UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-29296
TRAVEL SERVICES INTERNATIONAL, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-2030324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 No. Flagler Drive, Suite 300 - Pavillion
West Palm Beach, FL 33401
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(561) 802-3396
------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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 __ No X
The number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of August 28, 1997, was 8,781,726.
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TRAVEL SERVICES INTERNATIONAL, INC.
FORM 10-Q
INDEX
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION.........................................................................3
Item 1. Financial Statements
General Information ..........................................................................3
Balance Sheets as of December 31, 1996, June 30, 1997, and
June 30, 1997 (Pro Forma).....................................................................4
Statements of Income for the Three Months Ended June 30, 1996 and 1997,
and the Six Months Ended June 30, 1996 and 1997...............................................5
Statements of Pro Forma Combined Income for the Three Months Ended
June 30, 1996 and 1997, and the Six Months Ended June 30, 1996 and 1997.......................6
Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997......................7
Notes to Financial Statements.................................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................13
PART II OTHER INFORMATION............................................................................22
Item 1. Legal Proceedings............................................................................22
Item 4. Submission of Matters to a Vote of Security Holders..........................................22
Item 5. Other Information............................................................................22
Item 6. Exhibits and Reports on Form 8-K.............................................................23
SIGNATURES.....................................................................................................24
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Travel Services International, Inc. ("TSI" or the "Company") was established to
create a leading single source distributor of specialized leisure travel
services to both travel agents and travelers. On July 28,1997, simultaneously
with the closing of its initial public offering (the "Offering") of its common
stock (the "Common Stock"), TSI acquired five specialized distributors of travel
services in separate combination transactions (the "Combinations"). Through the
Combinations, TSI acquired the outstanding capital stock of Cruises Inc.
("Cruises Inc.") and D-FW Tours, Inc. and D-FW Travel Arrangements, Inc.
(collectively, "D-FW Tours"), and substantially all of the assets of Auto
Europe, Inc. (Maine) ("Auto Europe"), Cruises Only, Inc. ("Cruises Only") and
800-Ideas, Inc. ("Travel 800") (each a "Founding Company" and collectively the
"Founding Companies").
The consideration for the Combinations consisted of cash and Common Stock. The
Combinations are accounted for under the purchase method of accounting. Auto
Europe has been designated as the accounting acquiror for financial statement
presentation purposes in accordance with Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 97, which states that the combining
company which receives the largest portion of voting rights in the combined
corporation is presumed to be the acquiror for accounting purposes. Therefore,
the accompanying historical financial statements as of December 31, 1996 and
June 30, 1997 and for the three month and six month periods ended June 30, 1996
and 1997 that are presented as the historical financial statements of the
registrant are statements of Auto Europe. Unless the context otherwise
requires, all references herein to the Company include Auto Europe and the other
Founding Companies.
Operating results for interim periods are not necessarily indicative of the
results for full years. The financial statements included herein should be read
in conjunction with the Pro Forma Combined Financial Statements of the Company
and the related notes thereto, the Financial Statements of TSI, Auto Europe,
Cruises Inc., Cruises Only and Travel 800 and related notes thereto, and
management's discussion and analysis of financial condition and results of
operations related thereto, all of which are included in the Company's
Registration Statement on Form S-1 (No. 333-27125), as amended (the
"Registration Statement"), filed with the SEC in connection with the Offering.
3
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TRAVEL SERVICES INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
(UNAUDITED) (UNAUDITED)
------------ ----------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 6,018 $ 16,484
Trade and other receivables, net of
allowance of $108 for pro forma - 134 1,987
Receivables from stockholder and employees 370 513 580
Other current assets 52 43 737
---------- ----------- ------------
Total current assets 422 6,708 19,788
Property and equipment, net 4,825 4,997 9,070
Goodwill - - 41,700
Other assets 2,203 2,203 90
---------- ----------- ------------
Total assets $ 7,450 $ 13,908 $ 70,648
========== =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Bank overdraft $ 672 $ - $ -
Line of credit and short-term debt 2,300 - -
Current maturities of long-term debt 204 105 504
Trade payables, customer deposits and deferred income 1,774 7,874 13,552
Due to travel service providers 1,790 4,137 5,110
---------- ----------- ------------
Total current liabilities 6,740 12,116 19,166
Long-term debt, net of current maturities 1,880 1,840 4,190
Deferred income taxes - - 56
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none outstanding - - -
Common stock, $0.01 par value; 50,000,000 shares
authorized; 8,781,726 shares outstanding - - 88
Class A voting common stock, no par value; 1,000
authorized shares; 800 shares outstanding 1 1 -
Class B nonvoting common stock, no par value; 50,000
authorized shares; 800 shares outstanding 40 40 -
Additional paid-in capital 96 96 49,790
Accumulated deficit (1,307) (185) (2,642)
---------- ----------- ------------
Total stockholders' equity (deficit) (1,170) (48) 47,236)
---------- ----------- ------------
Total liabilities and stockholders' equity
(deficit) $ 7,450 $ 13,908 $ 70,648
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1997 1996 1997
------- ------------ ------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 9,773 $ 12,422 $ 15,537 $ 20,242
Operating expenses 6,655 7,995 11,270 13,718
-------- -------- -------- --------
Gross profit 3,118 4,427 4,267
General and administrative expenses 2,121 3,230 3,842 5,074
-------- -------- -------- --------
Income from operations 997 1,197 425 1,450
Interest expense and other, net 54 52 96 126
-------- -------- -------- --------
Net income $ 943 $ 1,145 $ 329 $ 1,324
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
STATEMENTS OF PRO FORMA COMBINED INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1996 1997 1996 1997
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 17,563 $ 22,812 $ 29,201 $ 37,938
Operating expenses 10,854 13,510 19,018 23,386
------------ ---------- ----------- -----------
Gross profit 6,709 9,302 10,183 14,552
General and administrative expenses 2,686 3,331 4,964 5,959
Goodwill amortization 298 298 596 596
------------ ---------- ----------- -----------
Income from operations 3,725 5,673 4,623 7,997
Interest expense and other, net 12 85 81 200
------------ ---------- ----------- -----------
Income before income taxes 3,713 5,588 4,542 7,797
Provision for income taxes 1,673 2,515 2,046 3,504
------------ ---------- ----------- -----------
Net income $ 2,040 $ 3,073 $ 2,496 $ 4,293
============ ========== =========== ===========
Pro forma net income per share $ 0.23 $ 0.35 $ 0.28 $ 0.49
============ ========== =========== ===========
Shares used in computing pro forma net income per
share 8,781,726 8,781,726 8,781,726 8,781,726
============ ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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<CAPTION>
TRAVEL SERVICES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
------- ------------
<S> <C> <C>
Cash from operating activities:
Net income $ 329 $ 1,324
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 321 391
Changes in operating assets and liabilities:
Trade and other receivables - (134)
Receivables from stockholder and employees 219 (143)
Other current assets (6) (9)
Other assets 32 -
Due to travel service providers (2,967) 6,665
Trade payables, customer deposits and
deferred income 5,397 1,111
--------- ---------
Net cash provided by operating activites 3,325 9,223
Cash flows from investing activities:
Purchase of property and equipment (2,407) (618)
Proceeds from sale of property and equipment 13 54
--------- ---------
Net cash used in investing activities (2,394) (564)
Cash flows from financing activities:
Net payments on short-term debt (700) (2,300)
Proceeds from long-term debt 2,415 -
Payments on long-term debt (523) (139)
Distributions to stockholders (110) (202)
Net cash provided (used) in financing --------- ---------
activities 1,082 (2,641)
Net increase in cash and cash equivalents 2,013 6,018
Cash and cash equivalents, beginning of period 14 -
--------- ---------
Cash and cash equivalents, end of period $ 2,027 $ 6,018
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 94 $ 149
========= =========
Supplemental disclosure of non-cash financing and
investing activites:
Receivable from stockholder exchanged for
non-operating assets $ 2,200 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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TRAVEL SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
TSI was established to create a leading single source distributor of specialized
leisure travel services to both travel agents and travelers. On July 28, 1997,
TSI acquired the Founding Companies for consideration consisting of cash and
Common Stock. The closing of the Offering also occurred on that date.
For financial statement purposes, Auto Europe, one of the Founding Companies,
has been identified as the accounting acquiror. Accordingly, the historical
financial statements represent those of Auto Europe prior to the Combinations
and the Offering. The Combinations were accounted for using the purchase method
of accounting. Allocations of the purchase price to the assets acquired and
liabilities assumed of the Founding Companies have been initially assigned and
recorded based on preliminary estimates of fair values and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available.
The interim financial statements as of June 30, 1997 and for the three and six
month periods ended June 30, 1996 and 1997 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
The unaudited pro forma combined financial information for the three and six
month periods ended June 30, 1996 and 1997 includes the results of TSI combined
with the Founding Companies as if the Combinations had occurred at the beginning
of each respective three and six month period. The unaudited pro forma combined
balance sheet gives effect to the Combinations and the Offering as if they had
occurred on June 30, 1997. The pro forma combined financial information includes
the effects of : (i) the Combinations; (ii) distributions of certain assets
prior to the Combinations to the former owners of the Founding Companies; (iii)
certain adjustments to salaries, bonuses, and benefits to former owners and key
management of the Founding Companies, to which such persons have agreed
prospectively (the "Compensation Differential"); (iv) reversal of the
non-recurring, non-cash compensation charge of $7.1 million recorded by TSI in
the three months ended March 31, 1997 related to Common
8
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Stock issued to founders and management of TSI; (v) provision for income taxes
as if income was subject to corporate federal and state income taxes during the
periods; (vi) repayment of long-term debt of $730,000; and (vii) amortization of
goodwill resulting from the Combinations. Prior to the Combinations, the
Founding Companies were not under common control or management; accordingly, the
pro forma combined financial information may not be indicative of or comparable
to the Company's post-Combination results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 to Financial Statements of Auto Europe, Cruises Inc., Cruises Only and Travel
800 included in the Financial Statements in the Company's Registration
Statement.
3. CREDIT FACILITY AND LONG-TERM DEBT
On July 3, 1997, the Company received a commitment letter for a $20 million
revolving line of credit and is actively negotiating the definitive terms of the
credit agreement, which also includes a term loan of approximately $3 million.
The credit facility may be used for acquisitions, capital expenditures,
refinancing of Founding Companies' debt, and for general corporate purposes. The
credit agreement will require the Company to comply with various loan covenants,
which are expected to include maintenance of certain financial ratios,
restrictions on additional indebtedness and restrictions on liens, guarantees,
advances, capital expenditures, sale of assets, and dividends. Interest on
outstanding balances will be computed based on the Eurodollar Rate plus a margin
ranging from 1.25 percent to 2.0 percent, depending on certain financial ratios.
Availability fees of 25 basis points per annum will be payable on the unused
portion of the line of credit and a facility fee will be paid equal to 5/8 of
one percent of the aggregate principal amount on the term loan. The credit
facility will have a three year term. The Company's subsidiaries will be
required to guarantee repayment of all amounts due under the credit facility.
The Company anticipates that a closing with respect to the credit agreement will
occur during September 1997.
On July 28, 1997, former stockholders of Cruises Only were released from
personal guarantees of outstanding long-term debt and, in exchange for this
release, TSI pledged $3.4 million as additional security for the debt. In early
1998, the Company plans to draw down on the term loan that is part of the
credit agreement discussed above, in order to simultaneously pay off this
existing Cruises Only debt.
Also on July 28, 1997, outstanding long-term debt of Cruises Inc. totaling
$52,000 was prepaid and the former stockholders were released from personal
guarantees of such debt.
On August 19, 1997, Auto Europe was required, in accordance with government
regulations, to prepay a second mortgage loan from the U.S. Small Business
Administration (SBA) with an outstanding balance of $730,000. This prepayment is
reflected in the pro forma combined
9
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balance sheet as of June 30, 1997. The original maturity date was October 2016
and a prepayment penalty of $53,577 was incurred. In connection with this
prepayment, the holder of the first mortgage notified Auto Europe that the
maturity date of its mortgage would be changed to August 2002, from the current
maturity date of September 2011. The accelerated maturity date will not impact
the 15 year amortization schedule for the first mortgage.
4. CAPITAL STOCK
On July 28, 1997, TSI completed the Offering, which involved the sale by TSI of
2,875,000 shares of Common Stock at a price to the public of $14.00 per share.
The net proceeds to TSI from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $33 million. Of
this amount, $28.5 million was used to pay the cash portion of the purchase
price relating to the Combinations (including working capital adjustments and
estimated reimbursements to stockholders of two of the Founding Companies that
had elected S Corporation status under the Internal Revenue Code, for certain
taxes that will be incurred by them in connection with the Combinations). The
remaining $4.5 million will be used for acquisitions and general corporate
purposes.
5. EARNINGS PER SHARE
The historical information presented represents the results of operations of
Auto Europe, the accounting acquiror, under its historical capital and income
tax structure, and does not include adjustments for the Compensation
Differential relating to Auto Europe. Accordingly, historical earnings per share
of Auto Europe are not meaningful and are not presented. The computation of pro
forma net income per share for the three and six month periods ended June 30,
1997 and 1996 are based on 8,781,726 shares outstanding, which includes the
following shares:
Issued in consideration for acquisitions of Founding Companies 3,422,225
Issued to founders and management of TSI 2,484,501
Sold pursuant to the Offering 2,875,000
---------
8,781,726
=========
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128"), which for
the Company will be effective for the year ended December 31, 1997. SFAS No. 128
simplifies the standards required under current accounting rules and replaces
the presentation of primary earnings per share and fully diluted earnings per
share with a presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ( "Diluted EPS"). Basic EPS excludes dilution and is
10
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determined by dividing net income available to common stockholders by the
weighted average of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common shares were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting rules and will be required to be disclosed.
Implementation of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share as determined under current accounting rules.
6. INCOME TAXES
Prior to the Combinations, the stockholders of Auto Europe, Cruises Only and
Travel 800 elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under these provisions, the entities were not subject to
taxation for federal purposes. Under S Corporation status, stockholders report
their share of taxable earnings or losses in their personal tax returns.
The Company intends to file a consolidated federal income tax return which
includes the operations of the Founding Companies for periods commencing on the
date of the Combinations (July 28, 1997). The Founding Companies will be
individually responsible for filing federal income tax returns based on earnings
through July 27, 1997. The provision for income taxes included in the Pro Forma
Statements of Combined Income for the three and six month periods ended June 30,
1996 and 1997 assumes the application of statutory federal and state income tax
rates and the partial non-deductibility of goodwill amortization.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the ordinary course
of business. The Company believes that none of the actions currently pending
will have a material adverse effect on its business, financial condition and
results of operations.
The Company carries a broad range of insurance coverage, including general and
business liability, commercial property, workers' compensation, and general
umbrella policies. In July 1997 the Company secured Directors and Officers and
Prospectus Liability insurance coverage with an aggregate limit of $5 million.
The Company has not incurred significant claims or losses on any of its
insurance policies during the periods presented in the accompanying financial
statements.
11
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The Company conducts a portion of its operations in leased facilities under
leases accounted for as operating leases. Minimum future lease payments under
noncancelable operating leases as of December 31, 1996 are as follows, for years
ending December 31,:
1997 $ 486,000
1998 328,000
1999 212,000
2000 180,000
2001 168,000
Thereafter 701,000
The leases provide for payment of taxes and other expenses by the Company. Total
rent expense for all operating leases was approximately $400,000 in each of the
six month periods ended June 30, 1996 and 1997.
TSI has negotiated a lease for a new corporate headquarters, with a five year
initial term, two five-year renewal options, and expansion options on adjacent
rental space. Minimum annual lease payments will be approximately $67,000, plus
a proportionate share of building operating costs.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Pro Forma
Financial Statements of the Company and related notes thereto and the Financial
Statements of TSI and the Founding Companies and related notes thereto included
in the Company's Registration Statement. Statements contained in this discussion
regarding future financial performance and results and other statements that are
not historical facts are forward-looking statements. The forward looking
statements are subject to numerous risks and uncertainties to the Company,
including but not limited to the risks associated with: successful integration
of the Founding Companies, factors affecting internal growth and management of
growth, the Company's acquisition strategy and availability of financing, the
travel industry, seasonality, quarterly fluctuations and general economic
conditions, dependence on technology and travel providers, and other factors
discussed in the Registration Statement.
RESULTS OF OPERATIONS - COMBINED
The combined results of operations of the Founding Companies for the periods
discussed herein do not represent the combined results of operations presented
in accordance with generally accepted accounting principles, but are only a
summation of the net revenues, operating expenses, gross profit, and general and
administrative expenses of the individual Founding Companies on a historical
basis, and do not include the effects of pro forma adjustments. This data may
not be comparable to and may not be indicative of the Company's post-Combination
results of operations due to a variety of factors, including: (i) the Founding
Companies were not under common control or management and had different tax and
capital structures during the periods presented; (ii) certain key management of
the Founding Companies have agreed to prospective reductions in salaries,
bonuses and benefits (Compensation Differential); (iii) the Company will incur
incremental costs related to its new corporate management and costs of being a
public company; (iv) the Company will use the purchase method of accounting and
establish a new basis of accounting to record the Combinations; and (v) the
combined data do not reflect potential benefits and cost savings the Company may
realize when operating as a combined entity. Future quarterly results may also
be materially affected by the timing and magnitude of acquisitions, integration
costs, variation in product mix, and seasonality of the travel industry. See "-
Seasonality and Quarterly Fluctuations--Combined." Accordingly, the operating
results for interim periods shown or for any other interim periods are not
necessarily indicative of the results that may be achieved for any subsequent
interim period or for a full fiscal year.
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THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 -
COMBINED
The following table sets forth certain selected combined financial data as a
percentage of revenues for the periods indicated (dollars in thousands):
THREE MONTHS ENDED JUNE 30,
--------------------------------------
1996 1997
--------------- -----------------
Net revenues $17,563 100.0% $22,812 100.0%
Operating expenses 10,854 61.8 13,510 59.2
------- ----- ------- -----
Gross profit 6,709 38.2 9,302 40.8
General and administrative expenses 4,149 23.6 5,274 23.1
Combined net revenues increased $5.2 million, or 29.9%, from $17.6 million for
the three months ended June 30, 1996 to $22.8 million for the three months ended
June 30, 1997. This increase is primarily attributable to increased sales of
travel services by the Company, including an increase in the number of airline
reservations from 66,000 in 1996 to 77,000 in 1997, an increase in the number of
European car rental reservations from 75,000 in 1996 to 90,000 in 1997, and an
increase in the number of cruise reservations from 26,000 in 1996 to 32,000 in
1997. Increases in average commission revenue per transaction were also realized
at Auto Europe, Cruises Only and D-FW Tours as a result of higher selling prices
at Auto Europe and D-FW Tours and higher effective commission rates earned at
Cruises Only. Cruises Only experienced difficulties during the three months
ended June 30, 1996 relating to its relocation to a new headquarters and
unanticipated problems with call center software installed as part of a new
telephone system. This telephone system was removed by the vendor and replaced
with a new telephone system in early July 1996.
Combined operating expenses increased $2.6 million, or 24.5%, from $10.9 million
in 1996 to $13.5 million in 1997. Approximately 73% of operating expenses in
both 1996 and 1997 are for salaries and benefits, and commissions to travel
agencies, independent contractors and employees. As a percentage of net
revenues, total operating expenses decreased from 61.8% in 1996 to 59.2% in
1997, primarily due to lower salaries and/or commissions expense as a percentage
of net revenues at Auto Europe, Cruises Inc., and D-FW Tours, offset in part by
higher salaries and commission expense as a percentage of net revenues at Travel
800.
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Combined gross profit increased $2.6 million, or 38.6%, from $6.7 million in
1996 to $9.3 million in 1997. This increase is primarily attributable to
increased sales of travel services by the Company, and lower operating expenses
as a percentage of net revenues.
Combined general and administrative expenses increased $1.2 million, or 27.1%,
from $4.1 million in 1996 to $5.3 million in 1997, and were 23.6% and 23.1%,
respectively, of net revenues. Excluding the Compensation Differential of $1.5
million in 1996 and $2.0 million in 1997, general and administrative expenses
increased $645,000, or 24.0%, from $2.7 million in 1996 to $3.3 million in 1997,
and were 15.3% and 14.6%, respectively, of net revenues. This decrease as a
percentage of net revenues was a result of spreading the Company's overhead
costs over a larger revenue base.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 -
COMBINED
THE FOLLOWING TABLE SETS FORTH CERTAIN SELECTED COMBINED FINANCIAL DATA AS A
PERCENTAGE OF REVENUES FOR THE PERIODS INDICATED (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1997
---------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $29,201 100.0% $37,938 100.0%
Operating expenses 19,018 65.1 23,386 61.6
-------- ------ ------- -----
Gross profit 10,183 34.9 14,552 38.4
General and administrative expenses 7,354 25.2 8,889 23.4
</TABLE>
Combined net revenues increased $8.7 million, or 30%, from $29.2 million for the
six months ended June 30, 1996 to $37.9 million for the six months ended June
30, 1997. This increase is primarily attributable to increased sales of travel
services by the Company, including an increase in the number of airline
reservations from 118,000 in 1996 to 137,000 in 1997, an increase in the number
of European car rental reservations from 118,000 in 1996 to 150,000 in 1997, and
an increase in the number of cruise reservations from 36,000 in 1996 to 46,000
in 1997. Increases in average commission revenue per transaction were also
realized at Auto Europe, Cruises Only and D-FW Tours as a result of higher
selling prices at Auto Europe and D-FW Tours and higher effective commission
rates earned at Cruises Only. Cruises Only experienced difficulties during the
six months ended June 30, 1996 relating to its relocation to a new headquarters
and unanticipated problems of call center software
15
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installed as part of a new telephone system. This telephone system was removed
by the vendor and replaced with a new telephone system in early July 1996.
Combined operating expenses increased $4.4 million, or 23%, from $19.0 million
in 1996 to $23.4 million in 1997. Approximately 72% of operating expenses in
1996 and 1997 are for salaries and benefits, and commissions to travel agencies,
independent contractors and employees. As a percentage of net revenues, total
operating expenses decreased from 65.1% in 1996 to 61.6% in 1997, primarily due
to lower salaries and/or commission expense as a percentage of net revenues at
Auto Europe, Cruises Inc., Cruises Only and D-FW Tours, offset in part by higher
salaries and commission expense as a percentage of net revenues at Travel 800.
Combined gross profit increased $4.4 million, or 42.9%, from $10.2 million in
1996 to $14.6 million in 1997. This increase is primarily attributable to
increased sales of travel services by the Company, and lower operating expenses
as a percentage of net revenues.
Combined general and administrative expenses increased $1.5 million, or 20.9%,
from $7.4 million in 1996 to $8.9 million in 1997, and were 25.2% and 23.4%,
respectively, of net revenues. Excluding the Compensation Differential of $2.4
million in 1996 and $2.9 million in 1997, general and administrative expenses
increased $1 million, or 20.0%, from $5.0 million in 1996 to $6.0 million in
1997, and were 17.0% and 15.7%, respectively, of net revenues. This decrease as
a percentage of net revenues was a result of spreading the Company's overhead
costs over a larger revenue base.
LIQUIDITY AND CAPITAL RESOURCES - COMBINED
During the six month period ended June 30, 1997, net cash provided by operating
activities of the Founding Companies was approximately $13.7 million, on a
historical basis, before the impact of the Compensation Differential of $2.9
million. Capital expenditures were $675,000 and net repayment of debt was $2.6
million, including short-term debt repayments of $2.3 million. Capital
distributions by the Founding Companies totaled $3.1 million during the six
month period ended June 30, 1997.
On July 3, 1997, the Company received a commitment letter for a $20 million
revolving line of credit and is actively negotiating the definitive terms of the
credit agreement, which also includes a term loan of approximately $3 million.
The credit facility may be used for acquisitions, capital expenditures,
refinancing of Founding Companies debt, and for general corporate purposes. The
credit agreement will require the Company to comply with various loan covenants,
which are expected to include maintenance of certain financial ratios,
restrictions on additional indebtedness and restrictions on liens, guarantees,
advances, capital expenditures, sale of assets, and dividends. Interest on
outstanding balances will be computed based on the Eurodollar Rate plus a margin
ranging from 1.25 percent to 2.0 percent, depending on certain financial ratios.
Availability fees of 25 basis points per annum will be payable on the unused
portion of the line of credit and a facility fee will be paid equal to 5/8 of
one percent of the aggregate principal amount on the term loan. The credit
facility will have a three year term. The Company's subsidiaries will be
required to guarantee repayment of all amounts due under the credit facility.
While the Company anticipates that a closing with respect to the credit
agreement will occur during September 1997, there can be no assurance such
closing will occur.
On July 28, 1997, TSI completed the Offering, which involved the sale by TSI of
2,875,000 shares of Common Stock, par value $.01 per share, at a price to the
public of $14.00 per share. The net proceeds to TSI from the Offering (after
deducting underwriting discounts, commissions and offering expenses) were
approximately $33 million. Of this amount, $28.5 million was used to pay the
cash portion of the purchase price of the Combinations (including working
capital adjustments and estimated reimbursements to stockholders of two of the
Founding Companies which had elected S Corporation status under the Internal
Revenue Code for certain taxes that will be incurred by them in connection with
the Combinations). The remaining approximately $4.5 million will be used for
acquisitions and general corporate purposes.
16
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On July 28, 1997, former stockholders of Cruises Only were released from
personal guarantees of outstanding long-term debt and, in exchange for this
release, TSI pledged $3.4 million as additional security for the debt. In early
1998, the Company plans to draw down on the new term loan which is part of the
credit agreement discussed above, in order to simultaneously pay off this
existing Cruises Only debt.
On July 28, 1997, outstanding long-term debt of Cruises Inc. totaling $52,000
was prepaid and the former stockholders were released from personal guarantees
of the debt.
On August 19, 1997, Auto Europe was required, in accordance with government
regulations, to prepay a second mortgage loan from the US Small Business
Administration (SBA) with an outstanding balance of $730,000. This prepayment is
reflected in the pro forma combined balance sheet as of June 30, 1997. The
original maturity date was October 2016; a prepayment penalty of $53,577 was
incurred. In connection with this prepayment, the holder of the first mortgage
notified Auto Europe the maturity date of the first mortgage will be changed to
August 2002, from the current maturity date of September 2011. The accelerated
maturity date will not impact the 15 year amortization schedule for this first
mortgage.
Each of the Founding Companies have made significant upgrades to their
technology systems in the past few years. Continued growth of the Founding
Companies and integration of their systems will require ongoing capital
expenditures in the short term and long term. It is anticipated that integrating
these systems will result in increased ability to cross sell the products and
services of the Founding Companies. The Company has recently begun its study of
the feasibility of integrating the systems of the Founding Companies;
consequently, the Company has not yet established its capital needs or timetable
for such integration. Capital needs for technology are also likely to change as
additional acquisitions are made.
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The Company will continue to pursue strategic acquisition opportunities. The
Company cannot predict the timing, size or success of any acquisition effort,
nor the associated potential capital commitments. The Company plans to fund
future acquisitions primarily through a combination of the remaining net
proceeds from the Offering, cash flows from operations and borrowings, including
borrowings under the credit facility currently being negotiated, as well as
issuances of additional equity. The Company plans to register an additional
3,000,000 shares of its Common Stock under the Securities Act for use as
consideration in future acquisitions. To the extent other new sources of
financing are necessary to fund future acquisitions, there can be no assurance
that the Company can secure such additional financing if and when it is needed
or on terms acceptable to the Company.
SEASONALITY AND QUARTERLY FLUCTUATIONS - COMBINED
The domestic and international leisure travel industry is extremely seasonal.
The results of each of the Founding Companies have been subject to quarterly
fluctuations caused primarily by the seasonal variations in the travel industry,
especially the leisure travel segment. Net revenues and net income for the
Founding Companies are generally higher in the second and third quarters. The
Company expects this seasonality to continue in the future on a combined basis.
One of the Founding Companies experienced an operating loss in the fourth
quarter of 1996. Founding Companies or other companies acquired by the Company
may experience quarterly losses in the future.
The Company's quarterly results of operations may also be subject to
fluctuations as a result of the timing and cost of acquisitions, fare wars by
travel providers, changes in relationships with certain travel providers
(including commission rates and programs), changes in the mix of services
offered by the Company, changes in timing of measurement and payment of volume
bonuses by travel providers, extreme weather conditions or other factors
affecting travel or the economy. Unexpected variations in quarterly results
could adversely affect the Company's results of operations, as well as the price
of the Common Stock, which in turn could limit the ability of the Company to
make acquisitions.
RESULTS OF OPERATIONS - TSI
The Combinations are accounted for under the purchase method of accounting, and
Auto Europehas been designated as the accounting acquiror in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 97. Therefore,
selected financial data of Auto Europe for the three month and six month periods
ended June 30, 1996 and 1997 are presented below.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997 - TSI
The following table sets forth certain selected financial data for TSI (Auto
Europe as accounting acquiror) as a percentage of revenues for the periods
indicated (dollars in thousands):
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THREE MONTHS ENDED JUNE 30,
--------------------------------------
1996 1997
------------- ---------------
Net revenues $9,773 100.0% $12,422 100.0%
Operating expenses 6,655 68.1 7,995 64.4
------ ----- ------- ------
Gross profit 3,118 31.9 4,427 35.6
General and administrative expenses 2,121 21.7 3,230 26.0
Net revenues increased $2.6 million, or 27.1%, from $9.8 million for the three
months ended June 30, 1996 to $12.4 million for the three months ended June 30,
1997. This increase is primarily attributable to an increase in the number of
European car rental reservations made from 75,000 in 1996 to 90,000 in 1997, and
an increase in average commission revenue per transaction as a result of higher
selling prices in the marketplace for European car rentals.
Operating expenses increased $1.3 million, or 20.1%, from $6.7 million in 1996
to $8.0 million in 1997. Approximately 73% in 1996 and 72% in 1997 of operating
expenses are for salaries and benefits, and commissions to travel agencies,
independent contractors and employees. As a percentage of net revenues, total
operating expenses decreased from 68.1% in 1996 to 64.4% in 1997, primarily due
to lower salaries and commission expenses as a percentage of net revenues.
Gross profit increased $1.3 million, or 42%, from $3.1 million in 1996 to $4.4
million in 1997. This increase is attributable to the increased number of car
rental reservations made, an increase in average commission revenue per
transaction as a result of higher selling prices, and lower operating expenses
as a percentage of net revenues.
General and administrative expenses increased $1.1 million, or 52.3%, from $2.1
million in 1996 to $3.2 million in 1997, and were 21.7% and 26.0%, respectively,
of net revenues. Excluding the Compensation Differential of $1.1 million in 1996
and $1.7 million in 1997, general and administrative expenses increased
$482,000, or 47.2%, from $1.0 million in 1996 to $1.5 million in 1997, and were
10.5% and 12.1%, respectively, of net revenues.
Prior to the Combinations, the stockholders of Auto Europe elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, Auto Europe was not subject to taxation for federal purposes. Under
S Corporation status, stockholders report their share of taxable earnings or
losses in their personal tax returns.
19
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SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 - TSI
The following table sets forth certain selected financial data for TSI (Auto
Europe as accounting acquiror) as a percentage of revenues for the periods
indicated (dollars in thousands):
SIX MONTHS ENDED JUNE 30,
------------------------------------
1996 1997
--------------- --------------
Net revenues $15,537 100.0% $20,242 100.0%
Operating expenses 11,270 72.5 13,718 67.8
------- ------ ------- -----
Gross profit 4,267 27.5 6,524 32.2
General and administrative expenses 3,842 24.8 5,074 25.0
Net revenues increased $4.7 million, or 30.3%, from $15.5 million for the six
months ended June 30, 1996 to $20.2 million for the six months ended June 30,
1997. This increase is primarily attributable to an increase in the number of
European car rental reservations made from 118,000 in 1996 to 150,000 in 1997,
and an increase in average commission revenue per transaction as a result of
higher selling prices in the marketplace for European car rentals.
Operating expenses increased $2.4 million, or 21.7%, from $11.3 million in 1996
to $13.7 million in 1997. Approximately 72% in 1996 and 71% in 1997 of operating
expenses are for salaries and benefits, and commissions to travel agencies,
independent contractors and employees. As a percentage of net revenues, total
operating expenses decreased from 72.5% in 1996 to 67.8% in 1997, primarily due
to lower salaries and commission expenses as a percentage of net revenues.
Gross profit increased $2.2 million, or 52.9%, from $4.3 million in 1996 to $6.5
million in 1997. This increase is attributable to the increased number of car
rental reservations made, an increase in average commission revenue per
transaction as a result of higher selling prices, and lower operating expenses
as a percentage of net revenues.
General and administrative expenses increased $1.3 million, or 32.1%, from $3.8
million in 1996 to $5.1 million in 1997, and were 24.8% and 25.0%, respectively,
of net revenues. Excluding the Compensation Differential of $1.9 million in 1996
and $2.5 million in 1997, general and administrative expenses increased $1.8
million, or 32.1%, from $5.7 million in 1996 to $7.5 million in 1997, and were
36.8% and 37.3%, respectively, of net revenues. Prior
20
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to the Combinations, the stockholders of Auto Europe elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, Auto Europe was not subject to taxation for federal purposes. Under
S Corporation status, stockholders report their share of taxable earnings or
losses in their personal tax returns.
LIQUIDITY AND CAPITAL RESOURCES - TSI
During the six month period ended June 30, 1997, net cash provided by operating
activities of Auto Europe, the accounting acquiror, was $9.2 million, before the
impact of the Compensation Differential of $2.5 million. Capital expenditures
were $618,000 and net payments on debt were $2.4 million. Capital distributions
were $202,000. In connection with the Combinations, certain non-operating assets
with a net book value of $2.4 million were retained by stockholders of Auto
Europe.
TSI is a holding company that conducts all its operations through its
subsidiaries. Accordingly, the primary internal source of liquidity is the cash
flow of Auto Europe, the accounting acquiror, and the other Founding Companies.
See " - Liquidity and Capital Resources - Combined" for a further discussion of
the liquidity and capital resources of the Company.
SEASONALITY AND QUARTERLY FLUCTUATIONS - TSI
Net revenues and net income are generally higher in the second and third
quarters. The Company expects this seasonality to continue in the future. Auto
Europe, the accounting acquiror, experienced an operating loss in the fourth
quarter of 1996 and may continue to do so in the future. See " - Seasonality and
Quarterly Fluctuations - Combined" for a further discussion of seasonality and
quarterly fluctuations of the Company.
21
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 29, 1995, the U.S. Department of Labor filed suit against Cruises Only,
Wayne Heller and Judy Heller in the U.S. District Court of the Middle District
of Florida, the Orlando Division, based on a claim that Cruises Only was not
entitled to pay its commission sales people under a provision of the Federal
Labor Standards Act of 1938 established for commission sales people in retail
and service businesses. The complaint did not specify a dollar amount of relief
sought. In late 1996, both parties filed a motion for summary judgement. On June
5, 1997, the Court granted the motion for summary judgement in favor of Cruises
Only. The U.S. Department of Labor initially filed a motion to appeal the
decision, but on August 22, 1997 the Department filed a motion to voluntarily
dismiss that appeal, with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 1997, the stockholders of the Company, by written consent in lieu of a
special meeting, adopted the following actions: (i) an amendment and restatement
of the Company's Certificate of Incorporation, including a change of name and
change in capitalization; (ii) the election of (A) Fraser Bullock, Elan J.
Blutinger and Tommaso Zanzotto as Class I Directors of the Company; (B) Imad
Khalidi, John W. Przywara and Joseph V. Vittoria as Class II Directors of the
Company; and (C) Wayne Heller, Robert G. Falcone and Susan Parker as Class III
Directors of the Company; (iii) the approval of the Company's 1997 Long-Term
Incentive Plan; and (iv) the approval of the Company's Non-Employee Directors'
Stock Plan. All matters were approved by the unanimous consent of all of the
stockholders.
ITEM 5. OTHER INFORMATION
On July 28, 1997 the Company consummated its initial public offering and the
Combinations. Pursuant to the Offering, the Company sold an aggregate of
2,875,000 shares of its Common Stock, at a price to the public of $14.00 per
share. Pursuant to the Combinations, the Company consummated the acquisitions of
the Founding Companies for an aggregate of approximately $28.5 million in cash
and 3,422,225 shares of Common Stock.
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits:
10.3 1997 Long-Term Incentive Plan.
10.4 1997 Non-Employee Directors' Stock Plan.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
23
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SIGNATURES
Pursuant to the requirements 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.
TRAVEL SERVICES INTERNATIONAL,
INC.
Date: August 29, 1997 By: /S/ JILL M. VALES
---------------------------------------
Jill M. Vales
Senior Vice President and Chief
Financial Officer
(as both a duly authorized officer
of the registrant and the principal
financial officer or chief
accounting officer of the
registrant)
24
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.3 1997 Long-Term Incentive Plan.
10.4 1997 Non-Employee Directors' Stock Plan.
27 Financial Data Schedule
TRAVEL SERVICES INTERNATIONAL, INC.
LONG-TERM INCENTIVE PLAN
1. PURPOSE. The purpose of the Long Term Incentive Plan (the "Plan") of
Travel Services International, Inc., a Delaware corporation (the "Company"), is
to advance the interests of the Company and its stockholders by providing a
means to attract, retain and reward executive officers, employee directors and
other key employees and consultants of and service providers to the Company and
its subsidiaries (including consultants and others providing services of
substantial value) and to enable such persons to acquire or increase a
proprietary interest in the Company, thereby promoting a closer identity of
interests between such persons and the Company's stockholders.
2. DEFINITIONS. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together
with any other right or interest granted to a Participant under the Plan, are
termed "Awards." For purposes of the Plan, the following additional terms shall
be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice or
other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time. References to any provision of the Code shall be deemed to include
regulations thereunder and successor provisions and regulations thereto.
(e) "Committee" means the Compensation Committee of the Board, or such
other Board committee as may be designated by the Board to administer the Plan;
PROVIDED, HOWEVER, that, to the extent necessary to comply with Rule 16b-3, the
Committee shall consist of two or more directors, each of whom is a
"non-employee director" within the meaning of Rule 16b-3.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act shall
be deemed to include rules thereunder and successor provisions and rules
thereto.
1
<PAGE>
(g) "Fair Market Value" means, with respect to Stock, Awards, or other
property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee, PROVIDED, HOWEVER, that (i) if the Stock is listed on a
national securities exchange or quoted in an interdealer quotation system, the
Fair Market Value of such Stock on a given date shall be based upon the last
sales price or, if unavailable, the average of the closing bid and asked prices
per share of the Stock on such date (or, if there was no trading or quotation in
the Stock on such date, on the next preceding date on which there was trading or
quotation) as reported in the WALL STREET JOURNAL (or other reporting service
approved by the Committee), (ii) the "Fair Market Value" of Stock subject to
Options granted effective upon commencement of the Initial Public Offering shall
be the Initial Public Offering price of the shares so issued and sold in the
Initial Public Offering, as set forth in the first final prospectus used in such
offering (the provisions of clause (i) notwithstanding) and (iii) the "Fair
Market Value" of Stock prior to the date of the Initial Public Offering shall be
as determined by the Board of Directors.
(h) "Initial Public Offering" shall mean an initial public offering of
shares of Stock in a firm commitment underwriting registered with the Securities
and Exchange Commission in compliance with the provisions of the Securities Act
of 1933, as amended.
(i) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(j) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(k) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(l) "Stock" means the Common Stock, $.01 par value, of the Company and
such other securities as may be substituted for Stock or such other securities
pursuant to Section 4.
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
such person;
2
<PAGE>
(iii) to determine the number of Awards to be granted, the number of
shares of Stock to which an Award will relate, the terms and conditions of any
Award granted under the Plan (including, but not limited to, any exercise price,
grant price or purchase price, any restriction or condition, any schedule for
lapse of restrictions or conditions relating to transferability or forfeiture,
exercisability or settlement of an Award, and waivers or accelerations thereof,
performance conditions relating to an Award (including performance conditions
relating to Awards not intended to be governed by Section 7(f) and waivers and
modifications thereof), based in each case on such considerations as the
Committee shall determine), and all other matters to be determined in connection
with an Award;
(iv) to determine whether, to what extent and under what circumstances
an Award may be settled, or the exercise price of an Award may be paid, in cash,
Stock, other Awards, or other property, or an Award may be cancelled, forfeited,
or surrendered;
(v) to determine whether, to what extent and under what circumstances
cash, Stock, other Awards or other property payable with respect to an Award
will be deferred either automatically, at the election of the Committee or at
the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any Award,
rules and regulations, Award Agreement or other instrument hereunder; and
(ix) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or advisable
for the administration of the Plan.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Unless authority is
specifically reserved to the Board under the terms of the Plan, the Company's
Certificate of Incorporation or Bylaws, or applicable law, the Committee shall
have sole discretion in exercising authority under the Plan. Any action of the
Committee with respect to the Plan shall be final, conclusive and binding on all
persons, including the Company, subsidiaries of the Company, Participants, any
person claiming any rights under the Plan from or through any Participant and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the
3
<PAGE>
Plan, the time at which the Committee must or may make any determination shall
be determined by the Committee, and any such determination may thereafter be
modified by the Committee (subject to Section 8(e)). The express grant of any
specific power to the Committee, and the taking of any action by the Committee,
shall not be construed as limiting any power or authority of the Committee. The
Committee may delegate to officers or managers of the Company or any subsidiary
of the Company the authority, subject to such terms as the Committee shall
determine, to perform administrative functions and, with respect to Participants
not subject to Section 16 of the Exchange Act, to perform such other functions
as the Committee may determine, to the extent permitted under Rule 16b-3, if
applicable, and other applicable law.
(c) LIMITATION OF LIABILITY. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants or any
executive compensation consultant, legal counsel or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
its behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination or
interpretation.
4. STOCK SUBJECT TO PLAN.
(a) AMOUNT OF STOCK RESERVED. The total amount of Stock that may be
subject to outstanding awards, determined immediately after the grant of any
Award, shall not exceed the greater of 900,000 shares of Stock or 12% of the
total number of shares of Stock outstanding at the time of such grant.
Notwithstanding the foregoing, the number of shares that may be delivered upon
the exercise of ISOs shall not exceed 100,000, subject in each case to
adjustment as provided in Section 4(c), and the number of shares that may be
delivered as Deferred Stock (other than pursuant to an Award granted under
Section 7(f)) shall not in the aggregate exceed 100,000, provided, however, that
shares subject to ISOs, Restricted Stock or Deferred Stock Awards shall not be
deemed delivered if such Awards are forfeited, expire or otherwise terminate
without delivery of shares to the Participant. If an Award valued by reference
to Stock may only be settled in cash, the number of shares to which such Award
relates shall be deemed to be Stock subject to such Award for purposes of this
Section 4(a). Any shares of Stock delivered pursuant to an Award may consist, in
whole or in part, of authorized and unissued shares, treasury shares or shares
acquired in the market for a Participant's Account.
(b) ANNUAL PER-PARTICIPANT LIMITATIONS. During any calendar year, no
Participant may be granted Awards that may be settled by delivery of more than
100,000 shares of Stock, subject to adjustment as provided in Section 4(c). In
addition, with respect to Awards that may be settled in cash (in whole or in
part), no Participant may be paid during any calendar year cash amounts relating
to such Awards that exceed the greater of the
4
<PAGE>
Fair Market Value of the number of shares of Stock set forth in the preceding
sentence at the date of grant or the date of settlement of Award. This provision
sets forth two separate limitations, so that Awards that may be settled solely
by delivery of Stock will not operate to reduce the amount of cash-only Awards,
and vice versa; nevertheless, Awards that may be settled in Stock or cash must
not exceed either limitation.
(c) ADJUSTMENTS. In the event that the Committee shall determine that
any dividend or other distribution (whether in the form of cash, Stock or other
property), recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Stock or other
securities, liquidation, dissolution, or other similar corporate transaction or
event, affects the Stock such that an adjustment is appropriate in order to
prevent dilution or enlargement of the rights of Participants under the Plan,
then the Committee shall, in such manner as it may deem equitable, adjust any or
all of (i) the number and kind of shares of Stock reserved and available for
Awards under Section 4(a), including shares reserved for the ISOs and Restricted
and Deferred Stock, (ii) the number and kind of shares of Stock specified in the
Annual Per-Participant Limitations under Section 4(b), (iii) the number and kind
of shares of outstanding Restricted Stock or other outstanding Award in
connection with which shares have been issued, (iv) the number and kind of
shares that may be issued in respect of other outstanding Awards and (v) the
exercise price, grant price or purchase price relating to any Award (or, if
deemed appropriate, the Committee may make provision for a cash payment with
respect to any outstanding Award). In addition, the Committee is authorized to
make adjustments in the terms and conditions of, and the criteria included in,
Awards in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence) affecting the Company or
any subsidiary or the financial statements of the Company or any subsidiary, or
in response to changes in applicable laws, regulations, or accounting
principles. The foregoing notwithstanding, no adjustments shall be authorized
under this Section 4(c) with respect to ISOs or SARs in tandem therewith to the
extent that such authority would cause the Plan to fail to comply with Section
422(b)(1) of the Code, and no such adjustment shall be authorized with respect
to Options, SARs or other Awards subject to Section 7(f) to the extent that such
authority would cause such Awards to fail to qualify as "qualified
performance-based compensation" under Section 162(m)(4)(C) of the Code.
5. ELIGIBILITY. Executive officers and other key employees of the
Company and its subsidiaries, including any director or officer who is also such
an employee, [any non-employee director] and persons who provide consulting or
other services to the Company deemed by the Committee to be of substantial value
to the Company, are eligible to be granted Awards under the Plan. In addition, a
person who has been offered employment by the Company or its subsidiaries is
eligible to be granted an Award under the Plan, provided that such Award shall
be cancelled if such person fails to commence such employment, and no payment of
value may be made in connection with such Award until such person has commenced
such employment. The foregoing notwithstanding, no member of the Committee shall
be eligible to be granted Awards under the Plan.
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<PAGE>
6. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award or
the exercise thereof such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant. Except as provided in Section 6(f), 6(h), or 7(a),
or to the extent required to comply with requirements of the Delaware General
Corporation Law that lawful consideration be paid for Stock, only services may
be required as consideration for the grant (but not the exercise) of any Award.
(b) OPTIONS. The Committee is authorized to grant Options (including
"reload" options automatically granted to offset specified exercises of Options)
on the following terms and conditions ("Options"):
(i) EXERCISE PRICE. The exercise price per share of Stock purchasable
under an Option shall be determined by the Committee; PROVIDED, HOWEVER, that,
except as provided in Section 7(a), such exercise price shall be not less than
the Fair Market Value of a share on the date of grant of such Option.
(ii) TIME AND METHOD OF EXERCISE. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part, the
methods by which such exercise price may be paid or deemed to be paid, the form
of such payment, including, without limitation, cash, Stock, other Awards or
awards granted under other Company plans or other property (including notes or
other contractual obligations of Participants to make payment on a deferred
basis, such as through "cashless exercise" arrangements, to the extent permitted
by applicable law), and the methods by which Stock will be delivered or deemed
to be delivered to Participants.
(iii) ISOS. The terms of any ISO granted under the Plan shall comply in
all respects with the provisions of Section 422 of the Code, including but not
limited to the requirement that no ISO shall be granted more than ten years
after the effective date of the Plan. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to ISOs shall be interpreted,
amended, or altered, nor shall any discretion or authority granted under the
Plan be exercised, so as to disqualify either the Plan or any ISO under Section
422 of the Code, unless requested by the affected Participant.
(iv) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
Committee, upon termination of a Participant's employment with the Company and
its subsidiaries, such Participant may exercise any Options during the
three-month period following such termination of employment, but only to the
extent such Option was exercisable immediately prior to such termination of
employment. Notwithstanding the foregoing, if the Committee determines that
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<PAGE>
such termination is for cause, all Options held by the Participant shall
terminate as of the termination of employment.
(c) STOCK APPRECIATION RIGHTS. The Committee is authorized to grant
SARs on the following terms and conditions ("SARs"):
(i) RIGHT TO PAYMENT. An SAR shall confer on the Participant to whom it
is granted a right to receive, upon exercise thereof, the excess of (A) the Fair
Market Value of one share of Stock on the date of exercise (or, if the Committee
shall so determine in the case of any such right other than one related to an
ISO, the Fair Market Value of one share at any time during a specified period
before or after the date of exercise), over (B) the grant price of the SAR as
determined by the Committee as of the date of grant of the SAR, which, except as
provided in Section 7(a), shall be not less than the Fair Market Value of one
share of Stock on the date of grant.
(ii) OTHER TERMS. The Committee shall determine the time or times at
which an SAR may be exercised in whole or in part, the method of exercise,
method of settlement, form of consideration payable in settlement, method by
which Stock will be delivered or deemed to be delivered to Participants, whether
or not an SAR shall be in tandem with any other Award, and any other terms and
conditions of any SAR. Limited SARs that may only be exercised upon the
occurrence of a Change in Control may be granted on such terms, not inconsistent
with this Section 6(c), as the Committee may determine. Limited SARs may be
either freestanding or in tandem with other Awards.
(d) RESTRICTED STOCK. The Committee is authorized to grant Restricted
Stock on the following terms and conditions ("Restricted Stock"):
(i) GRANT AND RESTRICTIONS. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any, as the Committee
may impose, which restrictions may lapse separately or in combination at such
times, under such circumstances, in such installments, or otherwise, as the
Committee may determine. Except to the extent restricted under the terms of the
Plan and any Award Agreement relating to the Restricted Stock, a Participant
granted Restricted Stock shall have all of the rights of a stockholder
including, without limitation, the right to vote Restricted Stock or the right
to receive dividends thereon.
(ii) FORFEITURE. Except as otherwise determined by the Committee, upon
termination of employment or service (as determined under criteria established
by the Committee) during the applicable restriction period, Restricted Stock
that is at that time subject to restrictions shall be forfeited and reacquired
by the Company; PROVIDED, HOWEVER, that the Committee may provide, by rule or
regulation or in any Award Agreement, or may determine
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<PAGE>
in any individual case, that restrictions or forfeiture conditions relating to
Restricted Stock will be waived in whole or in part in the event of termination
resulting from specified causes.
(iii) CERTIFICATES FOR STOCK. Restricted Stock granted under the Plan
may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of the
Participant, such certificates may bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such Restricted Stock, the
Company may retain physical possession of the certificate, and the Participant
shall have delivered a stock power to the Company, endorsed in blank, relating
to the Restricted Stock.
(iv) DIVIDENDS. Dividends paid on Restricted Stock shall be either paid
at the dividend payment date in cash or in shares of unrestricted Stock having a
Fair Market Value equal to the amount of such dividends, or the payment of such
dividends shall be deferred and/or the amount or value thereof automatically
reinvested in additional Restricted Stock, other Awards, or other investment
vehicles, as the Committee shall determine or permit the Participant to elect.
Stock distributed in connection with a Stock split or Stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a risk
of forfeiture to the same extent as the Restricted Stock with respect to which
such Stock or other property has been distributed, unless otherwise determined
by the Committee.
(e) DEFERRED STOCK. The Committee is authorized to grant Deferred Stock
subject to the following terms and conditions ("Deferred Stock"):
(i) AWARD AND RESTRICTIONS. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred Stock by
the Committee (or, if permitted by the Committee, as elected by the
Participant). In addition, Deferred Stock shall be subject to such restrictions
as the Committee may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times, separately or
in combination, in installments or otherwise, as the Committee may determine.
(ii) FORFEITURE. Except as otherwise determined by the Committee, upon
termination of employment or service (as determined under criteria established
by the Committee) during the applicable deferral period or portion thereof to
which forfeiture conditions apply (as provided in the Award Agreement evidencing
the Deferred Stock), all Deferred Stock that is at that time subject to such
forfeiture conditions shall be forfeited; PROVIDED, HOWEVER, that the Committee
may provide, by rule or regulation or in any Award Agreement, or may determine
in any individual case, that restrictions or forfeiture conditions relating to
Deferred Stock will be waived in whole or in part in the event of termination
resulting from specified causes.
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<PAGE>
(f) BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS. The
Committee is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of Company obligations to pay cash under other plans or
compensatory arrangements. Stock or Awards granted hereunder shall be subject to
such other terms as shall be determined by the Committee.
(g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend
Equivalents entitling the Participant to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock ("Dividend Equivalents"). Dividend Equivalents may be
awarded on a free-standing basis or in connection with another Award. The
Committee may provide that Dividend Equivalents shall be paid or distributed
when accrued or shall be deemed to have been reinvested in additional Stock,
Awards or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee may specify.
(h) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant such other Awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries ("Other Stock Based Awards"). The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with or in substitution for any other
Award granted under the Plan or any award granted under any other plan of the
Company, any subsidiary or any business entity to be acquired by the Company or
a subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Awards granted in addition to or in tandem with other
Awards or awards may be granted either as of the same time as or a different
time from the grant of such other Awards or awards.
(b) TERM OF AWARDS. The term of each Award shall be for such period as
may be determined by the Committee; PROVIDED, HOWEVER, that in no event shall
the term of any
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ISO or an SAR granted in tandem therewith exceed a period of ten years from the
date of its grant (or such shorter period as may be applicable under Section 422
of the Code).
(c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and
any applicable Award Agreement, payments to be made by the Company or a
subsidiary upon the grant, exercise or settlement of an Award may be made in
such forms as the Committee shall determine, including, without limitation,
cash, Stock, other Awards or other property, and may be made in a single payment
or transfer, in installments or on a deferred basis. Such payments may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments denominated
in Stock.
(d) LOAN PROVISIONS. With the consent of the Committee, and subject at
all times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee or arrange for a loan
or loans to a Participant with respect to the exercise of any Option or other
payment in connection with any Award, including the payment by a Participant of
any or all federal, state or local income or other taxes due in connection with
any Award. Subject to such limitations, the Committee shall have full authority
to decide whether to make a loan or loans hereunder and to determine the amount,
terms and provisions of any such loan or loans, including the interest rate to
be charged in respect of any such loan or loans, whether the loan or loans are
to be with or without recourse against the borrower, the terms on which the loan
is to be repaid and conditions, if any, under which the loan or loans may be
forgiven.
(e) PERFORMANCE-BASED AWARDS. The Committee may, in its discretion,
designate any Award the exercisability or settlement of which is subject to the
achievement of performance conditions as a performance-based Award subject to
this Section 7(e), in order to qualify such Award as "qualified
performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder. The performance objectives for an Award subject to this
Section 7(e) shall consist of one or more business criteria and a targeted level
or levels of performance with respect to such criteria, as specified by the
Committee but subject to this Section 7(e). Performance objectives shall be
objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of
the Code. Business criteria used by the Committee in establishing performance
objectives for Awards subject to this Section 7(e) shall be selected exclusively
from among the following:
(1) Annual return on capital;
(2) Annual earnings per share;
(3) Annual cash flow provided by operations;
(4) Changes in annual revenues; and/or
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<PAGE>
(5) Strategic business criteria, consisting of one or more
objectives based on meeting specified revenue, market penetration, geographic
business expansion goals, cost targets, and goals relating to acquisitions or
divestitures.
The levels of performance required with respect to such business criteria may be
expressed in absolute or relative levels. Achievement of performance objectives
with respect to such Awards shall be measured over a period of not less than one
year nor more than five years, as the Committee may specify. Performance
objectives may differ for such Awards to different Participants. The Committee
shall specify the weighting to be given to each performance objective for
purposes of determining the final amount payable with respect to any such Award.
The Committee may, in its discretion, reduce the amount of a payout otherwise to
be made in connection with an Award subject to this Section 7(e), but may not
exercise discretion to increase such amount, and the Committee may consider
other performance criteria in exercising such discretion. All determinations by
the Committee as to the achievement of performance objectives shall be in
writing. The Committee may not delegate any responsibility with respect to an
Award subject to this Section 7(e).
(f) ACCELERATION UPON A CHANGE OF CONTROL. Pursuant to the terms of
an individual Award Agreement, the Committee may, in its sole discretion) in the
event of a "change of control" (as such term may be defined by the Committee, in
its sole discretion).
8. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system or
any other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
(b) LIMITATIONS ON TRANSFERABILITY. Awards and other rights under the
Plan will not be transferable by a Participant except by will or the laws of
descent and distribution or to a Beneficiary in the event of the Participant's
death, and, if exercisable, shall be exercisable during the lifetime of a
Participant only by such Participant or his guardian or legal representative.
Notwithstanding the foregoing, the Committee may, in its discretion, authorize
all or a portion of the Award (other than an ISO) to be granted to a Particpant
to be on terms which permit transfer by such Participant to (i) the spouse,
children or grandchildren of such Partipant ("Immediate Family Members"), (ii) a
trust or trusts for exclusive benefit of such Immediate Family Members, or (iii)
a partnership in which such
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<PAGE>
Immediate Family Members are the only partners, provided that (x) there may be
no consideration for any such transfer, (y) the Award agreement pursuant to
which such Awards are granted must be approved by the Committee and must
expressly provide for transferability in a manner consistent with this Section,
and (z) subsequent transfers of transferred Awards shall be prohibited except
those occurring by laws of descent and distribution. Following transfer, any
such Awards shall continue to be subject to the same terms and conditions as
were applicable immediately prior to transfer, provided that for purposes of the
Plan, the term Participant shall be deemed to refer to the transferee. The
events of termination of employment set forth in Section 6 hereof shall continue
to be applied with respect to the original Participant, following which the
options shall be exercisable by the transferee only to the extent and for the
periods specified in Section 6. Awards and other rights under the Plan may not
be pledged, mortgaged, hypothecated or otherwise encumbered, and shall not be
subject to the claims of creditors.
(c) NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan nor
any action taken hereunder shall be construed as giving any employee or other
person the right to be retained in the employ or service of the Company or any
of its subsidiaries, nor shall it interfere in any way with the right of the
Company or any of its subsidiaries to terminate any employee's employment or
other person's service at any time.
(d) TAXES. The Company and any subsidiary is authorized to withhold
from any Award granted or to be settled, any delivery of Stock in connection
with an Award, any other payment relating to an Award or any payroll or other
payment to a Participant amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and
to take such other action as the Committee may deem advisable to enable the
Company and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other property and to make
cash payments in respect thereof in satisfaction of a Participant's tax
obligations.
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority to grant
Awards under the Plan without the consent of stockholders or Participants,
except that any such action shall be subject to the approval of the Company's
stockholders at or before the next annual meeting of stockholders for which the
record date is after such Board action if such stockholder approval is required
by any federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; PROVIDED, HOWEVER, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; PROVIDED, HOWEVER, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under such Award.
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(f) NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant or
employee shall have any claim to be granted any Award under the Plan, and there
is no obligation for uniformity of treatment of Participants and employees. No
Award shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended
to constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
PROVIDED, HOWEVER, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
(i) NO FRACTIONAL SHARES. No fractional shares of Stock shall be issued
or delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) COMPLIANCE WITH CODE SECTION 162(M). It is the intent of the
Company that employee Options, SARs and other Awards designated as Awards
subject to Section 7(e) shall constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m). Accordingly, if any
provision of the Plan or any Award Agreement relating to such an Award does not
comply or is inconsistent with the requirements of Code Section 162(m), such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements, and no provision shall be deemed to confer upon
the Committee or any other person discretion to increase the amount of
compensation otherwise payable in connection with any such Award upon attainment
of the performance objectives.
(k) GOVERNING LAW. The validity, construction and effect of the Plan,
any rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts of laws, and applicable federal law.
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<PAGE>
(l) EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become effective
as of the date of its adoption by the Board, subject to stockholder approval
prior to the commencement of the Initial Public Offering, and shall continue in
effect until terminated by the Board.
14
TRAVEL SERVICES INTERNATIONAL, INC.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
1. PURPOSE. The purpose of this Non-Employee Directors' Stock Plan (the
"Plan") of TRAVEL SERVICES INTERNATIONAL, INC. a Delaware corporation (the
"Company"), is to advance the interests of the Company and its stockholders by
providing a means to attract and retain highly qualified persons to serve as
non-employee directors and advisory directors of the Company and to enable such
persons to acquire or increase a proprietary interest in the Company, thereby
promoting a closer identity of interests between such persons and the Company's
stockholders.
2. DEFINITIONS. In addition to terms defined elsewhere in the Plan, the
following are defined terms under the Plan:
(a) "Code" means the Internal Revenue Code of 1986, as amended
from time to time. References to any provision of the Code shall be deemed to
include regulations thereunder and successor provisions and regulations thereto.
(b) "Deferred Share" means a credit to a Participant's
deferral account under Section 7 which represents the right to receive one Share
upon settlement of the deferral account. Deferral accounts, and Deferred Shares
credited thereto, are maintained solely as bookkeeping entries by the Company
evidencing unfunded obligations of the Company.
(c) "Exchange Act" means the Securities Exchange Act of 1934,
as amended. References to any provision of the Exchange Act shall be deemed to
include rules thereunder and successor provisions and rules thereto.
(d) "Fair Market Value" of a Share on a given date means the
last sales price or, if last sales information is generally unavailable, the
average of the closing bid and asked prices per Share on such date (or, if there
was no trading or quotation in the stock on such date, on the next preceding
date on which there was trading or quotation) as reported in the WALL STREET
JOURNAL; PROVIDED, HOWEVER, that the "Fair Market Value" of a Share subject to
Options granted effective on the date on which the Company commences an Initial
Public Offering shall be the price of the shares so issued and sold, as set
forth in the first final prospectus used in such Initial Public Offering.
(e) "Initial Public Offering" means an initial public offering
of shares in a firm commitment underwriting register with the Securities and
Exchange Commission in compliance with the provisions of the Securities Act of
1933, as amended.
(f) "Option" means the right, granted to a director under
Section 6, to purchase a specified number of Shares at the specified exercise
price for a specified period of time under the Plan.
All Options will be non-qualified stock options.
<PAGE>
(g) "Participant" means a person who, as a non-employee
director or advisory director of the Company, has been granted an Option or
Deferred Shares which remain outstanding or who has elected to be paid fees in
the form of Shares or Deferred Shares under the Plan.
(h) "Rule 16b-3" means Rule 16b-3, as from time to time in
effect and applicable to the Plan and Participants, promulgated by the
Securities and Exchange Commission under Section 16 of the Exchange Act.
(i) "Share" means a share of common stock, $.01 par value, of
the Company and such other securities as may be substituted for such Share or
such other securities pursuant to Section 8.
3. SHARES AVAILABLE UNDER THE PLAN. Subject to adjustment as provided
in Section 8, the total number of Shares reserved and available for issuance
under the Plan is 100,000. Such Shares may be authorized but unissued Shares,
treasury Shares, or Shares acquired in the market for the account of the
Participant. For purposes of the Plan, Shares that may be purchased upon
exercise of an Option or delivered in settlement of Deferred Shares will not be
considered to be available after such Option has been granted or Deferred Share
credited, except for purposes of issuance in connection with such Option or
Deferred Share; PROVIDED, HOWEVER, that, if an Option expires for any reason
without having been exercised in full, the Shares subject to the unexercised
portion of such Option will again be available for issuance under the Plan.
4. ADMINISTRATION OF THE PLAN. The Plan will be administered by the
Board of Directors of the Company; PROVIDED, HOWEVER, that any action by the
Board relating to the Plan will be taken only if, in addition to any other
required vote, such action is approved by the affirmative vote of a majority of
the directors who are not then eligible to participate in the Plan.
5. ELIGIBILITY. Each director or advisory director of the Company who,
on any date on which an Option is to be granted under Section 6 or on which fees
are to be paid which could be received in the form of Shares or deferred in the
form of Deferred Shares under Section 7, is not an employee of the Company or
any subsidiary of the Company will be eligible, at such date, to be granted an
Option under Section 6 or receive fees in the form of Shares or defer fees in
the form of Deferred Shares under Section 7. No person other than those
specified in this Section 5 will be eligible to participate in the Plan.
6. OPTIONS. An Option to purchase 10,000 Shares, subject to adjustment
as provided in Section 8, will be automatically granted, (i) at the commencement
of the Initial Public Offering, to each person who is serving as a director or
advisory director of the Company at that time or who becomes a director or
advisory director of the Company at that time and who is eligible under Section
5 at that time, and thereafter (ii) at the effective date of initial election to
the Board of Directors, to each person so elected or appointed who is eligible
under Section 5 at that date. In addition, an Option to purchase 5,000 Shares,
subject to adjustment as provided in Section 8, will be automatically granted,
at the close of business of each annual meeting of stockholders of the Company,
to each member of the Board of Directors or advisory director who is eligible
under Section 5 at the close of business of such annual meeting. Notwithstanding
the foregoing, any person who was automatically granted an Option to purchase
10,000 Shares at the effective date of initial election or to the Board of
Directors or appointment as an advisory director shall not be automatically
granted an Option to purchase
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5,000 shares at the first annual meeting of stockholders following such initial
election if such annual meeting takes place within three months of the effective
date of such person's initial election to the Board of Directors.
(a) EXERCISE PRICE. The exercise price per Share purchasable
upon exercise of an Option will be equal to 100% of the Fair Market Value of a
Share on the date of grant of the Option.
(b) OPTION EXPIRATION. A Participant's Option will expire at
the earlier of (i) 10 years after the date of grant or (ii) one year after the
date the Participant ceases to serve as a director of the Company for any
reason.
(c) EXERCISABILITY. Each Option may be exercised commencing
immediately upon its grant.
(d) METHOD OF EXERCISE. A Participant may exercise an Option,
in whole or in part, at such time as it is exercisable and prior to its
expiration, by giving written notice of exercise to the Secretary of the
Company, specifying the Option to be exercised and the number of Shares to be
purchased, and paying in full the exercise price in cash (including by check) or
by surrender of Shares already owned by the Participant (except for Shares
acquired from the Company by exercise of an option less than six months before
the date of surrender) having a Fair Market Value at the time of exercise equal
to the exercise price, or by a combination of cash and Shares.
7. RECEIPT OF SHARES OR DEFERRED SHARES IN LIEU OF FEES. Each director
or advisory director of the Company may elect to be paid fees, in his or her
capacity as a director or advisory director (including annual retainer fees for
service on the Board, fees for service on a Board committee, fees for service as
chairman of a Board committee, and any other fees paid to directors) in the form
of Shares or Deferred Shares in lieu of cash payment of such fees, if such
director is eligible to do so under Section 5 at the date any such fee is
otherwise payable. If so elected, payment of fees in the form of Shares or
Deferred Shares shall be made in accordance with this Section 7.
(a) ELECTIONS. Each director or advisory director who elects
to be paid fees for a given calendar year in the form of Shares or to defer such
payment of fees in the form of Deferred Shares for such year must file an
irrevocable written election with the Secretary of the Company no later than
December 31 of the year preceding such calendar year; PROVIDED, that any newly
elected or appointed director may file an election for any year not later than
30 days after the date such person first became a director or advisory director,
and a director may file an election for the year in which the Plan became
effective not later than 30 days after the date of effectiveness. An election by
a director or advisory director shall be deemed to be continuing and therefore
applicable to subsequent Plan years unless the director or advisory director
revokes or changes such election by filing a new election form by the due date
for such form specified in this Section 7(a). The election must specify the
following:
(i) A percentage of fees to be received in the form
of Shares or deferred in the form of Deferred Shares under the Plan; and
(ii) In the case of a deferral, the period or periods
during which settlement of Deferred Shares will be deferred (subject to such
limitations as may be specified by counsel to the
3
<PAGE>
Company). Certain elections may not result in receipt of Shares or deferral of
fees as Deferred Shares for a six-month period, as provided in Section 7(g).
(b) PAYMENT OF FEES IN THE FORM OF SHARES. At any date on
which fees are payable to a Participant who has elected to receive such fees in
the form of Shares, the Company will issue to such Participant, or to a
designated third party for the account of such Participant, a number of Shares
having an aggregate Fair Market Value at that date equal to the fees, or as
nearly as possible equal to the fees (but in no event greater than the fees),
that would have been payable at such date but for the Participant's election to
receive Shares in lieu thereof. If the Shares are to be credited to an account
maintained by the Participant and to the extent reasonably practicable without
requiring the actual issuance of fractional Shares, the Company shall cause
fractional Shares to be credited to the Participant's account. If fractional
Shares are not so credited, any part of the Participant's fees not paid in the
form of whole Shares will be payable in cash to the Participant (either paid
separately or included in a subsequent payment of fees, including a subsequent
payment of fees subject to an election under this Section 7).
(c) DEFERRAL OF FEES IN THE FORM OF DEFERRED SHARES. The
Company will establish a deferral account for each Participant who elects to
defer fees in the form of Deferred Shares under this Section 7. At any date on
which fees are payable to a Participant who has elected to defer fees in the
form of Deferred Shares, the Company will credit such Participant's deferral
account with a number of Deferred Shares equal to the number of Shares having an
aggregate Fair Market Value at that date equal to the fees that otherwise would
have been payable at such date but for the Participant's election to defer
receipt of such fees in the form of Deferred Shares. The amount of Deferred
Shares so credited shall include fractional Shares calculated to at least three
decimal places.
(d) CREDITING OF DIVIDEND EQUIVALENTS. Whenever dividends are
paid or distributions made with respect to Shares, a Participant to whom
Deferred Shares are then credited in a deferral account shall be entitled to
receive, as dividend equivalents, an amount equal in value to the amount of the
dividend paid or property distributed on a single Share multiplied by the number
of Deferred Shares (including any fractional Share) credited to his or her
deferral account as of the record date for such dividend or distribution. Such
dividend equivalents shall be credited to the Participant's deferral account as
a number of Deferred Shares determined by dividing the aggregate value of such
dividend equivalents by the Fair Market Value of a Share at the payment date of
the dividend or distribution.
(e) SETTLEMENT OF DEFERRED SHARES. The Company will settle the
Participant's deferral account by delivering to the Participant (or his or her
beneficiary) a number of Shares equal to the number of whole Deferred Shares
then credited to his or her deferral account (or a specified portion in the
event of any partial settlement), together with cash in lieu of any fractional
Share remaining at a time that less than one whole Deferred Share is credited to
such deferral account. Such settlement shall be made at the time or times
specified in the Participant's election filed in accordance with Section 7(a);
PROVIDED, HOWEVER, that a Participant may further defer settlement of Deferred
Shares if counsel to the Company determines that such further deferral likely
would be effective under applicable federal income tax laws and regulations.
4
<PAGE>
(f) NONFORFEITABILITY. The interest of each Participant in any
fees paid in the form of Shares or Deferred Shares (and any deferral account
relating thereto) at all times will be nonforfeitable.
8. ADJUSTMENT PROVISIONS.
(a) CORPORATE TRANSACTIONS AND EVENTS. In the event any
dividend or other distribution (whether in the form of cash, Shares or other
property), recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, exchange of Shares or other
securities of the Company, extraordinary dividend (whether in the form of cash,
Shares, or other property), liquidation, dissolution, or other similar corporate
transaction or event affects the Shares such that an adjustment is appropriate
in order to prevent dilution or enlargement of each Participant's rights under
the Plan, then an adjustment shall be made, in a manner that is proportionate to
the change to the Shares and otherwise equitable, in (i) the number and kind of
Shares remaining reserved and available for issuance under Section 3, (ii) the
number and kind of Shares to be subject to each automatic grant of an Option
under Section 6, (iii) the number and kind of Shares issuable upon exercise of
outstanding Options, and/or the exercise price per Share thereof (provided that
no fractional Shares will be issued upon exercise of any Option), (iv) the kind
of Shares to be issued in lieu of fees under Section 7, and (v) the number and
kind of Shares to be issued upon settlement of Deferred Shares under Section 7.
In addition, the Board of Directors is authorized to make such adjustments in
recognition of unusual or non-recurring events (including, without limitation,
events described in the preceding sentence) affecting the Company or any
subsidiary or the financial statements of the Company or any subsidiary, or in
response to changes in applicable laws, regulations or accounting principles.
The foregoing notwithstanding, no adjustment may be made hereunder except as
will be necessary to maintain the proportionate interest of the Participant
under the Plan and to preserve, without exceeding, the value of outstanding
Options and potential grants of Options and the value of outstanding Deferred
Shares.
(b) INSUFFICIENT NUMBER OF SHARES. If at any date an
insufficient number of Shares are available under the Plan for the automatic
grant of Options or the receipt of fees in the form of Shares or deferral of
fees in the form of Deferred Shares at that date, Options will first be
automatically granted proportionately to each eligible director, to the extent
Shares are then available (provided that no fractional Shares will be issued
upon exercise of any Option) and otherwise as provided under Section 6, and
then, if any Shares remain available, fees shall be paid in the form of Shares
or deferred in the form of Deferred Shares proportionately among directors then
eligible to participate to the extent Shares are then available and otherwise as
provided under Section 7.
9. CHANGES TO THE PLAN. The Board of Directors may amend, alter,
suspend, discontinue, or terminate the Plan or authority to grant Options or pay
fees in the form of Shares or Deferred Shares under the Plan without the consent
of stockholders or Participants, except that any amendment or alteration will be
subject to the approval of the Company's stockholders at or before the next
annual meeting of stockholders for which the record date is after the date of
such Board action if such stockholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system as then in effect, and the Board may otherwise determine to
submit other such amendments or alterations to stockholders for approval;
PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such
action may materially impair the rights of
5
<PAGE>
such Participant with respect to any previously granted Option or any previous
payment of fees in the form of Shares or Deferred Shares.
10. GENERAL PROVISIONS.
(a) AGREEMENTS. Options, Deferred Shares, and any other right
or obligation under the Plan may be evidenced by agreements or other documents
executed by the Company and the Participant incorporating the terms and
conditions set forth in the Plan, together with such other terms and conditions
not inconsistent with the Plan, as the Board of Directors may from time to time
approve.
(b) COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company will not
be obligated to issue or deliver Shares in connection with any Option, in
payment of any directors' fees, or in settlement of Deferred Shares in a
transaction subject to the registration requirements of the Securities Act of
1933, as amended, or any other federal or state securities law, any requirement
under any listing agreement between the Company and any stock exchange or
automated quotation system, or any other law, regulation, or contractual
obligation of the Company, until the Company is satisfied that such laws,
regulations, and other obligations of the Company have been complied with in
full. Certificates representing Shares issued under the Plan will be subject to
such stop-transfer orders and other restrictions as may be applicable under such
laws, regulations, and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
(c) LIMITATIONS ON TRANSFERABILITY. Options, Deferred Shares,
and any other right under the Plan will not be transferable by a Participant
except by will or the laws of descent and distribution or to a Beneficiary in
the event of the Participant's death, and, if exercisable, shall be exercisable
during the lifetime of a Participant only by such Participant or his guardian or
legal representative. Notwithstanding the foregoing, the Committee may, in its
discretion, authorize all or a portion of the Options, Deferred Shares or other
right under the Plan granted to a Particpant to be on terms which permit
transfer by such Participant to (i) the spouse, children or grandchildren of
such Partipant ("Immediate Family Members"), (ii) a trust or trusts for
exclusive benefit of such Immediate Family Members, or (iii) a partnership in
which such Immediate Family Members are the only partners, provided that (x)
there may be no consideration for any such transfer, (y) the Option, Deferred
Share or other right agreement pursuant to which such awards are granted must be
approved by the Committee and must expressly provide for transferability in a
manner consistent with this Section, and (z) subsequent transfers of transferred
Options, Deferred Shares or other rights shall be prohibited except those
occurring by laws of descent and distribution. Following transfer, any such
awards shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that for purposes of the
Plan, the term Participant shall be deemed to refer to the transferee. Options,
Deferred Shares, and any other right under the Plan may not be pledged,
mortgaged, hypothecated or otherwise encumbered, and shall not be subject to the
claims of creditors.
(d) NO RIGHT TO CONTINUE AS A DIRECTOR. Nothing contained in
the Plan or any agreement hereunder will confer upon any Participant any right
to continue to serve as a director or advisory director of the Company.
(e) NO STOCKHOLDER RIGHTS CONFERRED. Nothing contained in the
Plan or any agreement hereunder will confer upon any Participant (or any person
or entity claiming rights by or
6
<PAGE>
through a Participant) any rights of a stockholder of the Company unless and
until Shares are in fact issued to such Participant (or person) or, in the case
an Option, such Option is validly exercised in accordance with Section 6.
(f) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the
Plan by the Board of Directors nor its submission to the stockholders of the
Company for approval shall be construed as creating any limitations on the power
of the Board to adopt such other compensatory arrangements for directors as it
may deem desirable.
(g) GOVERNING LAW. The validity, construction, and effect of
the Plan and any agreement hereunder will be determined in accordance with the
laws of the State of [Delaware], without giving effect to principles of
conflicts of laws, and applicable federal law.
11. STOCKHOLDER APPROVAL, EFFECTIVE DATE, AND PLAN
TERMINATION. The Plan will be effective as of the date of its adoption by the
Board, subject to stockholder approval prior to the commencement of the Initial
Public Offering, and, unless earlier terminated by action of the Board of
Directors, shall terminate at such time as no Shares remain available for
issuance under the Plan and the Company and Participants have no further rights
or obligations under the Plan.
7
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