-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IjfWYxj7EnSO7lKYXPWAmzDh5qcz1awH9L7HRwG2sSrL6OcCDJZLhazOXlkOYHlr 9qD59fcogurRxUlFlq7Rkg== 0001047469-98-023133.txt : 19980608 0001047469-98-023133.hdr.sgml : 19980608 ACCESSION NUMBER: 0001047469-98-023133 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19980605 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOSPITALITY MARKETING CONCEPTS INC CENTRAL INDEX KEY: 0001062967 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330806192 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-56201 FILM NUMBER: 98643348 BUSINESS ADDRESS: STREET 1: 15751 ROCKFIELD BOULEVARD STREET 2: SUITE 200 CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 9494541800 MAIL ADDRESS: STREET 1: 15751 ROCKFIELD BOULEVARD STREET 2: SUITE 200 CITY: IRVINE STATE: CA ZIP: 92718 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ HOSPITALITY MARKETING CONCEPTS INC. (Exact name of registrant as specified in its charter) DELAWARE 7389 33-0806192 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
15751 ROCKFIELD BOULEVARD, SUITE 200, IRVINE, CALIFORNIA 92718 (949) 454-1800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) MOKHTAR RAMADAN CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER 15751 ROCKFIELD BOULEVARD SUITE 200 IRVINE, CALIFORNIA 92718 (949) 454-1800 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: PAULA J. PETERS, ESQ. ROBERT M. MATTSON, JR., ESQ. PATRICK A. POHLEN, ESQ. MICHAEL V. BALES, ESQ. TAMARA POWELL TATE, ESQ. TOMAS C. TOVAR, ESQ. Greenberg Glusker Fields Morrison & Foerster LLP Cooley Godward LLP Claman & Machtinger LLP 19900 MacArthur Boulevard Five Palo Alto Square 1900 Avenue of the Stars, Irvine, California 92612-2445 3000 El Camino Real Suite 2100 (949) 251-7500 Palo Alto, CA 94306 Los Angeles, CA 90067 (650) 843-5000 (310) 553-3610
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE Common Stock, $.001 par value................. $48,000,000 $14,160
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JUNE 5, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [LOGO] HOSPITALITY MARKETING CONCEPTS INC. SHARES COMMON STOCK ------------------ All of the shares of Common Stock offered hereby are being sold by Hospitality Marketing Concepts Inc. ("HMC" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the method of determining the initial public offering price. Application has been made for listing the Common Stock on the Nasdaq National Market under the symbol "HMCC." ------------------------ The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 6. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) Per Share................................. $ $ $ Total (3)................................. $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $1,200,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an aggregate of additional shares of Common Stock, solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------------------------ The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California, on or about , 1998. BANCAMERICA ROBERTSON STEPHENS WILLIAM BLAIR & COMPANY The date of this Prospectus is , 1998 [ARTWORK TO COME] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE --------- Summary.................................................................................................... 4 Risk Factors............................................................................................... 6 Reorganization............................................................................................. 19 Use of Proceeds............................................................................................ 20 Dividend Policy............................................................................................ 21 Capitalization............................................................................................. 21 Dilution................................................................................................... 22 Selected Consolidated Financial Data....................................................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24 Business................................................................................................... 32 Management................................................................................................. 43 Certain Transactions....................................................................................... 49 Principal Stockholders..................................................................................... 51 Description of Capital Stock............................................................................... 52 Shares Eligible for Future Sale............................................................................ 55 Underwriting............................................................................................... 56 Legal Matters.............................................................................................. 57 Experts.................................................................................................... 57 Additional Information..................................................................................... 58 Index to Consolidated Financial Statements................................................................. F-1
------------------------ HMC-SM-, CLUBHOTEL-TM- and Call Connect-TM- are trademarks or service marks of the Company. Certain of the Company's marks have been registered in foreign jurisdictions. This Prospectus includes other trademarks and service marks of the Company and other entities. The Company was incorporated in Delaware in May 1998 to consolidate the operations of several entities in the same business and under common ownership and management. See "Reorganization." The Company's principal executive offices are located at 15751 Rockfield Boulevard, Suite 200, Irvine, California 92718, and its telephone number is (949) 454-1800. 3 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE REORGANIZATION, (II) REFLECTS THE CONVERSION OF THE SUBORDINATED PROMISSORY NOTE (THE "SUBORDINATED PROMISSORY NOTE") HELD BY HOSPITALITY PARTNERS, LLC AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" AND "REORGANIZATION." THE COMPANY Hospitality Marketing Concepts Inc. ("HMC" or the "Company") is a leading provider of membership programs for prestigious hotels and other clients in international and domestic markets. The Company's hotel membership programs are designed to provide participating hotels with improved consumer loyalty, increased patronage, an additional channel for acquiring new customers and a more predictable recurring revenue stream from a growing base of individual members. The Company's marketing services address the increasing need of hotels and other businesses to increase profitability, leverage the marketing expertise and infrastructure of outside vendors and cost-effectively offer new and differentiated products and services to customers. As of March 31, 1998, the Company has established hotel membership programs and on-going marketing relationships with approximately 315 hotels in approximately 160 cities worldwide, including New York, Rome, London, Madrid, Hong Kong, Shanghai, Warsaw and Caracas. The Company selects prestigious, full-service hotels, which are generally four or five-star or "best in town," and creates hotel membership programs which offer individual members a variety of benefits, including premium service, complimentary nights, substantial discounts off published room rates and complimentary food and beverage privileges when dining with a guest at hotel restaurants. Approximately 175 of the Company's top client hotels honor reciprocal membership benefits through the Company's CLUBHOTEL-TM- program, a unique international network including four and five-star hotels, such as the Shangri-La Manila, Pan Pacific Kuala Lumpur, Victoria Intercontinental (Warsaw) and Husa Palace Barcelona. As the global market for goods and services becomes increasingly competitive, businesses have substantially increased the use of direct marketing methods to strengthen relationships with existing customers, attract new customers and generate predictable recurring revenue streams from existing and new products and services. According to the Direct Marketing Association, sales revenue in the United States attributable to direct marketing was estimated to be $1.2 trillion in 1997 and is estimated to reach $1.8 trillion in 2002. Membership programs are one of the fastest growing segments of the direct marketing industry. In the hospitality industry, hotels are increasingly utilizing membership programs to attract customers to fill their unoccupied rooms, utilize food and beverage services and use conference and banquet facilities. To generate increased profitability, hotels market their facilities to traditional customers consisting of business and vacation travelers. To attract such customers, hotels often rely on traditional marketing methods such as corporate and mass advertising, hotel and other travel reward programs, sponsorship of travel organizations and word-of-mouth. These methods have had limited success, however, at significantly increasing consumer loyalty and retention, because they attempt to influence the initial purchasing decision of the travelling customer and provide minimal incentives to use the hotels' facilities on a repeated basis. Likewise, many hotels and other businesses may lack the necessary marketing expertise and resources to focus on the needs and demands of local and international purchasing audiences with multiple languages and customs outside the region in which they are located. The Company's membership programs address the needs of three constituencies: client hotels, individual members and clients in travel-related industries whose complementary products and services are offered through the Company's membership programs. To address these needs, HMC designs membership programs which offer a unique combination of products and services targeting specific purchasing audiences. The Company's membership programs are designed to provide hotel clients with increased patronage and consumer loyalty from both a local membership base and the Company's domestic and international membership base and a more predictable recurring revenue stream. Individual members of the Company's hotel membership programs have access to enhanced services and benefits that significantly exceed the cost of membership. The Company also provides hotel and other clients with local access to domestic and international markets and to a receptive purchasing audience of a growing base of individual members through an established distribution channel of locally-staffed telemarketing offices and a network of on-going marketing relationships with approximately 315 hotels worldwide. To achieve its objective of becoming a leading provider of membership programs and marketing services to clients and customers worldwide, the Company intends to expand its membership programs within the hotel industry, advance the HMC-SM- and CLUBHOTEL-TM- brands, consolidate its marketing infrastructure and expand its distribution channels, offer complementary products and services and expand its proprietary membership database. The Company intends to capitalize on its accumulated marketing expertise, knowledge of the hotel industry and global marketing infrastructure to increase its active membership base, expand its presence in the hotel industry and design, market and manage other membership programs. 4 THE OFFERING Common Stock to be offered by the Company................................. shares (1) Common Stock to be outstanding after the offering................................ shares (1)(2) Use of proceeds........................... The net proceeds of the offering will be used for distributions to certain stockholders, payment of outstanding bank indebtedness and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.... HMCC
SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except share and per share data)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- CONSOLIDATED INCOME STATEMENT DATA: Revenues............................ $ 24,458 $ 23,893 $ 21,199 $ 27,297 $ 31,906 $ 7,777 $ 7,873 Gross margin........................ 7,845 7,833 7,411 9,826 11,248 2,622 2,840 General and administrative costs.... 6,580 6,813 6,316 6,396 7,304 1,477 2,005 Operating income.................... 1,265 1,020 1,095 3,430 3,944 1,145 835 Net income.......................... $ 1,142 $ 1,343 $ 995 $ 3,271 $ 3,655 $ 1,096 $ 695 Net income per share--Basic and diluted........................... $ 0.14 $ 0.17 $ 0.12 $ 0.39 $ 0.43 $ 0.13 $ 0.08 Weighted average common shares: Basic............................. 7,980,000 8,050,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 Diluted........................... 7,980,000 8,050,000 8,400,000 8,400,000 8,430,000 8,400,000 8,580,000 Pro forma data (3): Pro forma net income.............. $ 1,604 $ 302 Pro forma net income per share-- Basic and diluted............... $ $ Weighted average common shares: Basic........................... Diluted.........................
MARCH 31, 1998 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3)(4) AS ADJUSTED(5) --------- --------------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................................. $ 1,380 $ 1,380 $ Working capital (deficit).............................................. (4,161) (3,177) Total assets........................................................... 16,226 17,103 Long-term debt......................................................... 4,763 1,763 Distribution payable to stockholders................................... 7,000 Stockholders' deficit.................................................. (7,665) (10,681)
- ------------------------------ (1) Excludes 1,500,000 shares of the Company's Common Stock, par value $0.001 per share ("Common Stock"), reserved for issuance under the Company's 1998 Stock Option Plan (the "1998 Stock Option Plan"), of which options for an aggregate of 817,140 shares of Common Stock were issued and outstanding as of May 31, 1998, and an option to purchase 180,000 shares of Common Stock. See "Management--Option Plan," "Certain Transactions" and Notes 6 and 10 of Notes to Consolidated Financial Statements. (2) Includes 3,600,000 shares of the Company's Common Stock to be issued upon conversion of the Subordinated Promissory Note. See Note 9 of Notes to Consolidated Financial Statements. (3) See Note 9 of Notes to Consolidated Financial Statements for a discussion of pro forma income statement and balance sheet data. (4) Reflects the estimated distribution of approximately $7.0 million to the Principals and the assumed conversion of the Subordinated Promissory Note. Also adjusted to reflect the recording of a net deferred tax asset of $877,000 as if the Company's change from a limited liability company to a C corporation had occurred March 31, 1998. See Note 9 of Notes to Consolidated Financial Statements. (5) Adjusted to reflect the sale of shares of the Company's Common Stock in this offering and the application of the estimated proceeds therefrom. ------------------------------ CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE MEANINGS ASCRIBED TO SUCH TERMS ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "HMC" ARE TO HOSPITALITY MARKETING CONCEPTS INC. AND ITS SUBSIDIARIES. PRIOR TO THE REORGANIZATION, SUCH SUBSIDIARIES WERE UNDER COMMON OWNERSHIP AND MANAGEMENT AND WERE IN THE SAME BUSINESS. AS A RESULT, THE FINANCIAL STATEMENTS PRESENTED HEREIN HAVE BEEN PREPARED ON A CONSOLIDATED BASIS. 5 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE MATTERS SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. SEE "--FORWARD-LOOKING STATEMENTS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." DEPENDENCE ON HOTEL MEMBERSHIP PROGRAMS The Company's primary line of business involves the design, marketing and management of membership programs for hotels in international markets. The success of the Company's hotel membership programs involves numerous risks and uncertainties, including: the Company's ability to negotiate and enter into favorable marketing contracts with a large number of four and five-star or other quality hotels; the ability of the Company to attract and retain a sufficient number of program and operation managers to manage membership programs; the Company's ability to correctly evaluate local market conditions and demands and offer programs that address the needs of its clients and members; a change in the number, size or quality of hotels in the Company's hotel membership programs; and a change in the Company's reputation. The success of the Company's programs depends primarily on the ability of such programs to increase patronage and produce a predictable recurring revenue stream for client hotels. There can be no assurance that the Company's programs will continue to accomplish these ends or that such programs will continue to generate additional customers for the Company and its hotel clients. There also can be no assurance that the Company will be able to enter into or retain a sufficient number of agreements with hotels to offer membership programs. Any inability on the part of the Company to enter into or retain agreements with new and existing hotels, offer an increasing number of membership programs or attract members would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company may in the future enter into an increasing number of marketing contracts to create hotel membership programs for multiple hotels within a single hotel chain. Currently, a significant portion of the Company's revenue is derived from a limited number of hotel chains or corporations representing multiple hotels. For example, 2.9%, 12.5% and 11.7% of the Company's revenues were derived from Orbis Company, Inc. in 1995, 1996 and 1997, respectively. A dependence on an increasing number of such marketing contracts involves a number of risks, including the risk that a loss of a marketing contract, or deterioration in the relationship, with one hotel within the corporate entity could result in the loss of marketing contracts with the remaining hotels within the entity. If marketing contracts with a hotel chain were to be terminated or not renewed, the Company could experience a significant decline in membership levels and fees resulting therefrom, and such decline could have a material adverse effect on the Company's business. DEPENDENCE ON MEMBERSHIP FEES The Company derives substantially all of its revenues from membership and other fees from its membership programs. The Company anticipates that a substantial portion of its revenue will continue to be derived from such membership fees. The Company's membership programs are targeted predominantly at affluent executives and professionals within small to medium-sized businesses and professional organizations. However, there is no assurance that the appeal of the Company's programs to such individuals will continue. The appeal of the Company's programs depends, in part, on its ability to evaluate local market conditions and demands, to offer an appropriate mix of products and services to address the preferences of such individuals and to anticipate and respond to changes in the preferences of such individuals. If the Company is not successful in evaluating local market conditions or if there are any changes in the characteristics of the Company's typical member, such changes could have a material adverse effect on the 6 growth of the Company's membership base and, consequently, its revenues. The Company typically experiences higher marketing costs in connection with initial member procurement than for member renewals. Moreover, the ability to attract new members and retain existing members is subject to several factors, many of which are outside of the Company's control, including changing consumer preferences, competitive pressures, relocation, general economic conditions and member satisfaction. There can be no assurance that any of the Company's existing or new products or services will generate sufficient new memberships or membership renewals or related fees. Any significant decline in the growth of membership levels in, or the fees resulting from, the Company's hotel membership programs could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON HOTEL INDUSTRY The success of the Company's hotel membership programs is also dependent upon conditions within the hotel industry and in the geographic markets in which the Company operates, including factors outside the Company's control, such as: regional and local economic conditions; the rate at which new hotels are established; change of management at client hotels; changes in consumer preferences or market acceptance of the Company's programs; a change in the reputation of, or quality of service provided by, hotels affiliated with the Company's programs; adequate patronage of such hotels by individual members of the Company's programs; and changes within the hotel industry in general. The hotel industry is sensitive to changes in economic conditions that affect business and leisure travel and is highly susceptible to unforeseen events, such as political instability, regional hostilities, recession, gasoline price escalation, inflation and other adverse occurrences that may result in a significant decline in the utilization of hotel rooms. Any adverse change in economic or political conditions may result in decreased travel or increased competition among hotels and may lower demand for hotel services, including food and beverage, and could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the hotel industry recently has experienced a period of consolidation in which hotel chains have acquired or merged with other hotel chains. Such activities may reduce the Company's total potential client base and limit the number of hotel membership programs which the Company can offer. If further consolidation were to take place, the Company's clients may be acquired by third parties who utilize alternative solutions such as membership programs created and marketed using internal resources or other third parties. There can be no assurance that these, or other factors, will not occur or that such factors will not cause a decline in the number of hotel membership programs offered by the Company or prevent the Company from attracting and retaining new and existing hotels and members for its hotel membership programs. Any material inability to offer additional membership programs or any significant decline in the number of hotels and members for its membership programs would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY The Company believes that its future operating results may be subject to quarterly and annual fluctuations based on numerous factors, including general economic conditions and seasonal trends associated with the hotel industry. The Company's revenues and profits on a quarterly basis can be affected by such factors as: the number of additional members and renewals in a period; currency fluctuations, inflation and currency devaluation in countries with active membership programs; the number of new membership programs and cost of initiating and managing new membership programs, including the cost of hiring additional personnel and starting up new telemarketing offices in international markets; changes in the cost of, or sales cycle associated with, member procurement; scheduled payments to or from client hotels; the mix of products and services offered by the Company; lack of acceptance of the Company's products and services by the Company's members and clients; holidays and vacation patterns; the cost, timing and significance of new product and service introductions by the Company and its competitors; the intensity of product and price competition; changes in operating expenses; changes in the demand for 7 membership programs generally; changes in the Company's sales incentive strategy; personnel changes; unanticipated service interruptions; varying labor costs; and telecommunications and information technology installations and upgrades. Any one or more of these factors, many of which are beyond the Company's control, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, geographic regions may experience varying periods of seasonality, based on local holidays and customs. For example, the Company has historically experienced reduced performance in Europe in the third quarter. Due to the Company's revenue recognition policy, revenues from membership sales and the related membership acquisition costs are amortized over the 12-month term of such memberships, which may mask seasonality and other fluctuations. Increased revenues from the sale of other products and services may increase the degree to which the Company experiences seasonality and other fluctuations. In addition, from time to time, the Company's revenues have remained relatively constant as management and other resources have been allocated to the development of additional membership programs in new geographic regions. Due to these factors, the Company believes period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as indicators of future results of operations. The Company has implemented hotel program fee arrangements as part of its standard hotel membership programs. These hotel program fee arrangements typically involve the payment of a significant percentage of individual membership fees, after costs, to the participating hotel. Accordingly, any significant increase in the percentage of membership fees payable to participating member hotels, as a result of relative bargaining power, increased competition or other factors, would reduce the Company's operating margins and could have a material adverse effect on the Company's business, financial condition and results of operations. In certain instances, the Company has provided, and may in the future provide, participating client hotels with lump-sum payments in lieu of hotel program fee arrangements. The Company may not be able to recover such amounts from resulting membership or other fees. Any material shortfall in anticipated or projected membership and related fees relating to such arrangements could have an adverse effect on the Company's business, financial condition and results of operations. The Company's operating expenses are determined, in part, based on the Company's expectations of future revenue growth and are substantially fixed. As a result, unexpected changes in revenue levels will have a disproportionate effect on net income in any given period. Future acquisitions may have an adverse effect upon the Company's results of operation, particularly in quarters immediately following consummation of such transactions, while the operations of the acquired business are being integrated into the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Almost all of the Company's revenues to date have been derived from its international operations, including operations in several developing countries, and the Company anticipates that its international operations will continue to constitute a substantial portion of its revenues for the foreseeable future. In 1997, the Company generated 25.0%, 28.5%, 44.8% and 1.7% of its revenues in the American, European, Asian and Middle Eastern/North African regions. Operating in international and developing countries involves several risks, such as difficulties in staffing and managing foreign operations due to the limited supply of qualified labor, foreign currency exchange fluctuations and restrictions, currency devaluations, restrictions on currency conversion, implementation of a unified European Union currency, the burden of complying with a wide variety of complex foreign laws and treaties, the need for governmental approvals, the adoption of changes in regulatory and certification requirements, adverse changes in foreign or domestic laws and policies that govern the Company's operations, uncertainty of enforcement of contractual obligations, difficulty in accounts receivable collections, political and economic instability, natural disasters and catastrophes, adverse tax consequences, loss of revenue, property or equipment from expropriation, nationalization, war, insurrection and terrorism or changes in political ideologies. There can 8 be no assurance that any of these factors, singularly or together, will not have a material adverse effect on the Company's business, financial condition and results of operations. Foreign laws can affect the Company's operations in several respects. For example, the labor laws of certain countries restrict the manner in which the Company may hire or terminate local employees. As a result, the Company may be forced to give advance notice or make payments to local employees or governments prior to closing a program or location. In addition, foreign nationals may require visas to work outside their home country. Difficulty in hiring or laying off employees could have a material adverse effect on the Company's business, financial condition and results of operations. Further, foreign laws, including laws and regulations prohibiting telephone sales or requiring physical signatures on credit card charges, may severely restrict the Company's international operations. Certain countries tightly regulate the direct marketing industry by requiring disclosure or reporting by direct marketers about the use of customer data. In various countries, laws regulating telemarketing activity are just beginning to be developed. There can be no assurance that existing and future laws and regulations in the countries in which the Company operates will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company's operations and assets are subject to significant political, economic, legal and other uncertainties in some of the developing countries in which it operates, including China and Indonesia. Certain of these countries do not have comprehensive and highly developed systems of laws, particularly with respect to private enterprise and commercial activities, foreign investment activities and the interpretation and enforcement of private contracts. Enforcement of laws and private contracts in these countries is uncertain, and implementation and enforcement may be inconsistent. A change in leadership, social disruption or other circumstances affecting the political, economic or social life in any of these countries could have a material adverse effect on the Company's business, financial condition and results of operation. In addition, the Company's operations in China and some of these other countries are subject to administrative review and approval by various national, provincial and local governmental agencies. There can be no assurance that such approvals, when necessary or advisable, will be obtainable, or, if obtainable, that they will be on terms satisfactory to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS OF CURRENCY FLUCTUATIONS AND INFLATION The Company's current revenues, operating expenses and costs are almost entirely denominated in the functional currency of the foreign locations in which the Company operates. Conversion of total revenues and expenses to U.S. dollars is performed on a periodic basis. In addition, a significant portion of the Company's liabilities are denominated in foreign currencies. Fluctuations in the exchange rate between such foreign currencies and the U.S. dollar could affect the Company's cost of revenues, operating expenses or liabilities and, as a result, could materially adversely affect the Company's business, financial condition and results of operations. Some of the foreign countries in which the Company operates have experienced substantial, and in some periods extremely high, rates of inflation for recent years. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, adverse effects on the marketability of the Company's membership programs. In the past, the effects of such inflationary pressures have adversely affected the operating results of the Company, and in 1994 the Company terminated its operations in Turkey because of adverse effects on membership rates caused by currency devaluation and inflation. Similarly, rapid devaluation of currencies, such as that experienced in Columbia, Indonesia and Venezuela, have adversely affected, and may in the future adversely affect, the Company's business, financial condition and results of operations. In addition, the Company typically converts into U.S. dollars foreign revenues and expenses on a periodic basis. Fluctuations in currency rates in connection with such conversions may affect the period to period comparison of operating results. The Company does not presently engage in any hedging or other transactions intended to manage the risks relating to currency exchange rates or interest rate fluctuations. However, the Company may in the future undertake such 9 transactions if management determines that it is necessary to offset such risks. There can be no assurance that the use of such hedging transactions will be sufficient to manage the risk of foreign currency fluctuation. Any inability of the Company to successfully hedge such foreign currency risk could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." POTENTIAL INABILITY TO MANAGE GROWTH The Company has recently experienced a period of growth that has placed significant demands on the Company's management personnel and on its operational and financial resources. Net sales increased from approximately $21.2 million in the year ended December 31, 1995 to $31.9 million in the year ended December 31, 1997. In addition, the number of telemarketing call centers increased from 89 to 101 during the same period offering membership programs for 144 and 257 hotels, respectively. During this period, the Company has invested in new training programs, hired new personnel and upgraded its management information systems. The Company's ability to manage future growth will depend on its ability to continue to implement and improve operation, financial and management systems on a timely basis, to expand, train, motivate and manage its work force, hire additional qualified personnel and minimize turnover among program and operation managers. There can be no assurance that the Company's personnel, systems, procedures and controls will be adequate to support the Company's operations, and the failure to support the Company's operations effectively could have a material adverse effect on the Company's business, financial condition and results of operations. In order to provide and expand its membership programs, the Company will be required to attract and retain a sufficient number of additional highly skilled managerial and marketing personnel, including program and operation managers who are responsible for developing, marketing and managing the Company's membership programs. The Company has historically experienced high rates of turnover among its program managers, primarily as a result of the extensive travel that has been required of such individuals. Any prolonged continuation of or increase in program manager turnover rates could hinder the Company from developing its marketing infrastructure and could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company has invested significantly in management training programs to increase the number of qualified program and operation managers, there can be no assurance that these managers will remain with the Company for a sufficient period of time to allow the Company to recover the costs of training or that a sufficient number of such managers will be trained to serve existing or new clients effectively and establish additional membership programs. If the Company is unable to recruit and retain a sufficient number of qualified personnel, it may be unable to implement new and existing membership programs on a timely basis, or at all, which could adversely affect the Company's relationship with its clients as well as its reputation and could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, many of the Company's program and operation managers develop and maintain strong business relationships with the Company's clients. The Company depends on these relationships to contribute to the success of its existing membership programs, to generate additional membership programs with new clients and to attract and retain an active, loyal membership base. The loss of program and operation managers could lead to erosion of the Company's client base and a decline in the current number of hotel membership programs which could, in turn, have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY EMPLOYEES The Company's performance has depended, and will continue to depend, to a significant extent on the efforts and abilities of its executive officers and certain other key employees of the Company, particularly Mokhtar Ramadan, the Company's Chief Executive Officer. Although the Company has entered into employment contracts with its executive officers and certain of its key employees, there is no guarantee 10 that these employees will remain with the Company. The loss of the services of certain of these executive officers or key employees could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a number of members of management, including Frans Van Steenbrugge, the Company's Senior Vice President and General Manager of Telecommunications, and Philip G. Hirsch, the Company's Senior Vice President, Finance, and Chief Financial Officer, joined the Company in 1998. Accordingly, the Company's management team has not had extensive experience working together. The Company does not maintain key employee life insurance on the lives of certain of its executive officers, including its Chief Executive Officer. See "Management." COMPETITION Competition in the membership program industry is intense. The Company faces direct and indirect competition from a number of sources and expects to experience increased competition in the future. The Company competes with the internal marketing programs of client hotels and prospective client hotels. For example, certain hotels have frequent guest programs that may expand to offer benefits to their members similar to the benefits provided by Company's hotel membership programs. Accordingly, there can be no assurance that current and future client hotels will not elect to conduct all, or a significant portion of, their marketing efforts internally. The Company also competes with marketing services companies that employ a loyalty-driven marketing model similar to the one developed by the Company, but which focus on a broader array of membership programs. Companies such as Cendant Corporation and MemberWorks Incorporated provide membership programs in the travel, dining and retail industries. The Company's other competitors include a number of smaller, regional providers, large retailers, travel agencies, financial institutions, credit card issuers and other organizations that offer benefit programs to their customers and may include third-party service providers with whom the Company has established marketing relationships. Such competitors may have greater financial, personnel and marketing resources, greater name recognition and larger customer bases than the Company. There can be no assurance that the Company's competitors will not increase their emphasis on offering products and services similar to those offered by the Company or begin offering products and services which would be in direct competition with those which the Company may want to offer in the future. There also can be no assurance that competitors will not develop and successfully introduce competitive products and services, that the introduction of such products and services will not cause a reduction in the price at which the Company offers its products and services or that the Company will be able to compete successfully for both members and client hotels with any of these existing or potential competitors. Competition for clients in the calling card product segment is highly competitive, and the technology involved is rapidly evolving and subject to constant change. Today there are numerous companies offering calling cards, including companies such as AT&T Corp., British Telecom, MCI Communications Corporation, Sprint Corporation/Global One and several other local and regional international telephone companies, which are substantially larger than the Company and have greater financial, personnel and marketing resources, greater name recognition and larger customer bases than the Company. These advantages and contractual notice requirements restricting the Company's ability to change pricing unilaterally may afford the Company's competition with more pricing flexibility than the Company. The ability of the Company to compete effectively in the telecommunication services market will depend upon the Company's continued ability to provide access to high-quality service at prices generally competitive with, or lower than, those charged by its competitors. There is no assurance that the Company will be able to respond quickly and efficiently to any changes in prices charged by such competitors. There can be no assurance that competition from existing or new competitors or a decrease in the rates charged for telecommunication services by major long distance carriers or other competitors would not have a material adverse effect on the Company's business, financial condition or results of operations. 11 RISKS ASSOCIATED WITH NEW PRODUCT AND SERVICE INTRODUCTIONS The Company's growth strategy includes offering complementary products and services within travel-related industries to its members. The implementation of new products and services may require the investment of significant resources, which may not be offset by increased revenues. The Company's ability to successfully introduce complementary products and services depends, among other things, on its ability to contract with third party service providers, design effective membership programs for such providers and discern the purchasing preferences and demands of its members. Failure to discern such demands and preferences of its members or failure to anticipate and respond to changes in such demands and preferences could lead to, among other things, diminished member loyalty, difficulty in securing and maintaining marketing relationships with third-party service providers, lower margins and a decline in the Company's reputation, any one of which could have a material adverse effect on the Company's business, financial condition and results of operations. Failure to introduce new products and services in a timely manner also could result in the Company's competitors acquiring additional market share for a particular area of consumer interest or in a particular geographic region. In addition, the introduction or announcement of new products and services by the Company or others could render existing products and services obsolete, or result in a delay or decrease in demand for existing products and services as members evaluate new offerings. The Company's ability to offer complementary products and services involves risks and uncertainties that typically accompany new product and service offerings, including: limited management experience and expertise in designing, marketing and managing such new products and services; acceptance by the Company's members and clients; regulatory or legal approvals, particularly within international jurisdictions; delays in market introduction; competition; significant commitment of managerial resources and greater than anticipated costs. The Company has limited experience offering new products and services to its members and has only recently initiated its calling card and credit card offerings. There can be no assurance that existing members and clients will be receptive to such new products or services or that such members and clients will be able or willing to distinguish between the Company's and competitors' products and services. Accordingly, there can be no assurance that such new products or services will achieve a sustainable level of market acceptance or that the Company will be able to successfully manage or implement such new products and services. Failure of the Company to successfully design and market such new products and services, or the failure of such products and services to achieve a significant level of market acceptance, could affect the Company's relationship with existing members, prevent the Company from gaining new members in existing and new markets and have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON THIRD-PARTY PROVIDERS The Company's reputation, the success of its hotel membership programs and its ability to attract and retain individual members is substantially dependent on the quality of services provided by third parties. For example, the success of the Company's hotel membership programs is dependent on the quality of benefits and services provided by client hotels. Similarly, the success of the Company's calling card and credit card products is dependent on the service provided by third party service providers such as Sprint Corporation ("Sprint") and Standard Chartered Bank. Additionally, some of the Company's reservation and data gathering is provided by Anasazi Travel Resources, Inc. The Company has no direct control over the quality of such third-party services, and there is no assurance that third-party service providers will fulfill the Company's expectation of providing premium products and high-quality, professional service. Any material decline in the quality of the benefits and services provided by client hotels or other product and service providers or an interruption in the provision of such products and services, could affect the ability of the Company to sustain member satisfaction and could have a material adverse effect on the Company's business, financial condition and results of operations. 12 DEPENDENCE ON PROPRIETARY MEMBERSHIP DATABASE The Company's ability to design new membership programs and market them effectively is in large part dependent on the information contained in its membership database. In order to cost-effectively target a receptive purchasing audience, the Company must compile and update transactional data relating to current members' use of products and services provided through the Company's membership programs. There can be no assurance that the Company will be able to obtain a sufficient quantity of transactional data or, if acquired, that this data will be complete and accurate. Moreover, transactional data about a member's travel and purchasing preferences is, in some instances, dependent upon the accounting and reporting services provided by third parties. For example, data concerning members' purchase of travel, lodging, and food and beverages is dependent, in some instances, on a client hotel's records of such transactions. There can be no assurance that the Company's client hotels will keep such records, that such records will be accurate or that the clients will transmit such information to the Company in a timely fashion. Failure of third parties to transmit such information to the Company could have a material adverse effect on the Company's ability to discern a member's travel and purchasing preferences and to create effective, targeted marketing promotions and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to select purchasing audiences that are more likely to respond favorably to the products and services offered by the Company is also dependent on its database technology. The Company has only recently implemented certain database management software and its calling card billing system. There can be no assurance that such software or billing system will operate efficiently, accurately, without interruption and without technical problems. In addition, the Company anticipates that it will be necessary to continue to update its database systems and to select, invest in and develop new and enhanced technology on a timely basis in the future in order to maintain its competitiveness. The failure of the Company to successfully anticipate or adapt to technological changes or select and develop new and enhanced technology on a timely basis could adversely affect the quality of the services the Company provides to its clients or members, or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH GOVERNMENT REGULATION The Company primarily markets its membership programs through its local and regional telemarketing call centers. The telemarketing industry has become subject to an increasing amount of foreign, federal and state regulation in recent years, including limitations on the hours during which telemarketers may call consumers and prohibitions on the use of automated telephone dialing equipment to call certain telephone numbers. The Company is also subject to various foreign, federal and state regulations concerning the collection, distribution and use of information regarding individuals. Compliance with these laws and regulations is generally the responsibility of the Company even where it uses agents to conduct the telemarketing, and the Company could be subject to a variety of enforcement or private actions for any failure to comply with such regulations, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, growing concern about privacy and the collection, distribution and use of information about individuals has led to self-regulation of such practices by the direct marketing industry and to increased governmental regulation. The Direct Marketing Association (the "DMA"), the leading trade association of direct marketers, has adopted guidelines regarding the fair use of such information which it recommends participants in the direct marketing industry follow. Although the Company's compliance with the DMA's guidelines and applicable foreign, federal and state regulations has not had a material adverse effect on the Company, no assurance can be made that the DMA will not adopt additional guidelines or that additional foreign, federal or state laws or regulations (including antitrust and consumer privacy laws) will not be enacted or applied to the Company or its clients and marketing partners. Any such guidelines, laws or regulations could adversely affect the ability of the Company to collect and distribute 13 consumer information, increase the cost to the Company of collecting certain kinds of information, preclude the use by direct marketers of information that the Company could lawfully collect or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. To the extent the Company's hotel and other clients do not comply with such guidelines, laws or regulations, the Company may incur liabilities which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's calling card operations are subject to foreign, federal and state government regulation of long distance telephone services. The Company is regulated at the federal level by the Federal Communications Commission (the "FCC"). The Company is required to maintain an authorization, issued by the FCC, in connection with its international calling card service, and the Company is in the process of obtaining such an authorization. In addition, the FCC has required carriers to maintain both domestic and international tariffs for services containing the currently-effective rates, terms and conditions of service. The FCC has, however, eliminated the tariffing requirement for domestic interstate non-dominant carriers, and indeed prohibited the filing of such tariffs, but a federal court of appeals has stayed the effectiveness of this detariffing order pending appeal and the FCC's resolution of several petitions for reconsideration. There can be no assurance of the outcome of these proceedings. If the Company must negotiate individual contracts with each of its calling card customers, it could have a material adverse effect on the Company's business, financial condition and results of operations. Any intrastate long distance telecommunications operations of the Company are also subject to various state laws and regulations, including prior certification, notification or registration requirements. Although the Company does not intend to market its calling cards for intrastate use, there can be no guarantee that customers will not use the calling cards for this purpose. For any intrastate services, the Company generally must obtain and maintain certificates of public convenience and necessity from regulatory authorities in most states. In most of these jurisdictions, the Company must file and obtain prior regulatory approval of tariffs for intrastate services. In addition, the Company must update or amend the tariffs and, in some cases, the certificates of public convenience and necessity when rates are adjusted or new products are added to the long distance services offered by the Company. If the Company becomes aware that intrastate calling is occurring, the Company intends to comply with the applicable regulatory requirements. The FCC and numerous state agencies also impose prior-approval requirements on transfers of control, including corporate reorganizations and assignments of certain regulatory authorizations. If the federal and state regulations governing the fees to be charged for the origination and termination of calls by long-distance subscribers (such as the Company's consumers) change, particularly if such regulations are changed to allow variable pricing of such access fees based upon volume, such changes could have a material adverse effect on the Company's business, financial condition and results of operations. The FCC recently adopted a regulation which requires interexchange carriers to compensate payphone providers for each toll-free number call placed. The regulation allows such carriers to seek to recover these charges from their customers, including through future contractual provisions with customers such as the Company. The FCC rules require that, on an interim basis through October 1997, the interexchange carriers compensate payphone providers an amount equivalent to $0.35 per call. On July 1, 1997, the United States Court of Appeals for the District of Columbia ("D.C. Circuit") upheld the method of "carrier pays" for recovery of payphone compensation, but found the $0.35 per call charge and interim payphone compensation plan was arbitrary and capricious. The payphone compensation rules were remanded to the FCC for reconsideration and the FCC subsequently adjusted the compensation amount to $0.284 per call. On appeal, the D.C. Circuit again found this amount to be arbitrary and capricious and remanded the revised rules to the FCC for further explanation. On an interim basis, the compensation scheme adopted by the FCC remains in effect until the FCC concludes its evaluation of these issues. The FCC and D.C. Circuit have noted that the compensation scheme is subject to retroactive adjustment, if the FCC considers such an adjustment appropriate. In addition, carriers such as the Company that provide 14 domestic interstate services to end users must pay a fee each month for U.S. universal service funding, which supports telecommunications service in remote areas of the U.S. and also certain services used by schools and libraries. Currently, the Company must contribute approximately 4% of its annual end user revenues (including both domestic interstate and international revenues). The Company is unable to predict any changes in the level of this contribution or whether any such changes could have a material adverse effect on the Company. The Company is unable to predict whether these regulations or other potential changes in the regulatory environment could have a material adverse effect on the Company. RISK OF LOSS OF DATA CENTERS AND TELEPHONIC TRANSMISSION CAPABILITY The Company's business is highly dependent on its computer and telephone equipment and on telephone services provided by various local and long distance domestic and international telephone companies. Any significant interruption in computer or telephone services could adversely affect the Company's business, financial condition and results of operations. The Company's operations are dependent on its ability to protect its data center against damage from fire, earthquake, power loss, telecommunications failure or similar events. No assurance can be given that such precautions will be adequate or that operations will not be interrupted, even for extended periods. Any damage to the Company's data centers could cause interruptions in the Company's operations and have a material adverse effect on the Company's business, financial condition and results of operations. The Company's property and business interruption insurance may not be adequate to compensate the Company for all losses that may occur. The Company's operations, including its new telephone calling card product, are also dependent on the telephone transmission capabilities of Sprint. Any material disruption in Sprint's transmission capabilities could adversely affect the Company's ability to receive and transmit data and, accordingly, have a material adverse effect on the Company's business, financial condition and results of operations. See "--Dependence on Third-Party Providers." RISK OF LOSS FROM RETURNED TRANSACTIONS; FRAUD; BAD DEBT; THEFT OF SERVICES The Company utilizes national credit card clearance systems for electronic credit card settlement of its membership fees payments and calling card product. The Company's relationships with providers of merchant card services such as VISA and MasterCard could be adversely affected by excessive uncollectibles or chargebacks, which are generally higher in the telephone industry than in other industries. Credit risks arising from returned transactions caused by closed accounts, frozen accounts, unauthorized use, disputes, theft or fraud exists with the Company's membership fee payments, calling card product and credit card product. There can be no assurance that the Company will be able to effectively limit these risks, and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. From time to time, persons may obtain calling card services without rendering payment to the Company by unlawfully utilizing the Company's access numbers and PINs. There can be no assurance that the Company will not experience future losses due to unauthorized use of access numbers and customized PINs and that such losses will not be material. The Company intends to manage these risks through its internal controls, monitoring and blocking systems. There can be no assurance that the Company's risk management practices or reserves will be sufficient to protect the Company from unauthorized or returned transactions or thefts of services, which could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY PRINCIPAL STOCKHOLDERS Upon completion of the offering, Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan will beneficially own approximately 7,980,000 shares or % of the outstanding shares of Common Stock. As a result, these stockholders, if acting together, will be able to exercise control over matters requiring stockholder approval, including the election of directors, mergers, consolidations and sales of all or substantially all of the assets of the Company. This stockholder control may delay or prevent transactions 15 resulting in a change in control of the Company unless the terms are approved by such stockholders. See "Principal Stockholders" and "Description of Capital Stock--Certain Anti-Takeover Effects." In addition, affiliates of the Company will continue to have certain contractual and other business relationships with the Company and may engage in transactions from time to time that are material to the Company. See "Certain Transactions." Although any such material agreements and transactions would require approval of the Company's Board of Directors, such transactions generally will not require approval of the disinterested members of the Board of Directors and conflicts of interest may arise in certain circumstances. There can be no assurance that such conflicts will not from time to time be resolved against the interests of the Company. The Company currently has three directors, all of whom are stockholders and employees of the Company. BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Stock offered hereby are estimated to be approximately $ million ($ million if the Underwriter's overallotment option is exercised in full) after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds of this offering for distributions to certain stockholders, payment of outstanding bank indebtedness and working capital and other general corporate purposes. Management will retain a significant amount of discretion over the application of the net proceeds of the offering. Because of the number and variability of factors that determine the Company's use of the net proceeds of the offering, there can be no assurance that such application will not vary substantially from the Company's current intentions. Pending such utilization, the Company intends to invest the net proceeds of the offering in short-term investment grade and interest-bearing securities. See "Use of Proceeds." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBILITY VOLATILITY OF STOCK PRICES Prior to the offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price will be determined by negotiation among the Company and the representatives of the Underwriters based on several factors, including prevailing market conditions, certain financial information on the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present stage of the Company's development and other factors deemed relevant. See "Underwriting." In addition, the stock market in general, and membership services companies in particular, have in the past experienced price and volume fluctuations which have sometimes been unrelated to the operating performance of such companies. There can be no assurance that the prices at which shares of Common Stock will trade in the public market after the offering will not be lower than the price at which shares of Common Stock are sold in the offering. The trading price of the Common Stock after the offering could be subject to certain fluctuations in response to numerous factors, including, but not limited to, quarterly variations in operating results, competition, announcements of new or enhanced products or services by the Company or its competition, regulation changes, any difference in actual numbers and results expected by investors and analysts, changes in financial estimates by securities analysts and other events or factors. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies and that has often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after the offering could adversely affect the market price of the Common Stock. Upon completion of the offering, the Company will have outstanding shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options after May 31, 1998. The holders of 12,000,000 of such shares 16 and certain option holders have entered into agreements ("Lock-Up Agreements") agreeing not to sell such shares for a period of 180 days following the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens. In addition, as of May 31, 1998, there were options outstanding to purchase an aggregate of 997,140 shares of Common Stock, of which 180,000 are vested and exercisable at such date. Following the offering, the Company intends to file a registration statement covering the shares reserved for issuance under the Company's employee stock option plan, and the shares issued upon exercise of such options. See "Shares Eligible For Future Sale." ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS Certain provisions of Delaware law and the Company's Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws (the "Bylaws") may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors. Such provisions also may render the removal of directors and management more difficult. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. These provisions of Delaware law and the Company's Certificate of Incorporation and Bylaws may also have the effect of discouraging or preventing certain types of transactions involving an actual or threatened change of control of the Company (including unsolicited takeover attempts), even though such a transaction may offer the Company's stockholders the opportunity to sell their stock at a price above the prevailing market price. The Company's Certificate of Incorporation places certain restrictions on who may call a special meeting of stockholders. In addition, the Company's Board of Directors has the authority to issue up to 5,000,000 shares of undesignated preferred stock (the "Undesignated Preferred Stock") and to determine the price, rights, preferences and privileges of those shares without any further vote or actions by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Undesignated Preferred Stock that may be issued in the future. The issuance of such shares of Undesignated Preferred Stock, while potentially providing desirable flexibility in connection with possible acquisitions and serving other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or may discourage a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"), which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless the business combination is approved in a prescribed manner. The application of Section 203 of the DGCL also could have the effect of delaying or preventing a change of control of the Company. In addition, the Company's Certificate of Incorporation provides that the Board of Directors will be divided into three classes of directors serving staggered terms and that, upon consummation of the offering, all stockholder actions must be effected at a duly called meeting and not by a consent in writing. The classification provision and the prohibition on stockholder action by written consent could have the effect of discouraging a third party from making a tender offer or otherwise attempting to gain control of the Company. See "Reorganization" and "Description of Capital Stock--Certain Anti-Takeover Effects." DILUTION; ABSENCE OF DIVIDENDS The initial public offering price will be substantially higher than the pro forma net tangible book value per share of Common Stock. At an assumed initial public offering price of $ per share, investors purchasing shares of Common Stock in this offering will incur immediate, substantial dilution of $ per share in the pro forma net tangible book value of Common Stock. Additional dilution will occur upon the exercise of outstanding options. The Company does not anticipate paying cash dividends in the foreseeable future. See "Dilution" and "Dividend Policy." 17 YEAR 2000 Currently, many computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. The Company and third parties with which the Company does business rely on numerous computer programs in their day-to-day operations. The Company is evaluating the Year 2000 issue as it relates to the Company's internal computer systems and third party computer systems with which the Company interacts. The Company expects to incur internal staff costs as well as consulting and other expenses related to these issues; these costs will be expensed as incurred. In addition, the appropriate course of action may include replacement or an upgrade of certain systems or equipment at a substantial cost to the Company. There can be no assurance that the Year 2000 issues will be resolved in 1998 or 1999. The Company may incur significant costs in resolving its Year 2000 issues. If not resolved, this issue could have a significant adverse impact on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FORWARD-LOOKING STATEMENTS The statements contained in this Prospectus that are not historical fact are "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Management cautions the reader that these forward-looking statements, including statements about the Company's dependence on membership programs and fees, dependence on the hotel industry, seasonal and currency fluctuations, ability to manage growing operations, competition, the Company's ability to expand its membership programs in international operations and dependence on third-party service providers and other matters contained in this Prospectus regarding matters that are not historical facts, are only predictions. No assurance can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's projection and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this Prospectus. The forward-looking statements contained herein are based on current expectations, and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. 18 REORGANIZATION The Company was incorporated in Delaware in May 1998 to consolidate the operations of several entities in the same business and under common ownership and management. From 1989 to July 1996, the business of the Company was conducted through Hospitality Marketing Consultants, a general partnership (the "Original Partnership") composed initially of Mokhtar Ramadan, Marwan Ramadan and Fadi Ramadan. In 1994, Sandra Case was admitted to the Original Partnership as an additional partner. The Ramadans and Ms. Case are referred to as the "Principals." In addition, beginning in April 1989, the Company operated its business in the U.S. and Puerto Rico through HMC Consultants Inc., a California corporation ("HMC Inc."). Prior to the consummation of the Reorganization, all of the capital stock of HMC Inc. was beneficially owned by the Principals. In July 1996, the Principals organized Hospitality Marketing Consultants, LLC, a California limited liability company ("HMC LLC"), and HMC LLC purchased from the Original Partnership all of the Original Partnership's business and assets, except the real property at which the Company's Irvine, California headquarters is located. See "Certain Transactions." As the Principals commenced business operations in certain foreign countries, they generally established local corporations through which to conduct those operations. Corporations conducting business (each, a "Foreign Entity" and collectively, the "Foreign Entities") were organized in the following countries: Australia, Canada, Colombia, France, Indonesia, Italy, Lebanon, Malaysia, Poland, Singapore, Spain, United Kingdom and Venezuela. Prior to consummation of the Reorganization, the Foreign Entities organized in Australia, France, Indonesia, Malaysia, Singapore and Venezuela, were directly or indirectly, 100% beneficially owned by HMC LLC. Prior to consummation of the Reorganization, the Foreign Entities organized in Canada, Colombia, and United Kingdom were 100% beneficially owned by the Principals. The Principals also owned an 84% interest in the Foreign Entity organized in Poland, with the remaining 16% owned by Chris Feeney, a former consultant. In addition, prior to the consummation of the Reorganization, the Foreign Entities organized in Italy and Spain were 100% owned by HMC (International) Ltd., a United Kingdom Foreign Entity ("International"), which is owned by the Principals. Prior to the consummation of the offering, the following transactions will be effected (such transactions are referred to collectively as the "Reorganization"): Pursuant to a Contribution Agreement dated June 1, 1998 by and among the Company, HMC LLC and the Principals, the Principals have agreed to contribute all of their interests in all of the Foreign Entities owned by them, except International, to HMC LLC along with all right, title and interest in the entity currently being established in the Peoples Republic of China. Additionally, the Principals will contribute all of their stock in HMC Inc. to HMC LLC. The Principals will also contribute all of their interests in International to Hospitality Marketing Concepts (Holdings) Limited, a newly-organized United Kingdom Foreign Entity ("Holdings") owned by HMC LLC. Thereafter, International will be liquidated, and its interests in the Foreign Entities organized in Italy and Spain will be transferred to Holdings. As a result, HMC LLC will have acquired, directly or indirectly, 100% of the equity interests in HMC Inc. and each of the Foreign Entities, except that HMC LLC will own 84% of the equity interest in the Foreign Entity organized in Poland. In situations where, pursuant to the requirements of local law, it is necessary to have more than one owner of equity interests, some ownership interests in Foreign Entities will be held by third parties. However, in each such case, the party holding the interest will execute an Agency Agreement confirming that the party holds that interest for the benefit of HMC LLC, and that HMC LLC beneficially owns the interest, including all economic and voting rights relating to that interest. Effective prior to the closing of the offering, HMC LLC will be merged with and into the Company, with the Company as the surviving entity (the "Merger"). As a result of the Merger, the Company will succeed to HMC LLC's ownership interest in HMC Inc., Call Connect, Inc., a California corporation, and each of the Foreign Entities, as described above. The Company established Call Connect, Inc. to conduct its calling card business. The Reorganization has been structured as a tax-free reorganization. The 19 accounting for the Reorganization will be similar to the accounting for a pooling of interests, as it represents an exchange of equity interests among companies under common control. Prior to the Reorganization, the Company will conduct no business and hold no assets or liabilities. Following the Reorganization, HMC Inc., Call Connect, Inc. and each of the Foreign Entities will be an operating subsidiary of the Company. An aggregate of 8,400,000 shares of Common Stock will be issued by the Company to the Principals in connection with the Merger. Accordingly, each of Mokhtar Ramadan, Marwan Ramadan and Fadi Ramadan will receive 2,616,320 shares of Common Stock, a trust beneficially owned by the Ramadans will receive 131,040 shares of Common Stock and Sandra Case will receive 420,000 shares of Common Stock for their interests in HMC LLC. Following the offering, the Principals will beneficially own approximately % of the Company's outstanding Common Stock. See "Certain Transactions" and "Principal Stockholders." HMC LLC is a limited liability company and, accordingly, has not paid federal corporate income taxes. Instead, until consummation of the Merger, the Principals are obligated to pay U.S. federal and certain state income taxes on their allocable portion of the income of HMC LLC. HMC LLC and certain of the Foreign Entities periodically have made various distributions to the Principals. Distributions to the Principals totaled approximately $2.0 million, $5.1 million, $4.0 million, and $820,000 during the 1995, 1996 and 1997 fiscal years and the three months ended March 31, 1998, respectively. The Principals will continue to receive their normal periodic distributions prior to the consummation of the Reorganization. See "Certain Transactions." USE OF PROCEEDS The net proceeds of the Company from the sale of shares of Common Stock offered by the Company hereby are estimated to be approximately $ million ($ million if the Underwriters' overallotment option is exercised in full), assuming a public offering price of $ and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from this offering as follows: (i) distributions to the Principals of approximately $5.0 to $9.0 million, consisting of undistributed earnings of HMC LLC as of the date of the Merger, the value of prepaid taxes accruing to the benefit of the Company and certain foreign tax credits, (ii) payment of the Company's outstanding indebtedness under its bank lines of credit of approximately $1.3 million and (iii) working capital and other general corporate purposes. The Company plans to declare these distributions to the Principals prior to the consummation of the Merger. The Company may apply an undetermined portion of the net proceeds of this offering towards the acquisition of complementary businesses. The Company currently has no agreements or understandings with respect to any such acquisition. The aggregate amount of the net proceeds to the Company that will be received by the Principals is approximately $ million. See "Reorganization" and "Certain Transactions." Additional purposes of this offering are to create a public market for the Company's Common Stock, to facilitate future access by the Company to the public equity markets and to enhance the Company's public image and credibility, particularly to potential clients as it continues to expand globally and attract new products and services for sale to its members. Management will retain a significant amount of discretion over the application of the net proceeds of the offering. Because of the number and variability of factors that determine the Company's use of the net proceeds of the offering, there can be no assurance that such application will not vary substantially from the Company's current intentions. Pending use of the net proceeds as set forth above, the Company intends to invest the net proceeds of the offering in short-term, investment-grade, interest bearing securities. See "Risk Factors--Broad Management Discretion Over Use of Proceeds." 20 DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain all earnings for the operation and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon the future earnings, results of operations, capital requirements and general financial condition of the Company and general business conditions, as well as such other factors as the Board of Directors may deem relevant. As a limited liability company, HMC LLC has made substantial cash distributions to the Principals. The Principals will continue to receive their normal periodic distributions prior to the consummation of the Reorganization. See "Reorganization," "Use of Proceeds," "Certain Transactions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." CAPITALIZATION The following table sets forth the combined capitalization of the Company as of March 31, 1998 (i) on an actual basis after giving effect to the Reorganization, (ii) on a pro forma basis to reflect the estimated distribution of approximately $7.0 million to the Principals from the proceeds of this offering, the assumed conversion of the Subordinated Promissory Note as well as the recording of a net deferred tax asset of $877,000 as if the Company's change from a limited liability company to a C corporation had occurred March 31, 1998 and (iii) on a pro forma basis as adjusted to give effect to the sale of the shares of Common Stock being offered hereby (at an assumed public offering price of $ per share) after deducting estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds therefrom as described in "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements and related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing elsewhere in this Prospectus.
MARCH 31, 1998 --------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------- -------------- -------------- (In thousands) Lines of credit and current portion of notes payable........ $ 1,310 $ 1,310 $ Notes payable............................................... 4,763 1,763 Distribution payable to stockholders........................ 7,000 Stockholders' equity (deficit) (1): Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding............ -- -- -- Common Stock, $0.001 par value; 50,000,000 shares authorized; 8,400,000 shares issued and outstanding; 12,000,000 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted................................................ 8 12 Additional paid-in capital................................ 3,103 Accumulated deficit....................................... (7,442) (13,565) Accumulated other comprehensive income.................... (231) (231) Total stockholders' equity (deficit).................... (7,665) (10,681) ------------- -------------- ------- Total capitalization.................................... $ (1,592) $ (608) ------------- -------------- ------- ------------- -------------- -------
- ------------------------ (1) Excludes 1,500,000 shares of the Company's Common Stock reserved for issuance under the Company's 1998 Stock Option Plan, of which options for an aggregate of 817,140 shares of Common Stock were issued and outstanding as of May 31, 1998, and an option to purchase 180,000 shares of Common Stock. See "Management--Option Plan," "Certain Transactions" and Notes 6 and 10 of Notes to Consolidated Financial Statements. 21 DILUTION The pro forma net tangible book value (deficit) of the Company as of March 31, 1998, after giving effect to the conversion of the Subordinated Promissory Note and the issuance of 3,600,000 shares of Common Stock upon such conversion, the distribution to the Founding Stockholders of approximately $7.0 million from the proceeds of this offering, the recording of net deferred tax assets of $877,000 and the Reorganization, was $(11.5) million, or $(0.96) per share of Common Stock. Pro forma net tangible book value per share represents the Company's total pro forma tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. Without taking into account any changes in pro forma net tangible book value after March 31, 1998, other than to give effect to the sale of the shares of Common Stock offered hereby (at an assumed public offering price of $ per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company) the net tangible book value of the Company at March 31, 1998, would have been $ million, or $ per share of Common Stock. This represents an immediate dilution in net tangible book value of $ per share to new investors purchasing shares of Common Stock in the offering and an immediate increase in net tangible book value of $ per share to existing stockholders. The following table illustrates this per share dilution: Assumed public offering price per share..................... $ Pro forma net tangible book value (deficit) per share before the offering..................................... $ (0.96) Increase per share attributable to new public investors... --------- --------- Pro forma net tangible book value per share after the offering.................................................. --------- --------- Dilution per share to new public investors.................. $ --------- ---------
The following table summarizes, on a pro forma basis as of March 31, 1998, the differences between existing stockholders (giving pro forma effect to the conversion of the Subordinated Promissory Note and the Reorganization), and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company (based upon, in the case of new investors, an assumed public offering price of $ per share before deducting estimated underwriting discounts and commissions and offering expenses) and the average price per share paid:
AVERAGE PRICE PER SHARE -------------- SHARES PURCHASED TOTAL CONSIDERATION ------------------------- -------------------------- NUMBER PERCENT AMOUNT PERCENT ------------ ----------- ------------- ----------- Existing stockholders (1)...... 12,000,000 % $ 3,000,000 % $ 0.25 New investors.................. ------------ --- --- Total...................... 100% 100% ------------ --- ------------- --- ------------ --- ------------- ---
- ------------------------ (1) If the Underwriters' over-allotment option is exercised in full, sales by the Company in this offering will reduce the number of shares of Common Stock held by existing stockholders to approximately % of the total shares of Common Stock outstanding after this offering and will increase the number of shares held by new investors to or approximately % of the total shares of Common Stock outstanding after this offering. See "Underwriting." The foregoing table assumes no exercise of outstanding stock options after March 31, 1998. As of May 31, 1998, there were options outstanding to purchase a total of 997,140 shares of Common Stock, at a weighted average exercise price of $8.79 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. See "Management--Option Plan" and Notes 6 and 10 of Notes to Consolidated Financial Statements. 22 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below at December 31, 1995, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 have been derived from the Consolidated Financial Statements of the Company, which statements have been audited by Price Waterhouse LLP, independent accountants. The selected consolidated financial data at December 31, 1993 and 1994 and for each of the two years ended December 31, 1994 are derived from unaudited financial statements not included herein. The selected consolidated financial data at March 31, 1998 and for the three months ended March 31, 1997 and 1998 are derived from unaudited financial statements included elsewhere in this Prospectus, which, in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations of the Company for the unaudited interim periods. The data for the interim periods is not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- (In thousands, except share and per share data) CONSOLIDATED INCOME STATEMENT DATA: Revenues................................. $ 24,458 $ 23,893 $ 21,199 $ 27,297 $ 31,906 $ 7,777 $ 7,873 Cost of revenues......................... 16,613 16,060 13,788 17,471 20,658 5,155 5,033 --------- --------- --------- --------- --------- --------- --------- Gross margin............................. 7,845 7,833 7,411 9,826 11,248 2,622 2,840 General and administrative costs......... 6,580 6,813 6,316 6,396 7,304 1,477 2,005 --------- --------- --------- --------- --------- --------- --------- Operating income......................... 1,265 1,020 1,095 3,430 3,944 1,145 835 Interest expense......................... (150) (88) (72) (167) (285) (58) (144) Foreign currency transaction gain (loss)................................. (83) 51 (46) (28) 33 Other income (expense)................... (27) 411 55 (43) 42 37 (29) --------- --------- --------- --------- --------- --------- --------- Net income............................... $ 1,142 $ 1,343 $ 995 $ 3,271 $ 3,655 $ 1,096 $ 695 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income per share--Basic and diluted................................ $ 0.14 $ 0.17 $ 0.12 $ 0.39 $ 0.43 $ 0.13 $ 0.08 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares: Basic................................ 7,980,000 8,050,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 Diluted.............................. 7,980,000 8,050,000 8,400,000 8,400,000 8,430,000 8,400,000 8,580,000 Unaudited pro forma data (1): Unaudited pro forma net income......... $ 1,604 $ 302 Unaudited pro forma net income per share--Basic and diluted............. $ $ Unaudited pro forma weighted average common shares:....................... Basic................................ Diluted..............................
YEAR ENDED DECEMBER 31, ----------------------------------------------------- MARCH 31, 1993 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- ----------- (In thousands) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $ 1,433 $ 589 $ 577 $ 1,694 $ 2,840 $ 1,380 Working capital (deficit)........................... (3,215) (4,516) (5,588) (5,534) (3,856) (4,161) Total assets........................................ 8,162 5,904 9,252 12,389 16,498 16,226 Long-term debt...................................... 161 24 0 1,763 4,763 4,763 Stockholders' deficit............................... (2,977) (4,166) (5,254) (6,981) (7,470) (7,665)
- -------------------------- (1) See Note 9 of Notes to Consolidated Financial Statements for a discussion of pro forma income statement data. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" INVOLVING KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS." THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Hospitality Marketing Concepts Inc. is a leading provider of membership programs for prestigious hotels and other clients in international and domestic markets. The Company's hotel membership programs are designed to provide participating hotels with improved consumer loyalty, increased patronage, an additional channel for acquiring new customers and a more predictable recurring revenue stream from a growing base of individual members. The Company's marketing services address the growing needs of hotels and other businesses to increase profitability, leverage the marketing expertise and infrastructure of outside vendors and cost-effectively offer new and differentiated products and services to customers. In marketing their facilities, many hotels and businesses have limited resources to focus on the needs and demands of local and international purchasing audiences with multiple languages and customs outside the region in which they are located. The Company believes that its services address the needs of three constituencies: client hotels, individual members and clients in travel-related industries whose complementary products and services are offered through the Company's membership programs. As of March 31, 1998, the Company has established hotel membership programs and on-going marketing relationships with approximately 315 hotels in approximately 160 cities worldwide, including New York, Rome, London, Madrid, Hong Kong, Shanghai, Warsaw and Caracas. The Company derives substantially all of its revenues from the sale of membership programs for hotels in international markets. These membership programs typically are provided pursuant to exclusive marketing contracts with client hotel and hotel chains. Under these contracts, the Company assumes responsibility for the design, marketing and management of all aspects of each membership program, utilizing the Company's own marketing infrastructure to generate members for each program. The Company's members are typically affluent individuals employed in top positions within small to medium-sized businesses and professional organizations. As a general matter, individuals may cancel a membership within ten days of initial commitment for a full refund. Historically, the Company has not experienced a significant number of such cancellations. Memberships are typically one year. Membership fees are typically billed to the members' credit card. Membership fees earned are recorded, net of cancellations. Membership fees and related costs of acquisition are deferred and amortized as membership revenues on a straight-line basis over the membership period in order to provide a matching of revenue and expense with the service period. The Company's cost of revenues consists primarily of telemarketing payroll, hotel program fees, telephone costs, printing and distribution costs of membership materials and processing fees. The Company has frequently entered into hotel program fee arrangements as part of its hotel membership programs. Such arrangements typically involve the payment of a percentage of individual membership fees, after costs, to the participating hotel. The Company typically determines the percentage to be payable to the hotel on a case-by-case basis. Accordingly, any significant increase in the percentage of membership fees payable to participating member hotels, as a result of relative bargaining power, increased competition or other factors, would reduce the Company's operating margins and could have a material adverse effect on the Company's business, financial condition and results of operations. In certain instances, the Company has provided, and 24 may in the future provide, participating client hotels with lump-sum payments in lieu of hotel program fees. The Company may not be able to recover such amounts from resulting membership or other fees. Any material shortfall in anticipated or projected membership and related fees relating to such arrangements could have a material adverse effect on the Company's business, financial condition and results of operations. General and administrative expenses consist of management and administrative salaries and payroll-related costs, legal and accounting fees, travel, advertising and marketing, rent and other corporate overhead. The Company expects general and administrative expenses to increase in the future due to the hiring of additional personnel and the expansion of infrastructure necessary to continue offering its membership programs, the start-up costs of new programs and the introduction of new products and services. In certain geographic regions, the Company recently began offering a calling card and a co-branded credit card to members of its hotel membership programs. The Company expects the costs associated with these new products to increase in future periods. In addition, as a result of the reorganization, the Company expects to incur salaries and related costs for the Principals. In 1997, the Company generated 25.0%, 28.5%, 44.8% and 1.7% of its revenues in the American, European, Asian and Middle Eastern/North African regions. In all foreign operations, both revenues and expenses occur primarily in the functional currency of the foreign location in which the Company operates. Inflation and rapid fluctuations in inflation rates in a particular country have had, and may continue to have, an adverse effect on the marketability of the Company's membership programs in that country. In addition, the Company typically converts into U.S. dollars foreign revenues and expenses on a weekly basis. Fluctuations in currency rates in connection with such conversions may affect the period to period comparisons of operating results. As of March 31, 1998, the Company did not engage in financial instruments intended to hedge against such foreign exposures. However, the Company may in the future undertake such transactions if management determines that it is necessary to offset such risks. There can be no assurance that any use of such hedging transactions will be sufficient to manage the risk of foreign currency fluctuations. See "Risk Factors--Risks Associated with International Operations" and "--Risks Associated with Currency Fluctuations and Inflation." Effective prior to the closing of the offering, HMC LLC will be merged with, and into, the Company, with the Company as the surviving entity. As a result of the merger, HMC Inc., Call Connect, Inc. and each of the Foreign Entities will be operating subsidiaries of the Company. The Reorganization has been structured as a tax-free reorganization. The accounting for the Reorganization will be similar to the accounting for a pooling of interests, as it represents an exchange of equity interests among companies under common control. Until consummation of the Reorganization, the Principals were obligated to pay U.S. federal and certain state income taxes on their allocable portion of the income of HMC LLC. HMC LLC has made various distributions to the Principals totalling approximately $2.0 million, $5.1 million, $4.0 million, and $820,000 during the 1995, 1996 and 1997 fiscal years and the three months ended March 31, 1998, respectively. In connection with this offering, the Company expects to make distributions to the Principals of approximately $5.0 to $9.0 million consisting of undistributed earnings as of the date of the Merger, the value of prepaid taxes accruing to the benefit of the Company and certain foreign tax credits. The Company plans to declare these distributions to the Principals prior to the consummation of the Merger. The Principals will continue to receive their normal periodic distributions prior to the consummation of the Reorganization. See "Reorganization," "Use of Proceeds," "Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements. 25 RESULTS OF OPERATIONS The following table sets forth certain operating data of the Company expressed as a percentage of revenue:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- Revenues............................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues....................................................... 65.0 64.0 64.7 66.3 63.9 --------- --------- --------- --------- --------- Gross margin......................................................... 35.0 36.0 35.3 33.7 36.1 General and administrative costs....................................... 29.8 23.4 22.9 19.0 25.5 Interest expense....................................................... (0.3) (0.6) (0.9) (0.7) (1.8) Foreign currency transaction gain (loss)............................... (0.4) 0.2 (0.1) (0.4) 0.4 Other income (expense)................................................. 0.2 (0.2) 0.1 0.5 (0.4) --------- --------- --------- --------- --------- Net income........................................................... 4.7% 12.0% 11.5% 14.1% 8.8% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 REVENUES. Revenues increased from $7.8 million for the three months ended March 31, 1997 to $7.9 million for the three months ended March 31, 1998. During the quarter ended March 31, 1998, management resources were invested in building infrastructure to address the growth experienced over the prior twelve months and to position the Company for anticipated growth, including strategically redeploying key operations personnel, hiring and training of additional program and operation managers, establishing new subsidiaries and exploring sources of additional capital for the Company. COST OF REVENUES. Cost of revenues decreased from $5.2 million for the three months ended March 31, 1997 to $5.0 million for the three months ended March 31, 1998 primarily as a result of operational efficiencies achieved through consolidation of call centers as the Company continued to establish permanent call centers to replace temporary, hotel-based, call centers in a number of strategic locations. As of March 31, 1998, the Company had 45 such permanent call centers as opposed to 27 at March 31, 1997. GENERAL AND ADMINISTRATIVE COSTS. General and administrative expenses increased from $1.5 million for the three months ended March 31, 1997 to $2.0 million for the three months ended March 31, 1998. This increase is primarily attributable to the hiring of additional corporate personnel, increased occupancy costs and travel costs. INTEREST EXPENSE. Interest expense increased from $58,000 for the three months ended March 31, 1997 to $144,000 for the three months ended March 31, 1998. This increase is primarily attributable to an increase in the Company's outstanding indebtedness on its lines of credit. FOREIGN CURRENCY TRANSACTION GAIN (LOSS). Foreign currency transaction losses were $28,000 for the three months ended March 31, 1997 compared to transaction gains of $33,000 for the three months ended March 31, 1998. OTHER EXPENSE. Other expense increased from net income of $37,000 for the three months ended March 31, 1997 to expense of $29,000 for the three months ended March 31, 1998. Other expenses include the results of foreign currency transactions, as well as nonoperating income and expenses. 26 YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996 REVENUES. Revenues increased from $27.3 million for the year ended December 31, 1996 to $31.9 million for the year ended December 31, 1997. This increase in revenues is primarily attributable to the commencement of additional hotel membership programs in Asia, Italy and Lebanon resulting from contracts signed in the prior year. COST OF REVENUES. Cost of revenues increased from $17.5 million for the year ended December 31, 1996 to $20.7 million for the year ended December 31, 1997. The increase is primarily attributable to the increased number of call centers and an increase in hotel program fees resulting from the increased number of hotel membership programs in Asia. GENERAL AND ADMINISTRATIVE COSTS. General and administrative expenses increased from $6.4 million for the year ended December 31, 1996 to $7.3 million for the year ended December 31, 1997. This increase is attributable to the addition of administrative personnel, increased travel costs due to the Company's geographic expansion in Asia, increased advertising and marketing costs and an increase in the provision for doubtful accounts. INTEREST EXPENSE. Interest expense increased from $167,000 for the year ended December 31, 1996 to $285,000 for the year ended December 31, 1997. This increase is attributable to interest expense on the Original Partnership Note which was outstanding for a full year in 1997, but only six months in 1996. FOREIGN CURRENCY TRANSACTION GAIN (LOSS). Foreign currency transaction gains were $51,000 for the year ended December 31, 1996 as compared to foreign currency transaction losses of $46,000 for the year ended December 31, 1997. OTHER INCOME. Other income increased from expenses of $43,000 for the year ended December 31, 1996 to income of $42,000 for the year ended December 31, 1997. YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995 REVENUES. Revenues increased from $21.2 million for the year ended December 31, 1995 to $27.3 million for the year ended December 31, 1997. This increase is attributable to the commencement of additional hotel membership programs into new countries in Asia, including China, Singapore and Taiwan, as well as an increase in the number of members in its programs. COST OF REVENUES. Cost of revenues increased from $13.8 million for the year ended December 31, 1995 to $17.5 million for the year ended December 31, 1996. This increase is attributable to the increased number of call centers and an increase in hotel program fees resulting from the increased number of hotel membership programs in Asia. GENERAL AND ADMINISTRATIVE COSTS. General and administrative expenses increased from $6.3 million for the year ended December 31, 1995 to $6.4 million for the year ended December 31, 1996. This decrease as a percentage of revenue is attributable to the leveraging of fixed general and administrative costs as revenues increased from year to year. INTEREST EXPENSE. Interest expense increased from $72,000 for the year ended December 31, 1995 to $167,000 for the year ended December 31, 1996. This increase in interest expense is attributable to interest expense on the Original Partnership Note which was made on July 1, 1996, and increased borrowings on the Company's lines of credit. FOREIGN CURRENCY TRANSACTION GAIN (LOSS). Foreign currency transaction losses were $83,000 for the year ended December 31, 1995 compared to transaction gains of $51,000 for the year ended December 31, 1996. 27 OTHER EXPENSE. Other expense increased from income of $55,000 for the year ended December 31, 1995 to expense of $43,000 for the year ended December 31, 1996. QUARTERLY RESULTS The following tables present unaudited quarterly financial information for the nine quarters ended March 31, 1998. The information has been prepared by the Company on a basis consistent with the Company's audited consolidated financial statements appearing elsewhere in this Prospectus and includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. These operating results for any quarter are not necessarily indicative of results that may be expected for any subsequent periods.
QUARTER ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues...................... $ 6,019 $ 6,584 $ 7,130 $ 7,564 $ 7,777 $ 8,051 $ 8,038 Cost of revenues.............. 3,729 4,181 4,599 4,962 5,155 5,211 5,170 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross margin................ 2,290 2,403 2,531 2,602 2,622 2,840 2,868 General and administrative costs....................... 1,703 1,612 1,682 1,399 1,477 1,948 1,680 Interest expense.............. (39) (40) (42) (46) (58) (55) (67) Foreign currency transaction gain (loss)................. 13 13 13 12 (28) 3 (27) Other income (expense)........ 9 6 (30) (28) 37 (21) 16 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income.................... $ 570 $ 770 $ 790 $ 1,141 $ 1,096 $ 819 $ 1,110 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- DEC. 31, MARCH 31, 1997 1998 ----------- ----------- Revenues...................... $ 8,040 $ 7,873 Cost of revenues.............. 5,122 5,033 ----------- ----------- Gross margin................ 2,918 2,840 General and administrative costs....................... 2,199 2,005 Interest expense.............. (105) (144) Foreign currency transaction gain (loss)................. 6 33 Other income (expense)........ 10 (29) ----------- ----------- Net income.................... $ 630 $ 695 ----------- ----------- ----------- -----------
QUARTER ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales................. 62.0 63.5 64.5 65.6 66.3 64.7 64.3 ----- ----- ----- ----- ----- ----- ----- Gross margin................ 38.0 36.5 35.5 34.4 33.7 35.3 35.7 General and administrative costs....................... 28.3 24.5 23.6 18.5 19.0 24.2 20.9 Interest expense.............. (0.6) (0.6) (0.6) (0.6) (0.7) (0.7) (0.8) Foreign currency transaction gain (loss)................. 0.2 0.2 0.2 0.2 (0.4) 0.0 (0.4) Other income (expense)........ 0.2 0.1 (0.4) (0.4) 0.5 (0.2) 0.2 ----- ----- ----- ----- ----- ----- ----- Net income.................... 9.5% 11.7% 11.1% 15.1% 14.1% 10.2% 13.8% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- DEC. 31, MARCH 31, 1997 1998 ----------- ----------- Revenues...................... 100.0% 100.0% Cost of sales................. 63.7 63.9 ----- ----- Gross margin................ 36.3 36.1 General and administrative costs....................... 27.4 25.5 Interest expense.............. (1.3) (1.8) Foreign currency transaction gain (loss)................. 0.1 0.4 Other income (expense)........ 0.1 (0.4) ----- ----- Net income.................... 7.8% 8.8% ----- ----- ----- -----
Beginning in 1996, the Company grew its membership base by expanding its operations into certain Asian, European and Middle Eastern markets. As a result, revenues increased during each of the quarters in 1996 and the first and second quarters of 1997. For the second, third and fourth quarters of 1997, revenue stabilized as the Company shifted its focus from membership sales in established markets to developing programs in new markets. As the Company established operations in these new markets, management and sales personnel resources were repositioned from other markets to develop, strengthen operations and establish permanent geographic presence. This caused a slight decline in revenues for the first quarter of 1998. Total costs of sales have generally increased in absolute dollars over the quarters presented due to the Company's increased operations in Asia, Europe and the Middle East and the costs associated with 28 membership acquisition in these markets. As the number of membership programs in a particular country increases, the Company typically consolidates operations in that country by combining call centers, hiring additional managerial personnel, and reallocating available human resources to new regions or countries. General and administrative expenses have been generally flat in absolute dollars during the quarters presented. However, these expenses in the fourth quarter of 1997 and the first quarter of 1998 increased primarily because of additional hiring of key management personnel. FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY The Company believes that its future operating results may be subject to quarterly and annual fluctuations based on numerous factors, including general economic conditions and seasonal trends associated with the hotel industry. The Company's revenues and profits on a quarterly basis can be affected by such factors as: the number of additional members and renewals in a period; currency fluctuations, inflation and currency devaluation in countries with active membership programs; the number of new membership programs and cost of initiating and managing new membership programs, including the cost of hiring additional personnel and starting up new telemarketing offices in international markets; changes in the cost of or sales cycle associated with member procurement; scheduled payments to or from client hotels; the mix of products and services offered by the Company; lack of acceptance of the Company's products and services by the Company's members and clients; holidays and vacation patterns; the cost, timing and significance of new product and service introductions by the Company and its competitors; the intensity of product and price competition; changes in operating expenses; changes in the demand for membership programs generally; changes in the Company's sales incentive strategy; personnel changes; unanticipated service interruptions; varying labor costs; and telecommunications and information technology installations and upgrades. Any one or more of these factors, many of which are beyond the Company's control, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, geographic regions may experience varying periods of seasonality, based on local holidays and customs. For example, the Company has historically experienced reduced performance in Europe in the third quarter. Due to the Company's revenue recognition policy, revenues from membership sales and the related costs are amortized over the 12-month term of such memberships, which may mask seasonality and other fluctuations. Increased revenues from the sale of other products and services may increase the degree to which the Company experiences seasonality and other fluctuations. Due to these factors, the Company believes period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as indicators of future results of operations. The Company's operating expenses are determined, in part, based on the Company's expectations of future revenue growth and are substantially fixed. As a result, unexpected changes in revenue levels will have a disproportionate effect on net income in any given period. Future acquisitions may have an adverse effect upon the Company's results of operation, particularly in quarters immediately following consummation of such transactions, while the operations of the acquired businesses are being integrated into the Company's operations. See "Risk Factors--Fluctuations in Operating Results; Seasonality." LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has primarily funded operations through operating activities. Net cash provided by operating activities was $586,000 for the three months ended March 31, 1998 and $3.1 million for the year ended December 31, 1997. In connection with the ten year renewal of a hotel group marketing agreement, in 1997, the Company prepaid approximately $700,000 to a hotel group in lieu of future hotel revenue sharing payments. Deferred membership revenue, which includes cash already received or included in accounts receivable from membership sales, $14.1 million at March 31, 1998, $14.7 million at December 31, 1997 and $14.5 million at December 31, 1996, is amortized over the related membership period. Deferred membership acquisition costs, which include amounts already paid or included in trade accounts payable or 29 accrued liabilities, was $9.1 million at March 31, 1998, $9.6 million at December 31, 1997 and $9.7 million at December 31, 1996 and is amortized as the related revenue is recognized. Capital expenditures were $66,000 for the three months ended March 31, 1998, $218,000 in fiscal 1997, $70,000 in fiscal 1996, and $42,000 in fiscal 1995. In November 1997, HMC LLC issued a Subordinated Promissory Note to Hospitality Partners, LLC, an unrelated third party, for $3.0 million, which matures on December 31, 2001. Interest is payable monthly at the applicable bank prime rate commencing after December 31, 1999. The Company is subject to certain financial covenants and restrictions under the terms of the Subordinated Promissory Note, including the proscription of principal payments prior to December 31, 1999. The Subordinated Promissory Note will be converted into shares of Common Stock in the Merger prior to the closing of this offering. See "Reorganization" and "Certain Transactions." In July 1996, the Company issued a note payable due to the Original Partnership for $1.8 million, which matures on January 1, 2002, for the purchase of all hotel contracts and related business assets held by the Original Partnership. Interest is payable monthly at 8% per annum. It is anticipated that this note payable will be repaid out of the proceeds of the offering. See "Reorganization," "Use of Proceeds" and "Certain Transactions." In September 1995, the Company established a line of credit with a bank. The line of credit provides for borrowings of up to $400,000, as amended, and is due and payable April 1, 1999. Borrowings bear interest at 2% above the interest rate earned (6.0% at December 31, 1997) by a pledged $400,000 time deposit included in short term investments. The line of credit is secured by substantially all of the assets of HMC Inc. and is guaranteed by three of the Company's stockholders. Amounts outstanding under the line of credit was $400,000 at March 31, 1998 and December 31, 1997. It is anticipated that amounts outstanding under this line of credit will be repaid out of proceeds of this offering. See "Use of Proceeds." In October 1997, the Company established an additional line of credit with the same bank for borrowings of up to $1,000,000. The line of credit bears interest at the bank's prime rate (8.5% at December 31, 1997) plus 2% and is due and payable on October 1, 1998. The line of credit is secured by substantially all of the assets of HMC Inc. Amounts outstanding under the line of credit at March 31, 1998 and December 31, 1997 were $802,000 and $702,000, respectively. It is anticipated that amounts outstanding under this line of credit will be repaid out of proceeds of this offering. See "Use of Proceeds." In April 1997, the Company issued a $143,000 promissory note payable to a bank. The note is due and payable April 1, 1999, as amended, and bears interest at 2% plus the bank's prime rate (8.5% at December 31, 1997) per annum. The Company is required to pay three principal payments of $25,000 plus accrued interest quarterly commencing July 1, 1997 and, is required to pay a lump sum of $68,300 on April 1, 1999. The note is secured by substantially all of the assets of HMC LLC. It is anticipated that amounts outstanding under this note payable will be repaid out of proceeds of this offering. See "Use of Proceeds." YEAR 2000 Currently, many computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. The Company and third parties with which the Company does business rely on numerous computer programs in their day-to-day operations. The Company is evaluating the Year 2000 issue as it relates to the Company's internal computer systems and third party computer systems with which the Company interacts. The Company expects to incur internal staff costs as well as consulting and other expenses related to these issues; these costs will be expensed as incurred. In addition, the appropriate course of action may include replacement 30 or an upgrade of certain systems or equipment at a substantial cost to the Company. There can be no assurance that the Year 2000 issues will be resolved in 1998 or 1999. The Company may incur significant costs in resolving its Year 2000 issues. If not resolved, this issue could have a significant adverse impact on the Company's business, financial condition and results of operations. See "Risk Factors--Year 2000." RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD Recent pronouncements of the Financial Accounting Standards Board ("FASB") which are not required to be adopted until calendar 1998 and thereafter, include the following Statements of Financial Accounting Standards ("SFAS"): SFAS Number 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income (all changes in equity during a period except those resulting from investments by and distributions to owners) and its components in the financial statements. This new standard was adopted by the Company effective January 1, 1998. The adoption of this standard did not have a significant impact on the Company's financial statements. SFAS Number 131, "Disclosure about Segments of an Enterprise and Related Information," which will be effective for the Company for the year ending December 31, 1998, establishes standards for reporting information about operating segments in the annual financial statements, selected information about operating segments in interim financial reports and disclosures about products and services, geographic areas and major customers. This new standard may require the Company to report financial information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments, which may result in more detailed information in the notes to the Company's financial statements than is currently required and provided. The Company has not yet determined the effects, if any, of implementing SFAS Number 131 on its reporting of financial information. 31 BUSINESS THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Hospitality Marketing Concepts Inc. is a leading provider of membership programs for prestigious hotels and other clients in international and domestic markets. The Company's hotel membership programs are designed to provide participating hotels with improved consumer loyalty, increased patronage, an additional channel for acquiring new customers and a more predictable recurring revenue stream from a growing base of individual members. The Company's marketing services address the growing needs of hotels and other businesses to increase profitability, leverage the marketing expertise and infrastructure of outside vendors and cost-effectively offer new and differentiated products and services to customers. In marketing their facilities, many hotels and businesses have limited resources to focus on the needs and demands of local and international purchasing audiences with multiple languages and customs outside the region in which they are located. The Company believes that its services address the needs of three constituencies: client hotels, individual members and clients in travel-related industries whose complementary products and services are offered through the Company's membership programs. As of March 31, 1998, the Company has established hotel membership programs and on-going marketing relationships with approximately 315 client hotels in approximately 160 cities worldwide, including New York, Rome, London, Madrid, Hong Kong, Shanghai, Warsaw and Caracas. INDUSTRY BACKGROUND As the global market for goods and services becomes increasingly competitive, businesses are endeavoring to strengthen relationships with existing customers, attract new customers and generate predictable recurring revenue streams from existing and new products and services. Accordingly, businesses have substantially increased the use of direct marketing methods to reach existing and potential customers. Direct marketing provides a convenient and cost-effective method of marketing a wide variety of goods and services, including lodging, dining, travel, telecommunications and financial products and services. Traditional direct marketing methods include direct mail, telemarketing, personal contact and the Internet's World Wide Web. According to the Direct Marketing Association, sales revenue attributable to direct marketing in the United States was estimated to be $1.2 trillion in 1997 and is estimated to reach $1.8 trillion in 2002. Membership programs are one of the fastest growing segments of the direct marketing industry. Through membership programs, businesses typically offer discounted products and services, efficient purchasing procedures, special promotions for program members and access to customer service staffs. These programs can provide substantial benefits to the businesses that participate in such programs, individual members participating in the programs and other businesses offering products and services to program members. For the business participating in a program, the benefits can include new customers, increased consumer loyalty and awareness, and new revenue streams from products and services offered through the program. For the individual members, the benefits can include enhanced service and other benefits that offset or exceed the cost of membership. Through membership programs, other businesses can offer additional products and services to a captive and receptive purchasing audience. In most instances, membership programs offer businesses a cost-effective means to attract potential customers, retain existing customers and offer differentiated products and services. In the hospitality industry, hotels constantly seek ways to attract customers to fill their unoccupied rooms, utilize food and beverage services and use conference and banquet facilities. In many markets, four and five-star hotels offer facilities and restaurants which surpass other businesses offering similar services. 32 As most hotels must depreciate the large capital investments made in building, acquiring or renovating new and existing properties, profitability relies on active patronage and utilization of all operations, including room occupancy and food and beverage purchases. To generate increased profitability, hotels market their facilities to traditional customers consisting of business and vacation travelers. To attract such customers, hotels often rely on traditional marketing methods such as corporate and mass advertising, hotel and other travel reward programs, sponsorship of travel organizations and word-of-mouth. These methods have had limited success, however, at significantly increasing consumer loyalty and retention because they attempt to influence the initial purchasing decision of the travelling customer and provide minimal incentives to use the hotels' facilities on a repeated basis. These methods have also had limited success at generating an active customer base of local residents, particularly those employed at small to medium-sized businesses who require access to the hotels' food and beverage, lodging and conference facilities. Many hotels and other businesses may lack the necessary marketing experience and resources to cost-effectively increase distribution of their products and services to international customers. In marketing their facilities, many hotels and businesses have a limited understanding of the needs and demands of local and international purchasing audiences as well as a limited knowledge of languages and customs outside the region in which they are located. In addition, qualified consumer information, including reliable contact, income and consumer preference information, often is not readily available or collected for use by third parties in international markets. This lack of qualified information often renders it difficult and expensive to market existing and new products and services effectively within local and international markets. In many international markets, hotels are seeking alternative methods to attract and retain a loyal base of customers who will frequent the hotels' facilities. These hotels are also striving to attract and retain a larger base of local customers to use the hotels' food and beverage facilities, book rooms for out of town guests and use the hotels' conference and banquet facilities for meetings and other events. Other businesses are also looking for new, cost-effective distribution channels for both existing and new products. The Company believes that there are significant opportunities for companies specializing in designing, marketing and managing effective membership programs that increase consumer loyalty and provide higher revenue for participating organizations. THE HMC SOLUTION HMC designs, markets and manages membership programs for prestigious hotels and other clients in international and domestic markets. The Company's hotel membership programs are designed to provide participating hotels with improved consumer loyalty, increased patronage, an additional channel for acquiring new customers and a more predictable recurring revenue stream from a growing base of individual members. The Company's marketing services address the increasing need of hotels and other businesses to increase profitability, leverage the marketing expertise and infrastructure of outside vendors and cost-effectively offer new and differentiated products and services to customers. In most instances, the Company's membership programs produce increased patronage and a more predictable recurring revenue stream that would be difficult for the client to achieve using its internal resources. The Company believes that its services address the needs of three constituencies: client hotels, individual members and clients in travel-related industries whose complementary products and services are offered through the Company's membership programs. As of March 31, 1998, the Company has established hotel membership programs and on-going marketing relationships with approximately 315 hotels in approximately 160 cities worldwide, including Caracas, New York, Shanghai and Warsaw. The Company selects prestigious, full-service hotels which are generally four or five-star or "best in town" and creates hotel membership programs which offer individual members a variety of benefits, including premium service, complimentary nights, substantial discounts off published room rates and complimentary food and beverage privileges when dining with a guest at hotel restaurants. Approximately 175 of the Company's top client hotels honor reciprocal membership benefits through the Company's CLUBHOTEL-TM- program, a unique international network of four and five-star 33 hotels such as the Shangri-La Mactan Island, Pan Pacific Kuala Lumpur, Victoria Intercontinental (Warsaw) and Husa Palace Barcelona. To establish its membership programs, the Company generally enters into exclusive marketing contracts with hotels. Under these contracts, the Company assumes responsibility for the design, marketing and management of all aspects of each membership program, utilizing its own marketing infrastructure to generate members for each program. The Company also provides ongoing marketing support services, including market research, customer service and membership renewal programs. The Company's marketing services and membership programs provide substantial benefits to its hotel clients, individual members and clients in travel-related industries whose products and services are offered through the Company's membership programs. The Company's services and programs are designed to provide hotel clients with increased patronage and consumer loyalty from both a local membership base and the Company's domestic and international membership base and a more predictable recurring revenue stream. Individual members of the Company's hotel membership programs have access to enhanced services and benefits which exceed the cost of membership. The Company also provides hotel and other clients with local access to domestic and international markets and to a receptive purchasing audience of a growing base of individual members through an established distribution channel, a network of ongoing marketing relationships with approximately 315 hotels worldwide. Each telemarketing office is staffed with program managers who are familiar with the local language and customs. The Company manages membership programs and provides marketing services for clients without a significant capital investment or commitment of managerial resources from its clients. The Company believes that its services represent a high value alternative to membership programs created and marketed using the clients' internal resources or to membership programs created and marketed by other third parties. STRATEGY HMC's objective is to become a leading provider of membership programs and marketing services to clients and customers worldwide. The Company's strategy for achieving this objective includes the following key elements: EXPAND MEMBERSHIP PROGRAMS WITHIN HOTEL INDUSTRY. HMC intends to expand its presence in the hotel industry in selected countries within Europe, Asia/Pacific, Middle East/Africa and the Americas by offering additional local hotel membership programs for existing and new four and five-star hotels worldwide. The Company intends to capitalize on its accumulated marketing expertise, knowledge of the hotel industry and global marketing infrastructure to increase its active membership base, expand its presence in the hotel industry and design, market and manage other membership programs. ADVANCE THE HMC-SM- AND CLUBHOTEL-TM- BRANDS. In all aspects of its operations, including its membership programs, the quality of its client hotels and its telemarketing and customer service personnel, the Company is committed to promoting HMC-SM- and CLUBHOTEL-TM- as names that represent premium hotel and travel-related services. The Company seeks to promote this brand image through additional membership programs with prestigious hotels, additional marketing relationships with leading third-party service providers offering complementary products and services, and an emphasis on high-quality, professional service. In addition, the Company believes that offering high-quality, complementary products and services in association with leading financial, telecommunication and other service providers will advance the HMC-SM- and CLUBHOTEL-TM- brands. CONSOLIDATE MARKETING INFRASTRUCTURE AND EXPAND DISTRIBUTION CHANNELS. The Company is committed to consolidating its marketing infrastructure and expanding its distribution channels to increase the efficiency and effectiveness of its marketing services, cost-effectively offer a greater number of products and services including membership programs and provide high-quality service to its clients and members. The Company has established a global marketing infrastructure of locally-staffed telemarketing offices in 34 approximately 30 countries worldwide. The Company intends to further develop its marketing infrastructure by consolidating and establishing permanent call centers, hiring additional program and operation managers in targeted geographic regions and enhancing its marketing training programs to ensure the highest quality of service and professionalism and to increase the number of qualified program and operations managers within the Company. The Company intends to develop additional distribution channels for its products and services, including marketing partnerships with major banks, credit card issuers and travel agencies. The Company also anticipates enhancing its technological infrastructure, including its member database, tracking and segmenting capabilities to provide effective solutions for its clients. OFFER COMPLEMENTARY PRODUCTS AND SERVICES. The Company intends to offer complementary products and services within travel-related industries, such as telephone and financial service products, to its members. The Company believes that its established relationship with its members, the prestige associated with its programs and its ability to discern the purchasing preferences of its members provide it with significant opportunities to attract and retain an actively purchasing, loyal customer base for such products and services. The Company also believes that its established marketing infrastructure and network of ongoing marketing relationships with approximately 315 hotels provides it with an effective distribution channel for such products and services. In certain geographic regions, the Company recently began offering a competitively-priced calling card and a co-branded credit card to members of its hotel membership programs. The Company expects to enter additional marketing relationships with third-party service providers to continue offering new products and services to a growing base of individual members. EXPAND PROPRIETARY MEMBERSHIP DATABASE. The Company intends to expand its proprietary membership database by adding new members, collecting additional information on existing members and identifying qualified prospects through member and client referrals. The Company also intends to augment its database through local research and marketing efforts and the purchase of customer lists, which the Company screens and qualifies. The Company believes that its membership database is among the most established and comprehensive available in certain international markets. The Company's database tracking and segmenting abilities allow it to discern individual member purchasing preferences and evaluate patronage across a client's facilities, including room and food and beverage purchases by individual members. Using this information, the Company believes that it is capable of offering membership programs and other products and services that address the needs of its clients and members. HOTEL MEMBERSHIP PROGRAMS HMC designs, markets and manages membership programs for prestigious hotels and other clients in markets worldwide. The Company's hotel membership programs are designed to provide participating hotels with improved consumer loyalty, increased patronage, an additional channel for acquiring new customers and a new and predictable recurring revenue stream from a growing base of individual members. In most instances, hotel clients receive benefits difficult for the clients to achieve using the clients' internal resources. The Company hotel membership programs offer individual members a variety of benefits, including premium service, complimentary nights, substantial discounts off published room rates and complimentary food and beverage privileges when dining with a guest at hotel restaurants. In certain programs, members also receive discounts on conference and banquet facilities at participating hotels. Individual members of the Company's hotel membership programs have access to enhanced service and benefits which exceed the cost of membership. As of March 31, 1998, the Company had active membership programs for approximately 315 hotels and other clients in approximately 160 cities worldwide. The Company's services are provided pursuant to exclusive marketing contracts with client hotels and hotel chains. Under these contracts, the Company assumes responsibility for the design, marketing and management of all aspects of each membership program, utilizing its own marketing infrastructure to generate members. The Company believes that its accumulated expertise and success in the hotel industry 35 will enable it to continue offering high-quality membership programs to hotels and hotel chains worldwide. To establish a hotel membership program, the Company evaluates local market conditions and demands and designs program parameters, membership goals and prices for hotel management. Within the hotel industry, the Company chooses hotels which are rated with four or five stars by international hotel guides or which are "best-in-town." The benefits offered through each membership program are established based on each client's ability to provide the desired mix of services to members. Once the membership program has been designed, the Company identifies a potential purchasing audience of qualified member prospects, prepares outbound and inbound scripts, informs its telemarketing and managerial personnel of program parameters and initiates the sales process. The Company typically provides ongoing marketing support services, including market research, customer service and membership renewal programs. In certain instances, the Company assists hotels with marketing campaigns for special events and promotions. The Company's membership programs are designed to attract value-sensitive executives and professionals interested in premium service at local and international hotels. The Company's members are typically affluent individuals employed in the top positions within small to medium-sized businesses and professional organizations. To acquire members, the Company's marketing staff identifies qualified affluent individuals in targeted geographic regions and telephonically contacts such individuals to offer participation in a membership program. In many instances, the Company establishes a program office at the client site and may manage multi-location membership programs from a single site. The Company expands its membership base in a particular geographic region by establishing additional membership programs with hotels and hotel chains within that region. In many instances, once established within a particular region the Company will consolidate its marketing resources to establish a permanent marketing presence and achieve higher levels of efficiency. Upon enrollment in a membership program, a member receives a detailed information packet outlining the benefits provided by the program and an embossed membership card which contains the member's name and membership number. Membership information is often encoded on a magnetic strip on the back of the card to facilitate the efficient identification and tracking of each member. As a general matter, individuals may cancel a membership within ten days of initial commitment for a full refund. Memberships are typically one year. Membership fees are typically billed to the members' credit card. Renewals are generated by telemarketing personnel specifically trained in renewal sales. The Company also utilizes the renewal process to assess member satisfaction, update member information, gather additional member data and obtain referrals. The Company emphasizes professionalism and high-quality service in all of its programs. Each member of the Company's telemarketing and managerial staff has been trained to meet the sophisticated needs and profiles of the Company's members. In addition, each program office is staffed with personnel familiar with the local language and customs. The Company believes that on-going support and high-quality service encourages member renewals and referrals and strengthens member loyalty to the Company and the client. The Company assigns a local service representative to each membership program, provides customer service and assists members with problem resolution. The Company's customer service call centers are available to members via toll free telephone numbers. The Company also works closely with its clients' customer service staffs to ensure that the clients' representatives are knowledgeable in matters relating to the program. CLIENT HOTELS As of March 31, 1998, the Company had established hotel membership programs and on-going marketing relationships with approximately 315 hotels in approximately 160 cities worldwide, including New York, Rome, London, Madrid, Hong Kong, Shanghai, Warsaw and Caracas. These relationships provide the Company with additional members, significant cross-marketing opportunities for products and services within the hotel industry and a distribution channel for branded and co-branded products and services in travel related industries. 36 The Company represents individual hotels and hotels belonging to leading hotel chains such as: Alhambra Palace (Granada) China World Shangri-La (Beijing) Dusit Nikko Manila (Manila) Eden Garden (Jahor Bahru) Edsa Shangri-La (Manila) Far Eastern Plaza Shangri-La (Taipei) Halcyon (London) Hanoi Horison (Hanoi) Hotel Barchetta Excelsior (Como) Hotel Michelangelo (Milan) Husa Princesa (Madrid) Husa Palace Barcelona (Barcelona) Jakarta Hilton (Jakarta) Jolly Hotel Vittorio Veneto (Rome) Kowloon Shangri-La (Hong Kong) Minneapolis Hilton (Minneapolis) Oriental Singapore (Singapore) Pacific Star Guam (Guam) Pan Pacific Kuala Lumpur (Kuala Lumpur) Pan Pacific Singapore (Singapore) Real Santander (Santander) Regina Hotel Baglioni (Rome) Royal Carlton Hotel (Bologna) Shanghai Hilton (Shanghai) Shangri-La Mactan Island (Cebu Island) Sidi Saler (Valencia) Son Vida (Mallorca) Victoria Intercontinental (Warsaw) Approximately 175 of the Company's top client hotels participate in the Company's CLUBHOTEL-TM- network, a unique international network of hotels in approximately 30 countries worldwide. Through CLUBHOTEL-TM-, participating hotels honor reciprocal membership benefits nationally and internationally. All members of local hotel membership programs are automatically enrolled into the CLUBHOTEL-TM- program. The Company also offers CLUBHOTEL-TM- memberships directly to individuals outside of a specific hotel membership program. CLUBHOTEL-TM- members are also provided with centralized access to worldwide accommodations through the Company's reservation center, currently provided through its relationship with Anasazi Travel Resources Inc. The Company believes that its CLUBHOTEL-TM- network enhances the value and prestige of its local hotel membership programs and encourages consumer loyalty and increased patronage by extending local membership benefits to participating hotels of similar quality in other markets. OTHER PRODUCTS AND SERVICES The Company offers complementary products and services to its members. CALLING CARD The Company recently began offering a competitively-priced calling card to members of its hotel membership programs. The Company's marketing strategy for its calling card product consists of dedicated telemarketing efforts and other direct marketing methods to selected potential purchasers within its database. The Company intends to continue to promote the calling card through new and existing points of contact within its membership programs. The Company has also identified potential distribution channels for the calling card outside of existing membership programs, such as marketing agreements with major banks and credit card issuers, auto clubs and international student exchange programs. The Company plans to target the international markets because it believes that calling cards, as opposed to prepaid telephone cards, are less familiar and available outside North America and represent a substantial opportunity for the Company's calling card product. The Company provides card production, billing and marketing for its Call Connect-TM- calling card. Calling card charges are billed to members' credit cards and processed based on preset increments and monthly invoices. Long distance and customer service is provided by Sprint, which provides multiple functions in order to meet the members' international business calling needs. The Company's agreement with Sprint Communications Corporation, LLC (a division of Sprint) has a 33-month term from January 1998 and certain minimum usage requirements. The Company's rates vary based on usage levels during 37 specified periods. Under the Agreement, the Company must use Sprint as its primary domestic carrier and exclusive international carrier. CREDIT CARD The Company recently began offering a co-branded VISA credit card with Standard Chartered Bank in Malaysia. The Company will receive a percentage of all card charges and promotional fees from use of the card. This credit card will be offered to CLUBHOTEL-TM- members in Malaysia. Standard Chartered Bank will handle all collections, bear all operation costs and retain all bad debt exposure. The Company may also enter into similar marketing partnerships to offer credit cards in other countries in which the Company currently operates. MARKETING PARTNERS The Company has recently entered into marketing agreements with several clients offering complementary products and services in travel-related industries, including Halcon Viajes S.A. and Standard Chartered Bank. Historically, the Company has selected premier providers within its core hotel industry and within industries which provide complementary products. The industries it has selected to date offer products that the Company believes its existing membership will find valuable and will be likely to utilize. Partners may also have an existing, established and qualified constituency to which the Company will offer its own products and future products. Targeting this type of marketing partner affords the Company benefits, including: access to an established list of potential members through the partners' databases to whom it can market existing and future product offerings; high-quality service providers; immediate presence in new industries and an increase in the Company's distribution network through such partners' existing channels. MEMBERSHIP DATABASE As of March 31, 1998, the Company had a proprietary, qualified database of approximately 1.9 million persons, generally consisting of affluent professionals and executives of small to medium-sized businesses, resident primarily in international markets, which the Company has accumulated over the last five years. Of this database, approximately 580,000 relate to current or former members of hotel membership programs for which the Company collects detailed demographic and contact data, including the industry in which the member is employed, size of business, title, income, marital status and frequent travel destinations. The Company believes that its local hotel club members represent a receptive purchasing audience for both existing and new products and services. The Company regularly augments the information in its database with transactional data received from the use of the Company's membership cards, member renewals and referrals, information from marketing partners and data from its own information acquisition efforts. Transactional data is also collected by participating hotels as members purchase food and beverage, rooms and take advantage of other benefits at participating hotels. The information contained in its database provides the Company with insight into the travel and purchasing preferences of its members and allows the Company to design effective marketing programs to offer new membership programs, products and services. The information also allows the Company to cost-effectively target a receptive audience within its database and offer products and services that address the needs of its members. In international markets, the Company accumulates demographic and transactional consumer information not readily available from other sources. Together with the Company's overall marketing expertise, this information allows the Company to effectively target specific purchasing audiences and design effective marketing and membership programs offering unique combinations of its clients' products and services. Upon its entry into a market, the Company acquires available information from purchased lists and business directories, if available, which are then qualified by the Company's local or regional 38 telemarketing teams. The Company's telemarketing personnel verify such information with prospective members and obtain additional information and member referrals. In many international markets, purchased lists and business directories are unavailable or insufficient. In such markets, the Company conducts local area market research, followed by screening and list qualification. Demographic, contact and other information is also updated as part of the Company's renewal programs. The Company believes that this database is among the most established and extensive available for transactional profiles of affluent persons in certain international markets. TECHNOLOGY The Company has invested substantially in a management information system to allow it to operate its business more efficiently and productively. The Company regularly receives new member information from its local and regional call centers, and the system routes that data to other Company facilities for member fulfillment and allows the Company to mail member information kits to new members rapidly. The system also receives transactional data from the Company's clients on a regular basis, permitting the Company to update the member profile information. The Company's telecommunications system monitors the performance quality of its customer service representatives and other aspects of its business. In addition, the Company's marketing staff use the Company's database to review and analyze lists of prospective and current members, in order to determine which are most likely to respond to the Company's products and services. GOVERNMENT REGULATION The Company primarily markets its membership programs through its local and regional telemarketers. The telemarketing industry has become subject to an increasing amount of foreign, federal and state regulation in recent years, including limitations on the hours during which telemarketers may call consumers and prohibitions on the use of automated telephone dialing equipment to call certain telephone numbers. The Company is also subject to various foreign, federal and state regulations concerning the collection, distribution and use of information regarding individuals. Compliance with these laws and regulations is generally the responsibility of the Company even where it uses agents to conduct the telemarketing, and the Company could be subject to a variety of enforcement or private actions for any failure to comply with such regulations, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, growing concern about privacy and the collection, distribution and use of information about individuals has led to self-regulation of such practices by the direct marketing industry and to increased governmental regulation. The DMA, the leading trade association of direct marketers, has adopted guidelines regarding the fair use of such information which it recommends participants in the direct marketing industry follow. Although the Company's compliance with the DMA's guidelines and applicable foreign, federal and state regulations has not had a material adverse effect on the Company, no assurance can be made that the DMA will not adopt additional guidelines or that additional foreign, federal or state laws or regulations (including antitrust and consumer privacy laws) will not be enacted or applied to the Company or its clients and marketing partners. Any such guidelines, laws or regulations could adversely affect the ability of the Company to collect and distribute consumer information, increase the cost to the Company of collecting certain kinds of information, preclude the use by direct marketers of information that the Company could lawfully collect or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. To the extent the Company's hotel and other clients do not comply with such guidelines, laws or regulations, the Company may incur liabilities, which could have a material adverse effect on the Company's business, financial condition and results of operations. 39 The Company's calling card operations are subject to foreign, federal and state government regulation of long distance telephone services. The Company is regulated at the federal level by the FCC. The Company is required to maintain an authorization issued by the FCC, in connection with its international calling card service, and the Company is in the process of obtaining such an authorization. In addition, the FCC has required carriers to maintain both domestic and international tariffs for services containing the currently-effective rates, terms and conditions of service. The FCC has, however, eliminated the tariffing requirement for domestic interstate non-dominant carriers, and indeed prohibited the filing of such tariffs, but a federal court of appeals has stayed the effectiveness of this detariffing order pending appeal and the FCC's resolution of several petitions for reconsideration. There can be no assurance of the outcome of these proceedings. If the Company must negotiate individual contracts with each of its calling card customers, it could have a material adverse effect on the Company's business, financial condition and results of operations. Any intrastate long distance telecommunications operations of the Company are also subject to various state laws and regulations, including prior certification, notification or registration requirements. Although the Company does not intend to market its calling cards for intrastate use, there can be no guarantee that customers will not use the calling cards for this purpose. For any intrastate services, the Company generally must obtain and maintain certificates of public convenience and necessity from regulatory authorities in most states. In most of these jurisdictions, the Company must file and obtain prior regulatory approval of tariffs for intrastate services. In addition, the Company must update or amend the tariffs and, in some cases, the certificates of public convenience and necessity when rates are adjusted or new products are added to the long distance services offered by the Company. If the Company becomes aware that intrastate calling is occurring, the Company intends to comply with the applicable regulatory requirements. The FCC and numerous state agencies also impose prior-approval requirements on transfers of control, including corporate reorganizations, and assignments of certain regulatory authorizations. If the federal and state regulations governing the fees to be charged for the origination and termination of calls by long-distance subscribers (such as the Company's consumers) change, particularly if such regulations are changed to allow variable pricing of such access fees based upon volume, such changes could have a material adverse effect on the Company's business, financial condition and results of operations. The FCC recently adopted a regulation which requires interexchange carriers to compensate payphone providers for each toll-free number call placed. The regulation allows such carriers to seek to recover these charges from their customers, including through future contractual provisions with customers such as the Company. The FCC rules required that, on an interim basis through October 1997, the interexchange carriers compensate payphone providers an amount equivalent to $0.35 per call. On July 1, 1997, the D.C. Circuit upheld the method of "carrier pays" for recovery of payphone compensation, but found the $0.35 per call charge and interim payphone compensation plan was arbitrary and capricious. The payphone compensation rules were remanded to the FCC for reconsideration and the FCC subsequently adjusted the compensation amount to $0.284 per call. On appeal, the D.C. Circuit again found this amount to be arbitrary and capricious and remanded the revised rules to the FCC for further explanation. On an interim basis, the compensation scheme adopted by the FCC remains in effect until the FCC concludes its evaluation of these issues. The FCC and D.C. Circuit have noted that the compensation scheme is subject to retroactive adjustment, if the FCC considers such an adjustment appropriate. In addition, carriers such as the Company that provide domestic interstate services to end users must pay a fee each month for U.S. universal service funding, which supports telecommunications services in remote areas of the U.S. and also certain services used by schools and libraries. Currently, the Company must contribute approximately 4% of its annual end user revenue (including both domestic, interstate and international revenues). The Company is unable to predict any changes in the level of this contribution or whether any such changes could have a material adverse effect on the Company. The Company is unable to predict whether this 40 regulation or other potential changes in the regulatory environment could have a material adverse effect on the Company. See "Risk Factors--Risks Associated with Government Regulation." COMPETITION Competition in the membership program and direct marketing industry is intense. The Company faces direct and indirect competition from a number of sources and expects to experience increased competition in the future. The Company competes with the internal marketing programs of clients and prospective client hotels. For example, certain hotels have frequent guest programs that may expand to offer benefits to their members similar to the Company's hotel membership programs. Accordingly, there can be no assurance that current and future client hotels will not elect to conduct all or a significant portion of their marketing efforts internally. The Company also competes with marketing services companies that employ a loyalty-driven marketing model similar to the one developed by the Company, but which focus on a broader array of membership programs. Companies such as Cendant Corporation and MemberWorks Incorporated provide membership programs in the travel, dining and retail industries. The Company's other competitors include a number of smaller, regional providers, large retailers, travel agencies, financial institutions, credit card issuers and other organizations that offer benefit programs to their customers and may eventually include third-party service providers with whom the Company has established marketing relationships. Such competitors may have greater financial, personnel and marketing resources, greater name recognition and larger customer bases than the Company. There can be no assurance that the Company's competitors will not increase their emphasis on offering products and services similar to those offered by the Company or begin offering products and services that would be in direct competition with those which the Company may want to offer in the future. There also can be no assurance that competitors will not develop and successfully introduce competitive products and services, that the introduction of such products and services will not cause a reduction in the price at which the Company offers its products and services or that the Company will be able to compete successfully for both members and client hotels with any of these existing or potential competitors. Competition for clients in the calling card product segment is highly competitive, and the technology provided is rapidly evolving and subject to constant change. Today there are numerous companies offering calling cards, including companies such as AT&T Corp., British Telecom, MCI Communications Corporation, Sprint/Global One and several other local and regional international telephone companies, which are substantially larger than the Company and have greater financial, personnel and marketing resources, greater name recognition, and larger customer bases than the Company. These advantages and contractual notice requirements restricting the Company's ability to change pricing unilaterally may afford the Company's competition with more pricing flexibility than the Company. The ability of the Company to compete effectively in the telecommunication services market will depend upon the Company's continued ability to provide access to high-quality services at prices generally competitive with, or lower than, those charged by its competitors. There is no assurance that the Company will be able to respond quickly and efficiently to any changes in prices charged by such competitors. There can be no assurance that competition from existing or new competitors or a decrease in the rates charged for telecommunication services by major long distance carriers or other competitors would not have a material adverse effect on the Company's business, financial condition or results of operations. The Company's management believes that it competes in the hotel industry primarily on the basis of its demonstrated ability to attract consumers, ability to identify, develop and offer innovative marketing programs, reputation for quality, cost, international presence, technological expertise and the ability to promptly provide clients with customized solutions to their sales and marketing needs, without diverting management from its core business focus. See "Risk Factors--Competition." 41 EMPLOYEES As of March 31, 1998, the Company employed 144 persons on a full-time basis and 771 on a part-time or temporary basis. In a number of foreign countries in which the Company operates, the Company often employs personnel through temporary agencies. None of the Company's employees are represented by a labor union. The Company believes that its employee relations are good. FACILITIES The Company operates locally on-site in its client hotels' facilities in over 30 countries and maintains regional corporate offices on leased premises in 11 countries. The on-site locations are provided by the client hotels without charge for telemarketing and membership services. The regional offices house membership services representatives, operations personnel and telemarketing personnel, principally engaged in renewal solicitations. These facilities range from approximately 100 square feet to 3,400 square feet. The Company leases space in Irvine, California as the Company's corporate headquarters and main computer and telecommunications systems center. See "Certain Transactions." The Company's lease agreement is for a term of three years expiring in 2001 and covers approximately 13,100 square feet. The Company leases approximately 1,300 square feet for its corporate office in Singapore pursuant to a lease agreement with a term expiring in the year 2000. The Company also leases approximately 3,100 square feet for its corporate office in Madrid, Spain pursuant to a lease agreement expiring August 1, 2001. LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation or in settlement proceedings relating to claims arising out of its operations in the normal course of business. The Company is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, is likely to have a material adverse effect on the Company's business, financial condition and results of operations. 42 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information with respect to the directors, executive officers and certain key employees of the Company as of April 1, 1998:
NAME AGE POSITION(S) - ---------------------------------------- --- ------------------------------------------------------------------ DIRECTORS AND EXECUTIVE OFFICERS Mokhtar Ramadan....................... 42 Chairman of the Board, President and Chief Executive Officer Philip G. Hirsch...................... 45 Senior Vice President, Finance, Chief Financial Officer, Treasurer and Director Frans Van Steenbrugge................. 42 Senior Vice President, General Manager--Telecom Fadi Ramadan.......................... 37 Senior Vice President, Americas, and Director Sandra Case........................... 36 Senior Vice President, Asia/Pacific Marwan Ramadan........................ 39 Senior Vice President, Europe/Middle East and Africa KEY EMPLOYEES Edmundo Iglesias...................... 47 Vice President, Sales and Marketing, Europe Arturo Tolasi......................... 49 Vice President, Area Director Asia/Pacific
MOKHTAR RAMADAN, a co-founder of the Company, has served as Chief Executive Officer and Director of the Company since its inception. From 1987 to 1988, Mr. Ramadan served as Director of Sales and Marketing for Compaq Computer GmbH. From 1980 to 1986, Mr. Ramadan was Product Marketing Manager for Texas Instruments France. Mr. Ramadan received B.A. degrees in Business Administration and Electronic Engineering from Seattle Pacific University and a M.B.A. degree from Pacific Lutheran University. PHILIP G. HIRSCH has served as Chief Financial Officer, Group Vice President, Finance, and Treasurer of the Company since April 1998 and was promoted to Senior Vice President and Director in May 1998. From 1987 to March 1998, Mr. Hirsch was with Price Waterhouse LLP, an independent accounting firm, most recently as Managing Partner of its Century City, California office. From July 1990 through June 1995, he was the partner in charge of its west region transaction support (mergers and acquisitions) practice. Mr. Hirsch received a B.A. degree in political science from the University of Pennsylvania, a B.S. degree in finance from The Wharton School and a Masters degree in management and accounting from the Kellogg Graduate School of Management at Northwestern University and is a Certified Public Accountant. FRANS VAN STEENBRUGGE has served as Group Vice President/General Manager--Telecom of the Company since January 1998 and was promoted to Senior Vice President in May 1998. From 1996 to 1997, Mr. Van Steenbrugge served as Managing Director of France Telecom Mobile Services. From 1994 to 1995, Mr. Van Steenbrugge provided management consulting services in human resources, telecommunications and financial services. From 1978 to 1994, Mr. Van Steenbrugge held various senior positions for American Express, most recently serving as Vice President and General Manager of Travel Related Services for several European regions. FADI RAMADAN, a co-founder of the Company, has served as Group Vice President, Americas, since 1997 and a Director since its inception and was promoted to Senior Vice President in May 1998. From 1992 to 1996, Mr. Ramadan served as Group Vice President, Europe/Middle East & Africa. From 1988 to 1991, Mr. Ramadan served as Vice President of Operations. Prior to joining the Company, Mr. Ramadan worked for National Marketing Concepts, serving as Manager of Sales and, later, as Director of Operations worldwide. 43 SANDRA CASE has served as Group Vice President, Asia/Pacific, of the Company since 1995 and was promoted to Senior Vice President in May 1998. From 1988 to 1993, Ms. Case served as Director of Sales and Marketing, and in 1994 she was promoted to Vice President. Prior to joining the Company, Ms. Case worked for Commonwealth Hospitality as a senior executive in the sales and marketing division. Ms. Case received a B.A. degree in History from Memorial & St. Mary's University in Canada. MARWAN RAMADAN, a co-founder of the Company, has served as Group Vice President, Europe/Middle East and Africa, of the Company since 1997 and was promoted to Senior Vice President in May 1998. From 1994 to 1996, Mr. Ramadan served as the Company's Group Vice President, Americas. From 1988 to 1993, Mr. Ramadan led the Company's international expansion efforts, initially focusing on Canada and Europe. Prior to joining the Company, Mr. Ramadan operated a private consulting firm. Mr. Ramadan received his Dottore degree in economics from the University of Bologna, Italy. EDMUNDO IGLESIAS has served as Vice President, Sales and Marketing, Europe of the Company since April 1997. From 1973 to 1996, Mr. Iglesias worked with Melia Hotels, serving as general manager of various hotels and, most recently, as director of marketing and sales of Southeast Asia. Mr. Iglesias received a M.B.A. degree from Brussels University. ARTURO TOLASI has served as Vice President, Area Director Asia/Pacific of the Company since April 1998. From 1992 to 1997, Mr. Tolasi worked with Interesidence SpA, an Italian hotel group controlled by Premafin Holding, serving as a Managing Director. From 1971 to 1991, Mr. Tolasi held various positions with Hilton International, most recently serving as Area Director of Food & Beverage for South America, Central America and the Caribbean. From 1966 to 1970, Mr. Tolasi held various positions in the hotel industry in Germany. BOARD OF DIRECTORS AND COMMITTEES The Company's Certificate of Incorporation and Bylaws provide that the number of members of the Company's Board of Directors shall be determined by the Board of Directors. The number of directors is currently three. The Board of Directors is divided into three classes, with each class to be as nearly equal in number as possible. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that time are elected to hold office for a term of three years and until their respective successors are elected and qualified. The terms of office expire at the Company's annual meeting in the year indicated: Mokhtar Ramadan--2001; Philip Hirsch--2000; and Fadi Ramadan--1999. The Company intends to appoint two additional directors (the "Outside Directors") within the next six months. Such Outside Directors will be appointed to serve on the Audit and Compensation Committees and will not be employed by the Company nor affiliated with the Company's Founding Stockholders. All of the officers identified above serve at the discretion of the Board of Directors of the Company. Messrs. Mokhtar Ramadan, Marwan Ramadan and Fadi Ramadan are brothers. Although Hospitality Partners, LLC has the right until the consummation of the offering to elect one director of the Company under the terms of the Loan and Investment Agreement relating to the Subordinated Promissory Note, Hospitality Partners, LLC has waived this right. The Company's Board of Directors has not established a Compensation Committee or an Audit Committee, but intends to do so upon appointment of the Outside Directors. The Compensation Committee will consist of the Outside Directors. The principal functions of the Compensation Committee will be to review and determine executive compensation and to administer the Company's 1998 Stock Option Plan. The Audit Committee will consist of the Outside Directors. The Audit Committee will make recommendations to the Board concerning the engagement of independent auditors, review the auditing engagement, its results and the Company's internal accounting controls, and direct investigations into matters within the scope of its functions. The Board of Directors does not have a nominating committee. However, the Board of Directors will consider nomination recommendations from stockholders, which should be addressed to the Company's secretary at its principal executive offices. 44 DIRECTOR COMPENSATION Directors do not currently receive any cash compensation from the Company for their services as members of the Board of Directors, although they are reimbursed for out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors. EXECUTIVE COMPENSATION None of the Company's executive officers received any salary or bonus in 1997. HMC LLC, is a limited liability company of which the executive officers who held such offices in 1997 were all members. Consequently, such persons received equity distributions from HMC LLC instead of employment compensation. The following table indicates the equity distributions received by the Company's executive officers in 1997 and their salary following consummation of this offering.
1997 EQUITY 1998 SALARY DISTRIBUTIONS (POST- NAME AND PRINCIPAL POSITION (1) OFFERING)(2) - --------------------------------------------------------------------------------- --------------- -------------- Mokhtar Ramadan, Chairman of the Board, President and Chief Executive Officer................... $ 1,147,205 $ 300,000 Philip G. Hirsch, (3) Senior Vice President, Finance, Treasurer and Chief Financial Officer.......... N/A $ 175,000 Frans Van Steenbrugge, (4) Senior Vice President, General Manager--Telecom................................ N/A $ 125,000 Fadi Ramadan, Senior Vice President, Americas................................................ $ 1,381,047 $ 250,000 Sandra Case, Senior Vice President, Asia/Pacific............................................ $ 325,461 $ 225,000 Marwan Ramadan, Senior Vice President, Europe/Middle East and Africa........................... $ 1,155,529 $ 250,000
- ------------------------ (1) Includes the following business-related expenses: $100,521, $44,497, $23,288 and $60,651 paid in annual premiums on insurance policies for Mokhtar Ramadan, Fadi Ramadan, Sandra Case and Marwan Ramadan; $36,341 relating to housing in Singapore for Sandra Case, and $29,365 and $20,975 relating to housing in France for Fadi Ramadan and Marwan Ramadan, respectively, and car allowances of $13,494, $18,128 and $7,324, respectively, for Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan. In addition, Ms. Case has an option to purchase 180,000 shares of Common Stock, with an exercise price of $1.00 per share. See "Certain Transactions." (2) In addition to the salary amount, Mr. Hirsch is entitled to a guaranteed bonus of $75,000 under his employment contract with the Company and Mr. Van Steenbrugge is entitled to receive an annual bonus equal to 1% for the first year, and 1/2% for each year thereafter, of net revenues of Call Connect, Inc. The other executive officers are eligible for an annual bonus in the discretion of the Company's Board of Directors. See "--Employment Agreements." (3) Mr. Hirsch joined the Company in April 1998. (4) Mr. Van Steenbrugge joined the Company in January 1998. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with all of its executive officers and key employees. The agreements with the executive officers have three year terms. Pursuant to these agreements, the executive officers receive base salary in the amount of $300,000, $175,000, $125,000, $250,000, 45 $225,000 and $250,000, for each of Mokhtar Ramadan, Philip Hirsch, Frans Van Steenbrugge, Fadi Ramadan, Sandra Case and Marwan Ramadan, respectively. The executive officers will be eligible to receive annual bonuses, at the sole discretion of the Board; provided, that Philip Hirsch will receive a minimum bonus of $75,000, and Frans Van Steenbrugge is entitled to receive an annual bonus equal to 1% for the first year, and 1/2% for each year thereafter, of net revenues of Call Connect, Inc. If any agreement is terminated prior to its expiration for cause (as defined) or upon death or disability, the Company must pay the executive officer accrued salary, pro rata vacation, reimbursable expenses and certain other benefits; provided, that in the case of a Principal's termination due to disability, the Company continues to pay base salary and medical insurance for 12 months and, provided further, that in the event of a Principal's death, his or her dependents will continue to receive medical benefits for 12 months. If an agreement (other than Mr. Van Steenbrugge's) is terminated without cause or as a result of the Company's material breach of the agreement, the executive officer also receives an amount equal to the amount of his or her annual salary remaining for the balance of the term of the agreement, or 12 months' salary, if greater in the case of Principals. In addition, all stock options held by the executive officer to the extent not already vested or exercisable become immediately exercisable, and life insurance, disability insurance and health insurance benefits for the remainder of such term or 12 months, if greater, in the case of Principals. Principals also receive partial bonus payments in certain instances. In addition, it is deemed a termination without cause if a Principal terminates his employment for certain reasons, including a material diminution in the Principal's position or reduction in compensation, and in the event a change in control, as defined, occurs. Messrs. Hirsch and Van Steenbrugge were granted options to purchase 240,000 and 50,400 shares of Common Stock, respectively. Mr. Hirsch's options vest and become exercisable 90 days after the date of grant as to 20% and the balance vest in three equal installments annually. Mr. Van Steenbrugge's options vest ratably over four years. To the extent not already vested, if the options would terminate as a result of a change in control, then they become immediately exercisable. OPTION PLAN 1998 STOCK OPTION PLAN The Company's 1998 Stock Option Plan (the "1998 Stock Option Plan") was adopted by the Board of Directors in May 1998. A total of 1,500,000 shares of Common Stock have been reserved for issuance under the 1998 Stock Option Plan. As of May 31, 1998, no options to purchase shares of Common Stock had been exercised under the 1998 Stock Option Plan and options to purchase 817,140 shares of Common Stock were outstanding. The outstanding options were exercisable at an exercise price of $10.50 per share. The purpose of the 1998 Stock Option Plan is to motivate, attract and retain employees, directors and consultants of the Company and its related entities, to provide incentives to such persons and to promote the success of the Company's business. The 1998 Stock Option Plan provides for the granting to employees of Incentive Stock Options and the granting of Nonqualified Stock Options ("1998 Awards"). The 1998 Stock Option Plan is administered by the Board of Directors or a committee consisting of not less than two directors designated by the Board of Directors and, to the extent required, constituted to permit such 1998 Awards to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder. The plan administrator determines which individuals shall be granted 1998 Awards, and the provisions, terms and conditions of each 1998 Award, including, but not limited to, the timing, exercise price and number of shares subject to such award. 46 1998 Awards are not transferable by the optionee other than by will or the laws of descent or distribution, and each 1998 Award is exercisable during the lifetime of the optionee only by such optionee. The exercise price of options granted must be at least equal to the fair market value of the Common Stock on the date of grant, and the term of the options must not exceed ten years. With respect to an employee who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any Incentive Stock Option must equal at least 110% of the fair market value of the Common Stock on the grant date and the term of the option must not exceed five years. The consideration to be paid for the shares of Common Stock upon exercise of a 1998 Award will be determined by the plan administrator and may include cash or its equivalent, shares of previously acquired Common Stock, foregoing of compensation, the surrender of fully exercisable options or any combination of the above. Where the 1998 Award agreement permits the exercise or purchase of the 1998 Award for a certain period of time following the recipient's termination of service with the Company, disability, or death, the 1998 Award will terminate to the extent not exercised or purchased on the last day of the specified period or the last day of the original term of the 1998 Award, whichever occurs first. Unless terminated sooner, the 1998 Stock Option Plan will terminate automatically in 2008. The Board has the authority to amend, modify or terminate the 1998 Stock Option Plan subject to stockholder approval of certain amendments and provided no such action may adversely affect 1998 Awards previously granted under the 1998 Stock Option Plan unless agreed to by the affected persons. LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation and Bylaws provide that the Company shall indemnify all directors and officers and may indemnify any employee or agent to the fullest extent permitted by Section 145 of the DGCL, as it now exists or as amended. The Company intends to enter into agreements to indemnify its directors and officers, in addition to indemnification provided for in the Company's charter documents. These agreements, among other things, provide for the indemnification of the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or officer of the Company, any subsidiary of the Company or any other company or enterprise to which such person provides services at the request of the Company to the fullest extent permitted by applicable law. The Company believes that these provisions and agreements will assist the Company in attracting and retaining qualified persons to serve as directors, officers, employees and agents. Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Certificate of Incorporation will provide for the elimination of personal liability of a director for breach of fiduciary duty, as permitted by Section 102(b)(7) of the DGCL. The Underwriting Agreement provides for indemnification by the Underwriters under certain circumstances of directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions contained in the Certificate of Incorporation and Bylaws of the Company, the DGCL, the Underwriting Agreement or otherwise, the 47 Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the Common Stock being registered hereunder, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company intends to purchase and maintain insurance on behalf of the officers and directors insuring them against liabilities that they may incur in such capacities or arising out of such status. There is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought, nor is the Company aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. 48 CERTAIN TRANSACTIONS REORGANIZATION The Company was incorporated in Delaware in May 1998 to consolidate the operations of several entities in the same business and under common ownership and management. As a result of the Merger, HMC Inc., Call Connect, Inc., and each of the Foreign Entities will be operating subsidiaries of the Company. The Reorganization will be consummated prior to the effectiveness of the offering. Prior to the Reorganization, each of Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan owned 31 2/3% and Sandra Case owned 5% of the outstanding member interests of HMC LLC. In the Merger, Mokhtar Ramadan, Fadi Ramadan, Marwan Ramadan, a trust of which the Ramadans are beneficial owners and Sandra Case will receive 2,616,320, 2,616,320, 2,616,320, 131,040 and 420,000 shares of Common Stock, respectively. See "Reorganization" and "Principal Stockholders." TAX INDEMNIFICATION AGREEMENT Upon the closing of the offering, the Company and the Principals will enter into a tax indemnification agreement relating to their respective tax liabilities. The agreement will provide for indemnification by the Company of each of the Principals against all losses, liabilities, interest, penalties, attorneys' and accountants' fees and taxes on the receipt of such indemnification payments, resulting from any additional foreign, federal and state income taxes imposed upon any of the Principals because of any change in HMC LLC's income for the period from July 1996 through consummation of the Reorganization. The Principals will indemnify the Company, to the extent of tax refunds received by the Principals relating to the value of prepaid taxes accruing to the benefit of the Company, if the Company is required to pay tax on such deferred income without receiving the benefit of the prepayments made by the Principals. DISTRIBUTIONS TO THE PRINCIPALS Because of its limited liability company status, HMC LLC has not paid federal corporate income taxes. Instead, until consummation of the Merger, the Principals are obligated to pay U.S. federal and certain state income taxes on their allocable portions of the income of HMC LLC. HMC LLC has made various distributions to the Principals, including distributions which have enabled them to pay their income taxes on their allocable portions of the income of HMC LLC. None of the Principals has ever received a salary from the Company. Prior to the Reorganization, HMC LLC and certain of the Foreign Entities distributed to the Principals an aggregate of $2.0 million, $5.1 million, $4.0 million and $820,000 in dividends or partnership distributions during the 1995, 1996 and 1997 fiscal years and the three months ended March 31, 1998, respectively. Of these amounts, Mokhtar Ramadan received $556,991, $941,445, $1,033,190 and $253,638, respectively; Fadi Ramadan received $733,257, $1,176,811, $1,289,057 and $273,418, respectively; Marwan Ramadan received $528,165, $940,912, $1,066,579 and $159,797, respectively; and Sandra Case received $142,594, $242,960, $265,832 and $89,005, respectively. The Principals will continue to receive their normal periodic distributions prior to the consummation of the Reorganization. The Company plans to declare additional distributions of approximately $5.0 to $9.0 million to the Principals prior to the consummation of the Merger. See "Reorganization" and "Use of Proceeds." OTHER BENEFITS TO PRINCIPALS The Company has purchased insurance policies on the lives of the Principals in the amount of approximately $15,000,000 for each of Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan, and $6,600,000 for Sandra Case. The Principals are entitled to the cash surrender value of their respective policies. Upon the closing of the offering, the Company will cease paying premiums on the policies, and each of the Principals either will receive the cash surrender value of the policies or have the opportunity to continue the policies at his or her own expense. As of May 8, 1998, the estimated cash surrender receivable by the Principals is $119,024, $83,671, $115,170 and $67,831 for Mokhtar Ramadan, Fadi Ramadan, Marwan Ramadan and Sandra Case, respectively. In 1995, 1996 and 1997, premiums paid by the Company on insurance policies relating to the Principals aggregated: $28,788, $40,001 and $100,521 for Mokhtar 49 Ramadan; $18,377, $27,288 and $44,497 for Fadi Ramadan; $24,496, $35,214 and $60,651 for Marwan Ramadan; and $4,650, $13,150 and $23,288 for Sandra Case. The Company has also provided the Principals with automobiles and, in the case of expatriates, housing allowances. See "Management--Executive Compensation." Each of the Principals has entered into an employment agreement with the Company effective upon the completion of the offering, and Mr. Hirsch and Mr. Van Steenbrugge have received options to acquire Common Stock. See "Management--Employment Agreements." THE ORIGINAL PARTNERSHIP Prior to July 1996, the Original Partnership conducted certain of the Company's hotel membership programs in Asia, Europe and Latin America. On July 1, 1996, HMC LLC purchased the assets and assumed the liabilities associated with those programs for a purchase price of $1,762,270, represented by a promissory note (the "Original Partnership Note"), bearing interest at 8%, with interest payable monthly for five years commencing in January 1997, due in full January 1, 2002. The loan agreement with respect to the Subordinated Promissory Note prohibits any principal payment on the Original Partnership Note prior to consummation of the offering. The Original Partnership owns the land and approximately 13,100 square foot building in Irvine, California, where the Company's headquarters is located. The Company leases the property pursuant to a triple net lease providing for a monthly rental of $19,000. The term of the lease extends until 2001, and contains a three-year renewable option, with rental adjustments equal to the percentage increase, if any, in the consumer price index. The total amounts paid by the Company to the Original Partnership for rent were $89,000 for each of 1995, 1996, and 1997, respectively. The Company believes that the terms of the lease are at least as favorable as might be obtained from an independent third party. SUBORDINATED PROMISSORY NOTE In November 1997, Hospitality Partners, LLC made a $3.0 million loan to HMC LLC. The Subordinated Promissory Note evidencing the loan provides for interest at prime rate payable in arrears on the last day of each calendar month commencing December 31, 1999, due in full December 31, 2001. On or prior to consummation of the offering, the Subordinated Promissory Note will be converted into 3,600,000 shares of Common Stock. Under the terms of the agreement relating to the Subordinated Promissory Note, Hospitality Partners, LLC received a contractual right, subject to certain conditions, to require the Company to register its shares of Common Stock for resale under the Securities Act. See "Description of Capital Stock-- Registration Rights." Hospitality Partners, LLC has agreed for 180 days from the effective date of the offering not to sell or otherwise dispose of its shares. In connection with the November 1997 investment by Hospitality Partners, LLC, Sandra Case was granted an option to purchase an approximate 2% additional equity interest in HMC LLC, and a comparable equity interest in each of the related entities, for $180,000. This option will be converted in the Merger into an option to purchase 180,000 shares of the Company at an exercise price of $1.00 per share. The option is fully vested and exercisable. BANK LINE OF CREDIT The Company has a $400,000 revolving line of credit with Cedars Bank. The loan is personally guaranteed by Mokhtar, Fadi and Marwan Ramadan. The Company intends to repay the outstanding balance of this line of credit using a portion of the proceeds of the offering. See "Use of Proceeds" and Note 5 of Notes to Consolidated Financial Statements. INDEMNIFICATION AGREEMENTS The Company intends to enter into indemnification agreements with its officers and directors containing provisions which may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers, and to advance them expenses incurred as a result of any proceeding against them as to which they could be indemnified. See "Management--Limitation on Liability and Indemnification Matters." 50 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of the Company's outstanding Common Stock as of March 31, 1998 (giving effect to the Reorganization) and as adjusted to reflect the sale of the Common Stock offered hereby (i) each person who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Company's executive officers, and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE BENEFICIALLY NUMBER OF OWNED (2) SHARES -------------------------- BENEFICIALLY BEFORE AFTER BENEFICIAL OWNER (1) OWNED (2) OFFERING OFFERING - ------------------------------------------------------------------------------ ----------- ------------- ----------- Mokhtar Ramadan (3)........................................................... 2,747,360 32.7% Philip G. Hirsch (4).......................................................... 48,000 * Frans Van Steenbrugge......................................................... 0 * Fadi Ramadan (5).............................................................. 2,747,360 32.7 Sandra Case (6)............................................................... 600,000 7.0 Marwan Ramadan (7)............................................................ 2,747,360 32.7 Hospitality Partners, LLC (8)................................................. 3,600,000 30.0 All current directors and executive officers as a group (6 persons) (9)....................................................... 8,628,000 100.0%
- ------------------------ * Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock. (1) The address of all persons on the list set forth above is: 15751 Rockfield Boulevard, Suite 200, Irvine, California 92718. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. The persons named in this table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the other footnotes to this table. Percentage of beneficial ownership prior to the offering is based on 8,400,000 shares of Common Stock outstanding at March 31, 1998. Percentage of beneficial ownership after the offering is based on total shares outstanding, which includes the shares outstanding prior to the offering identified above and 3,600,000 shares of Common Stock issuable upon conversion by the Subordinated Promissory Note, plus shares of Common Stock to be sold pursuant to the offering. (3) Includes 416,640 shares held by Mokhtar Ramadan and Christine Ramadan, Trustees of The Mokhtar and Christine Ramadan Children's Trust of 1998 and 131,400 shares held by Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan, Trustees of The Ramadan Brothers Trust of 1998. (4) Represents an option exercisable for 48,000 shares of Common Stock exercisable within 60 days. (5) Includes 416,640 shares held by Fadi Ramadan and Jane Ramadan, Trustees of The Fadi and Jane Ramadan Children's Trust of 1998 and 131,400 shares held by Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan, Trustees of The Ramadan Brothers Trust of 1998. (6) Includes 63,000 shares held by Sandra Case, Trustee of The Sandra Case Children's Trust of 1998 and an option exercisable for 180,000 shares of Common Stock exercisable within 60 days. (7) Includes 416,640 shares held by Marwan Ramadan and Nikolitsa Ramadan, Trustees of The Marwan and Nikolitsa Ramadan Children's Trust of 1998 and 131,400 shares held by Mokhtar Ramadan, Fadi Ramadan and Marwan Ramadan, Trustees of The Ramadan Brothers Trust of 1998. (8) Represents shares issuable upon conversion of the Subordinated Promissory Note. See "Certain Transactions." (9) Includes options and shares issuable upon conversion of the Subordinated Promissory Note described in notes (3)-(7), above. 51 DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company and certain provisions of the Company's Certificate of Incorporation and Bylaws is a summary and is qualified in its entirety by the provisions of the Certificate of Incorporation and Bylaws, which have been filed as exhibits to the Company's Registration Statement of which this Prospectus is a part. Upon the completion of the offering, the authorized capital stock of the Company after giving effect to the Reorganization and conversion of the Subordinated Promissory Note into Common Stock will be 50,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000 shares of Preferred Stock, par value $.001 per share. COMMON STOCK Prior to the offering, after giving effect to the Reorganization and conversion of the Subordinated Promissory Note, there will be 12,000,000 shares of Common Stock outstanding held of record by five holders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Stockholders do not have the right to cumulate their votes in the election of directors. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available for the payment of dividends. See "Dividend Policy." Holders of Common Stock have no preemptive rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of the offering will be, fully paid and nonassessable. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of debts and liabilities and the liquidation preferences of any outstanding shares of preferred stock, if any. The rights of holders of Common Stock are subject to and qualified by, and may be adversely affected by, the rights of any series of preferred stock which the Company may issue in the future. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Undesignated Preferred Stock. The Board of Directors will have the authority to (i) issue the Undesignated Preferred Stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of Undesignated Preferred Stock and (ii) fix the number of shares constituting any series and the designation of such series without any further vote or action by the stockholders. The issuance of such preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. See "Risk Factors--Control by Principal Stockholders" and "--Anti-Takeover Effects of Delaware Law and Certain Charter Provisions." At present, the Company has no plans to issue any shares of preferred stock. CERTAIN ANTI-TAKEOVER EFFECTS Certain provisions of the Certificate of Incorporation and Bylaws, summarized in the following paragraphs, may be considered to have an anti-takeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by stockholders. The Certificate of Incorporation and Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the 52 Board of Directors will be elected each year. Classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for the Company. Moreover, under the DGCL, in the case of a corporation having a classified board of directors, the stockholders may remove a director only for cause. The Certificate of Incorporation provides that special meetings of stockholders may be called by the President and Chief Executive Officer or at the request of a majority of the Board of Directors of the Company. The Bylaws provide that stockholders seeking to bring business before a meeting of stockholders, or to nominate candidates for election as directors at a meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice to bring business before a meeting must be delivered to, or mailed and received at, the principal executive office of the Company not less than 60 days nor more than 90 days prior to the scheduled meeting (or, if a special meeting, not later than the close of business on the tenth day following the earlier of (i) the day on which such notice of the date of the meeting was mailed, or (ii) the day on which public disclosure of the date of the special meeting was made). The Bylaws also specify certain requirements pertaining to the form and substance of a stockholder's notice. These provisions may preclude some stockholders from making nominations for directors at an annual or special meeting or from bringing other matters before the stockholders at a meeting. The Certificate of Incorporation does not allow the stockholders of the Company to take action by written consent following completion of the offering. Section 203 of the DGCL ("Section 203") prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such person became an interested stockholder unless: (i) prior to such date, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or (ii) upon becoming an interested stockholder, the stockholder then owned at least 85% of the voting stock, as defined in Section 203; or (iii) subsequent to such date, the business combination is approved by both the Board of Directors and by holders of at least 66 2/3% of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder. For these purposes, the term "business combination" includes mergers, asset sales and other similar transactions with an "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or, within the prior three years, did own) 15% or more of the corporation's voting stock. The Certificate of Incorporation contains a provision that is designed to limit the directors' liability to the extent permitted by the DGCL and any amendments thereto. Specifically, directors will not be held liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability as a result of: (i) any breach of the duty of loyalty to the Company or its stockholders; (ii) actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) payment of an improper dividend or improper repurchase of HMC's stock under Section 174 of the DGCL; or (iv) actions or omissions pursuant to which the director received an improper personal benefit. The principal effect of the limitation of liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of the Company unless the stockholder can demonstrate one of the specified bases for liability. The provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. The Certificate of Incorporation does not eliminate a director's duty of care. The inclusion of this provision in the Certificate of Incorporation may, however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited HMC and its stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. 53 The Certificate of Incorporation and Bylaws also provide that the Company will indemnify its directors and officers, and may indemnify any of its employees and agents, to the fullest extent permitted by Delaware law. HMC is generally required to indemnify its directors and officers for all judgments, fines, penalties, settlements, legal fees and other expenses incurred in connection with pending, threatened or completed legal proceedings because of the director's or officer's position with HMC or another entity that the director or officer serves at the Company's request, subject to certain conditions and to advance funds to its directors and officers to enable them to defend against such proceedings. REGISTRATION RIGHTS After the offering, Hospitality Partners, LLC will be entitled to certain rights with respect to the registration of 3,600,000 shares under the Securities Act. Under the terms of the agreement between the Company and the holder of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other securityholders exercising registration rights, such holder is entitled to notice of such registration and is entitled to include shares of such Common Stock therein. Subject to certain limitations in the agreement, the holder of registrable shares may require, on one occasion, that the Company use its best efforts to register such shares for public resale, subject to certain limitations. These rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration in certain circumstances. Hospitality Partners, LLC has agreed not to exercise these registration rights for 180 days following the effective date of the offering. TRANSFER AGENT The Transfer Agent and Registrar for the Common Stock is Norwest Trust Co. 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to the offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing prices and the ability of the Company to raise equity capital in the future. Upon completion of the offering, the Company will have outstanding shares of Common Stock and options exercisable for 997,140 shares of Common Stock, based on the number of shares of Common Stock and options outstanding as of May 31, 1998 and giving effect to the conversion of the Subordinated Promissory Note. Of these shares, the shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act. The remaining 12,000,000 shares will be "restricted securities" as that term is defined under Rule 144 (the "Restricted Shares"). Registered securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. Sales of Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the number of shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock as reported through the Nasdaq National Market during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an "affiliate" of the Company at any time during the 90 days preceding a sale, and who has beneficially owned for at least two years the shares proposed to be sold, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. In general, Rule 701 permits resale of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirements, contained in Rule 144. Upon completion of the offering none of the Restricted Shares of Common Stock (all of which are subject to the Lock-Up Agreements) held by current stockholders will be immediately eligible for sale in the public market pursuant to Rule 144 of the Securities Act. In addition, 3,600,000 Restricted Shares of Common Stock (all of which are subject to the lock-up agreements described below) will be eligible for sale beginning 90 days after the date of this Prospectus pursuant to Rule 144 and the remaining 8,400,000 will be eligible for sale under Rule 144 beginning one year after the date of the Reorganization. All directors, officers and stockholders holding in the aggregate 12,000,000 shares of Common Stock have agreed that for a period of 180 days after the date of this Prospectus (the "Lockup Period") they will not, without the prior written consent of BancAmerica Robertson Stephens, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for any shares of Common Stock. See "Underwriting." The Company has granted registration rights to one of its securityholders. See "Description of Capital Stock--Registration Rights." 55 UNDERWRITING The Underwriters named below (the "Underwriters"), acting through their representatives, BancAmerica Robertson Stephens and William Blair & Company (the "Representatives"), have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- ---------- BancAmerica Robertson Stephens................................................... William Blair & Company, L.L.C................................................... ---------- Total........................................................................ ---------- ----------
The Company has been advised by the Representatives that the Underwriters proposed to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price, less a concession not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to additional shares of Common Stock at the same price per share as the Company will receive for the shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the shares are being sold. The Company will be obligated, pursuant to the option, to sell shares to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity between the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Each officer, director and stockholder of the Company, together holding approximately 12,000,000 shares of Common Stock, have agreed in writing with the Representatives (the "Lock-Up Agreements") that, until 180 days after the Registration Statement is declared effective by the Commission, subject to certain limited exceptions, they will not, directly or indirectly, sell, offer, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for, or any other rights to purchase or acquire, Common Stock owned directly by them or acquired by them after the date of the Lock-Up Agreements, or which may be deemed to be beneficially owned by them, without the prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the Lock-Up Agreements. In addition, the Company has agreed that, until 180 days after the Registration Statement is declared effective by the Commission, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, subject to certain limited exceptions, sell, offer, contract to sell, pledge, 56 grant any option to purchase or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for, or any other rights to purchase or acquire, shares of Common Stock, other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of the outstanding convertible securities or options, or the Company's grant of options and issuance of stock under existing employee stock option or stock purchase plans. See "Shares Eligible for Future Sale." The Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations among the Company and the Representatives. Among the factors to be considered in such negotiation are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present stage of the Company's development and other factors deemed relevant. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Greenberg Glusker Fields Claman & Machtinger LLP, Los Angeles, California. Certain legal matters relating to the offering will be passed upon for the Underwriters by Cooley Godward LLP, Palo Alto, California. EXPERTS The consolidated financial statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 57 ADDITIONAL INFORMATION As permitted by the rules and regulations of the Securities and Exchange Commission, this Prospectus omits certain information, exhibits, schedules and undertakings set forth elsewhere in the Registration Statement on Form S-1 of which this Prospectus forms a part. For further information pertaining to the Company and the securities offered hereby, reference is made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents or provisions of any documents referred to herein are not necessarily complete, and in each instance, reference is made to the copy of the document filed as an exhibit to this Registration Statement. The Company will issue annual and quarterly reports. Annual reports will include audited financial statements prepared in accordance with accounting principles generally accepted in the United States and a report of its independent auditors with respect to the examination of such financial statements. In addition, the Company will issue to its securityholders such other unaudited quarterly or other interim reports as it deems appropriate. This Registration Statement may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies may be obtained from the Commission at prescribed rates from the Public Reference Section of the Commission at such address, and at the Commission's regional offices located at 7 World Trade center, 13th Floor, New York, New York 10048, and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, registration statements and certain other filings made with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the Internet's World Wide Web, located at http:\\www.sec.gov. 58 HOSPITALITY MARKETING CONCEPTS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants.......................................................................... F-2 Consolidated Balance Sheet................................................................................. F-3 Consolidated Income Statement.............................................................................. F-4 Consolidated Statement of Stockholders' Deficit............................................................ F-5 Consolidated Statement of Cash Flows....................................................................... F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Hospitality Marketing Concepts Inc. THE REORGANIZATION DESCRIBED IN NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS HAS NOT BEEN CONSUMMATED. WHEN IT HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO FURNISH THE FOLLOWING REPORT: "In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Hospitality Marketing Concepts Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above." Price Waterhouse LLP Costa Mesa, California , 1998 F-2 HOSPITALITY MARKETING CONCEPTS INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31, PRO FORMA -------------------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 ------------ ------------ ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................. $ 1,694,000 $ 2,840,000 $ 1,380,000 $ 1,380,000 Short-term investments................................. 1,500,000 2,717,000 2,717,000 Trade receivables, net of allowance for doubtful accounts of $100,000, $215,000 and $265,000 at December 31, 1996 and 1997 and March 31, 1998, respectively......................................... 539,000 1,026,000 1,586,000 1,586,000 Other current assets................................... 136,000 403,000 211,000 211,000 Deferred income taxes.................................. 877,000 Membership acquisition and other deferred costs........ 9,704,000 9,580,000 9,073,000 9,073,000 ------------ ------------ ------------ ------------- Total current assets................................. 12,073,000 15,349,000 14,967,000 15,844,000 Fixed assets, net...................................... 252,000 378,000 419,000 419,000 Other assets........................................... 64,000 771,000 840,000 840,000 ------------ ------------ ------------ ------------- $ 12,389,000 $ 16,498,000 $ 16,226,000 $ 17,103,000 ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Lines of credit and current portion of notes payable... $ 300,000 $ 1,183,000 $ 1,310,000 $ 1,310,000 Trade accounts payable................................. 1,310,000 1,808,000 1,595,000 1,595,000 Accrued liabilities.................................... 1,227,000 940,000 1,681,000 1,574,000 Other current liabilities.............................. 249,000 614,000 436,000 436,000 Deferred membership revenues........................... 14,521,000 14,660,000 14,106,000 14,106,000 ------------ ------------ ------------ ------------- Total current liabilities............................ 17,607,000 19,205,000 19,128,000 19,021,000 ------------ ------------ ------------ ------------- Convertible note payable............................... 3,000,000 3,000,000 Note payable to stockholders........................... 1,763,000 1,763,000 1,763,000 1,763,000 Distribution payable to stockholders................... 7,000,000 ------------ ------------ ------------ ------------- Total liabilities.................................... 19,370,000 23,968,000 23,891,000 27,784,000 ------------ ------------ ------------ ------------- Commitments and contingencies (Note 7) Stockholders' deficit: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding......... -- -- -- -- Common stock, $0.001 par value; 50,000,000 shares authorized; 8,400,000 (12,000,000 pro forma) shares issued and outstanding............................... 8,000 8,000 8,000 12,000 Additional paid-in capital............................. 3,103,000 Accumulated deficit.................................... (6,974,000) (7,317,000) (7,442,000) (13,565,000) Accumulated other comprehensive income................. (15,000) (161,000) (231,000) (231,000) ------------ ------------ ------------ ------------- Total stockholders' deficit.......................... (6,981,000) (7,470,000) (7,665,000) (10,681,000) ------------ ------------ ------------ ------------- $ 12,389,000 $ 16,498,000 $ 16,226,000 $ 17,103,000 ------------ ------------ ------------ ------------- ------------ ------------ ------------ -------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 HOSPITALITY MARKETING CONCEPTS INC. CONSOLIDATED INCOME STATEMENT
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------- --------------------------- 1995 1996 1997 1997 1998 ------------- ------------- ------------- ------------ ------------- (UNAUDITED) Revenues.............................. $ 21,199,000 $ 27,297,000 $ 31,906,000 $ 7,777,000 $ 7,873,000 Cost of revenues...................... 13,788,000 17,471,000 20,658,000 5,155,000 5,033,000 ------------- ------------- ------------- ------------ ------------- Gross margin.......................... 7,411,000 9,826,000 11,248,000 2,622,000 2,840,000 General and administrative costs...... 6,316,000 6,396,000 7,304,000 1,477,000 2,005,000 ------------- ------------- ------------- ------------ ------------- Operating income...................... 1,095,000 3,430,000 3,944,000 1,145,000 835,000 Other income and expenses: Interest expense.................... (72,000) (167,000) (285,000) (58,000) (144,000) Foreign currency transaction gain (loss)............................ (83,000) 51,000 (46,000) (28,000) 33,000 Other income (expense).............. 55,000 (43,000) 42,000 37,000 (29,000) ------------- ------------- ------------- ------------ ------------- Income before provision for income taxes................................ 995,000 3,271,000 3,655,000 1,096,000 695,000 Provision for income taxes............ ------------- ------------- ------------- ------------ ------------- Net income............................ $ 995,000 $ 3,271,000 $ 3,655,000 $ 1,096,000 $ 695,000 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- Net income per share--Basic and diluted.............................. $ 0.12 $ 0.39 $ 0.43 $ 0.13 $ 0.08 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- Weighted average common shares:....... Basic............................... 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- Diluted............................. 8,400,000 8,400,000 8,430,000 8,400,000 8,580,000 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- Unaudited pro forma data: Unaudited pro forma net income (Note 9)................................ $ 1,604,000 $ 302,000 ------------- ------------- ------------- ------------- Unaudited pro forma net income per share--Basic and diluted.......... $ $ ------------- ------------- ------------- ------------- Unaudited pro forma weighted average common shares: Basic............................. ------------- ------------- ------------- ------------- Diluted........................... ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 HOSPITALITY MARKETING CONCEPTS INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
ACCUMULATED COMMON STOCK OTHER --------------------- ACCUMULATED COMPREHENSIVE SHARES AMOUNT DEFICIT INCOME TOTAL ---------- --------- ------------- ------------- ------------- Balance, December 31, 1994................... 8,400,000 $ 8,000 $ (4,129,000) $ (45,000) $ (4,166,000) Stockholder distributions.................... (2,011,000) (2,011,000) Comprehensive income: Foreign currency translation............... (74,000) (74,000) Net income................................. 995,000 995,000 ------------- Comprehensive income......................... 921,000 ---------- --------- ------------- ------------- ------------- Balance, December 31, 1995................... 8,400,000 8,000 (5,145,000) (119,000) (5,256,000) Stockholder distributions.................... (5,100,000) (5,100,000) Comprehensive income: Foreign currency translation............... 104,000 104,000 Net income................................. 3,271,000 3,271,000 ------------- Comprehensive income......................... 3,375,000 ---------- --------- ------------- ------------- ------------- Balance, December 31, 1996................... 8,400,000 8,000 (6,974,000) (15,000) (6,981,000) Stockholder distributions.................... (3,998,000) (3,998,000) Comprehensive income: Foreign currency translation............... (146,000) (146,000) Net income................................. 3,655,000 3,655,000 ------------- Comprehensive income......................... 3,509,000 ---------- --------- ------------- ------------- ------------- Balance, December 31, 1997................... 8,400,000 8,000 (7,317,000) (161,000) (7,470,000) Unaudited: Stockholder distributions.................... (820,000) (820,000) Comprehensive income: Foreign currency translation............... (70,000) (70,000) Net income................................. 695,000 695,000 ------------- Comprehensive income......................... 625,000 ---------- --------- ------------- ------------- ------------- Balance, March 31, 1998 (unaudited).......... 8,400,000 $ 8,000 $ (7,442,000) $ (231,000) $ (7,665,000) ---------- --------- ------------- ------------- ------------- ---------- --------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 HOSPITALITY MARKETING CONCEPTS INC. CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------- --------------------------- 1995 1996 1997 1997 1998 ------------- ------------- ------------- ------------ ------------- (UNAUDITED) Cash flows from operating activities: Net income.................................... $ 995,000 $ 3,271,000 $ 3,655,000 $ 1,096,000 $ 695,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred membership acquisition costs..... (234,000) (2,665,000) 124,000 258,000 507,000 Deferred membership revenues.............. 1,209,000 3,268,000 139,000 100,000 (554,000) Depreciation and amortization............. 113,000 82,000 92,000 20,000 25,000 Changes in assets and liabilities affecting operating cash flows: Trade receivables......................... (578,000) 535,000 (487,000) (562,000) (560,000) Other current assets...................... (9,000) 92,000 (267,000) (92,000) 192,000 Other assets.............................. (29,000) (35,000) (707,000) 15,000 (69,000) Trade accounts payable.................... 464,000 (145,000) 498,000 246,000 (213,000) Accrued liabilities....................... 214,000 (59,000) (287,000) (476,000) 741,000 Other current liabilities................. (30,000) (264,000) 365,000 (35,000) (178,000) ------------- ------------- ------------- ------------ ------------- Net cash provided by operating activities....... 2,115,000 4,080,000 3,125,000 570,000 586,000 ------------- ------------- ------------- ------------ ------------- Cash flows from investing activities: Acquisition of fixed assets................... (42,000) (70,000) (218,000) (75,000) (66,000) Disposal of fixed assets...................... 40,000 Increase in short-term investments............ (1,500,000) (1,217,000) ------------- ------------- ------------- ------------ ------------- Net cash used in investing activities........... (42,000) (30,000) (1,718,000) (75,000) (1,283,000) ------------- ------------- ------------- ------------ ------------- Cash flows from financing activities: Net proceeds from lines of credit and notes payable..................................... 300,000 883,000 89,000 127,000 Proceeds from convertible note payable........ 3,000,000 Stockholder distributions..................... (2,011,000) (3,337,000) (3,998,000) (901,000) (820,000) ------------- ------------- ------------- ------------ ------------- Net cash used in financing activities........... (2,011,000) (3,037,000) (115,000) (812,000) (693,000) ------------- ------------- ------------- ------------ ------------- Effect of exchange rates on cash................ (74,000) 104,000 (146,000) (66,000) (70,000) ------------- ------------- ------------- ------------ ------------- Net increase (decrease) in cash and cash equivalents................................... (12,000) 1,117,000 1,146,000 (383,000) (1,460,000) Cash and cash equivalents at beginning of period........................................ 589,000 577,000 1,694,000 1,694,000 2,840,000 ------------- ------------- ------------- ------------ ------------- Cash and cash equivalents at end of period...... $ 577,000 $ 1,694,000 $ 2,840,000 $ 1,311,000 $ 1,380,000 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- Supplemental cash flow information: Cash paid for interest........................ $ 24,000 $ 89,000 $ 18,000 $ 29,000
The accompanying notes are an integral part of these consolidated financial statements. F-6 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND REORGANIZATION NATURE OF BUSINESS Hospitality Marketing Concepts Inc. ("HMC" or the "Company") is involved in the design, marketing and management of hotel membership programs for hotels in approximately 30 countries throughout the world. Specifically, HMC promotes and sells hotel membership programs which grant members the right to certain discounts on hotel rooms and food and beverage services. Hospitality Marketing Concepts Inc. was formed in Delaware in May 1998. REORGANIZATION Beginning in 1989, the business of the Company was conducted through Hospitality Marketing Consultants, a general partnership (the "Original Partnership") composed initially of three partners. In 1994, an additional partner was admitted to the Original Partnership. These partners are referred to as the "Principals." The business in the U.S. and Puerto Rico was conducted through HMC Consultants Inc., formerly known as Hospitality Marketing Concepts, Inc., a California corporation ("HMC Inc."), all of the capital stock of which is beneficially owned by the Principals. In July 1996, the Principals organized Hospitality Marketing Consultants LLC, a California limited liability company ("HMC LLC"), and HMC LLC purchased from the Original Partnership all of the Original Partnership's business and assets, except the real property at which the Company's Irvine, California headquarters is located. The operations of the Original Partnership, excluding the real property, are included in the accounts of the Company from inception. As described below, the Company effected a reorganization in , 1998. An aggregate of 8,400,000 shares of common stock were issued by the Company to the Principals in connection with the reorganization. All share and per share amounts in these consolidated financial statements have been retroactively restated to reflect the shares of common stock issued in the reorganization. The reorganization has been structured as a tax-free reorganization. The Company accounted for the reorganization similar to the accounting for a pooling of interests, as it represented an exchange of equity interests among companies under common control. The ownership interests of each of the entities is proportionately identical. As the Principals commenced business operations in certain foreign countries, they generally established local legal entities through which to conduct those operations. The entities organized in Australia, France, Indonesia, Malaysia, Singapore and Venezuela, directly or indirectly, were 100% beneficially owned by HMC LLC. The entities in Canada, Colombia, and United Kingdom were 100% beneficially owned by the Principals, and the Principals also owned an 84% interest in the entity organized in Poland, with the remaining 16% owned by Chris Feeney, a former consultant. The entities organized in Italy and Spain were 100% owned by HMC (International) Ltd., a United Kingdom entity ("International"), which is owned by the Principals. Pursuant to a Contribution Agreement dated June 1, 1998 by and among the Company, HMC LLC and the Principals, the Principals have agreed to contribute all of their interests in all of the Foreign Entities owned by them, except International, to HMC LLC. Additionally, the Principals will contribute all of their stock in HMC Inc. to HMC LLC. The Principals will also contribute all of their interests in International to Hospitality Marketing Concepts (Holdings) Limited, a newly-organized United Kingdom entity ("Holdings") owned by HMC. Thereafter, International will be liquidated and its interests in the entities organized in Italy and Spain will be transferred to Holdings. As a result, HMC LLC will have F-7 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND REORGANIZATION (CONTINUED) acquired, directly or indirectly, 100% of the equity interests in HMC Inc. and each of the foreign entities except that HMC LLC will own 84% of the interest in the entity organized in Poland. Effective prior to the closing of the proposed public offering (Note 10), HMC LLC will be merged with and into the Company, with the Company as the surviving entity. As a result of the merger, the Company will succeed to HMC LLC's ownership interest in HMC Inc. and each of the foreign entities, as described above. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of HMC and its wholly and majority owned subsidiaries after the reorganization described in Note 1. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of theses consolidated financial statements in conformity with generally accepted accounting principles requires the management of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN EXCHANGE The financial statements of all foreign entities were prepared in their respective local currencies and translated into U.S. dollars based on the current exchange rate at the end of the period for the balance sheet and a weighted-average rate for the period on the consolidated income statements. Translation adjustments are reflected as foreign currency translation adjustments in Stockholders' Deficit. Transaction adjustments for all foreign entities are included in net income. The Company has, in the past, experienced material losses as a result of currency exchange rate fluctuations and has not engaged in hedging transactions to reduce its exposure to such fluctuations. The Company's inability to successfully hedge such foreign currency risk could have a material adverse effect on the Company's financial condition, results of operations and cash flows. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents and investments with original maturities of greater than 90 days to be short term investments. As of December 31, 1997, the Company had a short term investment which comprised a bank time deposit of $1,500,000. The bank time deposit has a contractual maturity of one year, was recorded at cost which approximates fair value and was classified as available-for-sale. FAIR VALUE OF FINANCIAL INSTRUMENTS All current assets and liabilities are carried at cost, which approximates fair value because of the short-term maturity of those instruments. The recorded amounts of the Company's long-term obligations also approximate fair value as current interest rates offered to the Company for debts of similar maturities are substantially the same. F-8 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consists primarily of accounts receivable. For the most part, membership fees are billed by the Company to major credit card issuers. However, certain of the Company's membership fees are billed through clients of the Company to credit card holders. Amounts collected by these clients are remitted to the Company after deduction of certain costs incurred and are received in U.S. dollars. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility of all accounts receivable. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally 3 to 7 years. Maintenance and repair expenses are charged to operations as incurred. REVENUE RECOGNITION Membership fees earned are recorded, net of cancellations incurred during the ten day trial period, and are deferred and amortized as membership revenues on a straight-line basis, over the membership period, generally twelve months. MEMBERSHIP ACQUISITION AND OTHER DEFERRED COSTS In accordance with the provisions of AICPA Statement of Position 93-7, "Reporting on Advertising Costs," membership acquisition costs directly related to the sales of memberships are deferred and charged to cost of revenues as revenues from membership fees are recognized. Membership acquisition costs consist of costs incurred directly related to telemarketing payroll and telephone costs. Other deferred costs consists of hotel program fees, printing and distribution costs of membership materials and processing fees which relate to the same revenue streams as the membership acquisition costs and are also charged to income over the membership period. INCOME TAXES The Company accounts for income taxes under the liability method. Deferred income taxes are provided for temporary differences between financial and income tax reporting. The Company has not recorded any deferred tax assets or liabilities at December 31, 1996 and 1997 as prior to the reorganization discussed in Note 1, HMC LLC was a limited liability company treated as a partnership for federal and California income tax purposes. As a result, federal and California income tax attributes passed to the HMC LLC members. Deferred tax assets and liabilities of HMC Inc. were not material at December 31, 1996 and 1997. STOCK-BASED COMPENSATION As permitted by SFAS No. 123, the Company accounts for its stock-based compensation arrangements pursuant to APB Opinion No. 25. In accordance with the provisions of SFAS No. 123, the Company discloses the pro forma effects of accounting for these arrangements using the minimum value method to determine fair value. F-9 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE Basic net income per share ("Basic EPS") is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share ("Diluted EPS") gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the treasury stock method is used in determining the number of shares assumed to be purchased from the conversion of common stock equivalents. The number of shares have been retroactively restated to reflect the shares of common stock issued in the reorganization (Note 1). The following is a reconciliation of the weighted average common shares outstanding used for the Basic and Diluted EPS computations for the periods presented below:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1997 MARCH 31, 1998 ----------------- -------------- Weighted average common shares--Basic..................... 8,400,000 8,400,000 Stock options............................................. 30,000 180,000 ----------------- -------------- Weighted average common shares--Diluted................... 8,430,000 8,580,000 ----------------- -------------- ----------------- --------------
COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income, defined as all changes in equity from nonowner sources. Adoption of SFAS 130 did not have a material effect on the Company's financial position or results of operations. UNAUDITED INTERIM INFORMATION The information presented as of March 31, 1998, and for the three month periods ended March 31, 1997 and 1998, has not been audited. In the opinion of management, the unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 1998, and the results of its operations and its cash flows for the three months ended March 31, 1997 and 1998, and the stockholders' deficit for the three months ended March 31, 1998. F-10 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. FIXED ASSETS Fixed assets comprised the following:
DECEMBER 31, ------------------------- 1996 1997 ----------- ------------ Computer and office equipment...................................... $ 292,000 $ 429,000 Furniture and fixtures............................................. 425,000 525,000 Vehicles........................................................... 73,000 54,000 ----------- ------------ 790,000 1,008,000 Accumulated depreciation........................................... (538,000) (630,000) ----------- ------------ $ 252,000 $ 378,000 ----------- ------------ ----------- ------------
4. LINES OF CREDIT In September 1995, the Company established a line of credit with a bank. The line of credit provides for borrowings of up to $400,000, as amended, and is due and payable April 1, 1999. Borrowings bear interest at the interest rate earned (6.0% at December 31, 1997) by the pledged $400,000 time deposit included in short term investments plus 2%. The line of credit is secured by substantially all of the assets of HMC Inc. and is guaranteed by three of the Company's stockholders. Amounts outstanding under the line of credit were $300,000 and $400,000 at December 31, 1996 and 1997, respectively. In October 1997, the Company established an additional line of credit with the same bank for borrowings of up to $1,000,000. The line of credit bears interest at the bank's prime rate (8.5% at December 31, 1997) plus 2% and is due and payable on October 1, 1998. The line of credit is secured by substantially all of the assets of HMC Inc. Amounts outstanding under the line of credit at December 31, 1997 were $702,000. 5. NOTES PAYABLE In conjunction with HMC LLC's purchase of assets from Hospitality Marketing Consultants as described in Note 1, Hospitality Marketing Consultants was issued an unsecured note payable in the amount of $1,763,000. The note is due and payable on January 1, 2002 and bears interest at 8% per annum. Interest charged to interest expense totaled $71,000 in 1996 and $141,000 in 1997. In April 1997, the Company issued a $143,000 promissory note payable to a bank. The note is due and payable April 1, 1999, as amended, and bears interest at the bank's prime rate (8.5% at December 31, 1997) plus 2% per annum. The Company is required to pay three principal payments of $25,000 plus accrued interest quarterly commencing July 1, 1997 and, is required to pay a lump sum of $68,300 on April 1, 1999. The note is secured by substantially all of the assets of HMC Inc. In November 1997, the Company issued a $3 million subordinated convertible unsecured note to Hospitality Partners, LLC, an unrelated party. The note payable is due in full on December 31, 2001. Interest at the bank's prime rate (8.5% at December 31, 1997) per annum is payable in arrears on the last day of each month commencing December 31, 1999. Imputed interest charges for the year ended December 31, 1997 aggregated $43,000. The note is convertible only upon closing of an initial public offering or other qualified transaction into a maximum of 30% of the total capitalization of the Company as defined in the loan agreement. The Company is subject to certain covenants and restrictions under the terms of the note, including the proscription of principal payments prior to December 31, 1999 as well as F-11 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. NOTES PAYABLE (CONTINUED) proscription of principal payments on the note payable to Hospitality Marketing Consultants discussed above. 6. STOCK OPTION In November 1997, the Principals granted one of the Principals, who is an officer of the Company, an option to buy an approximate 2% ownership interest in HMC LLC, HMC Inc. and each of the foreign entities for an aggregate price of $180,000. In connection with the reorganization this option was converted to an option to purchase 180,000 shares of the Company. Had compensation cost for these options granted been determined consistent with the minimum value method pursuant to SFAS No. 123, the difference between the Company's net income as reported and as adjusted for the compensation cost for the year ended December 31, 1997 was not material. 7. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases certain of its facilities under non-cancelable operating lease arrangements. The leases expire at various dates through 2007. Rent expense under all operating leases was $520,000, $593,000 and $679,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The future minimum lease payments required under non-cancelable operating leases at December 31, 1997 are as follows:
YEAR ENDING DECEMBER 31, - ---------------------------------------------------------------------------------- 1998.............................................................................. $ 138,000 1999.............................................................................. 112,000 2000.............................................................................. 56,000 2001.............................................................................. 30,000 2002.............................................................................. 9,000 Thereafter........................................................................ 35,000 ---------- $ 380,000 ---------- ----------
The Company's headquarters in Irvine, California is leased from an affiliate on a month to month basis. Rent paid under the lease was $89,000 for each of the three years ended December 31, 1995, 1996 and 1997. In June 1998, the Company executed a lease agreement with the affiliate. The agreement expires in 2001 and requires annual rental payments of $228,000 plus annual adjustments for increases in the consumer price index. MARKETING AGREEMENT In February 1997, the Company entered into a 10 year marketing agreement with a chain of hotels in Spain. In accordance with the agreement, the Company paid approximately $700,000 and is no longer required to pay program fees to the hotels. The amount is being amortized over the term of the agreement and the related expense is charged to cost of revenues. In addition, the Company purchased a 0.5% equity share of the hotel chain for $70,000 and, may purchase up to 21,260 additional shares over the next four years representing a current equity share of an additional 1.0%. As such, the Company is required to pay F-12 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) 10,000,000 Pesetas each year over the next four years commencing September 1, 1998. The price of exercising the right to purchase the 21,260 shares at December 31, 1997 was approximately $263,000 based on current exchange rates. 8. REVENUES Membership revenues by geographic area were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Americas (primarily United States).............. $ 7,805,000 $ 8,542,000 $ 7,973,000 Europe.......................................... 12,023,000 11,221,000 9,105,000 Asia............................................ 1,371,000 7,534,000 14,297,000 Middle East/North Africa........................ 531,000 ------------- ------------- ------------- $ 21,199,000 $ 27,297,000 $ 31,906,000 ------------- ------------- ------------- ------------- ------------- -------------
For the years ended December 31, 1996 and 1997, one client accounted for 12.5% and 11.7% of the Company's revenues, respectively. 9. PRO FORMA INFORMATION (UNAUDITED) PRO FORMA BALANCE SHEET The unaudited pro forma balance sheet at March 31, 1998 reflects the estimated distribution of $7,000,000 to the Principals and the conversion of the $3,000,000 note payable and related accrued interest (Note 5) in connection with the initial public offering (Note 10). The unaudited pro forma balance sheet also reflects the deferred tax assets and liabilities for the Company's change for federal and state income tax purposes from a limited liability company to a C corporation as if it occurred March 31, 1998 resulting in the recording of a net deferred tax asset of $877,000. The pro forma balance sheet does not give effect to distributions that may be paid and the tax effect of earnings generated subsequent to March 31, 1998. PRO FORMA INCOME STATEMENT DATA The unaudited pro forma net income reflects changes to net income for eliminating the interest expense related to the note payable to be converted in connection with the proposed public offering (Notes 5 and 10), recording pro forma compensation for the founding stockholders based upon their employment contracts and the recording of a pro forma income tax provision. The unaudited pro forma net income per share reflects the changes to net income mentioned above and an increase to the weighted average common shares outstanding for the conversion of the note payable and the incremental shares for the distributions to stockholders in excess of net income. The income tax provisions for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively, reflect an effective income tax rate of 40% for the Company's change for federal and state income tax purposes from a limited liability company to a C corporation. Pursuant to the requirements of the Securities and Exchange Commission, the pro forma basic weighted average common shares outstanding includes the effects of the incremental number of shares required to fund distributions to the stockholders of the Company in excess of earnings for the preceding 12 months (including the estimated distribution of $7,000,000). The pro forma net income per share does not give effect to distributions that may be paid from earnings generated subsequent to March 31, 1998. The following is a reconciliation of net income to unaudited pro forma net F-13 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED) income and the weighted average common shares outstanding used for the Basic and Diluted and pro forma Basic and Diluted EPS computations for the periods presented below:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1997 1998 ------------- ------------- Net income.......................................................................... $ 3,655,000 $ 695,000 Unaudited pro forma adjustments: Interest expense related to convertible note payable.............................. 43,000 64,000 Compensation for the Principals................................................... (1,025,000) (256,000) ------------- ------------- Unaudited income before provision for income taxes................................ 2,673,000 503,000 Provision for income taxes........................................................ (1,069,000) (201,000) ------------- ------------- Unaudited pro forma net income.................................................... $ 1,604,000 $ 302,000 ------------- ------------- ------------- -------------
YEAR ENDED DECEMBER THREE MONTHS ENDED 31, 1997 MARCH 31, 1998 ---------------------- ---------------------- BASIC DILUTED BASIC DILUTED ---------- ---------- ---------- ---------- Weighted average common shares................................ 8,400,000 8,430,000 8,400,000 8,580,000 Conversion of note payable.................................... 600,000 3,600,000 3,600,000 3,600,000 Stockholder distributions..................................... ---------- ---------- ---------- ---------- Pro forma weighted average common shares...................... ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
10. SUBSEQUENT EVENTS (UNAUDITED) PROPOSED PUBLIC OFFERING In June 1998, the Company entered into an agreement in principle with two underwriters (the "Underwriters"), whereby the Underwriters have agreed in principle to act as underwriters in an initial public offering (the "Offering") of up to shares of newly-issued Company common stock ( shares intended to be offered to the public and shares which the Underwriters have the option to purchase to cover over-allotments, if any). STOCK OPTION PLAN In May 1998, the Company's stockholders approved the 1998 Stock Option Plan (the "Plan") which permits the grant of incentive stock options and nonqualified stock options to purchase up to 1,500,000 shares of common stock to employees, officers, directors and consultants of the Company. The Plan is administered by a committee appointed by the Company's Board of Directors. In May 1998, the Company granted options to purchase 817,140 shares of common stock at an exercise price of $10.50 per share. Options granted to the Company's chief financial officer to purchase 240,000 shares of common stock vest and become exercisable 90 days after the date of grant as to 20% and the balance vest in three equal installments annually. The remaining options granted vest ratably over four years. All options granted expire within ten years of the grant date. F-14 [COMPANY MEMBERSHIP BROCHURES AND CARDS.] [LOGO] HOSPITALITY MARKETING CONCEPTS INC. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Other expenses in connection with the issuance and distribution of the securities to be registered hereunder, all of which will be paid by the registrant, will be substantially as follows:
ITEM AMOUNT - -------------------------------------------------------------------------------- ------------ SEC registration fee............................................................ $ 14,249 NASD filing fee................................................................. $ 6,020 Nasdaq National Market fee*..................................................... $ 90,500 Printing and engraving expenses*................................................ $ 200,000 Legal fees and expenses*........................................................ $ 500,000 Blue Sky fees and expenses (including legal fees)*.............................. $ 5,000 Accounting fees and expenses*................................................... $ 350,000 Registrar and Transfer Agent fees and expenses*................................. $ 5,000 Miscellaneous expenses*......................................................... $ 29,231 ------------ Total....................................................................... $ 1,200,000 ------------ ------------
- ------------------------ * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that an officer or director of the Company shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability for: (i) any breach of such person's duty of loyalty to the Company or its stockholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) liability for payments of dividends or stock purchases or redemptions in violation of Section 174 of the Delaware General Corporation Law; or (iv) any transaction from which such person derived an improper personal benefit. In addition, the Company's Certificate of Incorporation provides that the Company shall to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such amendment), indemnify and hold harmless any person who was or is a party, or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "Indemnitee") against expenses, liabilities and losses (including attorneys' fees, judgments, fines and penalties paid in connection with the Employee Retirement Income Security Act of 1974, as amended, and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith; provided, however, that except as otherwise provided with respect to proceedings to enforce rights to indemnification, the Company shall indemnify any such Indemnitee in connection with a proceeding (or part thereof) initiated by such Indemnitee only if such proceeding or part thereof was authorized by the board of directors of the Company. The right to indemnification set forth above includes the right to be paid by the Company the expenses (including attorneys' fees) incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an Indemnitee in his capacity as a director or officer (and not in any other capacity II-1 in which service was or is rendered by such Indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is not further right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this section or otherwise. The rights to indemnification and to the advancement of expenses conferred herewith are contract rights and continue as to an Indemnitee who has ceased to be a director, officer, employee or agent and inures to the benefit of the Indemnitee's heirs, executors and administrators. The Delaware General Corporation Law provides that indemnification is permissible only when the director, officer, employee, or agent acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. The Delaware General Corporation Law also precludes indemnification in respect of any claim, issue, or matter as to which an officer, director, employee, or agent shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that, despite such adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Company has agreed to indemnify the Underwriters and their controlling persons, and the Underwriters have agreed to indemnify the Company and its controlling persons, against certain liabilities, including liabilities under the Securities Act. Reference is made to the Underwriting Agreement filed as part of the Exhibits hereto. For information regarding the Company's undertaking to submit to adjudication the issue of indemnification for violation of the securities laws, see Item 17 hereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. 1. In connection with the Reorganization, the Company will issue an aggregate of 8,400,000 shares of Common Stock to the Principals effective concurrent with the closing of the offering. The transaction is exempt from registration pursuant to Section 4(2) of the Securities Act. 2. In November 1997, HMC LLC issued a $3.0 million Subordinated Promissory Note to Hospitality Partners, LLC, which is convertible into up to 30% of the total number of shares of Common Stock outstanding prior to the shares offered in the offering. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. 3. As of November 1997, the entities comprising the Company issued an option to purchase an additional interest in such entities, which will be exchanged in the Reorganization for an option to purchase 180,000 shares of the Company to a Principal. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. 4. On May 6, 1998, the Company granted options to its employees exercisable into an aggregate of 817,140 shares of Common Stock. The Company issued 454,740 shares to employees in reliance on Rule 701 promulgated under the Securities Act and 362,400 shares to executive officers and key employees which were exempt from registration pursuant to Section 4(2) of the Securities Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ----------- -------------------------------------------------------------------------------------------------------- 1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company. 3.2 Bylaws of the Company. 4.1* Specimen Stock Certificate of the Company. 5.1* Opinion of Greenberg Glusker Fields Claman & Machtinger LLP. 10.1 Loan and Investment Agreement, dated November 7, 1997, between Hospitality Partners, LLC, HMC LLC and the Principals. 10.2 Customer Network Service Agreement, dated January 15, 1998, between HMC LLC and Sprint Communications Company L.P. [Confidential treatment requested for portions of this exhibit. Omitted portions have been filed separately with the Commission.] 10.3 Form of Indemnification Agreement. 10.4 1998 Stock Option Plan. 10.5 Form of Incentive Stock Option Agreement. 10.6 Form of Nonqualified Stock Option Agreement (Employee). 10.7 Form of Nonqualified Stock Option Agreement (Non-employee). 10.8 Option Agreement, dated as of November 7, 1997, between Sandra Case and HMC LLC. 10.9 Promissory Note, dated July 1, 1996, in the principal amount of $1,762,270 in favor of Hospitality Marketing Consultants, LLC. 10.10 Employment Agreement, dated March 5, 1998, between HMC LLC and Philip Hirsch. 10.11 Form of Employment Agreement (Partners). 10.12 Employment Agreement, dated as of February 1, 1998, between Frans Van Steenbrugge and Hospitality Marketing Concepts Limited. 10.13 Cedars Bank Credit Line Agreement, dated September 1, 1995, and amendments thereto. 10.14 Lease between Hospitality Marketing Consultants, a general partnership, and Hospitality Marketing Consultants, LLC, dated June 1, 1998. 21 List of subsidiaries. 23.1* Consent of Price Waterhouse LLP, independent accountants. 23.2* Consent of Greenberg Glusker Fields Claman & Machtinger LLP (included in Exhibit 5.1). 24 Power of Attorney (see page S-1). 27 Financial Data Schedule.
- ------------------------ * To be filed by amendment. (b) Financial Statement Schedules. II-3 ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denomination and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (i) For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(b) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (ii) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on June 4, 1998. HOSPITALITY MARKETING CONCEPTS INC. By: /s/ MOKHTAR RAMADAN ----------------------------------------- Mokhtar Ramadan CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mokhtar Ramadan and Philip G. Hirsch, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitutions and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Form S-1 Registration Statement and to sign any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting under said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. NAME AND SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman of the Board, /s/ MOKHTAR RAMADAN President and Chief - ------------------------------ Executive Officer June 4, 1998 Mokhtar Ramadan (Principal Executive Officer) Senior Vice President, /s/ PHILIP G. HIRSCH Finance, Chief Financial - ------------------------------ Officer and Director June 4, 1998 Philip G. Hirsch (Principal Financial and Accounting Officer) /s/ FADI RAMADAN - ------------------------------ Senior Vice President, June 4, 1998 Fadi Ramadan Americas, and Director II-5 INDEX OF EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE - ----------- ------------------------------------------------------------------------------------------- ------------- 1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company. 3.2 Bylaws of the Company. 4.1* Specimen Stock Certificate of the Company. 5.1* Opinion of Greenberg Glusker Fields Claman & Machtinger LLP. 10.1 Loan and Investment Agreement, dated November 7, 1997, between Hospitality Partners, LLC, HMC LLC and the Principals. 10.2 Customer Network Service Agreement, dated January 15, 1998, between HMC LLC and Sprint Communications Company L.P. [Confidential treatment requested for portions of this exhibit. Omitted portions have been filed separately with the Commission.] 10.3 Form of Indemnification Agreement. 10.4 1998 Stock Option Plan. 10.5 Form of Incentive Stock Option Agreement. 10.6 Form of Nonqualified Stock Option Agreement (Employee). 10.7 Form of Nonqualified Stock Option Agreement (Non-employee). 10.8 Option Agreement, dated as of November 7, 1997, between Sandra Case and HMC LLC. 10.9 Promissory Note, dated July 1, 1996, in the principal amount of $1,762,270 in favor of Hospitality Marketing Consultants, LLC. 10.10 Employment Agreement, dated March 5, 1998, between HMC LLC and Philip Hirsch. 10.11 Form of Employment Agreement (Partners). 10.12 Employment Agreement, dated as of February 1, 1998, between Frans Van Steenbrugge and Hospitality Marketing Concepts Limited. 10.13 Cedars Bank Credit Line Agreement, dated September 1, 1995, and amendments thereto. 10.14 Lease between Hospitality Marketing Consultants, a general partnership, and Hospitality Marketing Consultants, LLC, dated June 1, 1998. 21 List of subsidiaries. 23.1* Consent of Price Waterhouse LLP, independent accountants. 23.2* Consent of Greenberg Glusker Fields Claman & Machtinger LLP (included in Exhibit 5.1). 24 Power of Attorney (see page S-1). 27 Financial Data Schedule.
- ------------------------ * To be filed by amendment. EX-3.1(A) 2 EXHIBIT 3.1(A) EXHIBIT 3.1(a) CERTIFICATE OF INCORPORATION OF MARKTECH INTERNATIONAL INC. 1. NAME. The name of this corporation is Marktech International Inc. (the "Corporation"). 2. REGISTERED OFFICE AND AGENT. The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805 in the County of New Castle. The registered agent of the Corporation at such address shall be Corporation Service Company. 3. PURPOSE AND POWERS. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. 4. CAPITAL STOCK. 4.1. AUTHORIZED SHARES. The total number of shares of all classes of stock that the Corporation shall have the authority to issue is 55,000,000 shares, of which 5,000,000 shares shall be Preferred Stock, having a par value of $0.001 per share ("Preferred Stock"), and 50,000,000 shares shall be classified as Common Stock, having a par value of $0.001 per share ("Common Stock"). A description of the respective classes of stock and a statement of designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, are set forth below. 4.2. COMMON STOCK. (a) RELATIVE RIGHTS. The Common Stock shall be subject to and qualified by all of the rights, privileges, preferences and priorities of the Preferred Stock. Each share of Common Stock shall have the same relative rights as and be identical in all respects to all the other shares of Common Stock. (b) VOTING RIGHTS. Each holder of shares of Common Stock shall be entitled to attend all special and annual meetings of the stockholders of the Corporation and, share for share and without regard to class, to cast one vote for each outstanding share of Common Stock so held upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. Except as otherwise provided in this Certificate of Incorporation or by applicable law, holders of shares of Common Stock shall vote together as a single class on all matters with the holders of any other class or series of stock of the Corporation. The holders of Common Stock shall have no right to cumulate votes in the election of directors of the Corporation. (c) DIVIDENDS. The holders of record of the Common Stock shall be entitled to receive dividends in equal amounts per share, when, as, and if declared by the Board of Directors, out of any assets legally available for the payment of dividends thereon, subject to any preferential rights of any other class of stock of the Corporation. (d) DISSOLUTION, LIQUIDATION, WINDING UP. In the event of any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of record of the Common Stock then outstanding, and all holders of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets, shall become entitled to participate in the ratable distribution of any assets of the Corporation remaining after the Corporation shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up, the full preferential amounts (if any) to which they are entitled, and shall have paid or provided for payment of all debts and liabilities of the Corporation. 4.3. PREFERRED STOCK. The Board of Directors is expressly authorized, subject to limitations prescribed by the Delaware General Corporation Law and the provisions of this Certificate of Incorporation, to provide, by resolution and by filing a certificate of designations pursuant to the Delaware General Corporation Law, for the issuance from time to time of the shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and other rights of each such series and to fix the qualifications, limitations and restrictions thereof, including, but without limiting the generality of the foregoing, the following: (a) the number of shares constituting that series and the distinctive designation of that series; 2 (b) the dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) whether or not the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) any other relative powers, preferences, and rights of that series, and qualifications, limitations or restrictions on that series. 4.4. ADJUSTMENTS OF AUTHORIZED STOCK. Except as provided to the contrary in the provisions establishing a class or series of stock, the number of shares of the authorized stock of the Corporation of any class or classes may be increased or decreased (but not below the number then outstanding) by the affirmative vote of a majority of the outstanding shares of capital stock of the Corporation. 5. INCORPORATOR. The name and mailing address of the incorporator (the "Incorporator") is Michael V. Bales, c/o Greenberg Glusker Fields Claman & Machtinger LLP, 1900 Avenue of the Stars, Suite 2100, Los Angeles, CA 90067-4590. 6. BOARD OF DIRECTORS. 6.1. CLASSIFICATION. 3 Except as otherwise provided in this Certificate of Incorporation or a certificate of designations relating to the rights of the holders of any class or series of Preferred Stock, voting separately by class or series, to elect additional directors under specified circumstances, the number of directors of the Corporation shall be as fixed from time to time by or pursuant to the Bylaws of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. The directors, other than those who may be elected by the holders of any class or series of Preferred Stock voting separately by class or series, shall be classified, with respect to the time for which they severally hold office, into three classes, Class I, Class II and Class III, which shall be as nearly equal in number as possible, and shall be adjusted from time to time in the manner specified in the Bylaws of the Corporation to maintain such proportionality. Each initial director in Class I shall hold office for a term expiring at the 2001 annual meeting of stockholders, each initial director in Class II shall hold office initially for a term expiring at the 2000 annual meeting of stockholders, and each initial director in Class III shall hold office for a term expiring at the 1999 annual meeting of stockholders. Notwithstanding the foregoing provisions of this Section 6.1, each director shall serve until such director's successor is duly elected and qualified or until such director's earlier death, resignation or removal. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors have been duly elected and qualified or until any such director's earlier death, resignation or removal. 6.2. CHANGE OF AUTHORIZED NUMBER. In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 6.3. DIRECTORS ELECTED BY HOLDERS OF PREFERRED STOCK. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation or a certificate of designations applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 6 unless expressly provided by the certificate of designations. 4 6.4. LIMITATION OF LIABILITY. To the extent permitted by the Delaware General Corporation Law, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director: (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) for the types of liability set forth in Section 174 of the Delaware General Corporation Law; or (d) for any actions or omissions from which the director received any improper personal benefit. Any repeal or modification of this Section 6.4 by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. 7. INDEMNIFICATION. To the extent permitted by law, the Corporation shall fully indemnify any person who was or is a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, liabilities and losses (including attorneys' fees, judgments, fines, penalties and amounts paid in settlement) actually and reasonably incurred by such person in connection with such action, suit or proceeding. To the extent permitted by law, the Corporation may fully indemnify any person who was or is a party or is threatened to be made a party or is otherwise involved in to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, liabilities and losses (including attorneys' fees, judgments, fines, penalties and amounts paid in settlement) actually and reasonably incurred by such person in connection with such action, suit or proceeding. The Corporation may advance expenses (including attorneys' fees) incurred by a director or officer in advance of the final disposition of such action, suit or proceeding upon the receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined, by final judicial decision from which there is no further right to appeal, that such director or officer is not entitled to indemnification. The Corporation may advance expenses (including attorneys' fees) incurred by an employee or agent in advance of the final disposition of such action, suit or proceeding upon such terms and conditions, if any, as the Board of Directors deems appropriate. 5 8. ACTIONS BY STOCKHOLDERS. Following the effectiveness of the registration of any class of stock of the Corporation pursuant to the requirements of the Securities Act of 1933, as amended, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders, and may not be effected by any consent in writing by such stockholders. 9. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the stockholders of the Corporation may be called at any time but only by (a) the President and Chief Executive Officer of the Corporation or (b) a majority of the directors in office, although less than a quorum. 6 10. COMPROMISE OR ARRANGEMENT CLAUSE. Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under Section 291 of the Delaware General Corporation Law or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under Section 279 of the Delaware General Corporation Law order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as such court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, such compromise or arrangement and such reorganization shall, if sanctioned by the court to which such application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of the Corporation, as the case may be, and also on the Corporation. 11. AMENDMENT OF CERTIFICATE OF INCORPORATION. Notwithstanding other provision of this Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), the affirmative vote of 66-2/3% of the total number of votes of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with the purpose or intent of Sections 6, 7, 8 and 9 hereof, and this Section 11. Notice of any such proposed amendment, repeal or adoption shall be contained in the notice of the meeting at which it is to be considered. Subject to the provisions set forth herein, the Corporation reserves the right to amend, alter, repeal or rescind any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law. 12. AMENDMENT OF BYLAWS. In furtherance and not in limitation of the powers conferred by the Delaware General Corporation Law, the Board of Directors is expressly authorized and empowered to adopt, amend and repeal the Bylaws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to amend or repeal Bylaws adopted by the Board of Directors as provided for in this Certificate of Incorporation or in the Bylaws of the Corporation. 7 IN WITNESS WHEREOF, the undersigned, being the Incorporator hereinabove named, for the purpose of forming a corporation pursuant to the Delaware General Corporation Law, hereby certifies that the facts hereinabove stated are truly set forth, and accordingly executes this Certificate of Incorporation this 14th day of May, 1998. ------------------------------ Michael V. Bales, Incorporator 8 EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF HOSPITALITY MARKETING CONCEPTS INC., A DELAWARE CORPORATION i TABLE OF CONTENTS ARTICLE I - Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Registered Office. . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Other Offices. . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - Stockholders' Meetings. . . . . . . . . . . . . . . . . . . . . 1 Section 2.1 Place of Meetings. . . . . . . . . . . . . . . . . . . . 1 Section 2.2 Annual Meetings. . . . . . . . . . . . . . . . . . . . . 1 Section 2.3 Special Meetings . . . . . . . . . . . . . . . . . . . . 1 Section 2.4 Notice of Meetings . . . . . . . . . . . . . . . . . . . 2 Section 2.5 Quorum and Voting. . . . . . . . . . . . . . . . . . . . 2 Section 2.6 Voting Rights. . . . . . . . . . . . . . . . . . . . . . 3 Section 2.7 Voting Procedures and Inspectors of Elections. . . . . . 4 Section 2.8 List of Stockholders.. . . . . . . . . . . . . . . . . . 5 Section 2.9 Stockholder Proposals at Annual Meetings.. . . . . . . . 5 Section 2.10 Nominations of Persons for Election to the Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.11 Action Without Meeting . . . . . . . . . . . . . . . . . 7 ii ARTICLE III - Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.1 Number and Term of Office. . . . . . . . . . . . . . . . 7 Section 3.2 Powers . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.3 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.4 Resignations and Removals. . . . . . . . . . . . . . . . 9 Section 3.5 Meetings.. . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.6 Quorum and Voting. . . . . . . . . . . . . . . . . . . .10 Section 3.7 Action Without Meeting . . . . . . . . . . . . . . . . .10 Section 3.8 Fees and Compensation. . . . . . . . . . . . . . . . . .10 Section 3.9 Committees . . . . . . . . . . . . . . . . . . . . . . .11 ARTICLE IV - Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Section 4.1 Officers Designated. . . . . . . . . . . . . . . . . . .12 Section 4.2 Tenure and Duties of Officers. . . . . . . . . . . . . .12 ARTICLE V - Execution of Corporate Instruments, and Voting of Securities Owned by the Corporation. . . . . . . . . . . . . . . . . . . . . . . .13 Section 5.1 Execution of Corporate Instruments.. . . . . . . . . . .13 Section 5.2 Voting of Securities Owned by Corporation. . . . . . . .14 iii ARTICLE VI - Shares of Stock . . . . . . . . . . . . . . . . . . . . . . . .14 Section 6.1 Form and Execution of Certificates.. . . . . . . . . . .14 Section 6.2 Lost Certificates. . . . . . . . . . . . . . . . . . . .15 Section 6.3 Transfers. . . . . . . . . . . . . . . . . . . . . . . .15 Section 6.4 Fixing Record Dates. . . . . . . . . . . . . . . . . . .15 Section 6.5 Registered Stockholders. . . . . . . . . . . . . . . . .16 ARTICLE VII - Other Securities of the Corporation. . . . . . . . . . . . . .16 ARTICLE VIII - Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . .17 ARTICLE IX - Indemnification . . . . . . . . . . . . . . . . . . . . . . . .17 Section 9.1 Indemnification in Actions, Suits or Proceedings Other Than Those by or in Right of the Corporation . . . . . .17 Section 9.2 Indemnification in Actions, Suits or Proceedings by or in the Right of the Corporation.. . . . . . . . . . .18 Section 9.3 Authorization of Indemnification . . . . . . . . . . . .19 Section 9.4. Advancement of Expenses. . . . . . . . . . . . . . . . .19 Section 9.5 Provisions Nonexclusive. . . . . . . . . . . . . . . . .19 Section 9.6 Authority to Insure. . . . . . . . . . . . . . . . . . .20 Section 9.7 Survival of Rights . . . . . . . . . . . . . . . . . . .20 iv Section 9.8 Settlement of Claims . . . . . . . . . . . . . . . . . .20 Section 9.9 Effect of Amendment. . . . . . . . . . . . . . . . . . .20 ARTICLE X - Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 ARTICLE XI - Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . .21 v BYLAWS OF HOSPITALITY MARKETING CONCEPTS INC., A DELAWARE CORPORATION ARTICLE I OFFICES SECTION 1.1 REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. SECTION 1.2 OTHER OFFICES. The corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS SECTION 2.1 PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors. SECTION 2.2 ANNUAL MEETINGS. The annual meetings of the stockholders of the corporation, commencing with the year 1999, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. SECTION 2.3 SPECIAL MEETINGS. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by the President and Chief Executive Officer or by a majority of the Board of Directors 1 at any time. SECTION 2.4 NOTICE OF MEETINGS. (a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, date and hour and purpose or purposes of the meeting, shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote thereat, directed to his address as it appears upon the books of the corporation; except that where the matter to be acted on is a merger or consolidation of the corporation or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than twenty (20) nor more than sixty (60) days prior to such meeting. (b) If at any meeting action is proposed to be taken which, if taken, would entitle shareholders fulfilling the requirements of Section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of that statutory section. (c) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken unless the adjournment is for more than thirty days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (d) Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and to the extent permitted by law, will be waived by any stockholder by his attendance thereat, in person or by proxy. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (e) Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. SECTION 2.5 QUORUM AND VOTING. (a) At all meetings of stockholders, except where otherwise provided by law, the Certificate of Incorporation, or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting have been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum, any meeting 2 of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. (b) Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation. (c) Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. SECTION 2.6 VOTING RIGHTS. (a) Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum. (b) Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary of the corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three years from its date unless the proxy provides for a longer period. (c) Without limiting the manner in which a stockholder may authorize another person or persons to act for him as proxy pursuant to subsection (b) of this section, the following shall constitute a valid means by which a stockholder may grant such authority: (1) A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not 3 limited to, by facsimile signature. (2) A stockholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Such authorization can be established by the signature of the stockholder on the proxy, either in writing or by a signature stamp or facsimile signature, or by a number or symbol from which the identity of the stockholder can be determined, or by any other procedure deemed appropriate by the inspectors or other persons making the determination as to due authorization. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. (d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. SECTION 2.7 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS. (a) The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their 4 count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. (d) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b)(v) of this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. SECTION 2.8 LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.9 STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought 5 before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.9, provided, however, that nothing in this Section 2.9 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with such procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.9, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 2.10 NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. In addition to any other applicable requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 30 days nor more than 60 days prior to the meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the 6 corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of preferred stock. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 2.11 ACTION WITHOUT MEETING. Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. To be effective, a written consent must be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this Section to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation in accordance with this Section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Notwithstanding the foregoing, following the effectiveness of the registration of any class of stock of the corporation pursuant to the requirements of the Securities Act of 1933, as amended, any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of stockholders, and may not be effected by any consent in writing of such stockholders. ARTICLE III DIRECTORS 7 SECTION 3.1 NUMBER AND TERM OF OFFICE. The number of directors of the corporation shall not be less than three (3) nor more than eleven (11) until changed by amendment of the Certificate of Incorporation or by a Bylaw amending this Section 3.1 duly adopted by the vote or written consent of holders of a majority of the outstanding shares or by the Board of Directors. The exact number of directors shall be fixed from time to time, within the limits specified in the Certificate of Incorporation or in this Section 3.1, by resolution of the Board of Directors. With the exception of the initial Board of Directors, which shall be elected by the incorporator, and except as provided in Section 3.3 of this Article III, the directors shall be elected by a plurality vote of the shares represented in person or by proxy, at the stockholders' annual meeting in each year and entitled to vote on the election of directors. Elected directors shall hold office until the next annual meeting for the years in which their terms expire and until their successors shall be duly elected and qualified. Directors need not be stockholders. If, for any reason, the Board of Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. The directors shall be divided into three classes, designated Class I, Class II, and Class III, as nearly equal in number as the then total number of directors permits. Each initial director in Class I shall hold office for a term expiring at the 2001 annual meeting of stockholders, each initial director in Class II shall hold office for a term expiring at the 2000 annual meeting of stockholders, and each initial director in Class III shall hold office for a term expiring at the 1999 annual meeting of stockholders. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose terms expire at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of these Bylaws applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 3.1 unless expressly provided by such terms. Any amendment, change or repeal of this Section 3.1, or any other amendment to these Bylaws that will have the effect of permitting circumvention of or modifying this Section 3.1, shall require the affirmative vote, at a stockholders' meeting, of the holders of at least 66 2/3% of the then outstanding shares of stock of the corporation entitled to vote. 8 SECTION 3.2 POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by or under the direction of the Board of Directors. SECTION 3.3 VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and each director so elected shall hold office for the unexpired portion of the term of the director whose place shall be vacant, and until his successor shall have been duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this section in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected (including any meeting referred to in Section 3.4 below) to elect the number of directors then constituting the whole Board. SECTION 3.4 RESIGNATIONS AND REMOVALS. (a) Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified. (b) At a special meeting of stockholders called for the purpose in the manner herein above provided, the Board of Directors, or any individual director, may be removed from office, with or without cause, and a new director or directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of directors. SECTION 3.5 MEETINGS. (a) The annual meeting of the Board of Directors shall be held immediately after the annual stockholders' meeting and at the place where such meeting is held or at the place announced by the Chairman at such meeting. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Regular meetings of the Board of Directors may be held at any place within or without the State of Delaware which has been designated by resolutions of the Board of Directors or the 9 written consent of all directors. (c) Special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board or, if there is no Chairman of the Board, by the President and the Chief Executive Officer, or by any of the directors. (d) Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each director or sent by telegram or facsimile transmission at least 48 hours before the start of the meeting, or sent by first class mail at least 120 hours before the start of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat. SECTION 3.6 QUORUM AND VOTING. (a) A quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 3.1 of Article III of these Bylaws, but not less than one; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board at which a quorum is present, all questions and business shall be determined by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation, or these Bylaws. (c) Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (d) The transactions of any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 3.7 ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee, as the 10 case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.8 FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. SECTION 3.9 COMMITTEES. (a) EXECUTIVE COMMITTEE: The Board of Directors may appoint an Executive Committee of not less than one member, each of whom shall be a director. The Executive Committee, to the extent permitted by law, shall have and may exercise when the Board of Directors is not in session all powers of the Board in the management of the business and affairs of the corporation, except such committee shall not have the power or authority to amend these Bylaws or to approve or recommend to the stockholders any action which must be submitted to stockholders for approval under the Delaware General Corporation Law. (b) OTHER COMMITTEES: The Board of Directors may, by resolution passed by a majority of the whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committee, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM: The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 3.9, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided, that no committee shall consist of less than one member. The membership of a committee member shall terminate on the date of his death or voluntary resignation, but the Board may at any time for any reason remove any individual committee member and the Board may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) MEETINGS: Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 3.9 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such 11 regular meetings need be given thereafter; special meetings of any such committee may be held at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. ARTICLE IV OFFICERS SECTION 4.1 OFFICERS DESIGNATED. The officers of the corporation shall be a President and Chief Executive Officer, a Secretary, and a Treasurer. The Board of Directors or the President and Chief Executive Officer may also appoint a Chairman of the Board, one or more Vice-Presidents, assistant secretaries, assistant treasurers, and such other officers and agents with such powers and duties as it or he shall deem necessary. The order of the seniority of the Vice- Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. The Board of Directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. SECTION 4.2 TENURE AND DUTIES OF OFFICERS. (a) GENERAL: All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the corporation. (b) DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS: The Chairman of the Board of Directors (if there be such an officer appointed), when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. 12 (c) DUTIES OF PRESIDENT AND CHIEF EXECUTIVE OFFICER: The President and Chief Executive Officer shall be the chief executive officer of the corporation and shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present at such meetings. The President and Chief Executive Officer shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) DUTIES OF VICE-PRESIDENTS: The Vice-Presidents, in the order of their seniority, may assume and perform the duties of the President and Chief Executive Officer in the absence or disability of the President or whenever the office of the President and Chief Executive Officer is vacant. The Vice-President shall perform such other duties and have such other powers as the Board of Directors or the President and Chief Executive Officer shall designate from time to time. (e) DUTIES OF SECRETARY: The Secretary shall attend all meetings of the shareholders and of the Board of Directors and any committee thereof, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice, in conformity with these Bylaws, of all meetings of the stockholders, and of all meetings of the Board of Directors and any Committee thereof requiring notice. The Secretary shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President and Chief Executive Officer may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the President and Chief Executive Officer shall designate from time to time. (f) DUTIES OF TREASURER: The Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President and Chief Executive Officer. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President and Chief Executive Officer shall designate from time to time. The President and Chief Executive Officer may direct any Assistant Treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform such other duties and have such other powers as the Board of Directors or the President and Chief Executive Officer shall designate from time to time. ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES OWNED BY THE CORPORATION 13 SECTION 5.1 EXECUTION OF CORPORATE INSTRUMENTS. (a) The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. (b) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the corporation, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board (if there be such an officer appointed) or by the President and Chief Executive Officer; such documents may also be executed by any Vice-President and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (c) All checks and drafts drawn on banks or other depositories on funds to the credit of the corporation, or in special accounts of the corporation, shall be signed by such person or persons as the Board of Directors shall authorize so to do. SECTION 5.2 VOTING OF SECURITIES OWNED BY CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), or by the President and Chief Executive Officer. ARTICLE VI SHARES OF STOCK SECTION 6.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman of the Board (if there be such an officer appointed), or by the President and Chief Executive Officer or any Vice-President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be 14 such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 6.2 LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to indemnify the corporation in such manner as it shall require and/or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. SECTION 6.3 TRANSFERS. Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a certificate or certificates for a like number of shares, properly endorsed. SECTION 6.4 FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record entitled notice of or to vote at a meeting of stockholders shall apply 15 to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 6.5 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII OTHER SECURITIES OF THE CORPORATION 16 All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President and Chief Executive Officer or any Vice-President or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons pertaining to any such bond, debenture or other corporate security, so authenticated by a trustee, shall be signed by the Treasurer or an Assistant Treasurer of the corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or before the bond, debenture or other corporate security so signed or attested shall have been delivered, ceases to be an officer of the corporation, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE VIII CORPORATE SEAL The corporate seal shall consist of a die bearing the name of the corporation and the state and date of its incorporation. Such seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE IX INDEMNIFICATION SECTION 9.1 INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE BY OR IN RIGHT OF THE CORPORATION. (a) To the extent permitted by law, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, liabilities and losses (including attorneys' fees, judgments, fines, penalties and amounts paid in settlement, and any interest, 17 assessments or other charges imposed thereon, and any federal, state, local or foreign taxes imposed on any person as a result of payment received under this Article) actually and reasonably incurred by such person in connection with such Proceeding, if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe that such conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal Proceeding, had reasonable cause to believe that such conduct was unlawful. (b) To the extent permitted by law, the corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed Proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, liabilities and losses (including attorneys' fees, judgments, fines, penalties and amounts paid in settlement, and any interest, assessments or other charges imposed thereon and any federal, state, local or foreign taxes imposed on any person as a result of payment received under this Article) actually and reasonably incurred by such person in connection with such Proceeding, if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe that such conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal Proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 9.2 INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. (a) To the extent permitted by law, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed Proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such Proceeding if such person acted in good faith and in a manner 18 which such person reasonably believed to be in or not opposed to the best interests of the corporation. No such indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (b) To the extent permitted by law, the corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed Proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such Proceeding if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation. No such indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. SECTION 9.3 AUTHORIZATION OF INDEMNIFICATION. Any indemnification under this Article 9 shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person or persons have met the applicable standard of conduct set forth in Sections 9.1 and 9.2 hereof. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to Proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by a majority of the stockholders entitled to vote generally in the election of directors. SECTION 9.4. ADVANCEMENT OF EXPENSES. The Corporation may advance expenses (including attorneys' fees) incurred by a director or officer (acting in his or her capacity as such) in advance of the final disposition of such Proceeding upon the receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined, by final judicial decision from which there is no further right to appeal, that such director or officer is not entitled to indemnification. The Corporation may advance expenses (including attorneys' fees) incurred by an employee or 19 agent in advance of the final disposition of such Proceeding upon such terms and conditions, if any, as the Board of Directors deems appropriate. SECTION 9.5 PROVISIONS NONEXCLUSIVE. The rights conferred on any person by this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Certificate of Incorporation, agreement or vote of the stockholders or disinterested directors is inconsistent with these bylaws, the provision, agreement, or vote shall take precedence. SECTION 9.6 AUTHORITY TO INSURE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation (or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) against liability asserted against or incurred by such person in such capacity or arising from such person's status as such (whether or not the corporation would have the power to indemnify such person against such liability). SECTION 9.7 SURVIVAL OF RIGHTS. The rights provided by this Article shall continue as to a person who has ceased to be a director, officer, employee or agent of the corporation (or has ceased serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust employee benefit plan or other enterprise) and shall inure to the benefit of the heirs, executors, and administrators of such a person. SECTION 9.8 SETTLEMENT OF CLAIMS. The corporation shall not be liable to indemnify any person under this Article (a) for any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. SECTION 9.9 EFFECT OF AMENDMENT. Any amendment, repeal, or modification of this Article shall not adversely affect any right or protection of any person covered by this Article existing at the time of such amendment, repeal, or modification. 20 ARTICLE X NOTICES Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, the same shall be given in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. Any notice required to be given to any director may be given by the method herein above stated, or by telegram or other means of electronic transmission, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of facsimile telecommunication) facsimile telephone number as such director shall have filed in writing with the Secretary of the corporation, or, in the absence of such filing, to the last known post office address of such director. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram or other means of electronic transmission shall be deemed to have been given as at the sending time recorded by the telegraph company or other electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not b affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of the Delaware statutes or of the Certificate of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. 21 ARTICLE XI AMENDMENTS The Board of Directors shall have the authority to repeal, alter or amend these Bylaws or adopt new Bylaws by unanimous written consent or at any annual, regular, or special meeting by the affirmative vote of a majority of the whole number of directors, provided that the Board of Directors shall not make or alter any Bylaws fixing the qualifications, classifications, or term of office of directors. If stockholders are entitled to vote with respect thereto to amend or repeal Bylaws adopted by the Board of Directors as may be provided in the Certificate of Incorporation or by law, then the affirmative vote of 66-2/3% of the total number of votes of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for the amendment or repeal of Bylaws by the stockholders of the corporation. 22 EX-10.1 4 EXHIBIT 10.1 EXHIBIT 10.1 LOAN AND INVESTMENT AGREEMENT The parties to this Loan and Investment Agreement (the "Agreement") are: LENDER Hospitality Partners, LLC, a Delaware limited liability company 3 Civic Plaza Suite 170 Newport Beach, CA 92660 BORROWER Hospitality Marketing Consultants, LLC, a California limited liability company 15751 Rockfield Boulevard Suite 2000 Irvine, CA 92718 MEMBERS Mokhtar Ramadan Fadi Ramadan Marwan Ramadan Sandra Case The Members join in this Agreement solely for purposes of confirming their agreement to Section 2.3(a). RECITALS A. The Members own all of the membership interests of Borrower. B. Lender has agreed to loan to Borrower $3,000,000 (the "Loan"), which shall be evidenced by a convertible subordinated promissory note in the form attached hereto as Exhibit "A" (the "Note"). C. As provided in Section 2.3(b), the Note is convertible into a minimum of 10% and up to a maximum of 30% of the equity interests of Borrower immediately prior to the closing of an initial public offering of Borrower's successor-in-interest as contemplated by this Agreement and as provided in the Note. D. Lender is willing to make the Loan to Borrower based on the representations, warranties and covenants of Borrower contained in this Agreement. ARTICLE 1 DEFINED TERMS/PRINCIPLES OF CONSTRUCTION SECTION 1.1. DEFINITIONS As used in this Agreement, the following terms will have the following meanings: AFFILIATE shall mean, with respect to any Person, any other Person (i) directly or indirectly controlling (including, but not limited to, all directors, officers, partners and members of such Person), controlled by, or under direct or indirect common control with, such Person; (ii) that directly or indirectly owns more than 5% of the voting securities of such Person; or (iii) who is related to such person by blood, marriage or adoption (a "Family Member"). A Person shall be deemed to control a corporation, partnership, limited liability company or other legal entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, partnership, or other legal entity whether through the ownership of voting securities, partnership interests, membership interests, by contract or otherwise. DISCLOSURE SCHEDULE is defined in Article 3. EVENTS OF DEFAULT is defined in Article 7. FINANCIAL STATEMENTS means the financial statements of Borrower, as may be required by Lender from time to time, including operating statements, income statements, balance sheets, cash flow statements, statements of changes in financial condition and any other financial reports and information that Lender may require. FUNDING DATE is defined in Section 2.2. LOAN is defined in Recital A. LOAN MATURITY DATE means December 31, 2001. LOAN PROCEEDS means funds disbursed by Lender pursuant to the Loan in accordance with this Agreement. NOTE is defined in Recital A. PERMITTED LIENS is defined in Section 6.1. PERSON shall mean any individual, partnership, joint venture, limited liability company, firm, corporation, association, trust or 2 other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. SENIOR INDEBTEDNESS is defined in Section 10.1. TRANSACTION DOCUMENTS means the Note and this Agreement. ARTICLE 2 MAKING OF LOAN SECTION 2.1. LOAN. Lender agrees to lend to Borrower, and Borrower agrees to borrow from Lender, $3,000,000 pursuant to the Loan, subject to the terms, conditions, representations, warranties, and covenants in this Agreement. SECTION 2.2. DISBURSEMENTS. Lender agrees to disburse the Loan Proceeds to Borrower upon execution and delivery of this Agreement (the "Funding Date"). Interest will accrue on disbursed Loan Proceeds as described in the Note. All Loan Proceeds will be evidenced by the Note. SECTION 2.3. INVESTMENT CONSIDERATIONS 2.3.(a) REORGANIZATION. It is contemplated by Lender and Borrower that Borrower will close an initial registered public offering (an "IPO") with an underwriter selected by Borrower (the "Underwriter") prior to December 31, 1999. In order for Borrower to issue shares to the public in the IPO, Borrower will be required to reorganize as a corporation ("Reorganized Borrower") taxable under Subchapter C of the Internal Revenue Code of 1986, as amended (the "Reorganization"). Attached to this Agreement as Exhibit "B" and incorporated herein by this reference is an organizational chart (the "Organizational Chart") depicting Borrower and its affiliated companies (the "Group"). Contemporaneously with the closing of the IPO, the Reorganization shall be effected so that Borrower is reorganized as a corporation on a tax-free basis and succeeds directly or indirectly to the ownership of the business of the other members of the Group, other than Hospitality Marketing Consultants, a general partnership, which shall be excluded from the Reorganization. Borrower and Lender understand and acknowledge that the Reorganization is extremely complicated and complex and involves extensive planning to ensure that it can be accomplished on a tax-free basis to the Members and without Material Adverse Effect on the Group's business. As part of the Reorganization, Reorganized Borrower shall indemnify Borrower's Members from all then current and preexisting liabilities, including tax liabilities. Borrower and Lender acknowledge and agree that the precise structure and exact manner of the Reorganization have not 3 at present been determined, and that therefore the manner and form of the Reorganization shall be subject to Lender's reasonable approval. Borrower understands and agrees that in granting or withholding its approval, Lender may take into account its own tax and securities requirements. The Members agree to take all actions required, including without limitation, contributing their equity interests in the other companies in the Group to Borrower, as shall be necessary to accomplish the Reorganization as devised by Borrower and approved by Lender as contemplated by this Section 2.3(a). 2.3.(b) CONVERSION OF NOTE. Pursuant to the Note, prior to December 31, 1999 (the "Cut-Off Date") and (i) from and after the execution and delivery of a firm commitment underwriting/purchase agreement with the Underwriter (the "Signing Date") and conditioned on the subsequent closing of the IPO in the case of a public offering, and (ii) from and after the execution and delivery of an agreement for the sale of all or substantially all of the business of the Group or equity interests of the Group (a "Private Sale"), and conditioned on the subsequent closing of the Private Sale in the case of a sale, Lender shall have the right to convert the principal balance of the Note into membership interests of Borrower or capital stock in the case of Reorganized Borrower (the "Shares") in an amount equal to a minimum of 10% and a maximum of 30% of the total capitalization of Borrower on a fully diluted basis (except for dilution resulting from the adoption of a stock option plan not to exceed 10% of Borrower's total capitalization) calculated prior to the dilution resulting from the issuance of shares to the public in the IPO, all calculated in accordance with the formula described below. In other words, Lender's equity interest shall be diluted along with the other Members of Borrower by the sale of stock to the public and by the Borrower's membership interests reserved for issuance pursuant to the stock option plan. If the valuation ascribed to the Reorganized Borrower for the IPO and on which the price per share to the public is calculated or the sale price to be paid by the buyer for the Group in a Private Sale (the "Valuation") is $50,000,000, Lender shall be entitled to convert the Note into 10% of Borrower's membership interests or capital stock in the case of Reorganized Borrower. The percentage of Borrower's membership interests or capital stock in the case of Reorganized Borrower into which the Note shall be converted shall increase thereafter by 1% for each $2,500,000 in Valuation up to a maximum of 30% of Borrower's membership interests or capital stock in the case of Reorganized Borrower at a Vauation of $100,000,000 or more. Lender shall have the right by written notice to Borrower to surrender its conversion rights by accelerating the Cut-Off Date to any month-end date from, after and including December 31, 1998. If Borrower has an active Registration Statement on file with the Securities and Exchange Commission on the Cut-Off Date, the Cut-Off Date shall be automatically extended for a period of time expiring one hundred eighty (180) days after the Registration Statement is 4 declared effective or the Registration Statement is withdrawn by Borrower, whichever is earlier. 2.3.(c) INVESTMENT REPRESENTATIONS. Lender is acquiring the Note and any Shares into which the Note is converted for its own account and not with a view to, or for sale in connection with, any distribution thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"). Lender understands that neither the Note nor the Shares will be registered under the Securities Act or qualified with any state securities agency for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4 of the Securities Act and similar provisions of applicable state law, and that the reliance of Borrower on such exemptions is predicated in part on Lender's representations set forth herein. Lender further represents that (i) it and each of its members except for one person is an "Accredited Investor" in the meaning of Rules 501-506 under the Securities Act and is an "Excluded Purchaser" within the meaning of Regulation 260.102.13 under the California General Corporation Law, or (ii) by reason of its financial experience or the financial experience of those persons that Lender has retained to advise it (none of whom are Affiliated with or compensated by Borrower), Lender and each of its members except for one person, together with such advisors has such knowledge, sophistication and experience in business and financial matters that it and they are capable of evaluating the merits and risks of an investment in the Shares, that it and they are able to bear the economic risk of such investment, and that it and they are able to afford a complete loss of such investment. SECTION 2.4. DELIVERY OF NOTE AND CERTIFICATE. Concurrently with execution and delivery of this Agreement, Borrower shall take the following actions: 2.4.(a) EXECUTION OF NOTE. Borrower shall execute and deliver the Note to Lender in the form attached hereto. 2.4.(b) ORGANIZATIONAL DOCUMENTS. Borrower shall deliver to Lender a Certificate, dated the Funding Date, signed by the Manager of Borrower, authorizing the issuance of the Note and the execution and delivery of the Transaction Documents, together with copies of the Operating Agreement, as amended, and Articles of Organization (Form LLC-1) as filed, of Borrower. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF BORROWER Except as disclosed on the schedule annexed hereto as Exhibit "C" and incorporated herein by this reference (the "Disclosure 5 Schedule"), as a material inducement to Lender to enter into this Agreement, to make the Loan to Borrower, Borrower unconditionally represents and warrants to Lender as of the Funding Date as follows: SECTION 3.1. FORMATION. Borrower is duly organized, validly existing and in good standing as a limited liability company, and has not taken any action to dissolve, under the laws of California, is duly qualified to do business in California and in each other jurisdiction (and is in good standing in each such jurisdiction) where it is required to be qualified to transact business as a foreign entity, in which the failure to be so qualified would have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) (a "Material Adverse Effect") on Borrower, and has full power and authority to consummate the transactions contemplated by this Agreement. The other members of the Group are duly organized, validly existing and in good standing under the laws of their respective jurisdiction of organization and are qualified to transact business in each other jurisdiction where they are required to be qualified to transact business as a foreign entity, in which the failure to be so qualified would have a Material Adverse Effect on the Group as a whole. SECTION 3.2. CAPITALIZATION. Borrower does not have outstanding any securities convertible into or exchangeable for its membership interests or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its membership interests. SECTION 3.3. OWNERSHIP. The Members are the owners, beneficially and of record, of all membership interests of Borrower in the respective amounts set forth in the Disclosure Schedule, free and clear of all liens, encumbrances, security agreements, equities, options, claims and charges. The ownership of the other companies in the Group is as set forth in the Organizational Chart. SECTION 3.4. NO SUBSIDIARIES. Except as shown in the Organizational Chart or disclosed in the Financial Statements, the Group does not own, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, limited liability company, business, trust or other entity. 6 SECTION 3.5. BORROWER'S POWERS. Borrower has full authority to execute this Agreement and the Note, to undertake and consummate the contemplated transactions, and to pay, perform, and observe all of the conditions, covenants, agreements, and obligations contained in the Transaction Documents, and has taken all necessary actions pursuant to its Operating Agreement to authorize the foregoing. SECTION 3.6. BINDING OBLIGATION. This Agreement and the Note have been duly executed and delivered by Borrower and the Members [solely with respect to Section 2.3(a)] and constitute a legal and binding obligation of, and are valid and enforceable against Borrower and the Members [solely with respect to Section 2.3(a)] in accordance with the terms of each. SECTION 3.7. LITIGATION. There are no actions, suits, or proceedings pending or, to the best knowledge of Borrower, threatened against or affecting the Group in which the amount in controversy exceeds $500,000 or involving the validity or enforceability of the Transaction Documents, at law or in equity, or before or by any governmental authority. The Group is in material compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except for such noncompliance as would not, in the aggregate, have a Material Adverse Effect on the Group taken as a whole. Neither Borrower nor any other member of the Group is in default with respect to any order, writ, injunction, decree, or demand of any court or other Governmental Authority. SECTION 3.8. NO VIOLATION. The consummation of the transactions covered by this Agreement and the payment and performance of all of the obligations in the Transaction Documents, will not (i) contravene any provision of any law, statute, rule, regulation or order, writ, injunction or decree of any court or governmental instrumentality, except for such of the foregoing as would not have a Material Adverse Effect on the Group as a whole, (ii) result in any breach of, or constitute a default under, any material mortgage, deed of trust, lease, contract, loan or credit agreement, corporate charter, bylaws, partnership agreement, operating agreement, trust agreement, or other instrument to which the members of the Group are parties or by which they may be bound or affected except for such of the 7 foregoing as would not have a Material Adverse Effect on the Group as a whole, or (iii) violate Borrower's Articles of Organization or Operating Agreement. SECTION 3.9. NO DEFAULT. There is no Event of Default on the part of Borrower under this Agreement or the other Transaction Documents, and no event has occurred and is continuing which with notice or the passage of time or both would constitute a default or an Event of Default thereunder. SECTION 3.10. GOVERNMENTAL APPROVALS. No material order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Transaction Document or (ii) the legality, validity, binding effect or enforceability of any such Transaction Document. SECTION 3.11. LABOR RELATIONS. 3.11.(a) The Group is not a party to any employment contract not entered into in the ordinary course of business or unusual in duration, collective bargaining agreement, or pension, bonus, profit sharing, stock option or other agreement providing for employee remuneration or benefits. 3.11.(b) The Group is not engaged in any unfair labor practice that could have a Material Adverse Effect on the Group as a whole. There is (i) no significant unfair labor practice complaint pending against the Group or, to Borrower's best knowledge, threatened against the Group before the National Labor Relations Board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Group or, to Borrower's best knowledge, threatened against the Group (ii) no significant strike, labor dispute, slowdown or stoppage is pending against the Group or, to Borrower's best knowledge, threatened against the Group, and (iii) to Borrower's best knowledge, there is no union representation question existing with respect to the employees of the Group and, to Borrower's best knowledge, no union organizing activities are taking place. SECTION 3.12. TRADEMARKS, LICENSES AND FRANCHISES. The Group owns or has the right to use all of the material trademarks, permits, service marks, trade names, copyrights, 8 licenses, franchises, or rights with respect to the foregoing, utilized in the operation of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, would result in a Material Adverse Effect on the Group as a whole. SECTION 3.13. NO USURY. The Loan is not usurious under California or Federal law. SECTION 3.14. TAXES. The Group has filed all required Federal, State, County, and City tax returns and has paid all taxes due and required to be paid. Borrower knows of no reasonable basis for additional assessments with respect to any material taxes. The Group has paid, or has provided adequate reserves (in the good faith judgment of the management of Borrower) for the payment of, all federal and state income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. SECTION 3.15. FINANCIAL STATEMENTS. The Financial Statements of the Group at August 30, 1997 (the "Financial Statement Date") including the balance sheet and the related statements of income and retained earnings for the eight (8)-month period ended on such date and heretofore furnished to Lender are unaudited, internally prepared compilations, based on the Group's historical accounting practices consistently applied, which present fairly the financial condition of the Group at the date of such Financial Statements and the results of the operations of Borrower for such eight (8)-month period. SECTION 3.16. ABSENCE OF SPECIFIED CHANGES. Since the Financial Statement Date, there has not been any: 3.16.(a) Transaction by the Group, other than this transaction, except in the ordinary course of business as conducted on that date; 3.16.(b) Material adverse change in the Group's financial condition, finances, income, debts, liabilities or assets; 3.16.(c) Destruction, damage to, or loss of any asset of the Group (whether or not covered by insurance) that materially and adversely affects the financial condition of the Group as a whole; 3.16.(d) Change in accounting methods or practices of the Group; 9 3.16.(e) Re-evaluation by the Group of any of its material assets; 3.16.(f) Sale or transfer, including without limitation, any mortgage, pledge or other encumbrance, of any of the Group's material assets, except in the ordinary course of business; 3.16.(g) Waiver or release of any material right or a claim of the Group in connection with its business, except in the ordinary course of business; 3.16.(h) Amendment or termination of any material contract, agreement or license, except in the ordinary course of business that materially and adversely affects the financial condition of the Group as a whole; 3.16.(i) Other events or condition of any character, that is or might reasonably have a Material Adverse Effect on the financial condition or assets of the Group as a whole; or 3.16.(j) Agreement by the Group to do any of the things described in this Section 3.16. SECTION 3.17. BUSINESS USE OF LOAN PROCEEDS. Borrower shall use the Loan Proceeds solely for the ongoing and legitimate business needs of the Group in its ordinary course of business. No portion of the Loan Proceeds will be disbursed to the Members or the Affiliates of Borrower or the Members (other than companies in the Group), directly or indirectly, or loaned to the Members or to any Affiliates of Borrower or the Members (other than companies in the Group). Borrower shall not use the Loan Proceeds to pay or fund distributions to the members of Borrower, or to redeem or repurchase membership interests of Borrower. Borrower shall not use the Loan Proceeds to repay loans to the Members, or pay salaries to the Members or Affiliates of Borrower or Members, unless Lender expressly consents to the contrary. Notwithstanding anything herein to the contrary, the foregoing shall not prohibit Borrower from repaying personal loans secured by certain Members' homes in the aggregate principal amount of $600,000 which loans were used to fund Group operations or from making distributions (other than of the Loan Proceeds) to Members pursuant to Borrower's Operating Agreement. SECTION 3.18. OTHER CONTRACTS. The Disclosure Schedule contains a true and complete list of all agreements to which the Group is a party which are material to the Group or its business, having a value or cost in excess of $500,000, copies of which have been furnished to or made available to Lender. To Borrower's knowledge, there is no default or event 10 that, with notice or lapse of time or both, would constitute a default by any party to any of these agreements. Borrower has not received notice, and Borrower does not have any knowledge, that any party to any of these agreements intends to cancel or terminate any of these agreements or to exercise or not exercise any options under any of these agreements. The Group is not a party to, nor is its property bound by, any agreement not entered into in the ordinary course of business, any agreement that is unusual in nature, duration, or amount, or any agreement that is materially adverse to the business, properties or financial condition of the Group taken as a whole. SECTION 3.19. NATURE OF REPRESENTATIONS AND WARRANTIES. Borrower certifies to Lender that as of the Funding Date, all representations and warranties made in this Agreement and all other Transaction Documents are true and correct in all material respects and do not contain any untrue statement of a material fact or omit any material fact necessary to make the representations and warranties not misleading. The representations and warranties will survive so long as the Loan or any part of it remains outstanding. Each representation and warranty made in this Agreement and in any other Transaction Document, and in any other document delivered to Lender by Borrower, will be deemed to have been relied on by Lender, regardless of any investigation, inspection, or inquiry made by Lender. The representations and warranties that are made to the best knowledge of Borrower have been made after diligent inquiry calculated to ascertain the truth and accuracy of the subject matter of each representation and warranty. SECTION 3.20. RELATED-PARTY TRANSACTIONS. Except as disclosed in the Financial Statements and except for intercompany transactions among the companies in the Group, no employee, officer or Member of the Borrower or members of his or her immediate family is materially indebted to the Borrower or the other companies in the Group, nor is the Borrower indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (a) for payment of salary for services rendered or distributions to Members in accordance with Borrower's Operating Agreement, (b) reimbursement for reasonable expenses incurred on behalf of the Borrower, and (c) for other standard employee benefits made generally available to all employees. To the best of the Borrower's knowledge, none of such persons have any direct or indirect ownership interest in any firm or corporation that competes with the Borrower. To the best of the Borrower's knowledge, no officer, director or Member or any member of their immediate families is, directly or indirectly, interested in any material contract with the Borrower. "Material" for purposes of 11 this Section 3.20 means having a value or cost in excess of $500,000. SECTION 3.21. LIMITATIONS. 3.21.(a) No representation or warranty is made by Borrower except as expressly set forth herein. 3.21.(b) The maximum amount of Borrower's liability for breach of the representations and warranties set forth in this Agreement will not exceed the unpaid amounts due pursuant to the Note. In no event will Borrower have any liability in excess of actual damages incurred and resulting from any such breach. Lender hereby waives all claims for consequential, special, expectancy or similar loss or damages. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF LENDER Lender hereby represents and warrants to Borrower as follows: SECTION 4.1. FORMATION Lender is duly organized, validly existing and in good standing under the laws of Delaware, is duly qualified to do business in Delaware which is the only jurisdiction in which such qualification is required, and has full power and authority to consummate the transactions contemplated by this Agreement. SECTION 4.2. LENDER'S POWERS Lender has full authority to execute this Agreement, to undertake and consummate the contemplated transactions and to pay, perform and observe all the conditions, covenants, agreements and obligations applicable to it contained in the Transaction Documents, and has taken all necessary action to authorize the foregoing. SECTION 4.3. BINDING OBLIGATION This Agreement and the other documents to which Lender is a party have been duly executed and delivered by Lender and constitute legal and binding obligations of, and are valid and enforceable against, Lender in accordance with the terms of each such document. SECTION 4.4. LITIGATION There are no actions, suits or proceedings pending, or to the best knowledge of Lender threatened, against or affecting Lender 12 which involve the validity or enforceability of the Transaction Documents, at law or in equity, or for or by any governmental authority. Lender is in material compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except for such noncompliance that would not have a Material Adverse Effect. Lender is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental authority. SECTION 4.5. CONTROL OF LENDER Lender hereby represents that Amre Youness is the sole manager of Lender. ARTICLE 5 AFFIRMATIVE COVENANTS Borrower covenants and agrees that: SECTION 5.1. INFORMATION COVENANTS Borrower will furnish to Lender: 5.1.(a) MONTHLY OPERATING STATEMENTS. Within 45 days after the end of each month, a monthly written report of the operating results and material events occurring in such month which report shall also contain such other information as is reasonably requested by Lender and shall be in a form reasonably satisfactory to Lender. 5.1.(b) QUARTERLY FINANCIAL STATEMENTS. Within 45 days (or 90 days in the case of the fourth fiscal quarter) after the close of each quarterly accounting period in each fiscal year, the balance sheet of Borrower as at the end of such quarterly period and the related statements of income and retained earnings and cash flow statement for such quarterly period, and for the elapsed portion of the fiscal year ended with the last day of such quarterly period all prepared in accordance with generally accepted accounting principles applied on a consistent basis, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be certified by Borrower's chief financial officer, subject to normal year-end audit adjustments. 5.1.(c) ANNUAL FINANCIAL STATEMENTS. Within 90 days after the close of each fiscal year, the balance sheet of Borrower 13 as at the end of such fiscal year and the related statements of income and retained earnings and cash flow statement for such fiscal year all prepared in accordance with generally accepted accounting principles applied on a consistent basis, in each case setting forth comparative figures for the preceding fiscal year and certified by independent certified public accountants of recognized national standing satisfactory to Lender, in each case together with a report of such accounting firm stating that in the course of its regular audit of Borrower's financial statements, which audit was conducted in accordance with generally accepted auditing standards, except as noted in such report, such accounting firm obtained no knowledge of any litigation, breach or default of Borrower to third Persons or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such has occurred and is continuing, a statement as to the nature thereof. 5.1.(d) MANAGEMENT LETTERS. Promptly after Borrower's receipt thereof, a copy of any "management letter" received by Borrower from its certified public accountants. 5.1.(e) BUDGETS. Within 60 days after the first day of each fiscal year of Borrower, a budget in form reasonably satisfactory to the Lender (including budgeted statements of income and sources and uses of cash and a balance sheet) prepared by Borrower for each of the four fiscal quarters immediately following the last day of such fiscal year accompanied by the statement of the chief financial officer of Borrower to the effect that, to the best of his or her knowledge, the budget is as of the date of its preparation, a reasonable estimate for the period covered thereby. 5.1.(f) OFFICER'S CERTIFICATES. At the time of the delivery of the monthly operating report and Financial Statements provided for in Sections 5.1(a), (b) and (c), a certificate of the chief financial officer of Borrower to the effect that, to the best of his or her knowledge, no default or breach of any material agreement with a third Person or Event of Default has occurred and is continuing or, if such has occurred and is continuing, specifying the nature and extent thereof. 5.1.(g) NOTICE OF DEFAULT OR LITIGATION. Promptly, and in any event within 3 business days after an officer of Borrower obtains knowledge thereof, notice of (i) the occurrence of any event which constitutes a default or breach of any material agreement with a third Person or Event of Default, (ii) any litigation or governmental proceeding pending (x) against Borrower which could materially and adversely affect the business, operations, property, assets, or condition (financial or otherwise) of Borrower or (y) with respect to any Transaction Document and (iii) any other event which is likely to materially and adversely affect the business, operations, property, assets, or condition (financial or otherwise) of Borrower. 14 5.1.(h) OTHER INFORMATION. From time to time, such other information or documents (financial or otherwise) as Lender may reasonably request. 5.1.(i) TERMINATION OF REPORTING OBLIGATION. The provisions of Sections 5.1.(a) through (h) shall terminate upon the consummation of an initial public offering by Borrower or its successor-in-interest, and thereafter, to the extent all or any portion of the Loan remains outstanding Lender shall receive copies of all documents filed by Borrower or its successor-in-interest with the Securities and Exchange Commission. SECTION 5.2. BOOKS, RECORDS AND INSPECTIONS. Borrower will keep proper books of record and account in which full, true and correct entries in conformity with generally accepted accounting principles and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. Borrower will permit designated representatives of Lender subject to reasonable confidentiality arrangements to visit and inspect, under guidance of officers of Borrower, any of the properties of Borrower, and to examine the books of account of Borrower and discuss the affairs, finances and accounts of Borrower with, and be advised as to the same by, its officers, all at such reasonable times and intervals and to such reasonable extent as Lender may request. SECTION 5.3. MAINTENANCE OF PROPERTY, INSURANCE. Borrower shall, in accordance with prudent industry practices, (i) keep all property useful and necessary in its business in good working order and condition, (ii) maintain with financially sound and reputable insurance companies insurance which is reasonable and customary in nature and amounts for businesses such as Borrower's, and (iii) furnish to Lender, upon written request, full information as to the insurance carried. SECTION 5.4. CORPORATE FRANCHISES. Borrower will, in accordance with prudent industry practices, do, or cause to be done, all things reasonably necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and leases. SECTION 5.5. COMPLIANCE WITH STATUTES, ETC. Borrower will, in accordance with prudent industry practices, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its 15 business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliance as could not, in the aggregate, have a Material Adverse Effect. SECTION 5.6. PERFORMANCE OF OBLIGATIONS. Borrower will perform all of its obligations under the terms of each mortgage, indenture, security agreement and other debt instrument by which it is bound, except such non-performances as could not in the, aggregate, have a Material Adverse Effect. SECTION 5.7. FINANCIAL STATEMENTS. Borrower shall have prepared audited Financial Statements for the fiscal years of Borrower ended December 31, 1995, December 31, 1996, and December 31, 1997, by a date mutually agreed by Borrower and Lender. SECTION 5.8. LENDER'S REPRESENTATION. Lender acknowledges that Borrower does not have a formal Board of Directors, but rather that the Members operate collectively by consensus. Nonetheless, Lender shall be entitled to have a representative attend all meetings of the Members (whether held telephonically or in person) and to participate therein to the same extent as if the representative were an outside director. Once Reorganized Borrower has been formed, Lender shall be entitled to designate one member of Reorganized Borrower's Board of Directors. ARTICLE 6 NEGATIVE COVENANTS Except to the extent the Lender otherwise consents in writing, which consent, so long as no Event of Default exists and is continuing, will not be unreasonably withheld, Borrower covenants and agrees that: SECTION 6.1. LIENS. Borrower will not create, incur, assume or suffer to exist any lien or security interest upon or with respect to any property or assets (real or personal, tangible or intangible) of Borrower, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable with recourse to Borrower, or assign any right to receive income or permit the filing of any financing statement under the UCC or any other similar notice of lien or security under any similar recording or notice statute; provided that the provisions of this Section 6.1 shall not prevent the 16 creation, incurrence, assumption or existence of the following (collectively, the "Permitted Liens"): 6.1.(a) liens for taxes, governmental assessments or claims not yet due or delinquent, or that are being contested in good faith and by appropriate proceedings for which adequate reserves have been established; 6.1.(b) liens in respect of property or assets of Borrower imposed by law, which were incurred in the ordinary course of business, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of Borrower or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such lien; 6.1.(c) liens which are listed, and the property subject thereto described in the Disclosure Schedule; 6.1.(d) utility deposits and pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation. 6.1.(e) liens in respect of Permitted Indebtedness or any extension, renewal, refunding or refinancing of any Permitted Indebtedness; 6.1.(f) liens to secure the performance of statutory obligations, surety or appeal bonds in the ordinary course of business; 6.1.(g) liens on property of a Person existing at the time such Person is merged into, acquired or consolidated with Borrower; and 6.1.(h) liens incurred in the ordinary course of business with respect to obligations that do not exceed $1,000,000 at any time outstanding, excluding liens to secure Permitted Indebtedness. SECTION 6.2. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Except as contemplated by this Agreement with respect to the Reorganization, an IPO or a Private Sale, and except for inter-company transactions among the companies within the Group, Borrower will not (a) wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, (b) convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any material part of its property or 17 assets, or (c) purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person, except that (i) Borrower may sell and lease inventory, materials and equipment in the ordinary course of business, (ii) investments may be acquired to the extent expressly permitted by Section 6.5 and (iii) capital expenditures shall be permitted to the extent not in violation of Section 6.7. Notwithstanding the foregoing to the contrary, Borrower may enter into a transaction of merger or consolidation in which it is the surviving corporation and consummate purchase transactions as described in clause (c), provided that Borrower's financial condition will not be impaired as reasonably determined by Lender and provided, further, that the total consideration for such transactions in cash, stock value, and debt assumed does not exceed One Million Dollars ($1,000,000) in the aggregate in any fiscal year. SECTION 6.3. LEASES. Borrower will not permit the aggregate payments (including, without limitation, any property taxes paid as additional rent or lease payments) by Borrower under agreements to rent or lease any real or personal property (excluding capitalized lease obligations and office base rent) to exceed $500,000, in any fiscal year. SECTION 6.4. INDEBTEDNESS. Borrower will not contract, create, incur, assume or suffer to exist any indebtedness, except (i) indebtedness incurred under this Agreement, (ii) indebtedness listed on the Disclosure Schedule, including any renewal or refinancing thereof ("Existing Indebtedness"), (iii) accrued expenses and trade accounts payable incurred and satisfied in the ordinary course of business, and obligations under trade letters of credit incurred by Borrower in the ordinary course of business, which are to be repaid in full not more than 18 months after the date on which such indebtedness is originally incurred to finance the purchase of goods by Borrower, (iv) obligations under letters of credit incurred by Borrower in the ordinary course of business in support of amounts owing to utilities from time to time and/or obligations incurred in connection with worker's compensation, unemployment insurance and other social security legislation, (v) indebtedness to any Person (other than Affiliates) providing credit to Borrower pursuant to the terms of a credit facility, including any guarantee thereof, (vi) indebtedness to finance purchases of equipment or to make capital expenditures not in excess of Five Hundred Thousand Dollars ($500,000) at any time outstanding, and (vii) indebtedness not otherwise permitted hereunder not in excess of One Million Dollars ($1,000,000) at any time outstanding (collectively, "Permitted Indebtedness"). 18 SECTION 6.5. ADVANCES, INVESTMENTS AND LOANS. Except for intercompany transactions among the companies in the Group and the Members to the extent disclosed in the Disclosure Schedule, Borrower will not lend money or credit or make advances to any Person (excluding loans to employees not in excess of $50,000), or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, except that the following shall be permitted: 6.5.(a) Borrower may acquire and hold receivables owing to it, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; 6.5.(b) Borrower may acquire and hold cash equivalents; and 6.5.(c) Borrower may make such purchases and acquisitions as are permitted by Section 6.2. SECTION 6.6. TRANSACTIONS WITH AFFILIATES. Other than the Reorganization as described in Section 2.3.(a), Borrower will not enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any Affiliate of Borrower or the Members other than intercompany transactions within the Group, other than on terms and conditions substantially as favorable to Borrower as would be obtainable by Borrower at the time in a comparable arm's length transaction with a Person other than an Affiliate. SECTION 6.7. CAPITAL EXPENDITURES. Borrower will not make any expenditure for fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with generally accepted accounting principles and including capitalized lease obligations) during any fiscal year (taken as one accounting period) which exceeds $500,000. SECTION 6.8. MODIFICATIONS OF ORGANIZATIONAL DOCUMENTS Borrower will not amend or modify, or permit the amendment or modification of, its Articles of Organization or Operating Agreement, without Lender's consent. SECTION 6.9. LIMITATION ON ISSUANCES OF EQUITY INTERESTS. 19 Borrower shall not issue any membership interests or any options or warrants to purchase, or securities convertible into, membership interests or other equity interests in Borrower. SECTION 6.10. RETENTION OF PROFESSIONALS. Lender shall have the right to approve any investment banker or underwriter engaged by Borrower to represent Borrower in an initial public offering, merger, acquisition or other significant corporate transaction and any accountant engaged by Borrower. ARTICLE 7 EVENTS OF DEFAULT At the option of Lender, the occurrence and continuation of any of the following events will unless and until cured within any applicable cure period or waived, constitute a default (each an "Event of Default"): (a) PAYMENTS. Borrower shall default in the payment when due of any principal or interest on the Loan which default is not cured within ninety (90) days after written notice from Lender to Borrower; or (b) REPRESENTATIONS, ETC. Any representation or warranty made by Borrower in Article 3 of this Agreement or in any other Transaction Document or in any certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made and such representation or warranty shall remain untrue from and after a period of 90 days after written notice from Lender to Borrower; provided, no Event of Default shall be deemed to have occurred if such breach is susceptible of being cured, during such period Borrower diligently and in good faith commences curing any such breach, such breach is cured within said ninety (90)-day period and during such cure period the financial condition of Borrower is not materially impaired thereby; or (c) COVENANTS. Borrower shall default in the due performance or observance by it of any term, covenant or agreement contained in this Agreement (other than those referenced to in Sections 7(a) and (b), and such default shall continue unremedied for a period of ninety (90) days after written notice to the Borrower by Lender; provided, however, no Event of Default shall be deemed to have occurred if such breach is susceptible of being cured, during such period Borrower diligently and in good faith commences curing any such default, such default is cured within said ninety (90)-day period, and during such cure period the financial condition of Borrower is not materially impaired thereby; or 20 (d) DEFAULT UNDER OTHER AGREEMENTS. Borrower shall (i) default in any payment of any indebtedness for borrowed money in excess of $1,000,000 (other than the Note) beyond the period of grace if any, provided in the instrument or agreement under which such indebtedness for borrowed money in excess of $1,000,000 was created, (ii) default in the observance or performance of any agreement or condition relating to any indebtedness for borrowed money in excess of $1,000,000 (other than the Note) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness for borrowed money in excess of $1,000,000 (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required), any such indebtedness for borrowed money in excess of $1,000,000 to become due prior to its stated maturity or (iii) any indebtedness for borrowed money in excess of $1,000,000 of Borrower shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or (e) BANKRUPTCY, ETC. Borrower shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against Borrower, and the petition is not controverted within 30 days, or is not dismissed within 90 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of Borrower, or Borrower commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Borrower, or there is commenced against Borrower any such proceeding which remains undismissed for a period of 90 days, or Borrower is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or Borrower suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 90 days; or Borrower makes a general assignment for the benefit of creditors; or any corporate action is taken by Borrower for the purpose of effecting any of the foregoing; or (f) JUDGMENTS. One or more judgments or decrees shall be entered against Borrower involving in the aggregate a liability (not paid and to the extent not covered by insurance) of $1,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within ninety (90) days from the entry thereof; or 21 (g) CROSS-DEFAULT. Any Event of Default under any Transaction Document shall constitute an Event of Default under all Transaction Documents. ARTICLE 8 REMEDIES SECTION 8.1. OPTION TO ACT. On the occurrence of any Event of Default, in addition to its other rights in this Agreement or in any of the other Transaction Documents, at law, or in equity, Lender may, without prior demand, exercise any one or more of the following rights and remedies: 8.1.(a) ACCELERATION. Declare the Note and all other sums owing to Lender with respect to the other Transaction Documents immediately due and payable without presentment, demand, protest or other notice, any and all of which are hereby waived by Borrower. 8.1.(b) LEGAL AND EQUITABLE REMEDIES. Proceed as authorized at law or in equity with respect to the Event of Default, and in connection therewith, remain entitled to exercise all other rights and remedies described in this Agreement or the other Transaction Documents. SECTION 8.2. RIGHTS CUMULATIVE, NO WAIVER. All of Lender's rights and remedies provided in this Agreement or in any of the other Transaction Documents are cumulative and may be exercised by Lender at any time and in any order. Lender's exercise of any right or remedy will not constitute a cure of any Event of Default unless all sums then due to Lender under the Transaction Documents are repaid and Borrower has cured all other Events of Default. No waiver will be implied from Lender's failure to take, or delay in taking, any action concerning any Event of Default or from any previous waiver of any similar or unrelated Event of Default. Any waiver under any of the Transaction Documents must be in writing and will be limited to its specific terms. SECTION 8.3. DISCLAIMER. Whether Lender elects to employ any of the remedies available to it in connection with an Event of Default, Lender will not be liable for the performance or nonperformance of any other obligation of Borrower. ARTICLE 9 MISCELLANEOUS 22 SECTION 9.1. NO WAIVER. No failure or delay on the part of Lender in exercising any right or remedy under the Transaction Documents will operate as a waiver nor will Lender be estopped to exercise any right or remedy at any future time because of any failure or delay. No express waiver will affect any matter other than the matter expressly waived and that waiver will be operative only for the time and to the extent stated. Waivers of any covenant, term, or condition in this Agreement will not be construed to waive any subsequent breach of the same covenant, term, or condition. SECTION 9.2. NO THIRD PARTIES BENEFITED. This Agreement is made and entered into for the sole protection and benefit of the parties and their permitted successors and assigns. SECTION 9.3. NOTICES. Notice shall be given as follows: IF TO LENDER: Hospitality Partners, LLC 3 Civic Plaza Suite 170 Newport Beach, CA 92660 By fax to (714) 721-8102 IF TO BORROWER OR MEMBERS: Hospitality Marketing Consultants, LLC 15751 Rockfield Boulevard Suite 2000 Irvine, CA 92718 By fax to: (714) 454-1764 Service shall be effected either: (1) by fax when the fax transmission is completed, provided a hard copy is deposited in the U.S. Mail within 24 hours of fax notice; or (2) by personal service when a copy is personally delivered to the person being served. If for any reason a party cannot readily serve the other either by fax or by personal delivery, service shall be proper if mailed to the party to be served at the address set forth above, certified mail, return receipt requested, in which event, service shall be deemed effective on the third business day after deposit in the mails. A party's failure or refusal to sign a return receipt shall not 23 invalidate the notice. Any party may change his, her or its address by notifying the other party in writing and supplying a new fax number. SECTION 9.4. ASSIGNMENT. The terms of this Agreement will be binding on and inure to the benefit of the successors and assigns of the parties. Neither Borrower nor Lender will assign this Agreement, any other Transaction Document or any interest therein or rights thereunder without the prior written consent of the other party; provided, however, that upon the occurrence and continuance of an Event of Default, Lender may enter into such assignments without Borrower's consent. Lender may at any time assign the Transaction Documents to any Affiliate of Lender. In that case, the provisions of this Agreement will continue to apply to the Loan, and the assignee will be substituted in the place and stead of Lender, with all rights, obligations, and remedies of Lender, including, without limitation, the right to further assign the Transaction Documents and its interest in the Loan. SECTION 9.5. TIME. Time is of the essence. SECTION 9.6. BORROWER'S RESPONSIBILITIES. Borrower shall, at Borrower's expense, defend, indemnify, save, and hold Lender harmless against all claims, demands, losses, expenses, liabilities, damages (general, punitive, or otherwise), judgments, costs, reasonable attorneys' fees and causes of action (whether legal or equitable) ("Liabilities") asserted by any Person which Lender may incur (a) as a direct or indirect consequence of (i) the making of the Loan, (ii) Borrower's failure to perform any obligations as and when required by this Agreement or any of the other Transaction Documents, (iii) the failure at any time of any of Borrower's representations or warranties to be true and correct; or (b) which (i) are related to the Transaction Documents, (ii) arise out of the transactions contemplated hereby, or (iii) arise out of the use of the Loan Proceeds, except to the extent that any such Liabilities arise solely from or relate solely to the negligence or willful misconduct of Lender. The provisions of this Section 9.6 will survive the termination of this Agreement and the repayment of the Loans. SECTION 9.7. NONLIABILITY FOR NEGLIGENCE, LOSS, OR DAMAGE. Borrower acknowledges, understands, and agrees that the relationship between Borrower and Lender is, and will at all times remain, solely that of borrower and lender, and there is no other 24 relationship between the parties except as is expressly set forth in a written agreement signed by the party to be charged. SECTION 9.8. CONTROLLING LAW; APPROVALS. 9.8.(a) The Transaction Documents will be governed by and construed in accordance with California law, excluding the rules on conflicts of law. 9.8.(b) All consents and approvals by Lender required or permitted by any provision of this Agreement must be in writing, Lender's consent to or approval of any act by Borrower requiring further consent or approval will not be deemed to waive or render unnecessary the consent or approval to or of any subsequent similar act. SECTION 9.9. SURVIVAL OF WARRANTIES AND COVENANTS. The warranties, representations, conditions, covenants, and agreements in this Agreement and in the other Transaction Documents will survive the making of the Loan and the execution and delivery of the Note and will continue in full force until the Loan has been paid in full or the Note has been converted into Shares of Borrower. Nothing in this Section 9.9 is intended to limit any other provision of the Transaction Documents that by their stated terms survive the repayment of the Loans or the termination of any Transaction Document. SECTION 9.10. NO REPRESENTATIONS BY LENDER. By accepting or approving anything required to be observed, performed, or fulfilled, or to be given to Lender pursuant to this Agreement or pursuant to the Transaction Documents, including, but not limited to, any officer's certificate, Financial Statement, survey, appraisal, or insurance policy, Lender will not be deemed to have warranted or represented the sufficiency, legality, effectiveness, or legal effect of it or of any particular term, provision, or condition of it, and any acceptance or approval will not be or constitute any warranty or representation by Lender. SECTION 9.11. AMENDMENT. The Transaction Documents and the terms of each of them may not be modified, waived, discharged, or terminated except by a written instrument signed by the party against whom enforcement of the modification, waiver, discharge, or termination is asserted. SECTION 9.12. COUNTERPARTS. The Transaction Documents may be executed in any number of counterparts and by different parties in separate counterparts, 25 each of which when executed and delivered will be deemed an original and all of which counterparts taken together will constitute one and the same instrument. They may be executed by facsimile. SECTION 9.13. SEVERABILITY. If any terms, provision, covenant, or condition or any application is held by a court of competent jurisdiction to be invalid, void, or unenforceable, all terms, provisions, covenants, and conditions and all applications not held invalid, void, or unenforceable will continue in full force and will in no way be affected, impaired, or invalidated. SECTION 9.14. CAPTIONS. All Article and Section headings in this Agreement are inserted for convenience of reference only and do not constitute a part of this Agreement for any other purpose. SECTION 9.15. COSTS Each party shall bear its own costs and attorney fees related to the preparation and filing of the documents for the Loans. SECTION 9.16. FURTHER ASSURANCES. At Lender's request and at Borrower's expense, Borrower will execute, acknowledge, and deliver all other instruments and perform all other acts necessary, desirable, or proper to carry out the purposes of the Transaction Documents. SECTION 9.17. INTEGRATION AND INTERPRETATION. The Transaction Documents contain or expressly incorporate by reference the entire agreement between Lender, on the hand, and Borrower and the Members, on the other hand, with respect to the covered matters and supersede all prior negotiations. Any reference to the Transaction Documents themselves in any of the Transaction Documents will include all amendments, renewals, or extensions approved by Lender. There are no oral agreements or promises of any kind, and the only understandings of the parties are those set forth in the written agreements signed by the parties. No modification or obligation of any kind shall be binding or enforceable unless in writing and signed by the party to be charged. SECTION 9.18. NUMBER. 26 When the context and construction so require, all words used in the singular will be deemed to have been used in the plural and vice versa. ARTICLE 10 SUBORDINATION The indebtedness evidenced by this Loan and Investment Agreement and the Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all the Borrower's Senior Indebtedness, as hereinafter defined. SECTION 10.1. SENIOR INDEBTEDNESS. As used in this Loan and Investment Agreement, the term "Senior Indebtedness" shall mean the principal of and unpaid accrued interest on: (i) all indebtedness of the Borrower to banks, insurance companies or other financial institutions regularly engaged in the business of lending money, which is for money borrowed by the Borrower (whether or not secured), (ii) all indebtedness of the Borrower to unaffiliated lenders which is for money borrowed by the Borrower and secured by the Borrower's accounts receivable, and (iii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for Senior Indebtedness. SECTION 10.2. DEFAULT ON SENIOR INDEBTEDNESS. Unless and until a bankruptcy proceeding is filed, if any Senior Indebtedness shall be declared due and payable prior to its stated maturity upon the occurrence of an event of default thereunder, then no amount shall be paid by the Borrower in respect of the principal of or interest on the Note at the time outstanding unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full or such event of default shall have been cured or waived. SECTION 10.3. EFFECT OF SUBORDINATION. Subject to the rights, if any, of the holders of Senior Indebtedness under this Article 10 to receive cash, securities or other properties otherwise payable or deliverable to the Lender, nothing contained in this Article 10 shall impair, as between the Borrower and the Lender, the obligation of the Borrower, subject to the terms and conditions hereof, to pay to the Lender the principal of and interest on the Note as and when the same become due and payable, or shall prevent the Lender, upon default under the Note, from exercising all rights, powers and remedies otherwise provided herein, therein or by applicable law. 27 SECTION 10.4. SUBROGATION. Subject to the payment in full of all Senior Indebtedness and until the Note shall be paid in full, the Lender shall be subrogated to the rights of the holders of Senior Indebtedness (to the extent of payments or distributions previously made to such holders of Senior Indebtedness pursuant to the provisions of Section 10.2 above) to receive payments or distributions of assets of the Borrower applicable to the Senior Indebtedness; shall, as between the Borrower and its creditors, other than the holders of Senior Indebtedness and the Lender, be deemed to be a payment by the Borrower to or on account of the Note; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the Lender would be entitled except for the provisions of this Article 10 shall, as between the Borrower and its creditors, other than the holders of Senior Indebtedness and the Lender, be deemed to be a payment by the Borrower to or on account of the Senior Indebtedness. SECTION 10.5. UNDERTAKING. By its acceptance of the Note, the Lender agrees to execute and deliver such documents as may be reasonably requested from time to time by the Borrower or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Article 10. LENDER Hospitality Partners, LLC Dated: November 7, 1997 By:_____________________________ Amre Youness, Manager BORROWER Hospitality Marketing Consultants, LLC Dated: November 7, 1997 By:_____________________________ Mokhtar Ramadan, President [The Members join in this Agreement solely for the purpose of confirming their agreement to the provisions of Section 2.3(a).] MEMBERS 28 Dated: November 7, 1997 ______________________________ Mokhtar Ramadan Dated: November 7, 1997 ______________________________ Fadi Ramadan Dated: November 7, 1997 ______________________________ Marwan Ramadan Dated: November 7, 1997 ______________________________ Sandra Case 29 CONVERTIBLE SUBORDINATED PROMISSORY NOTE $3,000,000.00 Irvine, California November 7, 1997 FOR VALUE RECEIVED, the undersigned, Hospitality Marketing Consultants, LLC, a California limited liability company ("Borrower"), hereby unconditionally promises to pay to Hospitality Partners, LLC, a Delaware limited liability company ("Lender"), or order, at 3 Civic Plaza, Suite 170, Newport Beach, California 92660, or at such other place as Lender may designate in writing, the principal sum of Three Million Dollars ($3,000,000), in lawful money of the United States of America, together with interest on the unpaid principal balance from time to time outstanding from and after the Cut-Off Date (as defined in the "Loan Agreement" as hereinafter defined) at a rate per annum equal to the Prime Rate established by Cedars Bank, as adjusted from time to time. Interest only shall be due and payable in arrears on the last day of each calendar month, commencing on the last day of the month following the Cut-Off Date until and including that date which is two years after the Cut-Off Date but in no event later than December 31, 2001 (the "Maturity Date") upon which date the entire unpaid principal balance hereunder, together with any accrued but unpaid interest thereon, shall be due and payable in full. This Note has been executed and delivered pursuant to that certain Loan and Investment Agreement between Borrower and Lender of even date herewith (the "Loan Agreement"), and shall be subject to subordination as provided in Article 10 thereof. Until such time as there occurs and is continuing an Event of Default, this Note (and any interest therein) shall not be transferred or assigned, except to an Affiliate of Lender. Lender shall have the right to convert the principal balance of this Note into membership interests or capital stock [in the case of Reorganized Borrower (as defined in the Loan Agreement)] of Borrower as provided in Section 2.3(b) of the Loan Agreement. This Note may be so converted by written notice of Lender's election to so convert the Note and by surrender of this Note to Borrower at Borrower's principal office. If Lender exercises this conversion option, it shall have the Registration Rights set forth in that certain Registration Rights Addendum attached hereto as Exhibit "A" and incorporated herein by this reference. Prior to the Cut-Off Date, Borrower shall not be permitted to prepay principal on this Note, in whole or in part. Thereafter, Borrower may, at any time or from time to time, from and after the Cut-Off Date prepay principal on this Note, in whole or in part, without penalty or bonus. Each payment shall be credited first to late charges, fees or other sums to be paid by Borrower to Lender; second to accrued and unpaid interest; and third, to principal. Interest shall cease on principal so credited. Upon the occurrence of an Event of Default as defined in the Loan Agreement, Lender shall have the right, without further notice or demand, to declare the entire balance of this Note, including interest, immediately due and payable. No waiver by Lender of any of its rights or remedies under this Note or under any other document evidencing this Note or otherwise shall be a waiver of any other right or remedy of Lender; no delay or omission in the exercise or enforcement by Lender of any right or remedy shall be construed as a waiver of any right or remedy of Lender; and no exercise or enforcement of any such right or remedy shall be held to exhaust any right or remedy of Lender. Borrower waives presentment for payment, demand, notice of non-payment and protest; and any endorsers, guarantors or sureties of this Note agree that the time for payment may be extended without notice to or consent by them. This Note is being executed and delivered, and is intended to be performed, in the State of California. Any controversy or claim arising out of or relating to this Note, or the making, performance, breach or interpretation of it, including tort claims, shall be adjudicated in the courts located in Orange County, California, which shall be the exclusive venue and jurisdiction for all claims arising out of or related to this Note. If any suit or other proceeding is brought to enforce this Note, or to collect all or any portion of it, including interest, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Note, or if the holder of this Note sues to protect, preserve or enforce its rights or position, the prevailing party shall recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it may be entitled. "Borrower" Hospitality Marketing Consultants, LLC, a California limited liability company By: _____________________________ Mokhtar Ramadan, President 2 EX-10.2 5 EXHIBIT 10.2 EXHIBIT 10.2 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] SPRINT CUSTOM NETWORK SERVICE AGREEMENT This Custom Network Service Arrangement by and between SPRINT COMMUNICATIONS COMPANY L.P., a Delaware limited partnership, 8140 Ward Parkway, Kansas City, Missouri 64114 ("Sprint") and Hospitality Marketing Consultants, LLC ("Customer") establishes certain interstate and international Discounts as well as related terms and conditions governing Sprint's provision of telecommunications services to Customer. The Discounts ("Discounts") set forth in this Agreement apply to Customer's Network Services and other services eligible to receive Discounts as specified herein. Sprint is a telecommunications common carrier providing interstate and international services pursuant to tariffs on file with the Federal Communications Commission (F.C.C.) and intrastate services pursuant to tariffs on file with the various state regulatory commissions (collectively referred to as "Tariff(s)") and from time to time Sprint amends the Tariffs. Sprint provides enhanced voice and data telecommunications services pursuant to written agreements. Sprint and Customer are referred to collectively herein as the "Parties" and individually as a "Party". 1. TERM. The term ("Initial Term") of this Agreement is [REDACTED*], commencing on the first day of the first complete billing month following execution of this Agreement by both parties ("Commencement Date"). At the conclusion of the Initial Term, Customer may renew the Agreement for [REDACTED*] prior to the conclusion of the Initial Term or prior to the conclusion of the then current Renewal Term, as the case my be. The Initial Term and, if applicable, the Renewal Term(s) will be referred to collectively hereinafter as the Term. Upon the expiration or other termination of this Agreement Sprint will provide services to Customer at then current Tariff rates. 2. NETWORK SERVICE CHARGES. Subject to all of the conditions and limitations set forth in this Agreement and Sprint F.C.C. Tariff No. 12, Customer will receive the Network Service charges set forth in Attachment A to the Agreement. 3. SERVICE COMMITMENT. a. During each Contract Year of the Term Customer [REDACTED*]. Contract Year is defined as the twelve month billing, period starting on the Commencement Date and any anniversary thereof. MSC Contributory Services are defined as [REDACTED*] calculated after all available Discounts. If Customer fails to satisfy the Minimum Annual Commitment; in addition to all other applicable charges, [REDACTED*]. b. If Customer terminates this Agreement or ceases to use Network Services to any material extent, except as provided in Section 5.f. below, SPRINT PROPRIETARY INFORMATION - RESTRICTED 1 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] [REDACTED*]. Sprint will bill Customer for such amount on its next regular invoice and such amount will be due and payable according to the payment terms contained in the Tariff. c. Beginning with the first month following [REDACTED*], Customer [REDACTED*]. Second MAC Contract Year is defined as the twelve month billing period starting on the day following [REDACTED*] and any anniversary thereof Second MAC Contributory Services are defined as [REDACTED*]. Customer's Second MAC Contributory Services Usage Charges during [REDACTED*] shall contribute to Customer's Second MAC for Contract Year One. If Customer fails to satisfy the Second MAC, in addition to all other applicable charges, Customer [REDACTED*]. SECOND MAC CONTRACT YEAR ONE: Actual Second MAC Contributory Services USAGE MINUTES SHORTFALL LIABILITY [REDACTED*] [REDACTED*] *If, during Second MAC Contract Year One, Customer's Actual Second MAC Contributory Services Usage Minutes [REDACTED*]. SECOND MAC CONTRACT YEAR TWO: Actual Second MAC Contributory Services USAGE MINUTES SHORTFALL LIABILITY [REDACTED*] [REDACTED*] **If, during Second MAC Contract Year Two, Customer's Actual Second MAC Contributory Services Usage Minutes are [REDACTED*]. d. If Customer terminates this Agreement or ceases to use Network Services to any material extent in Second MAC Contract Year One, except as provided in Section 5.f. below, Customer will pay to Sprint a termination liability calculated as follows: [REDACTED*]. Sprint will bill Customer for such amount on its next regular invoice and such amount will be due and payable according to the payment terms contained in the Tariff. e. If Customer terminates the Agreement or ceases to use Network Services to any material extent in Second MAC Contract Year Two, except as provided in Section 5.f. below, Customer will pay to Sprint a termination liability calculated as follows: [REDACTED*]. Sprint will bill Customer SPRINT PROPRIETARY INFORMATION - RESTRICTED 2 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] for such amount on its next regular invoice and such amount will be due and payable according to the payment terms contained in the Tariff. f. If Customer elects to purchase a new Service offering made available by Sprint during the Term as a direct substitute and replacement Service for any MSC Contributory Service, Customer's Service Usage Charges for its use of the new Service will contribute toward Customer's Minimum Service Commitment. 4. PAYMENT TERMS. All amounts stated on each monthly invoice will be due and payable upon receipt. The cost of services provided is exclusive of any applicable sales, use, excise and like taxes, which will be separately stated and included on each monthly invoice. All valid charges for services provided that remain unpaid by Customer for a period of sixty (60) days or more after the date of the invoice will be subject to interest from the date of the invoice at a rate of [REDACTED*], or the maximum rate allowable by applicable law. If Customer fails to pay for services in accordance with the terms of the Tariffs and the terms set forth in this Section, Customer will not receive Discounts. In the event Customer, in good faith, disputes Sprint's computation of amounts due and owing within all applicable legal periods of limitation, Customer may withhold payment of the disputed amount. Customer must pay all charges which are not in dispute in accordance with the payment terms set forth in this Section. An amount will not be considered "in dispute" until Customer has provided Sprint with written documentation explaining the disputed amount. Customer must cooperate with Sprint to resolve any dispute expeditiously. All disputed amounts are payable immediately upon Sprint's written denial of the dispute. 5. OTHER TERMS AND CONDITIONS. a. Terms used in this Agreement are defined in Sprint F.C.C. Tariff No. 12. All Standard Custom Network Service Arrangement terms and conditions in Sprint F.C.C. Tariff No. 12 apply to this Agreement. Rates, charges and discounts for call types, service elements, features and other products and services not in this Agreement will be those provided under the applicable Sprint base service tariff or public price list. Additional terms and conditions relating to services provided to Customer are contained in the applicable tariffs. The terms and conditions of any Tariff and/or other discount or incentive programs apply to the services and discounts or incentives available under such Tariff or program. In order to receive Term Plan or other incentive discounts Customer must execute the applicable agreements. Any terms and conditions applicable to such discounts and/or programs which Customer elects to participate in are in addition to the terms and conditions applicable to the Discounts. SPRINT PROPRIETARY INFORMATION - RESTRICTED 3 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] b. This Agreement and any information concerning its terms, conditions and/or Discounts are the confidential and proprietary information of Sprint and shall be governed by the Agreement for Use and Nondisclosure of Confidential Information executed by Customer and Sprint, dated ____________________, the term of which is extended to be coterminous with the Term of this Agreement. c. All notices, requests or other communications arising out of disputes hereunder shall be in writing to the addresses of the parties shown below the parties' signatures at the end of the Agreement. d. Customer must satisfy the following conditions during the Term: (i) Sprint must be Customer's "Primary Carrier" and, as such, award (1) [REDACTED*]. If, during any billing month of the Term, Customer [REDACTED*], Sprint may, upon prior written notice to Customer, revise Customer's Network Service charges under this Agreement. If, during any billing month of the Term, Customer [REDACTED*], Sprint may, at its option, [REDACTED*] as detailed in Sections 3.d. and 3.e. above. (ii) At least [REDACTED*] usage must be switched Service usage. If Customer fails to satisfy this condition during any billing month of the Term, Sprint may, upon prior written notice to Customer, revise Customer's Network Service charges under this Agreement. (iii) At least [REDACTED*] usage must be Off-Peak Service usage. If Customer fails to satisfy this condition during any billing month of the Term, Sprint may, upon prior written notice to Customer, revise Customer's Network Service charges under this Agreement. (iv) Customer's average completed call duration for its Sprint International Access Service [REDACTED*]. If Customer fails to satisfy this condition during any billing month of the Term, Sprint may, upon prior written notice to Customer, revise Customer's Network Service charges under this Agreement. (v) During any Second MAC Contract Year, a [REDACTED*]. If Customer fails to satisfy this condition during any Second MAC Contract Year, the Credits for which Customer is eligible will be reduced as set forth in Section 6 of Attachment A. e. Neither party may assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the other party, which the other party may grant or withhold in its sole discretion. SPRINT PROPRIETARY INFORMATION - RESTRICTED 4 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Notwithstanding the foregoing, the parties may assign their rights and benefits and delegate their duties and obligations under this Agreement without the consent of the other party to, in the case of Customer, any Customer Affiliate, PROVIDED THAT the performance of any Customer Affiliate assignee is guaranteed by Customer, and in the case of Sprint, to any entity one hundred percent (100%) owning, owned by or under common ownership with Sprint, PROVIDED THAT the performance of any Sprint assignee is guaranteed by Sprint. Any prohibited assignment or delegation shall be null and void. f. Customer agrees to provide prompt written notice to Sprint of any material failure by Sprint to provide Network Services as set forth in the tariffs. If Sprint fails to cure such failure within a reasonable time, Customer may terminate this Agreement on thirty (30) days' written notice to Sprint. A material failure by Sprint shall not include a failure caused by the local exchange carrier, Customer premise equipment, Customer or any other cause beyond the control of Sprint. g. During [REDACTED*], Sprint and Customer will meet to review the status of Customer's Minimum Service Commitment, growth of its MSC Contributory Services Usage Charges and the rates provided under this Agreement. If Sprint and Customer agree that revisions to this Agreement would be advantageous to both parties, then Sprint and Customer will cooperate in efforts to develop a mutually agreeable amendment that will satisfy the concerns of both parties and comply with all applicable legal and regulatory requirements. 6. ENTIRE AGREEMENT. This Agreement shall constitute the entire understanding between Sprint and Customer regarding Discounts on Network Services and shall supersede all prior proposals, agreements, understandings, negotiations and discussions, whether oral or written, between the parties relating to the Network Services. Customer is not relying upon any representations or promises made by or on behalf of Sprint in entering into this Agreement. In order to become effective this Agreement must be duly executed by an authorized officer of Customer and delivered to Sprint on or January 15, 1997, and thereafter executed by an officer of Sprint. All modifications, interlineations, additions, supplements and/or other changes to this Agreement are subject to written acceptance at Sprint Corporate Headquarters. HOSPITALITY MARKETING SPRINT COMMUNICATIONS CONSULTANTS, LLC COMPANY L.P. By: _____________________________ By: ____________________________ Name: ____________________________ Name: __________________________ (Print/Type) (Print/Type) SPRINT PROPRIETARY INFORMATION - RESTRICTED 5 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Title: ____________________________ Title: __________________________ Date: ____________________________ Date: __________________________ Address for Notice: __________________ Address for Notice: ___________________________________ 3100 Cumberland Circle ___________________________________ Atlanta, GA 30339 SPRINT PROPRIETARY INFORMATION - RESTRICTED 6 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] ATTACHMENT A NETWORK SERVICE CHARGES The following rates, charges and discounts are in lieu of and supersede any promotions or discounts which may be available under applicable Tariffs, including any applicable Tariff Term Plan discount. Consistent with FCC and other regulatory requirements, Sprint will file in its Tariffs a Customer Specific Tariff Option ("CNSA Option") accurately reflecting these rates and charges. Rates and charges for service elements not specified herein, shall be the applicable tariffed rate. Except for those Services specified as "fixed", Sprint reserves the right to modify the underlying tariffed rates (or list price in the case of a non-tariffed service) against which a specified discount may be applied. Additionally, Sprint reserves the right to pass on to Customer any tax, levy, or other surcharge which Sprint is obligated to pay to a governmental authority or other third-party (e.g. foreign P.T.T.), where: (1) such obligation is imposed by valid and lawful legislation or other regulation, and (2) such obligation arises directly out of the use of Sprint's Services pursuant to this Agreement. 1. VPN PREMIERE DISCOUNT. During each billing month of the Term Customer will receive the following Net Effective Usage rates and Discounts on its VPN Premiere Service: a. Customer will be charged a fixed Net Effective Usage rate in the applicable amount from the table below for its interstate VPN Premiere (including VPN Premiere FONCARD) Service Usage Charges. RATE PER MINUTE ON-ON ON-OFF OFF-ON OFF-OFF [REDACTED*] b. Customer will be charged a fixed Net Effective Usage rate in the applicable amount from the table below for its intrastate VPN Premiere (including VPN Premiere FONCARD) Service Usage Charges in the following states. RATE PER MINUTE STATE ON-ON ON-OFF OFF-ON OFF-OFF [REDACTED*] c. Customer will receive [REDACTED*], on its intrastate VPN Premiere (including VPN Premiere FONCARD) Service Usage Charges, except in those states listed in 1.b. above. SPRINT PROPRIETARY INFORMATION - RESTRICTED 7 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] d. Customer will receive [REDACTED*], on its domestic and international (domestic origination) VPN Premiere FONCARD per call surcharge. e. Customer will be charged a fixed Net Effective Usage rate in the applicable amount from the table below on its international (domestic origin) VPN Premiere (including VPN Premiere FONCARD) Service Usage Charges to the following countries. COUNTRY RATE PER MINUTE Albania [REDACTED*] Algeria [REDACTED*] American Samoa [REDACTED*] Andorra [REDACTED*] Angola [REDACTED*] Anguilla [REDACTED*] Antigua [REDACTED*] Argentina [REDACTED*] Armenia [REDACTED*] Aruba [REDACTED*] Ascension Island [REDACTED*] Australia [REDACTED*] Austria [REDACTED*] Azerbaijan [REDACTED*] Bahamas [REDACTED*] Bahrain [REDACTED*] Bangladesh [REDACTED*] Barbados [REDACTED*] Belarus [REDACTED*] Belgium [REDACTED*] Belize [REDACTED*] Benin [REDACTED*] Bermuda [REDACTED*] Bhutan [REDACTED*] Bolivia [REDACTED*] Bosnia-Herzegovinia [REDACTED*] Botswana [REDACTED*] Brazil [REDACTED*] British Virgin Island [REDACTED*] Brunei [REDACTED*] Bulgaria [REDACTED*] Burkina Faso [REDACTED*] Burundi [REDACTED*] Cambodia [REDACTED*] Cameroon [REDACTED*] Canada [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 8 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Cape Verde Islands [REDACTED*] Cayman Islands [REDACTED*] Central African Rep [REDACTED*] Chad Republic [REDACTED*] Chile [REDACTED*] China [REDACTED*] Colombia [REDACTED*] Comoros [REDACTED*] Congo Republic [REDACTED*] Cook Island [REDACTED*] Costa Rica [REDACTED*] Croatia [REDACTED*] Cuba [REDACTED*] Cyprus [REDACTED*] Czechoslovakia [REDACTED*] Denmark [REDACTED*] Diego Garcia [REDACTED*] Djibouti [REDACTED*] Dominican Republic [REDACTED*] Dominica [REDACTED*] Ecuador [REDACTED*] Egypt [REDACTED*] El Salvador [REDACTED*] Equatorial Guinea [REDACTED*] Eritrea [REDACTED*] Estonia [REDACTED*] Ethiopia [REDACTED*] Faeroe Islands [REDACTED*] Falkland Islands [REDACTED*] Fiji Islands [REDACTED*] Finland [REDACTED*] France [REDACTED*] French Guiana [REDACTED*] French Polynesia [REDACTED*] Gabon [REDACTED*] Gambia [REDACTED*] Georgia [REDACTED*] Germany [REDACTED*] Ghana [REDACTED*] Gibraltar [REDACTED*] Greece [REDACTED*] Greenland [REDACTED*] Grenada [REDACTED*] Guadeloupe [REDACTED*] Guam [REDACTED*] Guantanamo [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 9 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Guatemala [REDACTED*] Guinea [REDACTED*] Guinea-Bissau [REDACTED*] Guyana [REDACTED*] Haiti [REDACTED*] Honduras [REDACTED*] Hong Kong [REDACTED*] Hungary [REDACTED*] Iceland [REDACTED*] India [REDACTED*] Indonesia [REDACTED*] Iran [REDACTED*] Iraq [REDACTED*] Ireland [REDACTED*] Israel [REDACTED*] Italy [REDACTED*] Ivory Coast [REDACTED*] Jamaica [REDACTED*] Japan [REDACTED*] Jordan [REDACTED*] Kazakhstan [REDACTED*] Kenya [REDACTED*] Kiribati [REDACTED*] Kuwait [REDACTED*] Kyrgyzstan [REDACTED*] Laos [REDACTED*] Latvia [REDACTED*] Lebanon [REDACTED*] Lesotho [REDACTED*] Liberia [REDACTED*] Libya [REDACTED*] Liechtenstein [REDACTED*] Lithuania [REDACTED*] Luxembourg [REDACTED*] Macao [REDACTED*] Macedonian [REDACTED*] Madagascar [REDACTED*] Malawi [REDACTED*] Malaysia [REDACTED*] Maldives [REDACTED*] Mali Republic [REDACTED*] Malta [REDACTED*] Marshall Islands [REDACTED*] Mauritania [REDACTED*] Mauritius [REDACTED*] Mayotte Island [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 10 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Mexico [REDACTED*] Micronesia [REDACTED*] Moldavia [REDACTED*] Monaco [REDACTED*] Mongolia [REDACTED*] Montserrat [REDACTED*] Morocco [REDACTED*] Mozambique [REDACTED*] Myanmar [REDACTED*] Namibia [REDACTED*] Nauru [REDACTED*] Nepal [REDACTED*] Netherlands [REDACTED*] Netherlands Antilles [REDACTED*] Nevis Island [REDACTED*] New Caledonia [REDACTED*] New Zealand [REDACTED*] Nicaragua. [REDACTED*] Niger Republic [REDACTED*] Nigeria [REDACTED*] Niue Island [REDACTED*] North Korea [REDACTED*] Norway [REDACTED*] Oman [REDACTED*] Pakistan [REDACTED*] Palau Republic [REDACTED*] Panama [REDACTED*] Papua New Guinea [REDACTED*] Paraguay [REDACTED*] Peru [REDACTED*] Philippines [REDACTED*] Poland [REDACTED*] Portugal [REDACTED*] Qatar [REDACTED*] Reunion Island [REDACTED*] Romania [REDACTED*] Russia [REDACTED*] Rwanda [REDACTED*] Saint Helena [REDACTED*] Saint Kitts [REDACTED*] Saint Lucia [REDACTED*] Saint Pierre [REDACTED*] Saint Vincent [REDACTED*] Saipan [REDACTED*] San Marino [REDACTED*] Sao Tome [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 11 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Saudi Arabia [REDACTED*] Senegal [REDACTED*] Seychelles Island [REDACTED*] Sierra Leone [REDACTED*] Singapore [REDACTED*] Slovakia [REDACTED*] Slovenia [REDACTED*] Solomon Island [REDACTED*] Somalia [REDACTED*] South Africa [REDACTED*] South Korea [REDACTED*] Spain [REDACTED*] Sri Lanka [REDACTED*] Sudan [REDACTED*] Suriname [REDACTED*] Swaziland [REDACTED*] Sweden [REDACTED*] Switzerland [REDACTED*] Syria [REDACTED*] Taiwan [REDACTED*] Tajikstan [REDACTED*] Tanzania [REDACTED*] Thailand [REDACTED*] Togo [REDACTED*] Tonga [REDACTED*] Trinidad & Tobago [REDACTED*] Tunisia [REDACTED*] Turkey [REDACTED*] Turkmenistan [REDACTED*] Turks & Caicos [REDACTED*] Tuvalu [REDACTED*] Uganda [REDACTED*] Ukraine [REDACTED*] United Arab Emirates [REDACTED*] United Kingdom [REDACTED*] Uruguay [REDACTED*] Uzbekistan [REDACTED*] Vanuatu [REDACTED*] Vatican City [REDACTED*] Venezuela [REDACTED*] Vietnam [REDACTED*] Wallis & Futuna [REDACTED*] Western Samoa [REDACTED*] Yemen Arab Republic [REDACTED*] Yugoslavia [REDACTED*] Zaire [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 12 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Zambia [REDACTED*] Zimbabwe [REDACTED*] f. FPN Premiere FONCARD Service Usage is considered off-net originating. 2. TOLL FREE DISCOUNT. During each billing month of the Term Customer will receive the following Net Effective Usage rates and Discounts on its Premiere Toll Free Service: a. Customer will be charged a fixed Net Effective Usage rate in the applicable amount from the table below for its interstate Premiere Toll Free Service Usage Charges. RATE PER MINUTE DEDICATED SWITCHED [REDACTED*] [REDACTED*] b. Customer will be charged a fixed Net Effective Usage rate in the applicable amount from the table below for its intrastate Premiere Toll Free Service Usage Charges in the following states. RATE PER MINUTE STATE DEDICATED SWITCHED [REDACTED*] c. Customer will receive [REDACTED*], on its intrastate Premiere Toll Free Service Usage Charges, except in those states listed in 2.b. above: 3. INTERNATIONAL TOLL FREE SERVICE DISCOUNT. Customer will receive [REDACTED*], on its International Toll Free Service Usage Charges. 4. SPRINT INTERNATIONAL ACCESS DISCOUNT. a. Customer will be charged a fixed Net Effective Usage Rate based on the sum of (i) the applicable rate from Table A for the country from which a particular call is made and (ii) the applicable rate from Table B for the country to which a particular call is made for its Sprint International Access Service Usage Charges. SPRINT PROPRIETARY INFORMATION - RESTRICTED 13 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] TABLE A COUNTRY RATE PER MINUTE Antigua [REDACTED*] Australia [REDACTED*] Bahamas [REDACTED*] Bahrain [REDACTED*] Barbados [REDACTED*] Belgium [REDACTED*] Bermuda [REDACTED*] Bolivia [REDACTED*] Brazil [REDACTED*] Canada [REDACTED*] Cayman Islands [REDACTED*] Chile [REDACTED*] China [REDACTED*] Colombia [REDACTED*] Costa Rica [REDACTED*] Cyprus [REDACTED*] Denmark [REDACTED*] Dominican Republic [REDACTED*] Ecuador [REDACTED*] El Salvador [REDACTED*] Finland [REDACTED*] France [REDACTED*] Germany [REDACTED*] Guam [REDACTED*] Guatemala [REDACTED*] Hong Kong [REDACTED*] Indonesia [REDACTED*] Ireland [REDACTED*] Israel [REDACTED*] Italy [REDACTED*] Japan [REDACTED*] Liechtenstein [REDACTED*] Luxembourg [REDACTED*] Malaysia [REDACTED*] Mexico [REDACTED*] Monaco [REDACTED*] Netherlands [REDACTED*] Netherlands Antilles [REDACTED*] New Zealand [REDACTED*] Nicaragua [REDACTED*] Norway [REDACTED*] Panama [REDACTED*] Philippines [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 14 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Portugal [REDACTED*] Saipan [REDACTED*] San Marino [REDACTED*] Singapore [REDACTED*] South Africa [REDACTED*] South Korea [REDACTED*] Spain [REDACTED*] Sweden [REDACTED*] Switzerland [REDACTED*] Taiwan [REDACTED*] Thailand [REDACTED*] Trinidad & Tobago [REDACTED*] Turkey [REDACTED*] United Kingdom [REDACTED*] United States [REDACTED*] Vatican City [REDACTED*] Venezuela [REDACTED*] TABLE B COUNTRY RATE PER MINUTE Albania [REDACTED*] Algeria [REDACTED*] American Samoa [REDACTED*] Andorra [REDACTED*] Angola [REDACTED*] Anguilla [REDACTED*] Antigua [REDACTED*] Argentina [REDACTED*] Armenia [REDACTED*] Aruba [REDACTED*] Ascension Island [REDACTED*] Australia [REDACTED*] Austria [REDACTED*] Azerbaijan [REDACTED*] Bahamas [REDACTED*] Bahrain [REDACTED*] Bangladesh [REDACTED*] Barbados [REDACTED*] Belarus [REDACTED*] Belgium [REDACTED*] Belize [REDACTED*] Benin [REDACTED*] Bermuda [REDACTED*] Bhutan [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 15 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Bolivia [REDACTED*] Bosnia-Herzegovinia [REDACTED*] Botswana [REDACTED*] Brazil [REDACTED*] British Virgin Islands [REDACTED*] Brunei [REDACTED*] Bulgaria [REDACTED*] Burkina Faso [REDACTED*] Burundi [REDACTED*] Cambodia [REDACTED*] Cameroon [REDACTED*] Canada [REDACTED*] Cape Verde Islands [REDACTED*] Cayman Islands [REDACTED*] Central African Rep [REDACTED*] Chad Republic [REDACTED*] Chile [REDACTED*] China [REDACTED*] Colombia [REDACTED*] Comoros [REDACTED*] Congo Republic [REDACTED*] Cook Island [REDACTED*] Costa Rica [REDACTED*] Croatia [REDACTED*] Cuba [REDACTED*] Cyprus [REDACTED*] Czechoslovakia [REDACTED*] Denmark [REDACTED*] Diego Garcia [REDACTED*] Djibouti [REDACTED*] Dominican Republic [REDACTED*] Dominica [REDACTED*] Ecuador [REDACTED*] Egypt [REDACTED*] El Salvador [REDACTED*] Equatorial Guinea [REDACTED*] Eritrea [REDACTED*] Estonia [REDACTED*] Ethiopia [REDACTED*] Faeroe Islands [REDACTED*] Falkland Islands [REDACTED*] Fiji Islands [REDACTED*] Finland [REDACTED*] France [REDACTED*] French Guiana [REDACTED*] French Polynesia [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 16 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Gabon [REDACTED*] Gambia [REDACTED*] Georgia [REDACTED*] Germany [REDACTED*] Ghana [REDACTED*] Gibraltar [REDACTED*] Greece [REDACTED*] Greenland [REDACTED*] Grenada [REDACTED*] Guadeloupe [REDACTED*] Guam [REDACTED*] Guantanamo [REDACTED*] Guatemala [REDACTED*] Guinea [REDACTED*] Guinea-Bissau [REDACTED*] Guyana [REDACTED*] Haiti [REDACTED*] Honduras [REDACTED*] Hong Kong [REDACTED*] Hungary [REDACTED*] Iceland [REDACTED*] India [REDACTED*] Indonesia [REDACTED*] Iran [REDACTED*] Iraq [REDACTED*] Ireland [REDACTED*] Israel [REDACTED*] Italy [REDACTED*] Ivory Coast [REDACTED*] Jamaica [REDACTED*] Japan [REDACTED*] Jordan [REDACTED*] Kazakhstan [REDACTED*] Kenya [REDACTED*] Kiribati [REDACTED*] Kuwait [REDACTED*] Kyrgyzstan [REDACTED*] Laos [REDACTED*] Latvia [REDACTED*] Lebanon [REDACTED*] Lesotho [REDACTED*] Liberia [REDACTED*] Libya [REDACTED*] Liechtenstein [REDACTED*] Lithuania [REDACTED*] Luxembourg [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 17 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Macao [REDACTED*] Macedonian [REDACTED*] Madagascar [REDACTED*] Malawi [REDACTED*] Malaysia [REDACTED*] Maldives [REDACTED*] Mali Republic [REDACTED*] Malta [REDACTED*] Marshall Islands [REDACTED*] Mauritania [REDACTED*] Mauritius [REDACTED*] Mayotte Island [REDACTED*] Mexico [REDACTED*] Micronesia [REDACTED*] Moldavia [REDACTED*] Monaco [REDACTED*] Mongolia [REDACTED*] Montserrat [REDACTED*] Morocco [REDACTED*] Mozambique [REDACTED*] Myanmar [REDACTED*] Namibia [REDACTED*] Nauru [REDACTED*] Nepal [REDACTED*] Netherlands [REDACTED*] Netherlands Antilles [REDACTED*] Nevis Island [REDACTED*] New Caledonia [REDACTED*] New Zealand [REDACTED*] Nicaragua [REDACTED*] Niger Republic [REDACTED*] Nigeria [REDACTED*] Niue Island [REDACTED*] North Korea [REDACTED*] Norway [REDACTED*] Oman [REDACTED*] Pakistan [REDACTED*] Palau Republic [REDACTED*] Panama [REDACTED*] Papua New Guinea [REDACTED*] Paraguay [REDACTED*] Peru [REDACTED*] Philippines [REDACTED*] Poland [REDACTED*] Portugal [REDACTED*] Qatar [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 18 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] Reunion Island [REDACTED*] Romania [REDACTED*] Russia [REDACTED*] Rwanda [REDACTED*] Saint Helena [REDACTED*] Saint Kitts [REDACTED*] Saint Lucia [REDACTED*] Saint Pierre [REDACTED*] Saint Vincent [REDACTED*] Saipan [REDACTED*] San Marino [REDACTED*] Sao Tome [REDACTED*] Saudi Arabia [REDACTED*] Senegal [REDACTED*] Seychelles Island [REDACTED*] Sierra Leone [REDACTED*] Singapore [REDACTED*] Slovakia [REDACTED*] Slovenia [REDACTED*] Solomon Island [REDACTED*] Somalia [REDACTED*] South Africa [REDACTED*] South Korea [REDACTED*] Spain [REDACTED*] Sri Lanka [REDACTED*] Sudan [REDACTED*] Suriname [REDACTED*] Swaziland [REDACTED*] Sweden [REDACTED*] Switzerland [REDACTED*] Syria [REDACTED*] Taiwan [REDACTED*] Tajikstan [REDACTED*] Tanzania [REDACTED*] Thailand [REDACTED*] Togo [REDACTED*] Tonga [REDACTED*] Trinidad & Tobago [REDACTED*] Tunisia [REDACTED*] Turkey [REDACTED*] Turkmenistan [REDACTED*] Turks & Caicos [REDACTED*] Tuvalu [REDACTED*] Uganda [REDACTED*] Ukraine [REDACTED*] United Arab Emirates [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 19 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] United Kingdom [REDACTED*] United States [REDACTED*] Uruguay [REDACTED*] Uzbekistan [REDACTED*] Vanuatu [REDACTED*] Vatican City [REDACTED*] Venezuela [REDACTED*] Vietnam [REDACTED*] Wallis & Futuna [REDACTED*] Western Samoa [REDACTED*] Yemen Arab Republic [REDACTED*] Yugoslavia [REDACTED*] Zaire [REDACTED*] Zambia [REDACTED*] Zimbabwe [REDACTED*] b. Customer will receive [REDACTED*] for its Sprint International Access Service Usage Charges. c. Customer will receive [REDACTED*], on its Sprint International Access per call surcharges. d. Customer will not be issued actual FONCARDs that would typically be issued with this Service. Instead, Customer will create and distribute its own card and carrier ("Customer Card") which shall contain the appropriate toll free numbers required to utilize this Service. The Customer Card must contain the Sprint logo in conformity with Sprint's written guidelines, and Customer must obtain Sprint's written approval of the Customer Card prior to its production and distribution. Sprint is not liable for any costs associated with the Customer Cards, including but not limited to, any costs associated with production costs necessary to correct or change any toll free number printed thereon. Customer's members to whom the Customer Cards are distributed are the sole and exclusive customers of Customer. For the Term of this Agreement and the two years thereafter, Sprint will not solicit Customer's customers as a result of Sprint identifying such customers by virtue of the relationship of the parties in this Agreement. e. The rates described in subsection 4.a. above are [REDACTED*]. However, as stated herein, Sprint reserves the right to pass on to Customer any tax, levy, or other surcharge which Sprint is obligated to pay to a governmental authority or other third-party (e.g. foreign P.T.T.), where: (1) such obligation is imposed by valid and lawful legislation or other regulation, and (2) such obligation arises directly out of the use of Sprint's Services pursuant to this Agreement. SPRINT PROPRIETARY INFORMATION - RESTRICTED 20 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] f. Using its standard fraud detection capabilities, Sprint shall set detection parameters for calling card abuse in consultation with Customer. [REDACTED*]. Customer agrees that unauthorized use of a card code resulting from calling card abuse by a Customer employee, an authorized card holder, or any other person (such as a relative or acquaintance) to whom access to a card code is intentionally permitted or facilitated by a Customer employee or authorized card holder, does not constitute fraudulent use. During the Term Sprint's total liability for fraud under this subsection [REDACTED*]. 5. INSTALL WAIVERS. Sprint will waive: a. [REDACTED*] on Sprint provided, domestic, voice service T-1access lines installed during the Term. Access lines installed under subsection a. above are subject to a 24 month continuous use requirement. If Customer disconnects any access line receiving an installation waiver prior to the conclusion of the minimum required continuous use period, Customer must pay a prorated portion of the waived installation charges based upon the number of months remaining in the period. 6. CREDITS a. Following the conclusion of the Second MAC Contract Year One, Sprint will issue an INCREMENTAL Credit as set forth in the table below based upon Customer's Second MAC Contributory Services Usage Minutes and Customer's compliance with Section 5.d.v) of the Agreement. The Credit will be applied in the billing month following the conclusion of the Second MAC Contract Year One. Actual Second MAC Contributory SERVICES USAGE MINUTES INCREMENTAL USAGE CREDIT [REDACTED*] [REDACTED*] If Customer's Second MAC Contributory Services Usage is not in compliance with Section 5.d.v) of the Agreement, Sprint will issue an INCREMENTAL Credit as set forth in the table below based upon Customer's Second MAC Contributory Services Usage Charges. The Credit will be applied in the billing month following the conclusion of the Second MAC Contract Year One. Actual Second MAC Contributory SERVICES USAGE MINUTES INCREMENTAL USAGE CREDIT [REDACTED*] [REDACTED*] SPRINT PROPRIETARY INFORMATION - RESTRICTED 21 [*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.] b. Following the conclusion of the Second MAC Contract Year Two and each Second MAC Contract Year during a Renewal Term, Sprint will issue an INCREMENTAL Credit as set forth in the table below based upon Customer's Second MAC Contributory Services Usage Minutes and Customer's compliance with Section 5.d.v) of the Agreement. The Credit will be applied in the billing month following the conclusion of the Second MAC Contract Year Two. Actual Second MAC Contributory SERVICES USAGE MINUTES INCREMENTAL USAGE CREDIT [REDACTED*] [REDACTED*] If Customer's Second MAC Contributory Services Usage is not in compliance with Section 5.d.v) of the Agreement, Sprint will issue an INCREMENTAL Credit as set forth in the table below based upon Customer's Second MAC Contributory Services Usage Charges. The Credit will be applied in the billing month following the conclusion of the Second MAC Contract Year Two. Actual Second MAC Contributory SERVICES USAGE MINUTES INCREMENTAL USAGE CREDIT [REDACTED*] [REDACTED*] 7. ACCESS. a. Customer will receive [REDACTED*], on its monthly recurring Sprint provided, domestic, voice service T-1 access line charges (not including ACF, COC and other access related charges) for access lines installed for a two year or longer order term during the Term. b. Sprint will [REDACTED*]. c. Sprint will [REDACTED*]. SPRINT PROPRIETARY INFORMATION - RESTRICTED 22 EX-10.3 6 FORM OF INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement) is made as of ____________, 1998 by and between Hospitality Marketing Concepts Inc. a Delaware corporation (the "Corporation"), and _________________ (the "Indemnitee"), _________________________________________ _________________ of the Corporation. R E C I T A L S A. The Corporation and the Indemnitee recognize that the interpretation of statutes, regulations, court opinions and the Corporation's Certificate of Incorporation, as amended, and bylaws in certain circumstances may not provide the Corporation's officers and directors with adequate guidance with respect to the legal risks and potential liabilities to which they may become personally exposed as a result of performing their duties in good faith for the Corporation. B. The Corporation and the Indemnitee are aware of the substantial increase in the number of lawsuits filed against corporate officers and directors. C. The Corporation and the Indemnitee recognize that the cost of defending against such lawsuits, whether or not meritorious, may impose substantial economic hardship upon the Corporation's officers and directors. D. The Corporation and the Indemnitee recognize that the legal risks, potential liabilities and expenses of defense associated with litigation against officers and directors arising or alleged to arise from the conduct of the affairs of the Corporation are frequently excessive in view of the amount of compensation received by the Corporation's officers and directors, and thus may act as a significant deterrent to the ability of the Corporation to obtain experienced and capable officers and directors. E. Section 145 of the General Corporation Law of the State of Delaware, which sets forth certain provisions relating to the indemnification of officers and directors (among others) of a Delaware corporation by such corporation, is specifically not exclusive of other rights to which those indemnified thereunder may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. F. In order to induce capable persons such as the Indemnitee to serve or continue to serve as officers or directors of the Corporation and to enable them to perform their duties to the Corporation secure in the knowledge that certain expenses and liabilities that may be incurred by them will be borne by the Corporation, the Board of Directors of the Corporation has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Corporation and the Indemnitee in lieu of this Agreement, that the following Agreement is in the best interests of the Corporation and its stockholders. G. The Corporation desires to have the Indemnitee serve or continue to serve as an officer and/or director of the Corporation, and the Indemnitee desires to serve or continue to serve as an officer and/or director of the Corporation provided, and on the express condition, that he is furnished with the indemnity set forth below. A G R E E M E N T NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the Corporation and the Indemnitee agree as follows: 1. CONTINUED SERVICE. Subject to the terms of any written employment agreement between the Indemnitee and the Company, the Indemnitee agrees to serve or continue to serve as a director and/or officer of the Corporation for so long as he is duly elected or appointed or until such time as he resigns in writing. 2. DEFINITIONS. (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought in the name of the Corporation or otherwise and whether of a civil, criminal or administrative or investigative nature, including, but not limited to, actions, suits or proceedings brought under or predicated upon the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, their respective state counterparts or any rule or regulation promulgated thereunder, in which the Indemnitee may be or may have been involved as a party or otherwise by reason of the fact that the Indemnitee is or was a director and/or officer of the Corporation, by reason of any action taken by him or of any inaction on his part while acting as such director and/or officer, or by reason of the fact that he is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether or not he is serving in such capacity at the time any indemnified liability or reimbursable expense is incurred. (b) The term "Expenses" shall include, but shall not be limited to, damages, judgments, fines, settlements and charges, costs, expenses of investigation and expenses of defense of legal actions, suits, proceedings or claims and appeals therefrom, and expenses of appeal, attachment or similar bonds. "Expenses" shall not include any judgments, fines or penalties actually levied against the Indemnitee which the Corporation is prohibited by applicable law from paying. 3. INDEMNIFICATION IN THIRD-PARTY PROCEEDINGS. Subject to Paragraph 8, the Corporation shall indemnify the Indemnitee in accordance with the provisions of this Paragraph 3 if the Indemnitee is a party to, threatened to be made a party to or otherwise involved in, any Proceeding (other than a Proceeding by the Corporation itself to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such Proceeding, provided it is determined, pursuant to Paragraph 7 or by the court before which such action was brought, that 2 the Indemnitee acted in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction or upon a plea of NOLO CONTENDERE or its equivalent shall not, of itself, create a presumption that the Indemnitee did not act in good faith or in a manner that he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his conduct was unlawful. 4. INDEMNIFICATION IN PROCEEDINGS BY OR IN THE NAME OF THE CORPORATION. Subject to Paragraph 8, the Corporation shall indemnify the Indemnitee against all Expenses actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of any Proceeding by or in the name of the Corporation to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, but only if he acted in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification for Expenses shall be made under this Paragraph 4 with respect to any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that the Court of Chancery or the court in which such Proceeding is brought shall determine upon application that despite the adjudication of liability, but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provisions of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including the dismissal of an action without prejudice, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 6. ADVANCES OF EXPENSES. Expenses incurred by the Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance of the determination of such Proceeding at the written request of the Indemnitee, if the Indemnitee shall undertake to repay such amount to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification and shall agree that the Corporation shall be entitled to the right to offset, subject to applicable law, such amounts owed to the Corporation against any salary or other compensation that the Corporation is obligated to pay Indemnitee. 7. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification or advance under Paragraph 3, 4 or 6 shall be made no later than 30 days after receipt of the written request of the Indemnitee therefor, unless a determination is made within said 30-day period by (a) the Board of Directors of the Corporation by a majority vote of a quorum thereof consisting of directors who were not parties to such Proceedings, (b) independent legal counsel in a written opinion (which counsel shall be appointed if such a quorum is not 3 obtainable), or (c) the stockholders of the Corporation, that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3 and 4. The right to indemnification or advances as provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The Corporation shall bear the burden of proving that indemnification or advances are not appropriate. The failure of the Corporation to have made a determination that indemnification or advances are proper in the circumstances shall not be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's Expenses incurred in connection with successfully establishing his right to indemnification or advances, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. 8. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The right to indemnification provided by this Agreement shall not be exclusive of any other rights to which the Indemnitee may be entitled under the Corporation's Certificate of Incorporation, as amended, bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to the Indemnitee even though he may have ceased to be a director or officer, and shall inure to the benefit of the heirs and personal representatives of the Indemnitee. 9. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for a portion of his Expenses actually and reasonably incurred by him in any Proceeding but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such Expenses to which the Indemnitee is entitled. 10. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has otherwise actually received payment (under any insurance policy, the Corporation's Certificate of Incorporation, as amended, bylaws or otherwise) of the amounts otherwise indemnifiable hereunder. 11. SETTLEMENT OF CLAIMS. The Corporation shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without the Corporation's written consent. The Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. Neither the Corporation nor the Indemnitee will unreasonably withhold their consent to any proposed settlement. The Corporation shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial award if the Corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. 12. SEVERABILITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not 4 be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be revised to the extent (and only to the extent) necessary to make it enforceable, valid and legal. 13. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof. 14. NOTICES. The Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give to the Corporation written notice as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to15751 Rockfield Boulevard, Suite 200, Irvine, California 92718, Attention: Chairman of the Board (or at such other address or to the attention of such other person as the Corporation shall designate in writing to the Indemnitee). Notices to the Indemnitee shall be sent to the Indemnitee at the address set forth after his name on the signature page of this Agreement (or at such other addresses the Indemnitee shall designate in writing to the Corporation). HOSPITALITY MARKETING CONCEPTS INC. By:____________________________ Name:________________________ INDEMNITEE _______________________________ ______________________ INDEMNITEE'S ADDRESS: _______________________________ _______________________________ _______________________________ 5 EX-10.4 7 EXHIBIT 10.4 EXHIBIT 10.4 HOSPITALITY MARKETING CONCEPTS INC. 1998 STOCK OPTION PLAN HOSPITALITY MARKETING CONCEPTS INC. 1998 STOCK OPTION PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. On May 15, 1998 the Directors of Hospitality Marketing Concepts Inc. (the "Company") adopted, subject to the approval of shareholders, a stock option plan known as the "1998 Stock Option Plan" (hereinafter referred to as the "Plan"), which permits the grant of Incentive Stock Options and Nonqualified Stock Options. The Plan is designed to comply with the exemption for performance-based compensation provided for in Internal Revenue Code Section 162(m) and the Treasury Regulations promulgated thereunder. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success of the Company and its Subsidiaries by providing incentives to Eligible Individuals that will link their personal interests to the long-term financial success of the Company and its Subsidiaries and to growth in shareholder value. The Plan is designed to provide flexibility to the Company and its Subsidiaries in their ability to motivate, attract, and retain the services of Eligible Individuals upon whose judgment, interest, and special effort the successful conduct of their operations is largely dependent. 1.3 DURATION OF THE PLAN. The Plan commences on the date on which shareholders first approve the Plan, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 10 herein, until all Stock subject to it shall have been purchased or acquired according to the provisions herein. However, in no event may an Option be granted under the Plan on or after the tenth anniversary of the commencement date of the Plan. ARTICLE 2. DEFINITIONS AND CONSTRUCTION 2.1 DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (b) "Board" or "Board of Directors" means the Board of Directors of the Company. (c) "Cause" means the occurrence of any one of the following: 1 (i) The willful and continued failure by a Participant to substantially perform his/her duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Company or any of its Subsidiaries, as the case may be, believes that the Participant has not substantially performed his/her duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or (ii) The Participant's conviction for committing a felony in connection with the employment or service relationship; or (iii) The willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company or any of its Subsidiaries. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief, that his/her action or omission was in the best interest of the Company or any of its Subsidiaries; or (iv) Any event constituting termination for cause in an employment or consulting agreement between the Company or any of its Subsidiaries and the Participant. (d) "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (i) Any Person (other than (1) the Persons who are shareholders of the Company on the date of adoption of the Plan, (2) the Persons who hold options to acquire Stock on such date, (3) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, or (4) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of Stock of the Company), is or becomes the Beneficial Owner, directly or indirectly, of 20% or more of the Voting Securities of the Company; (ii) The Board shall at any time consist of a majority of individuals (the "New Majority") who where elected or appointed Directors of the Company without the approval of a majority of the Directors either (A) in office prior to the election or appointment of the first of the Directors comprising the New Majority, or (B) appointed by or elected with the approval of such Directors; or 2 (iii) The shareholders of the Company approve (A) a plan of complete liquidation of the Company, or (B) an agreement for the sale or disposition of all or substantially all the Company's assets; or (C) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), at least 50% of the combined voting power of the Voting Securities of the Company (or such surviving entity) outstanding immediately after such merger or consolidation. However, in no event shall a Change in Control be deemed to have occurred, with respect to a Participant, if the Participant is part of a purchasing group which consummates the Change in Control transaction. The Participant shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Participant is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than 5% of the combined voting power of the purchasing company or (ii) ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the nonemployee continuing members of the Board). (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee appointed by the Board to administer the Plan pursuant to Article 3 herein. (g) "Common Stock" or "Stock" means the shares of common stock, par value $.001 per share, of the Company. (h) "Company" means Hospitality Marketing Concepts Inc., a Delaware corporation, or any successor thereto. (i) "Eligible Individual" means an employee of the Company or any of its Subsidiaries, including an employee who is an officer or a Director of the Company or any of its Subsidiaries, a Director of the Company or a member of the board of directors or other governing body of any of its Subsidiaries who is not an employee of the Company or any of its Subsidiaries, or a consultant or service provider to the Company or any of its Subsidiaries who, in the opinion of the Committee, can contribute significantly to the growth and profitability of the Company and its Subsidiaries. "Eligible Individual" also may include any other employee, consultant or service provider, identified by the Committee, in special situations involving extraordinary performance, promotion, retention, or recruitment. 3 (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (k) "Fair Market Value" means the closing price of the Stock on a securities exchange, or if the Stock is not traded on an exchange, the average of the highest price and lowest price at which the Stock was traded, as reported on the Nasdaq National Market, on the relevant date, or on the most recent date on which the Stock was traded prior to such date. (l) "Incentive Stock Option" or "ISO" means an Option to purchase Stock, granted to a Participant pursuant to Article 6 herein, which is designated as an incentive stock option and is intended to meet the requirements of Section 422 of the Code. (m) "Nonqualified Stock Option" or "NQSO" means an Option to purchase Stock, granted to a Participant pursuant to Article 6 herein, which is not intended to be an Incentive Stock Option. (n) "Option" or "Options" means an Incentive Stock Option or a Nonqualified Stock Option. (o) "Option Agreement" means an Agreement evidencing an Option granted under Article 6 herein. (p) "Option Value" means, with respect to any Option, the product of (1) the number of shares of Common Stock subject to such Option and (2) the difference between (A) the Fair Market Value of one (1) share of the Stock and (B) the exercise price for such share provided for in the Option Agreement evidencing such Option. (q) "Outside Director" means any Director who qualifies as an "outside director" as that term is defined in Code Section 162(m) and the Treasury Regulations promulgated thereunder. (r) "Participant" means an Eligible Individual who has been granted an Option under the Plan. (s) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. (t) "Plan" means this 1998 Stock Option Plan of the Company, as herein described and as hereafter from time to time amended. 4 (u) "Pooling Transaction" means an acquisition of the Company in a transaction which is intended to be treated as a "pooling of interests" under generally accepted accounting principles. (v) "Subsidiary" means any (1) corporation of which more than 50% (by number of votes) of the combined voting power of outstanding securities is owned, directly or indirectly, by the Company, or (2) any partnership, limited partnership, limited liability company or other unincorporated legal entity in which more than 50% of both the capital interests and the profits interests are owned, directly or indirectly, by the Company. For purposes of the preceding sentence, the term "corporation" shall include any business entity specified in Section 301.7701-2(b)(8) of the Treasury Regulations, as amended from time to time, and any business entity which elects to be classified as a corporation pursuant to Treasury Regulations Section 301.7701-3(a). (w) "Stock" means the Common Stock. (x) "Director" means a member of the Board. (y) "Voting Securities" means the Common Stock or securities of any class or classes of securities of the Company, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the Directors. 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Board or by a committee (the "Committee") consisting of not less than two Directors who shall be appointed from time to time by, and shall serve at the discretion of, the Board. To the extent required to comply with Rule 16b-3 under the Exchange Act, each member of the Committee shall qualify as a "Non-Employee Director" as defined in Rule 16b-3 or any successor definition adopted by the Securities and Exchange Commission or grants of Options made under the Plan will be made in accordance with another available exception, including approval by the full Board or the shareholders. To the extent required to comply with Code Section 5 162(m), each member of the Committee also shall be an Outside Director. 3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full power to construe and interpret the Plan; to establish, amend or waive rules and regulations for its administration; to accelerate the exercisability of any Option; and (subject to the provisions of Article 10 herein) to amend the terms and conditions of any outstanding Option to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Notwithstanding the foregoing, the Committee shall have no authority to take any action to the extent that such action or the Committee's ability to take such action would cause any Option under the Plan to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the Treasury Regulations promulgated thereunder. Also notwithstanding the foregoing, no action of the Committee (other than pursuant to Section 4.3 hereof) may, without the consent of the person or persons entitled to exercise any outstanding Option adversely affect the rights of such person or persons. 3.3 SELECTION OF PARTICIPANTS. The Committee shall have the authority to grant Options under the Plan, from time to time, to such Eligible Individuals as may be selected by it. The Committee shall select Participants from among those who they have identified as being Eligible Individuals. 3.4 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries, its shareholders, employees, and Participants and their estates and beneficiaries, and such determinations and decisions shall not be reviewable. 3.5 DELEGATION OF CERTAIN RESPONSIBILITIES. The Committee may, in its sole discretion, delegate to an officer or officers of the Company the administration of the Plan under this Article 3; provided, however, that no such delegation by the Committee shall be made with respect to the administration of the Plan as it affects officers of the Company or its Subsidiaries and provided further that the Committee may not delegate its authority to correct errors, omissions or inconsistencies in the Plan. The Board or the Committee may delegate to the Chief Executive Officer of the Company its authority under this Article 3 to grant Options to Eligible Individuals who are not officers or Directors of the Company or its Subsidiaries subject to the reporting requirements of Section 16(a) of the Exchange Act. All authority delegated by the Board or the Committee under this Section 3.5 shall be exercised in accordance with the provisions of the Plan and any 6 guidelines for the exercise of such authority that may from time to time be established by the Board or the Committee. 3.6 PROCEDURES OF THE BOARD OR THE COMMITTEE. All determinations of the Board or the Committee with respect to this Plan shall be made by not less than a majority of its members present at the meeting (in person or otherwise) at which a quorum is present. A majority of the entire Board or the Committee shall constitute a quorum for the transaction of business. Any action required or permitted to be taken at a meeting of the Board or the Committee may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Board or the Committee and filed with the minutes for proceedings of the Board or the Committee. Service on the Board or the Committee shall constitute service as a Director of the Company so that members of the Board or the Committee shall be entitled to indemnification, limitation of liability and reimbursement of expenses with respect to their services as members of the Board or the Committee to the same extent that they are entitled under the Company's Certificate of Incorporation and Delaware law for their services as Directors of the Company. 3.7 OPTION AGREEMENTS. Each Option under the Plan shall be evidenced by an Option Agreement which shall be signed by an authorized officer of the Company and by the Participant, and shall contain such terms and conditions as may be approved by the Board or the Committee. Such terms and conditions need not be the same in all cases. 3.8 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Option (including, without limitation, the right of the Board or the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Rule 16b-3 (or any successor rule) under the Exchange Act ("Rule 16b-3"). ARTICLE 4. STOCK SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. The maximum number of shares of Stock that may be made the subject of Options granted under the Plan is One Million Five Hundred Thousand (1,500,000); provided, however, that the maximum number of shares of Stock that may be the subject of Options granted to any Eligible Individual during the term of the Plan may not exceed 250,000 shares. Upon a change in capitalization or authorized shares (as described in Section 4.3) the maximum number of shares shall be adjusted in number and kind pursuant to Section 4.3. The Company shall reserve for the purposes of the Plan, out of its authorized but unissued Common Stock or out of Common Stock held in the Company's treasury, or partly out of each, the number of shares as shall be determined by 7 the Board. Upon the granting of an Option, the number of shares available under Section 4.1 for the granting of further Options shall be reduced by the number of shares in respect of which the Option is granted or denominated. 4.2 LAPSED OPTIONS. If any Option granted under this Plan terminates, expires, or lapses for any reason, any Stock subject to such Option again shall be available for the grant of an Option under the Plan. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, share dividend, split-up, share combination, or other change in or affecting the Company's Common Stock, such adjustment shall be made in the number and class of shares which may be delivered under the Plan, and in the number and class of and/or price of shares subject to outstanding Options, granted under the Plan, as may be determined to be appropriate and equitable by the Board or the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of shares subject to any Option shall always be a whole number. Any adjustment of an Incentive Stock Option under this Section 4.3 shall be made in such a manner so as not to constitute a modification within the meaning of Section 425(h)(3) of the Code. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all individuals who, in the opinion of the Board or the Committee, are Eligible Individuals. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Board or the Committee may from time to time select those Eligible Individuals to whom Options shall be granted and determine the nature and amount of each Option. No individual shall have any right to be granted an Option under this Plan even if previously granted an Option. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Eligible Individuals at any time and from time to time as shall be determined by the Board or the Committee. The Board or the Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of shares subject to Options granted to any Participant. The Board or the Committee may grant any type of option that is permitted by law at the time of grant including, but not limited to, ISOs and NQSOs; provided, however, ISOs may only be granted to Eligible Individuals who are employees or the 8 Company or a Subsidiary at the time of grant. Unless otherwise expressly provided at the time of grant, Options granted under the Plan will be NQSOs. 6.2 LIMITATION ON EXERCISABILITY. The aggregate Fair Market Value (determined as of the date of grant) of the shares of Common Stock issuable pursuant to an ISO under this Plan and under any other plan of the Company, any parent corporation or any Subsidiary of the Company, which are exercisable for the first time by any employee during any calendar year, shall not exceed $100,000. Options for shares of Common Stock which are exercisable for the first time by any employee during any calendar year in excess of $100,000 shall be treated as NQSOs, in accordance with Section 422(d)(i) of the Code. 6.3 OPTION AGREEMENT. Each Option grant shall be evidenced by an Option Agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of shares of Common Stock to which the Option pertains, and such other provisions as the Board or the Committee shall determine. The Option Agreement shall specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Nonqualified Stock Option whose grant is not intended to be subject to the provisions of Code Section 422. 6.4 OPTION PRICE. The purchase price per share of an Option shall be determined by the Board or the Committee but shall not be less than the Fair Market Value of the shares of Common Stock on the date the Option is granted. An Incentive Share Option granted to an employee, who at the time of grant, owns (within the meaning of Section 425(d) of the Code) shares possessing more than 10% of the total combined voting power of all classes of shares of the Company, shall have an exercise price which is at least 110% of the Fair Market Value of the shares of Common Stock subject to the Option. 6.5 DURATION OF OPTIONS. Each Option shall expire at such time as the Board or the Committee shall determine at the time of grant, provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant, and no ISO granted to any individual who owns more than 10% of the Voting Securities of the Company shall be exercisable later than the fifth (5th) anniversary date of its grant. 6.6 EXERCISE OF OPTIONS. Subject to Section 3.8 herein, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Board or the Committee shall in each instance approve, which need not be the same for all Participants. 6.7 PAYMENT. Options shall be exercised by the delivery of 9 a written notice to the Company setting forth the number of shares of Common Stock with respect to which the Option is to be exercised, accompanied by full payment for the Stock. The purchase price upon exercise of any Option shall be payable to the Company in full either (a) in cash or its equivalent, (b) by tendering previously acquired Stock having a Fair Market Value at the time of exercise equal to the total purchase price, (c) by foregoing compensation under rules established by the Board or the Committee, (d) by surrendering fully exerciseable Options having an Option Value at the time of exercise equal to the total purchase price, or (e) by a combination of (a), (b), (c) or (d). The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general purposes. As soon as practicable, after receipt of written notification and payment, the Company shall deliver to the Participant share certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant's name. 6.8 RESTRICTIONS ON SHARE TRANSFERABILITY. The Board or the Committee shall impose such restrictions on any Stock acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable Federal securities law, under the requirements of any securities exchange upon which such Stock is then listed and under any applicable blue sky or state securities laws. 6.9 TERMINATION OF EMPLOYMENT OR SERVICE DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment or service of a Participant is terminated by reason of death, the Participant's outstanding Options may be exercised at any time prior to the expiration date of the Options or within one year after such date of termination of employment or service, whichever period is shorter, but only to the extent that the Participant was entitled to exercise the Options at the date of his termination, by such person or persons as shall have acquired the Participant's rights under the Option pursuant to Article 7 hereof or by will or by the laws of descent and distribution. In the event the employment of a Participant is terminated by reason of disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), the Participant's outstanding Options may be exercised at any time prior to the expiration date of the Options or within one year after such date of termination of employment or service, whichever period is shorter but only to the extent that the Participant was entitled to exercise the Options on the date of his termination. In the event the employment or service of a Participant who is an employee is terminated by reason of retirement, the Participant's outstanding Options may be exercised (subject to Section 3.8 herein) at any time prior to the expiration date of the Options or within 90 days after such date of termination of employment or service, whichever period is shorter, but only to the extent that 10 the Participant was entitled to exercise the Options on the date of his termination. In the case of Incentive Stock Options, the favorable tax treatment prescribed under Section 422 of the Code may not be available if the Options are not exercised within the Code Section 422 prescribed time period after termination of employment for death, disability, or retirement. 6.10 TERMINATION OF EMPLOYMENT OR SERVICE FOR OTHER REASONS. If the employment or service of a Participant shall terminate for any reason other than death, disability, retirement (in the case of an employee) or for Cause, the Participant shall have the right to exercise outstanding Options at any time prior to the expiration date of the Options or within the 90 days after the date of his termination, whichever period is shorter, but only to the extent that the Participant was entitled to exercise the Options at the date of his termination of employment or service. In its sole discretion, the Company may extend the 90 days to up to one year, but in no event beyond the expiration date of the Option. If the employment or service of the Participant shall terminate for Cause, all of the Participant's outstanding Options shall be immediately forfeited back to the Company. 6.11 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 7. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living trust) to whom any Option under the Plan is to be transferred in case of his death before such Option is fully exercised. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Board or the Committee, and will be effective only when filed by the Participant in writing with the Board or the Committee during his lifetime. In the absence of any such designation or if all designated beneficiaries predecease the Participant, the Participant's Options outstanding at death shall be transferred to the Participant's estate. ARTICLE 8. RIGHTS OF EMPLOYEES 8.1 EMPLOYMENT OR SERVICE. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Participant's employment or service at any time, nor confer upon any Participant any right to 11 continue in the employ or service of the Company or any of its Subsidiaries. 8.2 PARTICIPATION. No individual shall have the right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. 8.3 NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Board or the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its Subsidiaries shall be required or be liable to make any payment under the Plan. 8.4 NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. ARTICLE 9. CHANGE IN CONTROL 9.1 OPTIONS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Options granted under this Plan shall immediately vest 100% in each Participant (subject to Section 3.8 herein). 9.2 POOLING TRANSACTIONS. Notwithstanding anything contained in the Plan or any agreement to the contrary, in the event of a Change in Control which is also intended to constitute a Pooling Transaction, the Board or the Committee shall take such actions, if any, which are specifically recommended by an independent accounting firm retained by the Company to the extent reasonably necessary in order to assure that the Pooling Transaction will qualify as such, including but not limited to (a) deferring the vesting, exercise, payment or settlement with respect to any Option, (b) providing that the payment or settlement in respect of any Option be made in the form of cash, Stock or securities of a successor or acquired of the Company, or a combination of the foregoing and (c) providing for the extension of the term of any Option to the extent necessary to accommodate the foregoing, but not beyond the maximum term permitted for any Option. ARTICLE 10. AMENDMENT, MODIFICATION AND TERMINATION 12 10.1 AMENDMENT, MODIFICATION AND TERMINATION. At any time and from time to time, the Board may terminate, amend, or modify the Plan, subject to the approval of the shareholders of the Company if, but only if, required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any securities exchange or system on which the Stock is then listed or reported or by any regulatory body having jurisdiction with respect hereto. 10.2 OPTIONS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan other than pursuant to Section 4.3 hereof shall in any manner adversely affect any Option theretofore granted under the Plan, without the written consent of the Participant. 13 ARTICLE 11. WITHHOLDING 11.1 TAX WITHHOLDING. The Company and any of its Subsidiaries shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy Federal, state, local and applicable foreign taxes (including the Participant's FICA obligations) required by law to be withheld with respect to any grant or exercise of an Option made under or as a result of this Plan. 11.2 STOCK DELIVERY OR WITHHOLDING. With respect to withholding required upon the exercise of Nonqualified Stock Options, Participants may elect, subject to the approval of the Board or the Committee, to satisfy the withholding requirement, in whole or in part, by tendering to the Company previously acquired Stock, by having the Company withhold Stock, or by surrendering to the Company fully exerciseable Options in each such case in an amount having a Fair Market Value (in the case of Stock) or Option Value (in the case of Options) equal to the amount required to be withheld to satisfy the tax withholding obligations described in Section 11.1. The value of the Stock or Options to be tendered or withheld is to be based on the Fair Market Value of the Stock or Option Value of the Options on the date that the amount of tax to be withheld is to be determined. All Stock withholding elections shall be irrevocable and made in writing, signed by the Participant on forms approved by the Board or the Committee in advance of the day that the transaction becomes taxable. Stock withholding elections made by Participants who are subject to the short-swing profit restrictions of Section 16 of the Exchange Act must comply with the additional restrictions of Section 16 and Rule 16b-3 in making their elections. ARTICLE 12. EFFECT OF CERTAIN TRANSACTIONS EFFECT OF CERTAIN TRANSACTIONS. Subject to Article 9, or as otherwise provided in any Option Agreement, in the event of (a) the liquidation or dissolution of the Company or (b) a merger, consolidation or combination of the Company (a "Transaction"), the Plan and the Options issued hereunder shall continue in effect in accordance with their respective terms except that following a Transaction each Participant shall be entitled to receive in respect of each share of Common Stock subject to any outstanding Options upon exercise of any Option the same number and kind of securities, cash, property or other consideration that each holder of a share of Common Stock was entitled to receive in the Transaction in respect of such share; provided, however, that such securities, cash, property, or other consideration shall remain subject to all of the conditions, restrictions and performance criteria which were applicable to the Options prior to such Transaction. 14 ARTICLE 13. REQUIREMENTS OF LAW 13.1 REQUIREMENTS OF LAW. The granting of Options and the issuance of shares of Common Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or securities exchanges as may be required. 13.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of Delaware. 15 EX-10.5 8 EXHIBIT 10.5 EXHIBIT 10.5 Employee:____________________ Grant Date:__________________ No. Shares:__________________ FMV Per Share on Date of Grant:__________________ Exercise Price Per Share:_________________ INCENTIVE STOCK OPTION AGREEMENT PURSUANT TO THE HOSPITALITY MARKETING CONCEPTS INC. 1998 STOCK OPTION PLAN I. IDENTIFICATION. This Incentive Stock Option Agreement (the "Agreement") is made by and between Hospitality Marketing Concepts Inc., a Delaware corporation (the "Company"), and ___________________________ (the "Employee") as of ____________, 199_. 2. RECITALS. 2.1 On __________, ___, 1998, the Board of Directors of the Company adopted the Hospitality Marketing Concepts Inc. 1998 Stock Option Plan (the "Plan") providing for the grant of incentive stock options and nonqualified stock options to key employees, directors, consultants and service providers of the Company or any of its Subsidiaries (as defined in the Plan). 2.2 The shareholders of the Company approved the Plan on ____________. 2.3 Employee is a key employee of the Company and/or one or more of its Subsidiaries to whom options may be granted under the Plan. 2.4 The Stock Option and Compensation Committee (the "Committee") of the Board of Directors of the Company has authorized the grant to Employee of an option to purchase the Company's Common Stock upon the terms and conditions hereinafter set forth. 3. GRANT OF OPTION. Pursuant to the action of the Committee, and subject to the terms and conditions of this Agreement and the terms and conditions of the Plan, the Company grants to Employee an option to purchase ________ (___) shares of the Company's authorized and unissued Common Stock from the Company at the price of __________________ Dollars ($______) per share (the "Option"). The Option will be an incentive stock option, and will comply with all of the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 4. TERM OF OPTION. The Option was granted on ______________, 199_ (the "Grant Date"). Unless previously exercised pursuant to Section 5, the Option shall terminate on, and shall not be exercisable after, the expiration of (_____) years after the Grant Date [not to exceed ten (10) years]. 5. EXERCISE. 5.1 EXERCISABILITY. Subject to the terms and conditions of this Agreement, the Option shall become exercisable in _______________ equal cumulative installments of _________ shares of the Company's Common Stock (individually an "Installment" and collectively the "Installments"). Employee may exercise the Option with respect to each Installment on or after each successive annual anniversary of the Grant Date according to the following schedule: Installment Exercise Date (number of ------------- shares becoming exercisable) ---------------- First Anniversary _________________ ________________ Second Anniversary _________________ ________________ Third Anniversary _________________ ________________ Fourth Anniversary _________________ ________________ Fifth Anniversary _________________ ________________ Sixth Anniversary _________________ ________________ Seventh Anniversary _________________ ________________ Eighth Anniversary _________________ ________________ Ninth - 2 - Anniversary _________________ ________________ 5.2 NOTICE OF EXERCISE. Employee shall exercise the Option by (i) notifying the Secretary of the Company of Employee's election to exercise the Option and (ii) paying in full the purchase price as provided in Section 5.3. 5.3 PAYMENT OF PURCHASE PRICE. The purchase price for any shares of Common Stock with respect to which Employee exercises the Option shall be paid in full promptly after Employee gives notice of exercise as provided in Section 5.2. The purchase price shall be paid: (a) in cash or by check in United States dollars, or (b) if, and only if, the Committee so authorizes in its sole discretion, at the time Employee gives notice of exercise, (i) by transferring to the Company for redemption, Common Stock of the Company at its "Fair Market Value" (as defined in the Plan), with share certificates duly endorsed and accompanied by instruments of transfer with signatures guaranteed, or (ii) by surrendering to the Company for cancellation one or more Options granted to Employee under the Plan at their respective Option Values (as defined in the Plan), or (c) if, and only if, the Committee so authorizes in its sole discretion, a combination of (a), (b)(i) and/or (b)(ii). If Employee desires to pay all or a portion of the purchase price for the shares by transferring to the Company Common Stock for redemption, or surrendering Options for cancellation, Employee shall so notify the Secretary of the Company with the notice of Employee's election to exercise the Option in accordance with Section 5.2. Promptly after receipt of Employee's notice of exercise and request for payment by redemption or cancellation, the Company shall notify Employee of its decision as to whether it will permit Employee to pay the purchase price by transferring the Company's Common Stock to it for redemption or transferring Options to it for cancellation. If the Committee does not authorize the proposed payment by redemption or cancellation, Employee shall pay the purchase price in cash or by check in United States dollars as provided above. Employee acknowledges that, if payment is made by transfer of Common Stock acquired by exercise of an Option which was intended to be an incentive stock option, or by surrender of an Option which is intended to be an incentive stock option, the favorable tax treatment accorded to incentive Stock Options under the Code will not apply to such transferred Common Stock or such surrendered Option. 6. ISSUANCE OF SHARES. Promptly after the Company's receipt of notification of exercise provided for in Section 5.2 and Employee's payment in full of the purchase price, the Company shall deliver, or cause to be delivered, to Employee a certificate - 3 - for the whole number of shares with respect to which the Option is being exercised by Employee. Shares shall be registered in the name of Employee. If any law or regulation of the Securities and Exchange Commission or of any other federal or state governmental body having jurisdiction shall require the Company or Employee to take any action prior to the issuance to Employee of the shares of Common Stock of the Company specified in the written notice of election to exercise, the date for the delivery of such shares shall be adjourned until the completion of such action. 7. TERMINATION OF EMPLOYMENT; DEATH; PERMANENT DISABILITY. If Employee's employment with the Company (including for this purpose any Subsidiary) is terminated for any reason (other than permanent disability or dismissal for Cause as defined in the Plan) while Employee is still living, the Option or any unexercised Installments, to the extent the Option would have been exercisable by Employee on the date on which he ceases to be an employee (the "Termination Date"), may be exercised by Employee within ____ months [not to exceed three (3) months] from the Termination Date (the "Post-Termination Period"), but in any event not later than the expiration date of the Option. If Employee dies or becomes "permanently disabled" (a physical or mental impairment as defined in Section 22(e)(3) of the Code) while he is employed by the Company or during the Post-Termination Period (if the Employee's termination was for any reason other than Cause), the Option or any unexercised Installment, to the extent exercisable by him on the date of death or permanent disability, may be exercised by Employee, or if Employee is then deceased or legally incapacitated, by Employee's personal representative, heirs, or legatees, at any time prior to the expiration of ____ months [not to exceed twelve (12) months] from the Termination Date, but in any event, not later than the expiration date of the Option. In the Committee's sole discretion, all or any unexercisable Options or Installments may become exercisable on the date of Employee's death, so that such Options or Installments may be exercised pursuant to this Section 7 even though they would not otherwise have been exercisable had Employee not died. Unexercisable Options or Installments [shall (__)] [shall not (__)] become exercisable on the date of Employee's death. Notwithstanding the foregoing, if Employee's employment with the Company is terminated for Cause as determined by the Committee in its sole discretion, the Option shall expire on the Termination Date and thereafter shall not be exercisable in whole or in part. 8. ASSIGNMENT OR TRANSFER. The Option is not assignable or transferable except by will or by the laws of descent and distribution and during Employee's lifetime the Option may be exercised only by Employee. No transfer of the Option by will or by the laws of descent and distribution shall be effective, nor shall any designation of a person who may exercise the Option - 4 - after Employee's death be effective to bind the Company unless the Company is furnished with a written notice thereof and a copy of the will or such other evidence as the Company deems necessary to establish the validity of the transfer and the acceptance of the terms and conditions of the Option by the transferee or designee. 9. NO RIGHTS AS SHAREHOLDER. Employee shall have no rights as a shareholder with respect to shares of the Common Stock covered by this Option until the date of the issuance of a stock certificate or stock certificates evidencing issuance of such shares pursuant to Employee's exercise of the Option. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 hereof. 10. MODIFICATION AND TERMINATION. 10.1 The rights of Employee under this Agreement are subject to modification and termination as provided in the Plan. 10.2 If the number of issued and outstanding shares of Common Stock changes as a result of a stock split, reverse stock split, stock dividend, recapitalization, or any other change in the capital structure of the Company, the Committee, subject to approval by the Board, may appropriately adjust (a) the maximum number of shares which may be issued under the Plan, (b) the number of shares subject to each outstanding option, and (c) the price per share of each Option (but not the total price thereof), so that upon exercise of the Option, Employee will receive the same number of shares he would have received had he been the holder of all shares subject to his outstanding Options immediately before the effective date of the change in the number of issued shares of Common Stock. The adjustment shall not result in the issuance of fractional shares. 10.3 If the Company liquidates, merges, reorganizes, or consolidates with any other corporation in which the Company is not the surviving corporation or the Company becomes a wholly-owned subsidiary of another corporation, any unexercised option previously granted under the Plan shall be deemed canceled unless the surviving corporation in any merger, reorganization or consolidation elects to assume the options under the Plan or to issue substitute options in place thereof. If options are to be canceled in accordance with the foregoing, Employee shall have the right, exercisable during a thirty (30)-day period, ending on the fifth day prior to the liquidation, merger, reorganization or consolidation, to exercise Employee's Options, in whole or in - 5 - part, without regard to any installment exercise provisions in this Agreement. 10.4 No incentive stock option granted pursuant to the Plan shall be adjusted in any manner that causes it to fail to continue to qualify as an "incentive stock option" within the meaning of the Section 422 of the Code. 10.5 The grant of the Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes in its capital structure; to merger, consolidate, or dissolve; to change its business structure; or to liquidate, sell or transfer all or any part of its business or assets. 11. NO RIGHT TO EMPLOYMENT. Nothing in this Agreement, the Plan, or any instrument executed pursuant to the Plan shall confer upon Employee the right to continue to be employed by the Company or any Subsidiary, affect the right of the Company or any Subsidiary to terminate the employment of Employee with or without Cause, or be evidence of any agreement or understanding, express or implied, that the Company or any Subsidiary will employ or continue to employ Employee in a particular position or at a particular rate of remuneration. 12. COMPLIANCE WITH SECURITIES LAWS. At the time the Option is exercised, the Company may require Employee to execute any documents or take any action which may be then necessary to comply with the Securities Act of 1933, as amended, and the rules and regulations adopted thereunder, or any other applicable federal or state laws for the purpose of regulating the sale and issuance of securities. The Company reserves the right to change its requirements with respect to enforcing compliance with federal and state securities laws, including the request for, and enforcement of, letters of investment intent, such requirements to be determined by the Company in its judgment as necessary to assure compliance with such laws. Such changes may be made, with respect to this Option, upon exercise hereof, or prior to or after the exercise of this Option. The Company shall not be obligated to issue any shares upon the exercise of this Option unless the issuance, in the judgment of the Board, is in full compliance with all applicable laws, governmental rules and regulations, undertakings of the Company made under the Securities Act of 1933, as amended, any state securities laws, and stock exchange agreements of the Company. 13. GENERAL PROVISIONS. 13.1 SUBJECT TO PLAN. This Agreement shall conform with, and be subject to, all of the terms and conditions of the - 6 - Plan. Any conflict or inconsistency between this Agreement and the Plan shall be resolved in conformity with, and shall be governed by, the Plan. The Plan is attached hereto as Exhibit "A" and incorporated herein by this reference. 13.2 FURTHER ACTS. Employee agrees to perform all further acts and to execute and deliver any other and additional documents as may be reasonably necessary to carry out the provisions of this Agreement. IN WITNESS WHEREOF, this Agreement is executed by the parties on the date and at the place indicated below. "COMPANY" HOSPITALITY MARKETING CONCEPTS INC., a Delaware corporation Executed on _________, 199_ at __________, ____________. By:___________________________ Its________________________ "EMPLOYEE" Executed on _________, 199_ at __________, ____________. ______________________________ Employee's Name - 7 - EX-10.6 9 EXHIBIT 10.6 EXHIBIT 10.6 Employee:____________________ Grant Date:__________________ No. Shares:__________________ FMV Per Share on Date of Grant:__________________ Exercise Price Per Share:_________________ NONQUALIFIED STOCK OPTION AGREEMENT PURSUANT TO THE HOSPITALITY MARKETING CONCEPTS INC. 1998 STOCK OPTION PLAN I. IDENTIFICATION. This Nonqualified Stock Option Agreement (the "Agreement") is made by and between Hospitality Marketing Concepts Inc., a Delaware corporation (the "Company"), and ___________________________ (the "Employee") as of ____________, 199_. 2. RECITALS. 2.1 On __________, ___, 1998, the Board of Directors of the Company adopted the Hospitality Marketing Concepts Inc. 1998 Stock Option Plan (the "Plan") providing for the grant of incentive stock options and nonqualified stock options to key employees, directors, consultants and service providers of the Company or any of its Subsidiaries (as defined in the Plan). 2.2 The shareholders of the Company approved the Plan on ____________. 2.3 Employee is a key employee of the Company and/or one or more of its Subsidiaries to whom options may be granted under the Plan. 2.4 The Stock Option and Compensation Committee (the "Committee") of the Board of Directors of the Company has authorized the grant to Employee of an option to purchase the Company's Common Stock upon the terms and conditions hereinafter set forth. 3. GRANT OF OPTION. Pursuant to the action of the Committee, and subject to the terms and conditions of this Agreement and the terms and conditions of the Plan, the Company grants to Employee an option to purchase ________ (___) shares of the Company's authorized and unissued Common Stock from the Company at the price of __________________ Dollars ($______) per share (the "Option"). The Option will be a nonqualified stock option and not an incentive stock option pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 4. TERM OF OPTION. The Option was granted on ______________, 199_ (the "Grant Date"). Unless previously exercised pursuant to Section 5, the Option shall terminate on, and shall not be exercisable after, the expiration of (_____) years after the Grant Date [not to exceed ten (10) years or five (5) years in the case of any person who owns more than 10% of the Voting Securities of the Company, as defined in the Plan.]. 5. EXERCISE. 5.1 EXERCISABILITY. Subject to the terms and conditions of this Agreement, the Option shall become exercisable in _______________ equal cumulative installments of _________ shares of the Company's Common Stock (individually an "Installment" and collectively the "Installments"). Employee may exercise the Option with respect to each Installment on or after each successive annual anniversary of the Grant Date according to the following schedule: Installment Exercise Date (number of shares becoming exercisable) First Anniversary _________________ ________________ Second Anniversary _________________ ________________ Third Anniversary _________________ ________________ Fourth Anniversary _________________ ________________ Fifth Anniversary _________________ ________________ Sixth Anniversary _________________ ________________ Seventh Anniversary _________________ ________________ Eighth Anniversary _________________ ________________ -2- Ninth Anniversary _________________ ________________ 5.2 NOTICE OF EXERCISE. Employee shall exercise the Option by (i) notifying the Secretary of the Company of Employee's election to exercise the Option and (ii) paying in full the purchase price as provided in Section 5.3. 5.3 PAYMENT OF PURCHASE PRICE. The purchase price for any shares of Common Stock with respect to which Employee exercises the Option shall be paid in full promptly after Employee gives notice of exercise as provided in Section 5.2. The purchase price shall be paid: (a) in cash or by check in United States dollars, or (b) if, and only if, the Committee so authorizes in its sole discretion, at the time Employee gives notice of exercise, (i) by transferring to the Company for redemption, Common Stock of the Company at its "Fair Market Value" (as defined in the Plan), with share certificates duly endorsed and accompanied by instruments of transfer with signatures guaranteed, or (ii) by surrendering to the Company for cancellation one or more Options granted to Employee under the Plan at their respective Option Values (as defined in the Plan), or (c) by foregoing compensation payable to Employee as set forth on Schedule 1 attached hereto, or (d) if, and only if, the Committee so authorizes in its sole discretion, a combination of (a), (b)(i), (b)(ii), and/or (c). If Employee desires to pay all or a portion of the purchase price for the shares by transferring to the Company Common Stock for redemption, or surrendering Options for cancellation, Employee shall so notify the Secretary of the Company with the notice of Employee's election to exercise the Option in accordance with Section 5.2. Promptly after receipt of Employee's notice of exercise and request for payment by redemption or cancellation, the Company shall notify Employee of its decision as to whether it will permit Employee to pay the purchase price by transferring the Company's Common Stock to it for redemption or transferring Options to it for cancellation, or by foregoing compensation payable. If the Committee does not authorize the proposed payment by redemption or cancellation or by foregoing compensation payable, Employee shall pay the purchase price in cash or by check in United States dollars as provided above. Employee acknowledges that, if payment is made by transfer of Common Stock acquired by exercise of an Option which was intended to be an incentive Stock Option, or by surrender of an Option which is intended to be an incentive Stock Option, the favorable tax treatment accorded to incentive stock options under the Code will not apply to such transferred Common Stock or such surrendered Option. -3- 6. ISSUANCE OF SHARES. Promptly after the Company's receipt of notification of exercise provided for in Section 5.2 and Employee's payment in full of the purchase price, the Company shall deliver, or cause to be delivered, to Employee a certificate for the whole number of shares with respect to which the Option is being exercised by Employee. Shares shall be registered in the name of Employee. If any law or regulation of the Securities and Exchange Commission or of any other federal or state governmental body having jurisdiction shall require the Company or Employee to take any action prior to the issuance to Employee of the shares of Common Stock of the Company specified in the written notice of election to exercise, the date for the delivery of such shares shall be adjourned until the completion of such action. 7. TERMINATION OF EMPLOYMENT; DEATH; PERMANENT DISABILITY. If Employee's employment with the Company (including for this purpose any Subsidiary) is terminated for any reason (other than permanent disability or dismissal for Cause as defined in the Plan) while Employee is still living, the Option or any unexercised Installments, to the extent the Option would have been exercisable by Employee on the date on which he ceases to be an employee (the "Termination Date"), may be exercised by Employee within ____ months from the Termination Date (the "Post-Termination Period"), but in any event not later than the expiration date of the Option. If Employee dies or becomes "permanently disabled" (a physical or mental impairment as defined in Section 22(e)(3) of the Code) while he is employed by the Company or during the Post-Termination Period (if the Employee's termination was for any reason other than Cause), the Option or any unexercised Installment, to the extent exercisable by him on the date of death or permanent disability, may be exercised by Employee, or if Employee is then deceased or legally incapacitated, by Employee's personal representative, heirs, or legatees, at any time prior to the expiration of ____ months from the Termination Date, but in any event, not later than the expiration date of the Option. In the Committee's sole discretion, all or any unexercisable Options or Installments may become exercisable on the date of Employee's death, so that such Options or Installments may be exercised pursuant to this Section 7 even though they would not otherwise have been exercisable had Employee not died. Unexercisable Options or Installments [shall (__)] [shall not (__)] become exercisable on the date of Employee's death. Notwithstanding the foregoing, if Employee's employment with the Company is terminated for Cause as determined by the Committee in its sole discretion, the Option shall expire on the Termination Date and thereafter shall not be exercisable in whole or in part. 8. ASSIGNMENT OR TRANSFER. The Option is not assignable or transferable except by will or by the laws of descent and -4- distribution and during Employee's lifetime the Option may be exercised only by Employee. No transfer of the Option by will or by the laws of descent and distribution shall be effective, nor shall any designation of a person who may exercise the Option after Employee's death be effective to bind the Company unless the Company is furnished with a written notice thereof and a copy of the will or such other evidence as the Company deems necessary to establish the validity of the transfer and the acceptance of the terms and conditions of the Option by the transferee or designee. 9. NO RIGHTS AS SHAREHOLDER. Employee shall have no rights as a shareholder with respect to shares of the Common Stock covered by this Option until the date of the issuance of a stock certificate or stock certificates evidencing issuance of such shares pursuant to Employee's exercise of the Option. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 hereof. 10. MODIFICATION AND TERMINATION. 10.1 The rights of Employee under this Agreement are subject to modification and termination as provided in the Plan. 10.2 If the number of issued and outstanding shares of Common Stock changes as a result of a stock split, reverse stock split, stock dividend, recapitalization, or any other change in the capital structure of the Company, the Committee, subject to approval by the Board, may appropriately adjust (a) the maximum number of shares which may be issued under the Plan, (b) the number of shares subject to each outstanding option, and (c) the price per share of each Option (but not the total price thereof), so that upon exercise of the Option, Employee will receive the same number of shares he would have received had he been the holder of all shares subject to his outstanding Options immediately before the effective date of the change in the number of issued shares of Common Stock. The adjustment shall not result in the issuance of fractional shares. 10.3 If the Company liquidates, merges, reorganizes, or consolidates with any other corporation in which the Company is not the surviving corporation or the Company becomes a wholly-owned subsidiary of another corporation, any unexercised option previously granted under the Plan shall be deemed canceled unless the surviving corporation in any merger, reorganization or consolidation elects to assume the options under the Plan or to issue substitute options in place thereof. If options are to be -5- canceled in accordance with the foregoing, Employee shall have the right, exercisable during a thirty (30)-day period, ending on the fifth day prior to the liquidation, merger, reorganization or consolidation, to exercise Employee's Options, in whole or in part, without regard to any installment exercise provisions in this Agreement. 10.4 The grant of the Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes in its capital structure; to merger, consolidate, or dissolve; to change its business structure; or to liquidate, sell or transfer all or any part of its business or assets. 11. NO RIGHT TO EMPLOYMENT. Nothing in this Agreement, the Plan, or any instrument executed pursuant to the Plan shall confer upon Employee the right to continue to be employed by the Company, affect the right of the Company or any Subsidiary to terminate the employment of Employee with or without Cause, or be evidence of any agreement or understanding, express or implied, that the Company or any Subsidiary will employ or continue to employ Employee in a particular position or at a particular rate of remuneration. 12. COMPLIANCE WITH SECURITIES LAWS. At the time the Option is exercised, the Company may require Employee to execute any documents or take any action which may be then necessary to comply with the Securities Act of 1933, as amended, and the rules and regulations adopted thereunder, or any other applicable federal or state laws for the purpose of regulating the sale and issuance of securities. The Company reserves the right to change its requirements with respect to enforcing compliance with federal and state securities laws, including the request for, and enforcement of, letters of investment intent, such requirements to be determined by the Company in its judgment as necessary to assure compliance with such laws. Such changes may be made, with respect to this Option, upon exercise hereof, or prior to or after the exercise of this Option. The Company shall not be obligated to issue any shares upon the exercise of this Option unless the issuance, in the judgment of the Board, is in full compliance with all applicable laws, governmental rules and regulations, undertakings of the Company made under the Securities Act of 1933, as amended, any state securities laws, and stock exchange agreements of the Company. 13. GENERAL PROVISIONS. 13.1 SUBJECT TO PLAN. This Agreement shall conform with, and be subject to, all of the terms and conditions of the Plan. Any conflict or inconsistency between this Agreement and -6- the Plan shall be resolved in conformity with, and shall be governed by, the Plan. The Plan is attached hereto as Exhibit "A" and incorporated herein by this reference. 13.2 FURTHER ACTS. Employee agrees to perform all further acts and to execute and deliver any other and additional documents as may be reasonably necessary to carry out the provisions of this Agreement. IN WITNESS WHEREOF, this Agreement is executed by the parties on the date and at the place indicated below. "COMPANY" HOSPITALITY MARKETING CONCEPTS INC., a Delaware corporation Executed on _________, 199_ at __________, ____________. By:___________________________ Its________________________ "EMPLOYEE" Executed on _________, 199_ at __________, ____________. ______________________________ Employee's Name -7- EX-10.7 10 EXHIBIT 10.7 EXHIBIT 10.7 Optionee:____________________ Grant Date:__________________ No. Shares:__________________ FMV Per Share on Date of Grant:__________________ Exercise Price Per Share:_________________ NONQUALIFIED STOCK OPTION AGREEMENT PURSUANT TO THE HOSPITALITY MARKETING CONCEPTS INC. 1998 STOCK OPTION PLAN I. IDENTIFICATION. This Nonqualified Stock Option Agreement (the "Agreement") is made by and between Hospitality Marketing Concepts Inc., a Delaware corporation (the "Company"), and ___________________________ (the "Optionee") as of ____________, 199_. 2. RECITALS. 2.1 On __________, ___, 1998, the Board of Directors of the Company adopted the Hospitality Marketing Concepts Inc. 1998 Stock Option Plan (the "Plan") providing for the grant of incentive stock options and nonqualified stock options to key employees, directors, consultants and service providers of the Company or any of its Subsidiaries (as defined in the Plan). 2.2 The shareholders of the Company approved the Plan on ____________. 2.3 Optionee is a (______) director (_______) consultant or service provider of the Company and/or one or more of its Subsidiaries to whom options may be granted under the Plan. 2.4 The Stock Option and Compensation Committee (the "Committee") of the Board of Directors of the Company has authorized the grant to Optionee of an option to purchase the Company's Common Stock upon the terms and conditions hereinafter set forth. 3. GRANT OF OPTION. Pursuant to the action of the Committee, and subject to the terms and conditions of this Agreement and the terms and conditions of the Plan, the Company grants to Optionee an option to purchase ________ (___) shares of the Company's authorized and unissued Common Stock from the Company at the price of __________________ Dollars ($______) per share (the "Option"). The Option will be a nonqualified stock option and not an incentive stock option pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 4. TERM OF OPTION. The Option was granted on ______________, 199_ (the "Grant Date"). Unless previously exercised pursuant to Section 5, the Option shall terminate on, and shall not be exercisable after, the expiration of (_____) years after the Grant Date [not to exceed ten (10) years or five (5) years in the case of any person who owns more than 10% of the Voting Securities of the Company, as defined in the Plan.]. 5. EXERCISE. 5.1 EXERCISABILITY. Subject to the terms and conditions of this Agreement, the Option shall become exercisable in _______________ equal cumulative installments of _________ shares of the Company's Common Stock (individually an "Installment" and collectively the "Installments"). Optionee may exercise the Option with respect to each Installment on or after each successive annual anniversary of the Grant Date according to the following schedule: Installment Exercise Date (number of ------------- shares becoming exercisable) ---------------- First Anniversary _________________ ________________ Second Anniversary _________________ ________________ Third Anniversary _________________ ________________ Fourth Anniversary _________________ ________________ Fifth Anniversary _________________ ________________ Sixth Anniversary _________________ ________________ Seventh Anniversary _________________ ________________ Eighth Anniversary _________________ ________________ - 2 - Ninth Anniversary _________________ ________________ 5.2 5.3 NOTICE OF EXERCISE. Optionee shall exercise the Option by (i) notifying the Secretary of the Company of Optionee's election to exercise the Option and (ii) paying in full the purchase price as provided in Section 5.3. 5.4 PAYMENT OF PURCHASE PRICE. The purchase price for any shares of Common Stock with respect to which Optionee exercises the Option shall be paid in full promptly after Optionee gives notice of exercise as provided in Section 5.2. The purchase price shall be paid: (a) in cash or by check in United States dollars, or (b) if, and only if, the Committee so authorizes in its sole discretion, at the time Optionee gives notice of exercise, (i) by transferring to the Company for redemption, Common Stock of the Company at its "Fair Market Value" (as defined in the Plan), with share certificates duly endorsed and accompanied by instruments of transfer with signatures guaranteed, or (ii) by surrendering to the Company for cancellation one or more Options granted to Optionee under the Plan at their respective Option Values (as defined in the Plan), or (c) by foregoing compensation payable to Optionee as set forth on Schedule 1 attached hereto, or (d) if, and only if, the Committee so authorizes in its sole discretion, a combination of (a), (b)(i), (b)(ii), and/or (c). If Optionee desires to pay all or a portion of the purchase price for the shares by transferring to the Company Common Stock for redemption, or surrendering Options for cancellation, Optionee shall so notify the Secretary of the Company with the notice of Optionee's election to exercise the Option in accordance with Section 5.2. Promptly after receipt of Optionee's notice of exercise and request for payment by redemption or cancellation, the Company shall notify Optionee of its decision as to whether it will permit Optionee to pay the purchase price by transferring the Company's Common Stock to it for redemption or transferring Options to it for cancellation, or by foregoing compensation payable. If the Committee does not authorize the proposed payment by redemption or cancellation or by foregoing compensation payable, Optionee shall pay the purchase price in cash or by check in United States dollars as provided above. 6. ISSUANCE OF SHARES. Promptly after the Company's receipt of notification of exercise provided for in Section 5.2 and Optionee's payment in full of the purchase price, the Company shall deliver, or cause to be delivered, to Optionee a certificate for the whole number of shares with respect to which the Option is being exercised by Optionee. Shares shall be registered in the - 3 - name of Optionee. If any law or regulation of the Securities and Exchange Commission or of any other federal or state governmental body having jurisdiction shall require the Company or Optionee to take any action prior to the issuance to Optionee of the shares of Common Stock of the Company specified in the written notice of election to exercise, the date for the delivery of such shares shall be adjourned until the completion of such action. 7. TERMINATION OF SERVICE; DEATH; PERMANENT DISABILITY. If Optionee's service with the Company is terminated for any reason (other than permanent disability or dismissal for Cause as defined in the Plan) while Optionee is still living, the Option or any unexercised Installments, to the extent the Option would have been exercisable by Optionee on the date on which he ceases to be in service (the "Termination Date"), may be exercised by Optionee within ____ months from the Termination Date (the "Post-Termination Period"), but in any event not later than the expiration date of the Option. If Optionee dies or becomes "permanently disabled" (a physical or mental impairment as defined in Section 22(e)(3) of the Code) while he is in service with the Company or during the Post-Termination Period (if the Optionee's termination was for any reason other than Cause), the Option or any unexercised Installment, to the extent exercisable by him on the date of death or permanent disability, may be exercised by Optionee, or if Optionee is then deceased or legally incapacitated, by Optionee's personal representative, heirs, or legatees, at any time prior to the expiration of ____ months from the Termination Date, but in any event, not later than the expiration date of the Option. In the Committee's sole discretion, all or any unexercisable Options or Installments may become exercisable on the date of Optionee's death, so that such Options or Installments may be exercised pursuant to this Section 7 even though they would not otherwise have been exercisable had Optionee not died. Unexercisable Options or Installments [shall (__)] [shall not (__)] become exercisable on the date of Optionee's death. Notwithstanding the foregoing, if Optionee's service with the Company is terminated for Cause as determined by the Committee in its sole discretion, the Option shall expire on the Termination Date and thereafter shall not be exercisable in whole or in part. 8. ASSIGNMENT OR TRANSFER. The Option is not assignable or transferable except by will or by the laws of descent and distribution and during Optionee's lifetime the Option may be exercised only by Optionee. No transfer of the Option by will or by the laws of descent and distribution shall be effective, nor shall any designation of a person who may exercise the Option after Optionee's death be effective to bind the Company unless the Company is furnished with a written notice thereof and a copy of - 4 - the will or such other evidence as the Company deems necessary to establish the validity of the transfer and the acceptance of the terms and conditions of the Option by the transferee or designee. 9. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a shareholder with respect to shares of the Common Stock covered by this Option until the date of the issuance of a stock certificate or stock certificates evidencing issuance of such shares pursuant to Optionee's exercise of the Option. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 hereof. 10. MODIFICATION AND TERMINATION. 10.1 The rights of Optionee under this Agreement are subject to modification and termination as provided in the Plan. 10.2 If the number of issued and outstanding shares of Common Stock changes as a result of a stock split, reverse stock split, stock dividend, recapitalization, or any other change in the capital structure of the Company, the Committee, subject to approval by the Board, may appropriately adjust (a) the maximum number of shares which may be issued under the Plan, (b) the number of shares subject to each outstanding option, and (c) the price per share of each Option (but not the total price thereof), so that upon exercise of the Option, Optionee will receive the same number of shares he would have received had he been the holder of all shares subject to his outstanding Options immediately before the effective date of the change in the number of issued shares of Common Stock. The adjustment shall not result in the issuance of fractional shares. 10.3 If the Company liquidates, merges, reorganizes, or consolidates with any other corporation in which the Company is not the surviving corporation or the Company becomes a wholly-owned subsidiary of another corporation, any unexercised option previously granted under the Plan shall be deemed canceled unless the surviving corporation in any merger, reorganization or consolidation elects to assume the options under the Plan or to issue substitute options in place thereof. If options are to be canceled in accordance with the foregoing, Optionee shall have the right, exercisable during a thirty (30)-day period, ending on the fifth day prior to the liquidation, merger, reorganization or consolidation, to exercise Optionee's Options, in whole or in part, without regard to any installment exercise provisions in this Agreement. - 5 - 10.4 The grant of the Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes in its capital structure; to merger, consolidate, or dissolve; to change its business structure; or to liquidate, sell or transfer all or any part of its business or assets. 11. NO RIGHT TO EMPLOYMENT. Nothing in this Agreement, the Plan, or any instrument executed pursuant to the Plan shall confer upon Optionee the right to continue to be employed or retained by the Company or any Subsidiary, affect the right of the Company or any Subsidiary to terminate the employment or service of Optionee with or without Cause, or be evidence of any agreement or understanding, express or implied, that the Company or any Subsidiary will employ or retain or continue to employ or retain Optionee in a particular position or at a particular rate of remuneration. 12. COMPLIANCE WITH SECURITIES LAWS. At the time the Option is exercised, the Company may require Optionee to execute any documents or take any action which may be then necessary to comply with the Securities Act of 1933, as amended, and the rules and regulations adopted thereunder, or any other applicable federal or state laws for the purpose of regulating the sale and issuance of securities. The Company reserves the right to change its requirements with respect to enforcing compliance with federal and state securities laws, including the request for, and enforcement of, letters of investment intent, such requirements to be determined by the Company in its judgment as necessary to assure compliance with such laws. Such changes may be made, with respect to this Option, upon exercise hereof, or prior to or after the exercise of this Option. The Company shall not be obligated to issue any shares upon the exercise of this Option unless the issuance, in the judgment of the Board, is in full compliance with all applicable laws, governmental rules and regulations, undertakings of the Company made under the Securities Act of 1933, as amended, any state securities laws, and stock exchange agreements of the Company. 13. GENERAL PROVISIONS. 13.1 SUBJECT TO PLAN. This Agreement shall conform with, and be subject to, all of the terms and conditions of the Plan. Any conflict or inconsistency between this Agreement and the Plan shall be resolved in conformity with, and shall be governed by, the Plan. The Plan is attached hereto as Exhibit "A" and incorporated herein by this reference. 13.2 FURTHER ACTS. Optionee agrees to perform all further acts and to execute and deliver any other and additional - 6 - documents as may be reasonably necessary to carry out the provisions of this Agreement. IN WITNESS WHEREOF, this Agreement is executed by the parties on the date and at the place indicated below. "COMPANY" HOSPITALITY MARKETING CONCEPTS INC., a Delaware corporation Executed on _________, 199_ at __________, ____________. By:___________________________ Its________________________ "OPTIONEE" Executed on _________, 199_ at __________, ____________. ______________________________ Optionee's Name - 7 - EX-10.8 11 EXHIBIT 10.8 HOSPITALITY MARKETING CONSULTANTS, LLC 15751 ROCKFIELD BOULEVARD, SUITE 200 IRVINE, CALIFORNIA 92718 Dated as of November 7, 1997 Ms. Sandra Case 51 Merchant Road 03-09 Merchant Square Singapore 058283 Re: OWNERSHIP OF BORROWER AND GROUP Dear Sandra: This letter summarizes the agreement among all of the Members of Hospitality Marketing Consultants, LLC, a California limited liability company ("Borrower"), Borrower and Hospitality Partners, LLC, a Delaware limited liability company ("Lender") with respect to the Loan and Investment Agreement dated as of the date hereof among Lender, and the Members (the "Loan Agreement"). Capitalized terms used herein without definition have the meanings assigned to them in the Loan Agreement. Pursuant to the Loan Agreement, Lender will make a $3,000,000 loan to Borrower to be evidenced by the Note provided for therein. The Note is convertible into membership interests in Borrower on the terms and conditions set forth in Section 2.3.(b) of the Loan Agreement. You presently have a 5% Percentage Interest (as that term is defined in the Operating Agreement of Borrower) in Borrower. All of the Members and Lender have agreed that you shall have the right, at your option, to purchase additional membership interests so that you will not be diluted by the conversion of the Note and will retain approximately the same Percentage Interest after the conversion of the Note. Accordingly, Borrower hereby grants to you an option, exercisable immediately, for the purchase price of $180,000 and otherwise on the same terms and conditions that the Note is convertible pursuant to Section 2.3.(b) of the Loan Agreement, to purchase Membership Interests, equal to 5% of the maximum number of Membership Interests into which the Note is convertible. As you know, we conduct business through a number of entities including Borrower, which are not entirely owned directly, or indirectly, by Borrower, which entities along with Borrower are referred to in the Loan Agreement as the "Group." The Loan Agreement requires that a reorganization be effected in which a Reorganized Borrower succeeds to the ownership of the Group. This letter will confirm that if and to the extent that any member of the Group is not, directly or indirectly, wholly owned by Borrower or Reorganized Borrower at the time that you exercise your option, you shall automatically, and without further action on your part, acquire a like interest in such member of the Group. The option granted hereby shall terminate on December 31, 1999. Very truly yours, HOSPITALITY MARKETING CONSULTANTS, LLC By: Mokhtar Ramadan, President By their execution hereof, all of the Members of Hospitality Marketing Consultants, LLC and Hospitality Partners, LLC, as Lender, hereby consent to the foregoing action and the option granted thereby. ________________________________________ Mokhtar Ramadan, Member [Signatures continued on the following page] ________________________________________ Fadi Ramadan, Member ________________________________________ Marwan Ramadan, Member ________________________________________ Sandra Case, Member Hospitality Partners, LLC By: ___________________________________ Amre Youness, Manager EX-10.9 12 EXHIBIT 10.9 EXHIBIT 10.9 PROMISSORY NOTE Orange County, California July 1, 1996 FOR VALUE RECEIVED, Hospitality Marketing Consultants, LLC, hereby promises to pay to the order of Hospitality Marketing Consultants, or order, the sum of One Million Seven Hundred Sixty-two Thousand Two Hundred Seventy Dollars and ($1,762,270.00), in lawful money of the United States of America, together with interest thereon at the rate of eight percent (8%) per annum on the unpaid balance. Said sum shall be paid in the manner following: interest only shall be due and payable in arrears on the last day of each calendar month, commencing on January 1, 1997 for five (5) years, upon which date the entire unpaid principal balance hereunder, together with any accrued but unpaid interest thereon, shall be due and payable in full. This Note may be prepaid at any time, in whole or in part, without penalty. Upon default in payment of any interest hereon when due, the whole of the principal sum shall, at the option of the holder hereof, become due and payable, without demand or notice. In case payment hereof shall not be made at maturity, the undersigned further promises to pay all costs of collection and reasonable attorney's fees. This Note shall take effect as a sealed instrument and shall be construed, governed and enforced in accordance with the laws of the State of California. Hospitality Marketing Consultants By: /s/ MOKHTAR RAMADAN -------------------------------- Mokhtar Ramadan, General Partner EX-10.10 13 EXHIBIT 10.10 EXHIBIT 10.10 EMPLOYMENT AGREEMENT 1. IDENTIFICATION This Employment Agreement (the "Agreement"), dated for identification purposes only March 5, 1998, is entered into by and between Hospitality Marketing Consultants, LLC, a California limited liability company ("Company") and Philip G. Hirsch, an individual ("Executive"). 2. RECITALS 2.1. Company is engaged in the data-based information services business. 2.2. Executive has special skills and abilities in accounting and financial management and administration. 2.3. Company desires to employ Executive and Executive is willing to undertake such employment on the terms and conditions set forth in this Agreement. 3. EMPLOYMENT, DUTIES AND COVENANTS 3.1. EMPLOYMENT. During the "Term" (as hereinafter defined), (i) Company shall employ Executive as its Vice President-Finance and Treasurer/Chief Financial Officer with powers and duties consistent with such position, and (ii) Company shall also employ Executive, and Executive shall so serve, in such substitute or additional offices or positions with Company or any subsidiary or affiliate of Company (consistent with the position named above) as may, from time to time, be determined by Company's Board of Directors (the "Board") or President. 3.2. DUTIES. Executive hereby accepts employment in such capacity on the terms and conditions set forth herein. The powers, duties and responsibilities to be held or performed by Executive hereunder shall be such as inhere in the position of Vice President-Finance and Treasurer/Chief Financial Officer and such other powers, duties and responsibilities as may be delegated or assigned to Executive by the President or the Board; provided, however, that such other powers, duties and responsibilities shall be consistent with Executive's position, experience and level of compensation. 3.3. PERFORMANCE OF DUTIES. Executive shall discharge the duties described herein in a diligent and professional manner. Executive shall render services incidental to his position, during normal business hours, primarily, at Company's present place of business in Irvine, California, or at such other premises as may be occupied by Company or where Company may conduct its business during the Term. Company agrees that, notwithstanding that Executive may be required to temporarily travel to other places in the course of performing his duties, in the absence of Executive's consent, he shall not be required to move his permanent residence outside of the Southern California area. 3.4. EXTENT OF SERVICES. Executive shall devote his full and exclusive productive time, energy, effort, attention and ability solely to the performance of his duties as set forth above, and to the proper and efficient management and development of the business and operations of Company. Executive shall perform industriously and to the best of his ability, experience and talents all of the duties which may be required of him from time to time, pursuant to the terms hereof, to Company's full and complete satisfaction. During the Term, Executive shall not engage in any other occupation, and without Company's prior written consent, Executive shall not, directly or indirectly, at any time during the Term, render services of a business, professional or commercial nature to any other person, firm or entity whether without compensation or for any form of compensation whatsoever. Notwithstanding the foregoing, Executive may act for his own account in passive-type investments, or as a member of other boards of directors, or engage in charitable activities, where the time allocated for those activities does not materially interfere with the discharge of his duties for Company. 3.5. COMPANY'S AUTHORITY. Executive shall observe and comply at all times with the directions of the Board or the President regarding Executive's performance of his duties and with Company's business policies, rules and regulations as adopted by the Board. Executive shall carry out and perform any and all orders, directions, and policies, consistent with Executive's position, as may be so stated by the Board or President from time to time, either orally or in writing. 3.6. RESULTS AND PROCEEDS. Company owns all right, title and interest to all of the results and proceeds arising out of or as a result of all services performed by Executive on behalf of Company. 3.7. NONSOLICITATION OF GIFTS. Without Company's prior written consent in each instance, Executive shall not solicit or accept, for himself or for the benefit of any third party or entity, any contribution, donation, gift, discount or rebate or the like of material value or in violation of applicable law from any person, firm or entity with whom Company maintains any business relationship. 3.8. COMPETITIVE ACTIVITIES PROHIBITED. During the Term, Executive shall not, directly or indirectly (unless disclosed to Company and approved by Company in its sole and absolute 2 discretion): 3.8.(a) engage in any activity competitive with or adverse to the business, activities or welfare of Company, whether alone, as an agent, as a lender, as a general or limited partner of a partnership, as a member or manager of a limited liability company, or as an officer, director or holder of the outstanding shares of capital stock of any corporation; 3.8.(b) engage in any conduct or activity which would cause Company or Executive to be in a position of conflict of interest or cause Company to be in violation of any law, regulation, policy, statement or rule of any applicable governmental authority; or 3.8.(c) undertake planning for or organization of any business activity competitive with Company's business. 4. TERM AND TERMINATION OF AGREEMENT 4.1. TERM OF EMPLOYMENT. Executive's employment under this Agreement shall be for three (3) years, commencing on April 1, 1998 and ending on March 31, 2001 (the "Term"). The Term shall automatically be extended for one (1) additional year, unless either Executive or Company gives notice to the other at least three (3) months prior to expiration of the Term that the Term shall not be so extended. 4.2. TERMINATION. 4.2.(a) Executive's employment may be terminated without cause or grounds therefor by Company or Executive upon thirty (30) days' prior written notice from the terminating party. In addition, Company may terminate Executive's employment for "Cause" as provided in Section 4.2(b) at any time without prior notice. 4.2.(b) Company may terminate Executive for "Cause". Any termination of Executive's employment hereunder shall be deemed to be for "Cause" if: 4.2.(b)(i) Executive has materially breached a provision of this Agreement, and if such breach is curable, Executive has been provided written notice from Company identifying the alleged material breach, and Executive has failed within ten (10) days thereafter to cure the material breach; 4.2.(b)(ii) Executive is convicted of or pleads guilty to a felony charge involving financial misconduct or moral turpitude; 3 4.2.(b)(iii) Executive has misappropriated any funds or property of Company; 4.2.(b)(iv) Executive fails to comply with the reasonable oral or written directions of the Board or the President consistent with Executive's position and such failure is not cured within five (5) days after written notice from Company; 4.2.(b)(v) Executive is incompetent in performing his assigned duties or responsibilities; or 4.2.(b)(vi) Executive commits any other act or fails to take any action which a court or arbitrator of competent jurisdiction could justify as grounds for dismissal for "Cause". 4.3. DEATH. In the event of Executive's death during the Term, Executive's employment with Company shall terminate. 4.4. DISABILITY. If during the Term of this Agreement Executive becomes "Totally Disabled" (which for the purposes of this Agreement shall be deemed to occur if Executive is unable to perform his services and engage in his regular occupation pursuant to this Agreement due to physical or mental disability for a period of ninety (90) consecutive days, or for ninety (90) days during any three hundred sixty five (365) day period, Company shall have the right to terminate Executive's employment. 4.5. LEGAL OBLIGATIONS FOLLOWING TERMINATION. 4.5.(a) If Executive's employment hereunder is terminated by Executive as provided in Section 4.2(a) or as provided in Sections 4.2(b), 4.3 or 4.4, then Company shall be liable to pay Executive ONLY the following amounts: (i) Executive's salary through and including the "Effective Date of Termination", which for purposes of this Agreement shall be the last day on which Executive performed services pursuant to the terms of this Agreement, unless the notice of termination of this Agreement provides for payment through a later date; (ii) Executive's salary for the pro rata portion of any vacation to which he was entitled but which he has not taken; (iii) reimbursement of any expenses previously incurred pursuant to Section 5.4; and (iv) any benefits to which Executive is actually entitled under Article 5 hereof. If Executive's employment hereunder is terminated prior to the end of the Term of this Agreement by Company pursuant to Section 4.2(a) or as a result of Company's material breach, in addition Executive shall be paid the amount of his annual salary remaining for the balance of the Term of this Agreement pursuant to Section 5.1, all stock options held by Executive, to the extent not already vested or exercisable, shall become immediately exercisable, and Executive shall be 4 provided the life insurance, disability insurance and health insurance benefits pursuant to Section 5.6 for the remainder of the Term. Executive shall have an obligation to mitigate and seek other employment and the payments required to be made hereunder shall be offset by any amounts received in mitigation or as a result of other employment obtained by Executive. All such benefits shall cease upon Executive obtaining other employment. 4.5.(b) If Executive's employment is terminated, the vacation to which Executive would be entitled for his last year of service shall be prorated. If Executive has already taken more vacation than that to which he is entitled, Company shall be entitled to offset any sums owed by it to Executive against the amount of salary received by Executive for the number of vacation days taken in excess of vacation days which he was entitled to take. 4.5.(c) The termination of this Agreement and Executive's employment hereunder shall not affect Executive's right to exercise any vested stock options in accordance with the terms of Company's Stock Option Plan, and shall not relieve either party from any liability or damage directly or indirectly arising out of any breach of or default under this Agreement or any failure to comply with or perform any obligations under this Agreement, and termination of Executive's employment shall not affect Company's rights under Article 6. 5. COMPENSATION AND OTHER BENEFITS 5.1. ANNUAL SALARY. As compensation for services rendered by Executive to Company, Company shall pay Executive an annual salary in the amount of One Hundred Seventy-Five Thousand Dollars ($175,000) for each year of the Term, prorated for any partial period. The annual salary shall be payable in accordance with Company's regular payroll practices. 5.2. EMPLOYMENT TAXES. All compensation shall be subject to the customary withholding tax and other employment taxes as required with respect to compensation paid by a company to an employee. 5.3. BONUS. As additional compensation for services rendered by Executive to Company, Executive shall receive a bonus of at least Seventy-Five Thousand Dollars ($75,000) but not more than One Hundred Thousand Dollars ($100,000), the exact amount of which shall be determined by the Board in its sole and absolute discretion, and paid within thirty (30) days following Company's closing of its initial public offering. Company may pay Executive such other discretionary bonuses as may be determined by the Board in its sole and absolute discretion. 5.4. EXPENSES. Company and Executive hereby acknowledge that Executive may be required, during the Term, to incur certain expenses in connection with his employment 5 hereunder including, but not limited to, parking, travel, entertainment, and other expenses. Company shall reimburse Executive for ordinary and necessary business expenses incurred by Executive in the performance of his duties hereunder if such expenses have previously been approved by Company or if reimbursement is otherwise appropriate in accordance with Company's established policies and if Company receives such verification thereof as Company may require. 5.5. LIFE INSURANCE. Executive currently owns a life insurance policy on his life in the face amount of One Million Dollars ($1,000,000) issued by Minnesota Mutual Life, Policy No. 50014-G (the "Life Insurance Policy"). The monthly premium for such Life Insurance Policy is Four Hundred Twenty Dollars ($420). During the Term, Company shall pay the premiums on such Life Insurance Policy, or shall reimburse Executive if Executive pays such premiums himself. 5.6. STOCK OPTIONS. Executive understands that Company is currently in the process of designing and implementing a stock option program for its executives and employees. Upon adoption of such plan, Company shall grant to Executive stock options, conditioned on the closing of the Company's initial public offering, to purchase that number of shares of Common Stock of the Company which are equal to two percent (2%) of the Company's issued and outstanding prepublic offering capitalization on a fully diluted basis at the lowest purchase price for which options are to be granted under the Company's stock option plan prior to the initial public offering. Twenty percent (20%) of the stock options granted to Executive will automatically vest and become exercisable on that date which is ninety (90) days after the commencement date of the Term. The balance of the stock options shall vest in three (3) equal cumulative installments on the first anniversary date, second anniversary date and third anniversary date, respectively, of Executive's employment hereunder. If, Executive's unvested stock options would be terminated as a result of a "Change in Control" then, all of Executive's unvested options, if any, shall become immediately exercisable. For purposes of this Agreement, the term "Change in Control" means: (a) the obtaining of control by any person or "group" (other than the persons who own five percent (5%) or more of the shares of the Company as identified in the Company's Registration Statement on Form S-1 filed in connection with the Company's initial public offering) within the meaning of Section 13(d) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership (within the meaning of the Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of voting securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors; or (b) such time as a majority of the Board shall be comprised of persons who were not elected to such offices as part of the "Company nominated slate" of directors (i.e. the slate of nominees proposed by the Board in office immediately prior to the election; provided, however, that this clause shall not apply in the event one or more directors voluntarily 6 resign from the Board. All other terms and conditions of Executive's stock options shall be in accordance with the terms of the Company's stock option plan. 5.7. OTHER BENEFITS. During the Term of this Agreement, Executive shall receive such other life insurance, pension, disability insurance, health insurance, holiday, vacation and sick pay benefits which Company extends, as a matter of policy, to its executive employees and, except as otherwise provided herein, shall be entitled to participate in all deferred compensation and other incentive plans of Company on the same basis as other like employees of Company. Without limiting the generality of the foregoing, Executive shall be entitled to three (3) weeks vacation during each year of the Term of this Agreement, which shall be scheduled in Executive's discretion, subject to and taking into account the business exigencies of Company. Unused vacation may be accrued for one (1) year only. Vacation in excess of two (2) consecutive weeks shall be subject to the reasonable approval of the Board. 6. TRADE SECRETS; CONFIDENTIALITY 6.1. "CONFIDENTIAL INFORMATION". "Confidential Information" is all information, data and knowledge of a business, professional or technical nature relating to Company; its subsidiaries and affiliates; and Company's, its subsidiaries' and affiliates' business, finances, operations, properties, services and clients; information which is not generally known outside of Company or information entrusted to Company by third parties; and includes information known to Executive as confidential or secret or which Executive shall have reason to know or reasonably should know is confidential or secret, to the extent that such information derives potential or actual independent economic value from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from this disclosure or use and is the subject of efforts reasonable under the circumstances to maintain its secrecy. Confidential Information may relate, for example, to trade secrets, client lists, clients' names and requirements, client businesses, client profiles, client finances, client accounts, employees, business methods, business or marketing plans, personnel information, credit information, financial information, the names and locations of vendors and suppliers, equipment, equipment design, research, development, engineering, manufacturing, purchasing, accounting, selling, marketing, contractors, compositions, computer software, computer hardware, technology, research, infrastructures, products, procedures, calculations, specifications, developments, formulae, compilations, inventions, designs, plans, databases, database structure, data, accounts, billing methods, pricing, costs, business methods, systems, plans, internal affairs, legal affairs, security methods, creative ideas and concepts, projects, advertising, merchandising techniques and any and all information entrusted to the Company by third parties. This information may be contained in materials ("Materials") such as books, records, files, notes, lists, computer rograms, tapes, cd roms, hard disc and soft disc drive mechanisms, other mechanisms 7 for electronic or digital storage of information, computer printouts, data input to computers, drawings, documents, data, reports, customer, price and supplier lists, specifications, or other miscellaneous embodiments, or may be in the nature of, or consist of, verbal communication or unwritten knowledge, techniques, formulas, processes, practices or know-how. 6.2. ACKNOWLEDGMENT BY EXECUTIVE. Executive acknowledges that Company will be required hereunder to make Confidential Information available to Executive which has been developed at great expense and effort by Company because knowledge of such Confidential Information will be essential to the performance of Executive's duties under this Agreement. Executive recognizes that Company has expert knowledge in its field and that many of its methods, and much of its know-how is expert and unique and its customer and potential customer contracts are of substantial commercial value. Executive further acknowledges, without limiting the generality of the foregoing, that the identity, business needs, desires and peculiarities of customers and suppliers of Company constitutes valuable Confidential Information. Executive also acknowledges that prior to or during his employment with Company he may be given access to or become acquainted with Confidential Information. Executive acknowledges that such Confidential Information is a valuable, special, unique asset of Company's business. 6.3. NO USE OR DISCLOSURE. Without Company's prior written authorization, Executive shall not communicate, use, divulge, or disclose to any other person, firm or entity any Confidential Information or any copy, reproduction or summary thereof, in any manner, at any time, whether during the Term or after Executive's Employee's employment with Company has terminated, other than as required by Company in Executive's work for Company. 6.4. RESTRICTION ON REMOVAL AND REPRODUCTION. Executive agrees that all Confidential Information, and the tangible or intangible embodiments thereof including, without limitation, all Materials relating to Company's business, whether or not prepared or conceived by Executive during his employment with Company or by another, or which may be in Executive's possession or control, are and shall remain Company's exclusive property, and Executive shall not copy, summarize or remove from Company's premises such Confidential Information or Materials in whole or in part at any time prior to or after termination, except as otherwise permitted by Company in accordance with Company's rules and regulations. Executive shall not permit such Confidential Information or Materials to be used in any way for the benefit of Executive or any other person or business entity. Executive shall immediately return all such Confidential Information and Materials, and any and all copies or summaries thereof to Company when they are no longer required by Executive in order for Executive to perform his services for Company, when Executive's employment with Company terminates for any reason, or whenever Company may require that they be returned. 6 6.5. OWNERSHIP. Executive acknowledges and agrees that all results and proceeds of Executive's services hereunder, including all Confidential Information, Materials, work product and other materials of any kind or character which Executive has made or conceived, either solely or with others, during his employment by the Company which are applicable directly or indirectly to any phase of the Company's business shall automatically become the Company's sole and exclusive property and the Company shall be the owner and author thereof. Executive further acknowledges that all such results and proceeds shall constitute "works made for hire" within the meaning of the copyright laws of the United States. Executive hereby irrevocably assigns to the Company all rights, title and interest in and to all such results and proceeds including, without limitation, all copyrights and patents pertaining thereto and all renewals, extensions, subdivisions and continuations-in-interest thereof. Except as required in order to enable Executive to perform his job duties, no such results and proceeds, Materials or Confidential Information will be made available by Executive to others during or following his employment with the Company without the advance written permission of an officer of the Company. 6.6. NO SOLICITATION. While employed by the Company and for a period of one (1) year thereafter, without the express prior written approval of an officer of the Company, Executive shall not: (a) solicit or attempt to solicit any clients of Company, either for himself or for any other person, firm or corporation; (b) employ, attempt to employ, entice, encourage or solicit for employment by others, any of the Company's employees; (c) induce or attempt to induce a consultant, independent contractor, licensee or other third party to sever his, her or its relationship with the Company; or (d) assist any other person, firm or entity in the solicitation of any of the Company's consultants, independent contractors, licensees, or employees. 6.7. RETURN OF CONFIDENTIAL INFORMATION. Executive shall return immediately to the Company all Confidential Information and Materials, including copies, duplicates, summaries or reproductions thereof when he leaves its employ or whenever Company may otherwise require that such Confidential Information or Materials be returned. 7. SPECIFIC PERFORMANCE; SURVIVABILITY. 7.1. SPECIFIC PERFORMANCE. Without in any manner limiting the provisions of Article 6, Executive recognizes and acknowledges that all of the Confidential Information, as it may exist from time to time, is a valuable, special and unique trade secret asset of Company. Executive agrees that the remedy at law for a breach of the covenants contained in Article 6 is inadequate and that therefore in the event of a breach, or threatened breach by Executive of the provisions of Article 6, Company shall be entitled to an injunction or restraining order restraining Executive from disclosing in whole or in part any Confidential Information, or from rendering 9 any services to any person, firm, corporation, association or other entity to whom such Confidential Information, in whole or in part, may have been disclosed or is threatened to be disclosed or from breaching the covenants contained in Article 6. Nothing herein shall be construed as prohibiting Company from pursuing any other remedies available to Company for such breach or threatened breach, including the recovery of damages from Executive. To the extent permissible by law, Executive specifically waives the necessity for Company to post bond in any injunctive or similar proceeding, and in any event, consents to the posting of the smallest bond allowed by law. 7.2. REASONABLENESS OF RESTRICTIONS. Executive acknowledges that his covenants contained in Article 6 are a material part of the consideration for this Agreement, are reasonably necessary to protect legitimate interests of Company, are reasonable in scope and duration and are not unduly restrictive. 7.3. SURVIVABILITY. All covenants and agreements contained in Article 6 shall survive the termination of this Agreement and Executive's employment with Company. 80 INDEMNIFICATION Company shall, to the maximum extent permitted by law, indemnify and hold Executive harmless from and against all claims, actions, causes of actions, judgments, liabilities, obligations and expenses, including without limitation, attorneys' fees, court costs, judgments, fines, settlements, and other amounts actually incurred arising out of, relating to or in connection with Executive's employment by Company, his services as an officer of Company, or the discharge of his duties hereunder; provided, however, that the foregoing indemnity shall not apply to any activity which is beyond the scope of his employment or agency authority. Company shall advance to Executive any expenses incurred in defending any such proceeding to the maximum extent permitted by law. 90 ARBITRATION Any controversy or claim arising out of or relating to this Agreement including, but not limited to, any claim relating to its validity, interpretation, enforceability or breach, or any other claim or controversy arising out of the employment relationship or the commencement or termination of that relationship, including, but not limited to, claims for breach of covenant, breach of an implied covenant or intentional infliction of emotional distress, which are not settled by agreement between the parties, shall be settled by final and binding arbitration to be heard on an expedited basis by a retired California Superior Court or Appellate Court judge in Orange County, California in accordance with the employment dispute resolution rules of the American 10 Arbitration Association ("AAA") in effect at the time a claim is filed. In consideration of each party's agreement to submit to arbitration all disputes with regard to this Agreement or with regard to any alleged contract or tort or other claim arising out of the employment relationship or the commencement or termination of that employment relationship, and in consideration of the anticipated expedition and the minimizing of expense of this arbitration remedy, each party agrees that the arbitration provisions of this Agreement shall provide it with its exclusive remedy and each party expressly waives any right it might have to seek redress in any other forum except as provided in Article 7 and Section 10.1. The parties agree that this means that they are giving up their right to a jury trial and to trial in a court of law in favor of the right to arbitrate. The parties further agree that the arbitrators acting hereunder shall be empowered to assess any remedy including, but not limited to, injunctive orders (including temporary, preliminary and permanent relief) when appropriate. It is specifically contemplated and agreed by the parties hereto that discovery may be conducted by any party pursuant to the provisions of Section 1283.05 of the California Code of Civl Procedure which are hereby incorporated into, and made a part of, and made applicable to this Agreement, and the arbitrators shall have the full power of a Court of the State of California to issue and enforce subpoenas. A judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction. In reaching a decision, the arbitrator shall be required to apply substantive California and federal law and, shall have no authority to change, extend, modify or suspend any of the terms of this Employment Agreement. 100 GENERAL PROVISIONS. 10.1. INJUNCTIVE RELIEF. In the event of a breach by Executive of any of his undertakings hereunder, Executive agrees that in addition to any other rights or remedy provided by law or equity, a restraining order or an injunction may issue against Executive to enforce compliance with this Agreement. 10.2. NO PERSONAL INTEREST. Executive shall not have any personal interest, direct or indirect, in any supplier of, or in any transaction between, any supplier and Company. 10.3. ASSIGNMENT. Neither this Agreement nor any rights or benefits hereunder shall be subject to execution, attachment or similar process and Executive may not assign, transfer, pledge or hypothecate this Agreement or any rights or benefits hereunder without the prior written consent of Company. Any such assignment, transfer, pledge or hypothecation hereof by Executive in violation of this provision shall be null, void and of no effect. Subject to the foregoing, this Agreement and all of the terms and conditions hereof shall benefit and bind Company and its successors and assigns and shall benefit and bind Executive and his successors. Company's rights hereunder shall accrue to the benefit of any person, firm, or corporation which 11 may succeed to its business by merger, purchase of stock or assets, or otherwise. 10.4. INTEGRATION. Neither of the parties hereto have made any representations, statements, warranties or other agreements other than those expressed herein. This Agreement embodies the entire understanding of the parties with respect to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, or understandings, written or oral, between the parties. This Agreement may be amended or modified only by a written agreement, signed by the parties hereto. 10.5. NOTICES. 10.5.(a) All notices, requests, payments, statements, demands or other communications given under this Agreement (collectively "Communications") shall be in writing. Notice shall be sufficiently given for all purposes as follows: (1) PERSONAL DELIVERY. When personally delivered to the recipient. Notice is effective on delivery. (2) FIRST-CLASS MAIL. When mailed first class to the last address of the recipient known to the party giving notice. Notice is effective three (3) mail delivery days after deposit in a United States Postal Service office or mailbox. (3) CERTIFIED MAIL. When mailed certified mail, return receipt requested. Notice is effective on receipt, if delivery is confirmed by a return receipt. (4) OVERNIGHT DELIVERY. When delivered by (overnight delivery Federal Express/Airborne/United Parcel Service/DHL WorldWide Express), charges prepaid or charged to the sender's account. Notice is effective on delivery, if delivery is confirmed by the delivery service. (5) TELEX OR FACSIMILE TRANSMISSION. When sent by telex or fax to the last telex or fax number of the recipient known to the party giving notice. Notice is effective on receipt, provided that (a) a duplicate copy of the notice is promptly given by first-class or certified mail or by overnight delivery, or (b) the receiving party delivers a written confirmation of receipt. ; Any notice given by telex or fax shall be deemed received on the next business day if it is received after 5:00 p.m. (recipient's time) or on a nonbusiness day. 10.5.(b) Addresses for purpose of giving notice are as follows: If to Company: Hospitality Marketing Consultants, LLC 12 15751 Rockfield Blvd., Suite 200 Irvine, CA 92618 Attention: Mokhtar Ramadan, President Fax: (714) 747 454-1888 If to Executive: Philip G. Hirsch 121 29th Street Newport Beach, CA 92663 10.5.(c) Any correctly addressed notice that is refused, unclaimed, or undeliverable because of an act or omission of the party to be notified shall be deemed effective as of the first date that said notice was refused, unclaimed, or deemed undeliverable by the postal authorities, messenger, or overnight delivery service. 10.5.(d) Either party may change its address or telex or fax number for purposes of this Section 10.5 by notifying the other party of its new address in the manner set forth in this Section 10.5. 10.6. GOVERNING LAW; SEVERABILITY. This Agreement is made under and shall be construed in accordance with the laws of the State of California. Nothing in this Agreement shall be construed to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, ordinance or regulation contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event the provision of this Agreement so affected shall be curtailed and limited only to the extent necessary to bring it within the requirement of the law. If any term or provision of this Agreement is determined by a Court of competent jurisdiction to be illegal, invalid, or unenforceable for any reason whatsoever, such illegality, invalidity, or unenforceability shall not affect the remaining terms and provisions of this Agreement, which remaining terms and provisions shall remain in full force and effect. 10.7. WAIVER. A waiver of any of the terms and conditions hereof by Company or Executive shall not constitute a waiver of any other term or condition hereof, nor shall it constitute a general waiver by the waiving party, and the waiving party shall be free to reinstate any such term or condition without notice to the other party. 10.8. HEADINGS. The Article and Section headings used herein are for convenience only and are not a part of this Agreement. 13 10.9. GENDER. Whenever required by the context hereof, the singular shall be deemed to include the plural and the plural to include the singular, and the masculine, feminine and neuter gender shall each be deemed to include the others. 10.10. COUNTERPARTS. This instrument may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and at the place indicated opposite their respective signatures below. "COMPANY" HOSPITALITY MARKETING CONSULTANTS, LLC a California limited liability company Executed at ____________, this ____ day of ________. By:_________________________ Its:________________________ "EXECUTIVE" Executed at ____________, this ____ day of ________. ____________________________ Philip G. Hirsch 15 EX-10.11 14 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into as of July 1, 1998, by and between , an individual ("EMPLOYEE"), and Hospitality Marketing Concepts Inc., a Delaware corporation ("EMPLOYER"). R E C I T A L S: A. Employer desires to employ Employee and Employee desires to be employed by Employer, upon the terms and conditions set forth herein. A G R E E M E N T: NOW, THEREFORE, in consideration of the premises and mutual agreements, and upon the terms and subject to the conditions contained set forth below, the parties agree as follows: SECTION 1 TERM. Employer agrees to employ Employee, and Employee agrees to serve Employer, in accordance with the terms of this Agreement, for a term of three (3) years, commencing on July 1, 1998 and ending on June 30, 2001, unless this Agreement is earlier terminated in accordance with its provisions. SECTION 2 SERVICES AND EXCLUSIVITY OF SERVICES. So long as this Agreement shall continue in effect, Employee shall (i) devote his full business time, energy and ability exclusively to the business, affairs and interests of Employer and its subsidiaries and matters related thereto, (ii) use Employee's best efforts and abilities to faithfully and diligently promote the business, affairs and interests of Employer and its subsidiaries, if any, and (iii) shall perform the services contemplated by this Agreement in accordance with policies established by, and under the direction of, the Board or Directors of the Employer (the "Board"). Employer and Employee acknowledge that Employee will be required to perform services outside of the United States. -1- SECTION 3 SPECIFIC POSITION; DUTIES AND RESPONSIBILITIES. Employer and Employee agree that, subject to the provisions of this Agreement, Employer will employ Employee and Employee will serve Employer as a senior officer for the duration of this Agreement. The specific position in which Employee shall initially serve shall be ______________________________ ___________________________. Employee agrees to observe and comply with the rules and regulations of Employer as adopted by the Board respecting the performance of Employee's duties and agrees to carry out and perform orders, directions and policies of Employer and its Board as they may be, from time to time, stated either orally or in writing. Employer agrees that the duties which may be assigned to Employee shall be usual and customary duties of the office(s) or position(s) to which he may from time to time be appointed or elected and shall not be inconsistent with the provisions of the charter documents of Employer or applicable law. Employee shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties in any office that may be held. SECTION 4 COMPENSATION. (a) BASE SALARY. During the term of this Agreement, Employer agrees to pay Employee a base salary of _____________ Thousand Dollars ($______) per year, or such other amount as may be determined upon a review of Employee's performance to be undertaken by the Board at least once annually for such things a cost of living adjustments, changes in responsibilities and duties, and Employer's success and performance ("BASE SALARY"). The Base Salary shall be paid in installments on the same dates the other senior officers of Employer are paid. (b) BONUS. Employer agrees to negotiate with Employee an incentive bonus based upon the performance targets mutually agreed to by the Board and Employee from time to time but at least annually, in advance of the applicable year (and as soon as practicable with respect to the year commencing January 1, 1998). In the event such targets are established and the bonus amounts are so negotiated and agreed, such other terms and conditions shall be set forth in a letter to be signed by Employer and Employee. (c) ADDITIONAL BENEFITS. Employee shall also be entitled to all rights and benefits under the Employer's 1998 Stock Option Plan, as amended, and any other stock option, -2- bonus, incentive, participation or extra compensation plan, pension plan, profit-sharing plan, life, medical, dental, disability, or insurance plan or policy or other plan or benefit that Employer or its subsidiaries may provide for Employee (provided Employee is eligible to participate therein) or other employees of Employer generally as from time to time in effect during the term of this Agreement (the "PLANS"). The life, medical and dental plans shall also cover all dependents of Employee at Employer's sole expense. In any event, Employer shall provide Employee with (i) term life insurance equal to five (5) times the Base Salary and (ii) long-term disability insurance provided for Employer's executive employees generally. Employee shall also be entitled to fringe benefits in accordance with the plans, practices, programs and policies as in effect generally with respect to other peer executives of Employer. (d) PERQUISITES. (i) VACATION. Employee shall be entitled to four (4) weeks of paid vacation each twelve (12)-month period, which shall accrue on a monthly basis. Vacation time will continue to accrue so long as Employee's total accrued vacation does not exceed twelve (12) weeks. Should Employee's accrued vacation time reach twelve (12) weeks, Employee will cease to accrue further vacation until Employee's accrued vacation time falls below this level. Such vacation shall be taken at such time or times as shall not unduly disrupt the orderly conduct of the business of Employer and the duties of Employee. (ii) VEHICLE ALLOWANCE. During the term of this Agreement, Employer shall provide Employee an automobile reasonably acceptable to Employee and Employer shall bear all expenses associated with the automobile including, without limitation, lease or purchase payments, insurance, taxes and license fees, gasoline and all maintenance expenses. (iii) TAX PREPARATION AND ADVICE. During the term of this Agreement, Employer shall provide Employee an annual allowance for personal tax preparation and professional advice in the amount of Ten Thousand Dollars ($10,000) payable on April 15 of each year. (iv) POSTING OUTSIDE OF UNITED STATES. Should Employee be based at a location outside of the United States, Employer shall reimburse Employee for all extraordinary expenses associated with maintaining a residence outside of the United States including, without limitation: the provision of a -3- housing allowance sufficient to provide housing to Employee reasonably equal to the housing which Employee would maintain or has maintained in the United States; the costs of education for every dependent under the age of eighteen (18) years residing with Employee; all reasonable costs of moving furniture and other personal belongings to and from the location outside of the United States (including, without limitation, the costs of returning to the United States at the end of the term or upon the earlier termination (with or without cause) of this Agreement); the cost of two (2) roundtrip, first class airplane tickets to the United States per year for Employee, Employee's spouse and dependents under the age of eighteen (18) years; the excess, if any, of the amount of taxes paid by the Employee to any local, provincial, state, national or other governmental entity located outside of the United States, over what the Employee would have paid had the Employee resided in the United States; and a reasonable "hardship" allowance to be agreed upon by Employer and Employee. The housing allowance shall include, without limitation, the costs of renting or purchasing a residence (as agreed upon by Employer and Employee), utilities, and local taxes, if any. (e) OVERALL QUALIFICATION. Employer reserves the right to modify, suspend or discontinue any and all practices, policies and programs at any time (whether before or after termination of employment) without notice to or recourse by Employee. However, Employer shall not amend the perquisites set -4- forth in Section 4(d) to reduce Employee's benefits thereunder during the term of this Agreement. SECTION 5 TERMINATION. The compensation and other benefits provided to Employee pursuant to this Agreement, and the employment of Employee by Employer, shall be terminated prior to expiration of the term of this Agreement only as provided in this Section 5. (a) DISABILITY. In the event that Employee shall fail, because of illness, incapacity or injury which is determined to be a total disability ("DISABILITY") by a physician selected by Employer or its insurers and acceptable to Employee or Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably), to render for three consecutive months or for shorter periods aggregating ninety (90) or more business days in any twelve (12)-month period, the services contemplated by this Agreement, Employee's employment pursuant to this Agreement may be terminated by sixty (60) days' prior written notice of termination from Employer to Employee. Thereafter, Employer shall continue to (i) pay the Base Salary to Employee for a period of twelve (12) months after the date of termination, subject to adjustments referenced in the following paragraph, and (ii) to provide medical insurance as in effect prior to such termination for a period of twelve (12) months following the date of termination. Thereafter, no further salary shall be paid or medical insurance be provided. Employee's rights under the Plans subsequent to termination of employment pursuant to this paragraph shall be determined under the applicable provisions of the respective Plans unless otherwise expressly stated in this Agreement. This Agreement in all other respects will terminate upon the termination of employment pursuant to this paragraph. The amount of compensation to be paid to Employee pursuant to the preceding paragraph shall be adjusted in the event Employee becomes entitled to and receives disability benefits under any disability payment plan, including disability insurance, by reducing the amount of Employee's compensation otherwise payable by Employer pursuant to the preceding paragraph shall be reduced, on a dollar-for-dollar basis, but not to less than zero, by the amount of any such disability benefits received by Employee, but only to the extent such benefits are attributable to payments made by Employer. -5- (b) DEATH. In the event of Employee's death during the term of this Agreement, Employee's Base Salary shall immediately terminate and Employer shall pay to the estate of Employee the Base Salary accrued to the date of Employee's death to the extent not theretofore paid. If Employee's death occurs while receiving payments under Section 5(a), such payments shall cease. Employee's rights under the Plans subsequent to his death shall be determined under the applicable provisions of the respective Plans, PROVIDED that, notwithstanding any provisions to the contrary therein, Employer shall continue to provide medical insurance to the dependents of Employee for a period of twelve (12) months following the death of Employee. This Agreement in all other respects will terminate upon the death of Employee. (c) FOR CAUSE. Employee's employment hereunder shall be terminable upon a determination by the Board, acting in good faith based upon actual knowledge at such time, that Employee (i) is or has been engaging in a willful or grossly negligent conduct which has resulted in a failure to perform his duties hereunder or as an employee or officer of Employer, (ii) has committed an act of dishonesty, gross carelessness, or other misconduct, or (iii) has committed any act or series of acts which have a direct, substantial and adverse effect on Employer, its business or reputation. Notwithstanding the foregoing, Employee shall not be terminated for cause pursuant to the first paragraph of this Section 5(c) unless and until Employee has received notice of a proposed termination for cause and Employee has had an opportunity to be heard by the Board. Employee shall be deemed to have had such opportunity if given written or telephonic notice by any director at least ninety-six (96) hours in advance of a meeting. In the event of Employee's termination pursuant to this Section 5(c), Employee's rights to receive Base Salary shall immediately terminate and Employer shall pay to Employee his Base Salary accrued to the date of such termination to the extent not theretofore paid and the bonus which would otherwise have become payable pursuant to the terms established under Section 4(b) subject to the following provisions. If Employee is terminated with cause, Employee shall be entitled to receive a payment (the "PARTIAL BONUS SEVERANCE") equal to a portion of the bonus which would otherwise have become payable to Employee pursuant to the terms established under Section 4(b) (the "TOTAL POTENTIAL BONUS") if he had not been terminated. The amount of -6- such Partial Bonus Severance shall be equal to (X) the Total Potential Bonus multiplied by (Y) a fraction, the numerator of which shall be the days elapsed between the first day of the fiscal year and the date of Employee's termination, and the denominator of which shall be 365. The Partial Bonus Severance shall be calculated and paid only after the close of the fiscal year in which Employee was terminated, and then only at the times and in the proportions as bonuses are distributed generally by Employer. Employee's rights under the Plans subsequent to termination shall be determined under the applicable provisions of the respective Plans. Except as expressly set forth to the contrary, this Agreement in all other respects will terminate upon such termination. (d) WITHOUT CAUSE. Notwithstanding any other provision of this Section 5, the Board shall have the right to terminate Employee's employment with Employer without cause at any time upon at least thirty (30) days' prior written notice to Employee ("WITHOUT CAUSE TERMINATION"). In addition, it shall be deemed for all purposes to be a Without Cause Termination if Employee terminates his employment by reason of (i) any action by Employer which results in a material diminution in Employee's then position (including status, titles and reporting requirements), authority, duties or responsibilities, but excluding, for this purpose, an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by Employer promptly after receipt of written notice from Employee, (ii) any repeated failure of Employer to comply with any of the provisions of this Agreement and which is not remedied by Employer in a reasonable period of time after receipt of written notice from Employee, (iii) a reduction in the Employee's level of compensation (including Base Salary, fringe benefits and any non-discretionary and objective standard incentive payment, but not including the bonus referred to in Section 4(b) unless the performance targets referred to have been met and such bonus is not paid by the Employer), (iv) Employer requiring Employee to be based at any office or location more than thirty-five (35) miles from the Employee's current place of employment, or (v) a "change in control" shall occur. A "change in control" shall be deemed to occur upon the occurrence of any of the following events: (i) the acquisition by any person or entity of more than twenty-five percent (25%) of the combined voting power of the Employer's outstanding securities; or (ii) Employer stockholder approval of any consolidation or merger of the Employer with another corporation if, following the consolidation or merger, stockholders of the -7- Employer immediately prior to such consolidation or merger would not beneficially own securities representing at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the surviving or continuing corporation; or (iii) during any period of twenty-four (24) consecutive months individuals who at the beginning of such period constitute the Board and qualified replacements cease for any reason to constitute a majority of the board. A director shall be a "qualified replacement" if the election or nomination for election by the Employer's stockholders of the director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; or (iv) stockholder approval of any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Employer other than to an entity (or entities) of which the Employer or the stockholders of the Employer immediately prior to such transactions beneficially own securities representing at least sixty percent (60%) of the combined voting power of the outstanding voting securities. The following conditions shall thereupon become applicable upon the occurrence of a Without Cause Termination: (i) SEVERANCE PAY. Employer shall continue to pay Employee the Base Salary on a monthly basis for (X) the remainder of the term of this Agreement as it may be extended from time to time in the event such termination occurs before the second anniversary of this Agreement or (Y) a period of twelve (12) months in the event such termination occurs after the second anniversary of this Agreement. (ii) MEDICAL INSURANCE CONTINUATION. Employer shall continue to provide medical insurance as in effect prior to such termination for (X) the remainder of the term of this Agreement as it may be extended from time to time in the event such termination occurs before the second anniversary of this Agreement or (Y) twelve (12) months in the event such termination occurs after the second anniversary of this Agreement, PROVIDED that Employee's right to such benefits shall cease immediately upon the commencement of employment with a new employer. (iii) BONUS PAYMENT. If a Without Cause Termination occurs, Employee shall be entitled to receive a payment in lieu of the bonus which would otherwise have become payable to Employee pursuant to the terms established under Section 4(b) for the year when the termination occurs and for -8- each subsequent year for which Employee is entitled to receive Severance Pay pursuant to Section 5(d)(i) above which such payment shall be equal to: for the year of termination without cause, the Total Potential Bonus; and for each subsequent year, an amount equal to the highest amount paid to Employee pursuant to Section 4(b) in any prior year (including the year of the Without Cause Termination). (iv) OTHER PLANS. Except as set forth above, Employee's rights under the other Plans subsequent to termination shall be determined under the provisions of the other Plans. The foregoing to the contrary notwithstanding, Employee shall upon any such termination be deemed to be one hundred percent (100%) vested in any options, warrants, stock appreciation rights, or the like, previously granted to Employee pursuant to any Plan or otherwise. (e) VOLUNTARY TERMINATION. At any time during the term of this Agreement, Employee shall have the right, upon thirty (30) days' prior written notice to Employer, to terminate his employment with Employer. Upon termination of Employee's employment pursuant to this Section 5(e), (i) Employee's right to receive Base Salary shall immediately terminate and Employer shall pay to Employee his Base Salary accrued to the date of such termination to the extent not theretofore paid, and (ii) Employee's rights under the Plans subsequent to such termination shall be determined under the applicable provisions of the respective Plans. This Agreement in all other respects will terminate upon such termination. (f) NO LIMITATION. Employer's exercise of its right to terminate shall be without prejudice to any other right or remedy to which it or any of its affiliates may be entitled a law, in equity or under this Agreement. (g) EXCLUSIVE REMEDY. Employee agrees that the payments expressly required by this Agreement shall constitute the sole and exclusive obligation of Employer in respect of Employee's employment with and relationship to Employer and that the payment thereof shall be the sole and exclusive remedy for any termination of Employee's employment. Employee covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. (h) TAX TREATMENT. The parties intend that the compensation to be provided pursuant to this Agreement not exceed the limit imposed by Section 280(g) of the Internal -9- Revenue Code as it may be amended from time to time. The parties agree to limit the compensation payable pursuant to this Agreement as necessary from time to time in order to avoid exceeding such limit. SECTION 6 BUSINESS EXPENSES. During the term of this Agreement, to the extent that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by Employer (whether or not fully deductible by Employer) for federal income tax purposes as ordinary and necessary business expenses. Employer shall reimburse Employee promptly for reasonable business expenditures, including travel entertainment, parking, business meetings, and professional dues but not the costs of (or dues associated with) maintaining club membership, made and substantiated in accordance with policies, practices and procedures established from time to time by the Board and incurred in pursuit and furtherance of Employer's business and good will. SECTION 7 MISCELLANEOUS. (a) SUCCESSION; SURVIVAL. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Employee this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of Employer hereunder. The obligations and duties of Employee hereunder are personal and otherwise not assignable. Employee's obligations and representations under this Agreement will survive the termination of Employee's employment, regardless of the manner of such termination. (b) NOTICES. Any notice or other communication provided for in this Agreement shall be in writing and sent, if to Employer, to its office at: Hospitality Marketing Concepts Inc. 15751 Rockfield Boulevard, Suite 200 Irvine, California 92718 (949)454-1888 (facsimile) Attention: Chief Financial Officer -10- with a copy to: Greenberg Glusker Fields Claman & Machtinger LLP 1900 Avenue of the Stars, Suite 2100 Los Angeles, California 90067 (310)553-0687 (facsimile) Attention: Michael Bales, Esq. or at such other address as Employer may from time to time in writing designate, and if to Employee at the address set forth below his signature to this agreement or such other address as Employee may from time to time in writing designate (or Employee's business address of record in the absence of such designation). Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or pursuant to) this Section 7 and an appropriate answer back is received, (ii) if given by mail, three (3) days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid unless such address is outside the continental United States, in which case it shall be deemed effective when actually delivered at such address or (iii) if given by any other means, when actually delivered at such address. (c) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and it supersedes any prior agreements, undertakings, commitments and practices relating to Employee's employment by Employer. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Employee and, on behalf of Employer, by an officer expressly so authorized by the Board. (d) WAIVER. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) CHOICE OF LAW. This Agreement, the legal relations between the parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter of this -11- Agreement shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law. (f) ARBITRATION. Any dispute, controversy or claim arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter of this Agreement shall at the request of either party be submitted to and settled by arbitration conducted in Santa Ana, California in accordance with the Labor and Employment Arbitration Rules of the American Arbitration Association. The arbitration shall be governed by the Federal Arbitration Act (9 U.S.C. Sections 1-16). The arbitration of such issues, include the determination of any amount of damages suffered, shall be final and binding upon the parties to the maximum extent permitted by law. The arbitrator in such action shall not be authorized to change or modify any provision of this Agreement. Judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction. The arbitrator shall award reasonable expenses (including reimbursement of the assigned arbitration costs and legal fees) to the prevailing party upon application. (g) CONFIDENTIALITY; PROPRIETARY INFORMATION. Employee agrees to not make use of, divulge or otherwise disclose, directly or indirectly, any trade secret or other confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Employee may learn or be aware as a result of Employee's employment during the term of this Agreement or prior thereto as stockholder, employee, officer or director of or consultant to Employer, except to the extent such use or disclosure is (i) necessary to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other public sources, or (iv) authorized in writing by Employer. The provisions of this Section 7(g) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (h) SEVERABILITY. If this Agreement shall for any reason be or become unenforceable in any material respect by any party, this Agreement shall thereupon terminate and become unenforceable by the other party as well. In all other respects, if any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall -12- nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (i) WITHHOLDING; DEDUCTIONS. All compensation payable hereunder, including salary and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. (j) SECTION HEADINGS. Section and other headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. [SIGNATURE PAGE FOLLOWS] -13- (k) COUNTERPARTS. This Agreement and any amendment hereto may be executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. Entered into as of the date set forth above. "EMPLOYER" HOSPITALITY MARKETING CONCEPTS INC. By:_______________________________ Its: _____________________________ "EMPLOYEE" _______________________ __________________________________ Address: _________________________ _________________________ -14- EX-10.12 15 EXHIBIT 10.12 EMPLOYMENT AGREEMENT 1. IDENTIFICATION This Employment Agreement (the "Agreement"), dated for identification purposes only February 1, 1998, is entered into by and between Hospitality Marketing Concepts Limited, a company incorporated in the United Kingdom ("Company"), and Frans Van Steenbrugge, an individual ("Executive"). 2. RECITALS 2.1. Company is engaged in the business of providing membership programs and direct marketing services and is introducing a telephone calling card product for distribution to its members and others. 2.2. Executive has special skills and abilities in marketing and telecommunication services. 2.3. Company desires to employ Executive as Group Vice President/General Manager-Telecom and Executive is willing to undertake such employment on the terms and conditions set forth in this Agreement. Therefore, Company and Executive agree as follows: 3. TERM OF THE AGREEMENT Executive's employment under this Agreement shall be for three (3) years, commencing on February 1, 1998 and continuing through January 31, 2001 (the "Term"), subject, however, to prior termination as provided in Section 6. 4. EMPLOYMENT, DUTIES AND COVENANTS 4.1. EMPLOYMENT. Executive shall be employed during the Term as Group Vice President/General Manager-Telecom or in such other capacities, offices or positions with Company or any subsidiary or affiliate of Company as Company's Board of Directors (the "Board") or President may prescribe from time to time. All references to Company herein shall include its subsidiaries and affiliates. 4.2. DUTIES. The powers, duties and responsibilities to be held or performed by Executive hereunder shall include, without limitation, overall supervision of the Company's marketing and telecommunications operations and such other powers, duties and responsibilities typically held or performed by direct marketing and telecommunications executives. Executive agrees that Company, the Board and the President retain the sole discretion to modify, add to, or subtract from Executive's powers, duties and responsibilities at any time, provided, however, that any such modifications or additions shall be consistent with Executive's position, experience and level of compensation. 4.3. PERFORMANCE OF DUTIES. Executive shall discharge the duties described herein in a diligent and professional manner. Executive shall render services incidental to Executive's position, primarily during normal business hours at the Company's locations as may be required by Company during the Term. Company will consult with Executive prior to effecting any permanent relocation decision. Executive understands that Executive shall be required to travel to offices managed by affiliates of the Company in the course of performing Executive's duties. 4.4. EXTENT OF SERVICES. Executive shall devote Executive's full and exclusive productive time, energy, effort, attention and ability solely to the performance of Executive's duties as set forth herein, and to the proper and efficient management and development of the business and operations of Company. Executive shall perform industriously and to the best of Executive's ability, experience and talents all of the duties which may be required of Executive from time to time. During the Term, Executive shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person, firm or entity, whether with or without compensation, without Company's prior written consent. Notwithstanding the foregoing, Executive may act for Executive's own account in passive-type investments, or engage in charitable activities, provided any such activities do not interfere with the discharge of Executive's duties for Company. 4.5. COMPANY'S AUTHORITY. Executive shall observe and comply at all times with the orders, directives and policies as may be issued from time to time, either orally of in writing, by Company, the Board or the President. 4.6. NONSOLICITATION OF GIFTS. Without Company's prior written consent in each instance, Executive shall not solicit or accept, for Executive or for the benefit of any third party or entity, any contribution, donation, gift, discount or rebate or the like of material value or in violation of applicable law from any person, firm or entity with whom Company maintains any business relationship. 4.7. NO PERSONAL INTEREST. Executive shall not have any personal interest, direct or indirect, in any supplier of, or in any transaction between, any supplier and Company. 2 4.8. COMPETITIVE ACTIVITIES PROHIBITED. During the Term, Executive shall not, directly or indirectly (unless disclosed to Company and approved by Company in its sole and absolute discretion): 4.8.(a) engage in or have any interest in any activity or enterprise which is competitive with or adverse to the business, activities or welfare of Company or any affiliate or subsidiary of Company, whether alone or as an agent, employee, consultant, advisor, promoter, lender, general or limited partner, officer, director, owner or shareholder; provided, however, that nothing in this Section 4.8 shall prohibit Executive from owning less than 2% of the stock of any publicly traded company; 4.8.(b) engage in any conduct or activity which would cause Company or any affiliate or subsidiary of Company or Executive to be in a position of conflict of interest or cause Company or any affiliate or subsidiary of Company to be in violation of any law, regulation, policy, statement or rule of any applicable governmental authority; or 4.8.(c) plan for or organize, or assist any other person, firm or entity in planning for or organizing, any business activity which is competitive with the business of Company or any affiliate or subsidiary of Company. 5. COMPENSATION AND OTHER BENEFITS 5.1. ANNUAL BASE SALARY. As compensation for all of the services rendered by Executive during the Term, Company shall pay Executive an annual salary in the amount of One Hundred Twenty Five Thousand Dollars ($125,000). Such base salary shall be subject to all normal withholding, including, without limitation, state and federal income taxes, state disability insurance and FICA, and shall be paid to Executive in accordance with Company's normal payroll practices. 5.2. BONUS. In addition to the annual base salary described in Section 5.1 above, Executive shall be entitled to a bonus ("Bonus") in an amount equal to one percent (1%) of the net revenues, i.e. gross collected billings less chargebacks, fraud, etc. ("Net Revenue") of Call Connect Inc., a California corporation, ("CCI") for CCI's fiscal year ending December 31, 1998, calculated in accordance with U.S. generally accepted accounting principles, as determined by the independent public accounting firm engaged by the Company's affiliate Hospitality Marketing Consultants, LLC or its successors, if any ("HMC"). The Bonus shall be payable no later than ten (10) days after the calculation of such Bonus amount. For each fiscal year threreafter during the Term (pro rated for any partial year), Executive shall be entitled to a Bonus in an amount equal to one-half of one percent (1/2%) of CCI's Net Revenue for such fiscal year. 3 5.3. EXPENSES. Company and Executive hereby acknowledge that Executive may be required to incur certain expenses in connection with Executive's employment hereunder including, but not limited to, parking, travel, entertainment and other expenses. Company shall reimburse Executive for ordinary and necessary business expenses incurred by Executive in the performance of Executive's duties hereunder in accordance with Company's policies and procedures for making such reimbursements if: 5.3.(a) Each such expenditure is of a nature qualifying it as a proper deduction on the federal and state income tax returns of Company as a business expense and not as deductible compensation to Executive; and 5.3.(b) Executive furnishes Company with adequate records and other documentary evidence required by either federal or state statutes or regulations issued by appropriate taxing authorities for the substantiation of such expenditures as deductible business expenses of Company and not as deductible compensation to Executive. In addition, Executive shall be reimbursed for reasonable relocation expenses, including without limitation, shipping of household and personal items (at a cost not to exceed $10,000) and hotel accommodations for Executive and his family for a two-week period. 5.4. LEASED AUTOMOBILE. The Company shall pay for, or reimburse Executive for the cost of, a leased automobile during the Term, in an amount not to exceed $600 per month. In addition, the Company shall reimburse Executive for insurance, gasoline and reasonable maintenance expenses in connection with such leased automobile. 5.5. STOCK OPTIONS. Executive understands that HMC is currently in the process of designing and implementing a stock option program for executives and employees of HMC and its subsidiaries, including Company. Upon HMC's adoption of such plan, Company shall cause HMC to grant to Executive stock options, conditioned upon the closing of HMC's initial public offering, to purchase that number of shares of common stock of HMC which are equal to 6/10ths of 1% of HMC's issued and outstanding prepublic offering capitalization at the lowest purchase price for which options are to be granted under HMC's stock option plan prior to the initial public offering. The stock options shall vest in four equal cumulative installments on the first anniversary date, second anniversary date, third anniversary date and fourth anniversary date, respectively, of the Term (if the Term is extended). 5.6. VACATION. Executive shall accrue a total of four (4) weeks of vacation for each full year of the Term. If Executive's earned but unused vacation time reaches four (4) weeks, Executive will not continue to accrue additional vacation time until Executive uses enough vacation to fall below this maximum amount. 4 5.7. OTHER BENEFITS. During the Term of this Agreement, Executive shall receive such other life insurance, pension, disability insurance, health insurance, holiday and sick pay benefits which Company extends, as a matter of policy, to its executive employees and, except as otherwise provided herein, shall be entitled to participate in all deferred compensation and other incentive plans of Company on the same basis as other similarly situated executives of Company. 6. TERMINATION OF THE AGREEMENT. 6.1. TERMINATION WITHOUT CAUSE. Notwithstanding anything in this Agreement to the contrary, Company may terminate Executive's employment without cause upon ninety (90) days' prior written notice. 6.2. TERMINATION FOR GOOD CAUSE BY COMPANY. Notwithstanding anything in this Agreement to the contrary, Company may terminate Executive's employment for Good Cause without prior notice. For purposes of this Agreement, Good Cause for termination of Executive's employment shall be deemed to exist if: 6.2.(a) In the subjective judgment of Company, Executive breaches a material obligation under this Agreement; 6.2.(b) Executive is convicted of or pleads guilty or nolo contendere to a misdemeanor charge involving financial misconduct or moral turpitude or any felony; 6.2. (c) Executive misappropriates funds or property of Company, HMC or any of their respective subsidiaries or affiliates; 6.2.(d) Executive fails to comply with the reasonable oral or written orders, directives or policies of Company, the Board or the President; 6.2.(e) In the subjective judgment of Company, Executive is incompetent in performing his assigned duties, neglects his duties or performs his duties in a grossly negligent or malfeasant manner; or 6.2. (f) Executive violates Company's policies regarding unfair competition, trade secrets or confidentiality; 6.2. (g) Executive commits any other act or fails to take any action which an arbitrator of competent jurisdiction deems to constitute Good Cause for dismissal. 6.3. DEATH. Executive's employment with Company shall terminate immediately in the event of Executive's death. 5 6.4. DISABILITY. Company shall have the right to immediately terminate this Agreement in the event of Executive's "Disability". For purposes of this Agreement, "Disability" shall mean that because of a physical or mental disability, Executive is unable to perform the essential functions of Executive's job, even when Company provides such reasonable accommodations as it can without incurring undue hardship, and Executive has exhausted all leave allowances available to Executive pursuant to state and federal laws. In the event Executive is granted a leave of absence due to Executive's physical or mental disability, Company shall have no obligation to pay Executive any salary and/or bonus compensation for the period of the leave of absence except as required by law or as provided for pursuant to any disability insurance plans Company may carry. 6.5. LEGAL OBLIGATIONS FOLLOWING TERMINATION. 6.5. (a) If this Agreement is terminated by Company as provided in Sections 6.1, 6.2, 6.3 or 6.4, Company's sole obligation shall be the following: (i) payment of Executive's base salary through and including the effective date of termination; (ii) payment of the salary equivalent of all accrued and unused vacation time; and (iii) reimbursement of any ordinary and necessary business expenses previously incurred by Executive pursuant to Sections 5.3 and 5.4 within thirty (30) days of Executive's termination. Any stock options which have not vested at the time of termination shall lapse. Nothing in this Section 6.5. (a) is intended to affect Executive's rights in any stock options which, at the time of any termination hereunder, have already vested pursuant to Section 5.5. 6.5. (b) The termination of this Agreement and Executive's employment hereunder shall not affect Executive's right to exercise any vested stock options in accordance with the terms of HMC's stock option program nor shall it relieve either party from any liability or damage directly or indirectly arising out of any breach of or default under this Agreement or any failure to comply with or perform any obligations under this Agreement. 7. TRADE SECRETS; CONFIDENTIALITY 7.1. "CONFIDENTIAL INFORMATION". "Confidential Information" is all information, data and knowledge of a business, professional or technical nature relating to Company, HMC, and/or their respective subsidiaries and affiliates; and Company's, HMC's, and/or their subsidiaries' and affiliates' business, finances, operations, properties, services and clients; information which is not generally known outside of Company, HMC, or their respective subsidiaries and affiliates; and includes information known to Executive as confidential or secret or which Executive shall have reason to know or reasonably should know is confidential or secret, to the extent that such information derives potential or actual independent economic value from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from this disclosure or use and is the subject of efforts reasonable under the circumstances to maintain its secrecy. Confidential Information may 6 relate, for example, to trade secrets, client lists, clients' names and requirements, client businesses, client profiles, client finances, client accounts, employees, business methods, business or marketing plans, personnel information, credit information, financial information, the names and locations of vendors and suppliers, equipment, equipment design, development, engineering, manufacturing, purchasing, accounting, selling, marketing, contractors, compositions, computer software, computer hardware, technology, research, infrastructures, products, procedures, calculations, specifications, formulae, compilations, inventions, designs, plans, databases, database structure, data, accounts, billing methods, pricing, costs, systems, internal affairs, legal affairs, security methods, creative ideas and concepts, projects, advertising, merchandising techniques and any and all information entrusted to Company, HMC or their respective subsidiaries or affiliates by third parties. This information may be contained in materials ("Company Materials") such as books, records, files, notes, lists, computer programs, tapes, cd roms, hard disk and soft disk drive mechanisms, other mechanisms for electronic or digital storage of information, computer printouts, data input to computers, drawings, documents, data, reports, customer, price and supplier lists, specifications, or other miscellaneous embodiments, or may be in the nature of, or consist of, verbal communication or unwritten knowledge, techniques, formulas, processes, practices or know-how. 7.2. NO DISCLOSURE. In consideration of Executive's employment by Company, Executive agrees that, unless Executive has received the prior written consent of Company in each instance, Executive shall not use Confidential Information for any purpose not related to the business interests of Company, and shall not directly or indirectly disclose or communicate any Confidential Information to any person except as required to perform Executive's duties for Company. If any Confidential Information or Company Materials are sought by legal process, Executive agrees to notify Company promptly in writing and to cooperate with Company to preserve the confidentiality of such information in connection with any legal proceeding. If Executive becomes aware of any unauthorized use, disclosure or communication of Confidential Information by anyone, Executive agrees to inform Executive's supervisor immediately. 7.3. OWNERSHIP RIGHTS. Executive acknowledges and agrees that all Confidential Information and Company Materials, and all results and proceeds of Executive's services hereunder which Executive makes or conceives, either solely or with others, during Executive's employment by Company which are applicable directly or indirectly to any phase of Company's business shall automatically become Company's sole and exclusive property and Company shall be the owner and author thereof. Executive further acknowledges that all such results and proceeds shall constitute "works made for hire" within the meaning of the copyright laws of the United States. Executive hereby irrevocably assigns to Company, in perpetuity, all rights, title and interest of any kind or character in and to all such results and proceeds including, without limitation, all copyrights and patents pertaining thereto and all renewals, extensions, subdivisions and continuations-in-interest thereof. 7 7.4. NO REMOVAL OR DUPLICATION. Without Company's prior written consent in each instance, or except as expressly required by Company in connection with Executive's duties as an employee of Company, Executive shall not at any time, whether prior to or after Executive's employment with Company ends, remove, reproduce, summarize or copy any Confidential Information, or authorize, participate in, aid or abet such removal, reproduction, summarizing or copying. Executive shall immediately return to Company all Confidential Information and Company Materials, including all copies and summaries thereof, when Executive's employment by Company ends for any reason or at any time when Company may otherwise require that such Confidential Information or Company Materials be returned. 7.5. NO SOLICITATION. While employed by Company and for a period of one (1) year thereafter, without the express prior written approval of an officer of Company, Executive shall not: (a) solicit or attempt to solicit any clients of Company, HMC or their respective subsidiaries and affiliates, either for Executive or for any other person, firm or corporation; (b) employ, attempt to employ, entice, encourage or solicit for employment by others, any employees of the Company, HMC or their respective subsidiaries and affiliates; (c) induce or attempt to induce a consultant, independent contractor, licensee or other third party to sever their relationship with Company, HMC or their respective subsidiaries or affiliates; or (d) assist any other person, firm or entity in the solicitation of any consultants, independent contractors, licensees, or employees of the Company, HMC or their respective subsidiaries and affiliates. 7.6. NO EMPLOYMENT REQUIRING DISCLOSURE. Without Company's prior written approval, Executive shall not, either during or after Executive's employment by Company, accept employment with, acquire any financial interest in, or perform any services for a business or entity in which Executive's interest, duties or activities would explicitly or inherently require Executive to disclose or communicate any Confidential Information. 7.7. MATERIAL TERM. Executive acknowledges that maintaining the confidentiality of such Confidential Information is necessary to the successful conduct of the business of Company and its goodwill, and that any breach of any term of this Section 7 shall be a material breach of this Agreement. 7.8. INDEMNIFICATION. Executive agrees to indemnify and hold harmless Company, HMC, their respective subsidiaries, affiliates and joint ventures, and any current or former officer, director or employee of any of them, against any claim, loss, liability, damage or expense (including, without limitation, attorneys' fees) they may incur as a result of any breach by Executive of the terms of this Section 7. 7.9. SURVIVAL OF OBLIGATION. Executive's obligation to maintain the confidentiality of Confidential Information shall survive the ending of Executive's employment by Company, AND SUCH OBLIGATION SHALL CONTINUE FOR ALL TIME, regardless of whether such Confidential Information 8 was obtained before, during or after the Term of this Agreement. Executive and Company agree that this Section 7 shall be specifically enforceable in accordance with its terms. 8. ARBITRATION. 8.1. ARBITRABLE CLAIMS. Except as otherwise provided in this Section 8, Executive and Company agree to settle by final and binding arbitration any claim or controversy arising out of or in any way relating to this Agreement, the breach or termination thereof, Executive's employment by Company or the ending of such employment, that Company may have against Executive or that Executive may have against Company or any of its subsidiaries, parents, joint ventures or affiliated entities, or against any then current or former officer, director, owner, employee, member or agent of any of them, in their capacity as such or otherwise. The claims covered by this arbitration provision include, without limitation: claims for wages or other forms of compensation; claims for misrepresentation; claims for breach of contract; tort claims; and claims for discrimination or harassment under any local, state or federal statutory or common law, based on race, sex, religion, national origin, age, marital status, medical condition, physical or mental disability, sexual orientation or any other protected characteristic. Notwithstanding the foregoing, this Section 8 does not apply to claims by Executive for workers' compensation benefits, claims by Executive for unemployment compensation benefits or claims by Executive based upon an employee pension or benefit plan which contains an arbitration or other dispute resolution procedure, in which case the arbitration or other dispute resolution provision of such plan shall control. 8.2. PROCEDURE. All arbitrable claims shall be settled by final and binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") in effect at the time the claim is made. Such arbitration shall be filed with the AAA and shall be heard on an expedited basis in Irvine, California. The arbitrator shall apply, as applicable, California or federal substantive law and law of remedies. Executive and Company agree that discovery may be conducted by any party pursuant to the provisions of Section 1283.05 of the California Code of Civil Procedure which are hereby incorporated into, and made a part of, this Agreement. Any arbitrator acting hereunder shall have the full power of a court of the State of California to issue and enforce subpoenas. A judgment upon any award rendered by the arbitration may be entered in any court having jurisdiction. In reaching a decision, the arbitrator shall have no authority to change, extend, modify or suspend any of the terms of this Agreement. The parties agree that any arbitrator acting hereunder shall be empowered to assess any remedy including, but not limited to, injunctive orders (including temporary, preliminary and permanent relief) when appropriate. Either Executive or Company may bring an action in any court of competent jurisdiction, if necessary, to compel arbitration under this arbitration provision, to obtain preliminary relief in support of claims to be prosecuted in arbitration or to enforce an arbitration award. EXECUTIVE AND COMPANY UNDERSTAND AND ACKNOWLEDGE THAT BY 9 SIGNING THIS AGREEMENT, EXECUTIVE AND COMPANY ARE GIVING UP THE RIGHT TO A JURY TRIAL AND TO A TRIAL IN A COURT OF LAW. 9. GENERAL PROVISIONS. 9.1. ASSIGNMENT. Neither this Agreement nor any rights or benefits hereunder shall be subject to execution, attachment or similar process and Executive may not assign, transfer, pledge or hypothecate this Agreement or any rights or benefits hereunder without the prior written consent of Company. Any such assignment, transfer, pledge or hypothecation hereof by Executive in violation of this provision shall be null, void and of no effect. Subject to the foregoing, this Agreement and all of the terms and conditions hereof shall benefit and bind Company and its successors and assigns and shall benefit and bind Executive and Executive's successors. Company's rights hereunder shall accrue to the benefit of any person, firm, or corporation which may succeed to its business by merger, purchase of stock or assets, or otherwise. 9.2. NOTICES. 9.2. (a) All notices, requests, payments, statements, demands or other communications given under this Agreement (collectively "Communications") shall be in writing. Notice shall be sufficiently given for all purposes as follows: (1) PERSONAL DELIVERY. When personally delivered to the recipient. Notice is effective on delivery. (2) FIRST-CLASS MAIL. When mailed first class to the last address of the recipient known to the party giving notice. Notice is effective three (3) mail delivery days after deposit in a United States Postal Service office or mailbox. (3) CERTIFIED MAIL. When mailed certified mail, return receipt requested. Notice is effective on receipt, if delivery is confirmed by a return receipt. (4) OVERNIGHT DELIVERY. When delivered by overnight delivery, charges prepaid or charged to the sender's account. Notice is effective on delivery, if delivery is confirmed by the delivery service. (5) TELEX OR FACSIMILE TRANSMISSION. When sent by telex or fax to the last telex or fax number of the recipient known to the party giving notice. Notice is effective on receipt, provided that (a) a duplicate copy of the notice is promptly given by first-class or certified mail or by overnight delivery, or (b) the receiving party delivers a written confirmation of receipt. Any notice given by telex or fax shall be deemed received on the next business day if it is received after 5:00 p.m. (recipient's time) or on a nonbusiness day. 10 9.2.(b) Addresses for purpose of giving notice are as follows: If to Company: Hospitality Marketing Concepts Limited -------------------------------------- -------------------------------------- -------------------------------------- Attention: ---------------------------- Fax: ---------------------------------- If to Executive: -------------------------------------- -------------------------------------- -------------------------------------- Fax: ---------------------------------- 9.2. (c) Any correctly addressed notice that is refused, unclaimed, or undeliverable because of an act or omission of the party to be notified shall be deemed effective as of the first date that said notice was refused, unclaimed, or deemed undeliverable by the postal authorities, messenger, or overnight delivery service. 9.2. (d) Either party may change its address or telex or fax number for purposes of this Section 9.2. by notifying the other party of its new address in the manner set forth in this Section 9.2. 9.3. GOVERNING LAW. This Agreement is made under and shall be construed in accordance with the laws of the State of California. 9.4. SEVERABILITY. Nothing in this Agreement shall be construed to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, ordinance or regulation contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event the provision of this Agreement so affected shall be curtailed and limited only to the extent necessary to bring it within the requirement of the law. If any term or provision of this Agreement is determined by a court of competent jurisdiction to be illegal, invalid, or unenforceable for any reason whatsoever, such illegality, invalidity, or unenforceability shall not affect the remaining terms and provisions of this Agreement, which remaining terms and provisions shall remain in full force and effect. 11 9.5. WAIVER. A waiver of any of the terms and conditions hereof by Company or Executive shall not constitute a waiver of any other term or condition hereof, nor shall it constitute a general waiver by the waiving party, and the waiving party shall be free to reinstate any such term or condition without notice to the other party. 9.6. INTEGRATION. Neither of the parties hereto have made any representations, statements, warranties or other agreements other than those expressed herein. This Agreement embodies the entire understanding of the parties with respect to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, or understandings, written or oral, between the parties. This Agreement may be amended or modified only by a written agreement, signed by the parties hereto. 9.7. HEADINGS. The Section headings used herein are for convenience only and are not a part of this Agreement. 9.8. SURVIVAL. THE COVENANTS, REPRESENTATIONS AND WARRANTIES IN SECTIONS 7, 8, 9.4 AND 9.8 OF THIS AGREEMENT SHALL SURVIVE AND CONTINUE AFTER THE TERMINATION OF THIS AGREEMENT FOR ANY REASON WHATSOEVER. 9.9. COUNTERPARTS. This agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth below. "COMPANY" HOSPITALITY MARKETING CONCEPTS LIMITED Dated: , 1998 By: --------------- ---------------------------- Its: --------------------- "EXECUTIVE" Dated: , 1998 --------------- ------------------------------- Frans Van Steenbrugge 13 EX-10.13 16 EXHIBIT 10.13 [LETTERHEAD] MODIFICATION OF CREDIT LINE AGREEMENT November 14, 1997 Hospitality Marketing Concepts 15751 Rockfield Blvd., #200 Irvine, CA 92718 Re: Loan #1864 Dear Sirs, This document shall serve as a modification of the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications, ("Modification") between Cedars Bank (the "Bank") and Hospitality Marketing Concepts, a California Corporation (hereinafter called the "Borrower"). ARTICLE I "THE LINE OF CREDIT" 1.3 INTEREST shall be amended to read: Effective November 14, 1997, interest shall be payable on the outstanding principal balance of the Loan at a rate per annum equal to TWO percent (2.0%) above the rate earned by the pledged time deposit #2000010560 with any and all subsequent modifications, extensions, or renewals thereof. Interest shall accrue during the course of the month and shall be charged monthly to the Borrower's account #6123944031 on the first banking day of each month. ARTICLE II "SECURITY" 2.1 COLLATERAL shall be amended to read: As security for this facility, the Borrower shall grant to the Bank the following collateral: Pledged Time Deposit in the name of Hospitality Marketing Consultants, LLC, account #2000010560, in the amount of $400,000.00. Except as set forth above, this facility shall be subject to the same terms and conditions as set forth in the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications ("Agreement"). This Modification is hereby included in this Agreement and made a full part thereof. Accepted and agreed to this Sincerely, ____day of _______,1997. Cedars Bank Hospitality Marketing Concepts, a California Corporation By: /s/ [Illegible] By: /s/ [Illegible] ------------------------------ ------------------------------- Title By: /s/ [Illegible] ------------------------------- -2- Except as set forth above, this facility shall be subject to the same terms and conditions as set forth in the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications ("Agreement"). This Modification is hereby included in this Agreement and made a full part thereof. Accepted and agreed to this Sincerely, ____day of _______,1997. Cedars Bank Hospitality Marketing Concepts, Inc., a California Corporation By: /s/ Mokhtar Ramadan By: /s/ [Illegible] ----------------------------- ------------------------------- Mokhtar Ramadan President By: /s/ Marwan Ramadan By: /s/ [Illegible] ----------------------------- ------------------------------- Marwan Ramadan Secretary By: /s/ Fadi Ramadan ----------------------------- Fadi Ramadan CFO -2- [LETTERHEAD] MODIFICATION OF PROMISSORY NOTE November 14, 1997 Hospitality Marketing Concepts, a California Corporation, (hereinafter called the "Borrower"), and Cedars Bank (the "Bank") hereby agree to modify the terms of the Promissory Note dated September 1, 1995 and all its subsequent modifications between Borrower and Bank, as follows: The Borrower hereby unconditionally promises to pay to the order of Cedars Bank on April 1, 1998, in lawful money of the United States of America, the lesser of, (i) the principal sum of FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($400,000.00), or (ii) the aggregate unpaid principal amount of all advances made pursuant to the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications. Interest shall be payable on the outstanding principal balance of the Loan at a rate per annum equal to TWO percent (2.0%) above the rate earned by a pledged time deposit. Interest shall accrue during the course of the month and shall be charged monthly to the Borrower's account on the first banking day of each month, pending reimbursement by the Borrower. The Note shall be secured by a Pledged Time Deposit in the name of Hospitality Marketing Consultants, LLC, account #2000010560, in the amount of $400,000.00. DEFAULT FEE PROVISION: Upon the happening of any Event of Default or upon an occurrence of an Event of Default as set forth in the Promissory Note dated September 1, 1995 the whole of the principal set forth herein then remaining unpaid and all interest accrued thereon, shall at the option of the Bank become immediately due and payable, and in any such event, the Borrower agrees to pay a default rate of 5% above the Applicable Rate, plus all such costs and attorney's fees as may be incurred by the Bank in the collection of such sum. LATE FEE PROVISION: If any payment is overdue more than fourteen (14) calendar days, an additional charge will be due by Borrower. Borrower shall be assessed a late fee of 6% of the total payment due, or a minimum of $15.00, whichever is greater. Bank reserves the right to assess the highest rate permitted by applicable law as default interest, by notice to Borrower. All other terms and conditions as stated in original Promissory Note shall remain the same. Accepted and agreed to this __ day of _____ 1997. Borrower Cedars Bank Hospitality Marketing Concepts, By: /s/ [Illegible] a California Corporation ---------------------- By: /s/ [Illegible] By: /s/ [Illegible] ---------------------- ---------------------- Title [LETTERHEAD] MODIFICATION OF PROMISSORY NOTE September 2, 1996 Hospitality Marketing Concepts, Inc., a California Corporation, (hereinafter called the "Borrower"), and Cedars Bank (the "Lender") hereby agree to modify the terms of the Promissory Note dated September 1, 1995 and all its subsequent modifications, hereby attached as Exhibit A, between Borrower and Lender, as follows: The Borrower hereby unconditionally promises to pay to the order of Cedars Bank on April 1, 1998, in lawful money of the United States of America, the lesser of, (i) the principal sum of FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($400,000.00), or (ii) the aggregate unpaid principal amount of all advances made pursuant to the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications. The Note shall be secured by an Assignment and UCC-1 financing statement filed with the Secretary of State of California on inventory, receivables, and general assets of Borrower, as evidenced by a UCC-1 financing statement and Security Agreement filed on 9/20/1995 as file #9526960425, as modified by a UCC-2 form and Security Agreement filed 4/1/96 as file #96093C0751, as modified by a UCC-2 form and Security Agreement of even date herewith." All other terms and conditions as stated in original Promissory Note shall remain the same. Accepted and agreed to this ________ day of ___________ 1997. Borrower Cedars Bank Hospitality Marketing Concepts, Inc., a California Corporation By: /s/ Mokhtar Ramadan By: /s/ [Illegible] --------------------------------- ------------------------------- Mokhtar Ramadan President By: /s/ Marwan Ramadan By: /s/ [Illegible] --------------------------------- ------------------------------- Marwan Ramadan Secretary By: /s/ Fadi Ramadan --------------------------------- Fadi Ramadan CFO [LETTERHEAD] MODIFICATION OF CREDIT LINE AGREEMENT February 5, 1996 Hospitality Marketing Concepts, Inc. 15751 Rockfield Blvd. #200 Irvine, CA 92718 Re: Loan #1864 Dear Sirs, This document shall serve as a modification of the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications, ("Modification") between Cedars Bank (the "Bank") and Hospitality Marketing Corporation, a California Corporation (hereinafter called the "Borrower"). The Bank is pleased to advise the Borrower that the facility in the amount of $125,000.00 granted to you on September 1, 1995, has been increased by an amount of $175,000.00 (the "Increase") for a total aggregate facility of $300,000.00. As consideration for granting this facility, the Borrower shall pay a closing fee of EIGHT HUNDRED SEVENTY FIVE AND NO/100 Dollars ($875.00), being ONE HALF OF ONE PERCENT (0.5%) of the total increase. In addition, the Borrower shall pay a documentation fee of $150. These fees are due upon execution of this Agreement and shall be debited from the Borrower's account no. 612394. As a condition of renewal, Borrower shall furnish Bank a signed current financial statement, and a signed copy of 1995 tax returns. Except as set forth above, this facility shall be subject to the same terms and conditions as set forth in the Credit Line Agreement dated September 1, 1996 and all its subsequent modifications ("Agreement"). This modification is hereby included in this Agreement and made a full part thereof. Accepted and agreed to this Sincerely, ___ day of ___________, 1996. Cedars Bank Hospitality Marketing Concepts, Inc., a California Corporation By: /s/ Mokhtar Ramadan By: /s/ [Illegible] --------------------------------- ------------------------------ Mokhtar Ramadan President By: /s/ Marwan Ramadan By: /s/ [Illegible] --------------------------------- ------------------------------ Marwan Ramadan Secretary By: /s/ Fadi Ramadan By: --------------------------------- ------------------------------ Fadi Ramadan CFO -2- [LETTERHEAD] MODIFICATION OF PROMISSORY NOTE February 5, 1996 Hospitality Marketing Concepts, Inc., a California Corporation, (hereinafter called the "Borrower"), and Cedars Bank (the "Lender") hereby agree to modify the terms of the Promissory Note dated September 1, 1995 and all its subsequent modifications, hereby attached as Exhibit A, between Borrower and Lender, as follows: The Borrower hereby unconditionally promises to pay to the order of Cedars Bank on September 1, 1996, in lawful money of the United States of America, the lesser of, (i) the principal sum of THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000.00), or (ii) the aggregate unpaid principal amount of all advances made pursuant to the Credit Line Agreement dated September 1, 1995 and all its subsequent modifications. All other terms and conditions as stated in original Promissory Note shall remain the same. Accepted and agreed to this ____ day of _________________ 1996. Borrower Cedars Bank Hospitality Marketing Concepts, Inc., a California Corporation By: /s/ [Illegible] --------------------------------- By: /s/ Mokhtar Ramadan ------------------------------- Mokhtar Ramadan By: /s/ [Illegible] President -------------------------------- By: /s/ Marwan Ramadan ------------------------------- Marwan Ramadan Secretary By: /s/ Fadi Ramadan ------------------------------- Fadi Ramadan CEO [LOGO] CREDIT LINE AGREEMENT September 1, 1995 Hospitality Marketing Concepts, Inc. 15751 Rockfield Blvd. #200 Irvine, CA 92718 Loan #1864 Dear Sirs, Cedars Bank (the "Bank") is pleased to advise Hospitality Marketing Concepts, Inc., a California Corporation, (hereinafter called the "Borrower") of its agreement to grant the Borrower a Line of Credit in the amount of ONE HUNDRED TWENTY FIVE THOUSAND AND NO/100 Dollars ($125,000.00) (the "Line") to be used as set forth below. This Line of Credit is subject to the following terms and conditions: ARTICLE I "THE LINE OF CREDIT" 1.1 THE LINE OF CREDIT The Bank hereby agrees to grant a Line of Credit (the "Line") to the Borrower and the Borrower hereby agrees to borrow from the Bank an amount not to exceed at any time the sum of ONE HUNDRED TWENTY FIVE THOUSAND AND NO/100 Dollars ($125,000.00) to be used for overdraft protection. 1.2 THE NOTE The Line shall be evidenced by a note signed by the Borrower (the "Note") payable to the order of the Bank. This Note and the books of the Bank shall constitute sufficient evidence of the indebtedness of the Borrower to the Bank. 1.3 INTEREST Interest shall be payable on the outstanding principal balance of the Line at a rate per annum equal to THREE percent (3%) above the rate announced by the Bank from time to time as its prime rate, calculated on the basis of actual days elapsed in a year of 360 days. Interest shall accrue during the course of the month and shall be charged monthly to the Borrower's account on the first banking day of each month. If the Line is fully utilized, interest shall be paid directly by the Borrower each month. 1.4 MATURITY AND PREPAYMENT The outstanding principal balance of the Line plus any accrued interest, shall be payable in full on or before the 2nd day of September, 1996 unless renewed at the mutual option of the Borrower and the Bank. There will be no penalties or premium payable in the event of prepayment of all or any part of the Note. 1.5 CLOSING FEES As consideration for granting this facility, the Borrower shall pay a closing fee of ONE THOUSAND TWO HUNDRED FIFTY AND NO/100 Dollars ($1,250.00) being ONE percent (1%) of the total facility. In addition, the Borrower shall pay a documentation fee of $250.00. These fees shall be payable upon execution of this Agreement and shall be debited from the Borrower's Line account unless the Bank is otherwise advised. ARTICLE II "SECURITY" 2.1 COLLATERAL As security for this facility, the Borrower shall grant to the Bank the following collateral: -- Assignment and UCC-1 financing statement filed with the Secretary of State of California on inventory, receivables and general assets of Borrower, as evidenced by a UCC-1 financing statement and Security Agreement of even date herewith. 2.2 GUARANTEES The Bank shall receive and hold the personal and irrevocable guarantees of Mokhtar Ramadan, Marwan Ramadan and Fadi Ramadan ("Guarantors"). ARTICLE III "CONDITIONS TO CREDIT" 3.1 DOCUMENTS The Bank's agreement to lend, contained herein, shall be effective only upon receipt by the Bank, of the following duly executed documents in a form satisfactory to the Bank: this Agreement, Promissory Note, UCC-1 and Security Agreement, Corporate Resolution to Borrow, Continuing Guaranty, and any and all other documents which shall be required by the Bank's counsel to secure the Bank's interest. -2- ARTICLE IV "REPRESENTATIONS AND WARRANTIES" The Borrower represents and warrants the following: 1) That during the term of this agreement, the provisions herein contained shall continue to be true and correct; 2) That all due taxes of the Borrower have been paid; 3) That no legal or court action of adverse significance is in force or pending. ARTICLE V "AFFIRMATIVE COVENANTS" During the term of this agreement, and so long as any indebtedness of the Borrower to the Bank shall remain unpaid, including any indebtedness for fees and expenses, the Borrower and Guarantors shall furnish to the Bank annually and upon request financial statements and signed current tax returns. ARTICLE VI "NEGATIVE COVENANTS" During the term of this agreement, and so long as any indebtedness of the Borrower to the Bank shall remain unpaid, including any indebtedness for fees and expenses, the Borrower shall not encumber or grant any other liens on the collateral. ARTICLE VII "EVENTS OF DEFAULT" The occurrence of any one or more of the following events shall constitute an Event of Default: 1) If the Borrower defaults in payment of interest or principal as agreed upon hereinbefore; 2) Any default in the observance of any of the covenants or agreements of the Borrower contained in this agreement, or any other agreement connected or delivered with respect to this Line; or 3) The institution of any proceeding in bankruptcy, reorganization or insolvency against or by the Borrower or the appointment of a trustee or receiver of the Borrower's property. -3- Upon the happening of any Event of Default described above and if not remedied, the Bank shall be entitled to terminate this agreement and declare the Line to be due and payable without presentment, demand or protest, which are hereby expressly waived. ARTICLE VIII "EXPENSES" The Borrower shall reimburse the Bank or the Bank shall debit the Borrower's account for all of its out-of-pocket expenses including, but not limited to, attorney's fees, including actual attorney's fees incident to the enforcement of any provision of this agreement, UCC filing, messenger fees, etc. ARTICLE IX "MISCELLANEOUS" 9.1 SUCCESSORS AND ASSIGNS The Borrower, and the Bank as used herein, shall include the legal representatives or assigns of those parties. 9.2 GOVERNING LAW This agreement, the transaction described herein and obligations of the Bank and the Borrower, shall be construed and interpreted in accordance with the laws of the State of California. 9.3 COURSE DEALING Any delay or failure by the Bank at any time or times in enforcing its rights under the provisions set forth in this agreement in strict accordance with their terms shall not be construed as having created a course of dealing or performance modifying or waiving the specific provisions of this agreement. 9.4 OTHER ACTS The Borrower shall execute and deliver, or cause to be delivered to the Bank all further documents and perform all other acts and things which the Bank deems necessary or appropriate to protect the indebtedness of the Borrower to the Bank. 9.5 NOTICE The address for service of process upon the Borrower is: 15751 Rockfield Blvd., #200 Irvine, CA 92718 -4- 9.6 CREDIT INQUIRIES The Bank shall have the right at any time, to make all credit inquiries it deems necessary and obtain all credit information it considers relevant, at its sole and absolute discretion. This Agreement shall not be changed or altered in any way by the Borrower. Any change or alteration to this agreement without the prior and express agreement of the Bank will render this Agreement null and void. The Bank's commitment shall remain open until October 2, 1995 and shall take effect upon your signing this Line Agreement and the Note and returning them to us. Funds shall be disbursed upon full execution and delivery to the Bank of all documents necessary to secure the Collateral in form satisfactory to the Bank's counsel. We would like to add that Cedars Bank is delighted to have had the opportunity to be of service to you and we look forward to a mutually rewarding relationship. Accepted and agreed to this Very truly yours, 8th day of September, 1995 Cedars Bank Hospitality Marketing Concepts, Inc., a California Corporation By: /s/ Mokhtar Ramadan By: /s/ [Illegible] --------------------------------- ------------------------------- Mokhtar Ramadan President By: /s/ [Illegible] ------------------------------- By: /s/ Marwan Ramadan --------------------------------- Marwan Ramadan Secretary By: /s/ Fadi Ramadan --------------------------------- Fadi Ramadan CFO -5- [LOGO] PROMISSORY NOTE ($125,000.00) September 1, 1995 FOR VALUE RECEIVED, Hospitality Marketing Concepts, Inc., a California Corporation (hereinafter called the "Borrower") promises to pay to the order of Cedars Bank, (hereinafter called the "Bank"), at the Bank's office located at 444 South Flower Street, 14th Floor, Los Angeles, California 90071, or at such other place as the Bank may from time to time designate in writing, in lawful money of the United States of America, the lesser of, (i) the principal sum of ONE HUNDRED TWENTY FIVE THOUSAND AND NO/100 Dollars ($125,000.00), or (ii) the aggregate unpaid principal amount of all advances made pursuant to the Agreement (as defined below) on or before September 2, 1996. Interest shall be payable from the date hereof on the principal amount remaining unpaid from time to time at the fluctuating rate per annum equal to THREE percent (3%) above the rate announced by the Bank from time to time as its prime rate (hereinafter called "Applicable Rate"). Such interest shall be payable monthly on the first banking day of each month during the time this Note is outstanding and on the date of payment of this Note. Interest on this Note shall accrue during the course of the month and shall be calculated on the basis of actual days elapsed in a year of 360 days. The principal of and interest on this Note shall be payable at the Bank's address set forth hereinbefore or at such other address as the Bank shall from time to time designate in writing. If this Note is collected by suit through probate or bankruptcy court, or any other judicial proceedings, or if this Note is not paid at maturity, however such maturity may be brought about, and is placed in the hands of an attorney for collection, then the Borrower promises to pay all fees and costs incurred in connection with such collection. This Note is being issued pursuant to and in full accordance with, and is entitled to the benefits and subject to the provisions of the Agreement dated the 1st day of September, 1995 (the "Agreement"), and implementing and supplementing agreements, as the same may be amended, modified or supplemented from time to time. Reference is hereby made to the Agreement for the description of the provisions, among others with respect to the rights, duties and obligations of the Borrower and the rights and remedies of the Bank. This Note is secured by an Assignment and UCC-1 financing statement filed with the Secretary of State of California on inventory, receivables and general assets of Borrower, as evidenced by a UCC-1 financing statement and Security Agreement of even date herewith. This Note is further secured by the personal guarantees of Mokhtar Ramadan, Marwan Ramadan and Fadi Ramadan. The occurrence of any one or more of the following events shall constitute an Event of Default: (1) If the Borrower defaults in payment of interest or principal as agreed upon hereinbefore. (2) Any default in the observance of any of the covenants or agreements of the Borrower contained in this Note. (3) The institution of any proceeding in bankruptcy, reorganization or insolvency against or by the Borrower or the appointment of a trustee or receiver of the Borrower's property. Upon the happening of any Event of Default described above or upon an occurrence of an Event of Default as set forth above the whole of the principal set forth herein then remaining unpaid and all interest accrued thereon, shall at the option of the Bank become immediately due and payable, and in any such event, the Borrower agrees to pay such costs and attorney's fees as may be incurred by the Bank in the collection of such sum. After default or maturity, or if any payment is overdue more than ten (10) calendar days, an additional charge will be due by Borrower. Principal and past-due interest shall bear interest at the highest rate permitted by applicable law or, if no such maximum rate is established by applicable law, then at the Applicable Rate plus FIVE PERCENT (5%) per annum. The Borrower shall have the right, at any time or from time to time, without penalty or premium, to prepay all or part of the unpaid principal amount of the advances outstanding under this Note. The Borrower hereby waives presentment, protest, demand of payment and notice of non-payment or protest on this Note. -2- This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Borrower has signed this Note as of the 8th day of September, 1995. BORROWER HOSPITALITY MARKETING CONCEPTS, INC., A CALIFORNIA CORPORATION By: /s/ Mokhtar Ramadan ----------------------------------- MOKHTAR RAMADAN President By: /s/ Marwan Ramadan ----------------------------------- MARWAN RAMADAN Secretary By: /s/ Fadi Ramadan ----------------------------------- FADI RAMADAN CFO -3- EX-10.14 17 EXHIBIT 10.14 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only June 1, 1998, is made by and between Hospitality Marketing Consultants, a general partnership ("LESSOR") and Hospitality Marketing Consultants, LLC, a California limited liability company ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 15751 Rockfield Boulevard, Irvine located in the County of Orange, State of California 92718, and generally described as (describe briefly the nature of the property and, if applicable, the "PROJECT", if the property is located within a Project) ("PREMISES"). (See also Paragraph 2) 1.3 TERM: Three (3) years and No months ("ORIGINAL TERM") commencing July 1, 1998 ("COMMENCEMENT DATE") and ending June 30, 2001 ("EXPIRATION DATE"). (See also Paragraph 3) 1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $19,000 per month ("BASE RENT"), payable on the First (1st) day of each month commencing July 1, 1998 (See also Paragraph 4) / / If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $ None as Base Rent for the period. 1.7 SECURITY DEPOSIT: $ None ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: Any use permitted by law. (See also Paragraph 6) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise stated herein. (See also Paragraph 8) 1.10 REAL ESTATE BROKERS: (See also Paragraph 15) (a) REPRESENTATION: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): / / None represents Lessor exclusively ("LESSOR'S BROKER"); / / None represents Lessee exclusively ("LESSEE'S BROKER"); or / / None represents both Lessor and Lessee ("DUAL AGENCY"). (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of N/A% of the total Base Rent for the brokerage services rendered by said Broker). 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by None ("GUARANTOR"). (See also Paragraph 37) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs N/A through N/A and Exhibits None, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning system ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: PAGE 1 Initials ________________ FORM 204N-R-2/97 - -Copyright- 1997 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver the possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. PAGE 2 Initials ________________ FORM 204N-R-2/97 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances' shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consent to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation of contamination. PAGE 3 Initials ________________ FORM 204N-R-2/97 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor. (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same, If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. PAGE 4 Initials --- --- 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. PAGE 5 Initials --- --- Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated PAGE 6 INITIALS --- --- with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice PAGE 7 Initials --- --- from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1 (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination OF the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability PAGE 8 Initials --- --- under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("INTEREST") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession, If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. BROKERS' FEE. 15.1 ADDITIONAL COMMISSION, In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker. 15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. PAGE 9 Initials --- --- (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor an account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as it both parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new PAGE 10 Initials --- --- owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or about the Premises any ordinary "FOR SUBLEASE" sign. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. GUARANTOR. 37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. 39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 EFFECT OF DEFAULT AN OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including PAGE 11 the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease / / IS /X/ IS NOT attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. - -------------------------------------------------------------------------------- ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. - -------------------------------------------------------------------------------- The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures, Executed at: Executed at: -------------------------- --------------------------- on: on: ----------------------------------- ------------------------------------ By LESSOR: By LESSEE: HOSPITALITY MARKETING CONSULTANTS, HOSPITALITY MARKETING CONSULTANTS, LLC - -------------------------------------- --------------------------------------- a general partnership a California limited liability company - -------------------------------------- --------------------------------------- By: By: ----------------------------------- ------------------------------------ Name Printed: Name Printed: ------------------------- -------------------------- Title: Title: -------------------------------- --------------------------------- By: By: ----------------------------------- ------------------------------------ Name Printed: Name Printed: ------------------------- -------------------------- Title: Title: -------------------------------- --------------------------------- Address: Address: ------------------------------ ------------------------------- - -------------------------------------- --------------------------------------- Telephone: Telephone: ---------------------------- ----------------------------- Facsimile: ( ) Facsimile: ( ) ---------------------- ----------------------- Federal ID No. Federal ID No. ------------------------ ------------------------- NOTE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616 FORM 204N-R-2/97 PAGE 12 -C-COPYRIGHT 1997 - BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. ALL RIGHTS RESERVED. NO PART OF THESE WORKS MAY BE REPRODUCED IN ANY FORM WITHOUT PERMISSION IN WRITING. [LOGO] OPTION(S) TO EXTEND STANDARD LEASE ADDENDUM Dated June 1, 1998 ---------------------------------------------------------- BY AND BETWEEN (LESSOR) Hospitality Marketing Consultants, a --------------------------------------- general partnership (LESSEE) Hospitality Marketing Consultants, LLC, --------------------------------------- a California limited liability company ADDRESS OF PREMISES: 15751 Rockfield Boulevard ------------------------------------------- Irvine, California 92718 Paragraph ----- A. OPTION(S) TO EXTEND: Lessor hereby grants to Lessee the option to extend the term of this Lease for one (1) additional thirty-six (36) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least 6 but not more than 12 months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively. (ii) The provisions of paragraph 39, including those relating to Lessee's Default set forth in paragraph 39.4 of this Lease, are conditions of this Option. (iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply. (iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting. (v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) /X/ I. COST OF LIVING ADJUSTMENT(S) (COLA) a. On (Fill in COLA Dates): The first day of the option period the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): / / CPI W (Urban Wage Earners and Clerical Workers) or /X/ CPI U (All Urban Consumers), for (Fill in Urban Area): Los Angeles/Anaheim/Riverside All Items (1982-1984 = 100), herein referred to as "CPI" b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month two months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is two months prior to (select one): / / the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or / / (Fill in Other "Base Month"): two (2) months prior to the first month of the initial term of this Lease. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment. c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties. / / II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) a. On (Fill in MRV Adjustment Date(s)) ----------------------------------- - -------------------------------------------------------------------------------- the Base Rent shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then: (a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next thirty days. Any associated costs will be split equally between the Parties, or (b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions: (i) Within fifteen days thereafter, Lessor and Lessee shall each select an / / appraiser or / / broker ("CONSULTANT"--check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator. Initials: Initials: ------- ------- ------- ------- Page 1 of 2 FOR THIS FORM, WRITE: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 S. FLOWER STREET, SUITE 600, LOS ANGELES, CALIF. 90017 - -C-1997 -- AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION FORM (ii) The three arbitrators shall within thirty days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties. (iii) If either of the Parties fails to appoint an arbitrator within the specified fifteen days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties. (iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV. 2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment. b. Upon the establishment of each New Market Rental Value: 1) the new MRV will become the new "Base Rent" for the purpose of calculating any further Adjustments, and 2) the first month of each Market Rental Value term shall become the new "Base Month" for the purpose of calculating any further Adjustments. / / III. FIXED RENTAL ADJUSTMENT(S) (FRA) The Base Rent shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be: $ - ---------------------------------------- -------------------------- $ - ---------------------------------------- -------------------------- $ - ---------------------------------------- -------------------------- $ - ---------------------------------------- -------------------------- B. NOTICE: Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease. C. BROKER'S FEE: The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease. Initials: Initials: ------- ------- ------- ------- OPTION(S) TO EXTEND PAGE 2 OF 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 S. Flower Street, Suite 600, Los Angeles, CA 90017 (213) 687-8777. Fax No. (213) 687-8616. - -C-1997 -- AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION FORM EX-21 18 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES -------------------- NAME COUNTRY OR STATE OF ---- INCORPORATION ------------------- Hospitality Marketing Concepts Pty. Limited Australia Call Connect Inc. California HMC Consultants Inc. California HMC-International Marketing Concepts Inc. Canada Hospitality Marketing Concepts de Colombia, S.A. Colombia Hospitality Marketing Concepts sarl France Hospitality Management Consultant Indonesia Indonesia Hospitality Marketing Concepts Italia S.R.L. Italy Hotel Marketing Company (HMC) Lebanon Hospitality Marketing Consultants SDN BHD Malaysia HMC Consulting (Shanghai) Co., Ltd. Peoples Republic of China Hospitality Marketing Concepts [Poland] Sp. zoo. Poland Hospitality Marketing Concepts (Asia Pacific) Singapore Pte Ltd. Hospitality Marketing Concepts (Espana), S.L. Spain Hospitality Marketing Concepts (Holdings) Limited United Kingdom Hospitality Marketing Concepts Limited United Kingdom Hospitality Marketing Consultants 2000 de Venezuela Venezuela, C.A. EX-27 19 EXHIBIT 27 (FDS)
5 YEAR 3-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 MAR-31-1998 2,840,000 1,380,000 1,500,000 2,717,000 1,026,000 1,586,000 215,000 265,000 0 0 15,349,000 14,967,000 378,000 419,000 0 0 16,498,000 16,226,000 19,205,000 19,128,000 0 0 0 0 0 0 8,000 8,000 (7,478) (7,673) 16,498,000 16,226,000 31,906,000 7,873,000 31,906,000 7,873,000 20,658,000 5,033,000 7,304,000 2,005,000 4,000 (4,000) 0 0 285,000 144,000 3,655,000 695,000 0 0 0 0 0 0 0 0 0 0 3,655,000 695,000 0.43 0.08 0.43 0.08
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