-----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, GF0gE7qbG6QeUyVNtTTiVwGyhbWjv5w40otrS85uJ2NEjqsyLVq7TPQEFHOtdyNt kpaYX7np91zVSVYIzVkaLw== 0001047469-98-027167.txt : 19980717 0001047469-98-027167.hdr.sgml : 19980717 ACCESSION NUMBER: 0001047469-98-027167 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980714 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOSPITALITY MARKETING CONCEPTS INC CENTRAL INDEX KEY: 0001062967 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 330806192 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-56201 FILM NUMBER: 98665486 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/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1998 REGISTRATION NO. 333-56201 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 2 TO 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 92618 (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. Cooley Godward LLP Greenberg Glusker Fields Morrison & Foerster LLP Five Palo Alto Square Claman & Machtinger LLP 19900 MacArthur Boulevard 3000 El Camino Real 1900 Avenue of the Stars, Irvine, California 92612-2445 Palo Alto, CA 94306 Suite 2100 (949) 251-7500 (650) 843-5000 Los Angeles, CA 90067 (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./ / ------------------------------ 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 JULY 14, 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. 3,000,000 SHARES COMMON STOCK ------------------ All of the 3,000,000 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 $11.00 and $13.00 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 450,000 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 HMC has established membership programs and marketing relationships with over 300 hotels in over 150 cities worldwide, including New York, Rome, London, Madrid, Hong Kong, Shanghai, Warsaw and Caracas. [Company CLUBHOTEL brochure cover and foldout map indicating locations of CLUBHOTEL properties and HMC participating hotels.] 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............................................................................................ 21 Dividend Policy............................................................................................ 21 Capitalization............................................................................................. 22 Dilution................................................................................................... 23 Selected Consolidated Financial Data....................................................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25 Business................................................................................................... 34 Management................................................................................................. 45 Certain Transactions....................................................................................... 51 Principal Stockholders..................................................................................... 53 Description of Capital Stock............................................................................... 54 Shares Eligible for Future Sale............................................................................ 57 Underwriting............................................................................................... 58 Legal Matters.............................................................................................. 59 Experts.................................................................................................... 59 Additional Information..................................................................................... 60 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 92618, 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 provider of membership programs for prestigious hotels and other businesses in international and domestic markets. The Company's revenues are primarily derived from annual membership fees paid by individuals, a portion of which fees (after deducting costs related to marketing the programs) is paid to the applicable participating hotels. 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 over 300 hotels in over 150 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. Such benefits are provided directly by participating hotels, subject to availability, and the Company has no obligation to guarantee any level of member usage of rooms or services. Members pay the hotels directly for their use of hotel facilities at the discounted rates offered by the hotels to program members. Approximately 175 of the Company's top participating hotels have agreed to honor reciprocal membership benefits to all members of local HMC membership programs through the Company's CLUBHOTEL-TM- program, a unique international network including four and five-star participating 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 a study commissioned by 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 conventional 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, hotels and other businesses often lack the necessary marketing expertise and resources to address the needs and demands of multi-ethnic, international purchasing audiences whose languages and customs differ from those prevailing in the region in which they are located. The Company's membership programs address the needs of three constituencies: participating hotels, individual members and businesses 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 hotels 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 hotels and other participating businesses 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 over 300 hotels worldwide. Additionally, the Company recently began offering complementary products to its members such as an international calling card (Call Connect-TM-) and a co-branded VISA card (with Standard Chartered Bank in Malaysia). To achieve its objective of becoming a leading provider of membership programs and marketing services to businesses 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................................. 3,000,000 shares (1) Common Stock to be outstanding after the offering................................ 15,000,000 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 8,427,000 8,400,000 8,565,000 Pro forma data (3): Pro forma net income............. $ 1,604 $ 302 Pro forma net income per share: Basic.......................... $ 0.17 $ 0.02 Diluted........................ $ 0.13 $ 0.02 Weighted average common shares: Basic.......................... 9,651,000 12,651,000 Diluted........................ 12,678,000 12,816,000
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 $ 25,350 Working capital (deficit).............................................. (4,161) (3,177) 22,103 Total assets........................................................... 16,226 17,103 41,073 Long-term debt......................................................... 4,763 1,763 1,763 Distribution payable to stockholders................................... 7,000 Stockholders' equity (deficit)......................................... (7,665) (10,681) 21,599
- ------------------------------ (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 June 30, 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 3,000,000 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 hotels 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 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 participating hotels. 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 growth of the Company's membership base and, consequently, its revenues. The Company typically 6 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 participating 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 base of hotels and limit the number of hotel membership programs which the Company can offer. If further consolidation were to take place, hotels participating in the Company's programs 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 participating 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 hotels or other businesses; 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 7 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 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 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 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, respectively. 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 Colombia, 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 foreign revenues and expenses into U.S. dollars 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 transactions if management determines that it is necessary to offset such risks. There can be no assurance 9 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 at December 31, 1995 and December 31, 1997, respectively, 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 operational, 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 participating hotels and other businesses 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 participating hotels and other businesses 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 participating hotels and other businesses. The Company depends on these relationships to contribute to the success of its existing membership programs, to generate additional membership programs with new participating hotels and other businesses 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 base of participating hotels and other businesses 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. The Company does not maintain key employee life insurance on the lives 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 participating hotels and prospective 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 participating 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 participating hotels with any of these existing or potential competitors. Competition for customers 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 participating hotels and other businesses; 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 participating hotels and other businesses will be receptive to such new products or services or that such members and participating hotels and other businesses 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 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. 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 participating 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 proprietary 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 participating hotel's records of such transactions. There can be no assurance that the Company's participating hotels or other third parties will keep such records, that such records will be accurate or that the participating hotels or other third parties will transmit such information to the Company in a timely fashion. Failure of participating hotels and other 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 participating hotels and other businesses 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, including the recently promulgated FCC regulations implementing Section 222 of the Communications Act of 1934, as amended, regarding the use of customer proprietary network information ("CPNI"). 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 13 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 participating hotels and other businesses 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 14 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 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 53.2% of the outstanding shares of Common Stock. As a result, these stockholders, if acting together, will be able to exercise control over matters requiring 15 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 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 $32.3 million ($37.3 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. SIGNIFICANT DISTRIBUTION OF PROCEEDS TO STOCKHOLDERS The Company intends to use a portion of the net proceeds from this offering to make distributions to the Principals of approximately $5.0 to $7.0 million related to the conversion of the Company from a limited liability company to a C corporation, consisting of undistributed earnings of HMC LLC as of the date of the Merger (as defined), amounts related to prepaid taxes accruing to the benefit of the Company and amounts related to foreign tax credits of the Principals. The exact amount of such distributions in the aggregate, and to each Principal individually, are not presently determinable. 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 16 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 15,000,000 shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options after June 30, 1998. The holders of 12,000,000 of such shares 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 June 30, 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." 17 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 $12.00 per share, investors purchasing shares of Common Stock in this offering will incur immediate, substantial dilution of $10.62 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." 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, and certain affiliated family trusts for periods in 1998, 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 the date of the Contribution Agreement, the Foreign Entities organized in France, Indonesia, Malaysia, Singapore and Venezuela were directly or indirectly, 100% beneficially owned by HMC LLC. Prior to the date of the Contribution Agreement, the Foreign Entities organized in Australia, Canada, Colombia, Lebanon, 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 date of the Contribution Agreement, 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 (the "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 19 each of the Foreign Entities, as described above. HMC LLC established Call Connect, Inc. to conduct its calling card business. 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. 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 2,199,680 shares of Common Stock, three trusts for the benefit of their children will each receive 416,640 shares of Common Stock, a trust beneficially owned by the Ramadans will receive 131,040 shares of Common Stock, Sandra Case will receive 357,000 shares of Common Stock and a trust for the benefit of Ms. Case's children will receive 63,000 shares of Common Stock for their respective interests in HMC LLC. In addition, Ms. Case will hold an option to acquire 180,000 shares of Common Stock. Following the offering, the Principals will beneficially own approximately 56.5% 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." 20 USE OF PROCEEDS The net proceeds of the Company from the sale of 3,000,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $32.3 million ($37.3 million if the Underwriters' overallotment option is exercised in full), assuming a public offering price of $12.00 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 $7.0 million related to the conversion of the Company from a limited liability company to a C corporation, consisting of undistributed earnings of HMC LLC as of the date of the Merger, amounts related to prepaid taxes accruing to the benefit of the Company and amounts related to foreign tax credits earned by the Principals with respect to the Company's operations, (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. See "Reorganization," "Certain Transactions," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 4 of Notes to Consolidated Financial Statements. 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 hotels and other businesses 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." 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, which are estimated to be made in the following amounts from April 1, 1998 through July 31, 1998: Mokhtar Ramadan, $155,368; Fadi Ramadan, $138,704; Marwan Ramadan, $124,304; and Sandra Case, $88,732. See "Reorganization," "Use of Proceeds," "Certain Transactions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 21 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 $12.00 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 $ 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; 15,000,000 shares issued and outstanding, pro forma as adjusted................................................ 8 12 15 Additional paid-in capital................................ (10,462) 21,815 Accumulated deficit....................................... (7,442) Accumulated other comprehensive income.................... (231) (231) (231) Total stockholders' equity (deficit).................... (7,665) (10,681) 21,599 ------------- -------------- ------- Total capitalization.................................... $ (1,592) $ (608) $ 23,362 ------------- -------------- ------- ------------- -------------- -------
- ------------------------ (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 June 30, 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. 22 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 Principals 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 $12.00 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 $20.7 million, or $1.38 per share of Common Stock. This represents an immediate dilution in net tangible book value of $10.62 per share to new investors purchasing shares of Common Stock in the offering and an immediate increase in net tangible book value of $2.34 per share to existing stockholders. The following table illustrates this per share dilution: Assumed public offering price per share..................... $ 12.00 Pro forma net tangible book value (deficit) per share before the offering..................................... $ (0.96) Increase per share attributable to new public investors... 2.34 --------- Pro forma net tangible book value per share after the offering.................................................. 1.38 --------- Dilution per share to new public investors.................. $ 10.62 --------- ---------
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 at its face value 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 $12.00 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 80% $ 3,000,000 8% $ 0.25 New investors.................. 3,000,000 20 36,000,000 92 $ 12.00 ------------ --- ------------- --- Total...................... 15,000,000 100% 39,000,000 100% ------------ --- ------------- --- ------------ --- ------------- ---
- ------------------------ (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 77.7% of the total shares of Common Stock outstanding after this offering and will increase the number of shares held by new investors to 3,450,000 or approximately 22.3% 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 June 30, 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. 23 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 PricewaterhouseCoopers 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 8,427,000 8,400,000 8,565,000 Unaudited pro forma data (1): Unaudited pro forma net income......... $ 1,604 $ 302 Unaudited pro forma net income per share: Basic................................ $ 0.17 $ 0.02 Diluted.............................. $ 0.13 $ 0.02 Unaudited pro forma weighted average common shares: Basic................................ 9,651,000 12,651,000 Diluted.............................. 12,678,000 12,816,000
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. 24 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 businesses 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. Hotels and other businesses often lack the necessary marketing expertise and resources to address the needs and demands of multiethnic, international purchasing audiences whose languages and customs differ from those prevailing in the region in which they are located. The Company believes that its services address the needs of three constituencies: participating hotels, individual members and businesses 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 over 300 hotels in over 150 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. A portion of these membership fees (after deducting costs related to marketing the programs) paid by individual members is paid to the applicable participating hotels. The Company currently receives no revenue from participating hotels. These membership programs typically are provided pursuant to exclusive marketing contracts with participating 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 the Company's own marketing infrastructure to generate members for each program. Membership benefits are provided directly by participating hotels, subject to availability, and the Company has no obligation to guarantee any level of member usage of rooms or services. Members pay the hotels directly for their use of hotel facilities at the discounted rates offered by the hotels to program members. 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 25 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 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 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 addition, as a result of the Reorganization, the Company expects to incur salaries and related costs for the Principals. 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. The costs associated with the Company calling card product include: the cost of calls (telecommunications expense); member acquisition costs, including telemarketing expenses, promotional materials and credit card processing fees; and general and administrative expenses, including salaries and payroll-related costs, legal and accounting fees, travel, advertising and marketing, rent and other corporate overhead. The costs associated with the Company's credit card program include salaries and payroll-related costs. 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, respectively. 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 foreign currencies into U.S. dollars on a weekly basis. As a result of recent economic volatility in Asia, many currencies in the region have lost value relative to the U.S. dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of this currency crisis, the Company's operations in its Asia Region have been subject to a higher degree of economic instability, including the Company's operations in Indonesia, Hong Kong, Singapore, the Philippines and Malaysia. In addition, the Company's subsidiaries in Spain, Italy, France, Poland, the United Kingdom, Australia, Lebanon, Canada, Columbia and Venezuela operate in local currencies, and their results are translated into U.S. dollars. If the value of the U.S. dollar increases relative to foreign currencies, the Company's business, operating results and financial condition could be materially adversely affected. Fluctuations in currency rates in connection with currency conversions may affect the period to period comparisons of operating results. As of March 31, 1998, the Company did not engage in financial transactions 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 26 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 $7.0 million related to the conversion of the Company from a limited liability company to a C corporation, consisting of undistributed earnings of HMC LLC as of the date of the Merger, amounts related to prepaid taxes accruing to the benefit of the Company and amounts related to foreign tax credits earned by the Principals with respect to the Company's operations. 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. 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 (not including hotel-based call centers) as opposed to 27 at March 31, 1997. 27 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. 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. Membership increased to 235,570 at December 31, 1997 from 205,479 at December 31, 1996. 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 primarily 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 existing programs. Membership increased to 205,479 at December 31, 1996 from 130,136 at December 31, 1995. 28 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 new membership sales resulting from 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 primarily attributable to interest expense on the Original Partnership Note which was made on July 1, 1996, and to 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. 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. 29
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 the new markets, strengthen operations and establish a 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 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 30 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 participating 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 hotels or other businesses; 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 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 with respect to the Original Partnership Note. 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." 31 In July 1996, the Company issued a note payable due to the Original Partnership for $1.8 million (the "Original Partnership Note"), 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) and is secured 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" and "Certain Transactions." In October 1997, the Company established an additional line of credit with the same bank for borrowings of up to $1.0 million. 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 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 32 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. 33 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 provider of membership programs for prestigious hotels and other businesses in international and domestic markets. The Company's revenues are primarily derived from annual membership fees paid by individuals, a portion of which fees (after deducting costs related to marketing the programs) is paid to the applicable participating hotels. 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. Hotels and other businesses often lack the necessary marketing expertise and resources to address the needs and demands of multi-ethnic, international purchasing audiences whose languages and customs differ from those prevailing in the region in which they are located. The Company believes that its services address the needs of three constituencies: participating hotels, individual members and businesses 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 over 300 hotels in over 150 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 a study commissioned by 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. 34 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. 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 conventional 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 businesses 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 hotel or business to achieve using its internal resources. The Company believes that its services address the needs of three constituencies: participating hotels; individual members and businesses 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 over 300 hotels in over 150 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 35 room 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 participating hotels have agreed to honor reciprocal membership benefits to all members of local HMC membership programs through the Company's CLUBHOTEL-TM- program, a unique international network of four and five-star 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 participating hotels, individual members and businesses 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 participating hotels 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. Such benefits are provided directly by participating hotels, subject to availability, and the Company has no obligation to guarantee any level of member usage of rooms or services. Members pay the hotels directly for their use of hotel facilities at the discounted rates offered by the hotels to program members. The Company also provides hotel and other businesses 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, consisting of a network of ongoing marketing relationships with over 300 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 participating hotels and businesses without a significant capital investment or commitment of managerial resources from such participating hotels and businesses. The Company believes that its services represent a high value alternative to membership programs created and marketed using the internal resources of the hotel or business 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 hotels and businesses 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 participating 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 36 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 participating hotels and businesses and members. The Company has established a global marketing infrastructure of locally-staffed telemarketing offices in 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 participating hotels and businesses. 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 over 300 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 hotel and business 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 hotel'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 participating hotels and businesses and members. HOTEL MEMBERSHIP PROGRAMS HMC designs, markets and manages membership programs for prestigious hotels and other businesses 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, participating hotels receive benefits difficult for the hotels to achieve using the hotels' internal resources. The Company's hotel membership programs offer individual members a variety of benefits, including premium service, complimentary room nights, substantial discounts off published room rates and complimentary food and beverage privileges when dining with a guest 37 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. Such benefits are provided directly by participating hotels, subject to availability, and the Company has no obligation to guarantee any level of member usage of rooms or services. Members pay the hotels directly for their use of hotel facilities at the discounted rates offered by the hotels to program members. As of March 31, 1998, the Company had membership programs for over 300 hotels in over 150 cities worldwide. The Company's services are provided pursuant to exclusive marketing contracts with participating 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 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 hotel'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 hotel 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 38 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 the hotels' customer service staffs to ensure that the hotels' representatives are knowledgeable in matters relating to the program. PARTICIPATING HOTELS As of March 31, 1998, the Company had established hotel membership programs and on-going marketing relationships with over 300 hotels in over 150 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. The Company's programs include 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 participating hotels are affiliated with 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. 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 39 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 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 businesses 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 marketing 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 marketing 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 of such persons are 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 40 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 participating hotels and businesses 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 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 contains transactional profiles of affluent persons and is among the most established and extensive of such databases available 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 participating hotels and businesses 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, including the recently promulgated FCC regulations implementing Section 222 of the Communications Act of 1934, as amended, regarding the use of CPNI. 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 41 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 participating hotels and businesses 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 participating hotels and other businesses 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 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 42 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 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 participating hotels and prospective 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 participating 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 participating hotels with any of these existing or potential competitors. Competition for customers 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 43 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 hotels with customized solutions to their sales and marketing needs, without diverting management from its core business focus. See "Risk Factors--Competition." 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 participating 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 participating 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. 44 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 Olaf Isachsen(1)(2)................... 65 Director Nominee 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
- ------------------------ (1) Member of Audit Committee. (2) Member of Compensation Committee. 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. OLAF ISACHSEN will become a Director subsequent to the consummation of this offering. From 1978 to present, Mr. Isachsen has served as Chairman and Senior Consultant of the Institute for Management Development, a private consulting firm specializing in organizational development. He has also served as Associate Professor at California Polytechnic Institute and Visiting Professor at Stanford University. He received an MBA degree from Harvard University and a Ph.D. from Michigan State University. 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 45 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. 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 and Olaf Isachsen--2001; Philip Hirsch and an Outside Director-- 2000; and Fadi Ramadan--1999. The Company intends to appoint two additional directors (the "Outside Directors"). Mr. Isachsen will be appointed immediately following the consummation of this offering and the remaining Outside Director will be appointed 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. 46 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. 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, $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 47 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., a wholly-owned subsidiary of the Company. The other executive officers are eligible for an annual bonus at 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, $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 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 such executive officers 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 option vests and becomes exercisable 90 days after the date of grant as to 20% and the balance vests in three equal installments annually. Mr. Van Steenbrugge's option vests 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. 48 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. 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. 49 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 provides 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 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. 50 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 beneficially 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, trusts for the benefit of their children, a trust of which the Ramadans are beneficial owners, Sandra Case and a trust for the benefit of Ms. Case's children will receive 2,199,680, 2,199,680, 2,199,680, 1,249,920, 131,040, 357,000 and 63,000 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 $7.0 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 value 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 51 Company on insurance policies relating to the Principals aggregated: $28,788, $40,001 and $100,521 for Mokhtar 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 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. 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, an unrelated third party, made a $3.0 million loan to HMC LLC. The Subordinated Promissory Note evidencing the loan provides for interest at the 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 additional equity interest in HMC LLC, and a comparable equity interest in each of the related entities, for $180,000. This option will be exchanged in the Merger for an option to purchase 180,000 shares of Common Stock of the Company at an exercise price of $1.00 per share under the original terms of the option. 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 terminate this line of credit and 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." 52 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% 18.3% Philip G. Hirsch (4).......................................................... 48,000 * * Olaf Isachsen................................................................. 0 * * Frans Van Steenbrugge......................................................... 0 * * Fadi Ramadan (5).............................................................. 2,747,360 32.7 18.3 Sandra Case (6)............................................................... 600,000 7.0 4.0 Marwan Ramadan (7)............................................................ 2,747,360 32.7 18.3 Hospitality Partners, LLC (8)................................................. 3,600,000 30.0 24.0 All current directors and executive officers as a group (7 persons) (9)....................................................... 8,628,000 100.0% 56.6%
- ------------------------ * Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock. (1) Except as otherwise specified, the address of all persons on the list set forth above is: 15751 Rockfield Boulevard, Suite 200, Irvine, California 92618. (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 15,000,000 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 of the Subordinated Promissory Note, plus 3,000,000 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 131,040 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 131,040 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 131,040 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." Amre Youness is the Manager of Hospitality Partners, LLC. The address of Hospitality Partners, LLC is 301 N. Lake Avenue, Suite 910, Pasadena, California 91101 (9) Includes options and shares issuable upon conversion of the Subordinated Promissory Note described in notes (3)-(8), above. 53 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. 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 54 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. 55 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, Hospitality Partners, LLC 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. 56 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 15,000,000 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 June 30, 1998 and giving effect to the conversion of the Subordinated Promissory Note. Of these shares, the 3,000,000 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"). Restricted 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) 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 or as otherwise permitted under the Lock-Up Agreements, 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." 57 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........................................................................ 3,000,000 ---------- ----------
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 450,000 additional shares of Common Stock at the same price per share as the Company will receive for the 3,000,000 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 3,000,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 3,000,000 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, 58 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 PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 59 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. 60 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." PricewaterhouseCoopers 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............................. (10,462,000) Accumulated deficit.................................... (6,974,000) (7,317,000) (7,442,000) 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 8,427,000 8,400,000 8,565,000 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- Unaudited pro forma data: Unaudited pro forma income before income tax provision.............. $ 2,673,000 $ 503,000 Unaudited pro forma provision for income taxes...................... (1,069,000) (201,000) ------------- ------------- Unaudited pro forma net income (Note 9)................................ $ 1,604,000 $ 302,000 ------------- ------------- ------------- ------------- Unaudited pro forma net income per share: Basic............................. $ 0.17 $ 0.02 ------------- ------------- ------------- ------------- Diluted........................... $ 0.13 $ 0.02 ------------- ------------- ------------- ------------- Unaudited pro forma weighted average common shares: Basic............................. 9,651,000 12,651,000 ------------- ------------- ------------- ------------- Diluted........................... 12,678,000 12,816,000 ------------- ------------- ------------- -------------
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 and related persons 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 France, Indonesia, Malaysia, Singapore and Venezuela, directly or indirectly, were 100% beneficially owned by HMC LLC. The entities in Australia, Canada, Colombia, Lebanon 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., Call Connect Inc., a California corporation, 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 these 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 the hotels to credit card holders. Amounts collected by these hotels 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. If membership acquisition costs and other deferred costs were to exceed the related membership fee or if a hotel membership program was discontinued, an appropriate adjustment would be made for any significant impairment. 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............................................. 27,000 165,000 ----------------- -------------- Weighted average common shares--Diluted................... 8,427,000 8,565,000 ----------------- -------------- ----------------- --------------
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. This note was issued at its fair market value. 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 will be converted into 3.6 million shares of common stock upon closing of the proposed initial public offering (Note 10). The Company is subject to certain covenants and restrictions under the terms of the note, including the F-11 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. NOTES PAYABLE (CONTINUED) proscription of principal payments prior to December 31, 1999 as well as 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 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 exchanged for an option to purchase 180,000 shares of common stock of the Company under the original terms and conditions, including the exercise price of the option. Had compensation cost for this option 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 would not have been 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 F-12 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) years representing a current equity share of an additional 1.0%. As such, the Company is required to pay 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 reclassification of the Company's accumulated deficit and 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 reclassification of the Company's accumulated deficit to additional paid-in-capital had no impact on total stockholders' deficit. 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 F-13 HOSPITALITY MARKETING CONCEPTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED) 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 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 31, THREE MONTHS ENDED MARCH 1997 31, 1998 ------------------------ -------------------------- BASIC DILUTED BASIC DILUTED ---------- ------------ ------------ ------------ Weighted average common shares............................. 8,400,000 8,427,000 8,400,000 8,565,000 Conversion of note payable................................. 600,000 3,600,000 3,600,000 3,600,000 Stockholder distributions.................................. 651,000 651,000 651,000 651,000 ---------- ------------ ------------ ------------ Pro forma weighted average common shares................... 9,651,000 12,678,000 12,651,000 12,816,000 ---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------
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 3,450,000 shares of newly-issued Company common stock (3,000,000 shares intended to be offered to the public and 450,000 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, the fair market value on the date of grant. 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................................................................. $ 5,300 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*......................................................... $ 29,951 ------------ Total....................................................................... $ 1,200,000 ------------ ------------
- ------------------------ * Estimated 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 and related parties 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 issuance of 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 Common Stock 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 of Common Stock to employees in reliance on Rule 701 promulgated under the Securities Act and 362,400 shares of Common Stock to executive officers and key employees which were exempt from registration pursuant to Section 4(2) of the Securities Act. II-1 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 Employment Agreement, dated July 1, 1998, between HMC LLC and Mokhtar Ramadan. 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. 10.15 Contribution Agreement, made as of May 15, 1998, by and among Marktech International Inc., Hospitality Marketing Consultants, LLC, Mokhtar Ramadan, Marwan Ramadan, Fadi Ramadan and Sandra Case. 10.16+ Form of Tax Indemnification Agreement, made as of , 1998, by and between Hospitality Marketing Concepts Inc. and Mokhtar Ramadan, Marwan Ramadan, Fadi Ramadan and Sandra Case. 10.17 Amendment and Waiver, between Hospitality Partners, LLC and Hospitality Marketing Consultants, LLC, dated as of July 1, 1998. 10.18 Marketing Agreement, dated January 13, 1995, between Hospitality Marketing Concepts International Limited and Orbis Company Inc. [Confidential treatment requested for portions of this exhibit. Omitted portions have been filed separately with the Commission.] 10.19 Employment Agreement, dated July 1, 1998, between HMC LLC and Fadi Ramadan. 10.20 Employment Agreement, dated July 1, 1998, between HMC LLC and Marwan Ramadan. 10.21 Employment Agreement, dated July 1, 1998, between HMC LLC and Sandra Case. 21+ List of subsidiaries. 23.1* Consent of PricewaterhouseCoopers LLP, independent accountants. 23.2* Consent of Greenberg Glusker Fields Claman & Machtinger LLP (included in Exhibit 5.1).
II-2
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------- ------------------------------------------------------------------------------------------------------- 24+ Power of Attorney (see page S-1). 27+ Financial Data Schedule. 99.1 Consent of Olaf Isachsen
- ------------------------ * To be filed by amendment. + Previously filed. (b) Financial Statement Schedules. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on July 13, 1998. HOSPITALITY MARKETING CONCEPTS INC. By: /s/ MOKHTAR RAMADAN* ----------------------------------------- Mokhtar Ramadan CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amendment to 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 July 13, 1998 Mokhtar Ramadan (Principal Executive Officer) Senior Vice President, /s/ PHILIP G. HIRSCH Finance, Chief Financial - ------------------------------ Officer and Director July 13, 1998 Philip G. Hirsch (Principal Financial and Accounting Officer) /s/ FADI RAMADAN* - ------------------------------ Senior Vice President, July 13, 1998 Fadi Ramadan Americas, and Director *By: /s/ PHILIP G. HIRSCH ------------------------- Philip G. Hirsch ATTORNEY-IN-FACT
II-4 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 Employment Agreement, dated July 1, 1998, between HMC LLC and Mokhtar Ramadan. 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. 10.15 Contribution Agreement, made as of May 15, 1998, by and among Marktech International Inc., Hospitality Marketing Consultants, LLC, Mokhtar Ramadan, Marwan Ramadan, Fadi Ramadan and Sandra Case 10.16 Form of Tax Indemnification Agreement, made as of , 1998, by and between Hospitality Marketing Concepts Inc. and Mokhtar Ramadan, Marwan Ramadan, Fadi Ramadan and Sandra Case. 10.17 Amendment and Waiver, between Hospitality Partners, LLC and Hospitality Marketing Consultants, LLC, dated as of July 1, 1998. 10.18 Marketing Agreement, dated January 13, 1995, between Hospitality Marketing Concepts International Limited and Orbis Company Inc. [Confidential treatment requested for portions of this exhibit. Omitted portions have been filed separately with the Commission.] 10.19 Employment Agreement, dated July 1, 1998, between HMC LLC and Fadi Ramadan. 10.20 Employment Agreement, dated July 1, 1998, between HMC LLC and Marwan Ramadan. 10.21 Employment Agreement, dated July 1, 1998, between HMC LLC and Sandra Case. 21+ List of subsidiaries.
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE - --------- ------------------------------------------------------------------------------------------ ------------- 23.1* Consent of PricewaterhouseCoopers 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. 99.1 Consent of Olaf Isachsen
- ------------------------ * To be filed by amendment. + Previously filed. EX-10.11 2 EXHIBIT 10.11 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into as of July 1, 1998, by and between MOKHTAR RAMADAN, an individual ("EMPLOYEE"), and Hospitality Marketing Consultants, 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 Chairman and Chief Executive Officer. 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 Three Hundred Thousand Dollars ($300,000.00) 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. (v) TAX INDEMNIFICATION. Employer agrees to indemnify and hold Employee harmless from and against any and all claims, liabilities, actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses incurred as a result of any claim by any taxing authority for unpaid federal, foreign, state, province, local or other taxes, assessments, fees or other governmental charges, or any related penalties, whether or not reported or disputed, resulting from the prior activities of Employee with respect to and any predecessor entity of Employer (a "CLAIM" or the "CLAIMS"). Employee shall promptly give notice to Employer upon receipt of notice of any Claim and the Employer shall promptly pay or assume the defense of such Claim as such course of action is reasonably deemed appropriate by the Employer, using legal counsel reasonably satisfactory to Employee. Employer shall not be responsible for any settlement of any Claim made without its prior written consent which shall not be unreasonably withheld. The provisions of this Section 4(d)(v) shall survive the end of the term or other termination of this Agreement. (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. In addition, it shall be deemed for all purposes to be a Without Cause Termination ("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 Consultants, 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 CONSULTANTS, INC. By:_______________________________ Its: _____________________________ "EMPLOYEE" MOKHTAR RAMADAN __________________________________ Address: 15751 Rockfield Blvd., Suite 200 Irvine, CA 92618 Facsimile (949) 454-1888 -14- EX-10.15 3 EXHIBIT 10-15 EXHIBIT 10.15 CONTRIBUTION AGREEMENT THIS CONTRIBUTION AGREEMENT is made as of May 15, 1998 by and among Marktech International Inc., a Delaware corporation ("HMC Inc. Delaware"), Hospitality Marketing Consultants, LLC, a California limited liability company ("HMC LLC"), Mokhtar Ramadan, Marwan Ramadan, Fadi Ramadan and Sandra Case (collectively, the "Principals"), with reference to the following facts: A. The Principals own all of the issued and outstanding shares of HMC Inc. Delaware and all of the membership interests in HMC LLC. B. The Principals are also the beneficial owners of all of the equity interests in the foreign entities which are listed on Exhibit "A", attached hereto and incorporated herein by reference, except for Hospitality Marketing Concepts [Poland] Sp.zoo. ("HMC Poland"), a business entity organized in Poland of which the Principals beneficially own 84% of the equity interests (such foreign entities to be referred to collectively as the "Foreign Entities"). C. Hospitality Marketing Concepts (International) Ltd. ("HMC UK International") is the record and beneficial owner of all of the equity interests in Hospitality Marketing Concepts Espana ("HMC Spain"), a business entity organized in Spain, and Hospitality Marketing Concepts Italia S.R.L. ("HMC Italy"), a business entity organized in Italy. D. The Principals are the beneficial owners of all of the capital stock of Hospitality Marketing Concepts, Inc., a California corporation ("HMC California"), record ownership of which is held equally by Mokhtar, Fadi and Marwan Ramadan. E. The Principals are also beneficial owners of all of the equity interests in dormant business entities organized in Brazil and the Philippines (collectively, the "Dormant Entities") and are currently in the process of organizing an entity in the Peoples Republic of China to be called HMC Consulting (Shanghai) Co., Ltd. (the "Chinese Entity"). F. HMC LLC, HMC Inc. Delaware, HMC California and all of the Foreign Entities except for the Dormant Entities are engaged in similar and closely related business operations. G. Pursuant to the Agreement of the Principals, notwithstanding the fact that record title to HMC California and certain of the Foreign Entities is held by some, but not all, of the Principals, such record holders hold the equity interests for the benefit of all of the Principals, with beneficial ownership of HMC California and such Foreign Entities held 31-2/3% by each of Mokhtar, Fadi and Marwan Ramadan, and 5% by Sandra Case. 1 H. The Principals desire that HMC Inc. Delaware complete an initial public offering of its shares (the "IPO"). In preparation for the IPO, the Principals have agreed to the transactions provided for in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Each of the Principals agrees to contribute all of the equity interests now or hereafter beneficially owned by him or her in HMC California, HMC China and each of the Foreign Entities, other than HMC UK International, to HMC LLC, and HMC LLC agrees to accept each such contribution. Each such contribution shall be made as soon as possible hereafter as permitted by applicable local law. 2. Each of the Principals agrees to contribute all of his or her equity interests in HMC UK International to Hospitality Marketing Concepts (Holdings) Limited ("Holdings"), a business entity organized in the United Kingdom. Such contribution shall be made as soon as possible but in no event later than July 1, 1998. As a result of such contribution, HMC UK International will be wholly owned by Holdings. Each of the Principals further agrees to cause all appropriate action to be taken by HMC UK International and Holdings to cause HMC UK International to transfer all of its equity interests in HMC Spain and HMC Italy to Holdings. Each of the Principals further agrees to take all necessary action, following the distribution of the interests in HMC Spain and HMC Italy from HMC UK International to Holdings, to further cause HMC UK International to be liquidated and dissolved. As a result of these transactions, HMC Spain and HMC Italy will be wholly owned by Holdings, which currently is and will remain wholly owned by HMC LLC. 3. Each of the Principals agrees to cause all of his or her equity interests in HMC Poland to be transferred to HMC LLC made as soon as possible as permitted by applicable local law; provided, however, that such transfer may be structured other than as a transfer of equity interests, such as, for example, by recapitalization or asset transfer, if necessary or convenient to accommodate tax or accounting considerations. 4. Each of the Principals agrees to take all actions necessary or appropriate to transfer to HMC LLC record title of all capital stock of HMC California and all equity interests in the Foreign Entities. 5. Each of the Principals agrees to take all actions necessary or appropriate to wind up and dissolve each of the Dormant Entities. 6. Each of the Principals agrees to take all actions necessary or appropriate to cause HMC LLC to be merged with and into HMC Inc. Delaware, with HMC Inc. Delaware as the surviving business entity, effective immediately before or concurrent with the closing of the IPO. 7. Each of the undersigned agrees to execute and deliver such additional documents 2 and instruments and to perform such additional acts as may be necessary or appropriate to effectuate all of the terms, provisions and conditions of this Agreement and the transactions contemplated hereby. 8. All amendments to this Agreement must be in writing and signed by all of the parties hereto. 9. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 10. This Agreement shall be construed and governed by the internal laws of the State of California and the United States of America. IN WITNESS WHEREOF the parties have executed this Contribution Agreement effective as of the date first above written. "HMC INC. DELAWARE" Marktech International Inc. a Delaware corporation By:_____________________________ Its:_________________________ "HMC LLC" Hospitality Marketing Concepts LLC, a California limited liability company By:_____________________________ Its:_________________________ "PRINCIPALS" ________________________________ Mokhtar Ramadan [SIGNATURES CONTINUED ON PAGE 4] 3 ________________________________ Marwan Ramadan ________________________________ Fadi Ramadan ________________________________ Sandra Case 4 EXHIBIT A
NAME OF ENTITY COUNTRY OR STATE RECORD TITLE -------------- ---------------- ------------ Hospitality Marketing California Mokhtar Ramadan-3331/3 shares Concepts, Inc. Fadi Ramadan-3331/3 shares Marwan Ramadan-3331/3 shares HMC-International Canada Mokhtar Ramadan-1000 shares Marketing Concepts Inc. Fadi Ramadan-1000 shares Marwan Ramadan-1000 shares Hospitality Marketing Colombia Mokhtar Ramadan-26 shares Concepts de Colombia Fadi Ramadan-26 shares S.A. Marwan Ramadan-26 shares Sandra Case-2 shares Hospitality Marketing Consultants, LLC-92 shares Hostellery Company for Lebanon Mohamad Jawad Asfahani - 100 Tourism and Marketing Mohsen Jawad Asfahani - 10 s.a.r.l. Aida Mahmoud Rifahi - 10 Hospitality Marketing Poland Mokhtar Ramadan - 21 shares Concepts [Poland] Fadi Ramadan - 21 shares Sp.zoo. Marwan Ramadan-21 shares Christopher Feeney - 13 shares Sandra Case - 4 shares
5
NAME OF ENTITY COUNTRY OR STATE RECORD TITLE -------------- ---------------- ------------ Hospitality Marketing United Kingdom Mokhtar Ramadan - 38 ordinary shares Concepts (International) Fadi Ramadan - 38 ordinary shares Ltd. Marwan Ramadan - 38 ordinary shares Sandra Case - 6 ordinary shares Hospitality Marketing Concepts Limited United Kingdom Mokhtar Ramadan - 1 ordinary share Sandra Case - 1 ordinary share
6 EX-10.17 4 EXHIBIT 10.17 AMENDMENT AND WAIVER Reference is made hereby to that certain (i) Loan and Investment Agreement (the "Loan Agreement"), dated November 7, 1997, by and among Hospitality Partners, LLC ("Lender"), Hospitality Marketing Consultants, LLC ("Borrower") and Mokhtar Ramadan, Fadi Ramadan, Marwan Ramadan and Sandra Case, including all attachments, exhibits and addenda thereto; and (ii) Convertible Subordinated Promissory Note (the "Note"), dated November 7, 1997, in a principal amount of Three Million Dollars ($3,000,000) entered into by Borrower for the benefit of Lender, including the Registration Rights attached thereto. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Loan Agreement. In consideration of good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the undersigned hereby agree to amend the Loan Agreement and Note, as set forth below, to be effective upon the execution and delivery of a firm commitment underwriting agreement (the "Underwriting Agreement") between Hospitality Marketing Concepts, Inc., a Delaware corporation (the "Company") and BancAmerica Robertson Stephens. 1.1 Lender agrees to convert the principal balance of the Note in accordance with Section 2.3(b) of the Loan Agreement on the date on which the Underwriting Agreement with respect to the IPO is executed and delivered, conditioned upon the subsequent consummation of the IPO. 1.2 The defined term "IPO" shall mean an initial public offering of equity securities by the Company prior to September 30, 1998. 1.3 Lender confirms and agrees that the following sections of the Loan Agreement terminate and are of no further force or effect upon consummation of the IPO: SECTIONS 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, and 5.8, ARTICLE 6, and ARTICLE 7. 1.4 Notwithstanding any provisions of the Loan Agreement or the Note to the contrary, Lender hereby waives any and all rights (and any related notice requirements) to require the registration of securities it may have under any agreement or understanding, including the Loan Agreement, to be offered in the IPO; provided that such waiver shall apply only to the IPO. In addition, Lender agrees not to exercise any right to require Borrower or any Reorganized Borrower to register Conversion Shares pursuant to Lender's Registration Rights for a period of 180 days from the effective date of the IPO. 1.5 This Amendment and Waiver is a limited waiver and shall not constitute or be deemed a waiver of any other provision of the Loan Agreement, Note or related documents or of the rights of any party thereto. Any amendment, modification or termination of this Amendment and Waiver or any waiver of the provisions hereof shall be effective only if in writing and approved by all of the parties hereto. 1.6 This Amendment and Waiver may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed signature page to this Amendment and Waiver by facsimile shall be effective as delivery of a manually executed signature page. This Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of California. IN WITNESS WHEREOF, the undersigned have executed this Amendment and Waiver as of July 1, 1998. HOSPITALITY PARTNERS, LLC By: /s/ Amre Youness ----------------- Amre Youness Manager HOSPITALITY MARKETING CONSULTANTS, LLC By: /s/ Philip G. Hirsch --------------------- Philip G. Hirsch Senior Vice President of Finance and CFO 2 EX-10.18 5 EXHIBIT 10.18 *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. HOSPITALITY MARKETING CONCEPTS MARKETING AGREEMENT This Marketing Agreement ("Agreement") is entered into this 13th day of January 1995, by and between HOSPITALITY MARKETING CONCEPTS INTERNATIONAL LIMITED with its seat in West Sussex, England (hereinafter "HMC") and ORBIS COMPANY INC. (hereinafter "ORBIS") PREAMBLE WHEREAS, HMC has the expertise and experience in the organization, advertisement, research, promotion and development of hotel and hospitality marketing Programmes, as that term is hereinafter defined; and WHEREAS, ORBIS is in the business of offering to the general public lodging, recreational and restaurant facilities, including related services; and WHEREAS, HMC, ORBIS and the participating ORBIS HOTELS are desirous of entering into an agreement whereby HMC will act as the exclusive marketing representative, of Club ORBIS as describes hereinbelow, of the participating ORBIS HOTELS to market and promote the facilities and services hereafter described, within the Territory as defined under the terms and conditions set forth hereinbelow. 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. AGREEMENT THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements herein contained, it is agreed by and between HMC, ORBIS and the participating ORBIS HOTELS as follows: 1. DEFINITIONS (A) The preamble of this Agreement shall form an integral part hereof. (B) Unless otherwise specified by subject and content, the words appearing in the first column of the following table whenever used within this Agreement shall bear the meanings set opposite them, respectively, in the second column thereof: Agreement Term The period beginning on the day in which this Agreement becomes effective and continuing until this Agreement is terminated as provided herein. Club Name The name appearing on all the collateral material relating to the Membership Programme and the plastic membership card described herein. Execution Date The date of the execution of this Agreement as first written above. Active Programme A Marketing Programme that is actively selling memberships. HMC SP. Z 0.0. The legal entity which shall be established by HMC for realisation of this Agreement and to which all rights and obligations of HMC under this Agreement shall be assigned. Gross Receipts All membership fees generated by the Programme, less all amounts paid for VAT or other similar tax. ORBIS S.A. The legal entity entering into this Marketing Agreement with HMC. Marketing Programme The telemarketing operation implemented by HMC on behalf of ORBIS to promote and sell Membership Cards. Membership Programme The granting of the right to use the facilities of ORBIS under the "Club" name specified herein. Member(s)/Membership Those individuals who purchase the Membership Programme described herein and are holders of Membership Cards. 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. Membership Date The date of the purchase of the Membership Card by Member. Membership Term The period beginning on the Membership Date and continuing for twelve (12) to thirteen (13) consecutive months thereafter. Membership Card The plastic identification card issued in connection with the purchase of the Membership for the Membership Programme described herein. Membership Agreement The agreement under which a person becomes a member. Proprietary Information Any and all information of a secret or confidential nature arising in relation to the hotel marketing programmes of HMC, including but not limited to brochures, promotional literature, marketing materials, club membership agreements, club membership cards and all other products related, similar to or derived from the membership programme, any idea, date, knowhow, technique, formula, method process, use, composition, product, invention, trade secret or other technical, business, financial customer or product development plans, forecasts or strategies and the names and expertise of employees and consultants, whether or not any such information can be patented, trademarked, copyrighted or enforceable as a trade secret under the laws of any nation. Sales Reports Financial and accounting reports sent to ORBIS on a weekly basis. The Territory All domestic markets. 2. MEMBERSHIP CARDS HMC shall print or cause to be printed Membership Cards bearing the title ORBIS GOLD CLUB for the Membership Programme. HMC shall [REDACTED*] all design, preproduction, and manufacturing costs incurred relating to the production of the Membership Cards [REDACTED*]. Each Membership Card shall be valid and honored by each participating ORBIS hotel for the Membership Term. Prior to the initial distribution of Membership Cards to Members, HMC shall provide to ORBIS all plans, designs, and artwork on the proposed Membership Card. ORBIS shall, within ten (10) days of receipt of the proposed Membership Card, provide written notice to HMC that the proposed Membership Card has met, or rails to meet, the product quality control standards of ORBIS. In the event HMC does not receive written notice of acceptance or rejection of the proposed Membership Card, the plan, design, and artwork of the Membership Card will be presumed to meet the minimum product quality control standards of ORBIS, and will thereafter 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. be produced in such form and distributed to those entitled under this Agreement to Membership Cards. 3. COMPLIMENTARY MEMBERSHIPS ORBIS shall be entitled to [REDACTED*] Membership Cards free of charge for each participating ORBIS hotel. The [REDACTED*] promotional Membership Card, and each promotional Membership Card thereafter, will be distributed at a cost to the requester of [REDACTED*] of such Membership Card. 4. MARKETING MATERIALS Substantially contemporaneous with the production of the Membership Cards but not before, HMC shall produce marketing materials, including, but not limited to, marketing literature, promotional materials and advertisements for the Membership Programme [REDACTED*]. ORBIS has the right to review all materials produced by HMC relating to the packaging, promotion and marketing of ORBIS. Prior to the distribution of marketing materials to the general public, HMC shall provide ORBIS with copies of the proposed marketing material or advertisement. ORBIS shall, within then (10) days of receipt of the proposed marketing material, provide written notice to HMC that the proposed standards of ORBIS. In the event HMC does not receive written notice of acceptance or rejection of the proposed material within ten (10) days of receipt of said material, the plan, design and artwork of the material will be presumed to meet the minimum product quality control standards of ORBIS, and will thereafter be distributed to the general public. 5. MEMBERSHIP TERM Each Membership Card sold by HMC shall be valid for the Membership Term. Each Member shall be entitled to those privileges specified on the Membership Card and marketing materials, subject to all limitations, restrictions, and/or disclaimers contained in such materials. Membership Cards shall have no cash value or redemption value, unless specifically stated on the Membership Card to have said value. 6. RESTAURANT DISCOUNT All restaurants at participating ORBIS hotels shall honor the Membership Card for a minimum of two (2) persons with no maximum restrictions. A Member shall receive a [REDACTED*] discount on the total food purchased by the Member and one guest; a [REDACTED*] discount shall be given to a Member and two guests; a [REDACTED*] discount shall be given to the Member with three guests; and the discount shall continue as set forth above, pro-rata, depending upon the number of guests that accompany the Member. The participating hotel restaurants shall accept payment in any acceptable form for the total food bill, after crediting the Member with the applicable membership discount. All food 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. purchase during the participating restaurant's Membership Programme hours are to be ordered form the restaurant's regular menu, including any and all special menus, attachments, or "clipons". The amount of the discount shall be exclusive of (a) alcoholic/non- alcoholic beverages; (b) taxes (if applicable); (c) orders made off-premises or through room service; (d) discounted dining specials or hotel promotions independent of participating hotel's Marketing Programme. Participating ORBIS hotels shall have the sole responsibility for providing services and maintaining the facilities to provide the benefits described in ORBIS CLUB Membership Programme. payments for any of the services or facilities offered to any Member shall be made directly to the participating ORBIS outlet. It shall be the sole responsibility of the participating ORBIS outlet to satisfy itself as the payment for such services or facilities and under no circumstances shall HMC be liable to ORBIS or any participating ORBIS outlet for any payment for such services or facilities. HMC shall not be responsible for the refusal of a Member to honor obligation to pay for lodging, food or services provided by the ORBIS hotels. 7. ORBIS COMPENSATION In consideration of ORBIS's participation, in the Marketing Programme, ORBIS shall receive [REDACTED*] as more particularly set forth in the expense schedules, which are attached hereto and marked as Attachments C and D which are incorporated by this reference as though fully set forth herein. 8. HMC COMPENSATION All payments for memberships shall be remitted directly to HMC. The term "payments" as used herein includes payments made in cash, vouchers, caulks, debit cards, credit cards, including, but not limited to, Cakes, Visa, Diner's Club, Carte Blanche, and American Express. Said payments will be processed by HMC on a weekly basis. 9. ACCOUNTING AND REPORTING Complete and accurate records concerning monetary transactions will be maintained on each Membership Card purchased. HMC will diligently record and report the following information: (a) date and amount of each Membership Card sold; (b) an itemization of operating expenses; (c) the name and account number of the payer; (d) date and amounts of costs to be refunded to HMC for cancellations or refunds; 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. (e) dates and payments of customer payments as well as refunds; (f) records concerning any returned caulks. Monetary transactions are to be reported on a weekly basis, within three (3) working days of the last day of each, week (Sunday). HMC shall, within thirty (30) working days of ORBIS's receipt of the weekly Sales Reports and related documentation, pay to ORBIS an amount [REDACTED*]. 10. HOTEL FACILITIES ORBIS shall provide various office and lodging facilities free of charge or at an agreed charge as more precisely set forth in attachment D. 11. MANAGEMENT INFORMATION SYSTEMS As the exclusive marketing representative of the ORBIS CLUB HMC will require certain specific information concerning ORBIS and its participating hotels so that HMC can market an promote the facilities and services of said hotels. Therefore, on the request of HMC, ORBIS or the participating hotel shall provide HMC with information regarding its room accommodations, dining facilities, and services as HMC may reasonably request during the term of this Agreement. ORBIS and the Participating ORBIS Hotels shall provide HMC with duly completed vouchers for usage tracking purposes to enable HMC to provide Management Information Services to ORBIS as provide herein below. HMC shall provide ORBIS with monthly Member tracking reports providing ORBIS and the Participating ORBIS Hotels return F&B and rooms tracking vouchers as provided for in this Agreement. 12. MEMBERSHIP CANCELLATIONS Members shall have [REDACTED*] the receipt of their Membership Card to cancel and receive a full refund providing they return all membership material as outlined in the Membership Agreement. If a Member wishes to cancel after the [REDACTED*] period, the HMC shall seek ORBIS's approval before issuing such as refund. Such approval shall not be unreasonable withheld by ORBIS. Any cancellation or refund resulting from poor service, failure to honor the Agreement, or resulting from the conduct of ORBIS, or its agents and employees shall be the liability of ORBIS. Therefore, cancellation incurred directly by HMC shall be entitled to the compensation, as described herein, notwithstanding the refund, replacement or cancellation. 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. 13. INDEMNIFICATIONS ORBIS shall defend HMC and its representatives against all financial claims of third parties and shall reimburse HMC and its representatives for all justified costs and damages awarded by a final court decision (including but not limited to legal fees and court costs) relating to any failure of ORBIS to provide Members with the benefits conferred by the Membership Programme. HMC shall reimburse ORBIS and its representatives for all justified costs and damages related to the default realisation of HMC obligations under this Agreement. 14. MARKETING OF MEMBERSHIP PROGRAMME HMC shall advise each prospective Membership Programme purchase of the benefits to be derived from becoming a Member, subject to the conditions and limitations contained herein. 15. PROMOTION OF MEMBERSHIP PROGRAMME A) In promoting and marketing the Membership Programme, HMC shall use its best efforts to sell a minimum of [REDACTED*] memberships annually each year of this Agreement for the participating ORBIS HOTELS in Poland. The sale of the minimum number of memberships, as set forth above, is the target, goal, objective (hereinafter "objective") of the parties hereto, and it shall not be considered a breach of this agreement should HMC not achieve the mutually agreed upon objective. The above annual goal is based on the participation of [REDACTED*] ORBIS Hotels and may change from year to year of this Agreement depending on the number of Participating ORBIS Hotels, which number may be changed by ORBIS. B) HMC with the cooperation of ORBIS shall establish eight (8) regional active Programmes in certain cities to sell and promote Memberships of CLUB ORBIS. The anticipated duration of the selling and marketing of the Membership Programme at each ORBIS HOTEL regional marketing location is [REDACTED*] from the time HMC staff arrive at the ORBIS HOTEL regional marketing location. It shall be within HMC's sole discretion to terminate the selling and marketing of the Membership Programme only after the objective, as set forth in Paragraph A above, has been attained. The election to terminate the selling and marketing in a regional active Programme concludes the sales and marketing of the Membership Programme only for the given contract year. In no event shall this provision be interpreted to mean that this Agreement is terminated. This Agreement may only be terminated as set forth hereinbelow. C) The provision for further promotion and marketing by HMC for the renewal of the Membership Programme shall commence not earlier than four (4) weeks from the expiration of the earliest Membership Term. At the commencement (or as soon thereafter as the HMC staff can arrive at the Regional Location) of the second year, and each succeeding year thereafter, in which this Club Agreement is in force, a new selling and marketing period of [REDACTED*] shall take place. The terms and provisions of Paragraphs A and B above shall apply with each new annual selling and marketing period. 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. 16. TERMINATION This Agreement shall remain in effect for a period of [REDACTED*] from the date of its execution and shall be automatically renewed thereafter for [REDACTED*] periods. Either party to this Agreement may terminate the Agreement at the end of each period by giving not less than ninety (90) days written notice to the following addresses: HOSPITALITY MARKETING CONCEPTS ORBIS COMPANY INC 15751 Rockfield Boulevard 16 BRACKA STR. Irvine, California 92716 USA 00-028 WARSAW POLAND If Agreement is terminated: - (a) by HMC then ORBIS shall not within the Territory be involved, engaged, concerned or interested or promote any programme which is the same or similar to the Membership Programme until the expiration of the validity of the last Membership sold under this Agreement. (b) by ORBIS or by a participating hotel or by mutual consent then ORBIS and the participating hotels covenant that they will not jointly or severally within the Territory be involved, engaged, concerned or interested or promote any programme which is the same or similar to the Membership Programme for a period of [REDACTED*] from the expiration of the validity of the last Membership sold under this Agreement. 17. ORBIS COVENANTS ORBIS hereby covenants with HMC that it will not at any time directly or indirectly:- (a) Disclose or permit to be disclosed any Proprietary Information. (b) Utilise or allow to be used any Proprietary Information for its own benefit or for the benefit of any other person or persons or in a manner which might cause loss or be detrimental to HMC. (c) Within The Territory be involved, engaged, concerned or interested in any other business or course of conduct in respect of which use or disclosure of Proprietary Information could arise. (d) Without the express written consent of HMC extend the validity of the Membership Card. For the avoidance of doubt, all Proprietary Information remains at all times during the course of and subsequent to the termination of this Agreement the exclusive property of HMC. 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. 18. HMC COVENANTS HMC covenants with ORBIS that it will not sell or promote a similar or same Membership Programme in cities in Poland where a Participating ORBIS Hotel may exist as long as this Agreement is in force. In addition, HMC covenants with ORBIS that it will not disclose to any third party any information regarding ORBIS's turnover, occupancy rates and all financial information delivered to HMC by ORBIS or ORBIS hotels participating in the Programme and any other information, which will be named as confidential by ORBIS or ORBIS hotel participating in the Programme. 19. ASSIGNMENT This Agreement, and those rights granted hereunder, will bind and inure to the benefit of the successors and assigns of the parties. HMC may assign this Agreement to another HMC company upon thirty (30) days written notice to ORBIS. 20. SEPARATION OF PROVISIONS Each provision of this Agreement is separable and if any other provision is determined to be invalid, no other provision of this Agreement shall be affected and shall remain in full force and effect. 21. PREVIOUS AGREEMENT This Agreement supersedes all previous agreements, written or oral, between the parties hereto and may be modified only by the written mutual agreement of the parties. 22. NOTICES All notices required to be sent by either party to this Agreement to the other shall be sent by registered or certified mail to the respective addresses listed in paragraph 16, hereinabove. 23. LAW AND LITIGATION This Agreement shall be governed by Polish law, in any and all matters, such as interpretation, meaning and construction of this Agreement. If either party hereto brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in such action shall be entitled to an award of reasonable costs of litigation, including legal fees, in such amount as may be determined by the court having jurisdiction in such action. 24. JOINT VENTURE This Agreement shall neither constitute a Joint Venture Agreement between HMC and ORBIS nor a Joint Venture Agreement between HMC and the participating ORBIS hotels for the marketing and sale of the Membership Programme. 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. 25. EMPLOYEES HMC and ORBIS confirm and agree that throughout the Agreement Term and for a period of [REDACTED*] thereafter neither party hereto shall solicit, entice or procure the employee of the other party hereto. 26. COUNTERPARTS This Agreement may be executed in counterparts. 27. THE EFFECTIVE DATE OF THIS AGREEMENT This Agreement shall become effective on the day of registration by the respective court for commercial cases of the company HMC Poland Spolka z o.o. and the assignment by HMC to HMC Poland Spolka z o.o. all rights and obligations under this Agreement, which shall be notified by HMC to ORBIS in writing. 28. ATTACHMENTS The following documents attached to this Agreement are hereby incorporated herein by this reference and shall form an integral part hereof. A- SERVICES, FACILITIES, AND MEMBERSHIP BENEFITS/INCENTIVES B- LIST OF PARTICIPATING HOTELS C- EXPENSE SCHEDULE PROGRAMME D- EXPENSE SCHEDULE ORBIS FACILITIES E- "ORBIS GOLDEN CLUB" PLAN IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. HMC BY: /s/ ------------------------- ITS: ORBIS BY: /s/ ------------------------- ITS: BY: /s/ ------------------------- ITS: This constitutes a fair and accurate English translation of the underlying agreement By: /s/ Philip G. Hirsch -------------------------------- Philip G. Hirsch 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. MARKETING AGREEMENT ATTACHMENT A SERVICES, FACILITIES AND, MEMBERSHIP BENEFITS ORBIS engages HMC to promote and market the following restaurants and Hotel services: A. ORBIS PARTICIPATING HOTEL dining facilities: [REDACTED*] in all the restaurants of the ORBIS during their regular opening hours subject to exclusions and limitations contained in paragraph 6 of the Marketing Agreement. B. Room incentive and benefits: 1. [REDACTED*] off published rates or best available public rates upon presentation of a valid Membership Card valid all week. Transferable bookings allowed subject to space availability restrictions. Member need not to be present at time of his/her guest check-in to qualify for the above rates. 2. [REDACTED*] in a double room at any participating ORBIS Hotel, breakfast not included. Valid Friday, Saturday, or Sunday nights. Nontransferable, subject to availability and prior reservations. This benefit is provided upon presentation of a voucher to be given to each Member of the Club. C. Conference benefits: 1. [REDACTED*] off normal space rental fee on weekdays, Monday through Friday. 2. [REDACTED*] of normal space rental fee on weekends, Saturday & Sunday. Above conference benefits are subject to availability and prior reservations. Not valid for Food and Beverage services. D. Membership Cards will not be honored on the following dates: New Year's Eve and New Year's Day/ 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. MARKETING AGREEMENT ATTACHMENT B. LIST OF PARTICIPATING HOTELS LIST OF PARTICIPATING ORBIS HOTELS IN POLAND 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. MARKETING AGREEMENT ATTACHMENT C. EXPENSE SCHEDULE As used in the Marketing Agreement, The term "Operating Expenses", including but is not limited by the following: A. A fee for services of [REDACTED*]. Programme Management bonuses and incentives not to exceed [REDACTED*]. The Programme Manager and Assistant Programme Manager round trip transportation to the Programmes. Assistant Managers as required [REDACTED*]. B. When and if deemed necessary by HMC for the benefit of the Programmes on Operations Manager will be placed into the Programmes and charged as an Operational Expense at a fee of [REDACTED*] plus travel expenses. C. [REDACTED*] D. [REDACTED*] for the financial management of the Programme of Audits as may be required by Government authorities or ORBIS accountants or legal representatives. E. [REDACTED*] F. [REDACTED*] G. [REDACTED*] H. [REDACTED*]. Services listed in this item may be provided by HMC. I. [REDACTED*] J. [REDACTED*] will be charged to the Marketing Programme for tracking and Management Information Services. K In addition to standard telephone and printing reserves, HMC will withhold and a weekly basis during the Marketing Programme [REDACTED*] as reserve to cover contingencies and cancellations. A final audit will be performed ninety (90) days after the conclusion of the Marketing Programme at which time remaining funds will be distributed according to the Agreement. L. Other expenses as mutually agreed to in writing by both parties. 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. MARKETING AGREEMENT ATTACHMENT D. EXPENSE SCHEDULE In each of the eight (8) regional Marketing Programme HMC will required office and lodging facilities, which HMC agrees to pay for, as a Programme expense, where required at a substantial reduction to be negotiated with each of the ORBIS hotels participating in the Programme, but in any case a lodging rate shall [REDACTED*]. All charges paid for facilities whether to ORBIS or a participating ORBIS Hotel or and outside suppler shall be deemed [REDACTED*]. HMC will also require about 12 telephone lines and instruments in each location that ORBIS may supply or help arrange the supply of such lines and instruments. [REDACTED*]. The following facilities and services will be required in each of the eight location: (a) ORBIS shall provide or arrange for office space, with a minimum of about fifty (50) square meters with windows. Said office space will be utilized by HMC over the selling and marketing of the Membership Programme as set forth in Paragraph 15 above, and must be adequate to sustain up to twenty (20) telemarketing stations, secretarial space and a storage area for filing and ancillary materials; (b) Two single sleeping rooms which will serve as the residence of the Programme Manager and Assistant Programme Manager during the term of the promotion of the Membership Programme as set forth in paragraph 16 above; (c) Such photocopies as are reasonable required to enable HMC to adequately run the programmes and furnish ORBIS with the details of weekly and daily reports and other required information. [REDACTED*]. (d) Meals for HMC Corporate Management and the Programme Manager, Assistant Programme Manager, and Programme Secretary in the Hotel staff canteen, restaurants, or room Service at [REDACTED*], except for meals at the staff canteens. [REDACTED*]. All other expenses incurred by HMC in providing the services herein specified shall be deemed [REDACTED*], as set forth in the attachments hereto, which are hereby incorporated herein by this reference. 14 EX-10.19 6 EXHIBIT 10.19 EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into as of July 1, 1998, by and between FADI RAMADAN, an individual ("EMPLOYEE"), and Hospitality Marketing Consultants, 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 Senior Vice President. 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 Two Hundred Fifty Thousand Dollars ($250,000.00) 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. (v) TAX INDEMNIFICATION. Employer agrees to indemnify and hold Employee harmless from and against any and all claims, liabilities, actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses incurred as a result of any claim by any taxing authority for unpaid federal, foreign, state, province, local or other taxes, assessments, fees or other governmental charges, or any related penalties, whether or not reported or disputed, resulting from the prior activities of Employee with respect to and any predecessor entity of Employer (a "CLAIM" or the "CLAIMS"). Employee shall promptly give notice to Employer upon receipt of notice of any Claim and the Employer shall promptly pay or assume the defense of such Claim as such course of action is reasonably deemed appropriate by the Employer, using legal counsel reasonably satisfactory to Employee. Employer shall not be responsible for any settlement of any Claim made without its prior written consent which shall not be unreasonably withheld. The provisions of this Section 4(d)(v) shall survive the end of the term or other termination of this Agreement. (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. In addition, it shall be deemed for all purposes to be a Without Cause Termination ("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 Consultants, 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 CONSULTANTS, INC. By:_______________________________ Its: _____________________________ "EMPLOYEE" FADI RAMADAN __________________________________ Address: 15751 Rockfield Blvd., Suite 200 Irvine, CA 92618 Facsimile (949) 454-1888 -14- EX-10.20 7 EXHIBIT 10.20 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into as of July 1, 1998, by and between MARWAN RAMADAN, an individual ("EMPLOYEE"), and Hospitality Marketing Consultants, 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 -1- Employee acknowledge that Employee will be required to perform services outside of the United States. 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 Senior Vice President. 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 Two Hundred Fifty Thousand Dollars ($250,000.00) 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. -2- (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, 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, -3- 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 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. (v) TAX INDEMNIFICATION. Employer agrees to indemnify and hold Employee harmless from and against any and all claims, liabilities, actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses incurred as a result of any claim by any taxing authority for unpaid federal, foreign, state, province, local or other taxes, assessments, fees or other governmental charges, or any related penalties, whether or not reported or disputed, resulting from the prior activities of Employee with respect to and any predecessor entity of Employer (a "CLAIM" or the "CLAIMS"). Employee shall promptly give notice to Employer upon receipt of notice of any Claim and the Employer shall promptly pay or assume the defense of such Claim as such course of action is reasonably deemed appropriate by the Employer, using legal counsel reasonably satisfactory to Employee. Employer shall not be responsible for any settlement of any Claim made without its prior written consent which shall not be unreasonably withheld. The provisions of this Section 4(d)(v) shall survive the end of the term or other termination of this Agreement. (e) OVERALL QUALIFICATION. Employer reserves the right to modify, suspend or discontinue any and all practices, -4- 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 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 -5- benefits received by Employee, but only to the extent such benefits are attributable to payments made by Employer. (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 -6- 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 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. In addition, it shall be deemed for all purposes to be a Without Cause Termination ("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 -7- 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 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 -8- 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 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. -9- (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 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 Consultants, Inc. 15751 Rockfield Boulevard, Suite 200 -10- Irvine, California 92718 (949)454-1888 (facsimile) Attention: Chief Financial Officer 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 -11- 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 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 -12- 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 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 CONSULTANTS, INC. By:_______________________________ Its: _____________________________ "EMPLOYEE" MARWAN RAMADAN __________________________________ Address: 1240 Route Des Dolines Sophia Antipolis 06560 Valbonne, France Facsimile 33(0)4-929-4-8111 -14- EX-10.21 8 EXHIBIT 10.21 EXHIBIT 10.21 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into as of July 1, 1998, by and between SANDRA CASE, an individual ("EMPLOYEE"), and Hospitality Marketing Consultants, 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 Senior Vice President. 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 Two Hundred Fifty Thousand Dollars ($250,000.00) 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. (v) TAX INDEMNIFICATION. Employer agrees to indemnify and hold Employee harmless from and against any and all claims, liabilities, actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses incurred as a result of any claim by any taxing authority for unpaid federal, foreign, state, province, local or other taxes, assessments, fees or other governmental charges, or any related penalties, whether or not reported or disputed, resulting from the prior activities of Employee with respect to and any predecessor entity of Employer (a "CLAIM" or the "CLAIMS"). Employee shall promptly give notice to Employer upon receipt of notice of any Claim and the Employer shall promptly pay or assume the defense of such Claim as such course of action is reasonably deemed appropriate by the Employer, using legal counsel reasonably satisfactory to Employee. Employer shall not be responsible for any settlement of any Claim made without its prior written consent which shall not be unreasonably withheld. The provisions of this Section 4(d)(v) shall survive the end of the term or other termination of this Agreement. (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. In addition, it shall be deemed for all purposes to be a Without Cause Termination ("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 Consultants, 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 CONSULTANTS, INC. By:_______________________________ Its: _____________________________ "EMPLOYEE" SANDRA CASE __________________________________ Address: 51 Merchant Road #03-09 Merchant Square Singapore 058283 Facsimile (65) 435-5074 -14- EX-99.1 9 EXHIBIT 99.1 [LETTERHEAD] July 2, 1998 Olaf Isachsen Institute of Management Development 31831 Camino Capistrano, Suite 201 San Juan Capistrano, CA 92675 Dear Olaf Signing this letter will confirm that you agree to become a director of Hospitality Marketing Concepts Inc. effective upon closing of its contemplated public offering, and consent to being named in the Registration Statement relating thereto. Sincerely, /s/ Philip G. Hirsch Philip G. Hirsch Chief Financial Officer PHG/rmr /s/ Olaf Isachsen - ------------------------------ Olaf Isachsen -----END PRIVACY-ENHANCED MESSAGE-----