-----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, VQeg3RfZ+eu/ig9feyuINS6jZxwM158oYU7mpVovkyUjywXxLgiJBgMXe6mnO6ho iheLadxK403jZHF4Ys0EjA== 0001005477-98-003178.txt : 19981116 0001005477-98-003178.hdr.sgml : 19981116 ACCESSION NUMBER: 0001005477-98-003178 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 800 TRAVEL SYSTEMS INC CENTRAL INDEX KEY: 0001039208 STANDARD INDUSTRIAL CLASSIFICATION: TRANSPORTATION SERVICES [4700] IRS NUMBER: 593343338 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13271 FILM NUMBER: 98748918 BUSINESS ADDRESS: STREET 1: 4802 GUNN HIGHWAY CITY: TAMPA STATE: FL ZIP: 33624 BUSINESS PHONE: 9139080903 MAIL ADDRESS: STREET 1: 4802 GUNN HIGHWAY CITY: TAMPA STATE: FL ZIP: 33624 10QSB 1 FORM 10-QSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission file number 1-13271 800 TRAVEL SYSTEMS, INC. (Exact name of Small Business Issuer as specified in its charter) Delaware 59-3343338 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4802 Gunn Highway Tampa, Florida 33624 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (813) 908-0903 ------------------------------------------------------------------ N/A --------------------------------------------------- (Former name, former address and former fiscal year if changed since last report Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 7,508,427 shares of Common Stock, $.01 par value, were outstanding, as of November 6, 1998. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| ================================================================================ Form 10-QSB INDEX Page Number PART 1. FINANCIAL INFORMATION Item 1. Financial Statements .....................................F-1 to F-9 Balance Sheets ...............................................F-1 Statements of Operations .....................................F-3 Statements of Stockholders' Equity ........................ F-4 Statements of Cash Flows .................................. F-5 Notes to Financial Statements ............................. F-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 2 PART 2. OTHER INFORMATION ............................................. 6 Item 6. Exhibits, Lists and Reports on Form 8-K ...................... 6 (a) Exhibits ............................................. 6 (b) Reports on Form 8-K .................................. 6 SIGNATURES ............................................................... 7 PART 1 FINANCIAL INFORMATION Item 1. Financial Statements 800 TRAVEL SYSTEMS, INC. BALANCE SHEETS ASSETS September 30, December 31, 1998 1997 ------------- ------------ (unaudited) CURRENT ASSETS Cash $ 2,429,881 $ 18,710 Commissions receivable 882,185 553,358 Prepaids 154,500 16,617 ----------- ----------- Total current assets 3,466,566 588,685 ----------- ----------- LEASEHOLD IMPROVEMENTS AND EQUIPMENT 888,704 450,667 Less accumulated depreciation (219,424) (110,104) ----------- ----------- Net leasehold improvements and equipment 669,280 340,563 ----------- ----------- EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED Less accumulated amortization of $242,687 and $93,126, Respectively 4,812,718 1,024,385 ----------- ----------- DEFERRED OFFERING COSTS -- 1,408,573 ----------- ----------- OTHER ASSETS Trademarks, net of accumulated amortization of $54,864 and $29,616, respectively 360,136 185,384 Capitalized software 90,000 -- Related party receivables 2,400 308,425 Bonds, security deposits and 39,724 37,824 other assets Merger deposits and deferred -- 416,671 acquisition costs Prepaid expenses 193,121 68,000 ----------- ----------- Total other assets 685,381 1,016,304 ----------- ----------- TOTAL ASSETS $ 9,633,945 $ 4,378,510 =========== =========== (continued) F-1 LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 1998 1997 ------------- ------------ (unaudited) CURRENT LIABILITIES Note payable $ -- $ 50,000 Current maturities of long-term debt 118,687 260,000 Accounts payable 602,388 1,830,652 Accrued liabilities 568,644 479,670 ------------ ------------ Total current liabilities 1,289,719 2,620,322 DEFERRED RENT 72,641 138,228 LONG-TERM DEBT - excluding current maturities 29,174 50,000 ------------ ------------ Total liabilities 1,391,534 2,808,550 ------------ ------------ COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $.01 par value, 10,000,000 shares authorized; 7,497,096 and 5,959,709 shares issued and outstanding, respectively 74,971 59,597 Additional paid-in capital 11,823,592 5,297,424 Stock subscriptions receivable (21,547) (21,547) Accumulated deficit (3,634,605) (3,765,514) ------------ ------------ Total stockholders' equity 8,242,411 1,569,960 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,633,945 $ 4,378,510 ============ ============ The accompanying notes are an integral part of these financial statements F-2 800 TRAVEL SYSTEMS, INC. STATEMENTS OF OPERATIONS
For the Nine Months For the Three Months Ended September 30, Ended September 30, -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- REVENUES Commissions $ 5,921,691 $ 4,820,022 $ 2,347,417 $ 1,819,830 Ticket delivery and service fees 2,657,720 1,196,394 1,156,676 474,935 ----------- ----------- ----------- ----------- Total revenues 8,579,411 6,016,416 3,504,093 2,294,765 ----------- ----------- ----------- ----------- OPERATING EXPENSES Payroll, commissions and employee benefits 4,012,845 2,905,981 1,685,053 1,130,367 Telephone 1,442,029 787,488 631,380 286,242 Ticket delivery 808,808 523,789 361,259 195,863 Advertising 236,852 178,180 82,493 71,136 General and administrative 2,006,041 1,605,833 564,730 495,669 ----------- ----------- ----------- ----------- Total operating expenses 8,506,575 6,001,271 3,324,915 2,179,277 ----------- ----------- ----------- ----------- EARNINGS BEFORE OTHER INCOME 72,836 15,145 179,178 115,488 OTHER INCOME (EXPENSE) Interest income 76,134 4,726 25,096 -- Interest expense (18,061) (83,994) (4,933) (17,183) ----------- ----------- ----------- ----------- NET EARNINGS (LOSS) $ 130,909 $ (64,123) $ 199,341 $ 98,305 =========== =========== =========== =========== NET EARNINGS (LOSS) PER COMMON SHARE - BASIC $ .02 $ (.01) $ .03 $ .02 =========== =========== =========== =========== - DILUTED $ .02 $ (.01) $ .03 $ .02 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 7,451,035 5,956,859 7,497,096 5,959,709 =========== =========== =========== =========== - DILUTED 7,834,070 5,956,859 7,942,043 6,199,709 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements F-3 800 TRAVEL SYSTEMS, INC. STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock ------------ Additional Stock Paid-in Subscriptions Retained Shares Amount Capital Receivable Deficit Total ------ ------ ------- ---------- ------- ----- BALANCE, DECEMBER 31, 1996 5,951,209 $ 59,512 $ 4,976,259 $ (32,296) $ (3,503,009) $ 1,500,466 Issuance of common stock in connection with debt issuance and services 8,500 85 21,165 -- -- 21,250 Issuance of stock options to Directors -- -- 300,000 -- -- 300,000 Payment of stock subscription -- -- -- 10,749 -- 10,749 Net loss, year ended December 31, 1997 -- -- -- -- (262,505) (262,505) ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997 5,959,709 59,597 5,297,424 (21,547) (3,765,514) 1,569,960 Sales of common stock and warrants net of issuance expenses of $2,252,602 1,350,000 13,500 4,872,024 -- -- 4,885,524 Joseph Stevens Group, Inc. Purchase 383,333 3,833 1,944,082 -- -- 1,947,915 Purchase and retirement of 204,615 shares (204,615) (2,046) (405,954) -- -- (408,000) Exercise of warrants 58,200 582 363,168 -- -- 363,750 Shares exchanged in payment of receivables (49,531) (495) (247,152) -- -- (247,647) Net earnings -- -- -- -- 130,909 130,909 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, SEPTEMBER 30, 1998 7,497,096 $ 74,971 $ 11,823,592 $ (21,547) $ (3,634,605) $ 8,242,411 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements F-4 800 TRAVEL SYSTEMS, INC. STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, ----------------- 1998 1997 ----------- ----------- Increase (decrease) in cash and cash equivalents CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 130,909 $ (64,123) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 284,130 114,714 Stock, options and warrants issued for expenses -- 21,250 Prepaid rent amortization -- 9,000 Changes in operating assets and liabilities, net of effects of acquisition: Commissions receivable (328,827) (320,306) Prepaids (137,883) -- Other assets 2,713 5,347 Related party receivables -- (43,636) Deferred rent liability (65,587) 108,369 Accounts payable and accrued expenses (1,139,290) 335,811 ----------- ----------- Net cash provided by (used in) operating activities (1,253,835) 166,426 CASH FLOW FROM INVESTING ACTIVITIES Purchase of leasehold improvements and equipment (188,037) (46,703) Merger deposits and deferred acquisition costs -- (120,999) Cash paid for acquisition (2,114,665) -- ----------- ----------- Net cash used in investing activities (2,302,702) (167,702) CASH FLOW FROM FINANCING ACTIVITIES Deferred offering cost -- (558,658) Proceeds from borrowings, net -- -- Principal payments on debt (282,139) -- Issuance of common stock 6,657,847 -- Purchase of common stock (408,000) -- Stock subscription collection -- 8,749 ----------- ----------- Net cash provided by (used in) financing activities 5,967,708 (549,909) ----------- ----------- NET INCREASE (DECREASE) IN CASH 2,411,171 (551,185) CASH AT THE BEGINNING OF PERIOD 18,710 588,960 ----------- ----------- CASH AT THE END OF PERIOD $ 2,429,881 $ 37,775 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest expense $ 18,061 $ 83,994 =========== =========== NON-CASH FINANCING ACTIVITIES Common stock received for payment of related party receivables $ 247,647 $ -- =========== =========== Non-case activities During 1998, the Company acquired approximately $4.5 million in assets and assumed approximately $100,000 in liabilities in exchange for $2.1 million in cash, $400,000 of acquisition expenses and $1.9 million of common stock.
The accompanying notes are an integral part of these financial statements F-5 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 AND 1997 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-KSB of 800 Travel Systems, Inc. for the year ended December 31, 1997. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. NOTE 2 - SALE OF COMMON STOCK In January 1998, the Company sold 1,350,00 shares of common stock ($5.00) and 3,105,000 warrants ($.125). The following summarizes the transactions: Proceeds: Common stock $6,750,000 Warrants 388,125 ---------- 7,138,125 Expenses: Underwriter commissions and expenses 927,956 Printing 226,000 Other 1,098,645 ---------- Net proceeds $4,885,524 ========== F-6 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 AND 1997 NOTE 3 - ACQUISITION In January 1998, the Company acquired selected assets and selected liabilities of Joseph Stevens Group, Inc. in exchange for the issuance of 383,733 shares of its common stock, issuance of 250,000 warrants to purchase common stock and the payment of $1,578,000 purchase acquisition note. The following summarizes the transaction: Purchase Price: Cash payment on note $1,578,000 Common stock 1,916,665 Warrants 31,250 Cash payments 536,665 Acquisition expenses 345,315 Capital lease assumed 70,000 ---------- $4,477,895 ========== Assets Acquired: Equipment $ 340,000 Trademarks 200,000 Goodwill, amortized over 25 years 3,937,895 ---------- $4,477,895 ========== In March 1998, the Company entered into an agreement with the previous stockholders of Joseph Stevens Group, Inc. to purchase a telephone switch and certain other fixed assets and to release the Company from its guaranty of the future value of the Company's common stock issued to the principal stockholder of Joseph Stevens Group, Inc. for payments totalling $490,000. These have been included in the calculation of the purchase shown above. Prior to the January 1998 acquisition of selected assets and selected liabilities of Joseph Stevens Group, Inc., the Company entered into an Interim Operating Agreement pursuant to which the Company operated Joseph Stevens business for the account of the Company effective January 1, 1997. As a result, the statements of operations for the three and nine months ended September 30, 1997 and cash flows for the nine month period ended September 30,1997, include the operations of the Joseph Stevens Group, Inc. for the period January 1, 1997 to September 30, 1997. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to state fairly the information set forth therein. Operating results for the three and nine months ended September 30,1997 are not necessarily indicative of the results that would have occurred had they been a single entity during the period. F-7 800 TRAVEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 AND 1997 NOTE 4 - NET INCOME (LOSS) PER COMMON SHARE The following table reconciles the numerators and denominators of the basic and diluted income per share computations, as computed in accordance with FAS 128:
Nine months ended Three months ended September 30, September 30, -------------------- ----------------- 1998 1997 1998 1997 Net earnings (loss) - (numerator) $ 130,909 $ (64,123) $ 199,341 $ 98,305 =========== =========== =========== =========== Basic: Weighted average shares outstanding (denominator) 7,451,035 5,956,859 7,497,096 5,959,709 =========== =========== =========== =========== Net earnings (loss) per common share - basic $ .02 $ .01 $ .03 $ .02 =========== =========== =========== =========== Diluted: Weighted average shares outstanding 7,451,035 5,956,859 7,497,096 5,959,709 Effect of dilutive options 383,035 -- 444,947 240,000 ----------- ----------- ----------- ----------- Adjusted weighted average shares (denominator) 7,834,070 5,956,859 7,942,043 6,199,709 =========== =========== =========== =========== Net earnings (loss) per common share - diluted $ .02 $ .01 $ .03 $ .02 =========== =========== =========== ===========
All warrants outstanding are excluded from the calculation of adjusted weighted average shares, as they are anti-dilutive. Options for 460,000 shares of common stock are excluded from the adjusted weighted average shares for the nine months ended September 30, 1997, as they are anti-dilutive. NOTE 5 - INCOME TAXES Income taxes have not been provided on the earnings for the three months ended September 30, 1998 and the nine months ended September 30, 1998 due to the utilization of net operating loss carryovers that have not been previously recognized. NOTE 6 - COMMITMENTS AND CONTINGENCIES The Company has entered into an agreement with an outside consultant to supervise the development of the Company's new interactive website. The total cost of such development is expected to be approximately $350,000. As of September 30, 1998, the Company has capitalized approximately $90,000 in software costs related to this project. F-8 Item 2. Management 's Discussion and Analysis of Financial Condition and Results of Operations 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 was formed in November 1995 to acquire certain assets of and assume certain liabilities of 1- 800-Low Airfare, Inc. (the "Predecessor Business"). The acquisition was consummated on December 1, 1995. To expand its operations, in November 1996 the Company entered into a Merger Agreement with the Joseph Stevens Group, Inc. ("Stevens") and its sole shareholder, Joseph Stevens Group, LLC ("JSG"). Prior to the consummation of the merger with Stevens (the "Stevens Merger"), Stevens operated as an independent travel agency specializing in the telemarketing of airline tickets. Pursuant to the Merger Agreement, simultaneously with the closing of the Company's initial public offering on January 21, 1998, Stevens was 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 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 a consolidator that sells tickets on TWA at a discount (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. 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. Set forth below for the periods indicated are the gross dollar amounts of reservations booked, revenues and revenues as a percentage of reservations, the gross dollar amount of expenses, expenses as a percentage of revenues, net loss as a percentage of revenues and changes therein for the nine and three month periods ended September 30, 1998 and 1997. -2-
Nine Nine Months Ended Months Ended Sept. 30, 1998 % Sept. 30, 1997 % Change % -------------- --- -------------- --- ------ --- Gross Reservations .... $ 59,234,429 $ 39,152,651 $ 20,081,778 51 Revenues (including override and service charges) 8,579,411 15* 6,016,416 14* 2,562,995 43* OPERATING EXPENSES: Employee Costs ...... 4,012,845 47** 2,905,981 48** 1,106,864 38** Telephone ........... 1,442,029 17 787,488 13 654,541 83 Ticket Delivery ..... 808,808 9 523,789 9 285,019 54 Advertising ......... 236,852 3 178,180 3 58,672 33 General and Administrative .... 2,006,041 23 1,605,833 27 400,208 25 Total Operating Expenses ............ 8,506,575 99 6,001,271 100 2,505,304 42 Other Income (net) 58,073 1 (79,268) -- 137,341 -- Net Earnings (Loss) ... 130,909 2 (64,123) 1 195,032 -- ============ === ============ === ============ =====
- ---------- * Revenues as a percentage of gross reservations. ** Expenses as a percentage of revenues.
Three Three Months Ended Months Ended Sept. 30, 1998 % Sept. 30, 1997 % Change % -------------- --- -------------- --- ------ --- Gross Reservations .... $ 23,265,047 $ 15,576,009 $ 7,689,038 50 Revenues (including override and service charges) 3,504,093 15* 2,294,765 15* 1,209,328 53* OPERATING EXPENSES: Employee Costs ...... 1,685,053 48** 1,130,367 49** 554,686 49** Telephone ........... 631,380 18 286,242 12 345,138 121 Ticket Delivery ..... 361,259 10 195,863 9 165,396 84 Advertising ......... 82,493 2 71,136 3 11,357 16 General and Administrative .... 564,730 16 495,669 22 69,061 14 Total Operating Expenses ............ 3,324,915 95 2,179,277 95 1,145,638 53 Other Income (net) 20,163 1 (17,183) -- 37,346 -- Net Earnings (Loss) ... 199,341 6 98,305 4 101,036 103 ============ === ============ === ============ ===
- ---------- * Revenues as a percentage of gross reservations. ** Expenses as a percentage of revenues. -3- Results of Operations In connection with the Stevens Merger, the Company and Stevens entered into an Interim Operating Agreement pursuant to which the Company operated Stevens' business for the account of the Company effective January 1, 1997 through the closing of the Stevens Merger. The numbers in the tables above and in the discussion below include the operations of Stevens. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Revenues for the nine months ended September 30, 1998 ("1998") increased 43% to $8,579,411 compared to $6,016,416 for the nine months ended September 30, 1997 ("1997"). The increased revenues reflect the 51% increase in gross reservations booked in 1998 ($59,234,429) as compared to 1997 ($39,152,651). The gross reservation increase and the resulting revenue increase is largely attributable to the increase in the volume of calls handled at the Company's reservation centers as a result of increases in the number of reservation agents and certain operating efficiencies. The Company employed approximately 200 reservations agents as of September 30, 1997 as compared to 119 reservation agents employed as of December 31, 1998. As a percentage of gross reservations, revenues decreased to 14.5% of gross reservations during 1998 from 15.4% of gross reservations during 1997. The decrease in revenues as a percentage of gross reservations reflects the industry-wide decrease to 8% from 10% generally paid by airlines to reservation agents. Operating expenses for 1998 increased 42% to $8,506,575 compared to $6,001,271 for 1997. The increase in operating expenses resulted primarily from an increase in the Company's payroll, commissions and employee benefits expenses, which increased 38% to $4,012,845 in 1998 from $2,905,981 in 1997. The increase in payroll expenses reflects the absorption of the employees of Stevens as well as the increase in the number of reservation agents which occurred at both reservation centers. In addition, consistent with the increase in the volume of tickets sold by the Company, the Company also recorded increases in its telephone and ticket delivery expenses. Also contributing to the increase in operating expenses was an increase in the Company's advertising expense of 33% to $236,852 in 1998 from $178,180 in 1997 as the Company increased the number of yellow page directories in which it advertises and absorbed the cost of advertising its and Stevens' toll free numbers. The Company's general and administrative costs increased 25% to $2,006,041 in 1998 compared to $1,605,833 in 1997. Despite the increase in general and administrative expenses over the two periods, general and administrative expenses decreased as a percentage of revenues to 23% in 1998 as compared to 27% in 1997. The increase in the foregoing operating expenses was offset, in part, by an increase in interest and other income, on a net basis to $58,073 in 1998, from a net expense of ($79,268) in 1997. During the first three quarters of 1998 the Company's operating income was $72,836, slightly improved over the Company's operating income of $15,145 in the first three quarters of 1997. This improvement reflects the substantial increase in revenues, offset by the net changes in operating expenses outlined above. Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Revenues for the three months ended September 30, 1998 ("Third Quarter '98") increased 53% to $3,504,093 compared to $2,294,765 for the three months ended September 30, 1997 ("Third Quarter '97"). The increased revenues reflect the 50% increase in gross reservations booked in Third Quarter '98 ($23,265,047) as compared to Third Quarter '97 ($15,576,009). The gross reservation increase and the resulting revenue increase is largely attributable to the increase in the volume of calls handled at the -4- Company's reservation centers as a result of increases in the number of reservation agents and certain operating efficiencies. As a percentage of gross reservations, revenues increased to 15.1% of gross reservations during Third Quarter '98 from 14.7% of gross reservations during Third Quarter '97. The increase in revenues as a percentage of gross reservations reflects the Company's ability to increase its revenues through overrides and service fees charged to customers offset , in part, by the loss of revenues resulting from the drop in basic commission rates from 10% to 8%. Operating expenses for Third Quarter '98 increased 53% to $3,324,915 compared to $2,179,277 for Third Quarter '97. The increase in operating expenses resulted primarily from an increase in the Company's payroll, commissions and employee benefits expenses, which increased 49% to $1,685,053 in Third Quarter '98 from $1,130,367 in Third Quarter '97. The increase in payroll expenses reflects the absorption of the employees of Stevens as well as the increase in the number of reservation agents which occurred at both reservation centers. Consistent with the increase in the volume of tickets sold by the Company, the Company also recorded increases in its telephone and ticket delivery expenses. Also contributing to the increase in operating expenses was an increase in the Company's advertising expense of 16% to $82,493 in Third Quarter '98 from $71,136 in Third Quarter '97 as the Company increased the number of yellow page directories in which it advertises. The Company's general and administrative costs increased 14% to $564,730 in Third Quarter 1998 compared to $495.669 in Third Quarter '97. Despite the increase in general and administrative expenses over the two periods, general and administrative expenses decreased as a percentage of revenues to 16% in Third Quarter '98 as compared to 22% in Third Quarter '97. The increase in the foregoing operating expenses was offset, in part, by an increase in interest and other income, on a net basis to $20,163 in Third Quarter '98, from a net expense of ($17,183) in Third Quarter '97. During Third Quarter '98 the Company's operating income was $179,178, an improvement over the $115,488 in operating income recorded in Third Quarter "97. The improvement in operating income reflects the substantial increase in revenues, offset by the net changes in operating expenses outlined above. Liquidity and Capital Resources Prior to completion of its initial public offering in January 1998, the Company financed its operations from capital contributions, loans, and through services provided by certain vendors to be paid out of future revenues. In January 1998 the Company completed its initial public offering of its securities from which it derived net proceeds of $4,885,524. A portion of such proceeds was used to acquire the Joseph Stevens Group, Inc. and to satisfy liabilities accrued prior to completion of the offering. The Company used $1,253,855 in operating activities in the first nine months of 1998 as compared to $166,426 generated by operating activities in the first nine months of 1997. The use of cash in 1998 reflects the substantial reduction in the Company's accounts payable and accrued expenses and an increase in prepaid assets. 1998 capital expenditures were primarily for leasehold improvements, computers and other operating equipment purchased out of the initial public offering. During the third quarter of 1998 the Company generated in excess of $300,000 from operating activities. Further, the Company projects that if its revenues continue to grow as they did during the first nine months of 1998 it will continue to generate positive cash flow from operations, enabling it to preserve its working capital or apply it as it deems appropriate, as, for example, in completing the Company's electronic commerce initiative. For example, in March 1998 the Company used $558,000 to redeem 184,615 shares issued to JSG in connection with the Stevens Merger and to obtain the release of the Make-Whole Rights granted to JSG in the Merger Agreement. -5- YEAR 2000 The Company is aware of the uncertainty surrounding the ability of computer systems to function properly with the coming of the year 2000 and related issues. Management has begun to assess and in the immediate future will complete its assessment of the functionality of the Company's computer systems. Upon completion of this assessment the Company will determine which of the Company's hardware and software systems should be upgraded or replaced. Much of the computer hardware and software used by the Company is provided by Sabre pursuant to its agreement with the Company. Sabre has begun the process of implementing upgrades to the software provided to the Company to ensure that no disruptions to the reservation system are encountered as a result of the onset of the Year 2000. The Company intends to continue to work with SABRE to ensure that the travel reservation systems operate properly beyond 1999. PART 2 OTHER INFORMATION Item 6. Exhibits, Lists and Reports on Form 8-K. (a) Exhibits. Exhibit Description - ------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K. Not Applicable. -6- SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 13, 1998 800 TRAVEL SYSTEMS, INC. (Registrant) By: /s/ Mark D. Mastrini -------------------------------- Mark D. Mastrini, President and Chief Executive Officer -7- EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 2,429,881 0 0 0 0 3,466,566 888,704 219,424 9,633,945 1,289,719 29,174 0 0 74,971 11,823,592 9,633,945 5,921,691 8,579,411 0 0 8,506,575 0 18,061 130,909 0 130,909 0 0 0 130,909 .02 .02
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