Classic Vacation Group, Inc.

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Classic Vacation Group, Inc.

One North First Street, Suite 300
San Jose, California 95113
U.S.A.
Telephone: (408) 882-8455
Fax: (408) 287-9272
Web site: http://www.gvg.com

Public Company
Incorporated: 1998
Employees: 490
Sales: $132.9 million (2000)
Stock Exchanges: American
Ticker Symbol: CLV
NAIC: 561520 Tour Operators

Classic Vacation Group, Inc. pioneered consolidation of wholesale travel vacation providers when it formed with the acquisition of several leading companies in the late 1990s. Its financial difficulties led to a dismantling of the company, as minor subsidiaries were sold in late 2001 and early 2002. In January 2002, Expedia, Inc., an Internet-based travel company, purchased the primary subsidiary, Classic Custom Vacations, which had become one of the largest wholesale vacation providers in the nation under Classic Vacation Group. Expedia paid $52 million, $5 million in cash and $47 million stock. Three Cities Research, the primary note-holder for Classic Vacation Group, and Thayer Capital Partners, the primary stockholder, planned to sell the Expedia stock and to pay common shareholders at least $0.26 per share from the proceeds. They planned to liquidate remaining assets and to distribute those proceeds to the public shareholders as well.

Wholesale Travel Providers: 1998

Classic Vacation Group originated with the recapitalization of Allied Bus Corporation, which was then renamed Global Vacations Group (GVG). Roger Ballou formed GVG to consolidate wholesale vacation package providers into a larger, streamlined public company. Ballou brought 19 years experience in the travel industry, including such positions as former CEO of Alamo Rent-a-Car and former president of American Express Travel Services. Ballou’s background enabled him to attract investors and experienced executives to GVG. He hired J. Raymond Lewis, past president of Certified Vacations, Inc., as COO, and Walter Berman, former CFO of American Express Travel, for the same position at GVG. Thayer Capital Partner, headed by Fredric Malek, formerly president of Marriott Hotels and Resorts and Northwest Airlines, invested $75 million to fund acquisitions.

The predecessor of GVG, New York City-based Allied Bus Corporation, doing business as Allied Tours, provided escorted bus tours to European visitors to the United States. Founded in 1959, Allied marketed the tours to wholesale travel operators overseas; these operators sold the travel packages through retail travel agents. Eventually Allied added independent air-hotel packages and fly-drive packages, and offered vacation packages to Hawaii, Canada, Mexico, and the Caribbean. Allied expanded to wholesale companies in Asia and Central and South America, becoming one of the largest providers of in-bound, wholesale travel. In 1993, Allied began to offer escorted bus tours to travel agents in the United States. In 1997, Allied recorded $24.3 million in revenues, and a net loss of $1.1 million.

Concurrent with the capital investment of Thayer Capital in late March, GVG began to consolidate wholesale travel companies with the completion of two acquisitions. GVG purchased Haddon Holidays, Inc. of Mount Laurel, New Jersey, for $7.7 million. In business since 1975, Haddon provided upmarket vacation packages to Hawaii, Australia, and New Zealand. The company’s travel products included escorted or independent travel packages, offering airfare, hotel, ground transportation, and sightseeing options to independent travelers. Haddon recorded $7.1 million in revenues and $88,000 net income in 1997. GVG expected to benefit from Haddon’s exclusive contract with United Airlines to continue its plans for streamlined expansion. Executive vice-president Cheryl Van Horn stayed with Haddon under the new ownership.

In April, GVG acquired Classic Custom Vacations, Inc. in San Jose, California, for $18.5 million. As the name suggests, Classic tailored vacation packages according to the customer’s needs, offering airfare, car rental, brand-name hotels, and sightseeing trips. The company arranged customized sightseeing tours and excursions as well. For 20 years Classic Hawaii was the company’s primary travel destination. In 1995, Classic Custom introduced Classic America, to 20 U.S. destinations, and in 1998, introduced Classic Europe, to Italy, Greece, and Turkey. Classic reported $42.9 million in revenues in 1997 and $1 million in net profit. GVG retained Ron Letterman as president of Classic Custom.

In May 1998, GVG purchased two wholesale travel operators offering mid-priced vacation packages. For $27.2 million GVG purchased most of the assets of MTI Vacations of Oak Brook, Illinois. In addition to providing wholesale vacation packages for travel to Hawaii, MTI also handled Amtrak-sponsored vacation packages and reservations for Hyatt vacation packages. They also operated credit card reward fulfillment programs. In 1997, MTI earned $2.3 million in net income from $29.2 million in revenues.

GVG acquired Globetrotters, Inc., of Cambridge, Massachusetts, for $5.8 million. Globetrotters offered vacations packages to Florida, Mexico, the Caribbean, as well as other destinations, offering accommodations at brand name hotels. GVG merged the operations of the two companies, transferring Globetrotters to MTFs computer reservations platform and to the reservations center near Chicago; however, GVG planned to operate the division under the Globetrotters brand. Globetrotters president Bill Maulsby remained in that position, overseeing the newly combined unit.

Through its acquisitions GVG created a two-tiered marketing system. GVG merged Haddon and Classic Custom, though it continued to use both brand names for upmarket travel planning. MTI and Globetrotters provided mid-priced vacation packages. The consolidation of these companies created a foundation for high volume, high margin operations for vacations packages that sold at retail for $750 and up per person. GVG sought to simplify operations by limiting hotel and car rental suppliers to the most recognized and trusted brands, thus reducing the number of vendors and obtaining low-cost, high-volume rates which could be translated into competitive pricing. Also, the company simplified by discontinuing certain travel packages at Globetrotters.

While Ballou did not intend for GVG to develop so rapidly, he found more opportunities for acquisition than anticipated. GVG was the first to attempt a consolidation of wholesale travel providers, forming a prototype that other companies followed. Private travel companies sought the competitive edge of assimilation into a larger company. Selling $507 million in wholesale travel in 1998, GVG subsidiaries recorded $114.9 million in combined revenues for the entire year. Under GVG ownership, that meant $90.4 million in revenues and $4.7 million in net income for 1998. Approximately 50 percent of revenues originated from travel vacations to Hawaii.

Initial Public Offering and Acquisitions

GVG’s rapid growth led Ballou to advance the anticipated initial public offering of stock, moving it forward about 18 months to July 1998. GVG offered 3 million shares of stock at $14 per share and raised $36.2 million, after expenses. GVG became the first vacations wholesaler to be listed on the New York Stock Exchange.

The stock offering provided funds for working capital and for additional acquisitions. In March 1999, GVG purchased Long Island-based, family-run Friendly Holidays for $10.2 million in cash plus an additional payment, up to $2.8 million, depending on operating results. With revenues of $13 million in 1998, Friendly provided mid-range, wholesale travel to the Caribbean, Mexico, Central America, and South America. The company planned to use Friendly as a lead negotiator for volume inventory for these destinations, including a Globetrotters Mexico package. GVG retained the Friendly Holidays brand but integrated operations into its Chicago reservations system.

In April, GVG acquired both International Travel & Resorts and Island Resort Tours for $5 million, plus an additional payment, up to $1.7 million, based on future earnings. International Travel & Resorts provided representation and marketing services for three- to five-star, independent hotels in the Caribbean and private-label representation for hotel groups in the Caribbean, Mexico, Central America, mainland United States, and Hawaii. GVG also hoped to extend hotel representation services to Europe and South America. Island Resort Tours offered vacation packages to several Caribbean islands, so GVG integrated that company into operations at Globetrotters/MTI Vacations.

In promoting its wholesale travel packages, GVG fostered preferred supplier relationships with its travel agent customers, notably American Automobile Association, Carlson Wagonlit Travel, American Express Travel, Vacation.com, Leisure Travel Group, and Giants. GVG changed its commission structure to reward cumulative sales by travel agents, offering commission overrides based on sales from its different brands, with higher percentage rates given for more expensive travel packages. For 1999, travel GVG offered a $50 bonus for every five reservations made with Classic Custom or Haddon.

Key Dates:

1998:: Global Vacations Group forms to consolidate wholesale vacation providers.
1999:: Problems related to merger of MTI and Globetrotters cause financial losses.
2000:: Executive changes lead to appointment of new CEO.
2001:: The company relocates to San Jose and takes the name Classic Vacation Group.
2002:: Expedia, Inc. acquires Classic Custom Vacations and CLV discontinues operations.

Using the capabilities of its travel wholesale subsidiaries, GVG began to expand its travel products line in 1999. Friendly introduced vacation packages with airfare to Rio de Janeiro and Globetrotters added vacation packages to popular American ski resorts and to Europe. Classic Custom expanded its travel options to Italy and added travel packages to Spain and Portugal, where Classic Custom chose 26 luxury resorts based on distinctiveness, service, and location. In 2000, Classic Custom began to offer travel packages to England and France. GVG created private label travel packages for Meridian Corporation under the name Better Homes and Gardens Vacations, using the popular magazine as a base for advertising. The joint venture offered national hotel brands to popular destinations, including New York, Florida, Hawaii, California, and Mexico.

Computer capability was a primary concern at GVG, creating simplified reservations systems for its retail travel agent customers, as well as for direct consumer sales on the company website. In June, the company purchased most of the assets of Trase Miller Solutions. Trase Miller designed and implemented Trips Pro, GVG’s reservation system, and back office and market support systems, including the website and online booking. Also, GVG became the first operation to offer travel packages on Yahoo! Travel, the premier online travel site. GVG brand travel packages were made available on the front page of the new Specials area.

GVG launched a new auction website, vacations4auction.com, and began to offer tour products on FairMarket.com. Bids for vacation travel began as low as $1 for low season travel to Hawaii, Caribbean, Europe, and certain U.S. cities. The bidding period lasted ten days, being open to travel agents and consumers.

By summer 1999, problems with the integration of MTI and Globetrotters became apparent. The problems related to merging operations and converting Globetrotters to the Trips Pro reservation system, resulting in poor service to travel agents and lost business. Also, Globetrotters lost some of its original customer base due to delays in executing new promotional packages. Lower sales impacted the cost-structure of its hotel room inventory, resulting in higher room costs for Globetrotters. Lower earnings at Globetrotters led to lower stock prices and executive changes. Maulsby resigned and Cheryl Van Horn, then senior vice-president of strategic planning, took over as president of Globetrotters. In addition, travel sales had declined industry-wide. Allied tours reported lower revenues as the weak economies in Asia and Latin America reduced travel to the United States from these areas. In 1999 GVG reported revenues of $129 million and net loss of $3.5 million.

GVG Restructures Operations: 2000

By June 2000, GVG’s stock price dropped to approximately $3.00 per share and the company’s market capitalization fell to $38.7 million, below the New York Stock Exchange minimum of $50 million. GVG raised $27.5 million in funding from Three Cities Research, a private, venture capital firm. The investment consisted of nine percent, seven-year subordinated notes to convertible at $5.25 per share. GVG used the funds to pay debt and for working capital. Thus, the company gained approval to retain its position on the Exchange, with quarterly reviews. Ray Lutz, president of the Globetrotters private label operations, took over Globetrotters in June 2000.

In August, the company decided to merge the Friendly Holidays, Haddon, and Globetrotters brands into Classic Custom under Ron Letterman, also named vice-chairman of GVG’s board. At the same time, GVG discontinued the pilot program for Better Homes and Gardens Vacations. The restructuring left the company with four operating divisions: private label travel and reservations; Allied Tours; Island Resort Tours, including International Travel & Resorts; and Classic Custom. The change made Classic Custom the third largest wholesale travel company in the industry.

Classic Custom adapted to the new structure by extending its vacation packages to include mid-priced hotels. Since Classic Custom offered 75 percent of the same hotels as Globetrotters, this allowed the company to eliminate overlap with Globetrotter. Classic Custom then added new hotels to expand availability. GVG halted new sales of Globetrotters trips to Florida by September and to other destinations by the end of the year. GVG transferred Globetrotters to the personal computer reservations system used by Classic Custom, but it continued to use the Globetrotters reservation center in Chicago. GVG continued to use Trips Pro for private label vacation reservations. While GVG cut staff, including management, Classic Custom hired 45 reservation agents.

Restructuring the company resulted in a write-down of $35 million in tangible and intangible assets related to Trips Pro and employee severance. GVG expected saving to add up to $8 million to operating income. For 2000, GVG reported a 5.5 percent increase in revenues, to $132.9 million, and a net loss of $44.7 million. GVG executives and stock analysts attributed some of the company’s problems to the rapid growth and slow assimilation of the acquisitions. The financial benefits of volume business took too long to manifest. Moreover, GVG leaders made different decisions than they might have as a private company, perhaps taking fewer risks out of concern for shareholder value.

Financial difficulties prompted a series of changes at GVG, beginning with executive leadership. Ballou resigned in August, followed by CFO Jay Stuart in October. Malek, of Thayer Capital, became interim CEO until the board promoted Ron Letterman to the position in November. Debbie Lundquist, CFO at Classic Custom, took that position at GVG. One of Letterman’s first decisions was to shift GVG stock trading to the less restrictive American Stock Exchange in January 2001, citing that exchange as better suited to the size of the company and its shareholder base. GVG became Classic Vacation Group (CLV) in May 2001 and relocated to Classic Custom’s offices in San Jose.

The September 11th terrorist attack on the World Trade Center in 2001 further exacerbated financial problems at CLV, as all travel and new reservations came to an immediate halt and customers cancelled travel reservations. In October, CLV laid off 220 of 710 employees. CLV attempted to offset the decline in sales by offering travel agents a 20 percent commission on tours booked by the end of the year. Also in October, CLV obtained $24.5 million in financing from CVG Investment, LLC, an affiliate of Three Cities Research and Thayer Capital. In addition to providing working capital, the funds allowed CLV to initiate a stock repurchase plan with the intention to take the company private. CLV initiated a tender offer of $0.15 per share; the stock traded at approximately $0.65 per share at that time.

The tender offer began the dismantling of CLV. Stephen Hicks, the original owner of International Travel & Resorts and Island Resort Tours, repurchased those companies from CLV for $500,000 in November. The tender offer was extended into late January 2002 to accommodate other divestitures. In January, Kouni Holdings, a travel services company in Switzerland, purchased Allied Tours. The senior management team of Globetrotters and other investors purchased Globetrotters. By that time the subsidiary comprised Amtrak Vacations and a credit card rewards fulfillment program, Hyatt vacations reservations having been transferred to Classic Custom Vacations.

The final demise of CLV occurred when Expedia, Inc., an Internet-based travel company, acquired Classic Custom Vacations, retaining Letterman as president. Expedia paid $52 million, $5 million in cash and the balance in stock for the retirement of $47 million in debt. Expedia assumed $30 million in liabilities involving customer deposits and other working capital accounts. Three Cities Research, the primary noteholder for CLV, and Thayer Capital Partners, the primary stockholder, planned to sell the Expedia stock and to pay common shareholders at least $0.26 per share from the proceeds. They planned to liquidate remaining assets and to distribute those proceeds to the public shareholders as well.