Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Pre-Effective Amendment to Registration Statement 84 516K
(General Form)
2: EX-10.11 Material Contract 14 42K
3: EX-10.15 Material Contract 6 16K
4: EX-10.17 Material Contract 2 11K
5: EX-10.18 Material Contract 14 44K
6: EX-10.19 Material Contract 14 42K
7: EX-10.20 Material Contract 14 42K
8: EX-10.21 Material Contract 14 42K
9: EX-99.1 Miscellaneous Exhibit 1 7K
S-1/A — Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1998
REGISTRATION NO. 333-56201
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOSPITALITY MARKETING CONCEPTS INC.
(Exact name of registrant as specified in its charter)
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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)
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COPIES TO:
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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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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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./ /
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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.
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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
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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."
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The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors" beginning on page 6.
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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.
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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.
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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.
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TABLE OF CONTENTS
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PAGE
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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
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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
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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)
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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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
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MARCH 31, 1998
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PRO FORMA
ACTUAL PRO FORMA(3)(4) AS ADJUSTED(5)
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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
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(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.
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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.
[Enlarge/Download Table]
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:
[Download Table]
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:
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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
----------- -----------
----------- -----------
[Enlarge/Download Table]
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.
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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
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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
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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
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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
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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
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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
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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:
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
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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
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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
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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
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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
------------- -------------
------------- -------------
[Enlarge/Download Table]
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:
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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:
[Enlarge/Download Table]
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
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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.
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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
[Download Table]
*By: /s/ PHILIP G. HIRSCH
-------------------------
Philip G. Hirsch
ATTORNEY-IN-FACT
II-4
INDEX OF EXHIBITS
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
Dates Referenced Herein and Documents Incorporated by Reference
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