common Stock covered by any ISO shall in no event be less than 110% of the fair market value of the Common Stock at the time the ISO is granted. 6. Term of Options. The term of each Option shall be fixed by the Committee, but in no event shall it be exercisable more than 10 years from the date of grant, subject to earlier termination as provided in Paragraphs 9 and 10. An ISO granted to a 10% Holder shall not be exercisable more than 5 years from the date of grant. - 3 - 4 7. Exercise of Options. (a) Subject to the provisions of the Stock Option Plan, an Option granted to an employee under the Stock Option Plan shall become fully exercisable at the earlier of (A) employee's actual retirement date, unless such retirement is without the consent of the Board of Directors and is prior to the employee's normal retirement date as determined under any qualified retirement plan maintained by the Corporation at such time or, if no such plan is than in effect, age 65 (but in no event prior to the first anniversary of the date of grant), or (B) at such time or times as the Committee in its sole discretion shall determine at the time of the granting of the Option, except that in no event shall any such Option be exercisable earlier than six months or later than 10 years after its grant. Notwithstanding anything in this Stock Option Plan to the contrary, Options that are not designated as ISOs may be exercised in such manner and at such time or times as the Committee in its sole discretion shall determine, except that in no event shall any such Option be exercisable earlier than six months or later than 10 years after its grant. (b) An Option may be exercised as to any or all full shares of Common Stock as to which the Option is then exercisable. (c) The purchase price of the shares of Common Stock as to which an Option is exercised shall be paid in full in cash at the time of exercise; provided that, if permitted by the related Option Agreement or by the Committee, the purchase price may be paid, in whole or in part, by surrender or delivery to the Corporation of securities of the Corporation having a fair market value on the date of the exercise equal to the portion of the purchase price being so paid. Fair market value shall be determined as provided in Paragraph 5 for the determination of such value on the date of the grant. In addition, the holder shall, upon notification of the amount due and prior to or concurrently with delivery to the holder of a certificate representing such shares of Common Stock, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements. (d) Except as provided in Paragraphs 9 and 10, no Option may be exercised unless the original grantee thereof is then an Eligible Individual. (e) The Option holder shall have the rights of a stockholder with respect to shares of Common Stock covered by an Option only upon becoming the holder of record of such shares of Common Stock. (f) Notwithstanding any other provision of this Stock Option Plan, the Corporation shall not be required to issue or deliver any share of stock upon the exercise of an Option prior to the admission of such share to listing on any stock exchange or automated quotation system on which the Corporation's Common Stock may then be listed. - 4 - 5 8. Non-transferability of Options. No Options granted under the Stock Option Plan shall be transferable other than by will or by the laws of descent and distribution ("Permitted Transferee"). With respect to ISOs, Options may be exercised, during the lifetime of the holder, only by the holder, or by his guardian or legal representative. 9. Termination of Relationship to the Corporation. (a) In the event that any original grantee shall cease to be an Eligible Individual of the Corporation (or any subsidiary thereof), except as set forth in Paragraph 10, such Option may (subject to the provisions of the Stock Option Plan) be exercised (to the extent that the original grantee was entitled to exercise such Option at the termination of his employment or service as a director, officer, consultant, adviser, agent or independent representative, as the case may be) at any time within three months after such termination, but not more than 10 years (five years in the case of a 10% Holder) after the date on which such Option was granted or the expiration of the Option, if earlier. Notwithstanding the foregoing, if the position of an original grantee shall be terminated by the Corporation or any subsidiary thereof for cause or if the original grantee terminates his employment or position voluntarily and without the consent of the Corporation or any subsidiary corporation thereof, as the case may be (which consent shall be presumed in the case of normal retirement), the Options granted to such person, whether held by such person or by a Permitted Transferee shall, to the extent not theretofore exercised, forthwith terminate immediately upon such termination. The holder of any ISO may not exercise such Option unless at all times during the period beginning with the date of grant of the ISO and ending on the three months before the date of exercise he is an employee of the Corporation granting such Option, a subsidiary thereof, or a corporation or a subsidiary corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies. (b) Other than as provided in Paragraph 9(a), Options granted under the Stock Option Plan shall not be affected by any change of duties or position so long as the holder remains an Eligible Individual. (c) Any Option Agreement may contain such provisions as the Committee shall approve with reference to the determination of the date employment terminates or the date other positions or relationships terminate for purposes of the Stock Option Plan and the effect of leaves of absence, which provisions may vary from one another. (d) Nothing in the Stock Option Plan or in any Option granted pursuant to the Stock Option Plan shall confer upon any Eligible Individual or other person any right to continue in the employ of the Corporation or any subsidiary corporation (or the right to be retained by, or have any continued relationship with the Corporation or any subsidiary corporation thereof), or affect the right of the Corporation or any such subsidiary corporation, as the case may be, to terminate his employment, retention or relationship at any time. The grant of any option pursuant to the Stock Option Plan shall be entirely in the discretion of the Committee and nothing in the Stock - 5 - 6 Option Plan shall be construed to confer on any Eligible Individual any right to receive any Option under the Stock Option Plan. 10. Death or Disability of Holder. (a) If a person to whom an Option has been granted under the Stock Option Plan shall die (and the conditions in sub-paragraph (b) below are met) or become permanently and totally disabled (as such term is defined below) while serving as an Eligible Individual and if the Option was otherwise exercisable immediately prior to the happening of such event, then the period for exercise provided in Paragraph 9 shall be extended to one year after the date of death of the original grantee, or in the case of the permanent and total disability of the original grantee, to one year after the date of permanent and total disability of the original grantee, but, in either case, not more than 10 years (five years in the case of a 10% Holder) after the date such Option was granted, or the expiration of the Option, if earlier, as shall be prescribed in the original grantee's Option Agreement. An Option may be exercised as set forth herein in the event of the original grantee's death, by a Permitted Transferee or the person or persons to whom the holder's rights under the Option pass by will or applicable law, or if no such person has the right, by his executors or administrators; or in the event of the original grantee's permanent and total disability, by the holder or his guardian. (b) In the case of death of a person to whom an Option was originally granted, the provisions of subparagraph (a) apply if such person dies (i) while in the employ of the Corporation or a subsidiary corporation thereof or while serving as an Eligible Individual of the Corporation or a subsidiary corporation thereof or (ii) within three months after the termination of such position other than termination for cause, or voluntarily on the original grantee's part and without the consent of the Corporation or a subsidiary corporation thereof, which consent shall be presumed in the case of normal retirement. (c) The term "permanent and total disability" as used above shall have the meaning set forth in Section 22(e)(3) of the Code. 11. Adjustments upon Changes in Capitalization. Notwithstanding any other provision of the Stock Option Plan, each Agreement may contain such provisions as the Committee shall determine to be appropriate for the adjustment of the number and class of shares of Common Stock covered by such Option, the Option prices and the number of shares of Common Stock as to which Options shall be exercisable at any time, in the event of changes in the outstanding Common Stock of the Corporation by reason of stock dividends, split-ups, split-downs, reverse splits, recapitalizations, mergers, consolidations, combinations or exchanges of shares, spin-offs, reorganizations, liquidations and the like. In the event of any such change in the outstanding Common Stock of the Corporation, the aggregate number of shares of Common Stock as to which Options may be granted under the Stock Option Plan to any Eligible Individual shall be appropriately adjusted by the Committee whose determination shall be conclusive. In the event of (i) the dissolution, liquidation, merger or consolidation of the - 6 - 7 Corporation or a sale of all or substantially all of the assets of the Corporation, or (ii) the disposition by the Corporation of substantially all of the assets or stock of a subsidiary of which the original grantee is then an employee, officer or director, consultant, adviser, agent or independent representative or (iii) a change in control (as hereinafter defined) of the Corporation has occurred or is about to occur, then, if the Committee shall so determine, each Option under the Stock Option Plan, if such event shall occur with respect to the Corporation, or each Option granted to an employee, officer, director, consultant, adviser, agent or independent representative of a subsidiary respecting which such event shall occur, as determined by the Option Committee, shall (x) become immediately and fully exercisable or (y) terminate simultaneously with the happening of such event, and the Corporation shall pay the optionee in lieu thereof an amount equal to (a) the excess of the fair market value over the exercise price of one share on the date on which such event occurs, multiplied by (b) the number of shares subject to the Option, without regard to whether the Option is then otherwise exercisable. 12. Effectiveness of the Stock Option Plan. Options may be granted under the Stock Option Plan, subject to its authorization and adoption by stockholders of the Corporation, at any time or from time to time after its adoption by the Committee, but no Option shall be exercised under the Stock Option Plan until the Stock Option Plan shall have been authorized and adopted by a majority of the votes properly cast thereon at a meeting of stockholders of the Corporation duly called and held within 12 months from the date of adoption of the Stock Option Plan by the Board of Directors. If so adopted, the Stock Option Plan shall become effective as of the date of its adoption by the Board of Directors. The exercise of the Options shall also be expressly subject to the condition that at the time of exercise a registration statement under the Securities Act of 1933, as amended (the "Act"), shall be effective, or other provisions satisfactory to the Committee shall have been made to ensure that such exercise will not result in a violation of such Act, and such other qualification under any state or federal law, rule or regulation as the Corporation shall determine to be necessary or advisable shall have been effected. If the shares of Common Stock issuable upon exercise of an Option are not registered under such Act, and if the Committee shall deem it advisable, the Optionee may be required to represent and agree in writing (i) that any shares of Common Stock acquired pursuant to the Stock Option Plan will not be sold except pursuant to an effective registration statement under such Act or an exemption from the registration provisions of the Act and (ii) that such Optionee will be acquiring such shares of Common Stock for his own account and not with a view to the distribution thereof and (iii) that the holder accepts such restrictions on transfer of such shares, including, without limitation, the affixing to any certificate representing such shares of an appropriate legend restricting transfer as the Corporation may reasonably impose. 13. Termination and Amendment of the Stock Option Plan. The Board of Directors of the Corporation may, at any time prior to the termination of the Stock Option Plan, suspend, terminate, modify or amend the Stock Option Plan; provided that any increase in the aggregate number of shares of Common Stock reserved for issue upon the exercise of Options, any amendment which would materially increase the benefits accruing to participants - 7 - 8 under the Stock Option Plan, or any material modification in the requirements as to eligibility for participation in the Stock Option Plan, shall be subject to the approval of stockholders in the manner provided in Paragraph 12, except that any such increase, amendment or change that may result from adjustments authorized by Paragraph 11 or adjustments based on revisions to the Code or regulations promulgated thereunder (to the extent permitted by such authorities) shall not require such approval. No suspension, termination, modification or amendment of the Stock Option Plan may, without the express written consent of the Eligible Individual (or his Permitted Transferee) to whom an Option shall theretofore have been granted, adversely affect the rights of such Eligible Individual (or his Permitted Transferee) under such Option. 14. Financing for Investment in Stock of the Corporation. The Committee may cause the Corporation or any subsidiary to give or arrange for financing, including direct loans, secured or unsecured, or guaranties of loans by banks which loans may be secured in whole or in part by assets of the Corporation or any subsidiary, to any Eligible Individual under the Stock Option Plan who shall have been so employed or so served for a period of at least six months at the end of the fiscal year ended immediately prior to arranging such financing; but the Committee may, in any specific case, authorize financing for an Eligible Individual who shall not have served for such a period. Such financing shall be for the purpose of providing funds for the purchase by the Eligible Individual of shares of Common Stock pursuant to the exercise of an Option and/or for payment of taxes incurred in connection with such exercise, and/or for the purpose of otherwise purchasing or carrying a stock investment in the Corporation. The maximum amount of liability incurred by the Corporation and its subsidiaries in connection with all such financing outstanding shall be determined from time to time in the discretion of the Board of Directors. Each loan shall bear interest at a rate not less than that provided by the Code and other applicable law, rules, and regulations in order to avoid the imputation of interest. Each recipient of such financing shall be personally liable for the full amount of all financing extended to him. Such financing shall be based upon the judgment of the Committee that such financing may reasonably be expected to benefit the Corporation, and that such financing as may be granted shall be consistent with the Certificate of Incorporation and By-Laws of the Corporation or such subsidiary, and applicable laws. If any such financing is authorized by the Board of Directors, such financing shall be administered by the Committee. 15. Severability. In the event that any one or more provisions of the Stock Option Plan or any Agreement, or any action taken pursuant to the Stock Option Plan or such Agreement, should, for any reason, be unenforceable or invalid in any respect under the laws of the United States, any state of the United States or any other government, such unenforceability or invalidity shall not affect any other provision of the Stock Option Plan or of such or any other Agreement, but in such particular jurisdiction and instance the Stock Option Plan and the affected Agreement shall be construed as if such unenforceable or invalid provision had not been contained therein or if the action in question had not been taken thereunder. - 8 - 9 16. Applicable Law. The Stock Option Plan shall be governed and interpreted, construed and applied in accordance with the laws of the State of Delaware. 17. Withholding. A holder shall, upon notification of the amount due and prior to or concurrently with delivery to such holder of a certificate representing such shares of Common Stock, pay promptly any amount necessary to satisfy applicable federal, state, local or other tax requirements. 18. Miscellaneous. 1. The terms "parent," "subsidiary" and "subsidiary corporation" shall have the meanings set forth in Sections 424(e) and (f) of the Code, respectively. 2. The term "disinterested person" shall mean a person who is not at the time he exercises discretion in administering the Stock Option Plan eligible and has not at any time within one year prior thereto been eligible for selection as a person to whom stock may be allocated or to whom stock options may be granted pursuant to the Stock Option Plan or any other plan of the Corporation or any of its affiliates entitling the participants therein to acquire stock or stock options of the Corporation or any of its affiliates. 3. The term "terminated for cause" shall mean termination by the Corporation (or a subsidiary thereof) of the employment of or other relationship with, the original grantee by reason of the grantee's (i) willful refusal to perform his obligations to the Corporation (or a subsidiary thereof), (ii) willful misconduct, contrary to the interests of the Corporation (or a subsidiary thereof), (iii) commission of a serious criminal act, whether denominated a felony, misdemeanor or otherwise or (iv) such reasons as may be included within the term "for cause" (or similar phrase) in the employment or consulting agreement of the grantee. In the event of any dispute regarding whether a termination for cause has occurred, the Board of Directors may by resolution resolve such dispute and such resolution shall be final and conclusive on all parties. 4. The term "change in control" shall mean an event or series of events that would be required to be described as a change in control of the Corporation in a proxy or information statement distributed by the Corporation pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, in response to Item 6(e) of Schedule 14A promulgated thereunder, or any substitute provision which may hereafter be promulgated thereunder or otherwise adopted. The determination of whether and when a change in control has occurred or is about to occur shall be made by the Board of Directors in office immediately prior to the occurrence of the event or series of events constituting such change in control. - 9 - 10 800 TRAVEL SYSTEMS, INC. STOCK OPTION AGREEMENT (NON-QUALIFIED STOCK OPTION) THIS AGREEMENT, made as of this _____ day of _______________, 199__, by 800 TRAVEL SYSTEMS, INC., a Delaware corporation (hereinafter called the "Company"), with ________________________________ (hereinafter call the "Holder"): The Company has adopted a 1997 Stock Option Plan (the "Plan"). Said Plan, as it may hereafter be amended and continued, is incorporated herein by reference and made part of this Agreement. The Committee, which is charged with the administration of the Plan pursuant to Section 3 of the Plan, has determined that it would be to the advantage and interest of the Company to grant the option provided for herein to the Holder NOW, THEREFORE, pursuant to the Plan, the Company with the approval of the Committee hereby grants to the Holder as of the date hereof an option to purchase all or any part of ________ shares of Common Stock of the Company, par value $.01 per share, at a price per share of $__________, which price is not less than the fair market value of a share of Common Stock on the date hereof (the "Option"), and upon the following terms and conditions: 1. The Option shall continue in force through _____________________ (the "Expiration Date"), unless sooner terminated as provided herein and in the Plan. Subject to the provisions of the Plan, the Option shall become fully exercisable, as to the _____________________ shares covered hereby, on _________________________. 2. If the Holder shall (a) die or (b) become permanently and totally disabled, and if the Option was otherwise exercisable, immediately prior to the occurrence of such event, then such Option may be exercised as set forth herein by the Holder or by the person or persons to whom the Holder's rights under the Option pass by will or applicable law, or if no such person has such right, by his executors or administrators, at any time within one year after the date of death of the original Holder, or one year after the date of permanent or total disability, but in either case, not later than the Expiration Date. 3. a. The Holder may exercise the Option with respect to all or any part of the shares then purchasable hereunder by giving the Company written notice in the form annexed, as provided in paragraph 7 hereof, of such exercise. Such notice shall specify the number of shares as to which the Option is being exercised and shall be accompanied by payment in full in cash of an amount equal to the exercise price of such shares multiplied by the number of shares as to which the Option is being exercised; provided that, if permitted by the Board, the purchase price may be paid, in whole or in part, by surrender or delivery to the Company of securities of the Company having a fair market value on the date of the exercise equal to the portion of the purchase price being so paid. In such event fair market value should be determined pursuant to paragraph 5 of the Plan. b. Prior to or concurrently with delivery by the Company to the Holder of a certificate(s) representing such shares, the Holder shall, upon notification of the amount due, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements. In the event such amount is not paid promptly, the Company shall have the right to apply from the purchase price paid any taxes 11 required by law to be withheld by the Company with respect to such payment and the number of shares to be issued by the Company will be reduced accordingly. 4. Notwithstanding any other provision of the Plan, in the event of a change in the outstanding Common Stock of the Company by reason of a stock dividend, split-up, split-down, reverse split, recapitalization, merger, consolidation, combination or exchange of shares, spin-off, reorganization, liquidation or the like, then the aggregate number of shares and price per share subject to the Option shall be appropriately adjusted by the Board, whose determination shall be conclusive. 5. No options granted hereunder shall be transferable other than by will or by the laws of descent and distribution. Options may be exercised, during the lifetime of the Holder, only by the Holder, or by his guardian or legal representative. In the event of any attempt by the Holder to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of any right hereunder, except as provided for herein, or in the event of the levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate this Option by notice to the Holder and it shall thereupon become null and void. 6. Neither the Holder nor in the event of his death, any person entitled to exercise his rights, shall have any of the rights of a stockholder with respect to the shares subject to the Option until share certificates have been issued and registered in the name of the Holder or his estate, as the case may be. 7. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of its Secretary, 4802 Gunn Highway, Suite 140, Tampa, Florida 33624, and any notice to the Holder shall be addressed to him at his address now on file with the Company, or to such other address as either may last have designated to the other by notice as provided herein. Any notice so addressed shall be deemed to be given on the second business day after mailing, by registered or certified mail, at a post office or branch post office within the United States. 8. In the event that any question or controversy shall arise with respect to the nature, scope or extent of any one or more rights conferred by this Option, the determination by the Committee (as constituted at the time of such determination) of the rights of the Holder shall be conclusive, final and binding upon the Holder and upon any other person who shall assert any right pursuant to this Option. 800 TRAVEL SYSTEMS, INC. By:__________________________ Name: Title: ACCEPTED AND AGREED ____________________________ Holder - 2 - 12 FORM OF NOTICE OF EXERCISE TO: 800 TRAVEL SYSTEMS, INC. 4802 Gunn Highway, Suite 140, Tampa, Florida 33624 The undersigned hereby exercises his option to purchase _________ shares of Common Stock of 800 TRAVEL SYSTEMS, INC. (the "Company") as provided in the Stock Option Agreement dated as of ___________________, 199__ at $___________ per share, a total of $___________, and makes payment therefor as follows: (a) To the extent of $_______ of the purchase price, the undersigned hereby surrenders to the Company certificates for shares of its Common Stock which, valued at $__________________ per share, the fair market value thereof, equals such portion of the purchase price. (b) To the extent of the balance of the purchase price, the undersigned has enclosed a certificate or bank check payable to the order of the Company for $________________. A stock certificate or certificate for the shares should be delivered in person or mailed to the undersigned at the address shown below. The undersigned hereby represents and warrants that it is his present intention to acquire and hold the aforesaid shares of Common Stock of the Company for his own account for investment, and not with a view to the distribution of any thereof, and agrees that he will make no sale, thereof, except in compliance with the applicable provisions of the Securities Act of 1933, as amended. Signature: _________________________ Address: _________________________ _________________________ _________________________ Dated: ______________________ 13 800 TRAVEL SYSTEMS, INC. STOCK OPTION AGREEMENT (INCENTIVE STOCK OPTION) THIS AGREEMENT, made as of this ___ day of _____________, 199__ by 800 TRAVEL SYSTEMS, INC., a Delaware corporation (hereinafter called the "Company"), with _____________________________ ________ (hereinafter call the "Holder"): The Company has adopted a 1997 Stock Option Plan (the "Plan"). Said Plan, as it may hereafter be amended and continued, is incorporated herein by reference and made part of this Agreement. The Committee, which is charged, with the administration of the Plan pursuant to Section 3 of the Plan, has determined that it would be to the advantage and interest of the Company to grant the option provided for herein to the Holder as an inducement to remain in the service of the Company or one of its subsidiaries, and as an incentive for increased efforts during such service. NOW, THEREFORE, pursuant to the Plan, the Company with the approval of the Committee hereby grants to the Holder as of the date hereof an option (the "Option") to purchase all or any part of _________ shares of Common Stock of the Company, par value $.01 per share, at a price per share of $_________, which price is not less than the fair market value of a share of Common Stock on the date hereof (or 110% of the fair market value of a share of Common Stock if the Holder is a 10% Holder (as defined in the Plan)), and upon the following terms and conditions: 1. The Option shall continue in force through _______ ___, ____ (the "Expiration Date"), unless sooner terminated as provided herein and in the Plan. Subject to the provisions of the Plan, the Option shall become exercisable as follows: [as to 33 and 1/3% of the number of shares originally covered thereby upon the first anniversary of the date of grant of the Option, and as to 33 and 1/3% of the number of shares originally covered thereby upon the second anniversary of the date of grant of the Option, and on the third anniversary, the Option shall become fully exercisable]. Such installments shall be cumulative, subject to the following: a. Except as provided hereinbelow, the Option may not be exercised unless the Holder is then an employee (including officers and directors who are employees), non-employee director, consultant, advisor, agent or independent representative of the Company or any subsidiary of the Company or any combination thereof and unless the Holder has remained in the continuous employ or service thereof from the date of grant. 14 b. This Option is designated as an incentive stock option ("ISO") pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder. 2. In the event that the employment or service of the Holder shall be terminated prior to the Expiration Date (otherwise than by reason of death or disability), the Option may, subject to the provisions of the Plan, be exercised (to the extent that the Holder was entitled to do so at the termination of this employment or service) at any time within three months after such termination, but not after the Expiration Date, provided, however, that if such termination shall have been for cause or voluntarily by the Holder and without the consent of the Company or any subsidiary corporation thereof, as the case may be (which consent shall be presumed in the case of normal retirement), the Option and all rights of the Holder hereunder, to the extent not theretofore exercised, shall forthwith terminate immediately upon such termination. Nothing in this Agreement shall confer upon the Holder any right to continue in the employ or service of the Company or any subsidiary of the Company or affect the right of the Company or any subsidiary to terminate his employment or service at any time. 3. If the Holder shall (a) die while he is employed by or serving the Company or a corporation which is a subsidiary thereof or within three months after the termination of such position (other than termination for cause, or voluntarily on his part and without the consent of the Company or subsidiary corporation thereof, as the case may be, which consent shall be presumed in the case of normal retirement), or (b) become permanently and totally disabled within the meaning of Section 22 (e) (3) of the Internal Revenue Code of 1986, as amended (the "Code"), while employed by or serving any such company, and if the Option was otherwise exercisable, immediately prior to the occurrence of such event, then such Option may be exercised as set forth herein by the Holder or by the person or persons to whom the Holder's rights under the Option pass by will or applicable law, or if no such person has such right, by his executors or administrators, at any time within one year after the date of death of the original Holder, or one year after the date of permanent or total disability, but in either case, not later than the Expiration Date. 4. a. The Holder may exercise the Option with respect to all or any part of the shares then purchasable hereunder by giving the Company written notice in the form annexed, as provided in paragraph 8 hereof, of such exercise. Such notice shall specify the number of shares as to which the Option is being exercised and shall be accompanied by payment in full in cash of an amount equal to the exercise price of such shares multiplied by the number of shares as to which the Option is being exercised; provided that, if permitted by the Board, the purchase price may be paid, in whole or in part, by surrender or delivery to the Company of securities of the Company having a fair market value on the date of the exercise equal to the portion of the purchase price being so paid. In such event fair market value should be determined pursuant to paragraph 5 of the Plan. b. Prior to or concurrently with delivery by the Company to the Holder of a certificate(s) representing such shares, the Holder shall, upon notification of the amount due, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements. In the event such amount is not paid promptly, the Company shall have the right to apply from the 15 purchase price paid any taxes required by law to be withheld by the Company with respect to such payment and the number of shares to be issued by the Company will be reduced accordingly. 5. Notwithstanding any other provision of the Plan, in the event of a change in the outstanding Common Stock of the Company by reason of a stock dividend, split-up, split-down, reverse split, recapitalization, merger, consolidation, combination or exchange of shares, spin-off, reorganization, liquidation or the like, then the aggregate number of shares and price per share subject to the Option shall be appropriately adjusted by the Board, whose determination shall be conclusive. 6. This Option shall, during the Holder's lifetime, be exercisable only by him, and neither this Option nor any right hereunder shall be transferable by him, by operation of law or otherwise, except by will or by the laws of descent and distribution. In the event of any attempt by the Holder to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of any right hereunder, except as provided for herein, or in the event of the levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate this Option by notice to the Holder and it shall thereupon become null and void. 7. Neither the Holder nor in the event of his death, any person entitled to exercise his rights, shall have any of the rights of a stockholder with respect to the shares subject to the Option until share certificates have been issued and registered in the name of the Holder or his estate, as the case may be. 8. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of its Secretary, 4802 Gunn Highway, Suite 140, Tampa, Florida 33624, and any notice to the Holder shall be addressed to him at his address now on file with the Company, or to such other address as either may last have designated to the other by notice as provided herein. Any notice so addressed shall be deemed to be given on the second business day after mailing, by registered or certified mail, at a post office or branch post office within the United States. 9. In the event that any question or controversy shall arise with respect to the nature, scope or extent of any one or more rights conferred by this Option, the determination by the Committee (as constituted at the time of such determination) of the rights of the Holder shall be conclusive, final and binding upon the Holder and upon any other person who shall assert any right pursuant to this Option. 800 TRAVEL SYSTEMS, INC. By: ______________________ Name: Title: ACCEPTED AND AGREED ________________________ Holder 16 FORM OF NOTICE OF EXERCISE TO: 800 TRAVEL SYSTEMS, INC. 4802 Gunn Highway, Suite 140, Tampa, Florida 33624 The undersigned hereby exercises his/her option to purchase _____ shares of Common Stock of 800 TRAVEL SYSTEMS, INC. (the "Company") as provided in the Stock Option Agreement dated as of _____________________, _________ at $_______ per share, a total of $_____________, and makes payment therefor as follows: (a) To the extent of $_______ of the purchase price, the undersigned hereby surrenders to the Company certificates for shares of its Common Stock which, valued at $__________________ per share, the fair market value thereof, equals such portion of the purchase price. (b) To the extent of the balance of the purchase price, the undersigned has enclosed a certificate or bank check payable to the order of the Company for $________________. A stock certificate or certificate for the shares should be delivered in person or mailed to the undersigned at the address shown below. The undersigned hereby represents and warrants that it is his (her) present intention to acquire and hold the aforesaid shares of Common Stock of the Company for his (her) own account for investment, and not with a view to the distribution of any thereof, and agrees that he (she) will make no sale, thereof, except in compliance with the applicable provisions of the Securities Act of 1933, as amended. Signature: _________________________ Name: _________________________ Address: _________________________ _________________________ _________________________ Dated: _________________ EX-10.2 4 PROMISSORY NOTE DUE AND PAYABLE NOVEMBER 7, 1997 1 EXHIBIT 10.2 REPLACEMENT PROMISSORY NOTE $30,000.00 As of November 7, 1995 New York, New York FOR VALUE RECEIVED, the undersigned, 800 TRAVEL SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of S. TRAVEL, INC., a Delaware corporation (together with any subsequent holder(s) hereof, being hereinafter referred to collectively as "Holder"), pursuant to the terms hereinafter set forth, at 3018 U.S. Highway 301, North Tampa, Florida 33619, or at such other place as Holder may designate to Maker in writing from time to time, the principal sum of THIRTY THOUSAND AND 00/100 DOLLARS ($30,000.00), together with interest thereon at the rate hereinafter set forth, in lawful money of the United States of America. Interest on the amount from time to time outstanding hereunder shall accrue at a fixed per annum rate of interest equal to ten percent (10%). Interest shall be computed on the daily outstanding principal balance hereunder on a 365-day year simple interest basis. The indebtedness evidenced hereby shall be due and payable on November 7, 1997. The happening of any of the following events or conditions, whether voluntarily or involuntarily, shall constitute an "Event of Default" under this Note: (a) Maker shall fail to pay, when due, and within ten (10) days after written thereof from Holder to Maker, any payment of principal or interest hereunder; (b) Maker shall cease to operate as a going concern, shall liquidate or initiate dissolution proceedings; or (c) Appointment of a receiver for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against, Maker. Upon and after the occurrence of an Event of Default, Maker shall have the right at any time to declare all or any portion of the amounts due hereunder to be due and payable immediately, without presentment, demand, protest, notice of protest, or other 2 notice of dishonor of any kind, all of which are hereby expressly waived by Holder. After the occurrence of an Event of Default, the outstanding principal balance hereof shall bear interest at the rate of fifteen (15%) percent per annum until paid in full. Time is of the essence of this Note. In the event this Note, or any part thereof, is collected by or through an attorney-at-law, Maker agrees to pay all costs of collection including, but not limited to reasonable attorney's fees actually incurred by Holder. No failure to demand payment of the debt evidenced hereby for any reason whatsoever, no acceptance of any partial payment, nor any indulgences granted from time to time shall be construed (i) as a novation of this Note or as a reinstatement of the indebtedness evidenced hereby or as a waiver of such right to demand payment or of the right of Holder thereafter to insist upon strict compliance with the terms of this Note, or (ii) to prevent the exercise of such demand for payment or any other right granted hereunder or by the laws of the State of Delaware; and Maker hereby expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing. No extension of the time for the payment of this Note or any installment due hereunder, made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability of Maker under this Note, either in whole or in part unless Holder agrees otherwise in writing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. This Note is intended as a contract under and shall be construed and enforceable in accordance with the laws of the State of Delaware. If from any circumstances whatsoever, fulfillment of any provision of this Note or of any other instrument evidencing or securing the indebtedness evidenced hereby, at the time performance of such provision shall be due, shall involve transcending the limit of validity presently prescribed by any applicable usury statute or any other applicable law, with regard to obligations of like character and amount, then, ipso facto, the obligations to be fulfilled shall be reduced to the limit of such validity, so that in no event shall any exaction be possible under this Note or under any other instrument evidencing or securing the indebtedness evidenced hereby, that is in excess of the current limit of such validity, but such obligations shall be fulfilled to the limit of such validity. 2 3 As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective heirs, successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law. In the event that more than one person, firm or entity is a Maker hereunder, then all references to "Maker" shall be deemed to refer equally to each of said persons, firms, or entities, all of whom shall be jointly and severally liable for all of the obligations of Maker hereunder. This Note replaces Maker's obligation of pay on November 7, 1997 principal of $30,000 and interest thereon under that certain Promissory Note dated November 7, 1995 in the original principal amount of $90,000.00 executed by Maker and delivered to Holder. IN WITNESS WHEREOF, Maker has executed this Note under seal as of the date first above written. 800 TRAVEL SYSTEMS, INC. By ____________________________ Title: ________________________ 3 EX-10.3 5 PROMISSORY NOTE DUE AND PAYABLE NOVEMBER 7, 1997 1 EXHIBIT 10.3 REPLACEMENT PROMISSORY NOTE $30,000.00 As of November 7, 1995 New York, New York FOR VALUE RECEIVED, the undersigned, 800 TRAVEL SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of S. TRAVEL, INC., a Delaware corporation (together with any subsequent holder(s) hereof, being hereinafter referred to collectively as "Holder"), pursuant to the terms hereinafter set forth, at 3018 U.S. Highway 301, North Tampa, Florida 33619, or at such other place as Holder may designate to Maker in writing from time to time, the principal sum of THIRTY THOUSAND AND 00/100 DOLLARS ($30,000.00), together with interest thereon at the rate hereinafter set forth, in lawful money of the United States of America. Interest on the amount from time to time outstanding hereunder shall accrue at a fixed per annum rate of interest equal to ten percent (10%). Interest shall be computed on the daily outstanding principal balance hereunder on a 365-day year simple interest basis. The indebtedness evidenced hereby shall be due and payable on November 7, 1998. The happening of any of the following events or conditions, whether voluntarily or involuntarily, shall constitute an "Event of Default" under this Note: (a) Maker shall fail to pay, when due, and within ten (10) days after written thereof from Holder to Maker, any payment of principal or interest hereunder; (b) Maker shall cease to operate as a going concern, shall liquidate or initiate dissolution proceedings; or (c) Appointment of a receiver for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against, Maker. Upon and after the occurrence of an Event of Default, Maker shall have the right at any time to declare all or any portion of the amounts due hereunder to be due and payable immediately, without presentment, demand, protest, notice of protest, or other 2 notice of dishonor of any kind, all of which are hereby expressly waived by Holder. After the occurrence of an Event of Default, the outstanding principal balance hereof shall bear interest at the rate of fifteen (15%) percent per annum until paid in full. Time is of the essence of this Note. In the event this Note, or any part thereof, is collected by or through an attorney-at-law, Maker agrees to pay all costs of collection including, but not limited to reasonable attorney's fees actually incurred by Holder. No failure to demand payment of the debt evidenced hereby for any reason whatsoever, no acceptance of any partial payment, nor any indulgences granted from time to time shall be construed (i) as a novation of this Note or as a reinstatement of the indebtedness evidenced hereby or as a waiver of such right to demand payment or of the right of Holder thereafter to insist upon strict compliance with the terms of this Note, or (ii) to prevent the exercise of such demand for payment or any other right granted hereunder or by the laws of the State of Delaware; and Maker hereby expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing. No extension of the time for the payment of this Note or any installment due hereunder, made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability of Maker under this Note, either in whole or in part unless Holder agrees otherwise in writing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. This Note is intended as a contract under and shall be construed and enforceable in accordance with the laws of the State of Delaware. If from any circumstances whatsoever, fulfillment of any provision of this Note or of any other instrument evidencing or securing the indebtedness evidenced hereby, at the time performance of such provision shall be due, shall involve transcending the limit of validity presently prescribed by any applicable usury statute or any other applicable law, with regard to obligations of like character and amount, then, ipso facto, the obligations to be fulfilled shall be reduced to the limit of such validity, so that in no event shall any exaction be possible under this Note or under any other instrument evidencing or securing the indebtedness evidenced hereby, that is in excess of the current limit of such validity, but such obligations shall be fulfilled to the limit of such validity. 2 3 As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective heirs, successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law. In the event that more than one person, firm or entity is a Maker hereunder, then all references to "Maker" shall be deemed to refer equally to each of said persons, firms, or entities, all of whom shall be jointly and severally liable for all of the obligations of Maker hereunder. This Note replaces Maker's obligation of pay on November 7, 1998 principal of $30,000 and interest thereon under that certain Promissory Note dated November 7, 1995 in the original principal amount of $90,000.00 executed by Maker and delivered to Holder. IN WITNESS WHEREOF, Maker has executed this Note under seal as of the date first above written. 800 TRAVEL SYSTEMS, INC. By:__________________________ Title:_______________________ 3 EX-10.4 6 SABRE SUBSCRIBER AGREEMENT 1 EXHIBIT 10.4 STOCK REDEMPTION AGREEMENT AGREEMENT, made this ___ day of __________, 1997, by and between 800 TRAVEL SYSTEMS, INC., a Delaware corporation having offices at 4802 Gunn Highway, Suite 140, Tampa, Florida 33624 (the "Company") and MICHAEL CANTOR, an individual residing at 1160 South Ocean Boulevard, Manalapan, Florida 33462 (the "Shareholder"). W I T N E S S E T H WHEREAS, the Shareholder is currently the beneficial and record holder of _________ shares of the Company's common stock, par value $_______ par share and upon completion of the contemplated public offering of 1,800,000 shares of the Company's Common Stock shall be entitled to receive an additional _____ shares (collectively, the "Shares); and WHEREAS, the Company and the Shareholder mutually desire that the Company redeem all, and not less than all, of the Shares on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual promises and other good and valuable considerations hereinafter contained, the parties hereto agree as follows: 1. Redemption and Redemption Price. Subject to the conditions set forth in paragraph 4 of this Agreement, at the Closing (as hereinafter defined) the Company shall redeem from the Shareholder all, but not less than all, of the Shares at a redemption price (the "Redemption Price") equal to the initial public offering price of the shares, currently anticipated to be $5.00, less $1.25, so the currently anticipated purchase price is three dollars and seventy-five cents ($3.75) per share. 2. Closing. a. Date, Time and Place. Subject to the provisions of paragraphs 4(a) and 5 of this Agreement, the closing of the redemption contemplated by this Agreement (the "Closing") shall occur at 10:00 a.m. at the offices of Phillips Nizer Benjamin Krim & Ballon LLP, 666 5th Avenue, New York, New York 10103, on a date to be mutually agreed upon by the parties which in any event shall be no later than ten (10) business days after the closing of the initial public offering of the Company's securities. b. Deliveries. At the Closing: (i) the Shareholder shall sell, transfer and deliver the Shares to the Company, surrender and deliver to the Company all certificates representing the Shares or any portion of the Shares, together with stock powers separate from certificates, duly endorsed in blank by the Shareholder, and deliver to the Company the certificate required by paragraph 4(d) hereof; and (ii) the Company shall pay to the Shareholder the Redemption Price, in full, in lawful money of the United States of America, by delivery of the Company's certified check in the amount of the Redemption Price payable to the order of the Shareholder, or by wire transfer of the Redemption Price in federal funds to such bank account as shall be designated 1 2 by the Shareholder for such purpose, and shall deliver to the Shareholder the certificate required by paragraph 4(c) hereof. 3. Representation and Warranties. a. The Company represents and warrants to the Shareholder that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) The Company has full corporate power and authority and has taken all corporate action necessary to authorize, execute and deliver this Agreement and to consummate the transaction contemplated hereby; and this Agreement has been duly executed and delivered by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought; (iii) Neither the execution and delivery of this Agreement, nor the consummation of the transaction contemplated hereby, does or will violate any provision of the Company's Certificate of Incorporation or By- laws, or violate or result in the breach of any agreement or any federal or state law, rule, regulation, judgment, decree or order of any governmental authority or court to which the Company is subject or by which it is bound; (iv) The capital of the Company is, and at the Closing will be, in excess of the Redemption Price, and the payment of the Redemption Price will not impair the Company's capital; and (v) The Shares have been duly authorized and validly issued to the Shareholder and are non-assessable. b. The Shareholder represents and warrants to the Company that: (i) He is the sole beneficial and record holder of the Shares, and has not granted or sold any options or other rights to purchase any of the Shares to any individual, person or entity, other than to the Company under this Agreement; (ii) The Shares are not subject to any liens or other encumbrances, and at the Closing will be delivered free and clear of the same; 2 3 (iii) Neither the execution and delivery of this Agreement nor the consummation of the transaction contemplated hereby does or will violate or result in the breach of any agreement or any federal or state law, rule, regulation, judgment, order or decree of any governmental authority or court to which the Shareholder is subject or by which he is bound; (iv) This Agreement has been duly executed and delivered by the Shareholder and is a valid and binding obligation of the Shareholder enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought; and (v) The shares referred to in the Preamble hereto represent all of the shares which the Shareholder is entitled to receive pursuant to the various agreements between the Shareholder and the Company, and, subject to the closing of the IPO as contemplated by the Company's registration statement filed with the Securities and Exchange Commission on June __, 1997, and payment for the Shares as contemplated hereby, the Shareholder hereby releases the Company from any claims it has against the Company for any additional shares of capital stock of the Company. 4. Conditions to Closing. The obligations of the parties to consummate the transaction contemplated by this Agreement shall be subject to satisfaction, on or before the Closing, of each of the following conditions, unless waived in writing by the party to be so satisfied: a. The initial public offering of the Company's securities shall have been consummated and closed; b. The representations and warranties of each of the Company and the Shareholder contained herein shall be true and accurate in all material respects as of the date when made and at and as of the Closing as though made at and as of such date; c. The Company shall have furnished to the Shareholder a certificate of the Company's President to the effect that: (i) the initial public offering referred to in subparagraph a of this paragraph 4 has been consummated and closed with net proceeds to the Company as set forth in such subparagraph a, and (ii) all representations and warranties of the Company contained in this Agreement are true and accurate in all material respects at and as of the Closing; and d. The Shareholder shall have furnished to the Company his certificate to the effect that all representations and warranties of the Shareholder contained in this Agreement are true and accurate in all material respects at and as of the Closing. 5. Termination. Anything contained in this Agreement to the contrary notwithstanding, in the event the initial public offering described in paragraph 4(a) has not been consummated and closed on or before September 30, 1997, then either party may, upon 3 4 not less than two (2) weeks' prior written notice, terminate this Agreement. 6. Notices. Any notice given or required to be given pursuant to this Agreement shall be in writing and shall be deemed given three (3) days after being deposited in the U.S. Mail, first-class postage prepaid, addressed to the parties at the respective address first above written or such other address as may be established by written notice given in accordance with the provisions of this paragraph 6. 7. Miscellaneous. a. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, supersedes all prior such agreements whether written or oral, and may not be amended or otherwise modified except by a subsequent written instrument duly executed by the parties hereto. b. No Waiver. No delay or failure by either party to exercise any right hereunder, and no partial or single exercise of any such right, shall constitute a waiver of that right or any other right, unless expressly waived in writing. c. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. d. Binding Effect. The provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors, representatives and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. 800 TRAVEL SYSTEMS, INC. By:___________________________ President ______________________________ MICHAEL CANTOR 4 EX-10.6 7 AMENDMENT TO SABRE SUBSCRIBER AGREEMENT 1 EXHIBIT 10.6 PNBKB DRAFT 5/19/97 AGREEMENT THIS AGREEMENT is entered into as of the __ day of ___________, 1997, by and between 800 TRAVEL SYSTEMS, INC., a Delaware corporation with an address at 4802 Gunn Highway, Suite 140, Tampa, Florida 33624 (the "Company"), and PERRY TREBATCH, an individual with an address at 32 Nassau Drive, Great Neck, New York 11021 ("Stockholder"). R E C I T A L S Stockholder holds an aggregate 480,000 shares (the "Shares") of the common stock, par value $.01 per share, of the Company (the "Common Stock"), 380,000 of which were acquired directly from the Company as follows: a. 200,000 Shares were acquired on or about December 1, 1995 in connection with the Company's initial capitalization in partial consideration for $200,000 loaned to the Company's predecessor; b. 100,000 Shares were acquired for $200,000 on or about June 1, 1996 (the "Private Placement Shares"); c. 20,000 Shares were acquired on or about June 1, 1996 pursuant to a transaction in which Stockholder exchanged certain indebtedness outstanding to him from the Company's predecessor for such shares; and d. 60,000 Shares were issued to Stockholder on or about January 22, 1997 in satisfaction of obligations which had accrued as of June 30 and September 30, 1996. The Company and Stockholder desire to register a portion of the Shares upon the terms and conditions and for the consideration set forth herein. The Company desires to issue, and Stockholder desires to receive, warrants to purchase 300,000 shares of Common Stock (the "Warrants") upon the terms and conditions and for the consideration set forth herein. The Company and Stockholder desire to make arrangements with respect to certain indebtedness owing from the Company to Stockholder, upon the terms and conditions and for the consideration set forth herein. NOW, THEREFORE, in consideration of the premises hereof and the consideration set forth herein, the parties hereto agree as follows: 2 ARTICLE I REGISTRATION OF THE SHARES SECTION 1.1. Purchase of Certain Shares. (a) Within five (5) business days of the date hereof the Company shall redeem from Stockholder (i) 50,000 shares of the Company's Common Stock at a redemption price equal to the higher of $5.00 or the per share price at which the Company's Common Stock is initially offered to the public in the IPO (the "IPO Price") and (ii) 200,000 shares of the Company's Common Stock at a redemption price equal to the IPO Price less $1.25 (collectively, the "Redeemed Shares"). In exchange for the Redeemed Shares the Company shall issue to Stockholder a promissary note (the "Redemption Note") payable to the order of Stockholder in the principal amount of $1,000,000. Such promissary note shall not bear interest and shall be payable, in full, no later than five days of the closing of the IPO (as defined herein) by wire transfer of immediately available funds. (b) If on or prior to September 30, 1997, (i) the IPO has not closed or (ii) the Redemption Note has not been paid in full, then upon five (5) days notice by either the Company or Stockholder, the redemption of the shares provided for herein shall be deemed void ab initio and the Company shall issue 250,000 shares to the Stockholder and the Stockholder shall return the Redemption Note to the Company. SECTION 1.2. Registration of Certain Shares. In connection with the registration statement (the "Registration Statement") to be filed and declared effective to effectuate the Company's proposed public offering of its Common Stock (the "IPO"), which the Company currently contemplates completing with First London Securities Corporation as its underwriter, the Company shall exercise its best efforts to cause 210,000 of the shares to be registered for sale pursuant to the Registration Statement, such 210,000 shares to include 10,000 of the shares issued to Stockholders in January 1997 and 100,000 Private Placement Shares. SECTION 1.3. Sale of Remaining Shares. With respect to the Private Placement Shares, Stockholder shall comply with the "Lock-up" provisions provided for in the Subscription Agreement pursuant to which such shares were acquired. Notwithstanding any agreement to the contrary previously entered into by and between the Company and Stockholder and notwithstanding that Stockholder may be permitted to do so under applicable law, with respect to the remaining 110,000 shares registered on behalf of Stockholder, Stockholder shall not, directly or indirectly, sell, offer to sell, grant an option for the sale of, assign, transfer, pledge, hypothecate, or otherwise encumber or dispose of (collectively, "Sell") more than 10,000 Shares within thirty (30) days of the closing of the IPO and no more than 20,000 shares during each consecutive 30-day period thereafter, provided that if Stockholder does not sell all of the Shares which may be sold by him during any 30-day period, such Shares may be added to those which may be sold during a subsequent 30-day period. The Company will respond promptly to any request from Stockholder for the removal of legends from the certificates representing such Shares to permit their sale as provided herein. SECTION 1.4. Registration Obligations. When the Company effects the registration of Shares pursuant to the provisions of Section 1.2, the Company shall: (a) Keep the registration statement pursuant to which the Shares have been registered (the "Registration Statement") effective for such period as may be necessary for Stockholder to sell all of the Shares, but in all events for no more than nine months or until all of the shares are eligible for sale, in the opinion of counsel to the Company, in transactions 2 3 exempt from the registration or prospectus delivery requirements of the Securities Act so that all transfer restrictions with respect to such securities and all restrictive legends on the certificate evidencing the Shares are or may be removed upon consummation of such sale; (b) Furnish to Stockholder copies of any prospectus, subject to completion and final prospectus, in conformity with the requirements of the Securities Act, in order to facilitate the public sale or other disposition of the Shares; (c) Use its best efforts to register or qualify the Shares under the securities or "blue sky" laws of such jurisdictions as Stockholder shall reasonably request (provided, however, that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified) and do any and all other reasonable acts or things which may be reasonably necessary to enable Stockholder to consummate the public sale or other disposition in such jurisdictions of the Shares; (d) Notify each seller of Shares, at any time within the nine month period referred to in subparagraph (a), when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which such statements were made not misleading and at the reasonable request of such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which such statements were made, not misleading; (e) Furnish, at the request of Stockholder, on the date that the Shares are delivered to the underwriters for sale in connection with a registration pursuant to this Section, if the Shares are being sold through underwriters, or, if the Shares are not being sold through underwriters, on the date that the Registration Statement becomes effective, (i) to the underwriter an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to Stockholder; and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to Stockholder; and (f) The Company will be entitled to postpone or interrupt the effective date of the Registration Statement (and the use of the prospectus) if it determines, in its reasonable judgment after consultation with counsel, that such effectiveness would require the premature announcement of any material financing, acquisition, corporate reorganization or other material corporate transaction or development involving the Company if, in the Company's reasonable 3 4 determination, such announcement would be materially detrimental to the interests of the Company and its stockholders. The postponement or interruption will be for the minimum period reasonably required to avoid such premature disclosure. The Company will give prompt notice to Stockholder of any such postponement or interruption and will use all reasonable efforts to minimize the length of the postponement or interruption; (g) Notify Stockholder of (A) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threat of any proceedings for any of such purposes, and the Company shall take all practicable action necessary (i) to prevent the entry of any threatened stop order or any threatened suspension once entered and (B) of the lifting of any such order or suspension or resolution of any such proceedings that permits the resumption of offers and sales of the Shares; (h) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securities holders as promptly as practicable an earnings statement covering a period of twelve months beginning after the effective date of such Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder; and (i) Use its best efforts to include the Shares among the Company's securities listed on such securities exchange or national market system on which shares of the Company's Common Stock are then principally traded. SECTION 1.5. Expenses. All expenses incurred by the Company in complying with the requirement that the Shares be registered in accordance with Section 1.2, including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), fees and expenses of complying with securities and "blue sky" laws, printing expenses and fees and disbursements of counsel, and of the independent certified public accountants (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) of the Company shall be paid by the Company to the extent permitted under applicable federal and state regulations or by federal or state agencies having jurisdiction over the registration. 4 5 SECTION 1.6. Indemnification. (a) The Company will indemnify Stockholder, and each underwriter, if any, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other similar document (including the Registration Statement) incident to the registration or qualification of Shares in accordance with Section 1.2, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, or (ii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company in connection with any such registration or qualification, and will reimburse Stockholder, and each such underwriter, if any, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as incurred, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on (i) any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by Stockholder or any underwriter for inclusion in the registration statement, (ii) the failure of Stockholder or any underwriter to deliver, or cause to be delivered, a prospectus as required by the Securities Act or (iii) any untrue statement contained in or omission from any preliminary prospectus, if such deficiency is corrected in the final prospectus. (b) Stockholder will indemnify the Company, each of its directors and officers, each legal counsel and independent accountant of the Company, each underwriter, if any, of the Company's securities covered by the Registration Statement, and each person who controls the Company or such underwriter within the meaning of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other similar document (including the Registration Statement, any related notification or the like) incident to any registration or qualification of the Shares, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse the Company, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as incurred, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission, (or alleged omission) is made in such Registration Statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by Stockholder. (c) Each party entitled to indemnification under this Section 1.6 (the "Indemnified Party") shall give notice to the party required to provide Indemnification (the "Indemnifying Party") promptly after such Indemnified Party has received written notice of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume 5 6 the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnified Party shall bear the expense of such defense of the Indemnified Party if representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest. The failure of any Indemnified Party to give notice as provided herein shall relieve the Indemnifying Party of its obligations under this Section 1.6 only to the extent that such failure to give notice shall materially adversely prejudice the Indemnifying Party in the defense of any such claim or any such litigation. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. SECTION 1.7. Information by Stockholder. Stockholder shall furnish to the Company such information regarding Stockholder and the distribution proposed by Stockholder as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Article I. SECTION 1.8. Transfer of Registration Rights. The rights to cause the Company to register securities granted under Section 1.2 may be assigned or otherwise conveyed by Stockholder to his family members or a trust for his or their benefit, to any affiliates of Stockholder, or to any transferee who acquires all of the Shares held by Stockholder; provided in each case, that (i) the Company is given written notice by the transferor at the time of or within a reasonable time after said transfer, stating the name and address of said transferee, (ii) said transferee agrees in writing to be bound by the provisions of this Agreement and (iii) the Company receives an opinion of counsel from Stockholder stating that such transfer was made in compliance with applicable federal and state securities laws. SECTION 1.9. Further Assurances. Each party shall cooperate with the others, and execute and deliver, or cause to be executed and delivered, all such other instruments, including instruments of conveyance, assignment and transfer, and take all such other actions as such party may reasonably be requested to take by the other parties hereto from time to time, consistent with the terms of this Agreement, in order to effectuate the provisions and purposes of this Agreement. 6 7 ARTICLE II ISSUANCE OF WARRANTS SECTION 2.1. Warrants. (a) Simultaneously herewith, the Company is issuing and delivering to Stockholder the Warrants exercisable for an aggregate of 300,000 shares of Common Stock substantially in the form of Exhibit A attached hereto. The Warrants shall have an exercise price equal to One Hundred and Ten percent (110%) of the price at which the Common Stock is initially offered to the public in the IPO (the "IPO Price") or, if the IPO is not consummated on or before January 1, 1998, Four Dollars and Forty Cents ($4.40). The Warrants shall be exercisable as to 150,000 shares for a period of four (4) years commencing on the first anniversary of the earlier to occur of (i) the closing of the IPO or (ii) January 1, 1998 (such earlier date being referred to herein as the "Exercise Commencement Date"), and as to the remaining 150,000 shares for a period of three (3) years commencing on the second anniversary of the Exercise Commencement Date. (b) Stockholder shall have the option, exercisable by giving written notice to the Company any time on or before the first anniversary of the effective date of the Registration Statement, to exchange for no additional consideration all, but not less than all, of the Warrants for warrants exercisable for an aggregate of 300,000 shares of Common Stock identical to the warrants being sold and issued in the IPO (the "Exchange Warrants"). SECTION 2.2. Lock-up of Warrants. Stockholder shall not, directly or indirectly, sell, offer to sell, grant an option for the sale of, assign, transfer, pledge, hypothecate, or otherwise encumber or dispose of the Warrants or the Exchange Warrants, as the case may be, for the following periods: (a) with respect to one-half of the Warrants or the Exchange Warrants, as the case may be, for a period of one (1) year from the date hereof; and (b) with respect to the other half of the Warrants or the Exchange Warrants, as the case may be, for a period of two (2) years from the date hereof. SECTION 2.3. No Obligation to Register. The Company shall not be obligated to register any of the Warrants or the Exchange Warrants, as the case may be. SECTION 2.4. Legends. Each certificate representing the Warrants or any security issued or issuable upon exercise of the Warrants shall contain a legend on the face thereof, in form and substance satisfactory to counsel of the Company, setting forth the restrictions on transfer thereof contained herein. 7 8 ARTICLE III COMPANY'S INDEBTEDNESS TO STOCKHOLDER SECTION 3.1. Extension of Maturity. The Company acknowledges and agrees that it is indebted to Stockholder in the aggregate principal amount of Two Hundred Fifty Thousand Dollars ($250,000). No later than July 1, 1997, the Company shall pay to Stockholder $25,000 to be applied against the outstanding principal balance of the Notes. Notwithstanding anything to the contrary set forth in the notes evidencing the amounts due Stockholder (the "Promissory Notes), except for the principal payments provided for herein, Stockholder agrees to (i) extend the maturity date of each of the Promissory Notes to July 31, 1997 (the "New Maturity Date") and (ii) change the rate of interest due under the Promissory Notes to twelve percent (12.0%) per annum for the period from January 1, 1997, through May 31, 1997, and to eighteen percent (18%) effective June 1, 1997. Except as provided herein, all amounts of principal and interest due under the Promissory Notes shall be payable on the New Maturity Date. Except as provided in this Article III, all other terms and conditions of the Promissory Notes shall remain in full force and effect and the Company shall continue to pay interest accrued on the Promissory Notes monthly. SECTION 3.2. Default. In the event that the Company shall fail to pay when due any of its obligations to Stockholder: (a) the principal amount of the indebtedness under the Promissory Note shall continue to bear interest at the rate of eighteen percent (18.0%) per annum with principal and interest payable in twelve (12) equal monthly installments beginning on August 1, 1997; and (b) the Security Agreement attached hereto as Exhibit B creating a lien on the Company's telephone system in favor of Stockholder shall become effective and enforceable as of July 1, 1997. SECTION 3.3. Further Assurances. Each party shall cooperate with the others, and execute and deliver, or cause to be executed and delivered, all such other instruments including, without limitation, financing statements, and take all such other actions as such party may reasonably be requested to take by the other parties hereto from time to time, consistent with the terms of this Agreement, in order to effectuate the provisions and purposes of this Article III. SECTION 3.4. Method of Delivery of Payment. All payments due Stockholder hereunder shall be sent by FedEx courier service (or equivalent courier service) for receipt on the first day of the month, except that payments of $30,000 or more shall be sent by wire transfer. 8 9 SECTION 3.5. Acceleration. Notwithstanding anything herein to the contrary, all amounts due Stockholder under the Promissory Notes shall be paid within five (5) days of the closing of the IPO and, if not timely paid, shall thereafter bear interest at the rate of twenty-four percent (24.0%) per annum. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.1. Representations and Warranties of Stockholder. Stockholder represents and warrants as follows: (a) Validity of Agreement. Stockholder has full power and authority to execute and deliver this Agreement. All necessary proceedings have been duly taken to authorize the execution, delivery and performance by Stockholder of this Agreement and all documents and instruments referred to herein to which Stockholder is a party. This Agreement and such documents and instruments have been duly executed and delivered by Stockholder, and assuming due authorization, execution and delivery by the Company, constitute the valid and binding agreement of Stockholder enforceable in accordance with their terms. (b) No Conflict or Violation. No consent, authorization, approval, order, license, certificate or permit of or from or declaration or filing with any federal, state, local or governmental authority or any court or other tribunal is required for the execution, delivery or performance by Stockholder of this Agreement and the documents and instruments referred to herein to which Stockholder is a party. No consent of any party to any contract, agreement, instrument, lease, license, arrangement or understanding to which such person is a party or to which any of Stockholder's properties or assets are subject, is required for the execution, delivery or performance of this Agreement and the documents and instruments referred to herein to which Stockholder is a party. The execution, delivery and performance of this Agreement will not violate, result in the breach of, conflict with or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement or understanding, or violate or result in a breach of or conflict with any law, rule, regulation, order, judgment or decree binding on Stockholder. (c) Ownership of the Shares and the Promissory Notes. Stockholder has good, valid and marketable title to the Shares and the Promissory Notes, all of which are free and clear of all pledges, liens, claims, charges, options, calls, encumbrances, restrictions and assessments whatsoever (except any restrictions which may be created by operation of the Federal and State securities laws). Except for the restrictions contained herein, there is no agreement outstanding affecting the right of Stockholder to vote, sell, transfer or otherwise exercise any of the rights attendant to the Shares owned by Stockholder. 9 10 (d) Private Transaction. Stockholder acknowledges that the Warrants are being issued in a private transaction exempt from registration under the Securities Act and accordingly in the absence of such registration, the Warrants and the shares issuable thereunder may not be sold, hypothecated, exercised, assigned or transferred, except in accordance with and subject to the provisions of the Securities Act and the Rules and Regulations promulgated thereunder. SECTION 4.2. Representations and Warranties of the Company. The Company represents and warrants as follows: (a) Corporate Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to enter into this Agreement, to issue the Warrants and to perform its obligations hereunder and thereunder. (b) Authorization and Validity of Agreement. The Company has full power and authority to execute and deliver this Agreement and the documents and instruments referred to herein to which it is a party and to perform the transactions herein contemplated. All necessary proceedings have been duly taken to authorize the execution, delivery and performance by the Company of this Agreement, the Warrants, the shares issuable thereunder and the documents and instruments referred to herein to which it is a party. This Agreement, the Warrants and such other documents have been duly executed and delivered by the Company and assuming due authorization, execution and delivery by the other parties hereto, constitute the valid and binding agreements of the Company enforceable in accordance with their terms. (c) No Conflict or Violation. No consent, authorization, approval, order, license, certificate or permit of or from or declaration or filing with any federal, state, local or governmental authority or any court or other tribunal is required for the execution, delivery or performance by the Company of this Agreement and the documents and instruments referred to herein to which it is a party. No consent of any party to any contract, agreement, instrument, lease, license, arrangement or understanding to which the Company is a party or to which any of its properties or assets is subject, is required for the execution, delivery or performance of this Agreement and the documents and instruments referred to herein to which it is a party, except for such consents which have been obtained prior to the date hereof; and the execution, delivery and performance of this Agreement and such documents and instruments will not violate, result in the breach of, conflict with or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement or understanding, or violate or result in a breach of any term of the Certificate of Incorporation or By-Laws of the Company or violate, result in a breach of or conflict with any law, rule, regulation, order, judgment or decree binding on the Company or to which any of its operations, businesses, properties or assets are subject or result in the creation of any mortgage, pledge, lien, charge or encumbrance upon any of the assets of the Company or the loss of any license or other contractual right with respect thereto. 10 11 (d) Valid Issuance. Upon issuance in accordance with the terms hereof the Warrant to be issued to Stockholder will have been duly authorized and validly issued. SECTION 4.3. Survival. Each of the representations and warranties made by the parties in this Article IV shall survive the Closing indefinitely. ARTICLE V MISCELLANEOUS PROVISIONS SECTION 5.1. Confidentiality. All information given by any party hereto to any other party shall be considered confidential and shall be used only for the purposes intended. SECTION 5.2. Successors and Assigns; No Third-Party Beneficiaries. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns; provided, however, that no party shall assign or delegate any of the obligations created under this Agreement without the prior written consent of the other parties. Nothing in this Agreement shall confer upon any person or entity not a party to this Agreement, or the legal representatives of such person or entity, any rights or remedies of any nature or kind whatsoever under or by reason of this Agreement. SECTION 5.3. Notices. All notices and other communications given or made pursuant hereto shall be deemed to have been given or made if in writing and delivered personally, sent by registered or certified mail (postage prepaid, return receipt requested) or sent by telecopier to the Company and Stockholder at their respective addresses set forth above, in the case of the Company a copy to Phillips Nizer Benjamin Krim & Ballon LLP, 666 Fifth Avenue, New York, New York 10103, Attn: Vincent J. McGill, Esq. and, in the case of Stockholder, a copy to Brown Raysman Milstein Felder & Steiner LLP, 120 West 45th Street, New York, New York 10036 Attention: Sarah Hewitt, Esq., or at such other addresses as shall be furnished by any party by like notice to the others and such notice or communication shall be deemed to have been given or made as of the date so delivered or mailed. No change in any of such addresses shall be effective insofar as notices under this Section 5.3 are concerned unless such changed address is located in the United States of America and notice of such change shall have been given to the other parties hereto as provided in this Section 5.3. SECTION 5.4. Entire Agreement. This Agreement, together with the exhibits hereto, represents the entire agreement and understanding of the parties with reference to the transactions set forth herein and no representations or warranties have been made in connection with this Agreement other than those expressly set forth herein or in the exhibits, certificates and other documents delivered in accordance herewith. This Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Agreement, and all prior drafts of this 11 12 Agreement, all of which are merged into this Agreement. No prior drafts of this Agreement and no words or phrases from any such prior drafts shall be admissible into evidence in any action or suit involving this Agreement. SECTION 5.5. Waivers and Amendments. Any party may by written notice to the others (a) extend the time for the performance of any of the obligations or other actions of the others; (b) waive any inaccuracies in the representations or warranties of the others contained in this Agreement; (c) waive compliance with any of the covenants of the others contained in this Agreement; (d) waive performance of any of the obligations of the others created under this Agreement; or (e) waive fulfillment of any of the conditions to its own obligations under this Agreement. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. This Agreement may be amended, modified or supplemented only by a written instrument executed by the parties hereto. SECTION 5.6. Severability. This entire Agreement shall be void if any provision of this Agreement is invalid, illegal, unenforceable or inapplicable to any party or circumstance to which it is intended to be applicable. SECTION 5.7. Titles and Headings. The Article and Section headings contained in this Agreement are solely for convenience of reference and shall not affect the meaning or interpretation of this Agreement or of any term or provision hereof. SECTION 5.8. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. SECTION 5.9. Convenience of Forum; Consent to Jurisdiction. The parties to this Agreement, acting for themselves and for their respective successors and assigns, without regard to domicile, citizenship or residence, hereby expressly and irrevocably elect as the sole judicial forum for the adjudication of any matters arising under or in connection with this Agreement, and consent and subject themselves to the jurisdiction of, the courts of the State of New York located in New York City, and/or the United States District Court for the Southern District of New York, in respect of any matter arising under this Agreement. Service of process, notices and demands of such courts may be made upon any party to this Agreement by personal service at any place where it may be found or giving notice to such party as provided in Section 5.3 hereof. SECTION 5.10. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the choice-of-law provisions thereof. SECTION 5.11. Advice of Legal Counsel. Each party acknowledges and represents that, in executing this Agreement, such party has had the opportunity to seek the advice of legal 12 13 counsel and that such party has read and understood all of the terms and provisions of this Agreement. Further, this Agreement shall not be construed against any party by reason of its preparation or having drafted this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. 800 TRAVEL SYSTEMS, INC. By: ------------------------------- ---------------------------------- PERRY TREBATCH 13 14 EXHIBIT A Form of Warrants 14 15 EXHIBIT B Form of Security Agreement 15 EX-10.7 8 LEASE DATED FEBRUARY 10, 1996 1 EXHIBIT 10.7 SPECIAL STIPULATIONS RIDER THIS Special Stipulations Rider is incorporated within and made a part of the Lease dated February [10], 1996 by and between JFJ Real Estate Limited Partnership, as Landlord and 800 Travel Systems, Inc., as Tenant. 1. Punch List: Latent Defects. Notwithstanding the provisions of Section 2.03 of the Lease, following Substantial Completion of Landlord's Work, Landlord and Tenant shall make a joint inspection of the Premises for the purposes of determining any workmanship in need of correction or items of omitted work (collectively, "punch list items"). The extent of these punch list items shall be submitted to Landlord in writing within ten days after the joint inspection of the Premises, and landlord agrees, at its sole cost and expense, not to exceed $400,000, to promptly repair, replace or complete those items contained in the punch list to the reasonable satisfaction of Tenant. Notwithstanding the provisions of this Special Stipulation Rider No. 1, completion of any punch list items will not affect commencement of the Lease term. Tenant shall have a period of three (3) months after the Commencement Date of the Lease to report to Landlord any latent defects in the construction of the Premises or the mechanical systems relating thereto. Landlord shall promptly repair any such latent defects at its sole cost and expense. 2. Exclusions from Operating Costs. In no event shall Operating Costs include any of the following: (a) ground rent and mortgage interest, (b) leasing commissions, costs of legal and other professional fees incurred in preparing, negotiating and executing leases or in resolving any disputes with tenants, (c) the cost of electrical energy furnished and metered directly to tenants of the Shopping Center, (d) cost of any tenant installations and decorating expenses incurred in connection with preparing space for any new tenant, (e) overhead costs, salaries and similar items over and above the 15% allowance set forth in Section 4.01, (f) income taxes imposed upon Landlord, (g) cost of any special work or services performed by or at the request of any tenant, within tenant's premises, (h) costs incurred by Landlord, including legal and other professional fees, as a result of a breach by any tenant or Landlord of obligations under a lease, (i) increased insurance premiums caused by acts of any tenant, (j) costs of a capital nature, unless they result in decreased operating expenses (i.e., installation of an energy management system), (k) costs which are covered by insurance or by any manufacturer warranty, excluding any applicable deductibles and (l) depreciation. 3. Interruption of Utility Services. In the event that any interruption or suspension of utility services results 2 in the Premises being untenantable in whole or in part, then Tenant may abate all Rent payable hereunder based upon the extent of such untenantability, but only as follows: (a) if the interruption or suspension is caused by or results from the gross negligence or willful misconduct of Landlord, its agents, servants, employees or contractors, Rent shall abate as of the date of and for the duration of such untenantability, or (b) if such interruption or suspension of service is not caused by the gross negligence or willful misconduct of Landlord, its agents, servants, employees or contractors, Rent shall abate beginning seven days after the Premises become untenantable and continuing thereafter for the duration of such untenantability; provided, however, that if such suspension or interruption is caused by the negligence or willful misconduct of Tenant, Rent shall in no event abate hereunder. 4. In the event that any repairs made by Landlord (or failure to make repairs as required by the Lease) results in the Premises being untenantable in whole or in part, then Tenant may abate all rent (and any additional rent) payable under the Lease based upon the extent of such untenantability, but only as follows: (a) if such untenantability is caused by or results from the gross negligence or willful misconduct of Landlord, its agents, servants, employees or contractors, rent shall abate beginning 45 days after written notice is received by Landlord, from Tenant and for the duration of such untenantability, or (b) if such untenantability is not caused by the gross negligence or willful misconduct of Landlord, its agents, servants, employees or contractors, rent shall abate beginning 90 days after written notice is received by Landlord, from Tenant, after the Premises become untenantable and continuing thereafter for the duration of such untenantability. 5. Waiver of Subrogation. Notwithstanding anything contained in the Lease to the contrary, Landlord and Tenant hereby waive and release each other from any and all rights of recovery, claim, action or cause of action, against each other, their respective agents, officers and employees for any loss or damage that may occur to the Shopping Center or personal property located at the Shopping Center or within the Premises, by reason of fire, the elements or any other cause which could be insured against under the terms of standard fire and extended coverage insurance policies required to be maintained by Landlord and Tenant hereunder, regardless of origin, including negligence of Landlord or Tenant or their agents, employees and invitees as the case may be. Landlord and Tenant covenant that no insurer shall hold any right of subrogation against such other party hereto. The above waiver shall also be applicable to Landlord in the event that Landlord elects to self insure hereunder. - 2 - 3 ARTICLE 1 BASIC LEASE PROVISIONS AND EXHIBITS Section 1.01 - Summary of the Basic Lease Provisions 800 (A) DATE OF LEASE AND SIGNING BY LANDLORD: February [10], 1996. (B) NAME OF LANDLORD: ADDRESS OF LANDLORD: JFJ REAL ESTATE LIMITED PARTNERSHIP c/o CS MANAGEMENT GROUP an Illinois Limited Partnership 4050 Pennsylvania, Suite 215 d/b/a Town Centre Shopping Center Kansas City, MO 64111 Attn.: Director of Property Management (C) NAME OF TENANT: ADDRESS OF TENANT: 800 TRAVEL SYSTEMS, INC., d/b/a 4802 Gunn Highway 1-800-LOW-AIR-FARE Suite 140 a Delaware Corporation Tampa, FL 33624 (D) NAME OF GUARANTOR: ADDRESS OF GUARANTOR: None (E) PERMITTED USE: Solely and exclusively for Telecommunication, Telemarketing, General Office and Retail purposes. Other than the foregoing, the Premises shall be used for no other purpose. (F) TENANTS TRADE NAME: 1-800-Low-Air-Fare. (G) SHOPPING CENTER: Towne Centre (the "Shopping Center") described in Exhibit "A" attached hereto and incorporated by reference into the Lease. (H) THE PREMISES: The portion of the Shopping Center crosshatched on the "Site Plan" attached hereto as Exhibit "B" and made a part hereof and designated as Space Number 140-150; said Premises containing approximately 33,388 square feet. (I) COMMENCEMENT DATE: The Lease Term begins on the earlier to occur of the date upon which Tenant opens for business in the Premises or May 1, 1996, provided that substantial completion of Landlord's work, as outlined in Exhibit "c" for Phase I, has been achieved by such date. (J) RENTAL DUE DATE: First day of each month. (K) LATE PAYMENT CHARGE: Five percent (5%) of monthly Fixed Minimum Rent due per each occurrence. Assessed and payable - 3 - 4 on all payments received after the fifth (5th) business day of each month. (L) INTEREST ON DELINQUENCIES: Maximum legal rate or eighteen percent (18%) per annum, one and one half percent (1.5%) per month, whichever is less, from Rental Due Date. Assessed and payable on all payments received after the fifth (5th) business day of each month. (M) YEAR: Each twelve (12) month anniversary of the term commencing on the Commencement Date. However, if the Commencement Date does not occur on the first day of a calendar month, the first Year hereunder shall include the remainder of the month during which the Commencement Date occurs, plus the twelve (12) month period immediately succeeding the month during which Commencement Date occurred and each Year thereafter shall be the consecutive twelve (12) month period commencing on each anniversary of the first day of the full month immediately subsequent to the month during which the Commencement Date occurred. (N) LEASE YEAR: Twelve (12) consecutive calendar months commencing on January 1 and ending December 31. The term "Partial Lease Year" is the period from the Commencement Date through December 31 of the calendar year of the Commencement Date and any other period beginning on the first day of any Lease Year and ending, by reason of the expiration or earlier termination of this Lease, prior to the end of such Lease Year. (O) LEASE TERM AND EXTENSION RIGHTS: Approximately eleven (11) years beginning on the Commencement Date and expiring on the day immediately preceding the eleventh (11th) anniversary of the Commencement Date, but if the Commencement Date is not the first day of a calendar month, the Lease Term will expire on the last day of the calendar month in which the eleventh (11th) anniversary of the Commencement Date occurs. Provided Tenant is not in default, the Tenant shall be granted one Renewal Option for a period of five (5) years at the then market rate, as agreed to by Landlord an Tenant or as determined by an appraiser as selected by Landlord, which rate shall not be less than the then current base rate plus an increase equal to three percent (3%) in year one and the Fixed Minimum Rent shall increase three percent (3%) on each anniversary date of each year of the Renewal Option period. Tenant will give written notice to the Landlord on or before September 1, 2006 of Tenant's intention to exercise its Renewal Option. Failure by Tenant to notify Landlord on or before the date indicated will nullify Tenant's Renewal Option. Landlord will within sixty (60) days of receipt of Tenant's notice, provide Tenant the new Fixed Minimum Rent. - 4 - 5 (Q) LANDLORD'S WORK: That construction work to be substantially completed by landlord prior to delivering the Premises to Tenant, a description of which is contained in Exhibit "C", the Work Rider. The Landlord agrees to provide up to four hundred thousand dollars ($400,000) in Tenant Improvement Allowances to the Tenant. Said Tenant Improvement Allowance shall exclude up to $32,000 of Architectural fees, which shall be the sole responsibility of the Landlord. Landlord agrees that if the final cost of the Tenant Improvements are less than $350,000, then the Fixed Minimum Rent shall be reduced equally over the Lease Term on a square foot basis by an amount equal to the amount by which $350,000 exceed the actual cost of Tenant Improvements. In no event shall the Fixed Minimum Rent be reduced by more than $.1361 per square foot. Said Tenant Improvement Allowance shall not be used for furniture, fixtures, equipment, computer cabling or installation thereof, telephone system equipment, installation or cabling, satellite dish equipment, installation or cabling or special electrical cabling as determined by the sole discretion of the Landlord. (R) TENANT'S WORK: All construction work other than Landlord's Work which is required to complete the Premises to a finished condition ready for the conduct of Tenant's business. Tenant's Work shall be performed in a good and workmanlike manner in conformity with all governmental codes, statutes, rules and regulations and by a duly licensed and insured contractor who meets the criteria set forth in Exhibit "C". (S) CONSUMER PRICE INDEX: If applicable, the Index known as "United States Bureau of Labor Statistics, [Revised] Consumer Price Index (CPI), United States City Average for all Urban Consumers (1982-84=100). If discontinued, Landlord shall designate a reasonable alternative and comparable Consumer Price Index. (T) FIXED MINIMUM RENT: The sum due and payable to the Landlord will be $2,186,467.26 for the initial term of the Lease payable each Year as defined in 1.01(J) and calendar month during the Lease Term, subject to adjustment as provided in Section 3.01, is: ================================================================================ YEAR ANNUAL FIXED MINIMUM RENT MONTHLY RENT - -------------------------------------------------------------------------------- 1 $ 54,276.16 $ 4,523.00 - -------------------------------------------------------------------------------- 2 $171,484.11 $14,290.34 - -------------------------------------------------------------------------------- 3 $188,178.11 $15,681.51 - -------------------------------------------------------------------------------- 4 $188,178.11 $15,681.51 - -------------------------------------------------------------------------------- - 5 - 6 ================================================================================ YEAR ANNUAL FIXED MINIMUM RENT MONTHLY RENT - -------------------------------------------------------------------------------- 5 $204,872.11 $17,072.68 - -------------------------------------------------------------------------------- 6 $204,872.11 $17,072.68 - -------------------------------------------------------------------------------- 7 $221,566.1 $18,463.84 - -------------------------------------------------------------------------------- 8 $221,566.11 $18,463.84 - -------------------------------------------------------------------------------- 9 $238,260.11 $19,855.01 - -------------------------------------------------------------------------------- 10 $238,260.11 $19,855.01 - -------------------------------------------------------------------------------- 11 $254,954.11 $21,246.18 ================================================================================ The Fixed Minimum Rent above excludes any applicable state or local imposed sales taxes on Rent due hereunder, the cost of which shall be borne by Tenant in accordance with Florida state law. (W) COOPERATING BROKER: NONE. (AA) PREPAID RENT: Four thousand Five hundred Twenty-three and NO/100ths DOLLARS ($4,523.00) payable upon Tenant's execution of this Lease to be applied to the first installment(s) of Fixed Minimum Rent plus applicable state or local imposed sales taxes on Rent due hereunder the cost of which is $294.00. Total due to Landlord upon execution of the Lease by Tenant is $4,817.00. (AB) TENANT INDUCEMENT: As inducement to Landlord for the Tenant Improvement Allowances and the discounted rental rates early in the Lease, and in lieu of a security deposit, Tenant shall convey to Landlord, upon execution of this Lease, legal rights, title and interest to one Share or Unit of the "A Unit" private placement stock of Tenant being offered for public sale by Tenant in accordance with Tenant's Private Placement Memorandum and Prospectus number #66 (the "Stock") which Stock is being offered for $100,000 per "A Unit". Tenant represents and warrants that it has good title to the Stock, and that conveyance of marketable title to such Stock to Landlord has been duly authorized and approved by Tenant's Board of Directors pursuant to a current resolution of Tenant's Board of Directors. Section 1.02 - Significance of Basic Lease Information All of the provisions, covenants and conditions set forth in the remainder of this Lease and all exhibits and attachments hereto, are by this reference incorporated into this Article 1 as if the same were set forth at length in Article 1. Each reference in the remainder of the Lease and exhibits and other attachments to any provisions in Article 1 will be construed to incorporate all - 6 - 7 of the terms provided under this provision. In the event of any conflict between a provision in Article 1 and the remainder of this Lease or exhibits or other attachments, the latter will control. ARTICLE 2 LANDLORD'S GRANT OF POSSESSION AND QUIET ENJOYMENT Section 2.01 - Demise In consideration of the Rent, covenants and agreements contained in this Lease, Landlord leases the Premises to Tenant, and Tenant hereby rents it, so that Tenant shall continuous operate its business in accordance with the Permitted Use without creating any nuisances and, subject only to the Lease terms and conditions, matters of public record, public or private restrictions affecting Landlord or the Shopping Center and all applicable governmental rules and regulations. The Premises includes only the interior improvements specifically granted and as to the Premises Landlord may take whatever reasonable actions are necessary to fulfill its obligations hereunder and while doing so shall take reasonable efforts not to adversely interfere with Tenant's operations. Section 2.02 - Use of Common Areas and Relocation Rights Tenants may use the Common Area with others subject, however, to the terms and conditions of this Lease and to the Rules and Regulations as set by the Landlord. "Common Areas" mean all facilities outside of any Premises furnished by Landlord for the non-exclusive use of the occupants of the shopping Center, their officers, agents, employees and customers. The Common Area shall be solely controlled by Landlord. Landlord may alter the size, scope and configuration of the Shopping Center and any portion(s) of the Common Area, including, the construction of other buildings or improvements in the Shopping Center and the construction of parking facilities, provided only that the size, access and location of the Premises, and the parking facilities shall not be materially, adversely impaired. Section 2.03 - Construction/Possession Landlord's delivery to Tenant of the Premises for the commencement of Tenant's Work establishes acceptance of the Premises by Tenant in satisfactory condition and in full compliance with all of Landlord's covenants and obligations. Tenant shall accept possession upon substantial completion of Landlord's Work, if any. No representations or inducements respecting the condition of the Premises have been made to Tenant that any other tenants have leased or will continue to lease space within the Shopping Center or that Tenant has any product - 7 - 8 exclusive unless stated herein to the contrary. Tenant shall perform Tenant's Work in accordance with the Landlord's requirements and shall install such first class stock, fixtures and equipment and perform such other work as shall be necessary to prepare the Premises for the opening and continuous operation of business. Tenant shall pay for temporary utilities from the date when the Premises is made available to Tenant for Tenant's Work (or from the date when Tenant commences to perform its Tenant's Work, if earlier) until Commencement Date. SEE SPECIAL STIPULATION RIDER #1. Section 2.04 - Quiet Enjoyment Upon paying all sums due from Tenant to Landlord and performing and observing all of Tenant's covenants and obligations, Tenant, subject to the provisions hereof, shall peacefully and quietly have, hold and enjoy the Premises throughout the Lease Term without interference by Landlord. Section 2.05 - Statement of Lease Term and Rent Upon Landlord's request, Tenant shall execute and deliver a written statement specifying the Commencement Date and the expiration date of the Lease Term and the Fixed Minimum Rent after reduction, if any, for cost savings in the Tenant Improvement Allowances. ARTICLE 3 RENT Section 3.01 - Fixed Minimum Rent Tenant covenants and agrees to pay to Landlord, in lawful money of the United States, Fixed Minimum Rent, and applicable state and local sales tax, as provided in Section 1.01 in advance without demand, deduction or set-off whatsoever on the first (1st) day of each calendar month during the lease Term. Fixed Minimum Rent for any partial calendar month during the Lease Term shall be prorated on a per diem basis. Section 3.07 - Additional Rent and Address for Payment In addition to Fixed Minimum Rent, all other payments due and payable by Tenant hereunder, including, but not limited to, Tenant's proportionate share of "Operating Costs" and "Taxes" (as hereinafter defined), are known as "Additional Rent" and such sums shall be due and payable, together with interest thereon as provided below. Fixed Minimum Rent and Additional Rent are herein sometimes referred to as "Rent". Should Tenant fail to make any payment of Rent, within five business days after the Due Date, such unpaid amounts shall bear interest from the due date - 8 - 9 thereof to the date of payment at the rate which is the lesser of eighteen percent (18%) per annum or the maximum interest rate permitted by law. Tenant also shall pay as Additional Rent the Late Payment Charge outlined in Section 1.01 (K) for processing of late payments. Rent shall be due at the address specified By Landlord for notices hereunder. ARTICLE 4 OPERATING COSTS, TAXES Section 4.01 - Operating Costs Along with Fixed Minimum Rent and as part of Additional Rent, Tenant covenants to pay it share of all increases in the costs of maintaining, repairing, operating and insuring the Common Areas and other portions of the Shopping Center which are the responsibility of the Landlord including management fees and an administrative cost equal to fifteen percent (15%) of the foregoing costs, (collectively, "Operating Costs") over the Base Expense Stop in the amount of $99,000.00. Increases shall not be greater than five percent (5%) per year, cumulative. Tenant's share of Operating Costs shall be determined by the following formula: $99,000.00 (Base 33,388 (Gross Leasable Area of Premises) X Operating Costs) - ---------------------------------------- ---------------- 72,213 (Gross Leasable Area of Shopping Center) Tenant's pro rata share is 46.235% The gross leasable area of the Premises is measured from the center line of demising wall and to the exterior faces of exterior walls or windows. Landlord shall estimate these costs annually and Tenant covenants to pay one-twelfth (1/12th) of such estimated amount monthly, along with its monthly installment of Fixed Minimum Rent. Landlord shall provide to Tenant a written reconciliation of actual Operating Costs to payments received from Tenant by May 1 of the succeeding Lease Year. Any excess payments by Tenant shall be applied towards next month's (or months') Operating Costs and any shortage shall be paid to Landlord with Tenant's next Rent payment. Tenant's share of Operating Costs shall be prorated for any Partial Lease Year hereunder. Failure of Landlord to provide the statement called for hereunder within the time of prescribed shall not relieve Tenant from its obligation hereunder. SEE SPECIAL STIPULATION RIDER #2. - 9 - 10 Section 4.02 - Taxes Throughout the Lease Term, Tenant shall pay monthly as Additional Rent its proportionate share, see 4.01 above, of all increases over the Base Year Cost of 1995 which is $43,569.62. "Taxes" mean all federal, state, local, governmental, special district and special service area taxes, charges, assessments and any other government charges, surcharges and levies, general and special, ordinary or extraordinary, including state or local imposed sales taxes on Rent of any kind whatsoever (including interest thereon whenever same may be payable in installments) which Landlord shall pay or be obligated to pay arising out of the use, occupancy, ownership, leasing, management, repair or replacement of the Shopping Center, any appurtenance thereto or any property, fixtures or equipment thereon. Taxes also include the costs (including, without limitation, fees of attorneys, consultants or appraisers) of any negotiation, contest or appeal pursued by or on behalf of Landlord and relating to the Shopping Center. Taxes exclude any income, transfer, profit, inheritance or franchise tax which may be imposed upon Landlord. Tenant's share of Taxes shall be computed by multiplying Taxes by the fraction utilized in Lease Section 4.01. Landlord shall estimate Taxes annually and Tenant covenants to pay one-twelfth (1/12th) of such estimated amount monthly, along with its monthly installment of Fixed Minimum Rent. Landlord shall reconcile actual Taxes to payments received from Tenant by May 1 of the succeeding Lease Year. Should Taxes be underestimated, Tenant shall pay any deficiency with the next payment of Fixed Minimum Rent, and Landlord shall appropriately adjust its estimates. Any excess payments shall be credited against Tenant's next payment of Taxes. Failure of Landlord to provide the statement called for hereunder within the time prescribed shall not relieve Tenant from its obligation hereunder. ARTICLE 5 ADVERTISING AND PROMOTION Section 5.01 - Advertisements, Grand Opening Charge and Promotional Charge No more than three (3) times per Lease Year, Tenant, at Tenant's cost, shall participate in the cooperative advertising of the Shopping Center. Should Tenant fail to participate, Tenant shall pay as Additional Rent a fee of Three Hundred and No/100th Dollars ($300.00) for each occurrence of non-participation. ARTICLE 6 UTILITIES Section 6.01 - Utilities - 10 - 11 Tenant shall contract and pay for all utilities used or consumed in the Premises, including any tap-in, connection and metering fees which may be charged by the applicable utility supplier. If Tenant fails to pay such charges when due, then Landlord may, pay such charge on behalf of Tenant, with any such amount paid by Landlord being repaid by Tenant to Landlord, promptly upon demand, or at Landlord's option, along with an administrative charge of One Hundred Fifty and No/100ths Dollars ($150.00). The Landlord is not responsible for any interruptions or curtailment in utility services unless caused by the act of its agents or employees and if so caused, Landlord shall use prompt and reasonable efforts to restore said utility. SEE SPECIAL STIPULATION RIDER #3. ARTICLE 7 INSTALLATION, MAINTENANCE, OPERATION AND REPAIR Section 7.01 - Tenant Installation of Fixtures and Other Changes Tenant shall install first class trade fixtures and equipment required to operate its business. All trade fixtures, signs or other personal property installed in the Premises by Tenant shall remain its property and may be removed at any time, provided that Tenant is not in default and that the removal thereof does not cause, contribute to or result in Tenant's default hereunder. Tenant shall, at its expense, promptly repair any damage to the Premises. The term "trade fixtures" excludes carpeting, floor coverings, attached shelving, lighting fixtures, wall coverings or similar Tenant improvements, all of which shall become the property of Landlord upon surrender of the Premises. Tenant shall perform no work costing more than $5,000.00 in the aggregate per Lease Year, without the prior written approval of Landlord. Any work permitted shall be at Tenant's sole cost and expense and be done in a good and workmanlike manner in compliance with all governmental requirements and the Handbook, if any, without any liens attaching to the Premises or the Shopping Center. Section 7.02 - Non-Premises Maintenance by Landlord Landlord shall keep the exterior supporting walls, foundations, roof, landscape sprinkler system (if any), gutters and downspouts of the Premises in good repair. Landlord shall not repair, maintain, alter or perform any other repairs to the Premises including any plumbing, ventilating, electrical, air conditioning or other mechanical installations, but, to the extent not caused by the action or inaction of Tenant or its agents or independent contractors, shall repair the plumbing, sanitary sewer, electrical and water lines to their entry point into the Premises. Landlord shall maintain and keep in good repair the Common Areas (including, without limitation, the parking lot) - 11 - 12 within the Shopping Center. Except as provided in Article 9 hereof, Landlord shall have no responsibility whatsoever to make any repairs in the Premises resulting from (a) any alterations, modifications or improvements made by or on behalf of Tenant, (b) the installation of Tenant's property, fixtures (trade or otherwise), equipment or inventory, (c) Tenant's use or occupancy of the Premises in violation hereof or in a manner not contemplated by Landlord as of the date hereof, or (d) the acts or omissions of Tenant, its employees, agents contractors, sub- tenants, invitees, licensees or customers. SEE SPECIAL STIPULATION RIDER #4 Section 7.03 - Premises Maintenance By Tenant Except for Landlord's maintenance responsibilities as provided in Section 7.02, Tenant shall, at Tenant's expense, keep the Premises and appurtenances thereto, including all glass and exterior doors, in good order, condition and repair and in a clean, pleasant, sightly, sanitary and safe condition and free from loiterers. If Tenant fails to do so Landlord, after notice, may perform these duties and Tenant agrees to reimburse Landlord the reasonably incurred costs, including an administrative fee equal to twenty percent (20%) of the costs, upon ten (10) days request. Tenant shall make any and all additions, improvements, alterations and repairs to or on the Premises, other than those required for load-bearing interior walls and the roof, foundation or exterior walls, required by any lawful authorities or insurers. Landlord may deal directly with any authorities respecting their requirements for additions, improvements, alterations or repairs. Through a licensed or qualified contractor reasonably approved by Landlord, Tenant shall cause to be performed all maintenance on the Premises and its systems and equipment, including, but not limited to the fire sprinkler system, in a good and workmanlike manner including the monthly changing of heating, ventilating and air conditioning filters and lubrications, adjustments, and inspections and shall provide evidence of such maintenance within thirty (30) days of Landlord's request. Tenant, at its expense, shall retrofit, replace and/or repair such systems, equipment and all components thereof as required to maintain such systems in good working order and repair. Upon prior notice, Landlord, through an independent contractor, may undertake HVAC maintenance at competitive rates and charge Tenant for such maintenance as Additional Rent and in such event, Tenant covenants to pay such charges, including an administrative fee equal to twenty percent (20%) of the costs. Any and all roof penetrations and sprinkler changes required by Tenant's Work, whether or not performed by Landlord or for Tenant to comply with this Section 7.03 shall be made at Tenant's cost but at a competitive price by Landlord's independent roofing and sprinkler contractors, respectively. - 12 - 13 Section 7.04 - Signs, Awnings and Canopies No exterior door, wall or window signs, awnings or canopies nor any lighting or protruding object or any decoration, lettering or advertising mater on any exterior door, wall or window of the Premises is permitted without Landlord's advance written consent. Tenant shall maintain any local authority and Landlord approved sign, canopy, prior decoration, lettering or advertising matter in good condition and repair and shall obtain any and all permits or licenses required by applicable governmental authorities. Section 7.05 - Liens No encumbrances, charges or liens against the Shopping Center shall exist because of any action or inaction by Tenant or its independent contractors. Tenant shall discharge by bond or otherwise within fifteen (15) days of notice of its existence, any lien, encumbrance or other charge arising in violation of this Section. Section 7.06 - Surrender of Premises Upon termination, Tenant shall surrender the Premises in the same condition as the date Tenant opened for business, reasonable wear and tear and loss due to casualty and condemnation excepted, and shall surrender all keys for the Premises to Landlord. Tenant must remove all its trade fixtures and personal property and, if requested, any other installation, alterations or improvements made by Tenant and shall repair any damage caused thereby. ARTICLE 8 INSURANCE Section 8.01 - Tenant's Coverage Tenant shall have statutory worker's compensation, insure its property for all occurrences within the Premises and maintain, at its expense, comprehensive or commercial general insurance for the Premises. such coverage shall (i) have a single limit of not less than $3,000,000.00, (ii) cover Tenant's contractual liability hereunder, (iii) cover any third parties performing work in the Premises and (iv) name Landlord and Tenant as insureds. Tenant shall also keep in force all risk property coverage insurance for the full replacement value of Tenant's improvements. Tenant shall deliver certificates thereof to Landlord within ten (10) days of the Commencement Date which certificates shall reflect that the policies shall not be canceled without ten (10) days prior notice to Landlord, but if any work is to be performed for Tenant's improvements, the Certificate shall be delivered to Landlord prior to commencement of the improvements. If Tenant fails to obtain the necessary - 13 - 14 coverages, Landlord may do so and charge Tenant as part of Rent. Tenant's property insurance coverage shall include a waiver of subrogation against Landlord. SEE SPECIAL STIPULATION RIDER #5. Section 8.02 - Increase in Fire or Environmental Insurance Premium Tenant shall not keep, use, sell or offer for sale in or upon the Premises any article or service which may be prohibited by or increase the premiums under Landlord's property insurance policy or which is prohibited by any local, state or federal agency. Section 8.03 - Landlord's Coverage Landlord shall self insure or maintain adequate public liability and property (in an amount of not less than 80% of replacement cost) and rental insurance covering the Shopping Center. Tenant shall bear its proportionate share of the cost of insurance procured by Landlord, all in accordance with Section 4.01. Landlord shall waive any property damage claims against Tenant to the extent of Landlord's insurance. Section 8.04 - Indemnification Except as limited by Landlord's waivers in Special Stipulation Rider #5, Tenant warrants to protect, defend, indemnify and hold Landlord and Landlord's managing agent harmless from and against any and all claims, damages, liabilities or expenses arising out of or from (i) Tenant's use of the Premises, (ii) any breach or default in the performance of any obligation of Tenant, (iii) any act, omission or negligence of Tenant, its sublessees, assignees, licensees or concessionaries or any of their respective agents, employees and contractors. Tenant shall maintain a contractual liability endorsement to its public liability policy, specifically endorsed to cover the indemnity provision of this Section. Landlord shall not be liable for any damage to or loss of Tenant's personal property, inventory, fixtures or improvements. Landlord shall protect, indemnify and save Tenant harmless from and against any liability and expense arising from injuries or damages to persons or property (except tenant's property) occurring in the parking lots (except exclusively dedicated to Tenant after commencement of the Lease, if any), common ways, or common areas in the Shopping Center which are caused by the gross negligence or willful misconduct of Landlord, its agents, servants or employees. ARTICLE 9 DAMAGE AND DESTRUCTION - 14 - 15 Section 9.01 - Fire, Explosion or Other Casualty (an Occurrence) Tenant shall immediately give notice to Landlord of any damage to the Premises. If the Premises are damaged by a fire, explosion or other casualty (an Occurrence) to an extent of less than fifty percent (25%) of the cost of replacement of the Premises, the damage, except as provided in Section 9.02, shall promptly be repaired by landlord subject to this Section. Tenant may terminate this lease if such repairs are not commenced within 90 days after the Occurrence Date and thereafter diligently prosecuted, or if such repairs are not completed within 180 days after the Occurrence Date. Landlord shall not be required to repair or replace Tenant's improvements, alterations and additions, inventory, fixtures, furniture, furnishings, floor coverings, equipment and other personal property. If such damage occurs and (i) Landlord is not required to repair as provided above, or (ii) the Premises shall be damaged to the extent of fifty percent (50%) or more of the cost of replacement, or (iii) the building of which the Premises are a part is damaged to the extent of twenty-five percent (25%) or more of the cost of replacement, or (iv) the buildings (taken in the aggregate) in the Shopping Center shall be damaged to the extent of more than twenty-five percent (25%) of the cost of replacement, Landlord may repair or rebuild the Premises or the building(s), or terminate this Lease upon notice of such election in writing to Tenant within ninety (90) days after the Occurrence. If the Occurrence renders forty percent (40%) or less of the Premises untenantable and Tenant does not utilize the portion rendered untenantable, a proportionate abatement of the Rent shall be allowed from the Occurrence date until the date Landlord completes its work, said proportion to be computed on the basis of the relation which the gross square footage of the untenantable space bears to the floor area of the Premises. If more than forty percent (40%) of the Premises is rendered untenantable, and Tenant does not utilize the entire Premises for any purpose, then if and until Landlord restores it to the condition they were in on the Commencement Date, Rent shall abate until substantial restoration. If any Occurrence precludes twenty-five percent (25%) or more of the Premises' use by Tenant and less than twelve (12) months remain on the then current term, notwithstanding any of the other provisions of this Section, Landlord shall have no obligation to repair or rebuild unless Tenant, within thirty (30) days of the Occurrence, irrevocably exercises its next option, if any, to extend this lease. If no such option exists and less than twelve (12) months remain in the term, Landlord shall have no obligations to restore or rebuild. In the event of any Occurrence affecting Tenant's ability to operate, Tenant's Percentage Rent under the above circumstances for the purpose of Section 3.02 hereof and the computation of Percentage Rent shall be based upon an adjusted Percentage Rent - 15 - 16 Breakpoint which is decreased in the same proportion as Fixed Minimum Rent has been abated pursuant to this Section. Section 9.02 - Landlord's and Tenant's Work Upon an Occurrence, Landlord need only repair as is necessary to place the Premises in the same condition as when possession was initially delivered to Tenant, provided, however, Landlord shall not be required to rebuild or restore any portion of Tenant's Work or of any addition work performed by Landlord on behalf of Tenant. Immediately thereafter, Tenant shall, at Tenant's expense, promptly perform Tenant's Work and shall repair or replace its inventory, fixtures, personal property, and if applicable shall promptly reopen for business. ARTICLE 10 CONDEMNATION Section 10.01 - Condemnation If any or part of the Premises is rendered unusable because of a taking via eminent domain (or via a deed in lieu thereof), or if any part of the Shopping Center is taken and its continued operation is not in Landlord's opinion economical, this Lease shall automatically terminate as of the date possession is taken by the condemning authority. In the event of a partial taking which does not result in the termination of this Lease, Fixed Minimum Rent shall be proportionately reduced according to the part of the Premises remaining usable by Tenant. Rental shall also be proportionally abated during any restoration period, to the extent said restoration renders the premises unusable by Tenant for Tenant's purposes intended hereunder. Section 10.02 - Condemnation Award All compensation awarded or paid for any taking shall be the property of Landlord and Tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such compensation. Nonetheless, Landlord shall not be entitled to any award specifically made to Tenant for moving expenses or for the taking of the unamortized portion of Tenant's trade fixtures, furniture or leasehold improvements, based upon the earlier to occur of the expiration of the useful life thereof or the amount of time remaining in the then term hereof. Section 10.03 - Landlord's and Tenant's Work If this Lease is not terminated as provided above, Landlord shall promptly repair such structural portions of the Premises as may be necessary for Tenant to operate its business, to the extent of condemnation proceeds made available to landlord specifically for - 16 - 17 such purpose. Promptly following such repair, Tenant shall, at Tenant's expense, perform Tenant's Work required pursuant to the attached Handbook, if any, and shall timely open and operate and otherwise conform to the requirements of this Lease. ARTICLE 11 DEFAULT AND REMEDIES Section 11.01 - Default If Tenant fails to: (i) pay all or any portion of the Fixed Minimum Rent, Additional Rent or any other sum, within 5 business days of the Due Date; (ii) cease all conduct prohibited hereby within 5 days after receipt of written notice from Landlord; (iii) take actions within 30 days in accordance with the provisions of any written notice from Landlord to remedy Tenant's failure to perform any of the terms, covenants and conditions hereof; (iv) open or conduct business in the Premiss as required; (v) have any bankruptcy proceedings dismissed within thirty (30) days after filing; (vi) cease committing waste to the Premises upon written notice from Landlord; or (vii) conform with the lease provisions and is otherwise in breach of Tenant's obligations and shall not have cured within ten (10) days following written notice from Landlord; then Tenant shall be in default. Landlord may without further notice (a) terminate this Lease, (b) terminate Tenant's right to possession without terminating this Lease or (c) without terminating this Lease re-enter and resume possession of the Premises. If Landlord re-enters the Premises or terminates Tenant's right to possession of the Premises, Tenant covenants to pay all remaining Rent and Additional Rent as and when due, or if accelerated, discounted as set below. Tenant shall be responsible for all expenses incurred by Landlord in regaining possession and in releting the Premises, until such time, if any, as Landlord relets same and the Premises are occupied by such successor. Upon reletting, sums received from such new lessee shall be applied first to payment of costs incident to reletting and regaining possession; then to any indebtedness to Landlord from Tenant other than for fixed Minimum Rent; and any remaining excess shall then be applied to the payment of Fixed Minimum Rent due and unpaid. The balance, if any, between all amounts to be - 17 - 18 received and sums received by Landlord on reletting, shall be paid by Tenant to Landlord in full, within five (5) days of notice of same from Landlord. Tenant shall have no right to any proceeds of reletting that remain following application of the proceeds as above and Landlord shall be entitled to same as a brokerage fee for reletting the Premises. Section 11.02 - Rights and Remedies Landlord may exercise any or all remedies in this Lease in addition to any others and upon reasonable notice to Tenant, may cure any breach by Tenant at Tenant's cost and expense. Tenant shall reimburse Landlord for such expense upon demand. Section 11.03 - Bankruptcy If Landlord cannot terminate this Lease because of law, then Tenant, as a debtor in possession or on behalf of any trustee for Tenant, shall; (i) within the statutory time, assume or reject the Lease and (ii) not seek or request any extension or adjournment of any application to assume or reject this Lease by Landlord. In such event, Tenant or any trustee for Tenant may only assume this Lease if (A) it cures or provides adequate assurance that it will promptly cure any default hereunder, (B) it compensates or provides adequate assurance that Tenant will promptly compensate Landlord for any pecuniary loss to Landlord resulting from Tenant's defaults, and (C) it provides adequate assurance of performance during the Lease Term of all of the terms, covenants and provisions of this Lease to be performed by Tenant. In no event after the assumption of this Lease shall any then-existing default remain uncured for a period in excess of the earlier of ten (10) days or the time period set forth herein. Adequate assurance of performance shall include, without limitation, adequate assurance (1) of the source of rent reserved hereunder, (2) that any Percentage Rent due hereunder will not decline from the levels anticipated, and (3) that the assumption of this Lease will not breach any provision hereunder. Section 11.04 - Attorney's Fees and Acceleration If Landlord requires an attorney to enforce any of the provisions of this Lease, Landlord shall be entitled to all reasonable expenses and cost actually incurred by it. If Tenant ceases operations within the Premises in violation of this Lease, landlord may accelerate all amounts due under this Lease for the remainder of the term with a deduction to present value based upon two (2) points above the discount rate at the time of the acceleration. If Tenant pays to Landlord all accelerated sums due, any net rent received by virtue of the reletting of the Premises shall be reimbursed to Tenant as received. - 18 - 19 Section 11.05 - Landlord's Lien All property of the Tenant which is now or any hereafter be at any time during the Lease Term in or upon said Premises, whether exempt from execution or not, shall be bound by and subject to a lien for the payment of the Fixed Minimum Rent and Additional Rent herein reserved, and for any damages arising from any breach by the Tenant of any of the covenants or agreements of this Lease to be performed by Tenant. In the event of default Tenant in the payment of Fixed Minimum Rent and/or Additional Rent or otherwise, Landlord may, subject to rights of previous lien holders, foreclose such lien and take possession of said property or any part or parts thereof and sell or cause the same to be sold, at such place as Landlord may elect, at public or private sale, with or without notice, to the highest bidder for cash and apply the proceeds of said sale to pay the costs of taking possession of and selling said property, including Landlord's legal cost and attorney fees, and then toward the rental, debt and/or damages as aforesaid. Any excess of the proceeds of said sale over said costs, rental, debt, and/or damages shall be paid to Tenant. Any such sale shall bar any right of redemption by Tenant. Unless an Event of Default shall have occurred and be continuing hereunder, Landlord shall not file A UCC-1 with respect to the foregoing lien. ARTICLE 12 ASSIGNMENT AND SUBLETTING Section 12.01 - Covenant Not to Assign or Sublet Without Consent Tenant covenants that it will not assign, mortgage or encumber this Lease, nor sublease the Premises, or permit the Premises or any part of the Premises to be used or occupied by others whether voluntarily or by operation of law, without the prior written consent of Landlord in each instance. If Tenant conforms with Section 12.02 below, Landlord shall not unreasonably withhold its consent to the assignment or sublease. Section 12.02 - Conditions for Landlord's Consent to Assign or Sublease The granting of consent by Landlord shall be preconditioned upon the fulfillment of the following requirements: (1) Landlord shall be provided with at least thirty (30) days written notice prior to any proposed assignment or subletting; (2) Tenant shall remain primarily liable under this Lease and shall guaranty the Lease if Landlord so requests; (3) Any proposed assignee or sublessee shall assume, in a written instrument acceptable to Landlord, all of the obligations of Tenant; (4) No use shall be employed in connection with the Premises other than the Permitted Use set forth in this Lease; (5) The Premises shall remain intact - 19 - 20 unless Landlord agrees to the contrary; (6) The successor shall have a good reputation in the area and be financially capable of fulfilling its obligation; (7) The gross rental proceeds from the subtenant or assignee shall be equal to those paid by Tenant for Fixed Minimum Rent and Additional Rent; (8) Any use of the Premises permitted hereunder by the proposed sublessee/assignee will not violate or create any potential violation of any laws, nor will it violate any other agreements affecting the Premises, the Shopping Center or Landlord; (9) Tenant shall pay all reasonable attorney's fees or other costs associated with Landlord's review and approval of a prospective assignee or sublessee and (10) Tenant will not sublet or assign to an existing Shopping Center tenant, or to a person or entity with whom Landlord has negotiated for Shopping Center premises within the preceding six (6) months. If landlord improperly denies a sublease or assignment, Tenant's sole remedy shall be in equity. Section 12.03 - Assignment in Violation of Article No occupancy by any party other than Tenant or collection of Rent by Landlord will be deemed (1) a waiver of the provisions of this Article, or (ii) the acceptance of the assignee, subtenant or occupant as tenant, or (iii) a release of tenant from the further performance by Tenant of covenants on the part of Tenant contained in this Lease. The consent by Landlord to an assignment or sublease shall not relieve Tenant from obtaining Landlord's prior written consent in writing to any further assignment or sublease. No permitted subtenant shall assign or encumber its sublease all or any portion of its subleased space, or otherwise permit the subleased space or any part to its subleased space to be used or occupied by others. ARTICLE 13 RIGHTS OF ENTRY Section 13.01 - Reasonable Right of Entry Landlord or its agents may enter the Premises for any reasonable purpose and to bring and store necessary repair materials without any liability to Tenant. Landlord shall use reasonable efforts to minimize any disruption to Tenant's business caused by such entry. During the four (4) months before the end of the Lease Term or any renewal term, Landlord may place upon the Premises "To Let" or "For Rent" notices. - 20 - 21 ARTICLE 14 SUCCESSION TO LANDLORD'S INTEREST Section 14.01 - Attornment, Subordination and Estoppel Certificates Tenant shall attorn (recognize) and by bound to any of Landlord's assigns or successors under this Lease in accordance with all of the Lease terms, covenants and conditions. The term "Landlord" as used herein shall include any successor to Landlord's interest hereunder. This Lease is subject and subordinate to the present and future mortgages and their liens and to all renewals, modifications, consolidations, replacements and extensions thereof, and upon demand and upon receipt of an acceptable "Non Disturbance" covenant, Tenant shall promptly execute all documents evidencing its subordination and willingness to attorn to the future mortgages. Within ten (10) days after Landlord's request, Tenant shall return all Estoppel Letters or Certificates submitted by Landlord. ARTICLE 15 HOLDING OVER Section 15.01 - Holding Over Tenant may not remain within the Premises after the day of Lease expiration without Landlord's written approval. With Landlord's approval, Tenant shall become a tenant at will and any such holding over shall not constitute an extension of this Lease. During such holding over, Tenant shall pay one hundred fifty percent (150%) of the Rent in effect as of the expiration date. If Tenant holds over without Landlord's written consent, Tenant also shall be a tenant at sufferance and shall pay twice the then effective Rent until Tenant surrenders possession. Nothing contained herein shall be interpreted to grant permission to Tenant to holdover or to deprive Landlord of any rights and remedies with respect thereto. ARTICLE 16 HAZARDOUS SUBSTANCES Section 16.01 - Hazardous Substances (a) Neither Tenant, it successors or assigns, nor any permitted assignees, sublessee, licensee or other person or entity acting at the direction or with the consent of Tenant shall (1) manufacture, treat, use, store or dispose of any "Hazardous Substance" (as hereinafter defined) on the Premises, the Shopping Center or any part thereof or (ii) permit the "release" (as hereinafter defined) of a Hazardous Substance on or from the Premises, the Shopping Center or any part thereof unless the - 21 - 22 manufacturing, treatment, use, storage, disposal, or release of a Hazardous Substance is approved in writing by Landlord. (b) Tenant covenants, at its cost and expense, to protect, indemnify, defend and save Landlord harmless against and from any and all damages, losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, judgements, suits, proceedings, costs, or expenses of any kind or nature whatsoever (including, without limitation, attorney's fees and expert's fees) which may at any time be imposed upon, incurred by or asserted or awarded against Landlord arising from or out of any Hazardous Substance on, in, under or affecting the Premises, the Shopping Center or any part thereof as a result of any act or omission by Tenant, its successors or assigns, or any assignee, permitted sublessee, licensee or other person or entity acting at the direction, knowledge or implied consent of Tenant. Said indemnity shall survive the termination of the Lease. (c) The term "Hazardous Substance" shall mean any waste, substance or material (i) identified in Section 101(14) of the Comprehensive Environmental Response, Compensation Liability Act of 1980, as the same may be amended from time to time (herein called "CERCLA"), or (ii) determined to be hazardous, toxic, a pollutant or contaminant under or regulated by, any federal, state, or local statute, law, ordinance, rule, regulation or judicial or administrative order or decision, as same may be amended from time to time, including, but not limited to, petroleum and petroleum products. The term "release" shall have the meaning given to such term in Section 101(22) of CERCLA. ARTICLE 17 CONDITIONS OF LANDLORD-TENANT RELATIONSHIP Section 17.01 - Conditions of Landlord-Tenant Relationship A. The Landlord's acceptance of some act in violation of the terms of this Lease shall not prevent the Landlord from insisting upon the strict performance of that term at any other time. Time is of the essence of this Lease. B. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent stated shall be other than on account. Any endorsement or statement on a check or any accompanying letter is void, and Landlord may accept such check or payment without prejudice to right or remedy at law or in equity or provided in this Lease. Unless required by law, by court order or as otherwise provided herein, any payments made by Tenant hereunder shall be applied in the following order against the following outstanding charges: (a) applicable state rent or sales tax (if any), (b) Fixed Minimum Rent, (c) the Promotion Charge, (d) Operating Costs, (e) Taxes and (f) any Rent or Additional Rent - 22 - 23 not covered by subparagraphs (a) through (e) above. Payments shall be applied within each of the foregoing categories against the sums first due and payable thereunder. Notwithstanding the foregoing, special billings and Percentage Rent billings shall be applied separately in accordance with the provisions hereof. C. This Lease is the sole agreement concerning the Premises and the Shopping Center. All prior negotiations, considerations and representations have been incorporated herein. No course of prior dealings between the parties or their officers, agents or affiliates shall be relevant or admissible to supplement, explain or vary any of the terms of the Lease. No subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. No course of conduct shall constitute an amendment. D. Landlord and Tenant are not partners or joint venturers. E. If Landlord or Tenant is delayed, hindered or prevented from performing any act or things required hereunder by reason of strikes, lock-outs, labor troubles, casualties, inability to procure labor, materials or financing, failure or lack of utilities, governmental laws or regulations, riots, insurrection, war, acts of God, or other causes beyond the reasonable control of either, the delayed party shall not be liable and the period of performance of any such act shall be extended for a period equivalent to the period of such delay. The foregoing is inapplicable to the payment of Rent and Additional Rent unless due to an act arising after Tenant's mailing and affecting the physical delivery of the payment. F. Any writing required to be given under this Lease shall be delivered by hand delivery or sent by either United States certified mail, postage prepaid, return receipt requested, or overnight courier service and shall be addressed (i) if to Landlord, at the address provided in Section 1.01 (B) for Landlord or at such other address as Landlord may designate by written notice. and (ii) if to tenant, at the address provided in section 1.01 (C) for tenant or at such other address as tenant shall designate by written notice. Notices shall be effective upon delivery unless delivery is refused or cannot be made, in which event notice shall be effective on mailing. Facsimile notices shall be effective upon receipt if confirmed within twenty-four (24) hours by any of the foregoing methods. G. The captions, section numbers, article numbers and index appearing are for convenience and do not define, limit, construe or describe the scope or intent of such Sections of this Lease nor in any way affect this Lease. - 23 - 24 H. "Tenant" shall mean each and every entity or person executing this lease as a non-disclosed agent or if an agency relationship is disclosed then Tenant shall be the principal unless stated to the contrary or unless the agent is without authority to bind the principal to this Lease. I. Tenant and Landlord warrant that they have had no dealings with any broker or agent in connection with this Lease except CS Capital Group and Cooperating Broker, if any, whose commission shall be paid pursuant to a separate written agreement, and Landlord and Tenant covenant to pay, hold harmless and indemnify each other from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any broker or agent utilized by the indemnitor with respect to this Lease or the negotiation thereof. J. The remainder of this Lease shall be enforceable if any section or clause is found invalid or unenforceable. K. The submission of this Lease to a prospective Tenant is not an offer, a reservation of or option for the Premises, and this Lease becomes effective as Lease only upon execution and delivery thereof by Landlord and Tenant. L. The Laws of the state in which the Shopping Center is located shall govern the validity, performance and enforcement of this Lease. M. This Lease is binding upon any and all successors in title and assigns of Landlord and Tenant. N. Any obligation which by its nature is due after this Lease expires, shall survive the Lease's termination. O. In any judicial action, Tenant shall not assert any permissive counterclaims nor shall Tenant or landlord demand a jury trial. P. No levy or execution against landlord shall be satisfied from any assets other than Landlord's equity interest in the Shopping Center. Q. Highlighted language, if any, shall be of no greater or lesser force and effect than the remainder of this Lease. Any stricken language shall be treated as though it did not exist. R. Tenant's remedy for any actual or alleged breach of any provision of this Lease by Landlord solely shall be the enforcement of that provision. - 24 - 25 S. Any improvement or alteration to the Premises required because of Tenant's actual or contemplated use of the Premises shall be Tenant's obligation to undertake and complete at its expense. T. If Tenant is a corporation, the individual(s) executing this Lease warrants that s/he has full authority to execute and to bind the Tenant to its terms and conditions pursuant to a current resolution of the Tenant's Board of Directors, which resolution shall be promptly provided upon request. U. CS Capital Group L.L.C. and the Cooperating Broker, if any, are representing and are being paid by the Landlord. IN WITNESS WHEREOF, the parties hereto have executed this Lease under seal this day and year first above written. LANDLORD: Federal I.D. #[36-3925324] JFJ REAL ESTATE -------------- LIMITED PARTNERSHIP, an Illinois limited partnership, d/b/a Town Centre Shopping Center By: John P. Crowe Company, Its: General Partner [/s/ Stephen Soigfreid] By: [/s/ John P. Crowe] - ----------------------------- ------------------------------ (seal) John P. Crowe Witness Title: President TENANT: Federal I.D. #[59-3343338] 800 TRAVEL SYSTEMS, INC., --------------- A Delaware Corporation, d/b/a 1-800-Low-Air-Fare [/S/ Francisco Moreira Jr.] By: [/S/ Jerrold B.Sendrow] - ----------------------------- ------------------------------ (seal) Witness Title:[President] ---------------------------- Attest:[/S/ Jerrold B. Sendrow] --------------------------- SIGNATURE MUST BE WITNESSED AND ATTESTED. Title: [VP/CFO] --------------------------- - 25 - EX-10.8 9 AIRLINES REPORTING CORPORATION 1 EXHIBIT 10.8 AGENT REPORTING AGREEMENT TABLE OF CONTENTS Page SECTION I: PURPOSE AND SCOPE................................................ 1 SECTION II: DEFINITIONS..................................................... 1 SECTION III: LOCATIONS COVERED BY THIS AGREEMENT............................ 4 SECTION IV: QUALIFICATIONS FOR RETENTION ON THE AGENCY LIST................. 5 A. Financial Requirements........................................... 5 B. Personnel Standards.............................................. 7 C. General Qualification Requirements............................... 8 D. Other Requirements............................................... 8 SECTION V: APPOINTMENT OF AGENT BY CARRIER.................................. 10 SECTION VI: CHANGE OF NAME OR LOCATION...................................... 10 A. Procedures To Change Name........................................ 10 SECTION VII: AGENTS AUTHORITY, GENERAL RIGHTS AND OBLIGATIONS................................. 11 SECTION VIII: REPORTS AND SETTLEMENTS, DEFAULTS AND OTHER FINANCIAL IRREGULARITIES UNDER ASP...................... 12 A. Reports and Settlements-General.................................. 12 B. Exceptions To Reports and Settlements if Agent Has Ten or More Locations............................... 13 C. Other Settlement Arrangements Not Prohibited..................... 14 D. Financial and Reporting Irregularities........................... 14 E. Payment of Carrier Debit Memos................................... 20 F. Failure To Maintain Proper Bond Or Letter of Credit.............. 20 SECTION IX: ADDITIONAL OPERATING REQUIREMENTS............................... 21 SECTION X: REFUND OR EXCHANGE OF ARC TRAFFIC DOCUMENTS...................... 23 SECTION XI: LIABILITY AND WAIVER OF CLAIM................................... 23 SECTION XII: DELIVERY AND WITHDRAWAL OF TRAFFIC DOCUMENTS AND IDENTIFICATION PLATES...................................... 25 SECTION XIII: CUSTODY AND SECURITY OF TRAFFIC DOCUMENTS AND IDENTIFICATION PLATES..................................................... 27 - i - 2 Page SECTION XIV: INSPECTION AND RETENTION OF AGENT RECORDS...................... 27 SECTION XV: REVIEWS OF QUALIFICATIONS OF AND BREACHES BY AGENT...................................... 27 SECTION XVI: ANNUAL AND APPLICATION FEES.................................... 29 SECTION XVII: SPECIAL LOCATION EXEMPTIONS................................... 30 SECTION XVIII: NOTICES...................................................... 33 SECTION XIX: CENTRAL COLLECTION SERVICE..................................... 33 SECTION XX: TRANSFER OR ASSIGNMENT OF AGREEMENT, DEATHS AFFECTING OWNERSHIP, ABANDONMENT OF AUTHORIZED AGENCY LOCATION, TEMPORARY CLOSURE.................................................... 33 A. Change of Ownership.............................................. 33 B. Disapproval of Change of Ownership............................... 34 C. Death of a Sole Proprietor....................................... 34 D. Death of a Partner............................................... 35 E. Abandonment of Authorized Agency Location........................ 36 F. Temporary Closure................................................ 36 SECTION XXI: REDUCED RATE TRANSPORTATION FOR AGENT.......................... 37 SECTION XXII: REMUNERATION OF AGENTS........................................ 37 SECTION XXIII: TRAVEL AGENT ARBITER......................................... 38 SECTION XXIV: INTERPRETIVE OPINION PROCEDURES............................... 38 SECTION XXV: MEMORANDUM OF AGREEMENT AND ALTERNATIVE MEANS OF AGENT CONCURRENCE................................................ 38 SECTION XXVI: AMENDMENT OF THIS AGREEMENT................................... 39 SECTION XXVII: ASSURANCE OF NONDISCRIMINATION (Effective only as between the Agent and each U.S. carrier; not effective as between the Agent and ARC, itself)........................................... 39 SECTION XXVIII: EFFECTIVENESS............................................... 39 SECTION XXIX: TERMINATION................................................... 39 SECTION XXX: OTHER AGREEMENTS SUPERSEDED................................... 41 - ii - 3 AGENT REPORTING AGREEMENT This agreement by and between Airlines Reporting Corporation (hereinafter "ARC"), 1530 Wilson Boulevard, Suite 800, Arlington, VA 22209-2448, on its own behalf and on behalf of the carriers which have or hereafter execute the ARC carrier services agreement (hereinafter "carrier" or "carriers") and which appoint the Agent under this agreement, and the person who executes the memorandum of agreement described in section XXV hereof, agreeing to be bound to the terms and conditions of this agreement (hereinafter called "the Agent"), W I T N E S S E T H : WHEREAS, ARC maintains an agency list containing the names of persons who have been found to meet certain minimum requirements and qualifications, and are eligible to issue ARC traffic documents and to sell air transportation or provide for ancillary services on carriers which appoint them; WHEREAS, carriers which are parties to the ARC Carrier Services Agreement may appoint and provide their airline identification plates to such persons for the sale of air transportation and the issuance of ARC traffic documents on their behalf; WHEREAS, ARC administers and operates the agents' standard ticket and area settlement plan (hereinafter "ASP" or "the Plan") through which persons included on the ARC agency list report ARC traffic documents for the sale of air transportation and ancillary services on behalf of the carriers, and make settlement therefore; WHEREAS, the Agent engages in the sale of air transportation to the public as agent for and on behalf of the carriers and, upon application duly submitted, the agent has been found qualified for inclusion on the ARC agency list; WHEREAS, the Agent will utilize the plan to report ARC traffic documents issued for the sales of air transportation and ancillary services on behalf of the carriers appointing such Agent, and make settlement therefore; NOW, THEREFORE, in consideration of these premises and the mutual covenants and agreements hereinafter set forth, it is mutually agreed as follows: 4 SECTION I: PURPOSE AND SCOPE A. The purpose of this agreement is to facilitate the issuance of ARC traffic documents to the public by agents of carriers in a competitive and efficient manner. B. This agreement establishes a principal-agent relationship between the Agent and appointing carriers, and governs the terms and conditions under which the Agent is authorized to issue ARC traffic documents at or through its authorized agency locations in the United States, and does not extend to the terms and conditions under which the Agent is authorized to issue tickets and other forms that the carrier may provide to the Agent. C. This agreement does not constitute the entire agreement between the Agent and a carrier, but is specifically limited to the terms and conditions contained herein. SECTION II: DEFINITIONS For the purpose of this agreement-- AGENCY LIST and LIST mean the agency list maintained by ARC, which includes the name, address and agency code number for each authorized agency location which has been found qualified under ARC standards, and contains the classification under which the location was included. AGREEMENT means the ARC Agent Reporting Agreement. AGENT IDENTIFICATION PLATE means a plate bearing the Agent's name, city, state, and code number, which is used in a validator machine for the validation of ARC traffic documents (paper format). AIRLINE IDENTIFICATION PLATE means a plate bearing the carrier's name or authorized abbreviation, and code number, and is used in a validator machine for the validation of ARC traffic documents (paper format). ARBITER means the Travel Agent Arbiter established by ARC as an independent entity (including all Associate Travel Agent Arbiters) to decide disputes between ARC and agents and applicants. ARC TRAFFIC DOCUMENTS mean agents' standard tickets, miscellaneous charges orders, tour orders, and all other accountable forms and documents, both manual and automated, which ARC provides to agents in paper format for issuance to their clients, and which bear ARC-issued numbers, as well as electronic versions thereof. Both formats, paper and electronic, are assumed throughout this agreement; if only one format is applicable, such shall be noted. The term does not include carriers' own ticket stock, which - 2 - 5 includes tickets, miscellaneous charges orders, tour orders, and other accountable forms and documents of the carriers, or electronic versions thereof. ARC TRAFFIC DOCUMENTS (PAPER FORMAT) include both manual and automated (transitional automated tickets and Automated Ticket and Boarding Pass forms) ARC traffic documents. ARC TRAFFIC DOCUMENTS (ELECTRONIC FORMAT) mean any ARC traffic documents other than ARC traffic documents (paper format). AREA BANK means a bank or a processing center designated to receive and process sales reports and remittances from authorized agency locations in a geographic area. AUTHORIZED AGENCY LOCATION means a place of business operated by an agent which is included on the agency list, and includes the home office location and any branch office location of the Agent. CHECK means the check, draft, or debit entry that an area bank draws or initiates on the Agent's account designated pursuant to section VII.B of this agreement, to charge the amount owed by such agent under section VIII hereof. The various terms for describing the charge are used interchangeably in this agreement. CONTROL means the power or authority to manage, direct, superintend, restrict, regulate, govern, administer, or oversee; and the term embraces every form of control, actual or legal; direct or indirect; negative or affirmative; individual, joint, several, or family, without regard to the type or number of intervening or supervening persons involved. Two persons are under "common control" when both are controlled by the same person or persons. CREDIT REQUEST MEMO means any written request from an agent to a carrier demanding payment of any obligation arising under the agreement, and includes any form of credit request authorized by the carrier, including the Agent Sales Summary Adjustment Request, Form 1282. DEBIT MEMO means any written request from a carrier to an agent for payment of any obligation arising under this agreement. ELECTRONIC ISSUANCE of ARC traffic documents must include, but is not limited to, the process by which an ARC issued number is assigned to the ARC traffic document. INDUSTRY AGENTS' HANDBOOK or HANDBOOK means a handbook containing various rules, regulations and instructions of ARC covering an agent's responsibilities and activities under the agreement, which is maintained by ARC, and updated from time to time, and provided to all agents on a current and continuing basis. - 3 - 6 PERSON includes an individual, corporation, partnership, association, company, or firm. SYSTEM PROVIDER means a person, company, or other legal entity which operates a computerized reservations system which supplies ticketing data required for the imprinting of ARC traffic documents in paper format, or for the issuance of ARC traffic documents in electronic format, by ARC-approved Agents, and which has entered into an agreement with ARC and with the carrier(s) which are parties to the Agent Reporting Agreement. THE TRAVEL AGENT ARBITER PROGRAM, INC. is a corporation chartered in the District of Columbia whose purpose is to oversee the Travel Agent Arbiter and other specified programs. UNITED STATES includes only the fifty states and the District of Columbia. VARIABLE REMITTANCE PLAN means an arrangement negotiated between an individual carrier and an agent under which the agent settles ARC traffic documents with ARC on a schedule other than the tenth day after the close of the sales period, or settles directly with an individual carrier. There are four variable remittance plan options, including Direct Form of Payment (DP), Direct Form of Payment with Invoice (DI), Variable Payment with Consolidated Check (PC) and Variable Payment with Individual Check (PI). SECTION III: LOCATIONS COVERED BY THIS AGREEMENT A. The Agent may exercise the authority granted herein, only at such places of business operated by the Agent as are included on the ARC agency list. B. This agreement covers the home office and all branch locations of the Agent, including any which may be added to the ARC agency list after the date of execution hereof. C. No branch location shall be included on the agency list unless the corporate structure or ownership of the home office and the branch is absolute and all inclusive as a single entity, and the home office has full legal and financial responsibility for the administration, staff, liability, maintenance, and operational expense of the branch location. D. If the Agent wishes to have a place of business included on the agency list as a branch location under the terms of this agreement, it shall submit an application to ARC in accordance with the procedures ARC shall prescribe for submitting and processing such applications. ARC shall not approve any application for a branch location unless, among other things, the Agent is properly bonded in the amount required by section IV.A.1 of this agreement. - 4 - 7 SECTION IV: QUALIFICATIONS FOR RETENTION ON THE AGENCY LIST To be retained on the agency list, the Agent must continue to meet the following criteria: A. Financial Requirements 1. a. The Agent shall, without expense to ARC or any carrier, procure and maintain for the joint and several benefit of the carriers and ARC, a bond issued by a surety included on the current revision of Circular 570 issued by the United States Treasury Department, entitled "Surety Companies Acceptable on Federal Bonds." The bond shall be in the form prescribed from time to time by ARC, shall be in the amount prescribed below, and shall be conditioned upon the Agent's compliance with the provisions of this agreement governing remittances to ARC for the carriers. Subject to the minimum and maximum amounts stated below, the amount of the bond shall be equal to at least the average monthly net cash remittance as determined for the twelve-month period ending on the last sales period ending date of the fifth month prior to the anniversary date of the Agent's bond. If the Agent was approved by ARC within the preceding 12 months, the amount of the bond shall be equal to at least the average monthly net cash remittance of the preceding months ending on the last sales period ending date of the fifth month prior to the anniversary date of the Agent's bond. (1) The minimum amount of the bond that shall be maintained by each Agent approved by ARC for inclusion on its agency list shall be $20,000. This requirement shall remain in force as to each such agent for two years from the date of such approval; thereafter, the minimum shall be $10,000. (2) In no event shall the amount of the bond required of an applicant for a change of ownership as described in sections I, III, and IV of attachment G of this agreement be less than the amount of the bond required of the Agent prior to the approval of any such ownership change. (3) The minimum amount of the bond that shall be maintained by each Agent as to which a change of ownership within the scope of section II and section V of attachment G of this agreement is approved by ARC shall be $20,000. This requirement shall remain in force as to each such Agent for two years from the date of such approval, thereafter, the minimum shall be $10,000. However, in no event shall the amount of the bond required of an - 5 - 8 applicant for any change of ownership as described in sections II and V of attachment G of this agreement be less than the amount of the bond required of the Agent prior to the approval of any such ownership change, or $20,000, whichever is greater. (4) The maximum amount of the bond that shall be maintained by each Agent shall be $70,000. b. In lieu of the bond required by section IV.A.1.a of this agreement, the Agent may provide an irrevocable bank letter of credit in the form prescribed from time to time by ARC. The amount of the letter of credit shall be determined at all times in the same manner as the amount of the bond. 2. Effective on and after May 1, 1987, each agent which has been on ARC's agency list continuously for two years, and each agent (1) as to which ARC has approved a change of ownership within the scope of parts II or V of attachment G to this agreement and (2) which has been on ARC's agency list continuously for two years, may maintain, in lieu of the bond or letter of credit prescribed above, a bond or letter of credit in the required form in the amount of $10,000. This option may not be exercised until the Agent has submitted, and ARC has approved in writing, a current financial statement which shall thereafter be updated and submitted annually to ARC for written approval and shall at all times meet the following requirements: a. The financial statements of the Agent must: (1) be examined or audited in accordance with generally accepted auditing standards; and (2) be prepared in accordance with generally accepted accounting principles; and (3) contain a report on the examination signed by a person or firm licensed to practice public accountancy in a state of the U.S. Financial statements which are merely "reviewed" or "compiled," but not examined or audited by a firm licensed to practice public accounting, do not meet these requirements; and b. Tangible net assets demonstrated by such statements shall be at least $100,000; and c. The report on the financial statements must have been prepared within four months of the close of the period covered by the financial statements and, together with the relevant forms, mailed to ARC within thirty (30) days after the date of the report of the public accountant. - 6 - 9 d. Where the Agent is not a corporation but involves one or more individuals, personal financial statements may be accepted if prepared in accordance with Statement of Position 82-1 as published by the American Institute of Certified Public Accountants, and meets all other requirements set forth above. e. Financial statements meeting all the relevant requirements above may be accepted on behalf of an incorporated agent from either the parent organization, if the Agent is its subsidiary, or a stockholder of the Agent, provided that such parent or stockholder has on file with ARC an acceptable written guarantee of the Agent's obligations under this agreement. 3. Any required adjustment of the amount of the Agent's bond or irrevocable bank letter of credit to provide coverage in excess of the minimum shall be made each time it is renewed, reinstated, or replaced. If ARC determines that the Agent's bond or irrevocable bank letter of credit is less than the required amount, ARC will notify the Agent at least 90 days in advance of the anniversary date of such instrument. If, however, the increase required is greater than $10,000, the Agent may increase the bond or letter of credit in the amount of $10,000 per quarter, or 25% of the total increase required per quarter, whichever is higher. Notwithstanding the above concerning the time for adjusting, and the method of adjusting, the amount of coverage required, ARC will not approve an application for an additional authorized agency location of an agent unless the agent's bond or letter of credit is in the amount prescribed by section IV.A.I of this agreement. 4. In addition to the other financial requirements of this subsection, the Agent shall cause to have executed on its behalf a "Personal Guarantee of Performance of Agent's Agreement," attachment C of this agreement, if: a. The Agent is declared in default pursuant to section VIII.D of this agreement and, upon demand, fails to provide a certified check in replacement of a dishonored check or for withheld sales of unreported ARC traffic documents, or fails to provide a missing sales report together with a certified check to cover the report; or b. The Agent is required by the Arbiter to do so. B. Personnel Standards 1. Each authorized agency location of the Agent shall have at least one person who is a full-time employee at the place - 7 - 10 of business, and is either the owner, partner, officer, or manager who fulfills each of the following qualifications: a. Exercises daily supervision of, and responsibility for, the operations of that agency location and has the authority to make management decisions therefor; b. Has at least two years' full-time experience in either (1) selling general travel services to the public or (2) supervising the operation of a business offering such services; and c. Has demonstrated knowledge of the provisions of the Industry Agents' Handbook. 2. Each authorized agency location of the Agent shall have at least one full-time employee who has had, within the past three years, one year's full-time experience in airline ticketing. C. General Qualification Requirements 1. The Agent shall be a citizen or national of the United States, or an alien authorized employment (see 8 C.F.R. Part 109), or a foreign corporation authorized to do business in the jurisdiction in which the location is situated. 2. Each authorized agency location shall be clearly identified as, and held out to the public to be, an office for the sale of air transportation or ancillary services on behalf of the air transportation industry. 3. The name of the Agent shall not be the same as, or misleadingly similar to, a carrier, and not be identified as an airline office. 4. Each authorized agency location shall be open and freely accessible to the public so that access to the authorized agency location is unimpeded and unhampered, and it can be reached without hindrance or restraint, and it is open to all comers. 5. The office, department or space which the Agent purports to be the authorized agency location is engaged primarily in the retail sale of passenger transportation. D. Other Requirements 1. The Agent is ineligible for retention on the agency list where investigation reveals that: - 8 - 11 a. There was a material misrepresentation or inaccuracy in any application of the Agent for inclusion on the agency list*, or for changes to its status or listing thereon, or in any attachments thereto; b. Any person who is involved in the day-to-day operations of the agency and has access to monies from the sale of traffic documents, is not a citizen, or national of the U.S., or an alien authorized employment in the U.S.; or c. The Agent's authorized agency location does not have the requisite licenses of the jurisdiction in which located. 2. The Agent is ineligible for retention on the agency list if ARC has reason to believe that the Agent, or any person holding a financial or ownership interest in the Agent, or any officer, director, qualifying manager, or any person employed by it in a capacity in which that person has access to ARC traffic documents or money held by the Agent in payment therefor: a. Has or had a financial interest in, or a connection or affiliation with, or was employed by, any agent previously canceled from the agency list*; or b. Has or had a financial interest in, or a connection or affiliation with, or was employed by, any agent presently declared in default under the provisions of section VIII of the agent reporting agreement*; or c. Has been convicted of a felony, or a misdemeanor related to financial activities, or has been found by a court of competent jurisdiction to have committed a breach of fiduciary duty involving the use of funds of others, unless, based upon investigation, experience of the carriers with such person(s), where applicable, and all information and facts available, it is determined by ARC that the Agent can be relied on to adhere to the terms of this agreement. If the conduct invoking this provision occurred more than seven years prior to the filing of a complaint with the Arbiter, there - ---------- * For the purposes of this subsection, references to the ARC agency list and the agent reporting agreement include, in addition, the agency list and the passenger sales agency agreement, and its predecessor sales agency agreement, of the Air Traffic Conference of America. - 9 - 12 shall be a rebuttable presumption the Agent can be relied upon to adhere to the terms of this agreement. SECTION V: APPOINTMENT OF AGENT BY CARRIER A carrier may issue an appointment to the Agent permitting the Agent to issue ARC traffic documents on behalf of the carrier in one of two ways: A. The Agent shall be automatically appointed by any carrier which has, or hereafter may, deposit with ARC a general concurrence for the appointment of all agents on the ARC agency list. From time to time ARC will publish a list of all carriers which have deposited such a general concurrence. B. Any carrier which has not deposited with ARC the general concurrence for the appointment of all agents on the ARC agency list may appoint the Agent by delivering to the Agent a written certificate of appointment. SECTION VI: CHANGE OF NAME OR LOCATION A. Procedures To Change Name The Agent must provide thirty (30) days written advance notice to ARC to change its name and names as set forth in this agreement, under which its activities must be conducted. Within the thirty (30) day period, ARC shall ascertain whether the proposed name violates this agreement. If approved, ARC shall correct the agency list, notify all carriers and the system providers, and, unless the change relates only to a branch location, execute an amendment to the memorandum of agreement reflecting the change. If the proposed change is disapproved, ARC shall notify the carriers and the system providers and also advise the Agent with specific reasons, and the Agent may obtain review of that decision by the Arbiter, in accordance with section XXIII of this agreement. B. Procedures To Change Location The Agent must provide written advance notice to ARC to change its business location, accompanied by a full description in the form prescribed by ARC. If the new location is qualified under the standards set forth in section IV.C hereof, it shall be approved and ARC shall correct the agency list and notify all carriers and the system providers. If the location fails to qualify, ARC shall disapprove the change and notify the carriers and the system providers, and so advise the Agent with specific reasons. ARC shall advise the Agent of its approval or disapproval within forty-five (45) days of the receipt of the - 10 - 13 written notice from the Agent. The Agent may obtain review of that decision by the Arbiter, in accordance with section XXIII of this agreement. The Agent may, nevertheless, change the location pending the Arbiter's decision. If the Agent does not request such review and, further, fails to relocate to its former authorized agency location within 30 days from ARC's notice of disapproval, ARC may file a complaint against the Agent. SECTION VII: AGENTS AUTHORITY, GENERAL RIGHTS AND OBLIGATIONS A. The Agent shall at all times maintain ethical standards of business in the conduct of the agency and in its dealing with its clients, the public and the carrier. B. The Agent shall designate a bank account for the benefit of ARC and the carrier for deposit of (1) the proceeds of the sales of air transportation and ancillary services for which ARC traffic documents were issued, and (2) such funds as may be required to pay any other amount which ARC is authorized to draft from the account. The Agent recognizes that the proceeds of the sales, less the Agent's commissions, on these ARC traffic documents are the property of the carrier and shall be held in trust until accounted for to the carrier. C. In selecting the airline identification plate to be used in validating ARC traffic documents, or in the identification of the ticketing carrier, the Agent will follow the procedures specified in attachment F, hereto. D. The provisions of section VII.C above notwithstanding, no agent shall use an airline identification plate of one carrier, or identify a carrier on an ARC traffic document as the ticketing carrier, in connection with the sale of air transportation offered solely by another carrier which has notified the Agent and ARC that the Agent shall not represent that carrier. E. In exercising its authority under this agreement, the Agent shall issue only ARC traffic documents supplied pursuant to, or authorized by, this agreement. F. The Agent shall deliver to its clients the proper forms of ARC traffic documents and/or supporting documentation as authorized from time to time by the carrier. The information shown on any such documents shall be in accordance with the applicable rules, regulations and instructions furnished to the Agent by ARC by specific instruction or in the Industry Agents' Handbook, and by the carrier. G. The Agent shall comply with all instructions consistent with this agreement properly issued to him by ARC in the Industry - 11 - 14 Agents' Handbook and other specific instructions consistent with this agreement provided from time to time by ARC. H. The Agent shall comply with all instructions of the carrier, and shall make no representation not previously authorized by the carrier. The Agent shall deliver to the carrier such specific instructions, requests, or particulars in connection with a client or his transportation as may be proper to enable the carrier to render efficient service to its passengers. I. The Agent shall not knowingly or negligently sell or issue ARC traffic documents covering air passenger transportation to be offered by the carrier to persons who plan to sell, issue, or offer to sell or issue, such ARC traffic documents, but who have not been authorized by the carrier to represent the carrier. J. The Agent is not authorized by this agreement to admit, accept or receive service of summons or any other process on behalf of the carrier or ARC. K. In the absence of specific permission of the carrier, the Agent shall not use any credit card which is issued in the name of the Agent, or in the name of any of the Agent's personnel, or in the name of any third party, for the purchase of air transportation for sale or resale to other persons, nor report to the carrier the sale of any air transportation as a credit card transaction where at any time the Agent bills, invoices, or receives payment in cash from the customer for such air transportation. L. The Agent shall identify any sales to itself and/or such other persons which control, are controlled by, or are under common control with, the Agent, or with the officers, directors, stockholders, members, or employees of the Agent and/or such other persons, in accordance with the provisions of the Industry Agents' Handbook. SECTION VIII: REPORTS AND SETTLEMENTS, DEFAULTS AND OTHER FINANCIAL IRREGULARITIES UNDER ASP A. Reports and Settlements-General 1. The Agent shall make appropriate arrangements to permit the area bank to draw checks upon its bank account designated pursuant to section VII.B. of this agreement in payment for amounts owed hereunder. The Agent shall give ARC advance notice by certified mail of its intention to change bank accounts. Such notice must be received at least one week prior to the beginning of the affected sales period, and will state the first sales period ending date to which it applies. - 12 - 15 2. The Agent shall submit a weekly sales report containing the auditor's coupon (applicable to both paper and electronic format) of all ARC traffic documents, and other supporting documents issued and validated during the 7-day period Monday through Sunday. The weekly sales report shall be submitted to the designated area bank in the form prescribed. With each report, the Agent shall submit a settlement authorization form reflecting the maximum amount to be drawn from the Agent's account. If no air transportation or ancillary services have been sold during the 7-day period, the Agent shall submit to the area bank a weekly sales report reflecting "no sales." 3. The weekly sales report, with auditor's coupons and other supporting documents, or advice of "no sales," shall be mailed by First Class mail postage prepaid, or by Express Mail, or delivered to the designated area bank, not later than Tuesday following the close of the report period or by Wednesday if Monday or Tuesday is a Federal or state legal holiday, Rosh Hashanah or Yom Kippur. 4. The area bank will, based upon documents submitted by the Agent, determine the amount owed the carriers for the sales period and will draw a check for such amount on the Agent's account. The check will not be in excess of the settlement authorization amount provided by the Agent, or be presented for payment earlier than the tenth day after the close of the sales period. The area bank will mail to the Agent a weekly summary showing all transactions, and the amount of the check drawn, no later than the tenth day after the close of the sales period. Settlement of amounts owing will be made in official United States currency. 5. All monies and credit card billing documents, less applicable commission, collected by the Agent for sales hereunder are property of the carriers, and shall be held in trust by the Agent until satisfactorily accounted for to the carriers. B. Exceptions To Reports and Settlements if Agent Has Ten or More Locations An agent having 1) ten or more authorized locations, or 2) a wholly owned subsidiary with ten or more such locations, or 3) a combination of authorized locations (branch offices) of a wholly owned subsidiary totaling ten or more, may apply for an exception to the provision of section VIII.A.3 above requiring that the sales report and supporting documents be mailed not later than the Tuesday of each week. - 13 - 16 The exception will be granted to any agent having the requisite number of locations, which agrees to process each of its weekly sales reports at its central accounting office and submit them together to one designated area bank. An agent wishing such exception must first execute with ARC a supplementary agreement which, based upon the specific circumstances, authorizes the multi-reporting Agent to cause its weekly reports to be received at the area bank by noon on Thursday or Friday of each week. The exception does not affect the schedule for settlement. C. Other Settlement Arrangements Not Prohibited 1. Nothing contained in this agreement shall preclude an agent from proposing to a carrier which is a party to the Carrier Services Agreement, (a) that, for transactions in which the agent has issued and validated ARC traffic documents, it settle its account pursuant to a variable remittance plan, or (b) that the agent utilize the carrier's traffic documents. If such a proposal is made, the carrier shall consider the agent's proposal in good faith; however, a carrier's refusal to enter into such an arrangement shall not, in and of itself, constitute evidence of bad faith. 2. An agent shall not, without prior written consent by the carrier concerned, submit a settlement of ARC traffic documents pursuant to a variable remittance plan. D. Financial and Reporting Irregularities 1. This subsection governs payment of amounts due in the event of a dishonored check or failure to file a complete weekly sales report. It does not govern any amounts settled under a variable remittance plan if either the payment is made directly to an individual carrier or ARC collects the amount expressly on behalf of an individual carrier by means of an individual draft. In determining such amounts, debit memos based on the following claims are not to be included: (i) any debit memo issued prior to the date on which the Agent fails or refuses to provide funds on demand to cover a dishonored check, or the amount owed on withheld sales, or a missing report, as required by, respectively, paragraphs D.1.a., D.1.b and D.1.c of this section, which has been reasonably contested by the Agent in writing within 60 days of the Agent's receipt of such debit memo; and (ii) any debit memo issued on or after the date of the Agent's failure or refusal, as described above, for a transaction that occurred more than 60 days prior to such date; provided, however, that any debit memo issued for either an unreported sale or a fraudulently issued ARC traffic document, shall be includable in determining the amounts due the carriers under this agreement. - 14 - 17 a. ARC will immediately notify the Agent and its surety when a check drawn by the area bank has been dishonored by the Agent's bank. If the Agent does not immediately provide a certified check or wire funds to cover the dishonored check, ARC will i. withdraw from the Agent, and from all agents under common control with the Agent, and all authorized agency locations under common Control with the Agent, all ARC traffic documents (paper format) and airline identification plates, ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent, and so notify the carriers. ARC traffic documents will be resupplied and airline identification plates will be returned, except the identification plate of the carrier which has expressly instructed ARC to the contrary, to the Agent and all authorized agency locations under common control with the Agent, and the system providers notified that the issuance of ARC traffic documents is authorized, unless the carrier has also taken action to terminate the Agent's appointment pursuant to section XXIX of this agreement, when all amounts owing the carriers under this agreement have been fully paid (including, but not limited to, all other checks drawn by the area bank and dishonored by the Agent's bank) unless there is an outstanding notice of cancellation of the Agent's bond. A compensatory assessment shall be charged by ARC for each dishonored check for payment of sales reports to defray processing costs associated with the handling of dishonored checks, interest expense and special service costs described in section XI.I. This assessment will be calculated and charged by ARC based on a formula approved by the ARC Board of Directors. ARC shall notify the Agent as to the amount of the charge and the date on which payment will be due. The Agent hereby authorizes the area bank to collect the charge by issuing a draft against the bank account maintained pursuant to section VII.B of this agreement. Alternatively, the Agent shall make payment directly to ARC if required by the notice. b. ARC will notify the Agent if it has failed to include in its weekly sales report all ARC traffic documents issued through the close of the sales report period, as provided in subsection A.2 of this section. Unless the Agent immediately provides a certified check and - 15 - 18 supporting documents to cover the withheld sales, ARC will, where a clear and present danger of substantial loss is present, i. withdraw from the Agent, and all authorized agency locations under common control with the Agent, all ARC traffic documents (paper format) and airline identification plates, ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agents, and iii. prohibit the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent, and notify the carriers. ARC traffic documents will be resupplied and airline identification plates will be returned, except the identification plate of any carrier which has instructed ARC to the contrary, to the Agent and all agents under common control with the Agent, and the system providers notified that the issuance of ARC traffic documents is authorized on behalf of all appointing carriers, unless the carrier has also taken action to terminate the Agent's appointment pursuant to section XXIX of this agreement, when all amounts owing the carriers under this agreement have been satisfactorily accounted for (including, but not limited to, payment of all checks drawn by the area bank and dishonored by the Agent's bank) unless there is an outstanding notice of cancellation of the Agent's bond. A compensatory assessment shall be charged by ARC for unreported sales disclosed by an inspection pursuant to section XIV of this agreement, or otherwise disclosed, to defray costs associated with the processing and handling of the discovery and resolution of unreported sales, and special service costs described in section XI.I. This assessment will be calculated and charged by ARC based on a formula approved by the ARC Board of Directors. ARC shall notify the Agent as to the amount of the charge and the date on which payment will be due. The Agent hereby authorizes the area bank to collect the charge by issuing a draft against the bank account maintained pursuant to section VII.B of this agreement. Alternatively, the Agent shall make payment directly to ARC if required by the notice. c. If a weekly sales report together with auditor's coupons and supporting documents has not been received by the area bank within eight days after the close of the period, ARC will notify the Agent. - 16 - 19 Evidence of timely dispatch will be limited to (1) A Post Office postmark; or (2) Other evidence supplied by the Post Office of the mailing date; or (3) Priority service air bill or any other documentation acceptable to ARC. If the Agent has evidence of timely dispatch of the report, it shall, within 96 hours of notification by ARC send copies of such evidence to ARC and promptly transmit to the area bank a duplicate report, a settlement authorization form, and facsimiles of the auditor's coupons and other supporting documents for the report. In all other circumstances, the Agent shall, within 96 hours of notification by ARC, provide the report, or a duplicate report, to the area bank with either the auditor's coupons and other supporting documents if available, or their facsimiles, and a certified check to cover the amount owed. Unless the Agent complies with the above, ARC will i. withdraw from the Agent, and all authorized agency locations under common control with the Agent, all ARC traffic documents (paper format) and airline identification plates, ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC traffic document numbers for the issuance of ARC traffic documents (electronic format) by the system providers on behalf of such Agent, and so notify the carriers. ARC traffic documents will be resupplied and airline identification plates will be returned, except the identification plate of any carrier which has expressly instructed ARC to the contrary, to the Agent and authorized agency locations under common control with the Agent, and the system providers notified that the issuance of ARC traffic documents is authorized, unless the carrier has also taken action to terminate the Agent's appointment pursuant to section XXIX of this agreement, when the Agent has provided the report or duplicate report, and paid in full all amounts owed the carriers under this agreement (including, but not limited to, payment of all checks drawn by the area bank and dishonored by the Agent's bank) unless there is an outstanding notice of cancellation of the Agent's bond. A compensatory assessment shall be charged by ARC for a missing report for which the Agent does not have evidence of timely dispatch to defray handling and processing costs attributable to missing reports and special service costs described in - 17 - 20 section XI.I. This assessment will be calculated and charged by ARC based on a formula approved by the ARC Board of Directors. ARC shall notify the Agent as to the amount of the charge and the date on which payment will be due. The Agent hereby authorizes the area bank to collect the charge by issuing a draft against the bank account maintained pursuant to section VII.B of this agreement. Alteratively, the Agent shall make payment directly to ARC if required by the notice. d. If the Agent is unable to satisfy its debts to ARC arising from circumstances described in paragraphs D.l.a,b, and c of this section within the prescribed time: (1) The Agent and authorized agency locations and authorized agency locations under common control with the Agent may purchase prepaid special value tickets to be provided by ARC; (2) In lieu of the Agent and authorized agency locations under common control with the Agent surrendering its ARC traffic documents (paper format) and airline identification plates, the Agent may provide a separate bond to ARC applicable to ARC traffic documents (paper format) remaining in the Agent's possession, the amount of which is based on the average value of ARC traffic documents previously issued by the Agent times the number of documents to be retained. The Agent shall not be eligible to issue ARC traffic documents in electronic format. e. (1) If the Agent does not provide the required weekly sales reports and full payment therefor, or fails to make full payment of all amounts owed to the carrier (including, but not limited to, payment of all checks drawn by the area bank and dishonored by the agent's bank), on or before the 31st day after the date of ARC's written notice of a default based on a dishonored draft, unreported sale, or missing sales report, this agreement shall terminate automatically and without further notice, unless the Agent has surrendered all ARC traffic documents (paper format) and airlines identification plates and has ceased to issue ARC traffic documents in electronic format and, on or before such 31st day, has provided all missing sales reports and made a partial payment in an amount deemed appropriate by ARC, and ARC has determined that the Agent could make full payment if the time were extended, in which case ARC may extend the time for the Agent to make full payment and avoid termination of this agreement. Upon termination of the agreement pursuant to this section, ARC shall notify the carriers and the system providers that the Agent's agreement has - 18 - 21 been terminated, and that the issuance of ARC traffic documents is prohibited. (2) The full amount to be paid within the 31-day period described above or any extension thereof shall include, but not be limited to, all amounts owed for dishonored checks, unreported sales, compensatory fees and missing reports, regardless of whether such amounts and/or reports have been specifically identified in the written notice. (3) In determining whether or not to extend the time for full payment, ARC will consider the following factors, among others: the cause of the dishonor, unreported sale, or missing report; the payment schedule proposed; the current financial condition of the Agent; and any proposed remedial action. (4) An extension of time on the terms provided in the foregoing paragraphs shall be available to all agents, regardless of size. (5) In conjunction with the extension of time provided in the foregoing paragraphs, the Agent may obtain authority from one or more of the carriers involved to convert the Agent's cash indebtedness to each such carrier into individually sponsored credit plans, thereby transferring the indebtedness from ARC to such carrier. Upon receipt of written notice from the carrier concerned, ARC will modify or withdraw the notice of termination, as appropriate. (6) Upon the Agent's compliance with the foregoing paragraphs, ARC shall resupply the Agent with traffic documents and the carriers may, in their individual discretion, supply or authorize ARC to return to the Agent the airline identification plates. In addition, ARC will notify all system providers that the Agent may issue ARC traffic documents, and the carriers may, in their individual discretion, notify the system providers, if action is to be taken pursuant to section XXIX. f. Each Agent to whom notice of financial or reporting irregularity is sent pursuant to sections VIII.C.1.a, b or c of this agreement shall cause to be executed and filed with ARC a "Personal Guarantee of Performance of Agent's Agreement" as set forth in section V, attachment C to the agreement. Such execution and filing shall be a condition precedent to an agent's right to use ARC traffic documents - 19 - 22 and airline identification plates in the sale of air transportation and/or ancillary services. 2. This subsection governs insufficient settlement authorization amounts. a. If the area bank determines that the amount specified by the Agent on the settlement authorization form is less than the amount owed the carriers, the area bank will bill the Agent for the difference. If the area bank bill remains unsatisfied fifteen days after the date on which it was sent, ARC will bill the Agent for the amount owed. b. If ARC's bill remains unsatisfied for fifteen days after the date on which it was sent, ARC shall take such action as it deems appropriate under the circumstances. E. Payment of Carrier Debit Memos 1. If the Agent fails to pay a debit memo sent to it by a carrier or is otherwise in default to a carrier under this agreement, excluding liability for stolen ARC traffic documents or identification plates under section XI hereof, the carrier may: a. Terminate its appointment of the Agent, by notice in writing to the Agent, with such notice taking effect on the date specified therein, and withdraw its airline identification plate; or b. Withdraw from the Agent its airline identification plate; or c. Forward any uncontested debit memo to the Central Collection Service according to the provisions of section XIX of this agreement. 2. If any carrier which has deposited a general concurrence for the appointment of all agents invokes paragraph E.1.a of this section, it may so notify ARC. Upon receipt of such notice, ARC will immediately notify all carriers and the system providers. F. Failure To Maintain Proper Bond Or Letter of Credit 1. Upon cancellation of the Agent's bond or irrevocable bank letter of credit, ARC will immediately so notify all carriers and the Agent, and will i. withdraw all ARC traffic documents (paper format) and airline identification plates supplied to the Agent, ii. notify the system - 20 - 23 providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent provided, however, that as a temporary measure to avoid these events, the Agent may assign, in a form acceptable to ARC, a Certificate of Deposit in the amount required for a bond pursuant to section IV.A.1.a of this agreement. The effective date and acceptance by ARC of such assignment shall be no later than the date of cancellation of the bond or letter of credit and shall be accepted by ARC as a substitute for a period not to exceed thirty days from the date of the cancellation. Unless the Agent provides ARC a proper replacement bond or irrevocable bank letter of credit within 30 days after the cancellation, ARC will terminate this agreement. Upon termination of the agreement pursuant to this section, ARC shall notify the carriers and the system providers that the Agent's agreement has been terminated, and that the issuance of ARC traffic documents is prohibited. 2. If ARC determines that the Agent has failed to adjust its bond or letter of credit as required by section IV.A.3 of this agreement, ARC may apply to the Arbiter for an emergency authorization to i. remove ARC traffic documents (paper format) and the airline identification plates from the Agent, and ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent, and to so notify the carriers. SECTION IX: ADDITIONAL OPERATING REQUIREMENTS A. The Agent shall be subject to the requirements of this section when, during any twelve month period, 1. three or more of the Agent's checks for weekly sales have been dishonored and ARC has not received immediate reimbursement for such upon demand by ARC; or 2. three or more of the Agent's weekly sales reports, including auditor's coupons and supporting documents, have not been provided to ARC within 96 hours of notice to the Agent from ARC but such are ultimately received, prior to the Agent's termination. - 21 - 24 B. ARC will provide the Agent with 45 days advance written notice of the effectiveness of this section, which notice shall also be provided to the carriers. The notice will also inform the Agent that the following must be accomplished prior to the effective date of the section: 1. The Agent must provide a bond or letter of credit equal to or greater than its net cash remittances for a current 10 week period. The instrument may be a rider to the existing bond or letter of credit; will be calculated to take into account the amount of the existing bond or letter of credit; and, must conform in all other respects to the provisions of section IV.A. 2.a. The Agent must surrender traffic documents (paper format) to ARC, with an accompanying inventory summary, so that it retains no more than the highest number of ARC traffic documents issued at each of its locations during any one month in the past twelve months, rounded up to the next even 100. In order to insure the Agent's compliance with this section, ARC will inform the Agent, in the written notice required by this section, of the number of documents, by stock control number, that are permitted to be retained. b. The Agent may possess additional supplies of traffic documents (paper format only), but in no event more than a three month supply, only if it is able to post a bond or letter of credit as provided for in section VIII.D.1.d.(2). 3. The Agent must discontinue the issuance of ARC traffic documents in an electronic format and any and all use of Electronic Ticket Delivery Network(s). 4. Any pending application(s) for an additional approved location will be withdrawn by Agent, and ARC will reject and return to Agent any such application submitted while the Agent is subject to this section. C. If the Agent is not in compliance with the provisions of section IX.B. as of the effective date of this section, or at any time during the period of its effectiveness, ARC will terminate this agreement with the Agent and notify the carriers and the system providers that the Agent's agreement has been terminated and that the issuance of ARC traffic documents is prohibited. D.1. If, following the effectiveness of this section, and Agent's compliance with the provisions of section IX.B., there are no instances of dishonored drafts or - 22 - 25 missing reports within a twelve month period, the additional operating requirements of this section shall be removed, and the carriers shall be notified. 2. Alternatively, if there is an additional dishonored draft or missing report, ARC will file a complaint, pursuant to section XV.B., seeking the removal of the Agent from the agency list. E. The Agent may appeal ARC's determination that it is subject to this section to the Travel Agent Arbiter. During the pendency of the appeal, which shall be given expedited consideration, the section will continue to apply to the Agent unless or until removed by the Travel Agent Arbiter or the Agent's compliance with section IX.D.1. SECTION X: REFUND OR EXCHANGE OF ARC TRAFFIC DOCUMENTS A. The agent may refund any fare or charge applicable to air transportation only if sold by the Agent hereunder and for which the Agent has issued an ARC traffic document. The Agent shall make refund only to the person authorized to receive the refund and in accordance with tariffs, rules, regulations, and instructions issued by the carrier. B. The Agent, without the authority of the ticketing carrier whose ARC traffic document is to be issued, shall not: 1. Issue an ARC traffic document in exchange for any traffic document previously issued by another agent or by a carrier; or 2. Issue an ARC traffic document in exchange for a traffic document previously issued by that Agent naming another carrier as the ticketing carrier. SECTION XI: LIABILITY AND WAIVER OF CLAIM A. The carrier will indemnify and hold harmless the Agent, its officers, agents and employees from all responsibility and liability for any damage, expense, or loss to any person or thing caused by or arising from any negligent act, omission or misrepresentation of the carrier, its representatives, agents, employees, or servants, relating directly or indirectly to the performance of the duties and obligations of the carrier under this agreement. B. The Agent will indemnify and hold harmless the carrier, its officers, agents, and employees from all responsibility and liability for any damage, expense, or loss to any person or thing caused by or arising from any negligent act, omission, or misrepresentation of the Agent, its - 23 - 26 representatives, agents, employees, or servants relating directly or indirectly to the performance of the duties and obligations of the Agent under this agreement. C. The Agent will indemnify and hold harmless the carrier, its officers, agents and employees, from any and all damage, expense, or loss, on account of the loss,misapplication, theft, forgery or unlawful use of ARC traffic documents, ARC-issued numbers or other supplies furnished by or on behalf of the carrier to the Agent. However, the Agent shall be relieved of liability for losses arising from the proven theft or unlawful use, except by the Agent or his employees, of ARC traffic documents, ARC-issued numbers or identification plates from his premises upon a determination by ARC that the Agent, at the time of theft or unlawful use, exercised reasonable care for the protection of such ARC traffic documents, ARC-issued numbers or airline identification plates, and has, upon discovery, immediately reported the theft or unlawful use to the appropriate law enforcement authorities and has promptly notified ARC of the particulars of such theft or unlawful use both by telephone and telegram. Reasonable care, as used herein, shall include but not be limited to compliance with the minimum safeguards set forth in attachment B to this agreement. In making the determination specified herein, ARC may rely on the findings of the ARC Field Investigations and Fraud Prevention office or cooperating security officers of carriers. However, if ARC has filed a complaint with the Arbiter alleging the Agent failed to comply with the minimum safeguards set forth in attachment B of this agreement, ARC shall rely on the finding of the Arbiter in determining whether or not reasonable care was exercised by the Agent. If ARC determines that the Agent did not exercise reasonable care, ARC shall inform the Agent of the specific details and exact manner in which the Agent failed to exercise reasonable care. The Agent may appeal ARC's determination to the Arbiter pursuant to section XXIII. D. The Agent hereby expressly waives any and all claims, causes of action, or rights to recovery based upon libel, slander, or defamation of character by reason of publication of asserted grounds or reasons for removal from the agency list or such other action which may have been prescribed, or of alleged violations or other charges for which review of the Agent's eligibility is requested, as is reasonably related to the performance of appropriate functions specified for ARC, its officers and employees, or the Director of Field Investigations and Fraud Prevention or the Arbiter in the performance of their duties under this agreement. - 24 - 27 E. If ARC uses legal counsel to i. enforce its right to possession of ARC traffic documents (paper format) and airline identification plates, because the Agent failed or refused to surrender them upon demand made pursuant to this agreement, and/or ii. to otherwise obtain compliance by the Agent with the provisions of this section, the Agent shall reimburse ARC for all costs incurred by it, and for the reasonable fees of its attorneys, if its action is adjudicated or otherwise resolved in its favor. If its action is adjudicated or otherwise resolved in favor of the Agent, ARC shall reimburse the Agent for all costs incurred by it, and for the reasonable fees of its attorneys, in defending itself against ARC's action. The term "costs" as used herein shall include, but not be limited to, court costs, litigation bond premiums, private investigator fees incurred in attempting to locate traffic documents, and locksmith fees. F. If ARC uses legal counsel to enforce its right to inspect the Agent's books and records, because the Agent failed or refused to permit an inspection upon demand made pursuant to this agreement, the Agent shall reimburse ARC for all costs incurred by it, and for the reasonable fees of its attorneys, if its demand is adjudicated or otherwise resolved in its favor. If its demand is adjudicated or otherwise resolved in favor of the Agent, ARC shall reimburse the Agent for all costs incurred by it, and for the reasonable fees of its attorneys, in defending itself against ARC's demand. The term "costs" as used herein shall include, but not be limited to, court costs and litigation bond premiums. G. The Agent hereby agrees to indemnify and hold the carrier harmless from and against any claim arising from the failure of the Agent to refund to the authorized refund payee the proper amount of fare or other charges collected. H. The Agent hereby agrees that whenever an ARC representative must go to an agency or other location to remove ARC traffic documents (paper format only), collect funds due hereunder, etc., the Agent will pay the out-of-pocket special service costs incurred by ARC in conjunction with such action. SECTION XII: DELIVERY AND WITHDRAWAL OF TRAFFIC DOCUMENTS AND IDENTIFICATION PLATES A. The Agent shall procure, at no expense to ARC, one or more validator machine(s), or ticket writer(s), of a type approved by ARC for use at each place of business covered by this agreement in the issuance of ARC traffic documents (paper format). - 25 - 28 B. ARC will supply the Agent with ARC traffic documents (paper format) for issuance to the Agent's clients to cover transportation and ancillary services purchased, and one or more agent identification plates which the Agent will purchase from ARC. Shipping and handling costs on ARC traffic document (paper format) requisitions, submitted by the Agent, will be paid by the Agent as prescribed from time to time by ARC. C. After receipt of notice from ARC that an agency location has been included on the agency list, any carrier may deliver to such Agent airline identification plates for use at an authorized agency location in the issuance of ARC traffic documents (paper format) in a validator machine or ticket writer, and such identification plates shall not be used at any other place of business. Such airline identification plates shall remain the property of the carrier, and shall be returned to it upon demand or upon the termination of this agreement as between the Agent and carrier. D. All ARC traffic documents (including ARC-issued numbers used in an electronic format) supplied to the Agent shall be held in trust for ARC by the Agent until issued to the Agent's clients to cover transportation or ancillary services purchased, or until otherwise satisfactorily accounted for to ARC or the carrier, and shall be surrendered upon demand, together with all airline identification plates, to ARC pursuant to this agreement. E. ARC traffic documents (including ARC-issued numbers used in an electronic format) supplied for issuance at a specified place of business covered by this agreement shall not be written up or validated at any other place of business. ARC traffic documents (paper format) shall not be delivered to customers at or through any other agency location outside the United States, or customer-premises location. F. The Agent shall not accept custody of or deliver, blank, prevalidated, or partially written ARC traffic documents (including ARC-issued numbers used in an electronic format) not previously assigned to it under this agreement. Should the Agent be approached by another agent to distribute blank, prevalidated, or partially written, ARC traffic documents (paper format), or to distribute ARC traffic documents not provided to it through the system provider (electronic format), the Agent shall notify the ARC Director, Field Investigations and Fraud Prevention. - 26 - 29 SECTION XIII: CUSTODY AND SECURITY OF TRAFFIC DOCUMENTS AND IDENTIFICATION PLATES During its custody and control of ARC traffic documents, ARC-issued numbers and airline identification plates, the Agent shall comply with the security rules for such as specified in attachment B of this agreement. SECTION XIV: INSPECTION AND RETENTION OF AGENT RECORDS A. The Agent shall retain his duplicate copy of each sales report and his copies of supporting documents, as well as the weekly sales summary and his copies of voided ARC traffic documents, for at least two years from the date the sales report was due to be submitted to the area bank. B. The Agent recognizes and agrees that ARC and its designees, are authorized to represent ARC and the carriers for purposes of inspecting the books and records of the Agent pursuant to this agreement. In making such inspections, they may seek to determine whether the Agent is in full compliance with the provisions of the agreement. Books and records shall be opened for such inspection upon reasonable notice and the authorized representatives shall have authority to make such notes and copies as they deem appropriate. C. The Agent will be apprised of the purpose or occasion for such examination, and will be obligated to provide only those documents material and relevant to the examination, that are requested by the authorized representative. ARC shall, upon written request by the Agent, provide a copy of any written report prepared by the ARC representative who has completed an inspection of the books and records of such Agent. D. A carrier may examine the Agent's records with respect to ARC traffic documents issued by the Agent on behalf of such carrier at any time. SECTION XV: REVIEWS OF QUALIFICATIONS OF AND BREACHES BY AGENT A. In situations such as the following, in which it appears to ARC that there may be or has been fraudulent conduct on the part of the Agent and that there is a clear and present danger of substantial loss to ARC and/or the carriers, ARC may i. immediately remove its traffic documents (paper format only) and all airline identification plates from the Agent, and so notify the carriers, ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC - 27 - 30 traffic document numbers for the issuance of ARC traffic documents (electronic format) by system providers on behalf of such Agent and all agents under common control with the Agent: 1. Failure to include in a report the auditor's coupon (paper or electronic format) of all ARC traffic documents issued through the close of the sales report period, even though payment was subsequently made upon demand; 2. Issuance of ARC traffic documents against a credit card without the cardholder's authority, or against a stolen or otherwise fraudulent credit card; 3. Post-validation of ARC traffic documents; alteration of the issuance date on ARC traffic documents; or consistent or extensive reporting of sales in which ARC traffic documents have been issued out of numerical sequence; 4. Failure to account for missing ARC traffic documents or for flight, exchange, or service coupons thereof; 5. Permitting blank, prevalidated, or partially written ARC traffic documents (paper format), or ARC-issued numbers (electronic format) to be removed from the authorized agency location for issuance elsewhere; 6. Permitting alteration, omission, or other falsification on coupons of original ARC traffic documents or on any reissue thereof; 7. Falsification of reports, traffic documents, or other documents; 8. Acceptance of custody of, or delivering, blank, prevalidated, or partially written ARC traffic documents (paper format) or ARC-issued numbers (electronic format) not previously assigned to it under this agreement; 9. Distribution, sale or issuance of ARC traffic documents (paper format) or ARC-issued numbers (electronic format) which the Agent knew, or reasonably should have known, were stolen or reported as missing; or 10. Reporting cash refunds against sales made on credit cards. 11. Permitting the unlawful or unauthorized access or use of an airline or system provider computer reservations - 28 - 31 system owned, leased or controlled by it in connection with the issuance of ARC traffic documents. The Agent shall thereupon have the right of appeal to the Arbiter on an expedited basis pursuant to procedures established by the Arbiter. If an appeal is not taken within 10 days after ARC's demand for ARC traffic documents and airline identification plates, the Agent's agreement will be terminated by ARC without further notice. Upon termination of the agreement pursuant to this section, ARC shall notify the carriers and the system providers that the Agreement has been terminated and that the issuance of ARC traffic documents is prohibited. B. If there is reason to believe that the Agent has breached a provision of this agreement, ARC may file a complaint against the Agent with the Arbiter. C. If the Arbiter so directs, ARC shall remove from the agency list the Agent or any branch location. After the Agent has been removed from the agency list, ARC shall terminate the agreement with the Agent on behalf of all carriers. Upon termination of the agreement pursuant to this section, ARC shall notify the carriers and the system providers that the agreement has been terminated and that the issuance of ARC traffic documents is prohibited. SECTION XVI: ANNUAL AND APPLICATION FEES A. For each calendar year the Agent agrees to pay an annual administrative fee to ARC for each of its authorized agency locations to defray a portion of the costs associated with the operation of the ARC program as well as half of the costs associated with the operation of the Travel Agent Arbiter Program, Inc. The amount of such annual fee will be determined by the ARC Board of Directors, and ARC will notify the Agent of the amount of the fee for the next ensuing year before the end of the previous calendar year. 1. This fee will be collected by an area bank which will draw a separate check against the designated account of each authorized agency location with the second sales report period ending in January for the current calendar year. 2. If the separate check for the annual fee is not paid, and the amount remains unpaid 14 days thereafter, the Agent or authorized agency location involved will be removed from the agency list. Thereafter, ARC shall terminate the agreement and withdraw from the Agent all ARC traffic documents and airline identification plates and so notify the carriers. ARC shall also notify the - 29 - 32 carriers and the system providers that the agreement has been terminated and that the issuance of ARC traffic documents is prohibited. 3. For an authorized agency location added to the agency list during a calendar year, the annual fee, will be included with the application fee. B. An application filed by the Agent under this agreement to change its name, location, or ownership shall include therewith a fee as prescribed from time to time by ARC. The amount of such fee shall relate to the administrative expenses in processing the application and expenses incurred in updating the database. SECTION XVII: SPECIAL LOCATION EXEMPTIONS A. An authorized agency location that is located on the premises of a customer of the Agent and that issues ARC traffic documents primarily to that customer or its employees, may, upon request by the Agent, be classified as a customer-premises location. A customer-premises location must meet all the requirements provided in this agreement, including the qualifications in section IV for retention on the agency list, except that: 1. The person meeting the personnel standards of section IV.B.2 may be an employee of either the Agent or the customer; and 2. The location need not meet the requirements of sections IV.C.2, 4, and 5; and 3. If the location is a branch location, it need not meet the requirements of section IV.B.I. B. An authorized agency location that is not open and freely accessible to the public may, upon request by the Agent, be classified as a restricted-access location. A restricted-access location must meet all the requirements provided in this agreement, including the qualifications in section IV for retention on the agency list, except for the requirements provided in sections IV.C.2, 4, and 5. C.1. An Agent who wishes to have an authorized agency location classified as a customer-premises or restricted-access location, or who wishes to have an existing classification terminated, shall submit to ARC a written request for such action. If the request is to obtain a new classification, it shall set forth facts sufficient to show that the location is entitled to the classification requested in accordance with the qualifications set forth in subsection - 30 - 33 A or B above. If the request is to terminate an existing classification, it shall set forth facts sufficient to show that the location meets the qualifications in section IV for retention on the agency list from which the location was exempted by virtue of its current classification. 2. ARC shall promptly review any such request and notify the Agent whether the request is granted or denied. If the request is denied, the notification to the Agent shall include a statement of the reasons therefor. The Agent may obtain review of the denial, in accordance with section XXIII of this agreement. D. An agency location may, upon request by the Agent, be classified as an on-site location if it meets the following conditions: 1. The location is on the premises of a single client of the Agent for the primary purpose of providing travel services to that client; it is not intended to serve the general public; [Official Commentary: It is ARC's intent that the Agent primarily serve one client's business needs at this location (for example, one corporate client or one government client), but not be precluded from providing that client's employees with leisure travel counseling and ticketing or from serving other business clients.] 2. The location complies with all requirements for a branch application, except as otherwise noted, although it need not comply with section IV.B.I, section IV.C.5, section III of Attachment B (only insofar as it pertains to the storage of ARC traffic documents), or section VII of Attachment B; and 3. The location is or will be staffed by a person meeting the personnel standards of section IV.B.2 (but that person may be employed by either the Agent or the client of the Agent): 4. The location is not identified or advertised to the public as, or held out to the public to be, an office for the sale of air transportation or ancillary services on behalf of the air transportation industry. However, signage, identifying the on-site branch location within the premises occupied by the Agent's client, is permitted; 5. The Agent assumes full and absolute liability for any and all damage, expense, or loss experienced by any carrier, its officers, agents or employees on account - 31 - 34 of the loss, misapplication, theft or forgery of ARC traffic documents assigned to the location; 6. Security for the traffic documents assigned to the location includes the following: A. The Agent shall close, lock or otherwise secure all means of access to the authorized location (when applicable) and traffic document containers at all times when the location is not attended by authorized personnel. [Official Commentary: ARC envisions that a cubicle may be the actual on-site location, and recognizes such a location cannot be locked.] B. ARC recommends that all manual traffic documents, except those that are being issued, and all automated traffic documents not in use in a printer be locked in a safe meeting the requirements of section IV.B.3 of the Attachment B. C. All automated ticket printers must be either (a) locked up, (b) housed in a locked container, or (c) placed in a locked room. Alternatively, the traffic documents for the printer must be in a locked box. The printer and housing must be of such design that no traffic document stock is visible or accessible prior to printing. D. The Agent must maintain daily inventory procedures. For manual traffic documents, this means a daily usage log must be kept of all traffic documents assigned to the on-site location by ARC, with the current status of each. For automated traffic documents, this means, at a minimum, the maintenance of a record of daily usage, e.g., range usage as provided by an automated stock usage report, as well as a daily record of visual inspection. [Official Commentary: In connection with the visual inspection requirement, it is suggested that the agent consider, where appropriate, marking the side of the in-use stock with a "V" or a vertical line which, when inspected on a daily basis by the agent, will quickly signal whether tickets have been removed from the contents. Another suggestion would be to insert a ruler into the feed stock bin on a daily basis to verify that the volume depleted was related to the documents used.] E. All traffic documents must be removed from the printer and placed in the safe recommended in section 6.B., above, or in a locked steel container at the end of each operating day. - 32 - 35 SECTION XVIII: NOTICES Any notice which this agreement explicitly requires to be given in writing shall be sufficient if sent by prepaid telegram, mailgram, mail, or any government licensed delivery service which service provides a shipping receipt, airbill, or documentation of delivery, addressed as the Agent or ARC (as appropriate) shall have designated in writing during the term of this agreement. The date of such notice, for the purpose of making calculations with regard thereto, shall be the date such notice was mailed, telegraphed, or placed in the hand of a government licensed delivery service for delivery. SECTION XIX: CENTRAL COLLECTION SERVICE In order to expedite the flow and payment of (I) debit memos issued by a carrier against the Agent, and (2) credit request memos issued by the Agent against a carrier, and to provide a uniform manner of processing such items should the Agent or carrier fail to act upon direct submissions to them within a reasonable time, the Agent and carriers may issue credit request memos and debit memos, respectively, which may be submitted to the Central Collection Service, under the terms and conditions set forth in attachment D hereto. SECTION XX: TRANSFER OR ASSIGNMENT OF AGREEMENT, DEATHS AFFECTING OWNERSHIP, ABANDONMENT OF AUTHORIZED AGENCY LOCATION, TEMPORARY CLOSURE A. Change of Ownership 1. This agreement may not be assigned or transferred by the Agent without the approval of ARC. Moreover, if 30% or more of the shares of stock, cumulative, of the Agent have been sold or otherwise transferred (unless such Agent is an entity whose shares are listed on a securities exchange or are regularly traded in an over-the counter market), ARC approval, for purposes of retention on the ARC agency list, must be obtained. 2. Procedures for approval of changes of ownership are set forth in attachment G hereof. Upon receipt of a complete application for approval of a change of ownership, ARC shall notify the carriers and the system providers. Carriers and system providers will also be notified when such application is approved. 3. Possession of ARC traffic documents (paper format) by a new owner as well as access to such in an electronic format prior to ARC approval will be subject to appropriate action by ARC. - 33 - 36 4. If ARC determines that this agreement has been assigned or transferred, or that ownership of a branch location covered by this agreement has been assigned or transferred or that 30% or more of the stock in the agency entity has been sold or otherwise transferred and that ARC approval for purposes of retention on the ARC agency list has not been given, ARC may take appropriate action consistent with section XXIII of this agreement. 5. In the event a transfer or assignment of ownership interest occurs without ARC approval with respect to a branch location, the procedures set forth in paragraph 4 above shall only apply to the agency location affected by the change. B. Disapproval of Change of Ownership If ARC disapproves an application for a change of ownership, the carriers and the system providers shall be notified. The applicant may obtain a review of the disapproval by the Arbiter, in accordance with section XXIII of this agreement. The carriers and system providers shall also be notified when an application for approval of change of ownership is withdrawn and/or returned to the applicant. C. Death of a Sole Proprietor 1. On receipt of information of the death of the sole proprietor of the Agent, ARC shall notify all carriers, and may i. withdraw all ARC traffic documents (paper format) and airline identification plates supplied to such Agent, and ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent. In order to preserve the goodwill of the agency as far as possible, ARC may, at the request of the person entitled to represent the deceased's estate, enter into a temporary agreement with such person acting on behalf of the estate provided that such person submits a proper bond or letter of credit in the name of the estate. The temporary agreement shall be in the same form and have the same effect as this agreement. ARC shall examine the matter periodically, and, if it considers that conditions so warrant, shall direct that the temporary agreement be terminated. ARC shall notify all carriers - 34 - 37 and the agency accordingly, and may take appropriate action consistent with section XXIII of this agreement. Upon termination of the temporary agreement, ARC shall so notify the carriers and the system providers that the issuance of ARC traffic documents, whether in paper or electronic format, is prohibited. 2. If the person entitled to represent the estate proposes to transfer the temporary agreement to an heir, legatee, or other person, such transfer shall be deemed a change of ownership, and the procedures of attachment G shall apply. 3. Subject to earlier termination under the provision set forth above, a temporary agreement shall terminate if the representative of the estate ceases to carry on the agency business at the location covered by such agreement. D. Death of a Partner 1. In the event of a death of a member of a partnership or other unincorporated firm, ARC will notify all carriers, and may i. withdraw all ARC traffic documents (paper format) and airline identification plates supplied to such Agent and ii. notify the system providers to inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agent, and iii. prohibit the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent. In order to preserve the goodwill of the agency as much as possible, ARC may enter into a temporary agreement with the representative of the deceased's estate and/or remaining partner(s), provided such person(s) presents a proper bond or letter of credit as provided herein. The temporary agreement may be extended by ARC for good cause shown. The temporary agreement shall be in the same form and have the same terms and conditions as this agreement. 2. If the person(s) with whom the temporary agreement is executed proposes to become the new owner(s), or proposes to transfer the agreement to another person, such transfer shall be deemed a change of ownership and the procedures of attachment G shall apply. 3. Subject to earlier termination under the provision set forth above, a temporary agreement shall terminate if the person(s) with whom the temporary agreement is - 35 - 38 executed ceases to carry on the agency business at the location covered by such agreement. E. Abandonment of Authorized Agency Location 1. If ARC has cause to believe that the Agent has failed to keep its authorized agency location open and freely accessible to the public in accordance with section IV.C.4 (except as provided in section XVII of this agreement) and/or the Agent has moved its agency location without prior written notice to ARC (in accordance with section VI.B of this agreement), ARC will notify the agent in writing of such breach or breaches. Such notice shall be sent to the address which the Agent shall have designated in writing during the term of this Agreement, by a delivery service which provides a shipping receipt, airbill, or documentation of delivery. If ARC does not receive a written response to such notice on or before the 15th day from the date of such notice, this agreement shall terminate automatically and without further notice, effective the 16th day from the date of such notice. ARC shall notify the carriers and the system providers that the Agreement has been terminated and that the issuance of ARC traffic documents is prohibited. a. ARC shall have cause to believe that the Agent has closed, abandoned, or changed its authorized agency location without notifying ARC, for the purposes of this section, based on any reliable indicia of abandonment, closure, or changed location, including, but not limited to, the following: (1) the disconnection of the telephone number of the Agent's authorized location with no indication that the number has been changed or the telephone line has been damaged or is being serviced; (2) an ARC representative's observations upon visiting the Agent's authorized location, e.g., location is empty or non-existent, no forwarding address; or, (3) 2 or more returned letters or written notices sent by ARC to Agent's address of record. F. Temporary Closure 1. In the event of a situation beyond the Agent's control, e.g., fire, flood, illness, ARC may, upon written request by the Agent, permit the Agent to temporarily close its authorized agency location(s), for a period not to exceed 30 days. The Agent's request must be made within 10 days of the closure of the agency location. If circumstances warrant, ARC may approve a request for - 36 - 39 temporary closure which exceeds 30 days. All requests for temporary closure must be in the form prescribed by ARC and approved by ARC in writing. ARC's approval shall state the temporary closure time period. ARC shall not unreasonably deny any request for temporary closure of an authorized agency location, and the Agent may request the Travel Agent Arbiter to review any such denial. 2. The Agent's bond or letter of credit shall remain in full force and effect. Agent shall, in accordance with section VIII of this agreement, continue to submit weekly sales reports reflecting "no sales" when the agency location is temporarily closed unless ARC has removed all ARC traffic documents and carrier identification plates from the Agent during the period of closure, and notified the carriers and system providers that issuance of ARC traffic documents is prohibited. 3. ARC shall notify the carriers and the system providers of the temporary closure of the Agent's authorized location(s), directing that the system providers inhibit the transmission of ticketing records for the printing of such onto ARC traffic documents (paper format) by such Agents, and prohibiting the use of ARC traffic document numbers by system providers for the issuance of ARC traffic documents (electronic format) on behalf of such Agent. When the location(s) are reopened, the carriers and the system providers shall be notified. 4. If the agent fails to reopen within the time period approved by ARC, the agreement with the closed location(s) will be terminated, following 10 days advance notice to the Agent, and ARC shall notify the carriers and the system providers, accordingly. SECTION XXI: REDUCED RATE TRANSPORTATION FOR AGENT The provision of free or reduced rate transportation by a carrier to the Agent and its employees shall be in accordance with such terms, rules and regulations as the carrier shall establish. SECTION XXII: REMUNERATION OF AGENTS The remuneration paid the Agent for the sale of air transportation shall be that established by the carrier, or shall be such as may be mutually agreed between the carrier and the Agent, and is not provided herein. - 37 - 40 SECTION XXIII: TRAVEL AGENT ARBITER Disputes between the Agent and ARC shall be resolved by the Arbiter in accordance with the rules and procedures promulgated and published by the Arbiter and the decision of the Arbiter shall be final and binding; provided, however, that neither the Agent nor ARC is precluded from seeking judicial relief to enforce a decision of the Arbiter, or to compel compliance with a requirement or prohibition of this agreement prior to the filing of an answer in a proceeding concerning such requirement or prohibition before the Arbiter. SECTION XXIV: INTERPRETIVE OPINION PROCEDURES A. The Agent may, by written submission, request from ARC an opinion of the interpretation or application of an ARC resolution or a provision of an ARC agreement which may affect travel agents in their role as agents for carrier parties to the ARC carrier services agreement. The following guidelines will apply to such a request: 1. ARC must answer the request within fifteen (15 days of its receipt; 2. The opinion shall relate only to the Agent and the specific question(s) raised in the request; and 3. Unless the Agent seeks appeal of the opinion as hereinafter provided, the request and opinion shall not be circulated to any other person. B. The Agent seeking appeal of an opinion rendered above may by written submission to ARC, place on the agenda of the next ARC Board of Directors meeting, a request for the review of the opinion. The Board's decision shall be reported in the Minutes of the meeting, and a copy of the decision shall be promptly provided to the Agent. SECTION XXV: MEMORANDUM OF AGREEMENT AND ALTERNATIVE MEANS OF AGENT CONCURRENCE ARC may prepare a memorandum of agreement, execution of which binds ARC and the Agent, and the carriers appointing the Agent, to the terms and conditions of this agreement. The memorandum of agreement shall be executed in duplicate. The Agent's copy shall be attached to its copy of this agreement and the second copy will be returned to, and retained by, ARC. Alternatively, the Agent's concurrence in the terms and conditions of this Agreement may be obtained through an electronic signature; may be deemed to have occurred upon the Agent's performance under the Agreement, following advance notice, as of a fixed date; or, may be obtained or deemed to have occurred by any other means adopted by the ARC Board of Directors. - 38 - 41 SECTION XXVI: AMENDMENT OF THIS AGREEMENT A. ARC, in discharging the responsibility of notice, will submit each future amendment to this agreement to the Agent not less than forty-five days prior to the effective date of the amendment, unless otherwise specified. In the event that, immediately prior to the effectiveness of the amendment, this agreement is at that time subject to termination in accordance with its terms, this agreement shall remain subject to such termination, without regard to whether the amendment alters any provision of this agreement related to the basis for the termination. B. If ARC does not receive an executed amendment by the effective date thereof or the Agent's concurrence in the Agreement cannot be demonstrated, ARC may remove the Agent from the agency list and terminate this agreement with the Agent. Thereupon, ARC shall notify the carriers and, also, the system providers that the issuance of ARC traffic documents is prohibited. SECTION XXVII: ASSURANCE OF NONDISCRIMINATION (Effective only as between the Agent and each U.S. carrier; not effective as between the Agent and ARC, itself). In accordance with the Air Carrier Access Act of 1986 and 14 C.F.R. Part 382, the Agent shall not discriminate on the basis of handicap in performing services for air carriers subject to said Act, and the Agent shall comply with directives of the air carrier Complaints Resolution Officials issued pursuant to 14 C.F.R. Part 383. SECTION XXVIII: EFFECTIVENESS A. This agreement shall become effective as between the Agent and ARC on the date stated on the memorandum of agreement. B. This agreement shall be effective as between the Agent and each carrier which has, or hereafter may have, issued an appointment to the Agent. This agreement shall have the same force and effect between the carrier and the Agent as though they were both named in, and had subscribed their names to, the memorandum on the date appearing thereon. SECTION XXIX: TERMINATION A. This agreement may be terminated as between the Agent and ARC, and between the Agent and all carriers jointly, at any time by notice from the Agent to ARC, subject to a full and - 39 - 42 complete accounting. This agreement may be terminated as between ARC and the Agent in accordance with this agreement by notice in writing from ARC to the Agent. B. Whenever under the terms of this agreement ARC is required to remove the Agent or its branch location from the agency list, ARC will terminate this agreement with respect to the Agent or location, respectively. C. Upon termination as between the Agent and ARC, and between the Agent and all carriers jointly, all unused ARC traffic documents (paper format) and airline identification plates shall be immediately returned, together with all monies due and payable to the carriers hereunder, and a complete and satisfactory accounting rendered. ARC may designate a representative to remove all ARC traffic documents (paper format) and airline identification plates from the Agent. D. Whenever this agreement is terminated pursuant to paragraph A or B above, ARC shall notify all carriers and advise them of the effective date thereof. ARC shall also notify the system providers that the issuance of ARC traffic documents, whether in paper or electronic format, is prohibited. Additionally, the Agent shall cease any and all use of its code number(s) for purposes related to the issuance of ARC traffic documents. E. A carrier appointment may be terminated as between the Agent and any individual carrier at any time by notice in writing from one to the other. If a carrier which issues specific certificates of appointment under section V hereof, elects to terminate its appointment of the Agent, it shall notify the Agent of the termination of the certificate of appointment. A carrier which has deposited with ARC a concurrence for appointment of all agents may terminate its appointment of the Agent by notifying the Agent by certified mail, with a copy to ARC's Agency Accreditation Services, such notice to be distributed by ARC to all carrier participants, that the Agent shall not represent that carrier. ARC shall also notify the system providers that the Agent's agreement with the carrier is terminated. The system providers shall inhibit the printing of ARC traffic documents validated with such carrier's identifier as well the generation of such ARC traffic documents in an electronic format. Upon receipt of notice from a carrier that the termination of the Agent's agreement has been rescinded or revoked, ARC shall so notify the carriers and the system providers. F. Termination shall take effect immediately upon receipt of notice, or upon the date indicated therein, whichever shall - 40 - 43 be later, subject to the fulfillment by each of the parties of all obligations accrued prior to the effective date of such termination. SECTION XXX: OTHER AGREEMENTS SUPERSEDED This agreement shall supersede any and all prior agreements between the Agent and any carrier party to the Carrier Services Agreement concerning the issuance of ARC traffic documents for such party, including the Air Traffic Conference of America Passenger Sales Agency Agreement, except with respect to rights and liabilities thereunder existing at the date hereof. - 41 - EX-10.9 10 LETTER DATED MARCH 6, 1996 FROM ARC 1 EXHIBIT 10.9 March 6, 1996 800 TRAVEL SYSTEMS INC. DBA 1-800-LOW-AIR-FARE SUITE 100 3108 US HIGHWAY 301 NORTH TAMPA, FL 33619 ACN: 10-88484-5 ATTENTION: OWNER OR MANAGER RE: CHANGE OF OWNERSHIP/COMPLETE CHANGE TYPE V Dear Travel Agent: I am pleased to inform you that your application for a change of the ownership status in the above agent has been approved effective March 11, 1996, and we have notified the ARC participating carriers accordingly. In the event the application also included a name and/or city/state location change request, a new agency identification plate will be sent to you directly by the plate manufacturer within the next two to four weeks. In the interim, you may continue to use the plate you have on hand. The agency code number originally assigned to the former entity remains unchanged. Please reference your complete agency code number in all future correspondence with ARC. If the change of ownership included a change of bank account and you submitted a voided check, ARC will begin withdrawing from that account with the sales report period ending March 17, 1996. The proceeds from sales in which ARC traffic documents are issued, minus your commissions, are the property of the carriers and are held in trust by you. The first draft will be presented to the new account on March 27, 1996. Separate written confirmation of the bank account change will be forwarded within the next week. If you have not yet submitted a voided check but wish to change your bank account, you must follow the instructions set forth in Section 60.14 of the ARC Industry Agents' Handbook. Bear in mind that the Airlines Reporting Corporation's approval of this acquisition mandates that all debts incurred to ARC and/or the carriers prior to the effective date of the change of ownership are the responsibility of the "old" owner(s) of record (seller) and that, conversely, the "new" owner(s) of record (purchaser) is responsible only for debts incurred to ARC and/or the carriers as of the effective date of the change in ownership. Please note, as the corporate structure or ownership of the home office and branches and STP locations in absolute and all inclusive as a single entity, this change applies to all ARC accredited 2 branch and STP locations of the agent if they have not been otherwise sold or voluntarily deleted. Keep in mind, however, that STP locations may never be sold separately. Please remember also that ARC traffic documents may only be issued in the agency code number for which they are assigned. Under no circumstances may the home office's tickets be issued and identified by a branch or an STP location's agency code number, or vice versa, even if the supplies assigned to one are depleted. ARC traffic documents are extremely valuable and are supplied to you in trust. In the event of a change in ownership, possession and use of ARC traffic documents and carrier identification plates by the new owner(s) prior to ARC approval is prohibited. Attachment B in Section 80 of the Handbook contains the security rules for these documents and also for the airline identification plates that the carriers supply to you. If this change involves a home office or separate entity, enclosed is your executed copy of the Amendment to the ARC Agent Reporting Agreement. If the change involves a branch office becoming a separate entity, enclosed is your executed copy of the Memorandum of Agreement. The text of the Agent Reporting Agreement is in Section 80 of the Handbook. This agreement may not be assigned or transferred by the agent without the approval of ARC. Owners and qualifiers should familiarize themselves with the Industry Agents' Handbook, particularly Section 80 (Agent Reporting Agreement) which sets forth the rights and obligations of an ARC approved agent. Other very useful information and instructions may be found in Section 3.6 (ticket reordering forms and procedures), Section 3.8 (ticket imprinter ordering procedure), Section 12 (preparation of sales reports and area bank/processing center addresses), Section 20 (the ARC travel agent training program), Section 30 (bond/letter of credit forms and procedures), Section 60 (applications and procedures for any changes in status of an approved agent), and Section 70.2 (tips regarding security and storage for ARC traffic documents). The provisions of free or reduced-rate transportation by a carrier to any agent and its employees is governed by whatever terms, rules and/or regulations that the carrier establishes. Eligibility requirements are determined solely by the carriers, NOT BY ARC, and all questions regarding the requirements should be directed to the individual carriers. Please refer to Section 200 of the Handbook for additional information. Likewise, the commission and any other compensation paid to agents by carriers depend on what each carrier and each agent agree upon solely and directly between themselves. ARC has no role in determining the amount or nature of such compensation and will not involve itself in that process or in any dispute about it. 3 And last, we provide your agency name, address and agency code number not only to carrier participants, but to other organizations, some of which may use it for marketing purposes. If you prefer not to have your name released for such purposes, please advise ARC in writing promptly, and direct it to the attention of Data Services (202) 626-8010. If further assistance is needed, please refer to Section 1.2 of your Industry Agents' Handbook for the telephone number of the appropriate department. Sincerely, /s/ Barry M. Lemley - ----------------------------- Barry M. Lemley, Director Agency Accreditation Services EX-10.10 11 SUBSCRIBER SERVICE AGREEMENT 1 EXHIBIT 10.10 SUBSCRIBER SERVICE AGREEMENT Agreement made this [27th] day of [November], 19[95], between PAYROLL TRANSFERS INTERSTATE, INC., a Florida corporation (hereinafter referred to as "PTI"), and [800 TRAVEL SYSTEMS, INC.], located at [3018 US Highway 301N, Suite 100, Tampa, Florida] (hereinafter referred to as "Subscriber"). 1. PERSONNEL TRANSFER. Subscriber hereby agrees to transfer all existing personnel and any future personnel hired by Subscriber to the payroll of PTI, (hereinafter referred to as transferees ), and PTI hereby agrees to accept transferees from Subscriber. Subscriber agrees to provide PTI with the necessary personnel information for each applicant in order to properly complete the requisite personnel and payroll documentation. PTI will act as Employer and accept all Employer responsibilities which the law presently requires of an employee leasing relationship. 2. TERM OF AGREEMENT. This Agreement shall remain in force for the term of one year (the "Initial Term"). Following the Initial Term, this Agreement shall remain in force from month to month (the Extended Term ). 3. SET UP FEE. Subscriber agrees to pay PTI a non-refundable one time set up fee in the amount specified in the "Subscriber Service Sheet" to be due upon signing this Agreement. 4. PREPAYMENT. Subscriber shall maintain, at all times, a prepayment with PTI or provide a Letter of Credit to PTI equal to the amount specified in th "Subscriber Service Sheet". Should Subscriber fail to pay PTI any payment when due, PTI shall apply the prepayment to the amount due. Should the prepayment fall below the required amount, Subscriber shall immediately pay PTI an amount sufficient to comply with the required prepayment. If PTI receives insufficient funds to cover the payroll of the transferees at Subscriber s location, PTI may assess subscriber up to, but no more than, One Hundred ($100.00) Dollars per occurrence. The prepayment is placed with PTI to guarantee performance of all terms, covenants, conditions, and obligations of Subscriber under this Agreement. PTI shall refund any unapplied prepayment to Subscriber within thirty (30) days after the termination of this Agreement, without interest, provided Subscriber has performed each of its obligations under this Agreement. 5. SERVICE FEES. (a) Subscriber agrees to pay PTI a service fee equal to a percentage (%) above gross payroll of each transferee as specified in the "Subscriber Service Sheet". Should Subscribers payroll be less than $2,000.00 in total gross wages for any pay period, Subscriber agrees to pay PTI an additional $25.00 service fee. Should Subscriber require additional services not listed in "Subscriber Service Sheet" a fee will be negotiated and added to this Agreement. During the Initial Term of this Agreement, PTI may not adjust the fee rate percentage except for statutory increases or any changes in the insurance requirements or costs. Upon written notice to Subscriber from PTI of a fee adjustment, Subscriber shall have the right to terminate this Agreement by giving written notice of termination to PTI within fifteen (15) days of PTI's receipt of such notice. (b) Subscriber shall pay PTI all service fees due not later than the Invoice Date of each pay period. Subscriber agrees to verify all payroll data submissions of PTI transferees. If Subscriber believes that any billing or other communication between the parties is in error, Subscriber shall immediately notify PTI of such error. Subscriber agrees to pay PTI a minimum service fee of S50.00 for each pay period Subscriber fails to provide payroll information to PTI or fails to accept a payroll upon delivery. 6. INSURANCE. (a) If Subscriber transfers professionals engaged to act in their professional capacity, Subscriber shall furnish, and shall maintain in full force and effect at all times during this Agreement, professional liability and/or malpractice insurance covering any acts, errors or omissions of PTI transferees, with specific coverages and in limits satisfactory to PTI. Subscriber shall cause PTI to be named as an additional named insured, and a certificate of insurance shall be issued to PTI allowing not less than 30 days advance notice of any cancellation or material change. Subscriber warrants that its professional engagements and activities shall be only such as shall be within the scope and contemplation of such professional liability and/or malpractice insurance. 2 (b) Subscriber shall secure and maintain Commercial General Liability Insurance coverage with limits of liability no less than $1,000,000 combined single limit, and shall provide PTI with a Certificate of such insurance. (c) Each party shall maintain in full force and effect at all times during the term of this Agreement all insurance coverages which it is required to furnish or maintain under this Agreement, and shall furnish proof thereof at any time upon the request of the other party. 7. PENSION PLAN. PTI shall offer a 401(k) pension plan to all eligible transferees of Subscriber. PTI will match deposits of eligible Transferees at the rate of $.50 for each $1.00 saved up to a maximum 3% of gross wages in accordance with the 401(k) plan document. The specific rights of any Transferees under the 401(k) plan provided by PTI, whether respecting their eligibility, participation, payment of benefits, or otherwise, shall be governed solely by the express terms and provisions of the plan, as in effect or as amended from time to time. 8. SUPERVISION. With the assistance of the Subscriber, PTI will designate an on site supervisor in the "Subscriber Service Sheet". The on site supervisor shall direct operational and administrative matters on a day-to-day basis relating to service provided by PTI transferees. The PTI on site supervisor, with direction from the PTI Human Resource Department, shall determine the procedures to be followed by PTI transferees regarding their duties. PTI retains the right to hire, fire, set wages for and perform evaluations for all transferees as required by law. Subscriber shall not terminate any on site Supervisor without prior notice to PTI. 9. REPRESENTATION OF SUBSCRIBER. Subscriber represents and warrants to PTI as follows: (a) All wages and compensation to which any of Subscriber's employees are entitled and which shall have accrued as of the commencement of the Initial Term of this Agreement have been paid in full, or shall have been paid in full as of such date; (b) Except as expressly described herein, or as heretofore disclosed to PTI and acknowledged by PTI in writing, there are no separate agreements or arrangements, whether in the nature of employment agreements, collective bargaining agreements, deferred compensation arrangements, or otherwise, under which PTI would be obligated, or which would materially alter PTI's obligations hereunder; (c) All Transferees for whom an employment agreement with Subscriber may now be in effect, or with respect to whom an employment agreement may hereafter be desired by Subscriber, shall enter into a joint employment agreement with PTI; (d) All existing pension and profit sharing plans are current and in compliance with all applicable laws, rules and regulations, including but not limited to all requirements and limitations respecting funding, reporting and payment of benefits, and Subscriber shall furnish to PTI the opinion of Subscriber's counsel to these effects; and (e) Subscriber has terminated any other employee leasing arrangement to which Subscriber was heretofore a party, and Subscriber shall not enter into any other employee leasing arrangement while this Agreement remains in effect. 10. WORKERS' COMPENSATION. (a) PTI shall furnish and keep in full force and effect at all times during the term of this Agreement, workers' compensation insurance covering only PTI transferees for time worked and wages paid under the terms of this Agreement. Upon request, PTI shall produce a Certificate of Insurance to be issued naming Subscriber as the certificate holder. (b) Subscriber agrees to immediately notify PTI of any on-the-job injury and to complete the On The Job Injury Report form and forward same to PTI within 48 hours of the incident. (c) Failure to comply with the terms of Paragraph 10(b) may result in a $500.00 fine (per violation) to Subscriber, to be paid no later than the invoice date of the following pay period. 2 3 11. SAFE WORK ENVIRONMENT. (a) Subscriber agrees that it will comply with all health and safety laws (including the Occupational Health and Safety Act, (OSHA)), ADA Regulations, Title l of the Civil Rights Act of 1991, right-to-know laws, regulations, ordinances, directives, and rules imposed by controlling federal, state, and local government. (b) Subscriber agrees to comply at its expense with any specific directives from PTI, PTI's workers' compensation carrier, or any government agency having jurisdiction over the health and safety regulations at the work place. (c) Subscriber shall provide and ensure use of all personal protective equipment, as required by federal, state or local law, regulation, ordinance, directive, or rule as deemed necessary by PTI or PTI's workers' compensation carrier. (d) Subscriber, with PTI's assistance, agrees to implement a light duty return-to-work program to assist eligible injured workers compensation claimants (claimants with a suitable doctor's release) in returning to gainful employment. (e) PTI and PTI's workers compensation carriers, shall have the right to inspect Subscriber premises at a time mutually convenient for the Subscriber and the inspector. 12. ASSIGNMENT OF WAGES. Subscriber agrees that any wages and/or payroll taxes Subscriber owes with respect to a transferred employee, and which may be paid by PTI, are hereby assigned as wages and/or payroll taxes owed to and assigned to PTI, for which PTI as the assignee, shall have a direct claim against Subscriber until paid or reimbursed to PTI. 13. OBLIGATION FOR TIMELY PROVISION OF NECESSARY FORMS. Within five days of the date of Subscriber's first payroll, Subscriber must provide PTI with all necessary documents required to enroll each transferee, including but not limited to, each Employee Enrollment Form, Employment Eligibility Verification (Form 1-9), 401(k) Forms, Safety Rules and W-4 Withholding Forms. Subsequent to the date of this Agreement, Subscriber must provide PTI with the same documentation for all additional transferees within 48 hours of their hire. Subscriber may be assessed any and all fines and/or penalties imposed upon PTI resulting from client's failure to provide the required documentation. 14. INDEMNIFICATION AND ATTORNEYS FEES. (a) Subscriber hereby agrees to hold harmless, defend and indemnify PTI, its stockholders, officers, directors employees and agents in respect of any and all debts, claims, causes of action, liabilities, expenses (including court costs and attorney's fees) and suits, of whatsoever kind of nature, whether in law or in equity, which may be asserted against or incurred by them, or any of them, and which may result in whole or in any material part from the acts or omissions of Subscriber, its agents or employees including, without limitation, any breach or violation of any of the provisions of this Agreement and any claim whatsoever respecting product liability, quality of work, violations of wage and Hour laws, OSHA laws, ADA laws, EPA, DOL, EEOC or the National Labor Regulations Act, and any related rules and regulations. (b) Subscriber hereby agrees to indemnify, defend, and hold PTI harmless for any and all liabilities whatsoever arising from acts committed by or injuries to Independent Contractors and or Employees hired by Subscriber outside of the PTI Agreement. Subscriber hereby agrees to cover any and all employees and transferees with Subscriber's own workers' compensation policy during any period in which Subscriber fails to provide payroll information or does not accept a payroll from PTI. (c) In the event that any action is brought by either party hereto as a result of a breach of any provision of this Agreement or to enforce the terms of this Agreement, the prevailing party in such action shall be awarded reasonable attorney fees and court costs in addition to any other relief to which the party may be entitled. 3 4 15. TERMINATION OF THIS AGREEMENT. (a) At any time during the initial or extended term of this Agreement, this Agreement may be terminated by the mutual consent in writing of both parties. (b) Either party may terminate the Agreement, after completion of the Initial term, upon 15 days written notice to the other party. (c) During the Initial Term and Extended Term, PTI may terminate the Agreement upon 7 days written notice in the event Subscriber breaches any provisions of this contract. In addition, PTI shall have the right, at any time, to immediately terminate the Agreement in the event Subscriber: i) is late with payment for any payroll, fee or penalty required under the Agreement at any time from the date of this Agreement. ii) fails to comply with any directive regarding health and safety from PTI, PTI's workers' compensation carrier, or any government agency. iii) fails to provide any insurance required under this Agreement. iv) terminates any on-site supervisor as named in the Subscriber Service Sheet without prior written notice to PTI. v) is found to be conducting any illegal activity in conjunction with its employees, the operation of its business or on the business premises. vi) intentionally or materially misclassifies transferred employees workers compensation codes. (d) In the event that it shall reasonably appear to PTI that any circumstances may exist which would warrant a termination pursuant to Paragraph 15(c) or any other provision of this Agreement, PTI shall be entitled to suspend its performance pending its review and determination, without liability to Subscriber for so doing. (e) This Agreement shall terminate automatically without notice to Subscriber if petition in bankruptcy is filed by or against Subscriber, or if Subscriber shall have made an assignment for the benefit of creditors, shall have voluntarily or involuntarily adjudicated bankrupt by any court of competent jurisdiction, or if a petition is filed for reorganization of Subscriber. Subscriber and any Guarantor of Subscriber's obligations under this Agreement shall immediately notify PTI of any bankruptcy filing by or against it, or of any assignment by Subscriber for the benefit of its creditors, it being acknowledged that the acceptance of any payrolls from PTI thereafter would be fraudulent as to PTI in the absence of such notice. 16. MISCELLANEOUS. (a) Subscriber shall not assign this Agreement or its rights and duties hereunder, or any interest therein, without the prior written consent of PTI. Any such assignment or attempted assignment shall be void. No acceptance by PTI of any payment from the assignee or purported assignee shall operate, constitute or be construed as a waiver of this provision, or as a release of the Subscriber or any Guarantor. (b) This Agreement constitutes the entire Agreement between the parties with regard to this subject matter and no other agreement, statement, promise or practice between the parties relating to the subject matter shall be binding on the parties. This Agreement may be changed only by a written amendment signed by both parties. (c) Failure by either party at any time to require performance by the other party or to claim a breach of any provision of this Agreement will not constitute a waiver of any subsequent breach nor alter the effectiveness of this Agreement, nor any part thereof, nor prejudice either party in any subsequent action. (d) Any notice or demand to be given hereunder by either party to the other shall be by personal delivery in writing or by registered or certified mail, postage prepaid, return receipt requested, and shall be deemed communicated forty-eight (48) hours after mailing. Mailed notices shall be addressed to the party's principal place of business, or as set forth in this Agreement. Either party may change its address by written notice in accordance with this paragraph. 4 5 (e) Should any term, warrant, covenant, condition or provision of this Agreement be held to be invalid or unenforceable, the balance of this Agreement shall remain in full force and shall stand as if the unenforceable provision did not exist. (f) The paragraph headings of this Agreement are for reference only and shall not be considered in the interpretation of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. The parties mutually submit to the jurisdiction and stipulate to the venue of the Circuit Court for the 13th Judicial Circuit, Hillsborough County, Florida and, as applicable, the United States District Court for the Middle District of Florida, Tampa Division, for the resolution of any disputes or claims arising under or in connection with this Agreement. SIGNATURE PAGE TO FOLLOW 5 6 Executed at [Tampa, Florida] on the date first written above. PAYROLL TRANSFERS INTERSTATE, INC. SUBSCRIBER MICHAEL M. MOORE JERROLD B. SENDROW - ---------------- -------------------- ------------------ ------------------- NAME AUTHORIZED SIGNATURE NAME AUTHORIZED SIGNATURE PRESIDENT VICE PRESIDENT - ---------------- -------------------- ------------------ ------------------- TITLE DATE TITLE DATE
THE ABOVE AGREEMENT SHALL NOT BE BINDING UNTIL SIGNED BY AN OFFICER OF PAYROLL TRANSFERS INTERSTATE, INC. ================================================================================ PERSONAL GUARANTY In consideration of the undertakings of PAYROLL TRANSFERS INTERSTATE, INC. ("PTI") pursuant to the foregoing Subscriber Service Agreement, and the relationship of the undersigned to the named Subscriber, the undersigned ("Guarantor") hereby personally warrants and guarantees the full and timely payment and performance by the Subscriber of any and all of the payments and other obligations for which the Subscriber may now be or hereafter become obligated or liable pursuant to said Agreement. In the event of any breach thereof, PTI shall not be obligated to pursue or exhaust its remedies against the Subscriber as a condition to its enforcement of this Guaranty. Guarantor further agrees to be responsible for any and all costs, including attorney's fees, incurred by PTI in enforcing its rights under this Guaranty. By: JERROLD B. SENDROW ---------------------- -------------------------- NAME GUARANTOR SIGNATURE 6 7 "PROSPECTIVE CLIENT NOTICE" In accordance with Section #468.530(2), Florida Statutes on Employee Leasing, Mel Klinghoffer, License #C0 0000011, and Marc Moore, License #C0 0000010, are authorized by Statute to execute a Subscriber Service Agreement on behalf of Payroll Transfers, its subsidiaries, and affiliates, License numbers GL 0000002, GM 0000004, and GM 0000005. The undersigned hereby acknowledges and agrees that no Subscriber Service Agreement shall be binding or in affect whatsoever until prospective client is in receipt of a Subscriber Service Agreement fully executed by Mel Klinghoffer or Marc Moore, licensed representatives of Payroll Transfers. Prospective client also acknowledges and agrees to the following: o Prospective client should not cancel any insurances whatsoever until prospective client is in receipt of an executed Employee Leasing Agreement from Payroll Transfers. o Prospective client fully understands that it is the policy of Payroll Transfers, and as governed by various Federal, State and local regulations, that all required employee documentation, including employee application, W-2 Form, I-9 Form, Wellness Statement, employee benefits application and401(k) Plan application, be fully completed in order to qualify for acceptance by Payroll Transfers. o Prospective client understands that Payroll Transfers' workers' compensation carrier will review client's submitted information and acknowledge acceptance prior to the commencement of the Subscriber Service Agreement. The undersigned fully understands and agrees to the conditions above by their signature below. - ----------------------------------- PROSPECTIVE CLIENT'S NAME Submitted By: - ----------------------------------- ------------------------------ PROSPECTIVE CLIENTS SIGNATURE PAYROLL TRANSFERS MARKETING REPRESENTATIVE DATE 7 8 SUBSCRIBER SERVICE SHEET 800 TRAVEL SYSTEMS, INC. - -------------------------------------------------------------------------------- SUBSCRIBER 3018 US HIGHWAY 301N SUITE 100 - -------------------------------------------------------------------------------- ADDRESS TAMPA FLORIDA 33619 - ----------------------- ------------------------- ---------------- CITY STATE ZIP (813) 628-8855 - ----------------------------------------- --------------------------- TELEPHONE NUMBER EMERGENCY TELEPHONE NUMBER LUCIEN BITTAR FRANK MOREIRA - ----------------------------------------- --------------------------- ON SITE SUPERVISOR ADDITIONAL CONTACT 8810 MAN/CLERICAL 11.25 + W.C. 11.96 - ------------------------------ ----------------------- ------------------ WORKERS' COMPENSATION CODE SKILL CLASSIFICATION BILLING RATE - ------------------------------ ----------------------- ------------------ WORKERS' COMPENSATION CODE SKILL CLASSIFICATION BILLING RATE - ------------------------------ ----------------------- ------------------ WORKERS' COMPENSATION CODE SKILL CLASSIFICATION BILLING RATE - ------------------------------ ----------------------- ------------------ WORKERS' COMPENSATION CODE SKILL CLASSIFICATION BILLING RATE - ------------------------------ ----------------------- ------------------ WORKERS' COMPENSATION CODE SKILL CLASSIFICATION BILLING RATE EMPLOYEE COVERAGE: $50.00 SINGLE ONLY $ ------------------------ ----------------------------- SUBSCRIBER PAYS EMPLOYEE DEDUCT (SECTION 125) DEPENDENT COVERAGE: $ 0 $ ------------------------ ----------------------------- SUBSCRIBER PAYS EMPLOYEE DEDUCT (SECTION 125) $ - ----------------------------------- ---------------------- --------------------------------- PROPOSED EFFECTIVE DATE OF EMPLOYEE TRANSFER PROPOSED EFFECTIVE DATE OF HEALTH COVERAGE -BENEFIT PREPAYMENT
9 $ 0 $ - --------------------------------- --------------------------------- -------------------------------- --------------------- PERIOD ENDING DAY DELIVERY DAY SET-UP FEE PAYROLL PREPAYMENT PAY FREQUENCY: WEEKLY BI-WEEKLY SEMI-MONTHLY MONTHLY ========================================================-======================================================================= APPROVED BY: ------------------------------------------------------------------------------------------------------------------- AUTHORIZED SIGNATURE OF SUBSCRIBER DATE APPROVED BY: ------------------------------------------------------------------------------------------------------------------- OFFICER OF PAYROLL TRANSFERS INTERSTATE, INC. DATE
8 EX-10.11 12 FORM OF EMPLOYEMENT AGREEMENT-MARK M. MASTRINI 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT AGREEMENT entered into as of the 1st day of June, 1997 by and between 800 Travel Systems, Inc., a Delaware corporation ("Company") with an office at 4802 Gunn Highway, Tampa, Florida 33624 and Mark D. Mastrini ("Employee") an individual residing at [address]. WHEREAS, Company desires to employ Employee in the capacity and under the terms set forth below and Employee desires to be employed by Company in that capacity and on those terms; NOW, THEREFORE, it is agreed as follows: 1. Employment; Position; Duties. (a) Company hereby employs Employee, and Employee hereby accepts employment by Company, on the terms and conditions set forth in this Agreement. During the Term of this Agreement (as defined below) Employee shall serve as the President and Chief Operating Officer of the Company, subject to the direction of the Board of Directors of the Company (the "Board"), and in connection therewith shall perform his duties in accordance with the instructions and policies of the Board. If elected, Employee agrees to serve as a member of the Board. (b) The duties of Employee shall be those customarily associated with the offices of President and Chief Operating Officer including the supervision and direction of the Company's business operations and its senior management personnel. (c) During the Term, Employee shall devote his entire working time and attention to the business and affairs of 2 the Company and shall use his best efforts to promote the business of the Company. During the term of his employment hereunder, Employee shall have no interest in or perform any material service for any other business entity whether or not competitive with Company, except that the aforesaid prohibition against ownership shall not apply to either inactive investments in public companies whose stock is traded on a national securities exchange or actively traded over the counter or passive investments in entities not competitive with Company. (d) Employee will report to the Board and will provide the Board with such written reports relating to the Company's business as it may request. 2. Term. The term of Employee's employment (the "Term") shall be for a period of approximately three years commencing on the Effective Date (as hereinafter defined) and ending, notwithstanding the Effective Date, on June 30, 2000. The "Effective Date" means the date on which the currently contemplated initial public offering of common stock of Company (the IPO) is consummated. Anything contained herein to the contrary notwithstanding, Employee acknowledges that this Agreement is being entered into in contemplation of the aforesaid IPO and that, if such IPO does not become effective, for any reason whatsoever, this Agreement shall be of no force or effect. In the event that Employee continues in the full-time employ of Company after the end of the Term, such continued employment shall be on a year-to-year basis subject to the terms -2- 3 and conditions hereof. As used in this Agreement, the "First Contract Year" means the period commencing on the Effective Date and ending on June 30, 1998; the "Second Contract Year" means the one-year period immediately following the First Contract Year; and the "Third Contract Year" means the one-year period immediately following the Second Contract Year. Each subsequent July 1st occurring during the period in which Employee is employed by the Company shall be deemed to commence a new contract year. 3. Compensation; Benefits. (a) In consideration of the services to be rendered by Employee hereunder, Company shall pay Employee the following compensation: (i) in the First Contract Year a base salary at the rate of $89,000 per annum; (ii) in the Second Contract Year the Employee shall be paid a base salary equal to $89,000 plus an amount equal to $89,000 times (the percentage increase in the Consumer Price Index from June 1, 1997 to June 1, 1998 plus 5%). Thus, if the percentage increase in the CPI was 5%, commencing July 1, 1998, Employee's salary would be $97,900 ($89,000 + ($89,000 x .10)); (iii) in the Third Contract Year the Employee shall be paid a base salary equal to his salary rate for the Second Contract Year plus an amount equal to his salary rate for the Second Contract Year times the percentage increase in the Consumer Price Index from June 1, 1998 to June 1, 1999 plus 5%. -3- 4 (b) Company shall reimburse Employee promptly upon presentation of receipts or other satisfactory documentation for all reasonable expenses incurred by him in the furtherance of and in connection with his employment hereunder. (c) Company shall provide Employee with such medical and disability insurance as it makes available to its executives generally on substantially the same terms and conditions as such insurance is made available to other executives. (d) In recognition of Employee's need for a car to perform services required of him by the Company, the Company shall pay to Employee a car allowance of $500 per month. (e) Employee shall be entitled to two (2) weeks vacation in each calendar year during the Term, such vacation to be taken at times not inconvenient to Company. (f) As additional consideration for such service as may be rendered hereunder the Company has issued to Employee 100,000 shares of its Common Stock. The Employee agrees not to sell or otherwise transfer 90,000 of such shares prior to the second anniversary of the Effective Date without the prior written consent of the Company. Upon request, the Employee shall enter into a "lock-up" agreement with the underwriter of the IPO confirming his agreement not to transfer 90,000 of his shares prior to the second anniversary of the Effective Date without the consent of the underwriter. Employee shall be released from the transfer restriction contained in this paragraph upon termination of this Agreement. -4- 5 (g) Pursuant to the terms of the Company's Stock Option Plan (the "Plan") the Company shall grant to Employee options to purchase 25,000 shares of the Company's Common Stock at a price of $5.00 per share. The right to exercise such options shall vest in equal increments on June 1, 1998, and June 1, 1999. The terms and conditions of such options to be fully set forth in a Stock Option Agreement to be issued in accordance with the Plan. (h) Prior to the second anniversary of the Effective Date the Company shall register for sale under the Securities Act of 1933 the shares referenced in subparagraph (f) and the shares underlying the options referenced in subparagraph (g). 4. Termination. (a) This Agreement may be terminated by Company for cause (as defined below) immediately upon written notice thereof to Employee. Upon termination for cause, Company shall not be obligated to make any further payment to Employee under this Agreement, but the provisions of paragraph 6 shall survive any such termination. For the purposes of this Agreement, the phrase "for cause" shall mean Employee's (i) conviction of the willful violation of any law, rule or regulation, other than minor violations (which, through lapse of time or otherwise, is not subject to appeal); (ii) acts with respect to the property of the Company which constitute larceny, fraud, theft, embezzlement or the acceptance of a bribe or kick back; (iii) willful misconduct as an employee of Company; (iv) willful misrepresentation of a material -5- 6 matter to the Board; or (v) reckless disregard of his responsibilities under this Agreement. (b) If as a result of Employee's incapacity due to physical or mental illness, he shall have been absent from his duties with Company on a continuous basis for more than ninety days or for more than ninety working days during any nine month period, Company may upon thirty days prior written notice, terminate Employee's employment for "disability". Upon any such termination, except as otherwise required by law, Employee's rights to receive salary or other compensation or benefits hereunder shall terminate as of the date set forth in such notice. (c) This Agreement shall terminate automatically upon Employee's death. (d) In the event that Employee remains employed by the Company for the full Term of this Agreement but Company determines that it does not intend to offer to employ Employee on substantially the same or better terms after the end of the Term, the Company shall, not less than 45 days prior to the end of the Term, provide written notice to Employee of such determination. Notwithstanding the provisions of paragraph 1(c) of this Agreement, after receipt of such a notice, for the duration of the Term, Employee shall be permitted to devote a reasonable amount of his working time and attention to making arrangements for his employment after the Term, however, nothing contained herein shall diminish Employee's continuing obligation, during the balance of -6- 7 the Term, to use his best efforts to promote the business of the Company. 5. No Conflicting Agreement. Employee represents and warrants that he is not subject to any employment agreement, restrictive covenant, agreement or contract which might limit the performance of his duties and responsibilities hereunder. Employee further represents and warrants that he has made no commitment of any kind whatsoever inconsistent with the provisions of this Agreement and that he is under no disability of any kind which would prevent him from entering into this Agreement and performing all of his obligations hereunder. 6. Non-Competition; Confidentiality. (a) Employee covenants and agrees with Company that he will not, directly or indirectly: (i) while he is in Company's employ and at any time after the termination of his employment hereunder, disclose or use or otherwise exploit for his own benefit or the benefit of any other person (other than for the benefit of Company) any Confidential Information (as hereinafter defined) disclosed to Employee or of which Employee becomes aware by reason of his employment with Company; (ii) while he is in Company's employ and through the period ending two years after the termination of his employment hereunder, solicit or divert or appropriate to any Competing Business (as hereinafter defined), directly or indirectly, or attempt to solicit or divert or appropriate to any -7- 8 such Competing Business, any person or entity who was a customer or client of Company at any time during the last six months of Employee's employment hereunder; (iii) while he is in Company's employ and through the period ending two years after the termination of his employment hereunder, employ or attempt to employ or assist anyone else in employing any person who, at any time within the period commencing six months prior to the date of the termination of Employee's employment by Company and ending one year after the date of such termination, was, is or shall be an employee of Company (whether or not such employment is full time or is pursuant to a written contract with Company); and (iv) while he is in Company's employ and through the period ending ninety days after his employment hereunder, as an individual or as agent, employee, partner, officer, director, owner or independent contractor of any person or entity, engage in any Competing Business, directly or indirectly. (b) Employee agrees that upon the termination of his employment (whether voluntarily or involuntarily) he will not take with him or retain without the Company's written authorization, and will promptly deliver to Company, originals and all copies of all papers, files or other documents containing any Confidential Information and all other property belonging to Company. (c) For purposes of this Paragraph, the term "Competing Business" means any business located within the United -8- 9 States providing services substantially similar to those provided by the Company from time to time. The term "Confidential Information" means any and all data and information relating to the business of the Company (whether constituting a trade secret or not) which is or has been disclosed to Employee or of which Employee becomes aware as a consequence of or through his relationship with the Company and which has value to the Company and is not generally known by its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by Company (except where such public disclosure has been made by Employee without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means. If a court of competent jurisdiction determines that any of the provisions related to the right of Employee to compete with Company upon termination of his employment or to use information made know to him during the course of his employment by Company are not enforceable because of their length or territorial scope, Company and Employee agree that such court may limit the term or scope of such provision to such extent as is necessary to render it enforceable and that such provision, as so revised, shall be enforceable. (d) Employee acknowledges that irreparable loss and injury would result to Company upon the breach of any of the covenants contained in this paragraph 6 and that damages arising out of such breach would be difficult to ascertain. Employee -9- 10 agrees that, in addition to all other remedies available at law or at equity, Company may petition and obtain from a court of law or equity both temporary and permanent injunctive relief to prevent a breach by Employee of any covenant contained in this Paragraph 6 and that in any action or proceeding brought to enforce any provision of this Paragraph 6, the prevailing party shall be entitled to recover from the non-prevailing party the former's reasonable costs of enforcement, including legal fees. 7. Severance. In the event that any provision (or any portion of any provision) of this Agreement shall be held to be void or unenforceable, the remaining provisions of this Agreement (and the balance of any provisions held void or unenforceable in part only) shall continue in full force and effect, unless dependent upon an unenforceable or void provision. 8. Resignation. Upon the termination of his employment for any reason Employee shall be deemed to resign as an officer and director of Company and its affiliates, if then so acting. 9. Assignment; Successors. This Agreement may not be assigned by Employee, but may be assigned by Company to any successor in interest to its business. This Agreement shall inure to the benefit of and shall be binding upon Company, its successors and assigns, and Employee, his heirs, legal representatives, executors and assigns. 10. Complete Agreement; Governing Law. This Agreement contains the full and complete understanding and agreement of the parties and supersedes all prior agreements and understanding -10- 11 between the parties with respect to the subject matter hereof. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and wholly performed within said State, and may not be modified, amended, terminated or discharged orally. 11. Waiver; Estoppel. No waiver by either party of any breach of any provision of this Agreement shall be deemed a waiver of any preceding or succeeding breach of such provision or of a other provision herein contained. 12. Notices. Any notices hereunder shall be in writing and delivered at the addresses set forth above, or to such other address or addresses as may hereafter be furnished in writing by one party to the other, by certified mail, return receipt requested, or by telecopier. All such notices shall be deemed effective upon receipt. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ------------------------------ Mark D. Mastrini 800 TRAVEL SYSTEMS, INC. By:___________________________ -11- EX-10.12 13 FORM OF EMPLOYMENT AGREEMENT-JERROLD B. SENDROW 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT AGREEMENT entered into as of the 1st day of June, 1997 by and between 800 Travel Systems, Inc., a Delaware corporation ("Company") with an office at 4802 Gunn Highway, Tampa, Florida 33624 and Jerrold B. Sendrow ("Employee") an individual residing at [address]. WHEREAS, Company desires to employ Employee in the capacity and under the terms set forth below and Employee desires to be employed by Company in that capacity and on those terms; NOW, THEREFORE, it is agreed as follows: 1. Employment; Position; Duties. (a) Company hereby employs Employee, and Employee hereby accepts employment by Company, on the terms and conditions set forth in this Agreement. Employee shall initially serve as the Chief Financial Officer of Company, subject to the direction of the Chief Operating Officer of the Company. Employee has been advised that the Company may elect to engage another individual to serve as the Chief Financial Officer of the Company, in which event Employee shall serve as a Vice President-Controller of the Company. If elected, Employee agrees to serve as a member of the Board of Directors of the Company (the "Board"). (b) The duties of Employee initially shall be those customarily associated with the offices of Chief Financial Officer including having control over the financial accounts of the Company, subject to the policies of the Company as determined by the Board. If the Company shall engage a new Chief Financial 2 Officer, the duties of Employee shall be commensurate with the office of a Vice President-Controller. (c) During the Term, Employee shall devote his entire working time and attention to the business and affairs of the Company and shall use his best efforts to promote the business of the Company. During the term of his employment hereunder, Employee shall have no interest in or perform any material service for any other business entity whether or not competitive with Company, except that the aforesaid prohibition against ownership shall not apply to either inactive investments in public companies whose stock is traded on a national securities exchange or actively traded over the counter or passive investments in entities not competitive with Company. (d) Employee will report to the Chief Operating Officer and will provide him with such written reports relating to the Company's business as he may request. 2. Term. The term of Employee's employment (the "Term") shall be for a period of approximately three years commencing on the Effective Date (as hereinafter defined) and ending, notwithstanding the Effective Date, on June 30, 2000. The "Effective Date" means the date on which the currently contemplated initial public offering of common stock of Company (the IPO) is consummated. Anything contained herein to the contrary notwithstanding, Employee acknowledges that this Agreement is being entered into in contemplation of the aforesaid IPO and that, if -2- 3 such IPO does not become effective, for any reason whatsoever, this Agreement shall be of no force or effect. In the event that Employee continues in the full-time employ of Company after the end of the Term, such continued employment shall be on a year-to-year basis subject to the terms and conditions hereof. As used in this Agreement, the "First Contract Year" means the period commencing on the Effective Date and ending on June 30, 1998; the "Second Contract Year" means the one-year period immediately following the First Contract Year; and the "Third Contract Year" means the one-year period immediately following the Second Contract Year. Each subsequent July 1st occurring during the period in which Employee is employed by the Company shall be deemed to commence a new contract year. 3. Compensation; Benefits. (a) In consideration of the services to be rendered by Employee hereunder, Company shall pay Employee the following compensation: (i) in the First Contract Year a base salary at the rate of $70,200 per annum; (ii) in the Second Contract Year the Employee shall be paid a base salary equal to $70,200 plus an amount equal to $70,200 times (the percentage increase in the Consumer Price Index from June 1, 1997 to June 1, 1998 plus 5%). Thus, if the percentage increase in the CPI was 5%, commencing July 1, 1998, Employee's salary would be $77,200 ($70,200 + ($70,200 x .10)); -3- 4 (iii) in the Third Contract Year the Employee shall be paid a base salary equal to his salary rate for the Second Contract Year plus an amount equal to his salary rate for the Second Contract Year times the percentage increase in the Consumer Price Index from June 1, 1998 to June 1, 1999 plus 5%. (b) Company shall reimburse Employee promptly upon presentation of receipts or other satisfactory documentation for all reasonable expenses incurred by him in the furtherance of and in connection with his employment hereunder. (c) Company shall provide Employee with such medical and disability insurance as it makes available to its executives generally on substantially the same terms and conditions as such insurance is made available to other executives. (d) In recognition of Employee's need for a car to perform services required of him by the Company, the Company shall pay to Employee a car allowance of $350 per month. (e) Employee shall be entitled to two (2) weeks vacation in each calendar year during the Term, such vacation to be taken at times not inconvenient to Company. (f) At additional consideration for such service as may be rendered hereunder the Company has issued to Employee 100,000 shares of its Common Stock. The Employee agrees not to sell or otherwise transfer 90,000 of such shares prior to the second anniversary of the Effective Date without the prior written consent of the Company. Upon request, the Employee shall enter into a "lock-up" agreement with the underwriter of the IPO -4- 5 confirming his agreement not to transfer 90,000 of his shares prior to the second anniversary of the Effective Date without the consent of the underwriter. Employee shall be released from the transfer restriction contained in this paragraph upon termination of this Agreement. (g) Pursuant to the term of the Company's Stock Option Plan (the "Plan") the Company shall grant to Employee options to purchase 12,500 shares of the Company's Common Stock at a price of $5.00 per share. The right to exercise such options shall vest in equal increments on June 1, 1998, and June 1, 1999. The terms and conditions of such options to be fully set forth in a Stock Option Agreement to be issued in accordance with the Plan. (h) Prior to the second anniversary of the Effective Date the Company shall register for sale under the Securities Act of 1933 the shares referenced in subparagraph (f) and the shares underlying the options referenced in subparagraph (g). 4. Termination. (a) This Agreement may be terminated by Company for cause (as defined below) immediately upon written notice thereof to Employee. Upon termination for cause, Company shall not be obligated to make any further payment to Employee under this Agreement, but the provisions of paragraph 6 shall survive any such termination. For the purposes of this Agreement, the phrase "for cause" shall mean Employee's (i) conviction of the willful violation of any law, rule or regulation, other than minor -5- 6 violations (which, through lapse of time or otherwise, is not subject to appeal); (ii) acts with respect to the property of the Company which constitute larceny, fraud, theft, embezzlement or the acceptance of a bribe or kick back; (iii) willful misconduct as an employee of Company; (iv) willful misrepresentation of a material matter to the Board; or (v) reckless disregard of his responsibilities under this Agreement (b) If as a result of Employee's incapacity due to physical or mental illness, he shall have been absent from his duties with Company on a continuous basis for more than ninety days or for more than ninety working days during any nine month period, Company may upon thirty days prior written notice, terminate Employee's employment for "disability". Upon any such termination, except as otherwise required by law, Employee's rights to receive salary or other compensation or benefits hereunder shall terminate as of the date set forth in such notice. (c) This Agreement shall terminate automatically upon Employee's death. (d) In the event that Employee remains employed by the Company for the full Term of this Agreement but Company determines that it does not intend to offer to employ Employee on substantially the same or better terms after the end of the Term, the Company shall, not less than 45 days prior to the end of the Term, provide written notice to Employee of such determination. Notwithstanding the provisions of paragraph 1(c) of this Agreement, after receipt of such a notice, for the duration of the Term, -6- 7 Employee shall be permitted to devote a reasonable amount of his working time and attention to making arrangements for his employment after the Term, however, nothing contained herein shall diminish Employee's continuing obligation, during the balance of the Term, to use his best efforts to promote the business of the Company. 5. No Conflicting Agreement. Employee represents and warrants that he is not subject to any employment agreement, restrictive covenant, agreement or contract which might limit the performance of his duties and responsibilities hereunder. Employee further represents and warrants that he has made no commitment of any kind whatsoever inconsistent with the provisions of this Agreement and that he is under no disability of any kind which would prevent him from entering into this Agreement and performing all of his obligations hereunder. 6. Non-Competition; Confidentiality. (a) Employee covenants and agrees with Company that he will not, directly or indirectly: (i) while he is in Company's employ and at any time after the termination of his employment hereunder, disclose or use or otherwise exploit for his own benefit or the benefit of any other person (other than for the benefit of Company) any Confidential Information (as hereinafter defined) disclosed to Employee or of which Employee becomes aware by reason of his employment with Company; -7- 8 (ii) while he is in Company's employ and through the period ending two years after the termination of his employment hereunder, solicit or divert or appropriate to any Competing Business (as hereinafter defined), directly or indirectly, or attempt to solicit or divert or appropriate to any such Competing Business, any person or entity who was a customer or client of Company at any time during the last six months of Employee's employment hereunder; (iii) while he is in Company's employ and through the period ending two years after the termination of his employment hereunder, employ or attempt to employ or assist anyone else in employing any person who, at any time within the period commencing six months prior to the date of the termination of Employee's employment by Company and ending one year after the date of such termination, was, is or shall be an employee of Company (whether or not such employment is full time or is pursuant to a written contract with Company); and (iv) while he is in Company's employ and through the period ending ninety days after his employment hereunder, as an individual or as agent, employee, partner, officer, director, owner or independent contractor of any person or entity, engage in any Competing Business, directly or indirectly. (b) Employee agrees that upon the termination of his employment (whether voluntarily or involuntarily) he will not take with him or retain without the Company's written authorization, and will promptly deliver to Company, originals and -8- 9 all copies of all papers, files or other documents containing any Confidential Information and all other property belonging to Company. (c) For purposes of this Paragraph, the term "Competing Business" means any business located within the United States providing services substantially similar to those provided by the Company from time to time. The term "Confidential Information" means any and all data and information relating to the business of the Company (whether constituting a trade secret or not) which is or has been disclosed to Employee or of which Employee becomes aware as a consequence of or through his relationship with the Company and which has value to the Company and is not generally known by its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by Company (except where such public disclosure has been made by Employee without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means. If a court of competent jurisdiction determines that any of the provisions related to the right of Employee to compete with Company upon termination of his employment or to use information made know to him during the course of his employment by Company are not enforceable because of their length or territorial scope, Company and Employee agree that such court may limit the term or scope of such provision to such extent as is necessary to -9- 10 render it enforceable and that such provision, as so revised, shall be enforceable. (d) Employee acknowledges that irreparable loss and injury would result to Company upon the breach of any of the covenants contained in this paragraph 6 and that damages arising out of such breach would be difficult to ascertain. Employee agrees that, in addition to all other remedies available at law or at equity, Company may petition and obtain from a court of law or equity both temporary and permanent injunctive relief to prevent a breach by Employee of any covenant contained in this Paragraph 6 and that in any action or proceeding brought to enforce any provision of this Paragraph 6, the prevailing party shall be entitled to recover from the non-prevailing party the former's reasonable costs of enforcement, including legal fees. 7. Severance. In the event that any provision (or any portion of any provision) of this Agreement shall be held to be void or unenforceable, the remaining provisions of this Agreement (and the balance of any provisions held void or unenforceable in part only) shall continue in full force and effect, unless dependent upon an unenforceable or void provision. 8. Resignation. Upon the termination of his employment for any reason Employee shall be deemed to resign as an officer and director of Company and its affiliates, if then so acting. 9. Assignment; Successors. This Agreement may not be assigned by Employee, but may be assigned by Company to any successor in interest to its business. This Agreement shall inure -10- 11 to the benefit of and shall be binding upon Company, its successors and assigns, and Employee, his heirs, legal representatives, executors and assigns. 10. Complete Agreement; Governing Law. This Agreement contains the full and complete understanding and agreement of the parties and supersedes all prior agreements and understanding between the parties with respect to the subject matter hereof. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and wholly performed within said State, and may not be modified, amended, terminated or discharged orally. 11. Waiver; Estoppel. No waiver by either party of any breach of any provision of this Agreement shall be deemed a waiver of any preceding or succeeding breach of such provision or of a other provision herein contained. 12. Notices. Any notices hereunder shall be in writing and delivered at the addresses set forth above, or to such other address or addresses as may hereafter be furnished in writing by one party to the other, by certified mail, return receipt requested, or by telecopier. All such notices shall be deemed effective upon receipt. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ------------------------------ Jerrold B. Sendrow 800 TRAVEL SYSTEMS, INC. By:___________________________ -11- EX-10.13 14 FORM OF EMPLOYMENT AGREEMENT-BIAGIO BELIZZI 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT AGREEMENT entered into as of the 1st day of June, 1997 by and between 800 Travel Systems, Inc., a Delaware corporation ("Company") with an office at 4802 Gunn Highway, Tampa, Florida 33624 and Biagio Bellizzi ("Employee") an individual residing at [address].] WHEREAS, Company desires to employ Employee in the capacity and under the terms set forth below and Employee desires to be employed by Company in that capacity and on those terms; NOW, THEREFORE, it is agreed as follows: 1. Employment; Position; Duties. (a) Company hereby employs Employee, and Employee hereby accepts employment by Company, on the terms and conditions set forth in this Agreement. During the Term of this Agreement (as defined below) Employee shall serve as the Vice President-Marketing of the Company, subject to the direction of the Chief Operating Officer of the Company, and in connection therewith shall perform his duties in accordance with the instructions and policies of the Chief Operating Officer. (b) The duties of Employee shall be those customarily associated with a director of marketing of a company engaged in operations similar to those of the Company as more fully determined by the Board of Directors of the Company (the "Board"). (c) During the Term, Employee shall devote his entire working time and attention to the business and affairs of the Company and shall use his best efforts to promote the business 2 of the Company. During the term of his employment hereunder, Employee shall have no interest in or perform any material service for any other business entity whether or not competitive with Company, except that the aforesaid prohibition against ownership shall not apply to either inactive investments in public companies whose stock is traded on a national securities exchange or actively traded over the counter or passive investments in entities not competitive with Company. (d) Employee will report to the Chief Operating Officer and will provide him with such written reports relating to the Company's business as he may request. 2. Term. The term of Employee's employment (the "Term") shall be for a period of approximately three years commencing on the Effective Date (as hereinafter defined) and ending, notwithstanding the Effective Date, on December 31, 1999. The "Effective Date" means the date on which the currently contemplated initial public offering of common stock of Company (the IPO) is consummated. Anything contained herein to the contrary notwithstanding, Employee acknowledges that this Agreement is being entered into in contemplation of the aforesaid IPO and that, if such IPO does not become effective, for any reason whatsoever, this Agreement shall be of no force or effect. In the event that Employee continues in the full-time employ of Company after the end of the Term, such continued employment shall be on a year-to-year basis subject to the terms and conditions hereof. As used in this Agreement, the "First -2- 3 Contract Year" means the period commencing on the Effective Date and ending on June 30, 1998 the "Second Contract Year" means the one-year period immediately following the First Contract Year; and the "Third Contract Year" means the one-year period immediately following the Second Contract Year. Each subsequent July 1st occurring during the period in which Employee is employed by the Company shall be deemed to commence a new contract year. 3. Compensation; Benefits. (a) In consideration of the services to be rendered by Employee hereunder, Company shall pay Employee the following compensation: (i) in the First Contract Year a base salary at the rate of $45,000 per annum; (ii) in the Second Contract Year the Employee shall be paid a base salary equal to $45,000 plus an amount equal to $45,000 times (the percentage increase in the Consumer Price Index from June 1, 1997 to June 1, 1998 plus 5%). Thus, if the percentage increase in the CPI was 5%, commencing July 1, 1998, Employee's salary would be $49,500 ($45,000 + ($45,000 x .10)); (iii) in the Third Contract Year the Employee shall be paid a base salary equal to his salary rate for the Second Contract Year plus an amount equal to his salary rate for the Second Contract Year times the percentage increase in the Consumer Price Index from June 1, 1998 to June 1, 1999 plus 5%. (b) Company shall reimburse Employee promptly upon presentation of receipts or other satisfactory documentation for -3- 4 all reasonable expenses incurred by him in the furtherance of and in connection with his employment hereunder. (c) Company shall provide Employee with such medical and disability insurance as it makes available to its executives generally on substantially the same terms and conditions as such insurance is made available to other executives. (d) Employee shall be entitled to twice (2) weeks vacation in each calendar year during the Term, such vacation to be taken at times not inconvenient to Company. (e) As additional consideration for such services as may be rendered hereunder the Company has issued to Employee 50,000 shares of its Common Stock. The Employee agrees not to sell or otherwise transfer 45,000 of such shares prior to the second anniversary of the Effective Date without the prior written consent of the Company. Upon request, the Employee shall enter into a "lock-up" agreement with the underwriter of the IPO confirming his agreement not to transfer 45,000 of his shares prior to the second anniversary of the Effective Date without the consent of the underwriter. Employee shall be released from the transfer restriction contained in this paragraph upon termination of this Agreement. (f) Pursuant to the terms of the Company's Stock Option Plan (the "Plan") the Company shall grant to Employee options to purchase 12,500 shares of the Company's Common Stock at a price of $5.00 per share. The right to exercise such options shall vest in equal increments on June 1, 1998, and June 1, 1999. -4- 5 The terms and conditions of such options to be fully set forth in a Stock Option Agreement to be issued in accordance with the Plan. (g) Prior to the second anniversary of the Effective Date the Company shall register for sale under the Securities Act of 1933 the shares referenced in subparagraph (e) and the shares underlying the options referenced in subparagraph (f). 4. Termination. (a) This Agreement may be terminated by Company for cause (as defined below) immediately upon written notice thereof to Employee. Upon termination for cause, Company shall not be obligated to make any further payment to Employee under this Agreement, but the provisions of paragraph 6 shall survive any such termination. For the purposes of this Agreement, the phrase "for cause" shall mean Employee's (i) conviction of the willful violation of any law, rule or regulation, other than minor violations (which, through lapse of time or otherwise, is not subject to appeal); (ii) acts with respect to the property of the Company which constitute larceny, fraud, theft, embezzlement or the acceptance of a bribe or kick back; (iii) willful misconduct as an employee of Company; (iv) willful misrepresentation of a material matter to the Board; or (v) reckless disregard of his responsibilities under this Agreement. (b) If as a result of Employee's incapacity due to physical or mental illness, he shall have been absent from his duties with Company on a continuous basis for more than ninety days -5- 6 or for more than ninety working days during any nine month period, Company may upon thirty days prior written notice, terminate Employee's employment for "disability". Upon any such termination, except as otherwise required by law, Employee's rights to receive salary or other compensation or benefits hereunder shall terminate as of the date set forth in such notice. (c) This Agreement shall terminate automatically upon Employee's death. (d) In the event that Employee remains employed by the Company for the full Term of this Agreement but Company determines that it does not intend to offer to employ Employee on substantially the same or better terms after the end of the Term, the Company shall, not less than 45 days prior to the end of the Term, provide written notice to Employee of such determination. Notwithstanding the provisions of paragraph 1(c) of this Agreement, after receipt of such a notice, for the duration of the Term, Employee shall be permitted to devote a reasonable amount of his working time and attention to making arrangements for his employment after the Term, however, nothing contained herein shall diminish Employee's continuing obligation, during the balance of the Term, to use his best efforts to promote the business of the Company. 5. No Conflicting Agreement. Employee represents and warrants that he is not subject to any employment agreement, restrictive covenant, agreement or contract which might limit the performance of his duties and responsibilities hereunder. Employee -6- 7 further represents and warrants that he has made no commitment of any kind whatsoever inconsistent with the provisions of this Agreement and that he is under no disability of any kind which would prevent him from entering into this Agreement and performing all of his obligations hereunder. 6. Non-Competition; Confidentiality. (a) Employee covenants and agrees with Company that he will not, directly or indirectly: (i) while he is in Company's employ and at any time after the termination of his employment hereunder, disclose or use or otherwise exploit for his own benefit or the benefit of any other person (other than for the benefit of Company) any Confidential Information (as hereinafter defined) disclosed to Employee or of which Employee becomes aware by reason of his employment with Company; (ii) while he is in Company's employ and through the period ending two years after the termination of his employment hereunder, solicit or divert or appropriate to any Competing Business (as hereinafter defined), directly or indirectly, or attempt to solicit or divert or appropriate to any such Competing Business, any person or entity who was a customer or client of Company at any time during the last six months of Employee's employment hereunder; (iii) while he is in Company's employ and through the period ending two years after the termination of his employment hereunder, employ or attempt to employ or assist anyone -7- 8 else in employing any person who, at any time within the period commencing six months prior to the date of the termination of Employee's employment by Company and ending one year after the date of such termination, was, is or shall be an employee of Company (whether or not such employment is full time or is pursuant to a written contract with Company); and (iv) while he is in Company's employ and through the period ending ninety days after his employment hereunder, as an individual or as agent, employee, partner, officer, director, owner or independent contractor of any person or entity, engage in any Competing Business, directly or indirectly. (b) Employee agrees that upon the termination of his employment (whether voluntarily or involuntarily) he will not take with him or retain without the Company's written authorization, and will promptly deliver to Company, originals and all copies of all papers, files or other documents containing any Confidential Information and all other property belonging to Company. (c) For purposes of this Paragraph, the term "Competing Business" means any business located within the United States providing services substantially similar to those provided by the Company from time to time. The term "Confidential Information" means any and all data and information relating to the business of the Company (whether constituting a trade secret or not) which is or has been disclosed to Employee or of which Employee becomes aware as a consequence of or through his -8- 9 relationship with the Company and which has value to the Company and is not generally known by its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by Company (except where such public disclosure has been made by Employee without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means. If a court of competent jurisdiction determines that any of the provisions related to the right of Employee to compete with Company upon termination of his employment or to use information made know to him during the course of his employment by Company are not enforceable because of their length or territorial scope, Company and Employee agree that such court may limit the term or scope of such provision to such extent as is necessary to render it enforceable and that such provision, as so revised, shall be enforceable. (d) Employee acknowledges that irreparable loss and injury would result to Company upon the breach of any of the covenants contained in this paragraph 6 and that damages arising out of such breach would be difficult to ascertain. Employee agrees that, in addition to all other remedies available at law or at equity, Company may petition and obtain from a court of law or equity both temporary and permanent injunctive relief to prevent a breach by Employee of any covenant contained in this Paragraph 6 and that in any action or proceeding brought to enforce any provision of this Paragraph 6, the prevailing party shall be -9- 10 entitled to recover from the non-prevailing party the former's reasonable costs of enforcement, including legal fees. 7. Severance. In the event that any provision (or any portion of any provision) of this Agreement shall be held to be void or unenforceable, the remaining provisions of this Agreement (and the balance of any provisions held void or unenforceable in part only) shall continue in full force and effect, unless dependent upon an unenforceable or void provision. 8. Resignation. Upon the termination of his employment for any reason Employee shall be deemed to resign as an officer and director of Company and its affiliates, if then so acting. 9. Assignment; Successors. This Agreement may not be assigned by Employee, but may be assigned by Company to any successor in interest to its business. This Agreement shall inure to the benefit of and shall be binding upon Company, its successors and assigns, and Employee, his heirs, legal representatives, executors and assigns. 10. Complete Agreement; Governing Law. This Agreement contains the full and complete understanding and agreement of the parties and supersedes all prior agreements and understanding between the parties with respect to the subject matter hereof. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and wholly performed within said State, and may not be modified, amended, terminated or discharged orally. -10- 11 11. Waiver; Estoppel. No waiver by either party of any breach of any provision of this Agreement shall be deemed a waiver of any preceding or succeeding breach of such provision or of a other provision herein contained. 12. Notices. Any notices hereunder shall be in writing and delivered at the addresses set forth above, or to such other address or addresses as may hereafter be furnished in writing by one party to the other, by certified mail, return receipt requested, or by telecopier. All such notices shall be deemed effective upon receipt. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ------------------------------ Biagio Bellizzi 800 TRAVEL SYSTEMS, INC. By:___________________________ -11- EX-23.2 15 CONSENT OF KILLMAN, MURRELL & COMPANY 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form SB-2 of 800 Travel Systems, Inc. (the "Company") of our report dated April 20, 1997 on the balance sheets of the Company as of December 31, 1996 and 1995 and the related statements of operations, stockholders' equity and cash flows for the year ended December 31, 1996 and the one month ended December 31, 1995, and on the consolidated statements of operations, stockholders' (deficit) and cash flows of the Company and Subsidiary (Predecessor Business) for the eleven months ended November 30, 1995. We also consent to the reference to our Firm under the caption "Experts" in the Prospectus which is part of the Registration Statement. KILLMAN, MURRELL & COMPANY, P.C. Certified Public Accountants Dallas, Texas May 30, 1997 EX-23.3 16 CONSENT OF ACETTA AND OLMSTEAD, ACCOUNTANCY CORP. 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form SB-2 of 800 Travel Systems, Inc. of our report dated April 23, 1997 on the balance sheets of Joseph Stevens Group, Inc., as of December 31, 1996 and 1995 and the related statements of operations, capital deficit and cash flows for the two years then ended. We also consent to the reference to our Firm under the caption "Experts" in the Prospectus which is part of the Registration Statement. ACCETTA AND OLMSTED Accountancy Corporation Certified Public Accountants Fountain Valley, California May 30, 1997 EX-23.4 17 CONSENT OF FELDMAN, RADIN & CO., P.C. 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form SB-2 of 800 Travel Systems, Inc. of our report dated June 2, 1995 on the consolidated statement of operations, changes in stockholders' deficit and cash flows for the year ended December 31, 1994 of 1-800-Low-Airfare, Inc. and Subsidiary. We also consent to the reference to our Firm under the caption "Experts" in the Prospectus which is part of the Registration Statement. FELDMAN RADIN & CO., P.C. /s/ Feldman Radin & Co., P.C. Certified Public Accountants New York, New York May 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----