<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999
REGISTRATION NO. 333-90601
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
HOTEL RESERVATIONS NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 75-2817683
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------------
8140 WALNUT HILL LANE
SUITE 203
DALLAS, TEXAS 75231
(214) 361-7311
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
DAVID LITMAN
8140 WALNUT HILL LANE
SUITE 203
DALLAS, TEXAS 75231
(214) 361-7311
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C> <C>
PAUL D. GINSBERG, ESQ. THOMAS J. KUHN, ESQ. RICHARD D. TRUESDELL, JR., ESQ.
ROBERT B. SCHUMER, ESQ. USA NETWORKS, INC. DAVIS POLK & WARDWELL
PAUL, WEISS, RIFKIND, CARNEGIE HALL TOWER 450 LEXINGTON AVENUE
WHARTON & GARRISON 152 WEST 57TH STREET, 42ND FLOOR NEW YORK, NEW YORK 10017
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (212) 450-4000
NEW YORK, NEW YORK 10019 (212) 314-7200
(212) 373-3000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT PRICE (2) FEE
<S> <C> <C> <C> <C>
Class A Common Stock, par value $.01 per
share................................. 6,210,000 shares $13.00 $80,730,000 $22,363 (3)
</TABLE>
(1) Includes an aggregate of 810,000 shares which the Underwriters have the
option to purchase from the Registrant solely to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to rule 457(a) under the Securities Act of 1933, as amended.
(3) Of this amount, $20,850 has previously been paid.
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 COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- DECEMBER 22, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT RELATING TO
THIS OFFERING AND FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
5,400,000 SHARES OF CLASS A COMMON STOCK
- ----------------------------------------------------------------------
HOTEL RESERVATIONS NETWORK, INC.:
- We are a leading online consolidator of hotel accommodations, providing
service through our websites, affiliated websites and our toll-free call
center.
- Hotel Reservations Network, Inc.
8140 Walnut Hill Lane, Suite 203
Dallas, Texas 75231
(214) 361-7311
SYMBOL AND MARKET:
- ROOM/Nasdaq National Market
THE OFFERING:
- We are offering 5,400,000 shares of our class A common stock.
- The underwriters have an option to purchase from us up to an additional
810,000 shares of our class A common stock to cover overallotments.
- This is our initial public offering. We estimate that the public offering
price will be between $11.00 and $13.00 per share.
- Shares of our class A common stock have one vote per share and shares of
our class B common stock have 15 votes per share.
- Closing: , 2000
<TABLE>
<CAPTION>
<S> <C> <C>
PER SHARE
TOTAL
Public offering price: $ $
Underwriting fees:
Proceeds to Hotel Reservations Network, Inc.:
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 10.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
ALLEN & COMPANY INCORPORATED
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 10
Special Note Regarding Forward-Looking
Statements........................... 23
Use of Proceeds........................ 24
Dividend Policy........................ 24
Capitalization......................... 25
Dilution............................... 26
Selected Financial Data................ 27
Unaudited Pro Forma Combined Condensed
Statements of Operations............. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business............................... 43
Management............................. 52
Certain Transactions................... 56
Principal Stockholders................. 59
Description of Capital Stock........... 63
Shares Eligible for Future Sale........ 67
Underwriting........................... 69
Legal Matters.......................... 71
Experts................................ 71
Available Information.................. 71
Reports to Security Holders............ 71
Index to Financial Statements.......... F-1
</TABLE>
------------------------
In this prospectus, unless the context otherwise requires, the terms "we,"
"us," "our," "our company" and "Hotel Reservations Network" refer to Hotel
Reservations Network, Inc. and our predecessor entities; and "USAi" and "our
parent" refer to USA Networks, Inc. and its subsidiaries and managed affiliates
(other than our company).
Unless otherwise noted, all numbers discussed in this prospectus are
approximated to the closest round number.
This prospectus includes statistical data regarding our company, the
Internet and the industry in which we compete. This data is based on our records
or is taken or derived from information published or prepared by various
sources, including Jupiter Communications, LLC, Smith Travel Research and Travel
Industry Association of America, all of which are providers of market and
strategic information for the travel industry.
------------------------
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR CLASS A COMMON STOCK. YOU SHOULD READ
THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND THE
FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES TO THOSE STATEMENTS.
HOTEL RESERVATIONS NETWORK, INC.
OUR COMPANY
We are a leading online consolidator of hotel accommodations in terms of
hotel rooms booked online, providing service through our websites, affiliated
websites and our toll-free call center. We contract with hotels in advance for
volume purchases and guaranteed availability of hotel rooms at wholesale prices
and sell these rooms to consumers, often at significant discounts to published
rates. In addition, our hotel supply relationships often allow us to offer our
customers hotel accommodation alternatives for otherwise unavailable dates. At
September 30, 1999, we had room supply agreements with approximately 1,200
hotels in 40 major markets in North America and Western Europe.
We market our hotel accommodations primarily over the Internet through our
own websites, www.hoteldiscount.com and www.180096hotel.com, and through
third-party websites. We have negotiated affiliate marketing agreements with
many of the leading travel-related websites including Preview Travel, Expedia
(operated by Microsoft), Travelocity (operated by Sabre Holdings Corp., a
majority owned subsidiary of American Airlines), TravelWeb (operated by Pegasus
Systems), Cheap Tickets, Yupi.com, GetThere.com and over 1,500 other affiliate
websites. We are also prominently featured on and directly linked to most of the
leading Internet search engines and online communities, including Ticketmaster
Online-CitySearch, Excite and Infoseek. Through these agreements, our hotel
accommodations are prominently featured on and linked to these affiliated
websites on a co-branded or private label basis. By establishing these
wide-ranging affiliations, we believe that we are well-positioned to capitalize
on the expected growth in online hotel bookings regardless of where those
bookings are originated.
We have room supply relationships with a wide range of independent hotel
operators, as well as hotels associated with national chains, including Hilton,
Sheraton, Westin, Radisson, Best Western, Loews, Doubletree and Hampton Inn. Our
hotel suppliers view us as an efficient distribution channel to help maximize
their overall revenues and occupancy levels. Although we contract in advance for
volume room commitments, our hotel supply contracts often allow us to return
unsold rooms without penalty within a specified period of time. In addition,
because we contract to purchase hotel rooms in advance, we are able to manage
billing procedures for the rooms we sell and thereby maintain direct
relationships with our customers. We have developed proprietary revenue
management and reservation systems software that is integrated with our websites
and call center operations. These systems and software enable us to accurately
monitor our room inventory and provide prompt, efficient customer service. Our
hotel supply contracts and revenue management capabilities differentiate us from
retail travel agencies and other commission-based resellers of hotel
accommodations.
Our revenues have increased from $23.3 million in 1996 to $66.5 million in
1998, representing a compounded annual growth rate of 69%. For the nine month
period ended September 30, 1999, our revenues increased 166% over the comparable
period in 1998. Internet generated bookings accounted for 44% of our revenues in
1998 and 78% of our revenues for the nine months ended September 30, 1999. On a
pro forma basis, our net loss for the year ended December 31, 1998 was
$8.6 million, which reflects pro forma amortization of $20.0 million. As a
result of the acquisition of TMF, Inc. and HRN Marketing Corp., $200.3 million
of goodwill was created. This goodwill is being amortized over ten years and, as
of September 30, 1999, goodwill represented approximately 92.1% of the book
value of
3
<PAGE>
our assets. The amount of goodwill and related amortization may increase if we
are required to make future contingent payments in connection with this
acquisition. See "Our History," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
OUR INDUSTRY
Online sales of travel services have become an important part of the overall
travel industry and have expanded dramatically in recent years due to the
increased acceptance of the Internet by both travel service providers and
consumers. According to a May 1999 study by Jupiter Communications, the U.S.
online travel market has more than doubled from $911 million in 1997 to
$2.2 billion in 1998 and is expected to increase to $16.6 billion in 2003. In
addition, Jupiter Communications projects that online hotel bookings will
increase from $630 million in 1999 to $4.2 billion in 2003, representing a
compound annual growth rate of 60%.
Hotel reservations are particularly well-suited to the Internet and the
services of third-party consolidators. The Internet provides an efficient way
for travelers to quickly compare price, quality and location of a variety of
hotel rooms. The hotel industry is extremely fragmented and, unlike airline and
car rental reservations, pricing and availability cannot be controlled easily
through central reservation systems. Moreover, the central reservation systems
often do not provide access to discounted rates or to rooms during otherwise
unavailable dates. Alternative booking methods, such as calling individual
hotels or using publications like guidebooks or yellow pages, are both
cumbersome and time consuming. Online consolidators like our company are able to
aggregate inventory and market this inventory to travelers over the Internet,
benefitting hotels, travel agents and travelers.
OUR GROWTH STRATEGY
Our objective is to build upon our position as a leading online hotel
consolidator by pursuing the following growth strategies:
- increasing our Internet presence, including our number of Internet
affiliations;
- expanding our hotel supply arrangements in existing markets;
- entering new markets;
- initiating new affiliations with travel agencies, travel and membership
clubs and other groups;
- enhancing our offering of products and services to include other
travel-related services;
- offering paid advertising on our websites;
- pursuing strategic acquisitions; and
- leveraging our relationship with our parent company, USAi, and its
affiliates.
Our ability to implement our growth strategy may be impaired by the types of
risks described under the section "Risk Factors."
4
<PAGE>
OUR HISTORY
TMF, Inc. was incorporated in Texas in 1991, and HRN Marketing Corp. was
incorporated in Florida in 1998. In the spring of 1998, TMF, Inc. and HRN
Marketing Corp. engaged an advisor to explore a variety of strategic
alternatives. USAi, our parent company, was approached during this process.
Negotiations for a possible transaction began in August of 1998. In connection
with these negotiations, our company was formed in Delaware on March 25, 1999 as
a direct, wholly owned subsidiary of USAi.
On April 13, 1999, we entered into a definitive agreement with USAi, TMF,
Inc., HRN Marketing Corp. and Messrs. David Litman and Robert Diener to acquire
substantially all the assets and liabilities of TMF, Inc. and HRN Marketing
Corp. This transaction was completed on May 10, 1999. As a result, TMF, Inc. and
HRN Marketing Corp. are, collectively, our predecessor business. Along with
their spouses and trusts for the benefit of some members of their families,
Messrs. Litman and Diener were the sole stockholders of TMF, Inc. and HRN
Marketing Corp. Since the acquisition, Messrs. Litman and Diener have continued
on as our Chief Executive Officer and President, respectively.
At the closing of the acquisition, we paid approximately $162.5 million to
TMF, Inc. and HRN Marketing Corp. This amount consisted of the $150.0 million
purchase price, which was paid in the form of a promissory note, and a
$12.5 million payment for our predecessor business' attainment of financial
targets during its first fiscal quarter of 1999. Approximately $145.0 million of
the principal amount of the promissory note was paid on the day after the
closing and the final $5.0 million payment is due on January 30, 2000. Under the
purchase agreement, we are required to pay TMF, Inc. and HRN Marketing Corp. up
to $12.5 million at the end of each of the three remaining fiscal quarters in
1999 if we meet specified financial targets in each of those quarters. As a
result, we have paid a total of $25.0 million to TMF, Inc. and HRN Marketing
Corp. during our fiscal quarters ended June 30, 1999 and September 30, 1999 and
we have accrued for a $12.5 million payment that we expect to make for our final
fiscal quarter of 1999.
TMF, Inc. and HRN Marketing Corp. are entitled to contingent payments over
the next three years. The amount of these contingent payments will depend on our
performance for the twelve-month periods ending March 31, 2000, 2001 and 2002.
These additional payments will be based upon the greater of:
- a multiple of the total growth in our adjusted earnings before taxes from
the previous year; or
- a multiple of the total growth in our adjusted gross profit from the
previous year.
In addition to being a guarantor of our obligations, USAi has agreed to pay, on
our behalf, the first $130.0 million of these contingent payments.
We also are required to issue to TMF, Inc. and HRN Marketing Corp., for no
additional consideration, the number of shares of our class A common stock equal
to approximately 10% of the aggregate value of the equity of our company
immediately prior to the closing of this offering. See "Risk Factors--Contingent
payments may create a conflict of interest among us, our management and USAi,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
Our offices are located at 8140 Walnut Hill Lane, Suite 203, Dallas, Texas
75231, and our telephone numbers are (214) 361-7311 and (800) 96-hotel. Our
world wide websites are www.hoteldiscount.com and www.180096hotel.com. The
information on our websites is not incorporated by reference into this
prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A common stock offered(1)............................. 5,400,000 shares
Common stock to be outstanding after this offering:
Class A common stock(1)(2)................................ 10,299,900 shares
Class B common stock...................................... 44,099,100 shares
Total common stock(1)(2)................................ 54,399,000 shares
</TABLE>
- ------------------------
(1) Excludes 810,000 shares of class A common stock issuable upon exercise of
the overallotment option described in "Underwriting."
(2) Includes 4,899,900 shares of Class A common stock to be issued to TMF, Inc.
and HRN Marketing Corp. immediately prior to the closing of this offering.
See "Certain Transactions." Excludes 1,932,315 shares of class A common
stock reserved for issuance under our stock option plan as described in
"Management--Employee Benefit Plans."
<TABLE>
<S> <C>
Voting rights............................. Holders of class A common stock will have one vote per
share.
Relative rights of class A common stock
and class B common stock................ The class A common stock and class B common stock have
substantially identical rights except for conversion and
voting rights. The class A common stock entitles its
holders to one vote per share, and the class B common
stock entitles its holders to 15 votes per share on all
matters submitted to a vote or for the consent of
stockholders unless Delaware law requires otherwise. The
class A common stock and class B common stock will vote
together as a single class on all matters submitted to a
vote or for the consent of stockholders unless Delaware
law requires otherwise. The shares of class B common
stock are convertible at any time at the option of the
holder into shares of class A common stock on a
share-for-share basis. In addition, shares of class B
common stock will be automatically converted into a like
number of shares of class A common stock upon any sale,
conveyance, foreclosure upon, assignment or other
transfer of shares of class B common stock, other than a
transfer to an affiliate of USAi or, in certain
circumstances, a tax-free spin-off or similar
transaction by USAi. See "Description of Capital Stock."
Controlling stockholder................... USAi beneficially owns all the shares of our outstanding
class B common stock, and immediately after this
offering but before any exercise of the overallotment
option, will beneficially own approximately 81.1% of our
outstanding common stock, representing approximately
98.5% of the total voting power of our common stock. See
"Risk Factors--Our business is controlled by USAi and,
as a result, our other stockholders will have little or
no influence over stockholders' decisions," "--We may
face potential conflicts of interest with USAi which may
harm our business," "--USAi may sell its shares of our
common stock in the future which may depress our stock
price" and "Principal Stockholders."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Use of proceeds........................... We estimate that the net proceeds from this offering
will be approximately $59,489,000 million. We expect to
use the net proceeds of this offering for general
corporate purposes, including working capital to support
the continued expansion of our operations, including
expenses associated with enhancing our websites,
advertising campaigns and other marketing efforts,
capital expenditures and strategic acquisitions,
although we currently have no commitments to make any
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbol............. "ROOM"
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary financial data of our company and our
predecessor business. The data was derived from our unaudited financial
statements and our predecessor business' audited and unaudited (where indicated)
combined financial statements, and reflects the operations and financial
position of our company or our predecessor business at the dates and for the
periods indicated. The table also presents summary unaudited pro forma combined
condensed financial data for the year ended December 31, 1998 and as of and for
the nine month period ended September 30, 1999. The pro forma combined condensed
statements of operations data gives effect to the acquisition of substantially
all the assets of our predecessor business and to the capital transactions that
will occur in connection with this offering as if they had occurred on
January 1, 1998. The pro forma combined condensed balance sheet data gives
effect to the capital transactions that will occur in connection with this
offering as if they had occurred on September 30, 1999. Pro forma earnings per
share data is presented based on 44,099,100 shares of class B common stock
issued to USAi, 4,899,900 shares of class A common stock issued to TMF, Inc. and
HRN Marketing Corp., which represents approximately 10% of the aggregate value
of the equity of our company immediately prior to the closing of this offering
(see "Prospectus Summary--Our History"), and the 5,400,000 shares of class A
common stock issued in this offering, assuming no exercise of the overallotment
option. The information in this table should be read in conjunction with the
financial statements and accompanying notes and other financial data pertaining
to our company and our predecessor business as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. For a further discussion of the pro forma
adjustments, including the capital transactions that will occur in connection
with this offering, see "Unaudited Pro Forma Combined Condensed Statements of
Operations."
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------
ACTUAL
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................. $23,275 $34,758 $66,472
Operating costs and expenses:
Cost of sales............... 16,003 23,284 45,818
Selling, general and
administrative (2)........ 3,857 5,782 9,770
Officers' distributions
(2)....................... 3,618 6,160 10,126
Non-recurring acquisition
related costs (3)......... -- -- --
Amortization of goodwill
(4)....................... -- -- --
------- ------- -------
Total operating costs and
expenses................ 23,478 35,226 65,714
------- ------- -------
Operating profit (loss)..... (203) (468) 758
Other income (expense):
Interest and other, net..... 257 447 911
Gain on sale of
securities................ 71 13 74
------- ------- -------
328 460 985
------- ------- -------
Earnings (loss) before income
taxes....................... 125 (8) 1,743
Income tax expense (5)........ 38 2 5
------- ------- -------
Net earnings (loss)......... $ 87 $ (10) $ 1,738
======= ======= =======
Basic and diluted earnings
(loss) per share..........
Basic and diluted weighted
average shares
outstanding...............
<CAPTION>
PREDECESSOR REGISTRANT
------------------------------ --------------
PRO FORMA ACTUAL ACTUAL PRO FORMA
------------ ------------------------------ -------------- --------------
NINE MONTHS PERIOD NINE MONTHS
YEAR ENDED ENDED PERIOD MAY 11 TO ENDED
DECEMBER 31, SEPTEMBER 30, JANUARY 1 TO SEPTEMBER 30, SEPTEMBER 30,
1998 (1) 1998 MAY 10, 1999 1999 1999 (1)
------------ -------------- ------------ -------------- --------------
(UNAUDITED)
------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................. $ 66,472 $ 40,794 $ 37,701 $ 70,670 $ 108,371
Operating costs and expenses:
Cost of sales............... 45,818 28,416 26,538 51,724 78,262
Selling, general and
administrative (2)........ 10,020 6,580 5,669 8,969 14,797
Officers' distributions
(2)....................... -- 1,818 -- -- --
Non-recurring acquisition
related costs (3)......... -- -- 7,357 -- --
Amortization of goodwill
(4)....................... 20,031 -- -- 7,834 15,023
---------- -------- ----------- ----------- -----------
Total operating costs and
expenses................ 75,869 36,814 39,564 68,527 108,082
---------- -------- ----------- ----------- -----------
Operating profit (loss)..... (9,397) 3,980 (1,863) 2,143 289
Other income (expense):
Interest and other, net..... 674 472 429 754 1,099
Gain on sale of
securities................ 74 4 471 -- 471
---------- -------- ----------- ----------- -----------
748 476 900 754 1,570
---------- -------- ----------- ----------- -----------
Earnings (loss) before income
taxes....................... (8,649) 4,456 (963) 2,897 1,859
Income tax expense (5)........ -- -- -- 1,072 691
---------- -------- ----------- ----------- -----------
Net earnings (loss)......... $ (8,649) $ 4,456 $ (963) $ 1,825 $ 1,168
========== ======== =========== =========== ===========
Basic and diluted earnings
(loss) per share.......... $ (0.16) $ 0.04 $ 0.02
========== =========== ===========
Basic and diluted weighted
average shares
outstanding............... 54,399,000 48,999,000 54,399,000
========== =========== ===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED (9)
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,444 $ 6,444 $ 65,933
Deferred revenue............................................ 24,132 24,132 24,132
Net working capital (deficit) (10).......................... (63,567) (51,067) 8,422
Goodwill, net............................................... 192,474 192,474 192,474
Total assets................................................ 208,904 208,904 268,393
Current liability for amounts due under purchase
agreement (10)............................................ 30,000 17,500 17,500
Net stockholders' equity (10)............................... 131,561 144,061 203,550
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------
ACTUAL
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
OTHER DATA:
Total room nights sold........ 183,000 223,000 442,000
Cities served (at end of
period)..................... 14 16 27
Internet generated sales
(6)......................... 6% 21% 44%
CASH FLOW DATA:
Operating activities.......... $ 3,040 $ 647 $ 8,849
Investing activities.......... (390) (897) (4,214)
Financing activities.......... -- -- (2,499)
EBITDA (7).................... $ (150) $ (384) $ 990
<CAPTION>
PREDECESSOR REGISTRANT
------------------------------ --------------
PRO FORMA ACTUAL ACTUAL PRO FORMA
------------ ------------------------------ -------------- --------------
NINE MONTHS PERIOD NINE MONTHS
YEAR ENDED ENDED PERIOD MAY 11 TO ENDED
DECEMBER 31, SEPTEMBER 30, JANUARY 1 TO SEPTEMBER 30, SEPTEMBER 30,
1998 (1) 1998 MAY 10, 1999 1999 1999 (1)
------------ -------------- ------------ -------------- --------------
(UNAUDITED)
------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Total room nights sold........ 442,000 310,000 295,000 556,000 851,000
Cities served (at end of
period)..................... 27 27 36 40 40
Internet generated sales
(6)......................... 44% 40% 70% 84% 78%
CASH FLOW DATA:
Operating activities.......... $12,771 $ 17,223 $ 23,248
Investing activities.......... (2,893) 3,006 (146,617)(8)
Financing activities.......... -- -- 129,813 (8)
EBITDA (7).................... $ 4,055 $ (1,744) $ 10,161
</TABLE>
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(1) Pro forma statements of operations data gives effect to the elimination of
officers' distributions and non-recurring acquisition related costs,
amortization of acquisition related goodwill, interest expense and pro forma
income taxes. Pro forma balance sheet data reflects the recapitalization of
our capital stock and the capital contribution of $12.5 million by USAi for
the satisfaction of our acquisition related liability. See "Unaudited Pro
Forma Combined Condensed Statements of Operations."
(2) Our predecessor business distributed substantially all of its earnings
before taxes to its officers and recorded the distributions as expense. We
have new compensation arrangements with our officers and the expense related
to those arrangements is included in selling, general and administrative
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) Our predecessor business paid discretionary bonuses of $7.2 million to its
employees (other than Messrs. Litman and Diener) and incurred $0.2 million
of professional and advisory fees related directly to the acquisition.
(4) As a result of our acquisition of substantially all the assets of our
predecessor business on May 10, 1999, we recorded goodwill of
$200.3 million, representing the preliminary allocation to goodwill of the
unallocated excess of acquisition costs over net assets acquired, which is
being amortized over ten years. The pro forma information reflects the
incremental amount of goodwill amortization as if the acquisition had taken
place at the beginning of the periods presented. In connection with
finalizing the purchase price allocation, we are currently evaluating the
fair value of assets acquired and liabilities assumed. Using this
information, we will make a final allocation of the excess purchase price.
Accordingly, the purchase accounting information in this prospectus is
preliminary. TMF, Inc. and HRN Marketing Corp. are also entitled to other
payments based on our future earnings which, if realized, will result in
additional purchase price and goodwill. USAi has agreed to pay, on our
behalf, the first $130.0 million of these payments (other than the
$12.5 million payment we expect to make for the fourth quarter of 1999 for
which we had accrued a liability at September 30, 1999). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions." The pro forma information does not reflect the
incremental amount of goodwill amortization that will occur from the payment
of any additional purchase price by us or USAi.
(5) During 1994 and as of January 1, 1997, our predecessor business elected to
be taxed as a subchapter S corporation and as a result, did not pay federal
income taxes. As of May 11, 1999, in connection with our acquisition of our
predecessor business, we elected to be taxed as a subchapter C corporation.
(6) Reflects the percentage of revenues earned from hotel room bookings
generated through our websites or our affiliated websites.
(7) EBITDA is defined as operating profit before depreciation and amortization
of goodwill. Prior to the acquisition, EBITDA reflects officers'
distributions and non-recurring acquisition related costs. EBITDA is
presented in this prospectus because we believe it is a widely accepted
valuation indicator for companies in our industry. EBITDA should not be
considered in isolation or as a substitute for measures of financial
performance or liquidity prepared in accordance with generally accepted
accounting principles. EBITDA may not be comparable to calculations of
similarly titled measures presented by other companies. Depreciation expense
for the years ended December 31, 1996, 1997 and 1998, the nine months ended
September 30, 1998, the period January 1 to May 10, 1999 and the period
May 11 to September 30, 1999 was $53, $84, $232, $75, $119 and $184,
respectively.
(8) For the period May 11 to September 30, 1999, cash flows used in investing
activities includes $145.5 million of cash used in connection with our
acquisition of our predecessor business. Cash flows from financing
activities includes $129.8 million of net capital contributions by USAi.
(9) Balance sheet data is adjusted to give effect to the issuance of 5,400,000
shares of class A common stock in this offering at the midpoint of the
range, assuming no exercise of the overallotment option.
(10) As of September 30, 1999, we reflect a $30.0 million current liability
related to additional consideration in connection with the acquisition of
our predecessor business. Of that amount, $12.5 million was funded by a
capital contribution from USAi in November 1999. The pro forma balance sheet
data reflects the elimination of $12.5 million of this liability.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE DECIDING WHETHER TO
INVEST IN OUR CLASS A COMMON STOCK. THESE ARE NOT THE ONLY RISKS WE FACE. ALL OF
THESE RISKS COULD ADVERSELY AFFECT OUR BUSINESS. THE TRADING PRICE OF OUR
CLASS A COMMON STOCK COULD DECLINE BECAUSE OF GENERAL MARKET CONDITIONS OR IF
ANY OR ALL OF THESE RISKS CAME TO PASS, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT. IN EVALUATING THE RISKS OF INVESTING IN OUR COMPANY, YOU SHOULD ALSO
EVALUATE THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING OUR
FINANCIAL STATEMENTS AND THE NOTES ACCOMPANYING THEM.
IN THE FUTURE, IF WE ARE UNABLE TO OBTAIN ARRANGEMENTS WITH HOTEL SUPPLIERS
SUBSTANTIALLY SIMILAR TO THOSE WE CURRENTLY HAVE, OUR BUSINESS MAY SUFFER.
If we are unable to maintain satisfactory relationships with our existing
hotel suppliers or if our hotel suppliers establish similar or more favorable
relationships with our competitors, our operating results and our business would
be harmed. Our business depends significantly upon our ability to contract with
hotels in advance for volume purchases and guaranteed availability. We rely on
our hotel suppliers to provide us with rooms at wholesale prices. However, our
contracts with our hotel suppliers are not exclusive and most of the contracts
must be renewed annually. At times in the past, hotels have reduced our
allotment of rooms or renewed our contracts on less favorable terms and this may
occur again in the future. Furthermore, in order to maintain and grow our
business, we will need to establish new arrangements with hotels in our existing
markets and in new markets. We cannot assure you that we will be able to
identify appropriate hotels or enter into agreements with those hotels on
favorable terms or at all. This failure could harm the growth of our business,
and consequently, our stock price. See "Business--Competition."
In addition, there may be times when hotels have less excess capacity to
sell. If we cannot provide reliable service or if we do not have adequate
supply, we would not be able to meet the needs of our customers and our business
could be harmed. These shortages would be particularly detrimental to our
business results if we do not have available inventory during our peak seasons.
IF WE ARE UNABLE TO MAINTAIN OUR AFFILIATIONS OR OBTAIN NEW AFFILIATIONS WITH
OTHER TRAVEL SERVICE PROVIDERS, WE MAY LOSE ACCESS TO CUSTOMERS AND FACE
INCREASED COMPETITION.
We derive significant benefits, including revenues and customer awareness,
from our arrangements with leading travel websites on the Internet, such as
Preview Travel, Microsoft's Expedia, Sabre's Travelocity, Pegasus System's
TravelWeb, Cheap Tickets, Yupi.com and GetThere.com. Although we currently have
affiliations with these travel websites, these websites may also compete with us
for hotel bookings. If a substantial number of these websites were to terminate
their affiliation with us, we would lose access to the visitors to their
websites and, consequently, we would lose access to potential customers.
Alternatively, if our affiliates began to offer their own hotel accommodations
or if they developed relationships with our competitors, we would face increased
competition for customers. A loss of online exposure could also be detrimental
to our ability to maintain or enhance our relationships with our hotel
suppliers. See "--The travel industry, particularly the online travel services
market, is highly competitive. If we do not compete successfully, we will not be
able to attract customers and to maintain our arrangements with our hotel
suppliers." We also have numerous alliances with travel agencies, travel clubs
and other marketing organizations that we depend on to provide us with a broad
market presence and customer base. However, we cannot assure you that any of
these affiliations will continue, that our strategic affiliations will be
successful or that we will be able to find suitable additions or replacements.
The failure or loss of these affiliations would impair our growth strategy and
could harm our business, financial condition or results of operations because we
would lose access to customers and face increased competition.
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OUR OPERATING RESULTS FLUCTUATE AND THESE FLUCTUATIONS CAN BE UNPREDICTABLE. ANY
FUTURE FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our business is seasonal, largely due to the travel patterns of our
customers. As a result, we often have higher sales and gross profits in the
fourth quarter because of heavy holiday travel.
Our operating results also may fluctuate because of our reliance on leisure
travelers, who are sensitive to discretionary spending levels and tend to
curtail travel during general economic downturns. In addition, the travel
industry generally can be unpredictable and is susceptible to events that may be
unforeseen or beyond our ability to control. Other trends or events that tend to
reduce leisure travel also are likely to harm our business. These may include:
- bad weather or natural disasters;
- fuel price increases;
- travel-related accidents;
- hotel, airline or other travel-related strikes; or
- terrorism.
In addition, these fluctuations may affect our ability to predict demand for
rooms. We are not always able to return unsold rooms that we have committed to
purchase. If we do not correctly predict demand for hotel rooms which we are
committed to purchase, we would be responsible for covering the cost of the
rooms we are unable to sell. The losses relating to the lack of demand for rooms
we have committed to purchase could be material.
We also expect to experience significant fluctuations in our future
quarterly operating results due to a variety of additional factors, many of
which we do not control. Factors that may adversely affect our quarterly
operating results include, but are not limited to:
- the number of rooms we are able to sell, whether those rooms are sold over
the Internet, through our websites, our affiliates or travel agents and
whether they are sold for peak or off-peak periods;
- our ability to successfully replicate our business model in new markets;
- our ability to develop strong brand recognition, build customer loyalty
and attract new and repeat customers;
- our ability to increase the level of traffic on our websites;
- our ability to retain or expand our wholesale hotel supply arrangements,
obtain satisfactory discounts or obtain sufficient inventory of rooms; and
- the announcement or introduction of lower prices or new travel services
and products by our competitors.
Any change in these factors, particularly affecting our principal destinations,
could be detrimental to our operating results in future periods. Other events
outside our control, including those set forth in other risk factors, also may
cause us to experience significant fluctuations in revenues and operating
results.
For any of these reasons, or for other reasons we do not presently
anticipate, it is possible that our operating results will be below market
expectations, including the expectations of financial analysts and investors. If
this occurs, it would have a material and adverse effect on the price of our
class A common stock.
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THE TRAVEL INDUSTRY, PARTICULARLY THE ONLINE TRAVEL SERVICES MARKET, IS HIGHLY
COMPETITIVE. IF WE DO NOT COMPETE SUCCESSFULLY, WE WILL NOT BE ABLE TO ATTRACT
CUSTOMERS AND MAINTAIN OUR ARRANGEMENTS WITH OUR HOTEL SUPPLIERS.
We primarily compete with other consolidators of hotel accommodations,
online travel reservation services and entities that maintain travel-related
websites. Although we currently have affiliations with many of these websites,
we cannot assure you that these affiliations will continue in the future or that
they will continue to be beneficial to our business and we may find ourselves in
competition with these affiliates. We also compete with traditional travel
agencies and hotels. We may face more competition, directly or indirectly, from
hotels as hotels enter the discount rate market or book discount accommodations
through travel agents. Increasingly, hotels are offering travel products and
services directly to consumers through their own websites, and we believe this
trend will continue. Hotels and travel agents also may continue to rely upon
central reservations systems. In addition, the proliferation of special rate
offers by hotels may affect the rates that we can charge our customers, which
would affect our profit margins and, in turn, our business results.
Some of our actual and potential competitors may have competitive
advantages, such as:
- longer operating histories;
- larger customer bases;
- greater brand recognition;
- more website traffic; or
- significantly greater financial, marketing or other resources.
Our competitors may enter into strategic or commercial relationships with
each other or with other more established or well-financed companies which would
make it harder for us to compete with them. Our competitors may devote greater
resources to marketing and promotional campaigns and substantially more
resources to website and systems development. We purchase advertising from third
parties and there can be no assurance that we will continue to be able to obtain
the advertising we desire on terms and at rates consistent with the terms and
rates we have obtained in the past. Announcements of technological innovations,
new services, business relationships or acquisitions by our competitors could
cause our stock price to decline. Our competitors also may be able to secure
rooms and other travel accommodations from hotels and travel suppliers on more
favorable terms. As a result, they potentially may be able to offer customers a
greater selection at better prices. Increased competition could reduce our
operating margins and profitability, result in loss of market share and diminish
our brand recognition, which could harm our business. We cannot assure you that
we will be able to compete successfully against current or future competitors.
See "Business--Competition" for a discussion of our competition.
BECAUSE OUR BUSINESS HAS GROWN SO RAPIDLY, OUR BUSINESS COULD SUFFER IF WE DO
NOT SUCCESSFULLY MANAGE THIS GROWTH AND POTENTIAL FUTURE GROWTH.
Our business has grown very quickly in its few years of operating. We have
rapidly expanded our operations and anticipate further expansion. Since 1991, we
have launched our online operations, expanded the number of destinations we
offer and increased the number of hotels with which we have supply arrangements.
These changes have increased our volume of sales and have placed, and we expect
they will continue to place, a strain on our management, operational and
financial resources. We cannot assure you that we will be able to efficiently or
effectively manage the growth of our operations and any failure to do so may
have an adverse effect on our future growth and on our business generally.
12
<PAGE>
GOODWILL AMORTIZATION WILL, AND CONTINGENT PAYMENTS MAY, HAVE AN ADVERSE IMPACT
ON OUR FUTURE OPERATING RESULTS.
In connection with the acquisition of our predecessor business, we may be
required to make payments to TMF, Inc. and HRN Marketing Corp. over the next
three years if we meet specified financial targets. USAi has agreed with us to
pay the first $130.0 million of these contingent payments (other than the
$12.5 million payment we expect to make for the fourth quarter for which we had
accrued a liability at September 30, 1999) on our behalf. We will be primarily
liable for any payments in excess of that amount and secondarily responsible for
any amounts USAi fails to pay.
Goodwill is generally created at the time a business is acquired if the
total amount of the purchase price paid is greater than the fair value of the
assets acquired. Goodwill is amortized over a specified period and reduces
earnings as it is amortized. In connection with our acquisition of our
predecessor business, we recorded $200.3 million of goodwill, which will be
amortized over 10 years. Any future cash purchase price payments to TMF, Inc.
and HRN Marketing Corp. in connection with this acquisition, whether made by us
or by USAi, will increase our goodwill. We cannot estimate the impact of these
potential additional payments on net income in future periods. As of
September 30, 1999, goodwill represented 92.1% of the book value of our
company's assets and we will amortize approximately $192.5 million in goodwill
ratably through May 2009. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
CONTINGENT PAYMENTS MAY CREATE A CONFLICT OF INTEREST AMONG US, OUR MANAGEMENT
AND USAI.
The formula for determining the amount of any contingent payments results in
higher payments to our Chief Executive Officer and President, in their capacity
as stockholders of TMF, Inc. and HRN Marketing Corp., if near term earnings are
maximized. This arrangement may lead to a conflict of interest among us, our
management and USAi. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
OUR BUSINESS DEPENDS SUBSTANTIALLY ON THE CONTINUING EFFORTS OF OUR KEY
EMPLOYEES AND OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY
EMPLOYEES AND TO ATTRACT TALENTED NEW PERSONNEL.
We depend substantially on the continued services and performance of our
senior management, particularly David Litman, our Chief Executive Officer, and
Robert Diener, our President, and some other key personnel. The loss of the
services of either of these executive officers or other key employees could harm
the management of our business and our operating results because of the
significant role these employees play in the operation of our business.
Our future success depends on our ability to identify, attract, hire, train,
retain and motivate other highly skilled technical, managerial, marketing and
customer service personnel. We expect to hire additional key personnel and
support staff in the future. However, we cannot assure you that we will be able
to identify or to hire the right individuals to manage our growth effectively.
Competition for such personnel is intense. We may not be able to attract,
assimilate or retain sufficiently qualified personnel. This failure could
adversely affect our business and impair our growth strategy by decreasing our
ability to compete effectively with our competition.
ACQUISITIONS WHICH MAY EXPOSE US TO RISKS THAT COULD SIGNIFICANTLY HARM OUR
BUSINESS ARE A PART OF OUR GROWTH STRATEGY.
One part of our growth strategy is to broaden the scope and content of our
existing business. We may do so by acquiring other businesses, including
companies that provide similar services or that participate in other sectors of
the travel industry. Future acquisitions would expose us to potential risks.
These include risks associated with the:
- assimilation of new operations, sites and personnel;
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<PAGE>
- diversion of resources from our existing businesses, sites and
technologies;
- inability to generate sufficient revenues or content to offset the costs
and expenses of acquisitions;
- consequences of doing business in international markets, such as the
conversion of foreign currencies;
- maintenance of uniform standards, controls, procedures and policies; and
- potential loss of, or harm to, relationships with employees, customers and
hotel suppliers as a result of integration of new businesses.
We also cannot be sure that the sellers of acquired businesses will
accurately represent the results of operations, financial condition and business
of their companies or that they will be able to satisfy their indemnification
obligations. If misrepresentations are made, we may have significant liabilities
and none of the benefits expected from the acquisition. As a result, the
acquisition could have a material adverse effect on our business, financial
condition and results of operations. In addition, we may not be successful in
overcoming these risks or any other problems encountered in connection with
acquisitions, and, even if we are successful in acquiring and integrating a
business, the acquisition may be too time consuming, costly or unwise, which may
affect our operating results. Our inability or failure to manage these risks
could materially and adversely affect our business.
Although we are not currently committed to any particular acquisition, our
management regularly evaluates acquisition opportunities. We believe that
expanding our business through acquisitions is a way for us to remain
competitive, particularly given the nature of the travel industry. See "--The
travel industry, particularly the online travel services market, is highly
competitive. If we do not compete successfully, we will not be able to attract
customers and to maintain our arrangements with our hotel suppliers" and
"Business--Our Growth Strategy" for more information about our acquisition
strategy.
OUR BUSINESS IS CONTROLLED BY USAI AND, AS A RESULT, OUR OTHER STOCKHOLDERS WILL
HAVE LITTLE OR NO INFLUENCE OVER STOCKHOLDERS' DECISIONS.
We are currently a wholly owned subsidiary of USAi. Following this offering,
USAi will own 44,099,100 shares of our class B common stock which has 15 votes
per share. As a result, USAi will have the right to control the outcome of any
matter submitted for the vote or consent of our stockholders, except for when a
separate vote of the holders of class A common stock is required by Delaware
law. USAi will have the voting power to control the election of our board of
directors and it will be able to cause the amendment of our restated certificate
of incorporation or our restated bylaws. USAi also may be able to cause changes
in our business without seeking the approval of any other party. These changes
may not be to the advantage of our company or in the best interest of our other
stockholders. For example, USAi will have the power to prevent, delay or cause a
change in control of our company and could take other actions that might be
favorable to USAi, but not necessarily to other stockholders. Similarly, USAi
has the voting power to exercise a controlling influence over our business and
affairs and has the ability to make decisions concerning such things as:
- mergers or other business combinations;
- purchases or sales of assets;
- offerings of securities;
- indebtedness that we may incur; and
- payments of any dividends.
We cannot assure you that USAi's ownership of our common stock or its
relationship with us will not have a material adverse effect on our business,
financial condition or results of operations, or on the market price of our
class A common stock.
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USAi could elect to sell all or a substantial portion of its equity interest
in us to a third party, which would represent a controlling or substantial
interest, without offering to our other stockholders the opportunity to
participate in this transaction. If another party acquires USAi's interest in
us, that third party may be able to control us in the same manner that USAi is
able to control us. A sale to a third party also may adversely affect the market
price of our class A common stock and may adversely affect our business,
financial condition and results of operations because the change in control may
result in a change in management decisions and business policy. See "--Some of
our shares will be eligible for future sale which may depress our stock price."
WE MAY FACE POTENTIAL CONFLICTS OF INTEREST WITH USAI WHICH MAY HARM OUR
BUSINESS.
Conflicts of interest may arise between us, on the one hand, and USAi and
its affiliates, on the other hand, in areas relating to past, ongoing and future
relationships, corporate opportunities, indemnity agreements, tax and
intellectual property matters, potential acquisitions or financing transactions,
sales or other dispositions by USAi of shares of our common stock held by it and
the exercise by USAi of its ability to control our management and affairs. For
example, USAi is engaged in a diverse range of media and entertainment related
businesses, including businesses engaged in electronic and online commerce, such
as Home Shopping Network, Ticketmaster Online-CitySearch and USA Networks
Interactive, and these businesses may have interests that conflict or compete in
some manner with our business. USAi is under no obligation to share any future
business opportunities available to it with us, unless Delaware Law requires it
to do so, and our restated certificate of incorporation specifically includes
provisions which release USAi from this obligation and any liability that would
result from a breach of these obligations. We cannot assure you that any
conflicts that may arise between us and USAi or any of its affiliates, any loss
of a corporate opportunity to USAi that may otherwise be available to us or any
engagement by USAi in any activity that is similar to our business, will not
harm our business or negatively impact our financial condition or results of
operations because these conflicts of interest or a loss of a corporate
opportunity could result in a loss of customers and, therefore, business. See
"Description of Capital Stock--Corporate Opportunities."
IF OUR SECURITY SYSTEM IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.
In our business, secured transmission of confidential information over
public networks is essential to maintaining consumer and supplier confidence.
Although we employ measures such as encryption technology, our current security
measures may not be adequate. Advances in computer capabilities, new discoveries
in the field of cryptography, or other events or developments may result in a
compromise or breach of the methods we use to protect customer transactions and
personal data, such as our customers' credit card numbers. A party who can
circumvent our security might be able to steal or misuse this or other
proprietary information or cause interruptions in our operations. Security
breaches could also expose us to a risk of loss or litigation and possible
liability for failing to secure confidential customer or supplier information.
If any compromise of our security were to occur, it could have a detrimental
effect on our reputation and adversely affect our ability to attract customers.
We also may be required to expend significant financial and other resources to
protect against security breaches or to alleviate problems caused by breaches in
the future. Furthermore, concerns about the security of transactions conducted
on the Internet and the potential compromise of customer privacy may inhibit the
growth of commercial online services as a means of conducting commercial
transactions which, in turn, could adversely affect our business and the growth
of our business.
WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR DOMAIN NAMES, TRADE NAMES OR
OTHER INTELLECTUAL PROPERTY WHICH MAY HARM OUR BUSINESS AND EXPOSE US TO
LITIGATION.
We regard our domain names and similar intellectual property as critical to
our success. Failure to effectively protect our intellectual property could harm
us by resulting in erosion of our brand name, thereby hindering our ability to
compete effectively. We rely on a combination of laws and contractual
15
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restrictions to establish and protect our proprietary rights. However, laws and
contractual restrictions may not be sufficient to prevent misappropriation of
intellectual property or deter others from developing similar technologies.
Although we are pursuing the registration of our key trademarks in the United
States, some of our trade names are not eligible to receive trademark
protection. In addition, effective trademark protection may not be available or
sought by us in every country where our products and services are available.
We currently own the Internet domain names "www.hoteldiscount.com" and
"www.180096hotel.com" as well as various other related names. However, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our domain names, which may
hurt or otherwise adversely affect our business. In addition, the regulation of
domain names in the United States and in foreign countries is subject to change.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may not be able to maintain the "www.hoteldiscount.com"
or "www.180096hotel.com" domain names in all of the locations where we conduct
business.
We may be required to incur significant expenses to protect our rights. We
cannot be sure that the steps we have taken to protect our proprietary rights
will be adequate or that third parties will not infringe upon or misappropriate
our domain names and similar proprietary rights. In the future, litigation may
be necessary to enforce our intellectual property and contractual rights or to
determine the validity and scope of the proprietary rights of others. In
addition, other parties may assert claims of alleged infringement of trademarks
and other intellectual property rights of third parties by us. Any litigation,
regardless of merit or outcome, could result in substantial costs and diversion
of management and technical resources, either of which could harm our business.
If we do not prevail, we could be required to stop using our trade names or
domain names or to pay damages. See "Business--Proprietary Rights."
OUR BUSINESS MAY BE HARMED IF OUR INFRASTRUCTURE AND TECHNOLOGY ARE UNABLE TO
HANDLE OUR GROWTH.
We use an internally developed system that supports our websites and
substantially all aspects of transaction processing, including making
reservations and confirmations. Our business may be harmed if we are not able
to:
- accurately project the rate or timing of increases in traffic levels on
our websites;
- upgrade our systems and infrastructure fast enough to accommodate future
traffic levels; or
- successfully integrate any newly developed or purchased technology with
our existing systems.
In addition, online commerce is characterized by rapid technological change,
changes in user and customer requirements and preferences and changes in
industry standards and practices. Our existing technology and systems could
become obsolete because of the rapidly changing technologies of online commerce.
We cannot be sure that we will be able to effectively upgrade and expand our
transaction-processing systems in a timely manner or to successfully integrate
any newly developed or purchased modules with our existing systems. Upgrading or
expanding our systems would likely be expensive and time-consuming, and could
harm our operating results.
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Our ability to receive and fill orders through our call centers or online
and to provide high-quality customer service largely depends on the efficient
and uninterrupted operation of our computer and communications hardware systems.
Our call center and substantially all of our computer and communications systems
are located at a single facility in Dallas. Our systems and operations are
vulnerable to damage or interruption from human error, fire, flood, power loss,
telecommunications failure, break-ins, sabotage, intentional acts of vandalism,
natural disasters and similar events. We currently do not have redundant systems
and do not carry sufficient business interruption insurance to compensate us for
losses that may occur. Despite our implementation of network security measures,
our servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to accept and confirm customer reservations. In addition,
although we back up data on a regular basis, we do not have a formal disaster
recovery plan. See "Business--Technology" for a discussion of our technology.
Furthermore, our current and planned personnel, systems, procedures and
controls may be inadequate to support our future growth which could disrupt our
business and have an adverse effect on our results of operations. If our
business continues to grow, we may not be able to answer all calls or service
all inquiries adequately which could impair the quality of our service. Capacity
constraints could cause unanticipated system disruptions, slower response times,
poor customer service, impaired quality and speed of reservations and
confirmations and delays in reporting accurate financial information. These
factors could result in our losing customers and, in turn, our arrangements with
our hotel suppliers. In addition, our management may be consumed by dealing with
these and other operational issues as we grow, and as a result, our management
may not be able to identify, manage and exploit existing and potential market
opportunities successfully. Any or all of these factors could seriously harm our
operations and adversely affect our business and our growth strategy.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ONLINE COMMERCE AND OUR ONLINE
SALES. A DECLINE IN EITHER OF THESE MAY HARM OUR FUTURE SUCCESS.
The success of our business could be adversely affected if online commerce
and our online sales do not continue to grow. Our future revenues and profits
depend, to a large degree, upon the widespread acceptance and use of the
Internet and online services as a medium for commerce by customers and sellers.
The future demand for and acceptance of products and services delivered over the
Internet is uncertain. A sufficiently broad base of customers may not accept, or
continue to use, the Internet as a medium of commerce because of security
concerns or other reasons. For us to achieve significant growth, customers who
have historically used traditional means of commerce will instead need to elect
to purchase products and services online. Our success also depends in part on
customers choosing to make their hotel reservations over the Internet rather
than in person or through a more traditional travel service. Furthermore, our
revenues and profits depend on customers visiting our website and actually
making hotel reservations. Customers could potentially use our website for
information, but choose to book accommodations directly from hotels or
elsewhere. If online commerce does not grow or if our online sales do not
continue to improve, our business may be adversely affected because we will lose
access to a significant number of customers.
OUR BUSINESS DEPENDS ON THE INFRASTRUCTURE OF THE INTERNET TO FUNCTION PROPERLY.
IF THE INTERNET OR OUR TECHNOLOGY FAILS TO PERFORM, OUR BUSINESS MAY BE HARMED.
We cannot assure you that the infrastructure for the Internet and other
online services will be able to support the demands placed upon them. Our
business depends, to a large degree, on the ability of our customers to access
our websites and to book their hotel reservations through our websites or
affiliated websites. If customers are unable to access any or all of these
websites, our business would be harmed.
17
<PAGE>
Major online service providers and the Internet itself have experienced
outages and other delays as a result of software and hardware failures and could
face outages and delays in the future. If significant outages and delays occur,
these occurrences are likely to affect the level of Internet usage, consumer and
supplier confidence and the processing of transactions. Furthermore, any system
interruptions that result in the loss of data, the unavailability of our
websites or reduced performance of our reservation system would reduce the
volume of reservations and the attractiveness of our service offerings, which
could have a negative impact on our business and, as a result, our stock price.
It is unlikely that we could make up for the level of orders lost in those
circumstances by increased phone orders.
In addition, the Internet could lose its viability by reason of delays in
the development or adoption of new standards to handle increased levels of
activity or of increased government regulation. The adoption of new standards or
government regulation also may require us to incur substantial compliance costs.
See "--Changing government regulations and legal uncertainties may impair our
future growth and harm our business." If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, or if the
infrastructure for the Internet and other online services does not effectively
support the growth that may occur, or if the Internet and other online services
do not become a viable commercial marketplace, our business, prospects,
financial condition and results of operations could be adversely affected
because we will lose access to customers who choose to make hotel reservations
through means other than the Internet.
WE RELY ON THIRD PARTY SYSTEMS AND SERVICES AND OUR BUSINESS MAY SUFFER IF THEY
ARE UNAVAILABLE IN THE FUTURE OR IF THEY NO LONGER OFFER QUALITY PERFORMANCE.
We rely on some third-party computer systems and third-party service
providers, including the infrastructure and database of those Internet sites
with which we have relationships, our websites and our call center operations.
We also are dependent on major credit card companies to process payment for our
transactions. Any interruption or termination in these third-party services or a
deterioration in their performance could seriously disrupt our business and
negatively impact our operating results. If our arrangement with any of these
third parties is terminated, we may not find an alternative source of systems
support on a timely basis or on commercially reasonable terms which would harm
our business and our growth by decreasing our ability to provide our services
effectively.
SOME OF THE SERVICES OR SYSTEMS WE RELY ON MAY NOT BE YEAR 2000 COMPLIANT, WHICH
COULD RESULT IN A BREAKDOWN IN OUR OPERATIONS OR POTENTIAL LITIGATION.
The risks posed by Year 2000 issues could hurt our business in a number of
significant ways. Although we believe that our systems are Year 2000 compliant,
our information technology system could be substantially impaired or cease to
operate due to unanticipated or unforseen Year 2000 problems. Year 2000 issues
may impact other entities with which we do business, including, for example,
those responsible for maintaining telephone and Internet communications. We rely
on information technology and services supplied by third parties, and the hotels
and other parties we have relationships with are also heavily dependent on
information technology systems and on their own third party vendors' systems.
Year 2000 problems experienced by us or any third parties could negatively
impact our business. The Internet also could face serious disruptions arising
from Year 2000 problems which may negatively impact our business operations. As
a result of Internet problems or other problems arising from Year 2000
difficulties, consumers may not be able to visit our websites. Given the
pervasive nature of the Year 2000 problem, disruptions in other industries and
in the travel industry generally may have a material adverse effect on our
business. We are not able to predict the effect of the Year 2000 problem on us
or on other entities, and we cannot be sure that a failure of our systems or on
the systems that we rely upon will not have an adverse effect on our business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
18
<PAGE>
THERE IS UNCERTAINTY REGARDING HOW NEW OR EXISTING TAX LAWS MAY AFFECT OUR
BUSINESS AND OUR INDUSTRY AND ANY CHANGES TO THESE LAWS MAY ADVERSELY AFFECT OUR
BUSINESS.
Changes in tax laws, determinations, or interpretations that result in
significant additional taxes on our business could have an adverse effect on our
cash flows and results of operations. There is currently great uncertainty as to
whether or how existing laws governing sales and other taxes apply to the
Internet and commercial online services. For example, tax authorities in a
number of states, as well as a Congressional advisory commission, are currently
reviewing the appropriate tax treatment of companies engaged in online commerce,
and new tax regulations may subject us to, among other things, additional state
sales and income taxes. These issues may take years to resolve. Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to online commerce could result in
significant additional taxes on our business. These additional taxes could
negatively affect our cash flows and results of operations. See
"Business--Government Regulation."
Federal legislation imposing some limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, imposes a three-year moratorium on
state and local taxes on electronic commerce (unless these taxes were in effect
prior to October 1, 1998) but only where these taxes are discriminatory on
Internet access. It is possible that the legislation will not be renewed when it
terminates in October 2001. Failure to renew the legislation could allow state
and local government to impose taxes on Internet-based sales, and these taxes
could harm our business and our growth.
We file tax returns in some states based on applicable statutory
requirements. One or more states could seek to impose additional income tax
obligations or sales tax collection obligations on out-of-state companies, such
as ours, which engage in or facilitate online commerce. A number of proposals
have been made at state and local levels that could impose these taxes on the
sale of products and services online or the income derived from these sales.
These proposals, if adopted, could substantially impair the growth of online
commerce and as a result, harm our business. In addition, there is uncertainty
as to how certain state taxes should be applied to the sale of hotel rooms by
consolidators such as ourselves. Changes in policy regarding the state tax
applicable to our transactions could harm our business by subjecting us to
significant additional expenses. Furthermore, there is a possibility that we may
be subject to significant taxes and penalties for any past failures to comply
with these requirements.
CHANGING GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES MAY IMPAIR OUR FUTURE
GROWTH AND HARM OUR BUSINESS.
Some segments of the travel industry are heavily regulated by the United
States and other governments and these regulations may impose burdens which
could harm our business. All of our services are subject to federal and state
consumer protection laws and regulations prohibiting unfair and deceptive trade
practices. These consumer protection laws could result in substantial compliance
costs and could interfere with the conduct of our business. We also are subject
to regulations applicable to businesses generally and laws or regulations
applicable to online commerce.
Currently, few laws and regulations directly apply to the Internet and
commercial online services. However, it is possible that laws and regulations
may be adopted with respect to the Internet or commercial online services
covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust and characteristics and quality of products and
services. Further, the growth and development of the market for online commerce
may prompt calls for more stringent consumer protection laws. The adoption of
any additional laws or regulations may decrease the growth of the Internet or
commercial online services. In turn, this could decrease the demand for our
products and services and increase our cost of doing business, or otherwise hurt
our business. In addition, the
19
<PAGE>
applicability to online commerce of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve.
OUR EXPANSION INTO INTERNATIONAL MARKETS MAY MAKE US SUSCEPTIBLE TO GLOBAL
ECONOMIC FACTORS, FOREIGN TAX LAW ISSUES, FOREIGN BUSINESS PRACTICES AND
CURRENCY FLUCTUATIONS.
Our addition of international destinations may require us to make
significant investments to develop relationships in these locations for an
extended period of time before we realize returns on these investments, if any.
Offering international destinations may subject us to particular risks,
including:
- a decrease in tourism due to adverse political and economic conditions;
- fluctuations in the value of the U.S. dollar relative to other currencies;
- potentially adverse tax consequences;
- reduced protection for intellectual property rights and domain names in
some countries; and
- additional regulatory requirements.
If we do not realize our expected results from international operations, it
could have an adverse effect on our business, operating results and financial
position.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD CAUSE THE VALUE OF YOUR INVESTMENT
IN OUR COMPANY TO DECLINE.
Prior to this offering, you could not buy or sell our class A common stock
publicly. An active market for our class A common stock may not develop or be
sustained after this offering. With the underwriters, we will determine the
offering price for our class A common stock. That price may bear no relationship
to the price at which the class A common stock will trade after completion of
this offering. The market price of our class A common stock is likely to be
volatile and could be subject to significant fluctuations in response to
factors, such as the following, some of which are beyond our control:
- quarterly variations in our operating results;
- operating results that vary from the expectations of securities analysts
and investors;
- changes in expectations as to our future financial performance;
- changes in market valuations of other travel, Internet or online service
companies;
- announcements of technological innovations or new services by us or our
competitors;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of several of our hotel room supply arrangements;
- additions or departures of key personnel; and
- future sales of our common stock.
Domestic and international stock markets often experience extreme price and
volume fluctuations. These fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, may adversely affect the market price of our class A common stock.
20
<PAGE>
BECAUSE WE ARE AN INTERNET-RELATED BUSINESS, OUR STOCK PRICE MAY FLUCTUATE AND
THE VALUE OF YOUR INVESTMENT MAY BE AFFECTED.
The market prices for stocks of Internet-related and technology companies,
particularly following an initial public offering, frequently experience wide
fluctuations and reach levels that bear no relationship to the operating
performance of these companies. These market prices generally are not
sustainable and are subject to wide variations. If our class A common stock
trades to these levels following this offering, it likely will thereafter
experience a material decline.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. If our stock price is volatile, we may be the target of securities
litigation in the future. Securities litigation, regardless of merit or outcome,
could result in substantial costs and divert management's attention and
resources and could have a material adverse effect on our business, financial
condition and results of operations. In particular, we could be required to pay
substantial damages, including punitive damages, if we were to lose a lawsuit.
SOME OF OUR SHARES WILL BE ELIGIBLE FOR FUTURE SALE WHICH MAY DEPRESS OUR STOCK
PRICE.
Prior to this offering, there has been no market for our class A common
stock, and we cannot assure you that a significant public market for our
class A common stock will develop or be sustained after this offering. Future
sales of substantial amounts of our class A common stock, including shares
issued upon conversion of our class B common stock, in the public market after
this offering, or the anticipation of those sales, could adversely affect market
prices prevailing from time to time and could impair our ability to raise
capital through the sale of our equity securities.
Upon completion of this offering, we will have 10,299,900 shares of our
class A common stock outstanding, assuming no exercise of the underwriters'
overallotment option, and 44,099,100 shares of our class B common stock
outstanding. Shares of class B common stock, however, are convertible for
class A common stock on a share-for-share basis at the election of the holder.
Of the shares of class A common stock expected to be outstanding after this
offering (plus any additional shares sold upon exercise of the underwriters'
overallotment option), all of the shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless they are held
by "affiliates" of our company as that term is used under the Securities Act.
All shares of our class A common stock held by our affiliates are control
securities. The shares of our class A common stock issued to Messrs. Litman and
Diener immediately prior to this offering, the shares of our class A common
stock issuable upon conversion of the class B common stock and all of the
outstanding shares of our class B common stock owned by USAi also will be
"restricted securities" as that term is defined in Rule 144 of the Securities
Act. Restricted and control securities may not be sold in the public market
unless they qualify for an exemption from registration under Rule 144 or
Rule 701 or another exemption under the Securities Act. In addition to the
limitations of the Securities Act, Messrs. Litman and Diener and USAi have
agreed not to sell or otherwise dispose of any of their shares of our capital
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
See "Shares Eligible for Future Sale" and "Underwriting."
USAI MAY SELL ITS SHARES OF OUR COMMON STOCK IN THE FUTURE WHICH MAY DEPRESS OUR
STOCK PRICE.
Subject to applicable federal securities laws and the restrictions set forth
below, after completion of this offering, USAi may convert its shares of our
class B common stock at any time into shares of class A common stock on a
share-for-share basis. USAi also may transfer its class B common stock to its
affiliates, sell any portion, including all or substantially all, of the shares
of our class A common stock beneficially owned by it or distribute any or all of
these shares of our class A common stock to its stockholders. See "Description
of Capital Stock." Any sales or distributions by USAi of a substantial amount of
our class A common stock in the public market or to its stockholders, or the
perception that
21
<PAGE>
these transfers, sales or distributions could occur, could adversely affect the
prevailing market prices for our class A common stock. USAi is not subject to
any obligation to retain any portion of its controlling interest in our company,
except that USAi has agreed not to sell or otherwise dispose of any shares of
our capital stock for a period of 180 days after the date of this prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. See "Underwriting."
We cannot assure you that USAi will maintain its beneficial ownership of our
common stock owned by it following this offering for any period of time.
Moreover, we cannot assure you that, in any transfer by USAi of its controlling
interest in our company, you or any other holders of our common stock will be
able to participate in this transaction or will realize any premium or other
amounts with respect to the sale.
INVESTORS WHO PURCHASE OUR CLASS A COMMON STOCK IN THIS OFFERING WILL SUFFER AN
IMMEDIATE DILUTION OF THEIR INVESTMENT.
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding classes of our common stock.
Assuming an initial public offering price of $12.00 per share, investors
purchasing shares of our class A common stock in this offering will incur
immediate, substantial dilution of their investment of approximately $11.80 per
share. See "Dilution."
22
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
the securities laws. We have based these forward-looking statements on our
current expectations and projections about future events, based on the
information currently available to us. These forward-looking statements are
principally contained in the sections "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
The forward-looking statements include, among other things, statements relating
to our anticipated financial performance, business prospects, new developments,
new strategies and similar matters.
These forward-looking statements are subject to risks, uncertainties and
assumptions that may affect the operations, performance, development and results
of our business and include, but are not limited to the risk factors described
under the section "Risk Factors" in this prospectus and the following:
- material adverse changes in economic conditions in our markets;
- future regulatory actions and conditions in our operating areas;
- competition from others;
- successful integration of our divisions' management structures;
- product demand and market acceptance;
- the ability to protect proprietary information and technology or to obtain
necessary licenses on commercially reasonable terms; and
- obtaining and retaining key executives and employees.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or any other
reason. In light of these risks, uncertainties and assumptions, the
forward-looking statements discussed in this prospectus may not prove correct.
23
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $12.00 per share, we estimate
that we will receive approximately $59,489,000 million in net proceeds from the
sale of shares in this offering, after we deduct underwriting discounts and
commissions and an estimated $775,000 in expenses payable by us. If the
underwriters exercise their overallotment option in full, we would receive
approximately $68,528,600 million. We expect to use the net proceeds of this
offering for general corporate purposes, including working capital to support
the continued expansion of our operations, expenses associated with enhancing
our websites, advertising campaigns and other marketing efforts, capital
expenditures and strategic acquisitions, although we currently have no
commitments to make any acquisitions.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive upon the completion of this
offering. Accordingly, our management will have broad discretion in the
application of the net proceeds. Pending these uses, we intend to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We do not expect to declare or pay dividends on our common stock in the
foreseeable future. We currently anticipate that we will retain any future
earnings for use in our business.
24
<PAGE>
CAPITALIZATION
The following table gives effect to the recapitalization of our capital
stock and to the issuance of 4,899,900 shares of our class A common stock to
TMF, Inc. and HRN Marketing Corp. immediately prior to this offering. The table
shows our actual and unaudited pro forma capitalization as of September 30, 1999
and our adjusted capitalization as of September 30, 1999 as if the offering had
occurred as of September 30, 1999. You should read this table together with the
financial statements and accompanying notes included in this prospectus
beginning on page F-1 and the information under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash....................................................... $ 6,444 $ 6,444 $ 65,933
======== ======== ========
Long-term obligations, less current portion................ $ -- $ -- $ --
Stockholders' equity:
Common Stock:
Class A common stock, $0.01 par value; shares
authorized; 4,899,900, 4,899,900, 10,299,900 actual,
pro forma and as adjusted shares, respectively, issued
and outstanding........................................ 49 49 103
Class B common stock, $0.01 par value; shares
authorized; 44,099,100 actual, pro forma and as
adjusted shares issued and outstanding................. 441 441 441
Additional paid-in capital................................. 129,323 141,823 201,258
Accumulated other comprehensive loss....................... (77) (77) (77)
Retained earnings.......................................... 1,825 1,825 1,825
-------- -------- --------
Total stockholders' equity................................. 131,561 144,061 203,550
-------- -------- --------
Total capitalization................................... $131,561 $144,061 $203,550
======== ======== ========
</TABLE>
- ------------------------
(1) Pro forma capitalization reflects a capital contribution by USAi in November
1999 to pay a $12.5 million liability to TMF, Inc. and HRN Marketing Corp.
based on the attainment of financial targets during our fiscal quarter ended
September 30, 1999.
25
<PAGE>
DILUTION
As of September 30, 1999, our pro forma net tangible book value was
approximately $(48.4) million, or $(0.99) per share of common stock. "Pro forma
net tangible book value per share" represents net tangible assets (total
tangible assets less total liabilities) divided by the assumed total number of
shares of common stock outstanding before this offering but after our proposed
recapitalization and the issuance of 4,899,900 shares of our class A common
stock to TMF, Inc. and HRN Marketing Corp. immediately prior to this offering.
Without taking into account any changes in net tangible book value after
September 30, 1999, other than to give effect to this offering, the adjusted pro
forma net tangible book value of the common stock as of September 30, 1999 would
have been approximately $11.1 million, or $0.20 per share. The following table
shows the effect of the offering as if it had occurred at September 30, 1999 and
illustrates the immediate increase in pro forma net tangible book value of $1.19
per share to existing shareholders and immediate dilution of $11.80 per share to
new investors purchasing shares at the initial public offering price:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of
September 30, 1999...................................... $(0.99)
Increase in pro forma net tangible book value per share
attributable to the offering............................ $ 1.19
Pro forma net tangible book value per share as adjusted
for this offering....................................... $ 0.20
======
Dilution per share to new investors in this offering........ $11.80
======
</TABLE>
The calculation in the table above excludes 810,000 shares issuable upon
exercise of the underwriters' overallotment option.
The following table summarizes the number and percentage of shares of our
common stock purchased, the amount and percentage of consideration paid, and the
average price per share paid by existing shareholders and by new investors
purchasing shares of our class A common stock in this offering, assuming an
initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED PAID AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing shareholders.....................
Class A common stock.................... 4,899,900 9.0% -- -- $ --
Class B common stock (1)................ 44,099,100 81.1% $142,313,000 68.7% 3.23
New investors (2).........................
Class A common stock.................... 5,400,000 9.9% $ 64,800,000 31.3% 12.0
----------- ----- ------------ -----
Total............................... 54,399,000 100.0% 207,113,000 100.0%
=========== ===== ============ =====
</TABLE>
- ------------------------
(1) The total consideration paid by the class B shareholder, USAi, is based on
$182.3 million of net cash paid through December 17, 1999 less a dividend of
$40.0 million that we paid to USAi.
(2) If the underwriters' overallotment option is exercised in full, the number
of shares held by new investors will be increased to 6,210,000 or 11.3% of
the total shares of all classes of common stock to be outstanding after this
offering.
26
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data of our company and our
predecessor business. The data was derived from our unaudited financial
statements and our predecessor business' audited and unaudited (where indicated)
combined financial statements, and reflects the operations and financial
position of our company or our predecessor business at the dates and for the
periods indicated. The combined financial statements as of and for the four year
period ended December 31, 1998 were audited by Grant Thornton LLP, independent
certified public accountants. The information in this table should be read in
conjunction with the financial statements and accompanying notes and other
financial data pertaining to our company and our predecessor business as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
On May 10, 1999, we acquired substantially all the assets and assumed
substantially all of the liabilities of our predecessor business. We accounted
for this acquisition using the purchase method of accounting.
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
--------------------------------------------------------------------------- -------------
NINE
MONTHS PERIOD PERIOD
YEAR ENDED DECEMBER 31, ENDED JANUARY 1 MAY 11 TO
----------------------------------------------- SEPTEMBER 30, TO MAY 10, SEPTEMBER 30,
1994 1995 1996 1997 1998 1998 1999 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............. $9,355 $17,121 $23,275 $34,758 $66,472 $ 40,794 $37,701 $ 70,670
Operating costs and
expenses:
Cost of sales.......... 7,117 12,358 16,003 23,284 45,818 28,416 26,538 51,724
Selling, general and
administrative (1)... 2,032 2,986 3,857 5,782 9,770 6,580 5,669 8,969
Officers' distributions
(1).................. 300 1,996 3,618 6,160 10,126 1,818 -- --
Non-recurring
acquisition related
costs (2)............ -- -- -- -- -- -- 7,357 --
Amortization of
goodwill (3)......... -- -- -- -- -- -- -- 7,834
------ ------- ------- ------- ------- -------- ------- -----------
Total operating costs and
expenses............... 9,449 17,340 23,478 35,226 65,714 36,814 39,564 68,527
------ ------- ------- ------- ------- -------- ------- -----------
Operating profit
(loss)................. (94) (219) (203) (468) 758 3,980 (1,863) 2,143
Other income (expense):
Interest and other,
net.................. 1 186 257 447 911 472 429 754
Gain on sale of
securities........... -- -- 71 13 74 4 471 --
------ ------- ------- ------- ------- -------- ------- -----------
1 186 328 460 985 476 900 754
------ ------- ------- ------- ------- -------- ------- -----------
Earnings (loss) before
income taxes........... (93) (33) 125 (8) 1,743 4,456 (963) 2,897
Income tax (expense)
benefit (4)............ 3 9 (38) (2) (5) -- -- (1,072)
------ ------- ------- ------- ------- -------- ------- -----------
Net earnings (loss)...... $ (90) $ (24) $ 87 $ (10) $ 1,738 $ 4,456 $ (963) $ 1,825
====== ======= ======= ======= ======= ======== ======= ===========
Basic and diluted
earnings per share..... $ 0.04
===========
Basic and diluted
weighted average shares
outstanding............ 48,999,000
===========
Pro forma tax information
(4):
Historical earnings
(loss) before income
tax expense.......... $ 1,743 $ 4,456 $ (963)
Pro forma income tax
benefit (expense).... (645) (1,649) 356
------- -------- -------
Pro forma net earnings
(loss)............... $ 1,098 $ 2,807 $ (607)
======= ======== =======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
------------------------------------------------------------------------------- -------------
NINE
MONTHS PERIOD PERIOD
YEAR ENDED DECEMBER 31, ENDED JANUARY 1 MAY 11 TO
--------------------------------------------------- SEPTEMBER 30, TO MAY 10, SEPTEMBER 30,
1994 1995 1996 1997 1998 1998 1999 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 350 $ 428 $ 3,078 $ 2,828 $ 4,964 $ 12,706 25,193 $ 6,444
Deferred revenue.............. 844 1,305 1,470 3,278 7,299 11,386 19,293 24,132
Net working capital (deficit)
(7)......................... (543) (483) (463) (532) (1,856) 3,468 (3,311) (63,567)
Goodwill, net................. -- -- -- -- -- -- -- 192,474
Total assets.................. 1,801 4,013 7,105 7,958 14,544 20,528 32,127 208,904
Current liability for amounts
due under purchase agreement
(7)......................... -- 30,000
Net stockholders' equity
(deficit)................... (492) (384) (295) (54) (852) (4,402) (2,129) 131,561
OTHER DATA:
Total room nights sold........ 102,000 171,000 183,000 223,000 442,000 310,000 295,000 556,000
Cities served (at end of
period)..................... 15 15 14 16 27 27 36 40
Internet generated sales
(5)......................... -- -- 6% 21% 44% 40% 70% 84%
CASH FLOW DATA:
Operating activities.......... $ 1,192 $ 1,795 $ 3,040 $ 647 $ 8,849 $ 12,771 $ 17,223 $ 23,248
Investing activities.......... (1,221) (1,718) (390) (897) (4,214) (2,893) 3,006 (146,617)
Financing activities.......... (280) -- -- -- (2,499) -- -- 129,813
EBITDA (6).................... $ (74) $ (193) $ (150) $ (384) $ 990 $ 4,055 $ (1,744) $ 10,161
</TABLE>
- ------------------------------
(1) Our predecessor business distributed substantially all of its earnings
before taxes to its officers and recorded the distributions as expense. We
have new compensation arrangements with our officers and the expense related
to those arrangements is included in selling, general and administrative
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Our predecessor business paid discretionary bonuses of $7.2 million to its
employees (other than Messrs. Litman and Diener) and incurred $0.2 million
of professional and advisory fees related directly to the acquisition.
(3) As a result of our acquisition of substantially all the assets of our
predecessor business on May 10, 1999, we recorded goodwill of
$200.3 million, representing the preliminary allocation to goodwill of the
unallocated excess of acquisition costs over net assets acquired, which is
being amortized over ten years. In connection with finalizing the purchase
price allocation, we are currently evaluating the fair value of assets
acquired and liabilities assumed. Using this information, we will make a
final allocation of the excess purchase price. Accordingly, the purchase
accounting information in this prospectus is preliminary. TMF, Inc. and HRN
Marketing Corp. are also entitled to other payments based on our future
earnings which, if realized, will result in additional purchase price,
goodwill and an increase in associated amortization expense. USAi has agreed
to pay, on our behalf, the first $130.0 million of these contingent payments
(other than the $12.5 million payment we expect to make for the fourth
quarter of 1999 for which we had accrued a liability at September 30, 1999).
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Certain Transactions."
(4) During 1994 and as of January 1, 1997, our predecessor business elected to
be taxed as a subchapter S corporation and as a result, did not pay federal
income taxes. As of May 11, 1999, in connection with our acquisition of our
predecessor business, we elected to be taxed as a subchapter C corporation.
Pro forma tax information reflects net income calculated as if we had been
taxed as a subchapter C corporation for 1998 through May 10, 1999.
(5) Reflects the percentage of revenues earned from hotel room bookings
generated through our websites or our affiliated websites.
(6) EBITDA is defined as operating profit before depreciation and amortization
of goodwill. Prior to the acquisition, EBITDA reflects officers'
distributions and non-recurring acquisition related costs. EBITDA is
presented in this prospectus because we believe it is a widely accepted
valuation indicator for companies in our industry. EBITDA should not be
considered in isolation or as a substitute for measures of financial
performance or liquidity prepared in accordance with generally accepted
accounting principles. EBITDA may not be comparable to calculations of
similarly titled measures presented by other companies. Depreciation expense
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998, the nine
months ended September 30, 1998, the period January 1 to May 10, 1999 and
the period May 11 to September 30, 1999 was $20, $26, $53, $84, $232, $75,
$119 and $184, respectively.
(7) As of September 30, 1999, we reflect a $30.0 million current liability
related to additional consideration in connection with the acquisition of
our predecessor business. Of that amount, $12.5 million was funded by a
capital contribution from USAi in November 1999.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The following unaudited pro forma combined condensed statements of
operations have been prepared to give effect to the following capital
transactions that will occur in connection with this offering:
(1) the acquisition of substantially all the assets of our predecessor
business, which was accounted for under the purchase method of
accounting;
(2) the issuance of 4,899,900 shares of our class A common stock to TMF,
Inc. and HRN Marketing Corp. immediately prior to the closing of this
offering;
(3) the issuance of our class A common stock in this offering, assuming no
exercise of the overallotment option; and
(4) the recapitalization of our capital stock.
The pro forma combined condensed statements of operations reflect some
assumptions regarding these transactions and the acquisition and are based on
the historical statement of operations of our company and the historical
combined statements of operations of our predecessor business. The combined
condensed statements of operations, including the notes accompanying them, are
qualified in their entirety by reference to, and should be read in conjunction
with, the audited and unaudited combined financial statements, including the
notes accompanying them, of our predecessor business, and the financial
statements, including the notes accompanying them, of our company, all of which
are included in this prospectus.
The pro forma combined condensed statement of operations for the nine months
ended September 30, 1999 reflects the unaudited combined statement of operations
of our predecessor business for the period January 1 to May 10, 1999 and the
unaudited statement of operations of our company for the period May 11 to
September 30, 1999, including the pro forma effects of the acquisition referred
to in item (1) above and the capital transactions referred to in items (2)
through (4) above, that will occur in connection with this offering as if such
transactions had occurred as of January 1, 1998.
The pro forma combined condensed statement of operations for the year ended
December 31, 1998 reflects the audited combined statement of operations of our
predecessor business for the year ended December 31, 1998, including the pro
forma effects of the acquisition referred to in item (1) above and the capital
transactions referred to in items (2) through (4) above, that will occur in
connection with this offering as if such transactions had occurred as of
January 1, 1998.
We are in the process of evaluating the fair value of assets acquired and
liabilities assumed in the acquisition in order to make a final allocation of
the excess purchase price, including allocation to intangibles other than
goodwill. Accordingly, the purchase accounting information included in this
prospectus is preliminary.
The pro forma combined condensed statements of operations are presented for
illustrative purposes only. They are not necessarily indicative of the results
of operations which actually would have been reported had these transactions
occurred as of January 1, 1998, nor are they necessarily indicative of our
future financial results of operations.
29
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
------------ ------------------
JANUARY 1 TO MAY 11 TO PRO FORMA PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, 1999 MAY 10, 1999 SEPTEMBER 30, 1999 ADJUSTMENTS COMBINED
- ------------------------------------ ------------ ------------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................................... $37,701 $70,670 $ 108,371
Operating costs and expenses:
Cost of sales.................................. 26,538 51,724 78,262
Selling, general and administrative............ 5,669 8,969 $ 159 (1) 14,797
Non-recurring acquisition related costs........ 7,357 -- (7,357)(2) --
Amortization of goodwill....................... -- 7,834 7,189 (3) 15,023
------- ------- ------- -----------
Total operating costs and expenses............... 39,564 68,527 (9) 108,082
------- ------- ------- -----------
Operating profit (loss).......................... (1,863) 2,143 9 289
Interest and other, net.......................... 429 754 (84)(4) 1,099
Gain on sale of securities....................... 471 -- -- 471
------- ------- ------- -----------
900 754 (84) 1,570
------- ------- ------- -----------
Earnings (loss) before income taxes.............. (963) 2,897 (75) 1,859
Income tax benefit (expense)..................... -- (1,072) 381 (5) (691)
------- ------- ------- -----------
Net earnings (loss).............................. $ (963) $ 1,825 $ 306 $ 1,168
======= ======= ======= ===========
Basic and diluted earnings per share............. $ 0.02
===========
Basic and diluted weighted average shares
outstanding(6)................................. 54,399,000
===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE MONTHS ENDED DECEMBER 31, 1998 PREDECESSOR ADJUSTMENTS COMBINED
- ------------------------------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net revenues................................................ $66,472 $ 66,472
Operating costs and expenses:
Cost of sales............................................. 45,818 45,818
Selling, general and administrative....................... 9,770 $ 250 (1) 10,020
Officers' distributions................................... 10,126 (10,126)(1) --
Amortization of goodwill.................................. -- 20,031 (3) 20,031
------- -------- -----------
Total operating costs and expenses.......................... 65,714 10,155 75,869
------- -------- -----------
Operating profit (loss)..................................... 758 (10,155) (9,397)
Interest and other, net..................................... 911 (237)(4) 674
Gain on sale of securities.................................. 74 -- 74
------- -------- -----------
985 (237) 748
------- -------- -----------
Earnings (loss) before income taxes......................... 1,743 (10,392) (8,649)
Income tax benefit (expense)................................ (5) 5 (5) --
------- -------- -----------
Net earnings (loss)......................................... $ 1,738 $(10,387) $ (8,649)
======= ======== ===========
Basic and diluted loss per share............................ $ (0.16)
===========
Basic and diluted weighted average shares
outstanding(6)............................................ 54,399,000
===========
</TABLE>
(NOTES FOLLOW)
30
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(in thousands, except share data)
(1) Our predecessor business distributed substantially all its earnings before
taxes to its officers and recorded the distribution as expense. We have new
compensation arrangements with our officers and the expense related to those
arrangements is included in selling, general and administrative costs. The
pro forma information reflects the elimination of the historical officers'
distributions and the new compensation arrangements with our officers.
The following table presents historical compensation expense, the amount of
compensation expense that would have been incurred had the new compensation
arrangements been in place and the net amount which represents the pro forma
adjustment.
<TABLE>
<CAPTION>
PERIOD
-------------------------------
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- -------------
<S> <C> <C>
Historical compensation................................. $10,126 $ 29
Compensation under new arrangements..................... 250 188
------- -----
Net pro forma income (expense) adjustment............. $ 9,876 $(159)
======= =====
</TABLE>
(2) Represents elimination of discretionary bonuses of $7.2 million paid to its
employees (other than Messrs. Litman and Diener) and professional and
advisory fees of $0.2 million related directly to the acquisition.
(3) Reflects additional amortization expense resulting from the increase in
goodwill due to the acquisition of substantially all of the assets and
assumption of substantially all of the liabilities of our predecessor
business. The determination of the purchase price and the preliminary
allocation of the excess purchase price over net liabilities assumed is set
forth below:
<TABLE>
<S> <C>
Promissory note........................................... $150,000
Initial contingent payments............................... 50,000
Working capital adjustment................................ (798)
Transaction costs......................................... 611
--------
199,813
Plus: net liabilities assumed............................. 495
--------
Amount preliminarily allocated to goodwill................ $200,308
========
</TABLE>
The purchase price was $149.2 million, net of a working capital adjustment
of $0.8 million based on the specified level of working capital agreed to in
the asset purchase agreement, plus contingent payments based on our
operating performance during (a) the four fiscal quarters for the year ended
December 31, 1999 and (b) the twelve month periods ended March 31, 2000,
2001 and 2002. Through November 4, 1999, we have paid a total of
$37.5 million for the amounts due for 1999. Our management has determined
that, based on our operating performance, the remaining $12.5 million of the
1999 contingent payment is likely to be due to TMF, Inc. and HRN Marketing
Corp. and we have accrued a $12.5 million liability for that payment.
USAi has agreed to pay, on our behalf, the first $130.0 million of these
payments (other than the $12.5 million payment we expect to make in the
fourth quarter of 1999 for which we had accrued a liability at
September 30, 1999). See "Certain Transactions." The pro forma information
does not
31
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share data)
reflect the incremental amount of goodwill amortization that will occur from
the payment of any additional purchase price by us or by USAi.
We also are required to issue to TMF, Inc. and HRN Marketing Corp. the
number of shares of our class A common stock equal to approximately 10% of
the aggregate value of the equity of our company immediately prior to the
closing of this offering. See "Certain Transactions."
(4) Represents incremental interest expense at 4.75% on the promissory note of
$5.0 million issued in connection with the acquisition.
(5) Represents the income tax effect of the pro forma adjustments related to the
acquisition of our predecessor business.
(6) Shares outstanding reflect all 44,099,100 shares of our class B common stock
owned by USAi; 4,899,900 shares of our class A common stock issued to TMF,
Inc. and HRN Marketing Corp. immediately prior to the closing of this
offering; and 5,400,000 shares of our class A common stock to be issued in
this offering, assuming no exercise of the overallotment option.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF OUR COMPANY SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES ELSEWHERE IN THIS PROSPECTUS AND BEGINNING ON
PAGE F-1. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY
DIFFER MATERIALLY FROM THOSE DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS DUE
TO A NUMBER OF FACTORS. YOU SHOULD READ THE INFORMATION IN THE SECTIONS ENTITLED
"RISK FACTORS" AND "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR
INFORMATION ABOUT OUR PRESENTATION OF FORWARD-LOOKING INFORMATION.
OVERVIEW
We contract with hotels in advance for volume purchases and guaranteed
availability of hotel rooms at wholesale prices and resell these rooms to
consumers through our websites, affiliated websites and our toll-free call
center. At September 30, 1999, we had room supply agreements with approximately
1,200 hotels in 40 major markets in North America and Western Europe.
We began booking hotel rooms in six markets in December 1991. We introduced
service in four additional markets in January 1993 and three more markets in
December 1994. During 1995, we entered into our first Internet marketing
arrangement through an affiliation with a third party. In December 1996, we
introduced service in Las Vegas. In 1997, we implemented our first proprietary
website and started service in the Atlanta, Reno and Lake Tahoe markets. In
early 1998, our website was fully automated, and by mid-1998, we implemented our
strategy of pursuing affiliate relationships with Internet search engines and
travel-related websites. We also entered into ten new markets in 1998. As of
September 30, 1999, we have entered another twelve markets. We typically have
expanded our relationships with new hotels and increased our room allotments and
bookings with existing hotels in each market over time as we have demonstrated
our ability to fill rooms.
We service our customer base through the Internet and our call center
operations. Although the Internet is generating an increasing proportion of our
business, both operations have experienced significant growth. Our Internet
generated sales accounted for 21%, 44% and 78% of our sales in 1997, 1998 and
the nine months ended September 30, 1999, respectively.
We bill a customer's credit card in full when a reservation is booked and
pay the hotel after a guest has departed. We record prepaid bookings as deferred
revenue until check-out, at which time revenue is recognized. Accordingly,
prepaid bookings represent payments received for revenue to be recognized in the
future. We also impose a $50 change/cancellation fee that is recorded as revenue
upon change/cancellation of a reservation. Because our customers pay us when a
reservation is booked, charged or cancelled and we do not pay a hotel until
after a guest has departed, we are able to operate with limited or even negative
working capital.
Cost of sales includes room rates contracted for or purchased by us as well
as commissions paid to affiliates and travel agents. We contract with hotels in
advance for volume purchases and guaranteed availability at discounted rates.
Although we contract in advance for volume room commitments, our hotel supply
contracts often allow us to return unsold rooms without penalty within a
specified period of time. Nonetheless, we are responsible for the cost of rooms
cancelled by customers when we can no longer return the room to the hotel. We
have developed proprietary revenue management and reservations systems software
that is integrated with our websites and call center operations. These systems
and software enable us to accurately monitor our room inventory. As a result,
our gross margins are affected by a number of different factors, including the
mix of rooms sold during peak and off-peak periods, the mix of rooms sold
directly by us or through our affiliates or travel agents, the mix of rooms sold
in various cities and the amount of commissions paid to affiliates and travel
agents. We typically realize higher gross margins on rooms sold during peak
periods and rooms sold directly by us (rather than by travel agents or Internet
affiliates).
33
<PAGE>
Operating expenses include selling, general and administrative costs
associated with payroll and related costs, telephone line charges, credit card
processing fees, advertising and promotion costs, depreciation and other
miscellaneous expenses. As our Internet-related bookings have increased as a
percentage of our total revenues, our selling, general and administrative costs
have declined as a percentage of revenues due to lower telephone and payroll
costs associated with this sales growth. Prior to the acquisition of our
predecessor business, we did not pay fixed salaries to our two senior executive
officers, but distributed substantially all pre-tax profits to our officers and
recorded these amounts as additional operating expense. As a result of the
acquisition, officers' distributions were eliminated and we entered into new
compensation arrangements with our officers.
Other income relates mainly to interest and dividends earned on marketable
securities in which we invest working capital generated by our operations. We
have been able to generate positive cash flows from operations as a result of
our billing practices and hotel supply arrangements. Our ability to generate
positive cash flow from operations has allowed us to generate significant
interest and dividend income from investment-related activities. Related
investment income has increased in each of the past five years along with free
cash flow from operations.
On May 10, 1999, we completed our acquisition of our predecessor business
and as of May 11, 1999, we changed our tax status from a subchapter S
corporation to a subchapter C corporation. At the closing of the acquisition, we
paid approximately $162.5 million to TMF, Inc. and HRN Marketing Corp., which
consisted of a $150.0 million promissory note and a $12.5 million payment for
attainment of financial targets during our predecessor business' first fiscal
quarter of 1999. Approximately $145.0 million of the principal amount of the
promissory note was paid on the day after the closing and the final
$5.0 million payment is due on January 30, 2000. Following the closing, TMF,
Inc. and HRN Marketing Corp. paid $0.8 million to us as a working capital
adjustment to the purchase price based on the specified level of working capital
agreed to in the asset purchase agreement. Under the purchase agreement, we are
required to pay TMF, Inc. and HRN Marketing Corp. up to $12.5 million at the end
of each of the three remaining fiscal quarters in 1999 if we meet specified
financial targets in each of those quarters. As a result, we have paid a total
of $25.0 million to TMF, Inc. and HRN Marketing Corp. for our attainment of
specified financial targets during our fiscal quarters ended June 30, 1999 and
September 30, 1999 and we have accrued for a $12.5 million payment that we
expect to make in our final fiscal quarter of 1999.
TMF, Inc. and HRN Marketing Corp. are entitled to contingent payments over
the next three years. The amount of these contingent payments will depend on our
performance for the twelve-month periods ending March 31, 2000, 2001 and 2002,
respectively. These additional payments will be based upon the greater of:
- a multiple of the total growth in our adjusted earnings before taxes from
the previous year; or
- a multiple of the total growth in our adjusted gross profit from the
previous year.
In addition to being a guarantor of our obligations, USAi has agreed to pay,
on our behalf, the first $130.0 million of these contingent payments. See
"--Financial position, liquidity and capital resources," "Risk
Factors--Contingent payments may create a conflict of interest among us, our
management and USAi" and "Certain Transactions."
For the period May 11, 1999 to September 30, 1999, the acquisition resulted
in a significant increase in amortization expense related to the resulting
goodwill, which is being amortized over ten years, and a significant decrease in
operating costs related to the elimination of officers' distributions. Any
contingent purchase price obligations, whether paid by us or by USAi, will
increase goodwill by the same amount and result in an increase in related
amortization expense and, in the event we incur any indebtedness to finance such
payment, interest expense. Any such additional goodwill will be recorded when
the amount becomes reasonably estimable. Because the performance targets are
based on a fiscal year ending March 31, it is expected that such amounts will
not be
34
<PAGE>
reasonably estimable until approximately March 31 of each of 2000, 2001 and
2002, as of which date they will be recorded. Amortization of any increase would
begin in the subsequent quarter.
To enhance comparability, the discussion of consolidated results of
operations is supplemented, where appropriate, with separate pro forma financial
information that gives effect to the acquisition as if it had occurred at the
beginning of the respective periods presented.
The pro forma information is not necessarily indicative of the revenues and
cost of sales, which actually would have been reported had the acquisition
occurred at the beginning of the respective periods, nor is it necessarily
indicative of future results.
RESULTS OF OPERATIONS
The following table presents results of operations data for our company and
our predecessor business as well as pro forma operations data as a percentage of
total net revenue for the periods presented. Some columns may not add due to
rounding differences.
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR REGISTRANT
------------------------------ --------------------- ----------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------------------------------ ------------- ---------------------------------- -------------
NINE PERIOD
MONTHS JANUARY 1 PERIOD NINE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED TO MAY 11 TO ENDED
------------------------------ DECEMBER 31, SEPT. 30, MAY 10, SEPT. 30, SEPT. 30,
1996 1997 1998 1998 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs and
expenses:
Cost of sales............. 68.8% 67.0% 68.9% 68.9% 69.7% 70.4% 73.2% 72.2%
Selling, general and
administrative.......... 16.6% 16.6% 14.7% 15.1% 16.1% 15.0% 12.7% 13.7%
Officers' distributions... 15.5% 17.7% 15.2% -- 4.5% -- -- --
Non-recurring acquisition
related costs........... -- -- -- -- -- 19.5% -- --
Amortization of
goodwill................ -- -- -- 30.1% -- -- 11.1% 13.9%
------ ------ ------ ------ ------ ------ ------ ------
Total operating costs
and expenses.......... 100.9% 101.3% 98.9% 114.1% 90.2% 104.9% 97.0% 99.7%
------ ------ ------ ------ ------ ------ ------ ------
Operating profit
(loss)................ (0.9%) (1.3%) 1.1% (14.1%) 9.8% (4.9%) 3.0% 0.3%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
Our comparison of interim results compares the nine months ended
September 30, 1998 to the sum of the periods January 1 to May 10, 1999 and
May 11 to September 30, 1999 for revenues, cost of sales and selling, general
and administrative costs, as we believe this is the most meaningful
presentation.
Revenues for the nine months ended September 30, 1999 increased by
$67.6 million, or 165.7%, to $108.4 million compared to $40.8 million for the
nine months ended September 30, 1998. The increase resulted from expansion of
affiliate marketing programs, an increase in the number of hotels for existing
cities and expansion into new cities. Internet generated sales for the nine
months ended September 30, 1999 increased by $68.3 million, or 416.5%, to
$84.7 million compared to $16.4 million for the nine months ended September 30,
1998. As a percentage of total revenues, Internet generated sales increased to
78% for the nine months ended September 30, 1999 from 40% for the nine months
ended September 30, 1998. Non-Internet generated and other sales for the nine
months ended September 30, 1999 decreased by $0.7 million, or 2.9%, to
$23.7 million compared to $24.4 million for the nine months ended September 30,
1998.
Cost of sales for the nine months ended September 30, 1999 increased by
$49.8 million, or 175.4%, to $78.2 million compared to $28.4 million for the
nine months ended September 30, 1998. As a percentage of total revenues, cost of
sales increased to 72.2% for the nine months ended September 30, 1999 from 69.7%
for the nine months ended September 30, 1998. The increase in cost of sales is
35
<PAGE>
primarily due to increased percentage of revenue attributable to affiliate and
travel agent sales (for which we pay commissions), the use of revenue management
techniques to maximize revenues, increased credit card charge backs and
increased competition.
Selling, general and administrative costs for the nine months ended
September 30, 1999 increased by $8.0 million, or 122.5%, to $14.6 million
compared to $6.6 million for the nine months ended September 30, 1998, primarily
as a result of growth in staffing levels and systems to support increased
operations. As a percentage of net revenues, selling, general and administrative
costs decreased to 13.5% for the nine months ended September 30, 1999 from 16.1%
for the nine months ended September 30, 1998 as telephone and payroll costs
decreased as a percentage of net revenues due to an increase in Internet-related
bookings as a percentage of total revenue.
We incurred officers' distributions of $1.8 million for the nine months
ended September 30, 1998, as substantially all profits were distributed to the
officers as officers' distributions and recorded as expense. Since May 11, 1999,
no expense related to officers' distributions was incurred. As a result of the
acquisition of our predecessor business, there will be a significant decrease in
operating costs related to the elimination of officers' distributions in future
periods.
Our predecessor business paid discretionary bonuses of $7.2 million to its
employees (other than Messrs. Litman and Diener) and incurred $0.2 million of
professional and advisory fees related directly to the acquisiton.
On a pro forma basis, operating profit (loss) for the nine months ended
September 30, 1999 increased by $9.7 million to $0.3 million compared to a loss
of $9.4 million for the nine months ended September 30, 1998. Pro forma
operating loss for the nine months ended September 30, 1998 of $9.4 million is
calculated as historical operating profit ($4.0 million) plus pro forma
adjustments for goodwill amortization expense ($15.0 million), officers' salary
expense ($0.2 million) and the elimination of historical officers' distributions
($1.8 million). Pro forma results reflect the new compensation arrangements with
our officers, which are significantly lower than historical amounts incurred and
recorded by our predecessor business, as substantially all of our predecessor
business' earnings before taxes were distributed to its officers. Pro forma
goodwill amortization for this period is $15.0 million.
Historical amortization expense of $7.8 million in the period May 11 to
September 30, 1999 relates to goodwill of $200.3 million from the acquisition of
our predecessor business which is being amortized over ten years.
Other income relates mainly to interest and dividends earned on marketable
securities. Other income for the nine months ended September 30, 1999 increased
by $1.2 million to $1.7 million compared to $0.5 million for the nine months
ended September 30, 1998 due to the sale of securities at the time of the
acquisition and an increase in cash flow from operations.
Our effective tax rate for the period May 11, 1999 to September 30, 1999 is
37%, which reflects the federal and state income taxes. In 1998 and in the
period from January 1 to May 10, 1999, we were taxed as a subchapter S
corporation and, accordingly, the tax liability was incurred by our
shareholders.
TWELVE MONTHS ENDED DECEMBER 31, 1998 VS. TWELVE MONTHS ENDED DECEMBER 31, 1997
Revenues for the twelve months ended December 31, 1998 increased by
$31.7 million, or 91.2%, to $66.5 million compared to $34.8 million for the
twelve months ended December 31, 1997. The increase resulted primarily from
higher revenues generated from our websites and expansion into new markets. We
introduced our fully automated website in January 1998 and implemented our
strategy of pursuing affiliate relationships with Internet search engines and
travel related websites during the second quarter of 1998. Internet generated
sales for the twelve months ended December 31, 1998 increased by $21.6 million,
or 299.6%, to $28.8 million compared to $7.2 million for the twelve months ended
December 31, 1997. As a percentage of total revenues, Internet generated sales
increased to approximately 44% for the twelve months ended December 31, 1998
from approximately 21% for the twelve months ended December 31, 1997.
Non-Internet generated and other sales for the twelve
36
<PAGE>
months ended December 31, 1998 increased by $10.1 million, or 36.6%, to
$37.7 million compared to $27.6 million for the twelve months ended
December 31, 1997. The increase in non-Internet generated sales resulted from
repeat and referral customers and increased marketing programs with travel
agents and membership groups. In addition, we entered the Atlanta, Reno and Lake
Tahoe markets in December 1997 and realized the full impact of these markets in
1998.
Cost of sales for the twelve months ended December 31, 1998 increased by
$22.5 million, or 96.8%, to $45.8 million compared to $23.3 million for the
twelve months ended December 31, 1997. As a percentage of total revenues, cost
of sales increased to 68.9% for the twelve months ended December 31, 1998 from
67.0% for the twelve months ended December 31, 1997. The increase in cost of
sales is primarily due to increased commissions paid to affiliates and travel
agents (for which we pay commissions), the use of revenue management techniques
to maximize revenue and increased competition.
Selling, general and administrative costs for the twelve months ended
December 31, 1998 increased by $4.0 million, or 69.0%, to $9.8 million compared
to $5.8 million for the twelve months ended December 31, 1997. As a percentage
of net revenues, selling, general and administrative costs decreased to 14.7%
for the twelve months ended December 31, 1998 from 16.6% for the twelve months
ended December 31, 1997 as Internet-related bookings increased and associated
telephone and payroll costs decreased as a percentage of revenue.
Officers' distributions for the twelve months ended December 31, 1998
increased by $4.0 million to $10.1 million compared to $6.1 million for the
twelve months ended December 31, 1997 due to higher profits, as substantially
all profits were distributed as salary and distribution to the officers and
recorded as expense.
On a pro forma basis, operating loss for the twelve months ended
December 31, 1998 decreased by $5.2 million, or 35.6%, to a loss of
$9.4 million compared to a loss of $14.6 million for the twelve months ended
December 31, 1997. The pro forma operating loss for the year ended December 31,
1997 of $14.6 million is calculated as historical operating loss ($0.5 million)
plus pro forma adjustments for goodwill amortization expense ($20.0 million),
officers' salary expense ($0.3 million) and the elimination of historical
officers' distributions ($6.2 million). Pro forma results reflect the new
compensation arrangements with our officers, which are significantly lower than
historical amounts incurred and recorded by our predecessor business, as
substantially all of our predecessor business' earnings before taxes were
distributed to its officers. Pro forma goodwill amortization for this period is
$20.0 million.
Other income relates mainly to interest and dividends earned on marketable
securities. Investment income for the twelve months ended December 31, 1998
increased by $0.5 million, or 114.1%, to $1.0 million compared to $0.5 million
for the twelve months ended December 31, 1997 due to increased cash flow from
operations.
TWELVE MONTHS ENDED DECEMBER 31, 1997 VS. TWELVE MONTHS ENDED DECEMBER 31, 1996
Revenues for the twelve months ended December 31, 1997 increased by
$11.5 million, or 49.3%, to $34.8 million compared to $23.3 million for the
twelve months ended December 31, 1996, primarily due to increases in Internet
generated revenues and expansion in the Las Vegas market which began in
December 1996. Las Vegas bookings accounted for approximately $2.4 million of
revenues during 1997. In addition, we were able to obtain and sell a higher
number of rooms in many of our existing markets as a result of our growing
customer base. Internet generated sales for the twelve months ended
December 31, 1997 increased by $5.9 million, or 443.5%, to $7.2 million compared
to $1.3 million for the twelve months ended December 31, 1996. As a percentage
of total revenues, Internet generated sales increased to approximately 21% for
the twelve months ended December 31, 1997 compared to approximately 6% for the
twelve months ended December 31, 1996. Non-Internet generated and other sales
for the twelve months ended December 31, 1997 increased by $5.6 million, or
25.5%, to $27.6 million compared to $22.0 million for the twelve months ended
December 31, 1996.
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Cost of sales for the twelve months ended December 31, 1997 increased by
$7.3 million, or 45.5%, to $23.3 million compared to $16.0 million for the
twelve months ended December 31, 1996, primarily due to higher bookings recorded
in 1997. As a percentage of total revenues, cost of sales decreased to 67.0% in
the twelve months ended December 31, 1997 from 68.8% in the twelve months ended
December 31, 1996. The increase in cost of sales was primarily due to higher
sales volume.
Selling, general and administrative costs for the twelve months ended
December 31, 1997 increased by $1.9 million, or 49.9%, to $5.8 million compared
to $3.9 million for the twelve months ended December 31, 1996 due to hiring of
additional staff to support operations, start-up costs associated with the
Internet operations and variable costs associated with higher volumes of
bookings. As a percentage of net revenues, selling, general and administrative
costs were 16.6% in each period.
Officers' distributions for the twelve months ended December 31, 1997
increased by $2.6 million to $6.2 million compared to $3.6 million for the
twelve months ended December 31, 1996 due to higher profits, as substantially
all profits were distributed to the officers and recorded as expense.
Other income relates mainly to interest and dividends earned on marketable
securities. Investment income for the twelve months ended December 31, 1997
increased by $0.2 million, or 40.2%, to $0.5 million compared to $0.3 million
for the period ended December 31, 1996 due to increased cash flow from
operations.
SELECTED QUARTERLY OPERATING RESULTS AND SEASONALITY
The following table sets forth certain historical statements of operations
data of our company and our predecessor business for the seven quarters ended
September 30, 1999. This information has been derived from unaudited historical
financial records of our company and our predecessor business. In our
management's opinion, the unaudited historical information has been prepared on
the same basis as the annual financial statements of our predecessor business
and includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation for the quarters presented. This information
should be read in conjunction with the financial statements of our company and
our predecessor business and the accompanying notes included elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
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<TABLE>
<CAPTION>
REGISTRANT (UNAUDITED)
PREDECESSOR (UNAUDITED) ---------------------------
------------------------------------------------------------------------ THREE
PERIOD MONTHS
THREE MONTHS ENDED ------------------------ ENDED
----------------------------------------------------------- APRIL 1 MAY 11 -------------
MARCH 31, JUNE 30, SEPTEMBER 30, DEC. 31, MARCH 31, TO MAY 10, TO JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........... $9,051 $14,281 $17,462 $25,678 $22,921 $14,780 $23,018 $47,652
Operating costs and
expenses:
Cost of sales........ 6,100 10,048 12,268 17,402 15,852 10,686 16,774 34,950
Selling, general and
administrative..... 1,650 2,410 2,520 3,190 3,657 2,012 2,580 6,389
Officers'
distributions...... 556 482 780 8,308 -- -- -- --
Non-recurring
acquisition related
costs.............. -- -- -- -- -- 7,357 -- --
Amortization of
goodwill........... -- -- -- -- -- -- 2,809 5,025
------ ------- ------- ------- ------- ------- ------- -------
Total operating
costs and
expenses......... 8,306 12,940 15,568 28,900 19,509 20,055 22,163 46,364
------ ------- ------- ------- ------- ------- ------- -------
Operating profit
(loss)........... 745 1,341 1,894 (3,222) 3,412 (5,275) 855 1,288
Other income (expense):
Interest and other,
net................ 99 166 211 435 243 186 172 582
Gain on sale of
securities......... -- -- -- 74 -- 471 -- --
------ ------- ------- ------- ------- ------- ------- -------
99 166 211 509 243 657 172 582
Earnings (loss) before
income taxes......... 844 1,507 2,105 (2,713) 3,655 (4,618) 1,027 1,870
Income tax expense..... -- -- -- 5 -- -- 380 692
------ ------- ------- ------- ------- ------- ------- -------
Net earnings
(loss)............. $ 844 $ 1,507 $ 2,105 $(2,718) $ 3,655 $(4,618) $ 647 $ 1,178
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
SEASONALITY
We have historically experienced seasonal fluctuations in our operating
results, with the fourth quarter contributing the highest portion of our annual
revenue due to the higher volume of travelers during the fall shopping and
holiday season. Furthermore, the travel industry is subject to seasonal
fluctuations dependent upon business and leisure travel patterns. If seasonality
in the travel industry causes quarterly fluctuations, there could be a material
adverse effect on our business and the value of your stock. See "Risk
Factors--Our operating results fluctuate and these fluctuations can be
unpredictable. Any future fluctuations in our operating results may cause our
stock price to decline" for a more detailed explanation of how seasonal
fluctuations might affect our operating results.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
At the closing of the acquisition, we paid approximately $162.5 million to
TMF, Inc. and HRN Marketing Corp. The payment consisted of the $150.0 million
purchase price, which was paid in the form of a promissory note, and a
$12.5 million payment for the attainment of financial targets during our
predecessor business' first fiscal quarter of 1999. On the day after the
closing, $145.0 million of the principal amount of the promissory note was paid
and the final $5.0 million payment is due on January 30, 2000. The purchase
price was subject to a working capital adjustment and TMF, Inc. and
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HRN Marketing Corp. paid us approximately $0.8 million following the closing as
a working capital adjustment to the purchase price based on the specified level
of working capital agreed to in the asset purchase agreement. We have paid an
additional $25.0 million to TMF, Inc. and HRN Marketing Corp. for our attainment
of specified financial targets during our fiscal quarters ended June 30, 1999
and September 30, 1999. We have accrued for a $12.5 million payment that we
expect to make for our final fiscal quarter of 1999.
In addition, TMF, Inc. and HRN Marketing Corp. are entitled to contingent
payments over the next three years. The amount of these contingent payments will
depend on our performance for the twelve-month periods ending March 31, 2000,
2001 and 2002, respectively. These additional payments will be based upon the
greater of:
- a multiple of the total growth in our adjusted earnings before taxes from
the previous year; or
- a multiple of the total growth in our adjusted gross profit from the
previous year.
Following the twelve-month period ending March 31, 2000, the sellers are
entitled to payment from us equal to the greater of:
- 2.5 times the total growth in our adjusted earnings from the previous
twelve-month period; or
- 1.44 times the total growth in our adjusted gross profit from the previous
twelve-month period (provided this growth in adjusted gross profit exceeds
50%).
Following the twelve-month period ending March 31, 2001, TMF, Inc. and HRN
Marketing Corp. are entitled to a payment from us equal to the greater of:
- two times the total growth in our adjusted earnings from the previous
twelve-month period; or
- 1.18 times the total growth in our adjusted gross profit from the previous
twelve-month period (provided this growth in adjusted gross profit exceeds
35%).
Following the twelve-month period ending March 31, 2002, the sellers are
entitled to a payment from us equal to the greater of:
- 1.5 times the total growth in our adjusted earnings from the previous
twelve-month period; or
- 0.87 times the growth in our adjusted gross profit from the previous
twelve-month period (provided this growth in adjusted gross profit exceeds
20%).
Under an assumption agreement, USAi has agreed to pay, on our behalf, the
first $130.0 million of the contingent payments referred to in this paragraph.
See "Risk Factors--Contingent payments may have an adverse impact on our future
operating results" and "Certain Transactions."
Net cash provided by operating activities was $12.8 million, $17.2 million
and $23.2 million for the nine months ended September 30, 1998, the period
January 1 to May 10, 1999 and the period May 11 to September 30, 1999,
respectively. Net cash provided by operating activities was $3.0 million,
$0.6 million and $8.8 million for the years ended December 31, 1996, 1997 and
1998, respectively. Net cash provided by operating activities reflects officers'
distributions and non-recurring acquisition related costs. We paid officers'
distributions of $1.8 million, $3.6 million, $6.2 million and $10.1 million in
the nine months ended September 30, 1998 and the years ended December 31, 1996,
1997 and 1998, respectively. During the period January 1 to May 10, 1999, our
predecessor business paid discretionary bonuses of $7.2 million to its employees
and incurred $0.2 million of professional and advisory fees related directly to
the acquisition. We will not incur such amounts in the future, as our
predecessor business distributed substantially all profits to its officers. As
of May 11, 1999, we entered into new compensation arrangements with our officers
and paid discretionary bonuses related to the acquisition. Operating cash flow
is generated based on our practice of billing a customer's credit card in full
when a reservation is booked, and paying the hotel after a guest has departed.
We record prepaid bookings
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as deferred revenue until check-out. Accordingly, to the extent customers do not
cancel their reservations, prepaid bookings represent payments received for
revenue to be recognized in the future. Net cash provided from the increase in
prepaid bookings was $8.1 million, $11.9 million and $4.8 million for the nine
months ended September 30, 1998, the period January 1 to May 10, 1999 and the
period May 11 to September 30, 1999, respectively, and $0.2 million,
$1.8 million and $4.0 million for the years ended December 31, 1996, 1997 and
1998, respectively.
We declared and paid a dividend of $40.0 million to USAi on September 30,
1999.
Cash proceeds from operating activities and available cash were used to
purchase marketable securities (net) of $2.5 million, ($3.2) million and
$0.5 million for the nine months ended September 30, 1998, the period January 1
to May 10, 1999, and the period May 11 to September 30, 1999, respectively. Cash
proceeds were used to purchase marketable securities (net) of $0.3 million,
$0.4 million and $3.6 million for the years ended December 31, 1996, 1997 and
1998, respectively.
Capital expenditures were $0.3 million, $0.2 million and $0.6 million in the
nine months ended September 30, 1998, the period January 1 to May 10, 1999 and
May 11 to September 30, 1999, respectively. Capital expenditures were
$0.1 million, $0.5 million and $0.7 million for the years ended December 31,
1996, 1997 and 1998, respectively. Capital expenditures were primarily used for
computers, furniture, equipment and software.
We anticipate that we will need to invest working capital towards the
development and expansion of our overall operations, including expansion into
new cities and increasing our penetration in existing markets.
Our company generates significant cash flows from operations and cash flows
are expected to increase as revenues increase due to our billing and payment
policies. In our management's opinion, available cash, internally generated
funds and the proceeds of this offering will provide sufficient capital
resources to meet our needs. Additional funds may be necessary in the event of a
business combination, although management has no such plans at this time.
MARKET RELATED RISKS
We currently have no significant floating rate indebtedness, hold no
derivative instruments and do not earn income denominated in foreign currencies.
All of our revenue is recognized in dollars. Accordingly, changes in interest
rates do not generally have a material direct effect on our financial position.
However, to the extent that changes in interest rates and currency exchange
rates affect general economic conditions, we would be affected by such changes.
In addition, we also are subject to some risk from currency fluctuations because
the hotel rooms in foreign markets that we contract to purchase are paid for in
the currency of the country where they are located and are paid for by us in
advance of our reselling the rooms to our customers. As less than 10% of our
revenues are currently derived from hotel accommodations in foreign markets, we
do not believe we have any significant foreign currency exchange risk and as a
result, do not hedge against foreign currency exchange rate changes.
YEAR 2000
The widespread use of computer programs that rely on two-digit dates to
perform computation and decision-making functions may cause computer systems,
including systems and software used by our company and our websites, to
malfunction prior to or in the Year 2000, and may lead to significant business
delays and disruptions in our business and operations in the United States and
internationally. We have completed our plan to minimize the impact of this Year
2000 problem on our operations. The dollar cost of our Year 2000 compliance is
approximately $75,000, substantially all of which has been spent through the
date of this offering.
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In addition to our internal systems, several systems provided by third
parties are required for the operation of our services, any of which may contain
software code that is not Year 2000 compliant. These systems include server
software used to operate our network servers, software controlling routers,
switches and other components of our data network, disk management software used
to control our data disk arrays, firewall, security, monitoring and back-up
software, as well as desktop PC applications software. In most cases, we employ
widely available software applications and other products from leading
third-party vendors, and expect that these vendors will provide any required
upgrades or modifications in a timely fashion. However, any failure of
third-party suppliers to provide Year 2000 compliant versions of the products
used by us could result in a temporary disruption of our services or otherwise
disrupt our operations. Although we have received assurances from many of these
third parties that their products are compliant, we can not assure you that our
suppliers or our third-party suppliers will be Year 2000 compliant at the end of
the millennium. Failure to achieve compliance could result in complete failure
or inaccessibility of our services and could adversely affect our business,
financial condition and results of operations.
Year 2000 compliance problems could also undermine the general
infrastructure necessary to support our operations. For instance, we depend on
third-party Internet service providers for connectivity to the Internet. Any
interruption of service from our Internet service providers could result in a
temporary interruption of our services. Moreover, the effects of Year 2000
compliance deficiencies on the integrity and stability of the Internet are
difficult to predict. A significant disruption in the ability of businesses and
consumers to reliably access the Internet or portions of it would have an
adverse effect on demand for our services and could adversely impact our
business, financial condition and results of operations.
TAX MATTERS
We are included in the consolidated federal income tax return of USAi. We
pay our parent amounts equal to the taxes that we would otherwise have to pay if
we were to file a separate federal tax return. We also are included in certain
state and local tax returns of USAi. We will continue to be included in the
consolidated tax return of USAi until USAi's equity ownership in our company
falls below 80%. Immediately after the offering, excluding the 810,000 shares
issuable upon exercise of the overallotment option, USAi will have an 81.1%
equity ownership in our company.
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<PAGE>
BUSINESS
OVERVIEW
In terms of hotel rooms booked online, we are a leading online consolidator
of hotel accommodations, providing service through various websites and our
toll-free call center. We contract with hotels in advance for volume purchases
at wholesale prices and sell these rooms to consumers, often at significant
discounts to published rates. In addition, these hotel supply relationships
often allow us to offer our customers hotel accommodation alternatives for
otherwise unavailable dates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview".
INDUSTRY BACKGROUND
THE GROWTH OF ONLINE TRAVEL SERVICES. The U.S. travel industry is large and
growing. The Travel Industry Association of America estimates that consumers in
the U.S. spent in excess of $515 billion on business and leisure travel in 1998,
making travel one of the nation's largest industries. Lodging accounts for a
significant share of these travel expenditures. According to Smith Travel
Research, the U.S. lodging industry generated $93 billion in revenues in 1998.
Online sales of travel services have become an important part of the overall
travel industry and have expanded dramatically in recent years due to the
increased acceptance of the Internet by both travel service providers and
consumers. According to a May 1999 study by Jupiter Communications, the U.S.
online travel market has more than doubled from $911 million in 1997 to
$2.2 billion in 1998. Jupiter Communications projects that online travel
bookings will increase from $4.2 billion in 1999 to $16.6 billion in 2003,
representing a compound annual growth rate of 41%. For travel service providers,
the Internet is an efficient distribution channel and offers a medium to reach
more travelers and increase occupancy. The Internet also enables dynamic,
real-time updating of pricing and availability and targeted marketing of last
minute "specials" in order to maximize occupancy and yields. Consumers, on the
other hand, are attracted by the convenience of purchasing travel products and
services via the Internet because it provides an efficient way for customers to
quickly compare travel options and make reservations.
HOTEL RESERVATIONS ON THE INTERNET. Hotel reservations are particularly
well-suited to the Internet and the services of third-party consolidators. The
hotel industry is extremely fragmented. Historically, hotels have relied on
travel agencies and internal sales departments as their primary distribution
channel. These traditional channels have not enabled hotels to maximize capacity
and generally have offered limited assistance to the traveler. In addition, the
central reservation system that hotels and travel agents rely upon often does
not have access to discounted rates or to rooms during otherwise unavailable
dates. Alternative booking methods, such as calling individual hotels or using
publications like guidebooks or yellow pages, are both cumbersome and time
consuming.
According to a May 1999 study by Jupiter Communications, online hotel
bookings totaled $282 million in 1998. In addition, Jupiter Communications
projects that online hotel bookings will increase from $630 million in 1999 to
$4.2 billion in 2003, representing a compound annual growth rate of 60%.
Online consolidators like our company are able to aggregate inventory from
various travel service providers and market this inventory to travelers over the
Internet, often at reduced rates. To the hotel industry, consolidators offer an
efficient distribution platform that improves hotel occupancy levels and helps
maximize overall revenues for hotels. Travel agents use consolidators because
they typically pay commissions quickly and consistently and strengthen their
relationships with their customers by allowing them to provide better customer
service and competitive prices. Travelers enjoy access to the selection of
inventory and generally lower rates that consolidators typically provide. In
addition, consolidators offer both travel agents and travelers with information
about specific services from many different
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travel providers, which is becoming increasingly important as the number of
travel options continues to expand.
OUR COMPETITIVE STRENGTHS
We are a leading online consolidator of hotel accommodations, providing
service through our websites, affiliated websites and our toll-free call center.
We have achieved a leading position, in part, by establishing the competitive
strengths described below.
ESTABLISHED SUPPLY RELATIONSHIPS WITH HOTELS. We have developed supply
relationships with approximately 1,200 hotels. Due to our proven ability to sell
rooms in volume, we are able to secure room inventory during both peak and
off-peak time periods and often are permitted to return unsold rooms without a
penalty within a specified period of time. We believe we have established a
customer base that has made us a reliable distribution channel for hotels. When
featured on our websites, our hotel suppliers also benefit from our extensive
online exposure, which may not be economical for them to replicate on their own.
WIDE VARIETY OF OFFERINGS IN POPULAR DESTINATIONS. We offer accommodations
in 40 major metropolitan markets. In each market, we seek to offer a range of
hotel options at a variety of prices. We are typically able to secure rooms at a
substantial discount from the published rates, which allows us to offer our
customers substantial discounts off quoted hotel room prices, and to provide our
customers with hotel accommodations alternatives for otherwise unavailable
dates. Set forth below are the domestic and international destinations we
currently serve:
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL
- ---------------------------------------------------------------------- ----------------------
<S> <C> <C> <C>
Anaheim Nashville Amsterdam
Atlanta New Orleans Berlin
Atlantic City New York Florence
Baltimore Orlando Frankfurt
Boston Palm Beach London
Chicago Philadelphia Milan
Cleveland Phoenix Paris
Dallas Reno Rome
Denver San Antonio Toronto
Florida Keys San Diego Vancouver
Ft. Lauderdale San Francisco Venice
Houston Seattle
Las Vegas Tahoe
Los Angeles Tampa
Miami Washington D.C.
</TABLE>
Our two most important markets, New York and Las Vegas, represent a
significant portion of our revenues. Although we expect these markets to
continue to represent a significant portion of our revenues in the near term, we
expect the percentage of our revenues represented by New York and Las Vegas to
decline as we expand our presence in both our existing markets and new markets.
EASY TO USE WEBSITES. Through our fully automated websites, customers can
quickly and easily compare price, availability and amenity options, view photos
of accommodations and maps of the relevant area and securely book room
reservations with or without any assistance from our operators. Our
user-friendly websites are designed for intuitive operation and include helpful
guidance to "walk" consumers through each step of booking a hotel reservation
and completing an online transaction. Multiple room options are displayed
simultaneously based on availability for the date(s) requested to assist in
comparison shopping. We do not require customers to pre-register or to provide
detailed
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personal information to use our website, which allows for more convenient access
and reduces customer concerns about online privacy. Our website,
www.180096hotel.com, was one of the Internet sites to be recognized as "Best of
the Web" by U.S. News and World Report Online in December of 1998.
We established our first proprietary website in 1997 and our Internet
generated bookings have accounted for an increasing percentage of our total room
bookings in recent periods. Internet generated bookings accounted for 21%, 44%
and 78% of our total bookings in 1997, 1998 and the nine months ended
September 30, 1999, respectively.
AFFILIATIONS WITH A NUMBER OF INTERNET WEBSITES. We have negotiated
marketing agreements with many of the leading travel-related websites including
Preview Travel, Microsoft's Expedia, Sabre's Travelocity, Pegasus System's
TravelWeb, Cheap Tickets, Yupi.com, GetThere.com and over 1,500 other affiliate
websites. Through these agreements, our websites are prominently featured on and
linked to these affiliated websites on a co-branded or private label basis. In
some instances, our website is positioned as the preferred hotel accommodations
option on our affiliated websites. In addition, some of our affiliates, such as
Preview Travel, are fully integrated with our websites, and as a result, their
customers have direct access to our hotel accommodation offerings. We also are
prominently featured on most of the leading Internet search engines and online
communities, including Ticketmaster Online-City Search, Excite and Infoseek. We
believe our ability to establish such wide-ranging Internet affiliations and
Internet presence has positioned us to capitalize upon the expected growth in
online hotel bookings regardless of where these reservations are originated,
through our websites or through our affiliated websites.
For 1998, 16% of our Internet generated bookings were made through our
online affiliations. For the nine months ended September 30, 1999, 49% of our
Internet generated bookings were made through our online affiliations and no
single affiliate accounted for more than 10% of our revenue.
AFFILIATIONS WITH OTHER PROVIDERS OF TRAVEL SERVICES. We work with a
network of thousands of agencies to ensure awareness of our accommodations and
booking options. We believe travel agencies view us as complementary to their
business. Travel agencies typically book rooms through a central reservation
system, such as Sabre or Galileo, at "rack" rates (the regular non-discounted
published rate), corporate rates (typically 10-15% lower than the rack rate) or
other discount rates. However, the lowest rates offered by some hotels are often
not displayed. In addition, many available rooms do not appear on a central
reservation system if the hotel is predicting maximum capacity. We offer agents
one-stop shopping to check rates, confirm availability, obtain inventory and
promptly receive commission payments. We also offer travel agents access to
accommodations at discounted rates or for otherwise unavailable dates, which
improves their relationship with customers. In 1998, 8% of our bookings were
generated through travel agencies and for the nine months ended September 30,
1999, 3% of our bookings were generated through travel agencies.
We also are affiliated with a number of travel clubs and other membership
groups. Our services are featured as a benefit in many of the major hotel and
travel club programs including Quest, Entertainment and the Texaco Auto/Travel
Club. In addition, we are promoted by a number of prominent membership programs
including GNC, Great Earth, Damark and 24-hour Fitness Centers.
REVENUE MANAGEMENT TECHNIQUES. Unlike companies that book rooms on a
commission basis, we contract with hotels in advance for volume purchases and
guaranteed availability at discounted rates. Although we contract in advance for
volume room commitments, our hotel supply contracts often allow us to return
unsold rooms without penalty within a specified period of time. In addition,
because we contract to purchase hotel rooms in advance, we are able to manage
billing procedures for the rooms we sell and thereby maintain direct
relationships with our customers. We have developed proprietary revenue
management and reservation systems software which assists us in enhancing our
revenues. Our
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inventory tracking system and other software are integrated with our websites
and call center operations and enable us to accurately monitor our room
inventory.
POSITIVE CASH FLOW FROM OPERATIONS. Our operations generate positive cash
flow from operations, even during periods of significant growth. We bill a
customer's credit card in full upon booking of a reservation, which occurs prior
to check-in. Our typical payment terms with hotels are within 30 days of receipt
of invoice, which generally occurs after the customer checks out. As a result of
our payment policies, we generate significant investment income on cash balances
and incur low expenses from collecting accounts receivable. In addition, our
room supply arrangements typically allow us to return unsold inventory without
penalty within specified periods of time.
EXCELLENT CUSTOMER SERVICE. We have invested in technology, personnel and
training to facilitate a high level of customer service. Using our
fully-automated websites, customers can quickly review pricing, availability and
amenities of available inventory, book accommodations and receive instant
confirmation. For customers who prefer to book reservations by telephone, we
maintain a call center staffed by sales agents that are trained and
knowledgeable to answer questions about and review hotel options we offer to our
customers. We monitor call center conversations and hold times to ensure that
our customer service standards are properly maintained.
OUR GROWTH STRATEGY
Our objective is to build upon our position as a leading hotel consolidator
by pursuing the following growth strategies.
INCREASING OUR INTERNET PRESENCE, INCLUDING OUR NUMBER OF INTERNET
AFFILIATES. We intend to continue to establish strategic marketing affiliations
with additional Internet portals, search engines, content providers, communities
and other travel-related websites to capitalize on their brand recognition and
significant customer traffic levels. Although we have established affiliations
with most of the major Internet travel websites and search engines, many of
these affiliations have been operational only for a short time. As existing
affiliations mature and new ones are implemented, we believe that our Internet
traffic will continue to grow.
EXPANDING OUR HOTEL SUPPLY ARRANGEMENTS IN EXISTING MARKETS. We currently
account for only a small portion of the total hotel rooms that are sold in our
existing markets. Our proven ability to fill room commitments and our reputation
for reliable payment has allowed us to steadily increase our room inventory in
existing markets by broadening our hotel base and increasing inventory with our
current hotels. Each year we have been increasing our available room inventory
and revenues in each of our existing markets. We believe that there are
opportunities to expand our service in existing markets.
ENTERING NEW MARKETS. We began offering hotel accommodations in three new
markets in 1997, ten new markets in 1998 and twelve new markets in 1999. We
receive a number of inquiries for other destinations and have identified
numerous cities for future expansion. We plan to enter additional domestic and
international markets in future periods.
INITIATING NEW AFFILIATIONS WITH TRAVEL AGENCIES, TRAVEL AND MEMBERSHIP
CLUBS AND OTHER GROUPS.
We will pursue opportunities to increase our affiliations with travel agents,
travel clubs, membership organizations and other groups. Currently, less than 5%
of our revenue is derived from group and convention bookings. In many of our
markets, these sources account for a significant portion of hotel
accommodations. In addition, we have established affiliations with only a small
percentage of the travel agencies in the United States. Through more aggressive
marketing of our product and service offerings, we plan to further penetrate our
accessibility to these customer groups.
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ENHANCING OUR OFFERING OF PRODUCTS AND SERVICES TO INCLUDE OTHER TRAVEL
RELATED SERVICES. From the date of our inception, we have focused exclusively
on the hotel reservation market. However, there are a number of complementary
travel-related products which we could market to our customers, such as vacation
packages, vacation rentals, time share rentals, apartment rentals, tours,
theater tickets, and travel insurance. While we are committed to continuing our
expertise in the hotel room reservation market, our growing customer base and
affiliations represent an attractive distribution platform for additional
products.
OFFERING PAID ADVERTISING ON OUR WEBSITES. We currently offer limited
third-party advertising on our websites and our online newsletter, but with our
growing popularity, we believe they would be valuable platforms for other travel
service providers, advertisers in our destination cities and other businesses.
We intend to explore these options to increase our advertising revenues.
PURSUING STRATEGIC ACQUISITIONS. We intend to explore opportunities to
acquire other travel-related consolidators and online travel companies that we
believe will allow us to expand our offerings of hotels or other travel-related
products.
LEVERAGING OUR RELATIONSHIP WITH OUR PARENT COMPANY, USAI, AND ITS
AFFILIATES. Our recent acquisition by USAi provides us with access to several
potentially valuable cross-marketing opportunities with other entities also
controlled by USAi, such as the USA Network and the Sci-Fi Channel, Ticketmaster
Online-City Search, USA Broadcasting and Home Shopping Network. In addition, our
relationship with USAi may provide us with valuable expertise and resources that
will assist us in the growth of our business.
OPERATIONS
We service our customer base through the Internet and our call center
operations. Although the Internet is generating an increasing proportion of our
business, both operations have experienced significant growth.
INTERNET OPERATIONS. Our Internet operations have allowed us to expand our
customer base, improve customer service and reduce transactional costs. We offer
hotel accommodations through our www.hoteldiscount.com and www.180096hotel.com
websites and over 1,500 affiliate websites. Our websites are completely
automated and allow customers to compare hotel booking options, price,
availability and amenities and to book, charge and confirm orders within
seconds. Our websites are designed to provide customers with quick, efficient
and flexible service in a manner that facilitates comparison shopping. Our
Internet generated bookings accounted for 21%, 44% and 78% of our total bookings
in 1997, 1998 and the nine months ended September 30, 1999, respectively.
CALL CENTER OPERATIONS. We currently employ approximately 180 people in our
call center in Dallas, Texas. Our toll-free call center handles inbound calls
from our toll-free number (1-800-96-hotel) and hundreds of travel clubs and
affinity groups. On average, our call center receives approximately 6,000 calls
per day and provides customer service for our toll-free number customers, our
Internet customers, and a number of our affiliated travel and membership clubs.
Our highly-trained commissioned call center sales force is equipped to quickly
review a comprehensive list of the hotels and prices in individual markets and
to provide information on location and amenities. Our management continuously
monitors wait times and phone conversations to ensure superior sales technique
and compliance with our policies. Our call center recently began operating
24 hours a day, seven days a week to handle the increase in demand from our
customers. We also have entered into a relationship with Ticketmaster
Online-CitySearch, another USAi subsidiary, to assist us in handling additional
calls from our customers. Our non-Internet generated sales accounted for 79% of
our sales in 1997, 56% in 1998 and 22% for the nine months ended September 30,
1999.
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REVENUE MANAGEMENT TECHNIQUES. We have developed revenue management and
booking software that allows us to monitor available rooms, prices and sales
trends on a real-time basis to maximize revenues and gross margins, to process
transactions quickly and to provide prompt, effective customer service. We have
integrated this software with our websites and call center operations so that
customers always receive current room availability and pricing information. We
are developing enhancements to our software which will enable us to further
automate and enhance our revenue management capabilities.
SUPPLY ARRANGEMENTS
We contract with hotels in advance for volume purchases and guaranteed
availability. We obtain room inventory from approximately 1,200 hotels through
two primary methods: (a) contracting for initial room allotments on a
non-recourse basis, where we have the opportunity to purchase rooms at
predetermined wholesale rates and to return unsold inventory to the hotel within
a specified period of time, and (b) purchasing rooms in advance when we feel
there is a strong likelihood of selling all of the rooms. Most of our wholesale
arrangements allow us to return unsold rooms without penalty. However, most of
our contracts are not exclusive and must be renewed annually. See "Risk
Factors--In the future, if we are unable to obtain arrangements with hotel
suppliers substantially similar to those we currently have, our business may
suffer."
Our proprietary software allows us to continuously update our room
availability and keeps us aware of our supply needs. As a result, we are able to
monitor our room supply and return rooms or request additional rooms as
necessary. We have developed a strong reputation with our hotel suppliers
because we are able to fill a consistently high percentage of our contracted
room allotments.
MARKETING AND SALES
We have achieved our historical growth with only a modest advertising and
marketing budget. We intend to increase our marketing efforts in future periods
to capitalize upon our success and to expand customer awareness by actively
pursuing the following sales and marketing initiatives.
ONLINE MARKETING SOURCES. Our websites, www.hoteldiscount.com and
www.180096hotel.com, are among the most accessed and used hotel booking sites on
the Internet. Our websites also are integrated into most of the leading
travel-related websites on the Internet, and are prominently featured on and
linked to many of the leading Internet search engines and online communities.
Our standard affiliate agreements contain provisions whereby we pay a commission
for bookings originated from that website. In 1997, we began circulating a
weekly online newsletter highlighting available hotels and rates in selected
markets to subscribers. Our subscribers have increased from 30,000 at
December 31, 1997 to over 660,000 at December 9, 1999. We will seek to continue
to expand this number of subscribers as traffic on our websites increases. In
addition, we also purchase online advertising for preferred placement on certain
websites.
TRAVEL AGENCIES, TRAVEL CLUBS AND OTHER MEMBERSHIP ORGANIZATIONS. We
consider travel agencies to be marketing affiliates and, as such, work with a
network of thousands of agencies to ensure awareness of our accommodations and
booking options. We pay a commission to travel agents who book rooms on behalf
of their customers. Commissions are tracked by the International Association of
Travel Agents' numbers that are input directly on our websites or provided to
our call center agents at the time of booking. We are also affiliated with a
variety of travel clubs and membership organizations which promote our company
as a source of hotel accommodations. In addition, we provide hotel accommodation
booking services for a number of membership clubs on a private label basis.
MEDIA PROMOTION. We have developed a significant media network through our
use of television, radio, newspapers and magazines. Our President, Mr. Robert
Diener, is featured regularly on over 100
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radio stations across the country. In addition, our services have been featured
by such media outlets as The New York Times, the Los Angeles Times, USA Today,
The Wall Street Journal and The Chicago Tribune and have been profiled on CNN,
CBS, MSNBC and CNBC.
TECHNOLOGY
We have developed proprietary booking software that automatically updates
room availability and enables us to provide efficient customer service. The
software is integrated with our websites and call center operations and
completes booking, billing and accounting functions within seconds. In addition,
the software reports daily bookings by hotel, city and room type so that
management can monitor room availability. We are continuing to improve our
revenue management capabilities and are currently developing enhancements to our
software which will automatically adjust the presentation of information on our
websites based on booking activity. We expect this enhanced software to become
operational in mid-2000. We also intend to continue to develop or purchase
technology-driven enhancements to our websites and back-office systems in order
to continue to improve our efficiency and profit margins.
Our hardware platform for the Internet consists of an IBM RS 6000 and
Silicon Graphics Internet servers. We maintain our database on an IBM AS model
720 with a RAID disk storage tower and conduct daily backup functions for
off-site storage. We access the Internet backbone via T-1 data communication
lines. Our call center operations are managed by a Lucent Definity G3 Octel
switch. We also maintain backup in the event of power outages. Our systems have
not experienced significant downtime in over four years. We maintain an Internet
firewall to protect our internal systems. All credit card transactions are
processed using encryption technology, including public key cryptology and
secured socket layer technology.
COMPETITION
The online travel services market is new, rapidly evolving, intensely
competitive and has relatively low barriers to entry. We believe that
competition in the online travel services market is based predominantly on:
- price;
- selection and availability of hotel rooms;
- selection of destination markets;
- ease of use of online booking service;
- customer service;
- reliability; and
- travel-related content.
We compete against other consolidators of hotel accommodations, hotels,
travel agencies and other online travel services. Currently, most hotels sell
their services through travel agencies, travel wholesalers or directly to
customers, mainly by telephone. Increasingly, major hotels are offering travel
products and services directly to consumers through their own websites. We
believe that this trend will continue. Hotels and travel agents also may
continue to rely upon central reservations systems. In the online travel
services market, we compete with travel-related websites such as Preview Travel,
Microsoft's Expedia, Sabre's Travelocity, Pegasus System's TravelWeb,
Priceline.com, Travelscape and GetThere.com, among others. Although we currently
have agreements with many of these websites under which our booking engine is
prominently displayed on and integrated into their websites, we cannot assure
you that these affiliations will continue. See "Risk Factors--If we are unable
to maintain our affiliations, or obtain new affiliations, with other travel
service providers, we may lose access to customers and face increased
competition." As the market for online travel services grows, we believe
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that companies already involved in the online travel services industry, as well
as traditional travel suppliers and travel agencies, will increase their efforts
to develop services that compete with our online services. We also face
potential competition from Internet companies not yet in the leisure travel
market and from travel companies not yet operating online. We are unable to
anticipate which other companies are likely to offer services in the future that
will compete with the services we provide.
In addition, many of our current and potential competitors have greater
brand recognition, longer operating histories, larger customer bases and
significantly greater financial, marketing and other resources than us and may
enter into strategic or commercial relationships with larger, more established
and well-financed companies. Some of our competitors may be able to secure
services and products from travel suppliers on more favorable terms, devote
greater resources to marketing and promotional campaigns and devote
substantially more resources to website and systems development than our
company. New technologies and the continued enhancement of existing technologies
also may increase competitive pressures on our company. We cannot assure you
that we will be able to compete successfully against current and future
competitors or address increased competitive pressures. See "Risk Factors--The
travel industry, particularly the online travel services market, is highly
competitive. If we do not compete successfully, we will not be able to attract
customers and to maintain our arrangements with our hotel suppliers."
PROPRIETARY RIGHTS
We regard our domain names and similar intellectual property as critical to
our success. We rely on a combination of laws and contractual restrictions with
our employees, customers, suppliers, affiliates and others to establish and
protect our proprietary rights. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our intellectual property
without authorization. In addition, we cannot assure you that others will not
independently develop substantially similar intellectual property. Although we
are pursuing the registration of our key trademarks in the United States, some
of our trade names are not eligible to receive trademark protection. In
addition, effective trademark protection may not be available or may not be
sought by us in every country in which our products and services are made
available online, including the United States. Our failure to protect our
intellectual property in a meaningful manner could materially adversely affect
our business or result in erosion of our brand name.
From time to time we may be subject to legal proceedings and claims in the
ordinary course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by our
company. In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation,
regardless of outcome or merit, could result in substantial costs and diversion
of management and technical resources, any of which could materially harm our
business. See "Risk Factors--We may not be able to prevent others from using our
domain names, trade names or other intellectual property which may harm our
business and expose us to litigation."
GOVERNMENT REGULATION
Some segments of the travel industry are heavily regulated by the federal
and state governments and foreign governments and, accordingly, some services we
offer are affected by these regulations. All of our services are subject to
federal and state consumer protection laws and regulations prohibiting unfair
and deceptive trade practices. In addition, federal regulations concerning the
display and presentation of information currently applicable to hotel booking
services could be extended to us in the future. These consumer protection laws
could result in substantial compliance costs and could interfere with the
conduct of our business.
Although there are very few laws and regulations directly applicable to the
protections of consumers with respect to Internet commerce, it is possible that
legislation will be enacted in this area
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and could cover such topics as permissible online content and user privacy
(including the collection, use, retention and transmission of personal
information provided by an online user). Furthermore, the growth and demand for
online commerce could result in more stringent consumer protection laws that
impose additional compliance burdens on online companies. See "Risk
Factors--Changing government regulations and legal uncertainties may impair our
future growth and harm our business."
Moreover, in many states there is currently great uncertainty whether or how
existing laws governing issues such as property ownership, sales and other
taxes, libel and personal privacy apply to the Internet and commercial online
services. These issues may take years to resolve. For example, tax authorities
in a number of states, as well as a Congressional advisory commission, are
currently reviewing the appropriate tax treatment of companies engaged in online
commerce, and new state tax regulations may subject us to additional state sales
and income taxes. In addition, it is unclear how certain state taxes apply to
the sale of hotel rooms by consolidators such as ourselves. New legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and commercial online services could result in
significant additional taxes on our business. These taxes could have an adverse
effect on our cash flows and results of operations. Furthermore, there is a
possibility that we may be subject to significant fines or other payments for
any past failures to comply with these requirements.
Federal legislation imposing some limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, imposes a three-year moratorium on
state and local taxes on electronic commerce (unless these taxes were in effect
prior to October 1, 1998) but only where these taxes are discriminatory on
Internet access. It is possible that the legislation will not be renewed when it
terminates in October 2001. Failure to renew the legislation could allow state
and local government to impose taxes on Internet-based sales, and these taxes
could hurt our business.
EMPLOYEES
As of September 30, 1999, we had approximately 285 employees, of which 281
were full-time and four were part-time. Of the total, 99 people were employed in
sales; 34 in reservation services; 37 in customer service; six in sales support;
32 in finance and accounting; six in revenue management; ten in programming and
technical support; and eleven in management. We have never had a work stoppage
and none of our employees is represented by a labor union. We consider our
employee relationships to be positive.
FACILITIES
Our operations are headquartered in Dallas, Texas, where we lease an
aggregate of approximately 28,000 square feet of office space. In addition, we
have a right to use an additional 4,500 square feet of office space, if
necessary. We currently pay approximately $31,417 per month, but beginning
January 1, 2000, our rent will increase periodically, to a maximum of
approximately $34,914 per month, until May 31, 2003. Our lease for this space
expires in 2003.
We also have a small office in Miami, Florida, where we rent approximately
851 square feet of office space for approximately $1,246 per month. Our lease
for this space expires in 2002.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. Our
operations are subject to federal, state and local laws and regulations. Our
management believes that our company is in general compliance with applicable
laws, regulations and permits, including operating permits, safety, health,
environmental and consumer protection laws and regulations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
David Litman.............................. 42 Chief Executive Officer, Secretary and
Director
Robert Diener............................. 41 President, Treasurer and Director
Barry Baker............................... 47 Director
Barry Diller.............................. 57 Director
Victor A. Kaufman......................... 56 Director
Dara Khosrowshahi......................... 30 Director
</TABLE>
Mr. Litman serves as our Chief Executive Officer and Secretary and as a
director of our company. He founded our predecessor business with Mr. Diener in
1991 and served as its Chief Executive Officer. From 1985 to 1990, he served as
the Chief Executive Officer of World Enterprises, Inc., an airline ticketing
company, which he co-founded with Mr. Diener. Prior to that time, Mr. Litman was
an attorney with the law firm of Johnson & Gibbs in Dallas, Texas.
Mr. Diener serves as our President and as a director of our company. He
founded our predecessor business with Mr. Litman in 1991 and served as its
President and Treasurer. From 1985 to 1990, he served as the President of World
Enterprises, Inc., an airline ticketing company, which he co-founded with
Mr. Litman. Prior to that time, Mr. Diener was an attorney with the law firm of
Gibson, Dunn & Crutcher in Los Angeles, California.
Mr. Baker has served as a director of our company since November 1999. He
has been President and Chief Operating Officer of USAi since March 1999.
Mr. Baker was Executive Vice President of Sinclair Broadcast Group, Inc. and
served as Chief Executive Officer designate and as a director of Sinclair
Communications, Inc. from June 1996 through February 1999. From 1989 through
May 1996, he was the founder and served as Chief Executive Officer of River City
Broadcasting, L.P., which was acquired by Sinclair Broadcasting. Mr. Baker
serves as a director of Ticketmaster Online-CitySearch, Inc. and USAi.
Mr. Diller has served as a director of our company since November 1999. He
has been the Chairman and Chief Executive Officer of USAi and its predecessor
companies since August 1995. He was Chairman of the Board and Chief Executive
Officer of QVC, Inc. from December 1992 through December 1994. From 1984 to
1992, Mr. Diller served as the Chairman of the Board and Chief Executive Officer
of Fox, Inc. Prior to joining Fox, Inc., Mr. Diller served for ten years as
Chairman of the Board and Chief Executive Officer of Paramount Pictures
Corporation. Mr. Diller is a director and member of the Executive Committee of
Seagram, and serves as a director of Ticketmaster Online-CitySearch, Inc. and
USAi. He also serves on the Board of the Museum of Television and Radio and is a
member of the Board of Councilors for the University of Southern California's
School of Cinema-Television and is a member of the Board of Directors of
13/WNET. Mr. Diller also serves on the Board of Directors for AIDS Project Los
Angeles, the Executive Board for the Medical Sciences of University of
California, Los Angeles and the Board of the Children's Advocacy Center of
Manhattan.
Mr. Kaufman has served as a director of our company since November 1999.
Since October 1999, Mr. Kaufman has served as Vice Chairman of USAi. From
January 1997 until October 1999, Mr. Kaufman served in the Office of the
Chairman for USAi, and from November 1997 until October 1999, he served as Chief
Financial Officer for USAi. Prior to that time, he served as Chairman and Chief
Executive Officer of Savoy since March 1992 and as a director of Savoy since
February 1992.
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Mr. Kaufman was the founding Chairman and Chief Executive Officer of Tri-Star
Pictures, Inc. from 1983 until December 1987, at which time he became President
and Chief Executive Officer of Tri-Star's successor company, Columbia Pictures
Entertainment, Inc. He resigned from these positions at the end of 1989
following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined
Columbia in 1974 and served in a variety of senior positions at Columbia and its
affiliates prior to the founding of Tri-Star. Mr. Kaufman also serves as a
director of Ticketmaster Online-CitySearch, Inc. and USAi.
Mr. Khosrowshahi has served as a director of our company since
November 1999. Since August 1999, Mr. Khosrowshahi has been President of USA
Networks Interactive, a division of USAi. Prior to that time, Mr. Khosrowshahi
was the Vice President of Strategic Planning for USAi and USANi LLC since March
1998. Prior to joining USAi, from 1991 to 1998, he was at Allen & Company
Incorporated where he was a Vice President from 1995 to 1996 and a Director from
1996 to 1998. Mr. Khosrowshahi also serves as a director of Ticketmaster
Online-CitySearch, Inc., BET.com LLC and FreePC.
We will take appropriate measures to cause the election of two independent
directors to our board of directors following the completion of this offering.
BOARD COMPOSITION
Our board of directors is currently comprised of six directors. Upon
completion of this offering, under our restated certificate of incorporation,
the number of directors will be fixed from time to time by resolution of the
board of directors. All members of the board of directors are elected annually
by our stockholders. Four of our current directors are directors, officers or
employees of USAi. See "Risk Factors--Our business is controlled by USAi and, as
a result, our other stockholders will have little or no influence over
stockholders' decisions."
Our board of directors has a compensation committee, comprised of
Messrs. and , with serving as an observer to the
committee. The compensation committee makes recommendations to our board of
directors concerning salaries and incentive compensation for our officers and
employees, including equity compensation for our senior executives. In addition,
the board of directors has an audit committee, comprised of
Messrs. and , that reviews and monitors our corporate
financial reporting and audits, as well as any other accounting related matters.
After the independent directors are elected to our board of directors, they will
be appointed to serve on our audit committee.
DIRECTOR COMPENSATION
The members of our board of directors are not currently compensated for
their services to our company other than for reimbursement of their expenses
incurred in connection with their services as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has a compensation committee, comprised of
Messrs. and . No interlocking relationship exists between our
board of directors or the compensation committee and the board of directors or
compensation committee of any other company, nor has an interlocking
relationship existed in the past.
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EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation awarded to, earned by or paid for services rendered during the year
ended December 31, 1998 by our Chief Executive Officer and our other executive
officer who earned in excess of $100,000 in compensation during that year (the
"Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------- OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
David Litman............................................. $4,966,078 -- $ 8,093
Chief Executive Officer
Robert Diener............................................ $4,966,078 -- $ 8,093
President and Treasurer
</TABLE>
- ------------------------
(1) From January 1, 1997 until May 10, 1999, our predecessor business was a
subchapter S corporation, and substantially all of its earnings before taxes
were distributed to its officers. As our executive officers were the
officers and stockholders of our predecessor business, the previous
compensation for our executive officers does not accurately reflect their
current or future compensation.
Messrs. Litman and Diener are not parties to an employment agreement with
the Company.
EMPLOYEE BENEFIT PLANS
1999 STOCK PLAN. We have adopted the 1999 Stock Plan, subject to the
approval of our stockholders, and reserved 1,932,315 shares of class A common
stock for issuance under the plan. The 1999 Stock Plan provides for the grant of
incentive stock options to our employees, including our officers and employee
directors, and for the grant of nonstatutory stock options and stock purchase
rights, or SPRs, to our employees, directors and consultants. Unless terminated
sooner, the 1999 Stock Plan will terminate automatically in 2009.
The administrator of the 1999 Stock Plan has the power to determine the
terms of the options or SPRs granted, including the exercise price of the option
or SPR, the number of shares subject to each option or SPR, the exercisability
of the option or SPR, and the form of consideration payable upon such exercise.
In addition, the administrator has the authority to amend, suspend or terminate
the 1999 Stock Plan, provided that no such action may affect any shares of
class A common stock previously issued and sold or any option previously granted
under the plan. The maximum number of shares covered by options that each
optionee may be granted during a fiscal year is shares.
The terms and conditions of options granted to optionees will be set forth
in individual option agreements between the company and the optionee. Options
are generally exercisable as determined by the administrator and set forth in
the option agreements. Unless otherwise set forth in the individual option
agreement, options granted under the 1999 Stock Plan generally must be exercised
within three months following the end of the optionee's status as an employee,
director or consultant other than as a result of termination for cause, death or
disability; in the case of termination for cause, options automatically
terminate and expire on the date of termination and in the event of death or
disability options must be exercised within twelve months after the optionee's
termination, but in no event later than the expiration of the option's terms.
In the case of SPRs, unless the administrator determines otherwise, the
restricted stock purchase agreement shall grant our company a repurchase option
exercisable upon the voluntary or involuntary termination of a purchaser's
employment or consulting relationship with our company for any reason, including
death or disability. The purchase price for shares repurchased under the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation
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of any indebtedness of the purchaser to our company. The repurchase option shall
lapse at a rate determined by the administrator.
The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the class A common
stock on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1999 Stock Plan is determined by the administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the exercise price must be at least equal to the fair
market value of the class A common stock on the date of grant. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal to 10% of the fair market
value on the grant date, and the term of the incentive stock option must not
exceed five years. The term of all other options granted under the 1999 Stock
Plan may not exceed ten years. Options and SPRs granted under the 1999 Stock
Plan are generally not transferable by the optionee, and each option and SPR is
exercisable only by the optionee during his or her lifetime.
The 1999 Stock Plan provides that in the event of a merger of our company
with or into another corporation, or of a sale of substantially all of our
assets, each option and SPR shall be assumed or an equivalent option substituted
for it by the surviving corporation. If the outstanding options and SPRs are not
assumed or substituted for by the surviving corporation, the administrator shall
provide for the optionee to vest and to have the right to exercise the option or
SPR as to all of the optioned stock, including shares as to which it would not
otherwise be vested or exercisable. If the administrator makes an option or SPR
vested and exercisable in full in the event of a merger or sale of assets, the
administrator shall notify the optionee that the option or SPR shall be fully
exercisable for a period of 15 days from the date of notice, and the option or
SPR will terminate upon the expiration of the period.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our restated certificate of incorporation limits the liability of our
directors for a breach of their fiduciary duty as a director to the fullest
extent permitted by law. Delaware law provides that a corporation's certificate
of incorporation may contain a provision eliminating or limiting the personal
liability of directors for monetary damages for breach of their fiduciary duties
as directors, except for liability (a) for any breach of their duty of loyalty
to the corporation or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) for unlawful payments of dividends or unlawful stock repurchases or
redemptions or (d) for any transaction from which the director derived an
improper personal benefit. Our restated certificate of incorporation also
provides that we are required to indemnify, to the fullest extent permitted by
law, any of our directors, officers or employees.
Our restated bylaws provide that (a) we are required to indemnify our
directors and officers to the fullest extent permitted by law, subject to very
limited exceptions, (b) we may indemnify our other employees and agents to the
fullest extent permitted by law, (c) we are required to advance expenses, as
incurred, to our directors and officers in connection with a legal proceeding,
subject to very limited exceptions, and (d) the rights conferred in our restated
bylaws are not the exclusive remedy for our directors, officers and employees.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We also are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.
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CERTAIN TRANSACTIONS
ACQUISITION OF OUR PREDECESSOR
In April 1999, we entered into a purchase agreement with USAi, TMF, Inc.,
HRN Marketing Corp. and Messrs. David Litman and Robert Diener to acquire
substantially all the assets and liabilities of our predecessor business. The
acquisition was completed on May 10, 1999. Messrs. Litman and Diener are
currently our Chief Executive Officer and President, respectively. Prior to the
acquisition, Messrs. Litman and Diener, their spouses and trusts for the benefit
of some members of their respective families, were the sole stockholders of
TMF, Inc. and HRN Marketing Corp.
At the closing of the acquisition, we paid approximately $162.5 million to
TMF, Inc. and HRN Marketing Corp., which consisted of a promissory note in the
principal amount of $150.0 million, bearing interest at 4.75% annually, and a
$12.5 million payment for attainment of financial targets by our predecessor
business during the fiscal quarter ended March 31, 1999. Approximately
$145.0 million of the principal amount of this promissory note was paid on the
day after the closing and the final $5.0 million payment is due on January 30,
2000. Following the closing, TMF, Inc. and HRN Marketing Corp. paid
$0.8 million to us as a working capital adjustment to the purchase price based
on the specified level of working capital agreed to in the asset purchase
agreement. Under the purchase agreement, we are required to pay TMF, Inc. and
HRN Marketing Corp. up to $12.5 million at the end of each of the three
remaining fiscal quarters in 1999 if specified financial targets are met by us
in each of those quarters. As a result, we have paid a total of $25.0 million to
TMF, Inc. and HRN Marketing Corp. for our attainment of specified financial
targets during our fiscal quarters ended June 30, 1999 and September 30, 1999,
and we have accrued for a $12.5 million payment that we expect to make in our
final fiscal quarter of 1999.
TMF, Inc. and HRN Marketing Corp. are entitled to contingent payments over
the next three years. The amount of these contingent payments will depend on our
performance for the twelve-month periods ending March 31, 2000, 2001 and 2002,
respectively. These additional payments will be based upon the greater of:
- a multiple of the total growth in our adjusted earnings before taxes from
the previous year; or
- a multiple of the total growth in our adjusted gross profit from the
previous year.
Following the twelve-month period ending March 31, 2000, TMF, Inc. and HRN
Marketing Corp. are entitled to payment from us equal to the greater of:
- 2.5 times the total growth in our adjusted earnings from the previous
twelve-month period; or
- 1.44 times the total growth in our adjusted gross profit from the previous
twelve-month period (provided this growth in adjusted gross profit exceeds
50%).
Following the twelve-month period ending March 31, 2001, TMF, Inc. and HRN
Marketing Corp. are entitled to a payment from us equal to the greater of:
- two times the total growth in our adjusted earnings from the previous
twelve-month period; or
- 1.18 times the total growth in our adjusted gross profit from the previous
twelve-month period (provided this growth in adjusted gross profit exceeds
35%).
Following the twelve-month period ending March 31, 2002, TMF, Inc. and HRN
Marketing Corp. are entitled to a payment from us equal to the greater of:
- 1.5 times the total growth in our adjusted earnings from the previous
twelve-month period; or
- 0.87 times the total growth in our adjusted gross profit from the previous
twelve-month period (provided this growth in adjusted gross profit exceeds
20%).
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Under an assumption agreement, USAi has agreed to pay, on our behalf, the
first $130.0 million of the contingent payments referred to in this paragraph.
See "Risk Factors--Contingent payments may have an adverse impact on our future
operating results."
Under the terms of the purchase agreement, each of Messrs. Litman and Diener
and TMF, Inc. and HRN Marketing Corp. are required to indemnify us up to the
value of the purchase price paid to TMF, Inc. and HRN Marketing Corp. for
specified losses, including breaches of the purchase agreement's representations
and warranties. Each of Messrs. Litman and Diener guaranteed the obligations of
TMF, Inc. and HRN Marketing Corp. under the purchase agreement and USAi
guaranteed our obligations under the purchase agreement. Furthermore, under the
terms of the purchase agreement, each of Messrs. Litman and Diener have agreed
not to compete with our business for a five-year period following the
termination of their employment with our company or any of our affiliates.
We also are required to issue TMF, Inc. and HRN Marketing Corp. the number
of shares of our class A common stock equal to approximately 10% of the
aggregate value of the equity of our company immediately prior to the closing of
this offering.
OTHER TRANSACTIONS
TICKETMASTER. Since April 28, 1999, we have had arrangements with
Ticketmaster LLC ("Ticketmaster"), a wholly owned subsidiary of USAi, under
which Ticketmaster acts as our agent and sells hotel rooms to our customers
using our websites. On April 28, 1999, we entered into an arrangement with
Ticketmaster that provides that we pay an initial set up fee of $1,500, $12 per
operator hour of initial agent training and all telephone usage charges. We also
pay Ticketmaster a service fee of $7.50 for each completed transaction. In
return, Ticketmaster answers calls from our customers in a manner consistent
with our policies.
On July 14, 1999, we entered into a second agreement with Ticketmaster
regarding sales in Nashville, New Orleans, Dallas, Houston, Las Vegas and
San Antonio. The agreement runs concurrently with the April agreement and
provides for Ticketmaster agents to sell Ticketmaster's products in these cities
upon requests for hotel reservations there. Although we pay no set up fees,
training costs or telephone usage charges under this agreement, we do pay a
service fee of $15 per completed transaction. In return, Ticketmaster answers
calls from our customers in a manner consistent with our policies.
On May 13, 1999, we entered into an agreement with Ticketmaster
Online-CitySearch, Inc. ("TMCS"), a publicly-traded company controlled by USAi,
which operates CitySearch's Reservation Center. Under the agreement, TMCS will
market our hotel products via the Internet in return for (1) links from our
websites and newsletters to TMCS's website and (2) a 5% commission on total
booking price on all orders placed and exercised through CitySearch links.
HOME SHOPPING NETWORK AND USA NETWORKS. We have certain arrangements for
cable television commercial advertisements with USAi affiliates. From time to
time since early December 1999, Home Shopping Network has featured
advertisements on our behalf in exchange for a 5% commission on the revenue
generated by the advertisements. We also have been featured on USA Network, from
time to time pursuant to a similar arrangement. These advertisements may appear
again in the future on either Home Shopping Network or USA Network or USAi's
other cable channel, The Sci-Fi Channel. However, no agreement or other
commitment currently exists for such an arrangement, and it is possible that
future advertisements will be on different terms.
We will continue to consider expanding the scope of its relationship with
Ticketmaster, TMCS, Home Shopping Network, USA Network, The Sci-Fi Channel and
other USAi affiliates.
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<PAGE>
USAI. As a USAi subsidiary, we are covered, and will continue to be covered
after the offering, under certain of USAi's insurance policies, including its
directors and officers insurance, property, workers compensation and umbrella
and excess liability. The premiums are paid by USAi and a portion of the premium
is allocated to each subsidiary, including our company.
Following the offering, we will also continue to be included in the
consolidated tax return, including certain state and local tax returns, of USAi
until USAi's equity ownership in our company falls below 80%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Tax
matters."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth certain beneficial ownership information with
respect to our company and USAi, the majority stockholder of our company.
OUR CLASS A COMMON STOCK
The following table sets forth, as of September 30, 1999, certain
information regarding the beneficial ownership of our class A common stock, by
(a) each person or entity who is known by us to own beneficially 5% or more of
our outstanding class A common stock; (b) each director of our company;
(c) each of our Named Executive Officers; and (d) all of our directors and
executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
VOTING POWER
(OF ALL CLASSES)(2)
-------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF SHARES BEFORE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1) OFFERING OFFERING
- ------------------- ---------------------- ---------------------- -------- --------
<S> <C> <C> <C> <C>
USA Networks, Inc..................... 90% 81.1%
152 West 57th Street, 42nd Floor
New York, NY 10019
David Litman (3)...................... 5%
Robert Diener (3)..................... 5%
Barry Baker (4).......................
Barry Diller (4)......................
Victor A. Kaufman (4).................
Dara Khosrowshahi (4).................
All executive officers and directors
as a group (6 persons).............. 10%
</TABLE>
- ------------------------
(1) All numbers shown give effect to the sale of 5,400,000 shares of our
class A common stock in this offering. No shares of class A common stock
were issued or outstanding, and no shares of class A common stock were
beneficially owned, prior to this offering other than shares issuable upon
conversion of our outstanding class B common stock and shares issued to
Messrs. Litman and Diener immediately prior to this offering. Under our
restated certificate of incorporation, shares of our class B common stock
are convertible at any time into an equal number of shares of our class A
common stock. The percentage of shares beneficially owned assumes the
conversion of all shares of class B common stock beneficially owned by USAi.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of class A
common stock shown as beneficially owned by them.
(2) Percentage of total voting power of all classes after this offering gives
effect to the sale of 5,400,000 shares of class A common stock in this
offering. Percent of total voting power before and after the offering is
based on one vote for each share of our class A common stock and 15 votes
for each share of our class B common stock, calculated assuming no
conversion of our class B common stock by any holder.
(3) The address of Messrs. Litman and Diener is c/o Hotel Reservations
Network, Inc., 8140 Walnut Hill Lane, Suite 203, Dallas, TX 75231.
(4) The address of Messrs. Baker, Diller, Kaufman and Khosrowshahi is c/o USA
Networks, Inc., 152 West 57th Street, 42nd Floor, New York, NY 10019.
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<PAGE>
OUR CLASS B COMMON STOCK
The following table sets forth, as of September 30, 1999, certain
information regarding the beneficial ownership of our class B common stock by
(a) each person or entity who is known by us to own beneficially 5% or more or
of our outstanding class B common stock; (b) each director of our company;
(c) each of our Named Executive Officers; and (d) all of our directors and
executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED (1) CLASS (1)
- ------------------- ---------------- -------------
<S> <C> <C>
USA Networks, Inc........................................... 44,099,100 100%
152 West 57th Street, 42nd Floor
New York, NY 10019
David Litman (2)............................................ -- --
Robert Diener (2)........................................... -- --
Barry Baker (3)............................................. -- --
Barry Diller (3)(4)......................................... -- --
Victor A. Kaufman (3)....................................... -- --
Dara Khosrowshahi (3)....................................... -- --
All executive officers and directors as a group (6 -- --
persons)..................................................
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as otherwise indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
class B common stock shown as beneficially owned by them. Percentage of
class is based on 44,099,100 shares of class B common stock outstanding as
of September 30, 1999. Shares of our class B common stock may be converted
at any time into an equal number of shares of our class A common stock.
(2) The address of Messrs. Litman and Diener is c/o Hotel Reservations
Network, Inc., 8140 Walnut Hill Lane, Suite 203, Dallas, TX 75231.
(3) The address of Messrs. Baker, Diller, Kaufman and Khosrowshahi is c/o USA
Networks, Inc., 152 West 57th Street, 42nd Floor, New York, NY 10019.
(4) Includes 44,099,100 shares of our class B common stock beneficially owned by
USAi, as to which Mr. Diller disclaims beneficial ownership.
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<PAGE>
USAI COMMON STOCK
The following table sets forth, as of October 31, 1999, information relating
to the beneficial ownership of the common stock of USAi by (a) each director of
our company; (b) the Named Executive officers of our company; and (c) all
executive officers and directors of our company as a group.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE OF TOTAL
NAME AND ADDRESS NUMBER OF OF VOTING POWER
OF BENEFICIAL OWNER SHARES CLASS (1) (OF ALL CLASSES) (2)
- ------------------- ---------- ---------- --------------------
<S> <C> <C> <C>
David Litman (3)...................................... -- -- --
Robert Diener (3)..................................... -- -- --
Barry Baker (4)(5).................................... 5,300 * *
Barry Diller (4)(6)................................... 70,145,282 37.3% 75.0%
Victor A. Kaufman (4)(7).............................. 435,000 * *
Dara Khosrowshahi (4)(8).............................. 30,000 * *
All executive officers and directors as a group (6 70,615,582 37.5% 75.0%
persons)............................................
</TABLE>
- ------------------------
* The percentage of shares beneficially owned does not exceed 1% of the class.
(1) The percentage of beneficial ownership listed assumes the conversion of any
shares of USAi class B common stock owned by such listed person, but does
not assume the conversion of USAi class B common stock owned by any other
person. Beneficial ownership has been determined in accordance with the
rules of the Commission. Shares of USAi class B common stock are convertible
at any time into an equal number of shares of USAi common stock.
(2) The percentage of votes for all classes is based on one vote for each share
of USAi common stock and ten votes for each share of USAi class B common
stock (assuming no conversion of USAi class B common stock).
(3) The address of Messrs. Litman and Diener is c/o Hotel Reservations
Network, Inc., 8140 Walnut Hill Lane, Suite 203, Dallas, TX 75231.
(4) The address of Messrs. Baker, Diller, Kaufman and Khosrowshahi is c/o USA
Networks, Inc., 152 West 57th Street, 42nd Floor, New York, NY 10019.
(5) Includes 5,300 shares of common stock.
(6) Liberty Media Corporation, Universal Studios, Inc., The Seagram Company
Ltd., USAi and Mr. Diller are parties to a stockholders agreement under
which Liberty and Mr. Diller have formed BDTV INC., BDTV II INC., BDTV
III INC. and BDTV IV INC. (together, the "BDTV Entities") which entities, as
of October 31, 1999, hold 4,000,000, 15,618,222, 4,005,182 and 800,000
shares of USAi class B common stock, respectively, and an aggregate of 22
shares of USAi common stock collectively. Mr. Diller generally has the right
to vote all of the shares of USAi common stock and USAi class B common stock
held by the BDTV Entities, Liberty and Seagram. These figures also include
1,104,954 shares of USAi common stock owned by Mr. Diller, options to
purchase 19,941,694 shares of USAi common stock granted under USAi's stock
option plan, 32,000 shares of USAi common stock held by a private foundation
as to which Mr. Diller disclaims beneficial ownership, 22 shares of USAi
common stock and 24,423,404 shares of USAi class B common stock held by the
BDTV Entities, and 8,459,232 shares of USAi common stock and 378,322 shares
of USAi class B common stock which are held by Liberty, and 9,090,654 shares
of USAi common stock and 6,715,000 shares of USAi class B common stock,
which are held by Universal and otherwise beneficially owned by Seagram, as
to which Mr. Diller has general voting authority under the stockholders
agreement.
(7) Includes options to purchase 435,000 shares of common stock granted under
USAi's stock option plans.
(8) Includes options to purchase 30,000 shares of common stock granted under
USAi's stock option plans.
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<PAGE>
USAI CLASS B COMMON STOCK
The following table sets forth, as of September 30, 1999, information
relating to the beneficial ownership of the class B common stock of USAi for the
individuals described in the table regarding ownership of USAi common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED (1) CLASS
- ------------------- ---------------- -------------
<S> <C> <C>
Barry Diller (2)............................................ 31,516,726 100%
c/o USA Networks, Inc.
152 West 57th Street, 42nd Floor
New York, NY 10019
</TABLE>
- ------------------------
(1) All or any portion of the USAi class B common stock may be converted at any
time into an equal number of shares of the common stock of USAi.
(2) These figures do not include any unissued shares of USAi common stock or
USAi class B common stock issuable upon conversion of certain shares
beneficially owned by Liberty or Seagram.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of our capital stock is qualified in its
entirety by reference to the applicable provisions of Delaware law and our
restated certificate of incorporation and restated bylaws.
COMMON STOCK
At the completion of this offering, there will be 10,299,900 shares of
class A common stock outstanding and 44,099,100 shares of class B common stock
outstanding, and we will be authorized to issue an additional shares of
class A common stock and shares of class B common stock. All of the
outstanding shares of our class B common stock are held by USAi. Except as
otherwise provided by applicable law, each share of class B common stock issued
and outstanding has 15 votes on any matter submitted to a vote of our
stockholders and each share of class A common stock issued and outstanding has
one vote on any matter submitted to a vote of stockholders. The class A common
stock and the class B common stock will vote together as a single class on all
matters submitted to a vote of our stockholders unless otherwise required by
law.
While held by USAi or any of its affiliates, each share of class B common
stock may be converted at any time into one share of class A common stock at the
option of the holder, and this one-to-one conversion ratio is to be equitably
preserved in the event of our merger, consolidation or other reorganization.
Our restated certificate of incorporation provides that:
- we will reserve and keep available out of our authorized but unissued
shares of class A common stock, solely for the purpose of effecting the
conversion of the shares of the class B common stock, the number of shares
of class A common stock necessary to effect the conversion of all
outstanding shares of class B common stock;
- shares of class B common stock will be automatically converted into a like
number of shares of class A common stock upon any sale, conveyance,
foreclosure upon, assignment or other transfer of the class B common
stock, other than transfers to an affiliate of USAi;
- each share of class B common stock held by USAi or any of its affiliates
may be converted into a share of class A common stock at the class
B holder's option prior to a spin-off transaction which is on a tax-free
basis ("Tax-Free Spin-Off") or other similar transaction;
- if 20% or less of the value of our outstanding stock is issued by us in
this offering or otherwise before the Tax-Free Spin-Off or similar
transaction, unless, and to the extent that, USAi has received an opinion
of counsel that the conversion provision is likely to create a significant
risk of material adverse tax consequence to USAi or its stockholders;
- except as provided below, after the Tax-Free Spin-Off or the similar
transaction, any outstanding shares of class B common stock will no longer
be convertible into shares of class A common stock for a period of five
years; and
- shares of class B common stock automatically will convert into shares of
class A common stock on the fifth anniversary of the Tax-Free Spin-Off,
unless, before the Tax-Free Spin-Off, the class B common stockholder
delivers to us an opinion of counsel that we find reasonably satisfactory
to the effect that the conversion could adversely affect the class
B common stockholder's ability to obtain a favorable ruling from the
Internal Revenue Service stating that the transfer would be a Tax-Free
Spin-Off.
PREFERRED STOCK
At the completion of this offering, we will be authorized to issue
shares of preferred stock. Our board of directors is authorized, subject to
limitations prescribed by Delaware law, to determine the terms and conditions of
the preferred stock, including whether the shares of preferred stock will be
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<PAGE>
issued in one or more series, the number of shares to be included in each series
and the powers, designations, preferences and rights of the shares. Our board of
directors is also authorized to designate any qualifications, limitations or
restrictions on the shares without any further vote or action by the
stockholders. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company and may adversely
affect the voting and other rights of the holders of our common stock, which
could have an adverse impact on the market price of our class A common stock. We
have no current plan to issue any shares of preferred stock.
CORPORATE OPPORTUNITIES
Our restated certificate of incorporation provides that "USA Networks" (for
purposes of this discussion only, as defined below) and its officers, directors
and employees do not have a fiduciary duty or any other obligation to share any
business opportunities with us and releases USAi from any liability that would
result from a breach of this kind of obligation. Specifically, our restated
certificate of incorporation provides as follows:
- USA Networks has no duty to refrain from engaging in lines of business
similar to ours;
- USA Networks, its officers, directors and employees are not liable to us
or our stockholders for breach of a fiduciary duty by reason of its
activities;
- if USA Networks acquires knowledge of a potential transaction or matter
which may be a corporate opportunity for both USA Networks and our
company, USA Networks will have no duty to communicate or offer corporate
opportunities to us and is not liable for breach of any fiduciary duty as
a stockholder of our company because it pursues or acquires the corporate
opportunity for itself, directs the corporate opportunity to another
person, or does not communicate information regarding the corporate
opportunity to our company; and
- nothing in the restated certificate of incorporation amends or modifies,
or will amend or modify, in any respect any written contractual
arrangement between USA Networks and our Company.
- in the event that a director or officer of our company who is also a
director, officer or employee of USA Networks acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for
both our company and USA Networks, the director or officer of our company
will have fully satisfied and fulfilled his or her fiduciary duty to our
company and our stockholders with respect to the corporate opportunity, if
he or she acts in a manner consistent with the following policy:
(1) a corporate opportunity offered to any officer of our company who is
also a director but not an officer or employee of USA Networks,
belongs to our company;
(2) a corporate opportunity offered to any person who is a director but
not an officer of our company, and who is also a director, officer
or employee of USA Networks, belongs to our company if the
opportunity is expressly offered to that person in his or her
capacity as a director of our company, and otherwise belongs to USA
Networks; and
(3) a corporate opportunity offered to any person who is an officer or
employee of USA Networks and an officer of our company belongs to
our company if the opportunity is expressly offered to the person in
his or her capacity as an officer or employee of our company, and
otherwise belongs to USA Networks.
For purposes of this section:
(1) a director of our company who is chairman of the board of directors of
our company or of a committee of our board of directors is not deemed to
be an officer of our company by reason of holding that position (without
regard to whether the position is deemed an office of our company under
the restated bylaws of our company), unless that person is a full-time
employee of our company;
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(2) the term "company" means our company and all corporations, partnerships,
joint ventures, associations and other entities in which our company
beneficially owns, directly or indirectly, 50% or more of the
outstanding voting stock, voting power, partnership interests or similar
voting interests; and
(3) the term "USA Networks" means USA Networks, Inc., a Delaware
corporation, USANi LLC, a Delaware limited liability company, and all
corporations, partnerships, joint ventures, associations and other
entities (other than our company), as defined in accordance with this
paragraph) in which USA Networks beneficially owns, directly or
indirectly, 50% or more of the outstanding voting stock, voting power,
partnership interests or similar voting interests.
The provisions of our restated certificate of incorporation described in
this section expire on the date that USA Networks ceases to beneficially own
common stock representing at least 20% of the total voting power of all classes
of our outstanding capital stock entitled to vote in the election of directors
and on the date that no director or officer of our company is also a director or
officer of USA Networks. In addition to any vote of the stockholders required by
law, until the time that USA Networks ceases to beneficially own common stock
representing at least 20% of the total voting power of all classes of
outstanding capital stock of our company entitled to vote in the election of
directors, the affirmative vote of the holders of more than 80% of the total
voting power of all classes of outstanding capital stock of our company is
required to alter, amend or repeal in a manner adverse to the interests of USA
Networks, or adopt any provision adverse to the interests of USA Networks and
inconsistent with, the corporate opportunity provisions described above.
Any person purchasing or otherwise acquiring any interest in shares of our
capital stock is deemed to have notice of and to have consented to the foregoing
provisions of our restated certificate of incorporation described above.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
Some provisions of our restated certificate of incorporation and our
restated bylaws may render more difficult, or have the effect of discouraging,
unsolicited takeover bids from third parties or the removal of incumbent
management of our company or may otherwise adversely affect the market price for
the class A common stock. These provisions include the right of the holders of
our class B common stock to 15 votes per share, as compared to one vote per
share for the holders of our class A common stock, and the prohibition against
stockholders calling special meetings. In addition, our restated certificate of
incorporation authorizes our board of directors to issue, without stockholder
approval, shares of preferred stock with voting, conversion and other
rights and preferences that could adversely affect the voting power or other
rights of the holders of our common stock. See "--Preferred stock." Although
these provisions do not have a substantial practical significance to investors
while USAi, through its ownership of our common stock, is in a position to
effectively control all matters affecting our company, these provisions could
have the effect of depriving stockholders of an opportunity to sell their shares
at a premium over prevailing market prices should USAi no longer have control of
our company.
EFFECT OF ANTITAKEOVER STATUTE
We are subject to Section 203 of Delaware law, the Antitakeover Law, which
regulates corporate acquisitions. The Antitakeover Law prevents some Delaware
corporations, including those whose securities are listed for trading on the
Nasdaq National Market, from engaging in a "business combination" with any
"interested stockholder" for three years after the stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes a merger or consolidation involving our company and the
interested stockholder and the sale of more than ten percent of our assets. In
general, the Antitakeover Law defines an "interested stockholder" as any entity
or person beneficially owning 15% or more of the outstanding voting stock of our
company and any entity or person affiliated with or controlling, or controlled
by, that entity or person. Although
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Delaware Law permits us to "opt out" of this Antitakeover Law with an express
provision in our original or amended certificate of incorporation or in bylaws
approved by at least a majority of the stockholders, we have not "opted out" of
the Antitakeover Law. Nevertheless, the restrictions of the Antitakeover Law
will not apply to our significant stockholder, USAi, because when USAi became an
"interested stockholder," we did not have a class of voting stock (x) listed on
a national securities exchange, (y) authorized for quotation on the Nasdaq Stock
Market or (z) held of record by more than 2,000 stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our class A common stock is
.
LISTING
An application has been made for quotation of our class A common stock on
the Nasdaq National Market under the trading symbol "ROOM."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our class A common
stock, and we cannot assure you that a significant public market for our
class A common stock will develop or be sustained after this offering. Future
sales of substantial amounts of our class A common stock, including shares
issued upon conversion of our class B common stock, in the public market after
this offering, or the anticipation of those sales, could adversely affect market
prices prevailing from time to time and could impair our ability to raise
capital through the sale of our equity securities.
Upon completion of this offering, we will have 10,299,900 shares of our
class A common stock outstanding, assuming no exercise of the underwriters'
overallotment option, and 44,099,100 shares of our class B common stock
outstanding. Shares of class B common stock, however, are convertible for shares
of class A common stock on a share-for-share basis at the election of the
holder. Of the shares of class A common stock expected to be outstanding after
this offering (plus any additional shares sold upon exercise of the
underwriters' overallotment option), all of the shares sold in this offering
will be freely transferable without restriction under the Securities Act, unless
they are held by affiliates of our company, as that term is used under the
Securities Act. All shares of our class A common stock held by our affiliates
are control securities. The shares of our class A common stock issued to TMF,
Inc. and HRN Marketing Corp. immediately prior to this offering, the shares of
our class A common stock issuable upon conversion of the class B common stock
and all of the outstanding shares of our class B common stock owned by USAi also
will be restricted shares, as that term is defined in Rule 144 of the Securities
Act. Restricted and control securities may not be sold in the public market
unless they qualify for an exemption from registration under Rule 144 or
Rule 701 or another exemption under the Securities Act.
We and each of our directors, executive officers and our existing
stockholders have agreed that, without the prior written consent of Donaldson
Lufkin & Jenrette Securities Corporation on behalf of the underwriters, it will
not, during the period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, file a registration statement or otherwise
transfer or dispose of, directly or indirectly, any shares of class A
common stock or any securities convertible into or exercisable or
exchangeable for class A common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
The restrictions described in this paragraph do not apply to some
circumstances, including:
- the sale of the shares to the underwriters in this offering;
- the grant of options to some officers, directors, employees or
consultants, provided these options are not exercisable prior to the end
of the lock-up period; and
- other transfers of any shares of class A common stock by some of the
foregoing persons to any associate, as that term is defined in Rule 12b-2
under the Exchange Act, of that person which agrees to be bound by the
foregoing provisions.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after the date of this prospectus, a person or persons whose
shares are aggregated and who has beneficially owned restricted shares for at
least one year, including the holding period of any prior owner of the shares,
except an affiliate of our company, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of
(a) 1% of the number of shares of our class A common stock then outstanding,
which will equal approximately 102,999 shares of class A common stock
immediately after this offering but before any exercise of the overallotment
option, or (b) the
67
<PAGE>
average weekly trading volume of our class A common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to any sale.
Sales under Rule 144 also are subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of our company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions of Rule 144. Any employee, officer or
director of or consultant to our company who purchased his or her shares
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 also provides that non-affiliates may sell shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. Under
Rule 701, all holders of shares are required to wait until 90 days after the
date of this prospectus before selling their shares.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement dated the
date of this prospectus, the underwriters named below, who are represented by
Donaldson Lufkin & Jenrette Securities Corporation, Allen & Company
Incorporated, Bear, Stearns & Co. Inc., Thomas Weisel Partners LLC and
DLJDIRECT Inc. (the "Representatives"), have severally agreed to purchase from
us the respective number of shares of class A common stock set forth opposite
their names below at the initial public offering price less the underwriting
fees set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Allen & Company Incorporated................................
Bear, Stearns & Co. Inc.....................................
Thomas Weisel Partners LLC..................................
DLJDIRECT Inc...............................................
---------
Total..................................................... 5,400,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to other
specified conditions. The underwriters are obligated to purchase and accept
delivery of all the shares (other than those shares covered by the overallotment
option described below) if they purchase any of the shares.
The underwriters initially propose to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per share on sales to
other dealers. After the initial offering of the shares to the public, the
representatives may change the public offering price and such concessions at any
time without notice.
We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase, from time to time, in whole or in part, up
to 810,000 additional shares at the public offering price less the underwriting
fees. The underwriters may exercise such option solely to cover overallotments,
if any, made in connection with this offering. To the extent that the
underwriters exercise such option, such underwriter will become obligated,
subject to specified conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of class A common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share............................................
Total................................................
</TABLE>
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
of any of those liabilities.
The underwriters have reserved for sale, at the initial public offering
price, shares of the class A common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
such shares of common stock in this offering. The number of shares
69
<PAGE>
of class A common stock available for sale to the general public in this
offering will be reduced to the extent such persons purchase the reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares offered hereby.
We estimate that expenses of the offering will total $775,000.
We, USAi and those of our executive officers and directors who are holders
of our common and preferred stock have agreed that, subject to some exceptions
for a period of 180 days from the date of this prospectus, we will not, without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, any shares of class A common stock or any securities convertible
into or exercisable or exchangeable for class A common stock;
- purchase any option or contract to sell any shares of class A common stock
or any securities convertible into or exercisable or exchangeable for
class A common stock;
- grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of class A common stock or
any securities convertible into or exercisable or exchangeable for
class A common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any class A
common stock or any securities convertible into or exercisable or
exchangeable for class A common stock (regardless of whether any of the
transactions described above is to be settled by the delivery of common
stock, or such other securities, in cash or otherwise).
In addition, during such period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and several of our shareholders have agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
class A common stock or any securities convertible into or exercisable or
exchangeable for class A common stock without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation.
An application has been made for quotation of our class A common stock on
the Nasdaq National Market under the symbol "ROOM".
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of class A common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any such
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
this offering and the distribution of this prospectus. This prospectus is not an
offer to sell or a solicitation of an offer to buy any shares of class A common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
class A common stock. Specifically, the underwriters may overallot this
offering, thereby creating a syndicate short position. In addition, the
underwriters may bid for and purchase shares of class A common stock in the open
market to cover such syndicate short
70
<PAGE>
position or to stabilize the price of the class A common stock. These activities
may stabilize or maintain the market price of the class A common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead-manager or
co-manager on 100 filed public offerings of equity securities, of which 79 have
been completed, and has acted as a syndicate member in an additional 54 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Some of the underwriters engage in transactions with, and perform services
for, our company in the ordinary course of business and have engaged and may in
the future engage in investment banking transactions with us, for which they
receive customary compensation.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York will pass upon
certain legal matters for our company in connection with this offering. Certain
legal matters will be passed upon for the underwriters by Davis Polk & Wardwell,
New York, New York.
EXPERTS
Grant Thornton LLP, independent certified public accountants, have audited
the combined financial statements of our predecessor at December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998, as
set forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Grant
Thornton LLP's report given on their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form S-1 regarding the offering
with the SEC. This prospectus, which is a part of the registration statement,
does not contain all of the information included in the registration statement
and you should refer to the registration statement and its exhibits to read that
information. References in this prospectus to any of our contracts or other
documents are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document. Copies of the registration statement are on file at the offices of the
Securities and Exchange Commission and may be inspected without charge at the
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of the registration statement may be obtained from the Public Reference
Section of the Commission upon payment of the fee prescribed by the Commission.
Information on Hotel Reservations Network can be obtained from the Public
Reference Room by calling 1-800-SEC-0330. The Commission maintains a website
that contains all information filed electronically by us, including reports,
proxy and information statements. The address of the Commission's website is
(http://www.sec.gov).
We intend to list our class A common stock on the Nasdaq National Market.
Reports, proxy statements and other information concerning us can be inspected
at: the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
REPORTS TO SECURITY HOLDERS
We intend to distribute to our shareholders annual reports containing
audited financial statements and will make available copies of our quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
TMF, Inc. (d/b/a Hotel Reservations Network) and HRN
Marketing Corp.
-- Audited Combined Financial Statements
Report of Independent Certified Public Accountants........ F-2
Combined Balance Sheets at December 31, 1997 and 1998..... F-3
Combined Statements of Operations for the years ended
December 31, 1996, 1997 and 1998........................ F-4
Combined Statement of Changes in Stockholders' Deficit for
the years ended December 31, 1996, 1997 and 1998........ F-5
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998........................ F-6
Notes to Combined Financial Statements.................... F-7
Hotel Reservations Network, Inc. -- Unaudited Financial
Statements
Balance Sheet at September 30, 1999....................... F-11
Statements of Operations of the Predecessor Company for
the nine months ended September 30, 1998 and for the
period from January 1 to May 10, 1999................... F-12
Statement of Operations for the period from May 11 to
September 30, 1999...................................... F-12
Statement of Stockholders' Deficit of the Predecessor
Company for the period from January 1 to May 10,
1999.................................................... F-13
Statement of Stockholders' Equity for the period from
May 11 to September 30, 1999............................ F-13
Statements of Cash Flows of the Predecessor Company for
the nine months ended September 30, 1998 and for the
period from January 1 to May 10, 1999................... F-14
Statement of Cash Flows for the period from May 11 to
September 30, 1999...................................... F-14
Notes to Financial Statements............................. F-15
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
TMF, Inc. and HRN Marketing Corp.
We have audited the accompanying combined balance sheets of TMF, Inc. (d/b/a
Hotel Reservations Network) and HRN Marketing Corp. as of December 31, 1997 and
1998, and the related combined statements of operations, changes in
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1998. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of TMF, Inc. (d/b/a
Hotel Reservations Network) and HRN Marketing Corp. as of December 31, 1997 and
1998, and the combined results of their operations and their combined cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
February 26, 1999
F-2
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
COMBINED BALANCE SHEETS
DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
ASSETS -------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $2,828 $ 4,964
Marketable securities--available for sale................. 4,083 7,672
Accounts receivable....................................... 89 127
Prepaid hotel rooms....................................... 204 341
Other current assets...................................... 177 381
------ -------
TOTAL CURRENT ASSETS.................................... 7,381 13,485
PROPERTY AND EQUIPMENT--AT COST
Equipment................................................. 309 440
Software.................................................. 289 613
Furniture and fixtures.................................... 123 325
------ -------
721 1,378
Less accumulated depreciation........................... 176 408
------ -------
545 970
OTHER ASSETS................................................ 32 89
------ -------
$7,958 $14,544
====== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.......................................... $4,530 $ 7,947
Deferred revenue.......................................... 3,278 7,299
Deferred tax liability.................................... 49 44
Accrued liabilities....................................... 56 51
------ -------
TOTAL CURRENT LIABILITIES............................... 7,913 15,341
OTHER LIABILITIES........................................... 99 55
STOCKHOLDERS' DEFICIT
Common stock
TMF, Inc. $.01 par value; 1,000 shares authorized,
issued and outstanding in 1997 and 1998............... -- --
HRN Marketing Corp., $.01 par value; 1,000 shares
authorized, issued and outstanding in 1998............ -- --
Additional paid-in capital................................ 1 2
Accumulated other comprehensive income.................... 351 314
Accumulated deficit....................................... (406) (1,168)
------ -------
TOTAL STOCKHOLDERS' DEFICIT............................. (54) (852)
------ -------
$7,958 $14,544
====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES................................................ $23,275 $34,758 $66,472
OPERATING COSTS AND EXPENSES
Cost of sales............................................. 16,003 23,284 45,818
Officers' distributions................................... 3,618 6,160 10,126
Selling, general and administrative....................... 3,857 5,782 9,770
------- ------- -------
23,478 35,226 65,714
------- ------- -------
Operating profit (loss)............................... (203) (468) 758
OTHER INCOME
Interest and other, net................................... 257 447 911
Gain on sales of securities, net of losses of $6, $0 and
$24, respectively....................................... 71 13 74
------- ------- -------
328 460 985
------- ------- -------
Earnings (loss) before income taxes................... 125 (8) 1,743
INCOME TAX EXPENSE.......................................... 38 2 5
------- ------- -------
NET EARNINGS (LOSS)................................... $ 87 $ (10) $ 1,738
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME DEFICIT DEFICIT
-------- -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996........... 1,000 $ -- $ 1 $124 $ (483) $ (358)
Comprehensive income:
Net earnings........................ -- -- -- -- 87 87
Unrealized gain on marketable
securities available for sale, net
of tax effect of $11.............. -- -- -- 22 -- --
Less: reclassification adjustment
for gains included in net
earnings net of tax effect of
$24............................. -- -- -- (47) -- --
----
-- -- -- (25) -- (25)
-------
Total comprehensive income...... 62
------ ---- ---- ---- ------- -------
Balances at December 31, 1996......... 1,000 -- 1 99 (396) (296)
Comprehensive income:
Net loss............................ -- -- -- -- (10) (10)
Unrealized gain on marketable
securities available for sale..... -- -- -- 263 -- --
Less: reclassification adjustment
for gains included in net
earnings net of tax effect of
$2.............................. -- -- -- (11) -- --
----
-- -- -- 252 -- 252
-------
Total comprehensive income...... 242
------ ---- ---- ---- ------- -------
Balances at December 31, 1997......... 1,000 -- 1 351 (406) (54)
Comprehensive income:
Net earnings........................ -- -- -- -- 1,738 1,738
Unrealized gain on marketable
securities available for sale..... -- -- -- 32 -- --
Less: reclassification adjustment
for gains included in net
earnings net of tax effect of
$5.............................. -- -- -- (69) -- --
----
-- -- -- (37) -- (37)
-------
Total comprehensive income...... 1,701
-------
Sale of common stock of HRN Marketing
Corp................................ 1,000 -- 1 -- -- 1
Capital distributions to
stockholders........................ -- -- -- -- (2,500) (2,500)
------ ---- ---- ---- ------- -------
Balances at December 31, 1998......... 2,000 $ -- $ 2 $314 $(1,168) $ (852)
====== ==== ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 87 $ (10) $ 1,738
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Loss on sale of property and equipment.................. -- 9 --
Depreciation............................................ 53 84 232
Gain on sale of marketable securities................... (71) (13) (74)
Deferred income taxes................................... 38 -- --
Changes in operating assets and liabilities
Accounts receivable................................... 113 (40) (38)
Receivable from sale of securities.................... (203) 203 --
Prepaid hotel rooms................................... 43 (102) (137)
Other current assets.................................. 63 (96) (204)
Other assets.......................................... (24) (1) (57)
Accounts payable...................................... 1,233 1,336 3,417
Accrued bonuses....................................... 1,562 (2,641) --
Deferred revenue...................................... 166 1,808 4,021
Accrued liabilities and other......................... (20) 110 (49)
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 3,040 647 8,849
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (57) (482) (657)
Proceeds from sale of equipment........................... -- 4 --
Purchase of marketable securities......................... (4,512) (3,000) (10,158)
Proceeds from sales of marketable securities.............. 4,179 2,581 6,601
------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES............... (390) (897) (4,214)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock...................................... -- -- 1
Capital distributions to stockholders..................... -- -- (2,500)
------- ------- --------
NET CASH USED IN FINANCING ACTIVITIES............... -- -- (2,499)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 2,650 (250) 2,136
Cash and cash equivalents at beginning of period............ 428 3,078 2,828
------- ------- --------
Cash and cash equivalents at end of period.................. $ 3,078 $ 2,828 $ 4,964
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
TMF, Inc. ("TMF") operates Hotel Reservations Network, a leading online
consolidator of hotel rooms for resale in the consumer market in the United
States. Its affiliate, HRN Marketing Corp. ("Marketing"), which was formed on
August 17, 1998 and commenced operations on October 1, 1998, specializes in
Internet marketing and provides on a contract basis, the marketing, advertising,
promotional activities and public relations for TMF. In addition, Marketing
performs banner advertising, linking programs, search engine placement and
arranging for Internet affiliations for TMF.
The accompanying combined financial statements as of December 31, 1998, and
since October 1, 1998, present TMF and Marketing (collectively, the "Company")
on a combined basis since the companies are controlled by common shareholders,
although neither company has a controlling interest in the other.
On May 10, 1999, Hotel Reservations Network, Inc. ("Hotel Reservations
Network"), a wholly-owned subsidiary of USA Networks, Inc. ("USAi"), acquired
substantially all of the assets of TMF and Marketing. See Note 8.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable debt and equity securities are classified as available for sale
and are carried at market value. Unrealized gains and losses are recorded as a
component of accumulated other comprehensive income in stockholders' equity
until realized. Realized gains and losses on the sale of investments are based
upon the specific identification method and are included in the statement of
operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated useful lives of five to seven years.
PREPAID HOTEL ROOMS
Prepaid hotel rooms are carried at cost and are expensed at the conclusion
of the customer's stay at the hotel. The Company reviews the carrying value of
prepaid hotel rooms and provides a carrying adjustment, if necessary. As of
December 31, 1997 and 1998, no carrying adjustment was recorded.
F-7
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
REVENUE RECOGNITION
Charges for hotel accommodations are billed to customers in advance. The
related payments are included in deferred revenue and recognized as income at
the conclusion of the customer's stay at the hotel.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed when the advertising first
takes place and were approximately $500, $1,000 and $2,600 for the years ended
December 31, 1996, 1997 and 1998, respectively.
The Company capitalizes costs paid for advertising to specific target
audiences on third party Internet websites that have resulted in hotel room
bookings for which revenue has not been recognized as of the balance sheet date.
The capitalized costs are amortized over a period of no more than three months,
which approximates the period over which the revenue is earned. At December 31,
1998, the amount capitalized was $125.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3--MARKETABLE SECURITIES--AVAILABLE FOR SALE
Investments in marketable securities--available for sale consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------------- --------------------------------------------------------------
MARKET UNREALIZED MARKET UNREALIZED UNREALIZED NET UNREALIZED
COST VALUE GAIN COST VALUE GAIN LOSS GAIN (LOSS)
-------- -------- ---------- -------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government bonds........... $2,844 $2,887 $ 43 $3,384 $3,369 $ 6 $(21) $(15)
Common stocks.............. 744 1,081 337 985 1,359 381 (7) 374
Mutual funds, primarily
invested in government
bonds.................... 95 115 20 2,945 2,944 -- (1) (1)
------ ------ ---- ------ ------ ---- ---- ----
$3,683 $4,083 $400 $7,314 $7,672 $387 $(29) $358
====== ====== ==== ====== ====== ==== ==== ====
</TABLE>
F-8
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
Scheduled maturities of debt securities classified as available for sale at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
MARKET
DUE IN COST VALUE
- ------ -------- --------
<S> <C> <C>
1999........................................................ $ 100 $ 100
2000 - 2003................................................. 914 915
2004 - 2008................................................. 2,020 1,995
2009 and later.............................................. 350 359
------ ------
$3,384 $3,369
====== ======
</TABLE>
NOTE 4--COMMITMENTS
LETTERS OF CREDIT
At December 31, 1998, the Company had a letter of credit of $500 outstanding
under an agreement expiring in October 1999. Investments with a fair value of
approximately $900 were pledged to secure the letter of credit.
The Company also had unsecured letters of credit outstanding with various
hotels. At December 31, 1998, the unsecured letters of credit totaled $425. They
expire in March 2000.
OPERATING LEASES
The Company conducts a portion of its operations in leased facilities. The
minimum rental commitments under these leases, which are noncancellable, are as
follows:
<TABLE>
<S> <C>
1999........................................................ $235
2000........................................................ 240
2001........................................................ 244
----
$719
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $100, $113 and $211, respectively.
NOTE 5--INCOME TAXES
TMF elected S corporation status for Federal income tax purposes effective
January 1, 1997. As a result, TMF does not pay Federal income taxes, except for
the Federal taxes related to built-in gains which existed at January 1, 1997.
Tax expense related to built-in gains was $2 and $5 for the years ended
December 31, 1997 and 1998. At January 1, 1997, TMF had net unrealized built-in
gains of approximately $150 which, if recognized during the ten-year recognition
period beginning on January 1, 1997, will result in a tax liability. TMF has
recorded a deferred income tax liability of $49 and $44 at December 31, 1997 and
1998, respectively. Marketing has also elected S corporation status for Federal
income tax purposes.
F-9
<PAGE>
TMF, INC. (D/B/A HOTEL RESERVATIONS NETWORK)
AND HRN MARKETING CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
NOTE 4--COMMITMENTS (CONTINUED)
The income tax provision reconciled to the tax computed at the statutory
Federal rate for the year ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Federal tax expense at statutory rate....................... $43
Dividend exclusion.......................................... (3)
Other....................................................... (2)
---
$38
===
</TABLE>
NOTE 6--CONTINGENCIES
In conducting its activities, the Company from time to time is the subject
of various claims arising from the ordinary course of business. In the opinion
of management, the ultimate resolution of such claims are not expected to have a
material adverse effect upon the financial position or operations of the
Company.
NOTE 7--RELATED PARTY TRANSACTIONS--OFFICERS' COMPENSATION
During 1996, 1997, and 1998, the Company's stockholders received officers'
distributions of $3,618, $6,160 and $10,126, respectively.
NOTE 8--BENEFIT PLANS
Effective January 1, 1998, the Company offers a plan pursuant to
Section 401(k) of the Internal Revenue Code (the "Plan") covering substantially
all full-time employees who are not party to collective bargaining agreements
and those employees who are non-resident aliens. The Company's share of the
matching employer contributions is set at the discretion of management. The
expense for the Plan for the year ended December 31, 1998 was $16.
NOTE 9--SUBSEQUENT EVENT (UNAUDITED)
On May 10, 1999, Hotel Reservations Network completed the acquisition of
substantially all of the assets of TMF and Marketing. The purchase price was
$149.2 million plus contingent payments based on operating performance of TMF
and Marketing during the year ending December 31, 1999 and the twelve month
periods ending March 31, 2000, 2001 and 2002.
F-10
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 6,444
Marketable securities..................................... 4,968
Accounts receivable....................................... 97
Prepaid hotel rooms....................................... 1,277
Other current assets...................................... 959
--------
Total current assets.................................... 13,745
PROPERTY AND EQUIPMENT
Computer equipment........................................ 1,173
Buildings and leasehold improvements...................... 230
Furniture and other equipment............................. 423
--------
1,826
Less accumulated depreciation and amortization............ 184
--------
1,642
OTHER ASSETS
Goodwill, net of amortization of $7,834................... 192,474
Deferred tax asset........................................ 979
Other assets.............................................. 64
--------
$208,904
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade................................... $ 18,815
Deferred revenue.......................................... 24,132
Amounts due under the acquisition agreement............... 30,000
Due to USAi for income taxes.............................. 2,051
Other accrued liabilities................................. 2,314
--------
Total current liabilities............................... 77,312
OTHER LIABILITIES........................................... 31
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A common stock, $0.01 par value shares
authorized, 4,899,900 shares outstanding................ 49
Class B common stock, $0.01 par value shares
authorized, 44,099,100 shares outstanding............... 441
Additional paid-in capital................................ 129,323
Accumulated other comprehensive loss...................... (77)
Retained earnings......................................... 1,825
--------
Total stockholders' equity.............................. 131,561
--------
$208,904
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD PERIOD
ENDED JANUARY 1 MAY 11
SEPTEMBER 30, TO MAY 10, TO SEPTEMBER 30,
1998 1999 1999
------------- ---------- ----------------
(PREDECESSOR COMPANY)
<S> <C> <C> <C>
Net revenues......................................... $40,794 $37,701 $ 70,670
Operating costs and expenses:
Cost of sales...................................... 28,416 26,538 51,724
Selling, general and administrative................ 6,580 5,669 8,969
Officers' distributions............................ 1,818 -- --
Non-recurring acquisition related costs............ -- 7,357 --
Amortization of goodwill........................... -- -- 7,834
------- ------- -----------
Total operating costs and expenses............... 36,814 39,564 68,527
------- ------- -----------
Operating profit (loss).......................... 3,980 (1,863) 2,143
Other income (expense):
Interest, dividends and other income............. 479 434 848
Interest expense................................. (7) (5) (94)
Gain on sales of securities, net of losses of $0,
$79 and $0, respectively....................... 4 471 --
------- ------- -----------
476 900 754
------- ------- -----------
Earnings (loss) before income taxes................ 4,456 (963) 2,897
Income tax expense................................. -- -- 1,072
------- ------- -----------
NET EARNINGS (LOSS).................................. $ 4,456 $ (963) $ 1,825
======= ======= ===========
Basic and diluted earnings per share................. $ 0.04
===========
Basic and diluted weighted average shares
outstanding........................................ 48,999,000
===========
Pro forma information:
Historical earnings (loss) before provision for
income taxes..................................... $ 4,456 $ (963)
Pro forma income tax benefit (expense)............. (1,649) 356
------- -------
Pro forma net earnings (loss)...................... $ 2,807 $ (607)
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TMF AND
HRN
TOTAL HRN MARKETING RETAINED
STOCKHOLDERS' TMF MARKETING CLASS A CLASS B ADDITIONAL ADDITIONAL EARNINGS
EQUITY COMMON COMMON COMMON COMMON PAID-IN PAID-IN (ACCUMULATED
(DEFICIT) STOCK STOCK STOCK STOCK CAPITAL CAPITAL DEFICIT)
------------- -------- ---------- ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE AT JANUARY
1, 1999........... $ (852) $ -- $ -- $ 2 $(1,168)
Comprehensive
income:
Net loss for the
period January 1,
1999 to May 10,
1999.............. (963) -- -- -- (963)
Less:
reclassification
adjustment for
gains included in
net loss.......... (314) -- -- -- --
--------
Comprehensive
loss.............. (1,277) -- -- -- --
-------- ---- ---- ---- -------
Deficit of
Predecessor
Company as of May
10, 1999 prior to
the change in
capitalization due
to the
Acquisition....... $ (2,129) $ -- $ -- $ 2 $(2,131)
======== ==== ==== ==== =======
HOTEL RESERVATIONS
NETWORK, INC.
Initial
capitalization of
Company in
conjunction with
the Acquisition... $157,313 $ -- $ -- $157,313 $ --
Recapitalization of
the common stock
in connection with
the initial public
offering.......... -- -- 441 (441)
Issuance of class A
common stock
immediately prior
to the initial
public offering... -- 49 -- (49)
Net earnings for the
period May 11,
1999 to September
30, 1999.......... 1,825 -- -- 1,825
Unrealized losses on
available for sale
securities........ (77) -- -- --
--------
Comprehensive
income............ 1,748
--------
Capital contribution
by USAi related to
payment of
contingent
purchase price.... 12,500 -- -- 12,500 --
Dividend
distribution to
USAi.............. (40,000) -- -- (40,000) --
-------- ---- -------- -------
BALANCE AT SEPTEMBER
30, 1999.......... $131,561 $ 49 $441 $129,323 $ 1,825
======== ==== ======== =======
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
--------------
<S> <C>
PREDECESSOR COMPANY
BALANCE AT JANUARY
1, 1999........... $ 314
Comprehensive
income:
Net loss for the
period January 1,
1999 to May 10,
1999.............. --
Less:
reclassification
adjustment for
gains included in
net loss.......... (314)
Comprehensive
loss.............. --
-----
Deficit of
Predecessor
Company as of May
10, 1999 prior to
the change in
capitalization due
to the
Acquisition....... $ --
=====
HOTEL RESERVATIONS
NETWORK, INC.
Initial
capitalization of
Company in
conjunction with
the Acquisition... $ --
Recapitalization of
the common stock
in connection with
the initial public
offering..........
Issuance of class A
common stock
immediately prior
to the initial
public offering...
Net earnings for the
period May 11,
1999 to September
30, 1999..........
Unrealized losses on
available for sale
securities........ (77)
Comprehensive
income............
Capital contribution
by USAi related to
payment of
contingent
purchase price.... --
Dividend
distribution to
USAi.............. --
-----
BALANCE AT SEPTEMBER
30, 1999.......... $ (77)
=====
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD PERIOD
ENDED JANUARY 1 MAY 11
SEPTEMBER 30, TO MAY 10, TO SEPTEMBER 30,
1998 1999 1999
------------- ---------- ----------------
(PREDECESSOR COMPANY)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................. $ 4,456 $ (963) $ 1,825
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation...................................... 75 119 184
Amortization of goodwill.......................... -- -- 7,834
Gain on sale of marketable securities............. (4) (471) --
Deferred income taxes............................. -- -- (979)
Changes in current assets and liabilities:
Accounts receivable............................. (1) 20 50
Prepaid hotel rooms............................. 204 (179) (757)
Accounts payable................................ 63 7,123 7,322
Deferred revenue................................ 8,108 11,994 4,839
Accrued liabilities............................. -- (371) 3,481
Other, net...................................... (130) (49) (551)
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 12,771 17,223 23,248
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of TMF and Marketing, net of cash
acquired.......................................... -- -- (145,485)
Capital expenditures................................ (331) (222) (590)
Purchase of marketable securities................... (2,503) (8,434) (1,500)
Proceeds from sale of marketable securities......... -- 11,631 996
Other, net.......................................... (59) 31 (38)
------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................... (2,893) 3,006 (146,617)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions by USAi....................... -- -- 169,813
Dividend distribution to USAi....................... -- -- (40,000)
------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... -- -- 129,813
------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 9,878 20,229 6,444
Cash and cash equivalents at beginning of period...... 2,828 4,964 --
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $12,706 $25,193 $ 6,444
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
On May 10, 1999, Hotel Reservations Network, Inc. ("Hotel Reservations
Network" or the "Company"), a wholly-owned subsidiary of USA Networks, Inc.
("USAi"), acquired substantially all of the assets and assumed substantially all
of the liabilities of TMF, Inc. ("TMF") and HRN Marketing Corp. ("Marketing")
(the "Acquisition"). See Note 3. The Company operates the Hotel Reservations
Network, a leading consolidator of hotel rooms for resale in the consumer market
in the United States. Until its acquisition by Hotel Reservations Network, TMF
operated the Hotel Reservations Network. Marketing, which was formed on
August 17, 1998 and commenced operations in October 1998, specialized in
Internet marketing and provided, on a contract basis, marketing, advertising,
promotional activities and public relations to TMF. Marketing also performed
banner advertising, linking programs, search engine placement and arranging for
Internet affiliations for TMF.
The Acquisition was accounted for under the purchase method of accounting.
The accompanying balance sheet as of September 30, 1999 and the statements of
operations, cash flows and stockholders' equity for the period May 11 to
September 30, 1999 give effect to the Acquisition. The accompanying financial
statements prior to the Acquisition reflect the financial position, results of
operations and cash flows of TMF and Marketing (the "Predecessor") on a combined
basis based upon their historical basis of accounting. The Predecessor financial
statements are presented on a combined basis since the companies were controlled
by common shareholders, although neither company had a controlling interest in
the other. All significant intercompany accounts and transactions are eliminated
in the combined financial statements.
The interim combined financial statements and related notes thereto of TMF
and Marketing for the nine months ended September 30, 1998, and the period
January 1 to May 10, 1999 and the financial statements as of September 30, 1999
and for the period May 11 to September 30, 1999 are unaudited and should be read
in conjunction with the audited combined financial statements and notes thereto
of the Predecessor for the year ended December 31, 1998. In the opinion of the
Company, all adjustments necessary for a fair presentation of such interim
financial statements have been included. Such adjustments consist of normal
recurring items.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Charges for hotel accommodations are billed to customers in advance. The
related payments are included in deferred revenue and recognized as income at
the conclusion of the customer's stay at the hotel.
CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments.
Short-term investments consist primarily of U.S. Treasury Securities, U.S.
Government agencies and certificates of deposit with original maturities of less
than 91 days.
MARKETABLE SECURITIES
Marketable debt and equity securities are classified as available for sale
and are carried at market value. Unrealized gains and losses are recorded as a
component of accumulated other comprehensive
F-15
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income in stockholders' equity until realized. Realized gains and losses on the
sale of investments are based upon the specific-identification method and are
included in the statement of operations.
FINANCIAL INSTRUMENTS
The carrying value of all financial instruments approximates their fair
value due to the short maturity of the respective instruments.
PREPAID HOTEL ROOMS
Prepaid hotel rooms are carried at cost and are expensed at the conclusion
of the customer's stay at the hotel. The Company reviews the carrying value of
prepaid hotel rooms and provides a carrying adjustment, if necessary. As of
September 30, 1999, no carrying adjustment was recorded.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are recorded at
cost. Repairs and maintenance and any gains or losses on dispositions are
included in operations.
Depreciation and amortization is provided for on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives.
<TABLE>
<CAPTION>
ASSET CATEGORY DEPRECIATION/AMORTIZATION PERIOD
- -------------- --------------------------------
<S> <C>
Computer equipment................................ 3 years
Leasehold improvements............................ 4 years
Furniture and other equipment..................... 3 to 10 years
</TABLE>
LONG-LIVED ASSETS INCLUDING INTANGIBLES
The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of long-lived assets, including goodwill
and property and equipment, is to review the carrying value of the assets if the
facts and circumstances suggest that they may be impaired. If this review
indicates that the carrying value will not be recoverable, as determined based
on the projected undiscounted future cash flows, the carrying value is reduced
to its estimated fair value.
ADVERTISING
Advertising expense for the nine month period ended September 30, 1998, the
period January 1 to May 10, 1999 and the period May 11 to September 30, 1999 was
$1,591, $1,375 and $2,644, respectively.
The Company capitalizes costs paid for advertising to specific target
audiences on third party Internet websites that have resulted in hotel room
bookings for which the revenue has not been recognized as of the balance sheet
date. The capitalized costs are amortized over a period of no more than three
months, which approximates the period over which the revenue is earned. As of
September 30, 1999, capitalized advertising is $351. Other advertising costs are
expensed in the period incurred.
F-16
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Predecessor to the Company elected to be taxed as an S corporation for
Federal income tax purposes and thus generally did not pay federal income taxes.
Since May 11, 1999, the Company is included in the consolidated tax return
of USAi. The Company's financial statements for the period May 11 to
September 30, 1999 reflect income tax expense computed on a stand-alone basis at
the applicable federal and state tax rates.
The statements of operations for the nine month period ended September 30,
1998 and the period January 1 to May 10, 1999 do not include a provision for
income taxes using C corporation rates. The unaudited pro forma net income
includes a provision for federal income taxes that would have been required had
the Predecessor not elected to be treated as an S corporation.
Furthermore, the Company accounts for income taxes under the liability
method, and deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled on a stand-alone basis.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average shares of common stock presented as outstanding since May 11,
1999. The shares presented reflect the recapitalization of the Company's capital
stock that will occur in conjunction with our initial public offering as if the
recapitalization took place as of May 11, 1999. In exchange for their shares of
our common stock, USAi will be issued 44,099,100 shares of class B common stock
and TMF and Marketing, collectively, will be issued 4,899,900 shares of class A
common stock, representing approximately 10% of the aggregate value of the
equity of the Company immediately prior to the public offering. The Company had
no stock options or other potential common stock equivalents; therefore, there
is no difference in basic and diluted earnings per share. Earnings per share is
not presented for the Predecessor since such amounts are not meaningful.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior year combined financial statements have been
reclassified to conform to the 1999 presentation.
NOTE 3--BUSINESS ACQUISITION
On May 10, 1999, the Company completed its acquisition of substantially all
of the assets of TMF and Marketing. The transaction has been accounted for under
the purchase method of accounting. The
F-17
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--BUSINESS ACQUISITION (CONTINUED)
purchase price was $149.2 million, net of a working capital adjustment of
$0.8 million, plus contingent payments based on operating performance during the
year ending December 31, 1999 and for the twelve month periods ending March 31,
2000, 2001 and 2002. In addition to being a guarantor of our obligations, USAi
has agreed to pay, on our behalf, the first $130.0 million of these contingent
payments (other than the $12.5 million payment we expect to make for the fourth
quarter of 1999 for which we had accrued a liability at September 30, 1999). The
purchase price was paid in the form of a cash payment of $145 million on
May 11, 1999 and a promissory note of $5 million which is due on January 30,
2000 and which bears interest at 4.75% per annum. Interest for the period May 11
to September 30, 1999 on the promissory note was $92.
The Company is required to issue the sellers of our predecessor business the
number of shares of our class A common stock equal to approximately 10% of the
aggregate value of the equity of the Company immediately prior to a transaction,
as defined, including an initial public offering or sale or merger of the
Company. This 10% equity interest has been accounted for at the historical
carryover basis of our predecessor business.
The initial contingent payments total $50 million, of which $37.5 million
has been paid through November 4, 1999 by the Company with funds contributed by
USAi in consideration of equity interests, including $12.5 million at the date
of Acquisition. The remaining $12.5 million has been accrued based on the
probability that the operating performance will be obtained in the fourth
quarter of 1999. The purchase price, including the initial contingent payments
of $50.0 million for the year ending December 31, 1999, has been preliminarily
allocated to the assets acquired and liabilities assumed based on their
respective fair values at the date of purchase. The unallocated excess of
acquisition costs over net assets acquired of $200.3 million has been
preliminarily allocated to goodwill, which is being amortized over ten years.
The following unaudited pro forma combined condensed financial information
for the nine months ended September 30, 1998 and 1999, is presented to show the
results of the Company as if the Acquisition occurred at the beginning of the
periods presented. The pro forma results include certain adjustments, including
increased amortization related to goodwill and other intangibles, interest
expense and income tax expense, and are not necessarily indicative of what the
results would have been had the transaction actually occurred on the
aforementioned dates.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1999
-------- ---------
(UNAUDITED)
<S> <C> <C>
Net revenues............................................ $40,794 $108,371
Net earnings (loss)..................................... (9,105) 1,168
</TABLE>
F-18
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--MARKETABLE SECURITIES--AVAILABLE FOR SALE
Investments in marketable securities--available for sale consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------
UNREALIZED
COST MARKET LOSS
-------- -------- ----------
<S> <C> <C> <C>
Government bonds...................................... $2,189 $2,134 $55
Medium term notes..................................... 2,856 2,834 22
------ ------ ---
$5,045 $4,968 $77
====== ====== ===
</TABLE>
Maturities of marketable securities--available for sale are $1,500, $246,
$98 and $3,124 in 2000, 2003, 2004 and 2005 and thereafter, respectively.
NOTE 5--INCOME TAXES
A reconciliation of total income tax expense to the amounts computed by
applying the statutory federal income tax rate to earnings before income taxes
for the period May 11 to September 30, 1999 is shown as follows (in thousands):
<TABLE>
<S> <C>
Income tax expense at the federal statutory rate of 34%..... $ 985
State income taxes, net of effect of federal tax benefit.... 87
Non-deductible portion of executive compensation............ --
--------
Income tax expense.......................................... $ 1,072
========
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<S> <C>
Current income tax expense:
Federal................................................... $ 1,802
State..................................................... 249
--------
Current income tax expense:............................. 2,051
--------
Deferred income tax benefit:
Federal................................................... 861
State..................................................... 118
--------
Deferred income tax benefit............................. 979
--------
Total net income tax expense............................ $ 1,072
========
</TABLE>
The deferred tax benefit of $979 as of September 30, 1999 is related
entirely to the tax effects of cumulative temporary differences arising from the
amortization of goodwill, which is amortized over 10 years for book purposes and
15 years for tax purposes. The effective tax rate is 37% which reflects the
federal statutory rate and applicable state income tax rates.
F-19
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment used in connection with its
operations under various operating leases. Future minimum payments under these
non-cancelable agreements total $2,184 and are $148 for the remainder of 1999
and $607, $601, $590 and $238 in the years 2000, 2001, 2002 and 2003,
respectively.
Expenses charged to operations under these agreements were $178, $108 and
$210 for the nine months ended September 30, 1998, the period from January 1 to
May 10, 1999 and the period May 11 to September 30, 1999, respectively.
At September 30, 1999, the Company has $1,757 of outstanding letters of
credit that expire between March and December 2000. The outstanding letters of
credit are collateralized by $2,000 of investments that are classified as cash
equivalents.
NOTE 7--LITIGATION
In the ordinary course of business, the Company is engaged in various
lawsuits; however, the Company is not currently involved in any material legal
proceedings. In the opinion of management, the ultimate outcome of the various
lawsuits should not have a material impact on the liquidity, results of
operations or financial condition of the Company.
NOTE 8--RELATED PARTY TRANSACTIONS
The Company has arrangements with Ticketmaster LLC ("Ticketmaster") a wholly
owned subsidiary of USAi that allows Ticketmaster to sell hotel rooms to the
Company's customers using the Company's websites. Furthermore, the Company
entered into an arrangement with Ticketmaster for teleservices in certain
markets. For the period May 11 to September 30, 1999, the Company incurred fees
of $16 under these arrangements.
The Company entered into an agreement with Ticketmaster Online-CitySearch,
Inc. ("TMCS"), a subsidiary of USAi which operates CitySearch's Reservation
Center. Under the agreement, TMCS will market the Company's hotel products via
the Internet in return for (1) links from the Company's websites and newsletters
to TMCS's website and (2) a 5% commission on total booking price on all orders
placed and exercised through City Site links. The commission paid to TMCS for
the period May 11 to September 30, 1999 was not material.
The Company has certain arrangements for cable television commercial
advertisements with USAi affiliates. No advertisements ran during the period
ended September 30, 1999.
During the nine months ended September 30, 1998, the Predecessor's
officers/stockholders received officers' distributions of $1,818, as the
Predecessor distributed virtually all pre-tax profits to its officers/
stockholders.
NOTE 9--NON-RECURRING ACQUISITION RELATED COSTS
During the period January 1 to May 10, 1999, the Predecessor paid
discretionary bonuses of $7,198 to its employees (other than Messrs. Diener and
Litman, the principal owners of the predecessor) and incurred professional and
advisory fees of $159 related directly to the acquisition.
F-20
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--BENEFIT PLANS
The Company offers a plan pursuant to Section 401(k) of the Internal Revenue
Code (the "Plan") covering substantially all full-time employees who are not
party to collective bargaining agreements and those employees who are
non-resident aliens. The Company's share of the matching employer contributions
is set at the discretion of management. The expense for the Plan for the nine
months ended September 30, 1998, the period January 1 to May 10, 1999 and the
period May 11 to September 30, 1999 was $13 and $6 and $9, respectively.
NOTE 11--COMMITMENTS
As of September 30, 1999, the Company has non-cancelable commitments for
hotel rooms totalling $3,566, which relate to the period October 1, 1999 to
December 31, 2000. Furthermore, the Company has non-cancelable commitments under
advertising contracts with third party Internet websites totalling $1,186 as of
September 30, 1999.
NOTE 12--STOCKHOLDERS' EQUITY
Stockholders' equity for the period May 11 to September 30, 1999 reflects
the recapitalization of the Company's capital stock that will occur in
conjunction with our initial public offering, as if the recapitalization took
place as of May 11, 1999. The 4,899,900 shares of class A common stock are based
on the shares to be issued to the sellers of the predecessor business (See
Note 3). The shares of class B common stock are based on the 44,099,100 shares
to be issued to USAi in consideration of its equity interests.
The holders of our class B common stock will be entitled to 15 votes for
each share, and the holders of our class A common stock will be entitled to one
vote per share.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[LOGO]
5,400,000 SHARES OF CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
ALLEN & COMPANY INCORPORATED
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC.
---------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
information different from that which is contained in this prospectus. We are
offering to sell shares of class A common stock and seeking offers to buy shares
of class A common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the class A common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000, all dealers that buy, sell or trade in our class A
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This delivery requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses expected to be incurred
by the Registrant in connection with the issuance and distribution described in
this registration statement, other than underwriting discounts and commissions.
All amounts other than the Commission registration fee are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $22,363
NASD filing fee............................................. 8,573
Blue sky fees and expenses.................................. 2,500
Nasdaq listing fee.......................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Printing and engraving expenses............................. *
Transfer Agent and Registrar fees and expenses.............. *
Miscellaneous............................................... *
-------
Total................................................... $ *
=======
</TABLE>
- ------------------------
*To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware provides
that a Delaware corporation may include in its charter documents, and in
agreements between the corporation and its directors, provisions expanding the
scope of indemnification beyond that specifically provided by the current law.
The Registrant's restated certificate of incorporation limits the personal
liability of directors of the Registrant and provides for the indemnification of
directors of the Registrant to the fullest extent permitted under Delaware law.
The Registrant's restated bylaws also provide for the indemnification of
officers, directors and third parties acting on behalf of the company if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the company, and with respect to any criminal
action or proceeding, the indemnified party had no reason to believe his conduct
was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 25, 1999, the date of inception of the Registrant, the
Registrant has issued securities that were not registered under the Securities
Act in the following transactions:
(1) In connection with the formation of the Registrant, 100 shares of common
stock were issued to USA Networks, Inc. ("USAi"), our parent company, on
April 19, 1999. The shares were issued in exchange for USAi's initial
capital contribution to the Registrant.
II-1
<PAGE>
(2) Immediately prior to the closing of this offering, the Registrant will
authorize a recapitalization of its common stock, and USAi will exchange all
of its shares of common stock, which constitutes all of the Registrant's
outstanding common stock, for shares of class B common stock.
(3) Following the recapitalization but prior to the closing of this offering,
the Registrant will issue TMF, Inc. and HRN Marketing Corp. the number of
shares of class A common stock equal to approximately 10% of the aggregate
value of the equity of the Registrant. TMF, Inc. and HRN Marketing Corp.
will receive these shares as part of their consideration for the sale of
substantially all their assets to the Registrant.
The original issuance of shares to USAi and the issuance of shares to TMF,
Inc. and HRN Marketing Corp. is a transaction exempt from the registration
requirements under Section 4(2) of the Securities Act. The recapitalization is a
transaction exempt from the registration requirements under Section (3)(a)(9) of
the Securities Act. In addition, no public offering was involved in any of these
transactions nor were underwriting discounts or commissions paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Amended Certificate of Incorporation (as currently in
effect)
3.2** Form of Restated Certificate of Incorporation (to be
effective immediately prior to the consummation of this
offering)
3.3** Form of Bylaws
4.1** Specimen class A common stock certificate
5.1** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
10.1** Assumption Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc.
10.2** Tax Sharing Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc.
10.3** 1999 Stock Option Plan
10.4* Asset Purchase Agreement by and among Hotel Reservations
Network, Inc., USA Networks, Inc., TMF, Inc., HRN Marketing
Corp., David Litman and Robert Diener
23.1* Consent of Grant Thornton LLP
23.2** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in Exhibit 5.1)
24.1*** Powers of Attorney
27.1*** Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Previously filed
II-2
<PAGE>
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on December 22, 1999.
<TABLE>
<S> <C> <C>
HOTEL RESERVATIONS NETWORK, INC.
By: /s/ THOMAS J. KUHN
-----------------------------------------
Name: Thomas J. Kuhn
Title: Vice President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons on behalf
of the registrant and in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<C> <S> <C>
*
--------------------------------- Chief Executive Officer and Director December 22, 1999
David Litman (Principal Executive Officer)
* President, Treasurer and Director
--------------------------------- (Principal Financial and December 22, 1999
Robert Diener Accounting Officer)
*
--------------------------------- Director December 22, 1999
Barry Baker
*
--------------------------------- Director December 22, 1999
Barry Diller
*
--------------------------------- Director December 22, 1999
Victor A. Kaufman
*
--------------------------------- Director December 22, 1999
Dara Khosrowshahi
</TABLE>
*By: /s/ THOMAS J. KUHN
----------------------------
Name: Thomas J. Kuhn
Title: Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Amended Certificate of Incorporation (as currently in
effect)
3.2** Form of Restated Certificate of Incorporation (to be
effective immediately prior to the consummation of this
offering)
3.3** Form of Bylaws
4.1** Specimen class A common stock certificate
5.1** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
10.1** Assumption Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc.
10.2** Tax Sharing Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc.
10.3** 1999 Stock Option Plan
10.4* Asset Purchase Agreement by and among Hotel Reservations
Network, Inc., USA Networks, Inc., TMF, Inc., HRN Marketing
Corp., David Litman and Robert Diener
23.1* Consent of Grant Thornton LLP
23.2** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in Exhibit 5.1)
24.1*** Powers of Attorney
27.1*** Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Previously filed
(b) Financial Statement Schedules
None
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HRN, INC.
------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
------------------------------------------
HRN, Inc., a Delaware corporation (hereinafter called the
"Corporation"), does hereby certify as follows:
FIRST: Article 1 of the Corporation's Certificate of
Incorporation is hereby amended to read in its entirety as set forth below:
"1. The name of the corporation is Hotel Reservations
Network, Inc. (the "CORPORATION").
SECOND: The foregoing amendment was duly adopted in accordance
with Section 242 of the General Corporation Law of the State of Delaware (the
"G.L.C."). Prompt written notice of the Adoption of the Amendments has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the G.C.L.
IN WITNESS WHEREOF, the undersigned Vice President and
Secretary has caused this Certificate to be duly executed in its corporate name
this 8th day of November, 1999.
HRN, INC.
By: /s/ Thomas Kuhn
------------------------------
Thomas Kuhn
Vice President and Secretary
<PAGE>
Exhibit 10.4
Execution Copy
ASSET PURCHASE AGREEMENT
by and among
HRN, INC.,
USA NETWORKS, INC.,
TMF, INC.,
HRN MARKETING CORP.,
ROBERT DIENER
and
DAVID LITMAN
-------------------
April 13, 1999
-------------------
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
----
<S> <C> <C>
1. Sale of Assets..................................................................................1
1.1 Assets to be Sold......................................................................1
1.2 Excluded Assets........................................................................3
2. Assumption of Liabilities.......................................................................3
2.1 Liabilities Assumed by the Buyer.......................................................3
2.2 Liabilities Not Assumed by the Buyer...................................................4
3. Purchase Price and Payment......................................................................5
3.1 Purchase Price.........................................................................5
3.2 Payment of Purchase Price..............................................................6
3.3 Purchase Price Adjustment..............................................................7
3.4 Purchase Price Allocation..............................................................9
4. Closing.........................................................................................9
5. Representations and Warranties of the Sellers and Diener and Litman............................10
5.1 Due Incorporation and Qualification; Capitalization...................................10
5.2 Certificate of Incorporation and By-laws..............................................11
5.3 Financial Statements..................................................................11
5.4 No Material Adverse Change............................................................12
5.5 Tax Matters...........................................................................12
5.6 Compliance with Laws..................................................................14
5.7 Authority to Execute and Perform Agreements; Consents.................................15
5.8 Litigation............................................................................16
5.9 Agreements............................................................................16
5.10 Real Estate...........................................................................18
5.11 Accounts and Notes Receivable.........................................................19
5.12 Tangible Property.....................................................................19
5.13 Intangible Property...................................................................20
5.14 Liens.................................................................................21
5.15 Indebtedness..........................................................................21
5.16 Liabilities...........................................................................22
5.17 Suppliers and Customers...............................................................22
5.18 Pension and Benefit Plans and Compliance with ERISA...................................23
5.19 Insurance.............................................................................25
5.20 Officers, Directors and Employees.....................................................26
5.21 Operations of the Seller..............................................................26
5.22 Potential Conflicts of Interest.......................................................29
5.23 Environmental.........................................................................29
5.24 Investments...........................................................................30
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.25 Projections...........................................................................30
5.26 Entire Investment in the Business; No Other Businesses................................30
5.27 Full Disclosure.......................................................................31
5.28 No Broker.............................................................................31
5.29 Representations and Warranties on Closing Date........................................31
6. Representations and Warranties of the Buyer....................................................32
6.1 Due Incorporation.....................................................................32
6.2 Corporate Power of the Buyer..........................................................32
6.3 No Broker.............................................................................32
6.4 Representations and Warranties on Closing Date........................................32
7. Covenants and Agreements.......................................................................33
7.1 Conduct of Business...................................................................33
7.2 Insurance.............................................................................33
7.3 Preservation of Business..............................................................33
7.4 Litigation............................................................................33
7.5 Continued Effectiveness of Representations and Warranties of
the Sellers...........................................................................34
7.6 Corporate Examinations and Investigations.............................................34
7.7 Expenses of Sale......................................................................35
7.8 Further Assurances....................................................................35
7.9 Additional Purchase Price.............................................................36
7.10 Quarterly Deferred Payment............................................................40
7.11 Participation Payment.................................................................42
7.12 USAi Guaranty.........................................................................46
7.14 Obligations Regarding Acquired Businesses.............................................47
8. Conditions Precedent to the Obligation of the Buyer to Close...................................48
8.1 Representations and Covenants.........................................................48
8.2 Governmental Permits and Approvals....................................................49
8.3 Third Party Consents..................................................................49
8.4 Opinion of Counsel to the Sellers.....................................................49
8.5 Litigation............................................................................49
8.6 Escrow Agreement......................................................................50
8.7 Hart-Scott-Rodino.....................................................................50
8.8 Landlord Estoppel Certificate.........................................................50
8.9 Assignment of Lease...................................................................51
8.10 Tax Returns...........................................................................51
8.11 FIRPTA Affidavit......................................................................51
9. Conditions Precedent to the Obligation of the Sellers to Close.................................51
9.1 Representations.......................................................................51
9.2 Opinion of Counsel to the Buyer.......................................................52
9.3 Litigation............................................................................52
9.4 Hart-Scott-Rodino.....................................................................52
10. Covenants of Robert Diener and David Litman....................................................52
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10.1 Covenants Against Competition.........................................................52
10.2 Rights and Remedies Upon Breach.......................................................55
10.3 Severability of Covenants.............................................................55
10.4 Blue-Pencilling.......................................................................56
10.5 Enforceability in Jurisdictions.......................................................56
10.6 Shareholder Guaranty..................................................................56
11. Survival of Representations and Warranties of the Sellers......................................57
12. Indemnification................................................................................59
12.1 Obligation of the Sellers and Diener and Litman to Indemnify..........................59
12.2 Obligation of Buyer to Indemnify......................................................60
12.3 Notice to Indemnifying Party..........................................................60
12.4 Escrow Fund...........................................................................61
12.5 Limitation on Indemnification.........................................................62
12.6 Set-Off Rights........................................................................62
13. Termination of Agreement.......................................................................63
13.1 Termination...........................................................................63
13.2 Survival After Termination............................................................65
14. Miscellaneous..................................................................................65
14.1 Certain Definitions...................................................................65
14.2 Publicity.............................................................................72
14.3 Notices...............................................................................72
14.4 Entire Agreement......................................................................73
14.5 Waivers and Amendments................................................................73
14.6 Governing Law.........................................................................74
14.7 Consent to Jurisdiction and Service of Process........................................74
14.8 No Assignment.........................................................................75
14.9 Usage.................................................................................76
14.10 Counterparts..........................................................................76
14.11 Exhibits and Schedules................................................................76
14.12 Headings..............................................................................76
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
Exhibit A Bill of Sale
Exhibit B Purchase Note
Exhibit C Escrow Agreement
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule 1.2 Excluded Assets
Schedule 5.1 Due Incorporation and Qualification: Capitalization
Schedule 5.5 Tax Matters
Schedule 5.6 Permits
Schedule 5.7 Authority to Execute and Perform Agreements; Consents
Schedule 5.8 Litigation
Schedule 5.9 Agreements
Schedule 5.10 Real Estate
Schedule 5.12 Tangible Property
Schedule 5.13 Intangible Property
Schedule 5.15 Indebtedness
Schedule 5.16 Liabilities
Schedule 5.17 Suppliers and Customers
Schedule 5.18 Pension and Benefit Plans and Compliance with ERISA
Schedule 5.19 Insurance
Schedule 5.20 Officers, Directors and Employees
Schedule 5.21 Operations of the Sellers
Schedule 5.22 Potential Conflicts of Interest
Schedule 5.23 Environmental
Schedule 5.24 Investments
Schedule 7.10 Target Adjusted Gross Profit
Schedule 7.11.5 Calculation Schedule
Schedule 14.1(xvii) Calculation of Gross Profit
Schedule 14.1 (xxiv) Calculation of Net Working Capital
</TABLE>
iv
<PAGE>
EXECUTION COPY
ASSET PURCHASE AGREEMENT
AGREEMENT dated as of April 13, 1999, by and among HRN, Inc.,
a Delaware corporation (the "BUYER"), USA Networks, Inc., a Delaware corporation
("USAi"), TMF, INC., a Texas corporation, HRN Marketing Corp., a Florida
corporation (collectively, the "SELLERS"), Robert Diener ("DIENER") and David
Litman ("LITMAN"; and together with Diener the "SHAREHOLDERS").
The Buyer wishes to purchase from the Sellers, and the Sellers
wish to sell to the Buyer, substantially all of the assets, properties, rights
and business of the Sellers, subject to certain liabilities, upon the terms and
conditions of this Agreement. The Shareholders and trusts for the benefit of
their families are the sole holders of all the issued and outstanding capital
stock of the Sellers. As an inducement to the Buyer to enter into this
Agreement, each Shareholder has (i) approved this Agreement and (ii) agreed to,
jointly and severally, guarantee all the obligations of the Sellers hereunder on
the terms and conditions provided herein.
Accordingly, the parties agree as follows:
1. SALE OF ASSETS.
1.1 ASSETS TO BE SOLD. Except as otherwise provided in Section
1.2, at the closing provided for in Section 4 (the "CLOSING"), the Sellers shall
sell, assign, transfer and deliver to the Buyer all of the assets, properties,
rights and business of the Sellers of every type and description, real, personal
and mixed, tangible and intangible, wherever located and whether or not
reflected on the books and records of the Sellers
<PAGE>
EXECUTION COPY
(all of such assets, properties, rights and business being hereinafter sometimes
collectively called the "PURCHASED ASSETS"), including, without limitation:
(i) those assets, properties and rights
reflected on the audited balance sheet of the Sellers as at December 31, 1998
referred to in Section 5.3 (the "BALANCE SHEET") (subject to changes in the
ordinary course of business therein through the Closing Date (as hereinafter
defined)) or otherwise referred to in this Agreement or any Schedule hereto;
(ii) the Sellers' list of customers and
subscriptions;
(iii) the Sellers' right to use the name "Hotel
Reservations Network" and all variants thereof;
(iv) all of the Sellers' interest in and claims
and rights under contracts and other agreements, Permits (as hereinafter
defined), titles, copyrights and applications therefor which are referred to in
this Agreement or any Schedule hereto (subject to changes therein through the
Closing Date);
(v) the books and records of the Sellers
relating to the Purchased Assets;
(vi) the Sellers' rights in all domain names used
by the Sellers;
(vii) the goodwill of the Sellers; and
(viii) all other assets, properties, rights,
claims, entitlements and business of every kind and nature owned or held by the
Sellers, or in which the Sellers have an interest, on the Closing Date, known or
unknown, fixed or unfixed,
<PAGE>
EXECUTION COPY
inchoate, accrued, absolute, contingent or otherwise, whether or not
specifically referred to in this Agreement.
In confirmation of the foregoing sale, assignment and transfer, the Sellers
shall execute and deliver to the Buyer at the Closing a Bill of Sale in the form
of EXHIBIT A.
1.2 EXCLUDED ASSETS. Notwithstanding the foregoing, the
following assets are not included among the Purchased Assets and are excluded
from the sale and transfer provided in this Agreement:
(i) any counterclaims the Sellers may have
relating to the Worldcom Litigation, the Westinghouse Litigation or the Frontier
Litigation (each as defined in SCHEDULE 5.8); and
(ii) the personal effects of Diener and Litman
and other assets of the Sellers, described on SCHEDULE 1.2.
2. ASSUMPTION OF LIABILITIES.
2.1 LIABILITIES ASSUMED BY THE BUYER. In partial payment of
the Purchase Price (as defined in Section 3.1), the Buyer shall, subject to
Section 2.2, assume, as of the Closing Date, the following liabilities and
obligations of the Sellers to the extent existing on the Closing Date:
(i) all liabilities of the Sellers reflected on
the Balance Sheet; and
(ii) all liabilities and obligations under
contracts and other agreements to which the Sellers are a party or by or to
which they or their assets,
<PAGE>
EXECUTION COPY
properties or rights are bound or subject but only insofar as are reflected in
SCHEDULES 5.9, 5.10, 5.12, 5.13, 5.16 OR 5.18; and
(iii) all liabilities and obligations of the
Sellers assumed or undertaken by the Sellers from the Balance Sheet Date through
the Closing Date in the ordinary course of business without violation of the
provisions of Sections 5.21 and 7.1.
The specific liabilities to be assumed by the Buyer pursuant to this Agreement
are hereinafter sometimes collectively referred to as the "ASSUMED LIABILITIES."
2.2 LIABILITIES NOT ASSUMED BY THE BUYER. Anything in this
Agreement to the contrary notwithstanding, the Buyer shall not assume, or in any
way be liable or responsible for, any liabilities or obligations of the Sellers
except as specifically provided in Section 2.1. Without limiting the generality
of the foregoing, the Buyer shall not assume the following:
(i) any liability or obligation of the Sellers
arising out of or in connection with the negotiation and preparation of this
Agreement and the consummation and performance of the transactions contemplated
hereby, including without limitation on the foregoing, any tax liability so
arising and the fee of Donaldson, Lufkin & Jenrette referred to in Section 5.28;
(ii) any liability or obligation under contracts
and other agreements to which the Sellers are a party or by or to which they or
their assets, properties or rights are bound or subject which are not described
in SCHEDULES 5.9, 5.10, 5.12, 5.13, 5.16 OR 5.18 or which are not entered into
by the Sellers from the
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date hereof through the Closing Date in the ordinary course of business or which
are otherwise in violation of the provisions of Section 5.21 or 7.1;
(iii) liabilities with respect to Taxes, including
any contractual liability with respect to Taxes of another person, for any
taxable period or portion thereof ending on or before the Closing Date;
(iv) any liability or obligation of the Sellers
to the Shareholders or to their respective affiliates;
(v) any liability or obligation of the Sellers
arising out of or relating to any breach of a representation, warranty, covenant
or agreement of the Sellers contained herein;
(vi) any liability or obligation relating to the
Worldcom Litigation, Westinghouse Litigation or the Frontier Litigation (each as
defined in SCHEDULE 5.8); or
(vii) any liability or obligation relating to any
severance payment, change of control payment or other payment or obligation any
employee of the Sellers becomes entitled to as a result of the transaction
contemplated hereby.
3. PURCHASE PRICE AND PAYMENT.
3.1 PURCHASE PRICE. The aggregate purchase price for the
Purchased Assets (the "PURCHASE PRICE") shall be an amount equal to (i) $150
million (as adjusted pursuant to Section 3.3 below); (ii) the Quarterly Deferred
Payments, if any, provided in Section 7.10; (iii) the Additional Purchase
Payment, if any, provided in Section 7.9;
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(iv) the Participation Payment, if any, provided in Section 7.11 and (v) the
aggregate amount of the Assumed Liabilities on the Closing Date.
3.2 PAYMENT OF PURCHASE PRICE. The Buyer shall pay the
Purchase Price by (i) payment to the Sellers as hereinafter provided (the
"PURCHASE PAYMENT") and (ii) the assumption by the Buyer of the Assumed
Liabilities. The Purchase Payment shall be paid by the Buyer as follows:
(i) at the Closing, the Buyer shall pay to the
Sellers by delivery of a promissory note, in the form attached hereto as EXHIBIT
B, payable to the Sellers in the stated principal amount of $150 million and
bearing interest at the rate of 4.75% (the "PURCHASE NOTE"), with a payment of
$145 million due the day after the Closing Date ($5 million of which shall be
paid to the Escrow Agent as provided in paragraph (ii) below) and $5 million due
on January 30, 2000 (which shall be paid to the Escrow Agent as provided in
paragraph (ii) below). The Purchase Note shall be subject to any adjustments
described in Section 3.3 below; and
(ii) the Buyer shall pay to the escrow agent
("ESCROW AGENT") under the Escrow Agreement referred to in Section 8.6, (i) on
the day following the Closing Date, an aggregate of $5 million of the cash
payment due under the Purchase Note on such date in cash, and (ii) on January
30, 2000 $5 million of the cash payment due under the Purchase Note on such date
in cash, such amounts to be held and dealt with as provided in the Escrow
Agreement.
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Any such payment due in cash shall be made by wire transfer of immediately
available funds to an account designated in writing by the Sellers or the Escrow
Agent, as the case may be, at least two Business Days prior to the due date of
such payment.
3.3 PURCHASE PRICE ADJUSTMENT. (a) As soon as practicable but
in any event within ninety (90) days after the Closing Date, the Buyer shall
deliver to the Sellers a balance sheet of the Purchased Assets and Assumed
Liabilities dated as of the Closing Date (the "CLOSING DATE BALANCE SHEET"),
which Closing Date Balance Sheet shall (i) have been prepared by the Buyer in
accordance with GAAP applied consistently with the Financials (as defined
herein), and (ii) set forth the Net Working Capital of the Sellers as of the
Closing Date. The Sellers and their representatives shall have the right, during
normal business hours and upon reasonable request, to review all work papers and
procedures used to prepare the Closing Date Balance Sheet and to have reasonable
access to the Buyer's financial employees and accountants involved in the
determination of the Closing Date Balance Sheet and shall have the right to
perform reasonable procedures necessary to confirm the accuracy thereof.
(b) The Closing Date Balance Sheet shall become final and
binding on the Sellers and Buyer unless the Sellers notify the Buyer in writing
thirty (30) days after delivery of the Closing Date Balance Sheet and specify
therein the basis and reason for the dispute and the amount which is in dispute.
During a period of fifteen (15) days following the delivery of such notice, the
Buyer and the Sellers shall attempt to resolve any such dispute. If, at the end
of such fifteen (15) day period, the Buyer and the Sellers shall have failed to
reach agreement with respect to such dispute, the unresolved disputed matters
(the "DISPUTED MATTERS") shall be referred to
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PricewaterhouseCoopers or if such firm declines to act in such capacity, any
such other firm of independent nationally recognized accountants chosen and
mutually accepted by both parties (the "ARBITRATOR") for resolution. The
Arbitrator shall be instructed to use every reasonable effort to make its
determination with respect to the Disputed Matters (the "ARBITRATOR'S WC
DETERMINATION") within thirty (30) days of the submission to it of the Disputed
Matters. The Buyer shall give the Arbitrator, during normal business hours and
upon reasonable request, access to all work papers and procedures used to
prepare the Buyer's determination of the Closing Date Balance Sheet and to the
Buyer's financial employees and accountants. The Arbitrator shall deliver the
Arbitrator's WC Determination to the Buyer and the Sellers. The final
determination of the Net Working Capital of the Sellers as of the Closing Date
(the "FINAL CLOSING NET WORKING CAPITAL") shall be the Net Working Capital set
forth in the Closing Balance Sheet as adjusted by any disputes resolved by the
parties and by the Arbitrator's WC Determination, if any. Each of the parties
shall bear all costs and expenses incurred by it in connection with such
arbitration, and the fees of the arbitrator shall be shared equally by the Buyer
and the Sellers. This provision for arbitration shall be specifically
enforceable by the parties and the decision of the Arbitrator in accordance with
the provisions hereof shall be final and binding and there shall be no right of
appeal therefrom.
(c) Within 10 days after the determination of the Final
Closing Net Working Capital in accordance with Section 3.3(b):
(i) if the Final Closing Net Working Capital is
greater than -$750,000, the Buyer shall pay to the Sellers, in immediately
available funds, the
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amount by which (A) the Final Closing Net Working Capital exceeds (B) -$750,000;
or, alternatively
(ii) if the Final Closing Net Working Capital is
less than -$750,000, the Sellers shall pay to the Buyer, in immediately
available funds, the amount by which (A) -$750,000 exceeds (B) the Final Closing
Net Working Capital.
3.4 PURCHASE PRICE ALLOCATION.
(i) The Purchase Price and Assumed Liabilities
shall be allocated among the Purchased Assets (A) in accordance with the values
reflected for such Purchased Assets on the Closing Date Balance Sheet (as
adjusted by any disputes resolved by the parties and by the Arbitrator's WC
Determination, if any), (B) $1 million to the covenants against competition
described in Section 10.1 and (C) the balance to intangible assets and goodwill.
(ii) For all Tax purposes, the Buyer and the
Sellers agree (A) to report the transactions contemplated by this Agreement in a
manner consistent with the terms of this Agreement, and (B) that none of them
will take any position inconsistent therewith in any Tax Return.
4. CLOSING. The Closing of the sale and purchase of the Purchased
Assets shall take place at the offices of Paul, Weiss, Rifkind, Wharton &
Garrison, 1285 Avenue of the Americas, New York, New York 10019, at 10:00 a.m.
local time, on the first Business Day following the day on which all the
conditions, other than conditions to be satisfied on that day, set forth in
Articles 8 and 9 are satisfied or waived by the party entitled to waive such
condition or at such other time and place as
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the Buyer and the Sellers mutually agree in writing. The date upon which the
Closing occurs is herein called the "CLOSING DATE."
5. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND DIENER AND LITMAN.
Each of the Sellers, Diener and Litman, jointly and severally (subject to the
limitation on liability contained in Section 12.5), represent and warrant to the
Buyer as follows:
5.1 DUE INCORPORATION AND QUALIFICATION; CAPITALIZATION. Each
of the Sellers is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and lawful authority to own, lease and operate its
assets, properties and business and to carry on its business as now conducted.
Each of the Sellers is qualified to transact business and is in good standing in
each jurisdiction in which the nature of its business or location of its
properties requires such qualification and in which the failure so to qualify
would have a Sellers Material Adverse Effect. For purposes of this Agreement,
"SELLERS MATERIAL ADVERSE EFFECT" shall mean a circumstance, fact, change,
development or effect (i) that would or could reasonably be expected to be
materially adverse to the properties, business, prospects, results of operations
or condition (financial or otherwise) of the Sellers, taken as a whole, or (ii)
that adversely effects the ability of the Sellers or the Shareholders to
consummate the transactions contemplated by this Agreement or the Escrow
Agreement in any material respect or materially impairs or delays the ability of
the Sellers or the Shareholders to effect the Closing. Each of the Sellers does
not own or lease property in any jurisdiction other than its jurisdiction of
incorporation and the jurisdictions set forth on SCHEDULE 5.1.
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The Shareholders, directly or indirectly as set forth on SCHEDULE 5.1, own
beneficially and of record all of the issued and outstanding capital stock of
the Sellers free and clear of any lien. There is no outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
agreement of any kind to purchase or otherwise to receive from either of the
Sellers any capital stock of the Sellers.
5.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. The copies of
the Certificate of Incorporation and By-laws of each of the Sellers, and all
amendments to each, which have been delivered to the Buyer are true, correct and
complete and in effect as of the date hereof.
5.3 FINANCIAL STATEMENTS. The balance sheets of the Sellers as
at December 31, 1996, December 31, 1997 and December 31, 1998, and the related
statements of income, retained earnings and changes in financial position for
the years then ended, including the footnotes thereto, certified by Grant
Thornton LLP, independent certified public accountants, which have been
delivered to the Buyer, fairly present the financial position of the Sellers as
at such dates and the results of its operations and the changes in its retained
earnings and its financial position for the years then ended in accordance with
GAAP consistently applied. Without limiting the foregoing, the revenue and
expense recognition policies used in preparation of the Balance Sheet are fully
consistent with each Sellers' past practices with respect thereto. (The
foregoing financial statements of the Sellers as at December 31, 1998 and for
the year then ended being sometimes herein called the "FINANCIALS," the balance
sheet included in the Financials being sometimes herein called the "BALANCE
SHEET" and December 31, 1998 being sometimes herein called the "BALANCE SHEET
DATE.")
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5.4 NO MATERIAL ADVERSE CHANGE. Since the Balance Sheet Date,
there has been no change, development or effect that, together with all other
changes, developments or effects, individually or in the aggregate has had a
Sellers Material Adverse Effect, and neither the Sellers nor the Shareholders
knows of any such change which is threatened, nor has there been any damage,
destruction or loss materially affecting the assets, properties, business or
condition of either of the Sellers, whether or not covered by insurance.
5.5 TAX MATTERS.
(i) Each of the Sellers has timely filed or
caused to be filed all Tax Returns required to be filed with respect to each
Seller and has paid or provided for all deficiencies or other assessments of Tax
owed by it. All such Tax Returns are true, complete, and correct in all material
respects. Neither Seller's federal, state, or local Income Tax Returns have been
audited. No unassessed Tax deficiency has been proposed or threatened against
either Seller. Except as set forth on SCHEDULE 5.5, no audit of any Tax Return
of either Seller has been proposed, threatened, or is in progress. No extension
of time with respect to any date on which any Tax Return was or is to be filed
with respect to either Seller is in force, and no waiver or agreement by either
Seller is in force for the extension of time for the assessment or payment of
any Tax.
(ii) TMF, Inc. has properly elected under section
1362(a) of the Code (and all similar provisions of state and local law) to be
treated as an S corporation, within the meaning of section 1361(a) of the Code
(and all similar provisions of state and local law) for all of its taxable years
from April 1, 1992 through
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December 31, 1993, and for all of its taxable years beginning on or after
December 31, 1996, and will continue to qualify as an S corporation as described
through the Closing Date. HRN Marketing Corp. has properly elected under section
1362(a) of the Code (and all similar provisions of state and local law) to be
treated as an S corporation, within the meaning of section 1361(a) of the Code
(and all similar provisions of state and local law) for all of its taxable years
beginning on or after August 17, 1998, and will continue to qualify as an S
corporation as described through the Closing Date. Accordingly, the Sellers will
have no liability for federal, state, or local Income Taxes with respect to such
periods, other than liability under section 1374 of the Code (and all similar
provisions of state and local law) with respect to the transactions contemplated
hereby.
(iii) During all taxable periods for which the
statute of limitations has not yet expired, (a) neither Seller was a member of
an affiliated group within the meaning of Treasury regulation ss. 1.1502-1, and
(b) neither Seller's relevant taxable income was included in a consolidated,
combined, or unitary federal, state, local, or foreign Tax Return.
(iv) No claim has ever been made by a taxing
authority in a jurisdiction where the Sellers do not currently file Tax Returns
that the Sellers are or may be subject to taxation by such jurisdiction.
(v) The Sellers (a) are not required to make any
adjustment pursuant to section 481 of the Code (or similar provision of other
laws or regulations) by reason of a change in accounting method or otherwise,
(b) have no knowledge that the Internal Revenue Service or other taxing
authority has proposed any such
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adjustment or change in accounting method which proposal is currently pending,
and (iii) do not have an application pending with any taxing authority
requesting permission for any change in accounting methods that relates to their
business and operations.
(vi) Neither Seller has been a United States real
property holding corporation within the meaning of section 897(c)(2) of the Code
during the applicable period specified in section 897(c)(1)(A)(ii).
(vii) No payment that will, or may, be made by either
Seller to any employee, former employee, officer, director, or agent thereof
will be characterized as an "excess parachute payment" within the meaning of
section 280G of the Code.
(viii) Neither Seller has filed a consent under
section 341(f) of the Code or any comparable provision of state or other revenue
statutes.
5.6 COMPLIANCE WITH LAWS. The Sellers have complied with
all material federal, state, county, local and foreign laws, ordinances,
regulations and orders applicable to them or their business. Except as set forth
in SCHEDULE 5.6, no license, permit, order or approval of any governmental or
regulatory body (collectively the "PERMITS") is material to or necessary for the
conduct of the business of the Sellers. All Permits of the Sellers are set forth
on SCHEDULE 5.6 and are in full force and effect, no violations are or have been
recorded in respect of any Permit and no proceeding is pending, or to the
knowledge of the Sellers threatened, to revoke or limit any Permit.
5.7 AUTHORITY TO EXECUTE AND PERFORM AGREEMENTS; CONSENTS. The
Sellers have the full legal right and power and all authority and approval
required to
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enter into, execute and deliver this Agreement and the Escrow Agreement and to
perform fully the Sellers' obligations hereunder and thereunder. Each of this
Agreement and the Escrow Agreement has been duly executed and delivered and
constitutes the legally valid and binding obligation of the Sellers and the
Shareholders enforceable against the Sellers and the Shareholders in accordance
with its terms. No approval or consent of any foreign, federal, state, county,
local or other governmental or regulatory body, and, except as set forth on
SCHEDULE 5.7 hereto, no approval or consent of any other person is required in
connection with the execution and delivery by the Sellers and the Shareholders
of this Agreement and the Escrow Agreement and the consummation and performance
by the Sellers and the Shareholders of the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the Escrow Agreement,
the consummation of the transactions contemplated under this Agreement and the
Escrow Agreement, and the performance by the Sellers and the Shareholders of
this Agreement and the Escrow Agreement in accordance with their respective
terms and conditions will not conflict with or result in the breach or violation
of any of the terms or conditions of, or constitute (or with notice or lapse of
time or both would constitute) a default under, (i) the Articles of
Incorporation or By-Laws of either of the Sellers; (ii) any instrument, contract
or other agreement by or to which either Seller or either Shareholder is a party
or by or to which it or their or its or their assets or properties are bound or
subject; (iii) any statute or any regulation, order, judgment or decree of any
court or governmental or regulatory body; or (iv) any Permit.
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5.8 LITIGATION. Except as set forth on SCHEDULE 5.8, the
Sellers are not a party to, or to the Sellers' knowledge, threatened with, any
claim, action, suit, complaint, demand, litigation or judicial, administrative
or arbitration proceeding which would, or could reasonably be expected to, have
a Sellers Material Adverse Effect. Except as set forth on SCHEDULE 5.8, the
Sellers do not know of any dispute with any person under contract with the
Sellers which materially and adversely affects, or may cause a Sellers Material
Adverse Effect.
5.9 AGREEMENTS. SCHEDULE 5.9 sets forth all of the following
contracts and other agreements to which the Sellers are a party or by or to
which they or their assets or properties are bound or subject: (i) contracts and
other agreements with any current officer, director, employee, consultant or
shareholder; (ii) agreement with any labor union or association representing any
employee; (iii) contracts and other agreements for the sale of hotel rooms or
other materials, supplies, equipment, merchandise or services; (iv) contracts
and other agreements for the purchase, acquisition or allocation of hotel rooms,
materials, supplies, equipment, merchandise or services; (v) copyright licenses,
royalty agreements or similar contracts; (vi) distributorship, depository,
representative, management, marketing, sales agency, printing or advertising
agreements; (vii) contracts and other agreements for the sale of any of its
assets or properties other than in the ordinary course of business or for the
grant to any person of any preferential rights to purchase any of its assets or
properties; (viii) joint venture agreements relating to the assets, properties
or business of the Sellers or by or to which it or its assets or properties are
bound or subject;
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(ix) contracts or other agreements under which it agrees to indemnify any party,
to share the tax liability of any party or to refrain from competing with any
party; (x) any contract or agreement containing any noncompete provision; (xi)
any contract or agreement providing the Sellers or any other person with a right
to be the exclusive provider of specified goods or services; (xii) any contract
or agreement containing any "most favored nation" type provision; (xiii) any
contract or agreement terminable, requiring a consent, or resulting in any
acceleration of rights thereunder upon a change of control of the Sellers; or
(xiv) any other material contract or other agreement whether or not made in the
ordinary course of business (other than those reflected on SCHEDULES 5.10, 5.12,
5.13 AND 5.18). All of the contracts and other agreements set forth on SCHEDULE
5.9 or elsewhere referred to in this Agreement are in full force and effect and
the Sellers have paid in full or accrued all amounts due thereunder and have
satisfied in full or provided for all of its liabilities and obligations
thereunder, and are not in default under any of them, nor, to either Seller's
knowledge, is any other party to any such contract or other agreement in default
thereunder, nor does any condition exist which with notice or lapse of time or
both would constitute a default thereunder. Except as separately identified on
SCHEDULE 5.9, to Sellers' knowledge, neither Seller is a party to or is bound by
any contract or other agreement which either individually or in the aggregate
would cause a Sellers Material Adverse Effect if either Seller were to be in
default thereunder and any such default remained uncured by either Seller or
which was entered into other than in the ordinary course of its business. Except
as separately identified on SCHEDULE 5.9, other than with respect to the
contracts set forth on section (iv) of SCHEDULE 5.9, no approval or consent of
any person is needed in
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order that the contracts or other agreements set forth on SCHEDULE 5.9 and other
Schedules hereto continue in full force and effect following the consummation of
the transactions contemplated by this Agreement. With respect to the contracts
and agreements referred to in Section 5.9(iv), except as separately identified
on Schedule 5.9(iv), no approval or consent of any person is needed in order
that the contracts or other agreements that comprise the top 20 (by revenue
generated) of such contracts or agreements continue in full force and effect
following the consummation of the transactions contemplated by this Agreement.
5.10 REAL ESTATE. Neither Seller owns any real property.
SCHEDULE 5.10 sets forth a list of (i) all leases, subleases or other agreements
and all amendments or modifications thereto (the "LEASES") under which either
Seller is lessor or lessee of any real property; (ii) all options held by either
Seller or contractual obligations on the part of either Seller to purchase or
acquire any interest in real property and all amendments or modifications
thereto; and (iii) all options granted by either Seller or contractual
obligations on the part of either Seller to sell or dispose of any interest in
real property and all amendments or modifications thereto (the options referred
to in clauses (ii) and (iii) above, collectively, the "OPTIONS"). The Sellers
are the lessee under the Leases or holder or grantor of the Options, as the case
may be, as set forth on SCHEDULE 5.10. The Leases are in full force and effect
and neither Seller has received any notice of any default thereunder, and no
termination event or condition exists thereunder. Each Seller has delivered to
Buyer true and correct copies of the Options and Leases. The Options are in full
force and effect subject to no lien or other encumbrance. The Sellers' leasehold
interests are subject to no lien, title defect, or
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other encumbrance and no underlying mortgage, lease or other interest which is
superior to Sellers' interest to such leasehold exists other than landlord
liens. Sellers have no ownership or financial interest in the landlord under any
Lease or the holders of any Option. All of the land, buildings, or other
improvements used by Sellers in connection with the business of Sellers is
included in the Leases. All water, gas, electric, sanitary and sewage lines and
systems and other similar systems are sufficient to enable the real property
leased under the Leases to be operated as currently used and enter such property
from an adjacent public street or valid easement. The real property leased
pursuant to the Leases have direct access to a street.
5.11 ACCOUNTS AND NOTES RECEIVABLE. All accounts and notes
receivable reflected on the Balance Sheet and all accounts and notes receivable
arising subsequent to the Balance Sheet Date, have arisen in the ordinary course
of business, represent valid obligations to the Sellers and, subject only to
reserves for bad debts calculated consistent with past practice, have been
collected or are collectible in the aggregate recorded amounts thereof in
accordance with their terms. All items which are required by GAAP to be
reflected as accounts and notes receivable on the Financials and on the books of
the Sellers are so reflected.
5.12 TANGIBLE PROPERTY. SCHEDULE 5.12 sets forth all
interests owned or claimed by the Sellers (including, without limitation,
options) in or to the plant, machinery, equipment, furniture, leasehold
improvements, fixtures, vehicles, structures, any related capitalized items and
other tangible property, including, without limitation, all computer and
telecommunications equipment, material to the business of the Sellers and which
is treated by the Sellers as depreciable or amortizable property
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not reflected on the Balance Sheet and not sold or disposed of in the ordinary
course of business since the Balance Sheet Date ("TANGIBLE PROPERTY"). All
material leases, conditional sale contracts, franchises or licenses pursuant to
which the Sellers may hold or use any interest owned or claimed by it
(including, without limitation, options) in or to Tangible Property are in full
force and effect and, with respect to the Sellers' performance thereunder, there
is no default or event of default or event which with notice or lapse of time or
both would constitute a default. The Tangible Property of the Sellers is in good
operating condition and repair, and the Sellers have received no notice that any
of it is in violation of any existing law or any building, zoning, health,
safety or other ordinance, code or regulation. During the past three years there
has not been any significant interruption of the Sellers' operations due to
inadequate maintenance of the Tangible Property.
5.13 INTANGIBLE PROPERTY. SCHEDULE 5.13 sets forth all
patents, trademarks, service marks, trade names, internet assets (including, but
not limited to, the Sellers' websites), trade secrets, domain names, software
and franchises and other proprietary rights, all applications for any of the
foregoing, and all permits, grants and licenses or other rights running to or
from the Sellers relating to any of the foregoing which are material to its
business. Except as set forth on SCHEDULE 5.13, the rights of the Sellers in the
property set forth on SCHEDULE 5.13 are free and clear of any liens or other
encumbrances. Except as set forth on SCHEDULE 5.13, the Sellers have no notice
of any adversely held patent, invention, trademark, service mark or trade name
of any other person or notice of any claim of any other person relating to any
of the property
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set forth on SCHEDULE 5.13 or any process or confidential information of the
Sellers, and the Sellers do not know of any basis for any such charge or claim.
5.14 LIENS. The Sellers own outright and have good and
marketable title to all of their assets and properties, including, without
limitation, all of the assets and properties reflected on the Balance Sheet, in
each case free and clear of any lien or other encumbrance, except for (i) assets
and properties disposed of, or subject to purchase or sales orders, in the
ordinary course of business since the Balance Sheet Date; (ii) liens or other
encumbrances securing taxes, assessments, governmental charges or levies, or the
claims of materialmen, carriers, landlords and like persons, which are not yet
due and payable; or (iii) minor liens or other encumbrances of a character which
do not substantially impair the assets or properties of the Sellers or
materially detract from its business.
5.15 INDEBTEDNESS. All Indebtedness (as herein defined) of the
Sellers as at the Balance Sheet Date is set forth in the Financials. SCHEDULE
5.15 sets forth a true and correct aged list of all accounts payable of the
Sellers as of the end of the month prior to the date hereof in excess of $50,000
to any one payee. No account payable of the Sellers which has arisen subsequent
to the end of the month prior to the date hereof has exceeded $50,000. All
Indebtedness reflected in the Financials or on SCHEDULE 5.15 or which has arisen
after the Balance Sheet Date has arisen in the ordinary course of business and
represents valid Indebtedness of the Sellers. As used herein, the term
"INDEBTEDNESS" means all items which, in accordance with GAAP, would be
reflected on a balance sheet of the Sellers created during the existence of such
item.
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5.16 LIABILITIES. As at the Balance Sheet Date, except as set
forth on SCHEDULE 5.16, the Sellers do not have any direct or indirect
indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, known or unknown, fixed or unfixed, inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise,
including, without limitation, liabilities on account of Taxes, other
governmental charges or lawsuits brought, whether or not of a kind required by
GAAP to be set forth on a financial statement, ("LIABILITIES"), which were not
fully and adequately reflected on the Financials or SCHEDULE 5.16. Except as
listed on SCHEDULE 5.16, the Sellers do not have any Liabilities, other than (i)
Liabilities fully and adequately reflected on the Financials and (ii) those
incurred since the Balance Sheet Date in the ordinary course of business. The
Sellers have no knowledge of any circumstances, conditions, events or
arrangements which may hereafter give rise to any Liabilities of the Sellers or
any successor to the business of the Sellers except in the ordinary course of
business or as otherwise set forth on SCHEDULE 5.16.
5.17 SUPPLIERS AND CUSTOMERS. No single supplier, customer or
distributor (including travel agents, travel clubs and affiliate's websites) is
of material importance to the business of the Sellers. The relationships of the
Sellers with its suppliers, customers and distributors are good commercial
working relationships and, except as set forth on SCHEDULE 5.17, no supplier,
customer or distributor of the Sellers has canceled or otherwise terminated, or
threatened in writing to cancel or otherwise terminate, its relationship with
the Sellers or has during the last 12 months decreased materially, or threatened
to decrease or limit materially, its services, supplies or materials to the
Sellers or its usage of the Sellers' services or products, as the case may
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be. The Sellers do not have any notice that any such supplier, customer or
distributor intends to cancel or otherwise modify its relationship with the
Sellers or to decrease materially or limit its services, supplies or materials
to the Sellers or its usage of the services or products of the Sellers, and the
acquisition of the Purchased Assets by the Buyer will not, to the best of
Sellers' knowledge, adversely affect the relationship of the Buyer (as successor
to the business of the Sellers) with any such supplier, customer or distributor.
5.18 PENSION AND BENEFIT PLANS AND COMPLIANCE WITH ERISA.
(a) SCHEDULE 5.18 identifies each employment, severance or similar contract
or arrangement and each plan, policy, fund, program or contract or
arrangement (whether or not written) providing for compensation, bonus,
profit-sharing, stock option, or other stock related rights or other forms of
incentive or deferred compensation, vacation benefits, insurance coverage
(including any self-insured arrangements) health or medical benefits,
disability benefits, worker's compensation, supplemental unemployment
benefits, severance benefits and post- employment or retirement benefits
(including compensation, pension, health, medical or life insurance or other
benefits) under which the Sellers have or in the future could have any
liability ("BENEFIT PLANS"). There is no Benefit Plan which (i) is a
multiemployer plan (within the meaning of Section 3(37) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) is a plan,
other than a multiemployer plan, subject to Title IV of ERISA (a "TITLE IV
PLAN") or (iii) is maintained in connection with any trust described in
section 501(c)(9) of the Code.
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(b) The Sellers have furnished to the Buyer
copies of the Benefit Plans (and, if applicable, related trust agreements) and
all amendments thereto and written interpretations thereof together with the
most recent annual report (Form 5500 including, if applicable, Schedule B
thereto), the most recent actuarial valuation report prepared in connection with
any Benefit Plan, and the most recent IRS determination letter received with
respect to any Benefit Plan.
(c) No transaction prohibited by Section 406 of
ERISA or section 4975 of the Code, has occurred with respect to any employee
benefit plan or arrangement which is covered by Title I of ERISA which
transaction has or will cause the Sellers or any of its subsidiaries to incur
any liability under ERISA, the Code or otherwise, excluding transactions
effected pursuant to and in compliance with a statutory or administrative
exemption.
(d) Each Benefit Plan that is intended to be
qualified under section 401(a) of the Code is so qualified and has been so
qualified during the period since its adoption; each trust created under any
such Plan is exempt from tax under section 501(a) of the Code and has been so
exempt since its creation. Each Benefit Plan has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and all
applicable statutes, orders, rules and regulations, including but not limited to
ERISA and the Code.
(e) Neither of the Sellers has any current or
projected liability in respect of post-employment or post-retirement health or
medical or life insurance benefits for retired, former or current employees of
the Sellers, except as required under applicable law.
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(f) There is no contract, plan or arrangement
(written or otherwise) covering any employee or former employee of either Seller
that, individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to the terms of section 280G of the Code.
(g) Except as set forth on SCHEDULE 5.18, no
employee or former employee of either Seller or any subsidiary will become
entitled to any bonus, retirement, severance, job security or similar benefit or
enhanced such benefit (including acceleration of vesting or exercise of an
incentive award) as a result of the transactions contemplated hereby.
(h) There are no unfunded obligations under any
Benefit Plan which are not fully reflected on the most recent Financials of the
Sellers.
5.19 INSURANCE. SCHEDULE 5.19 sets forth all policies or
binders of fire, liability, workmen's compensation, vehicular or other
insurance held by or on behalf of the Sellers (specifying the insurer, the
policy number or covering note number with respect to binders, and describing
each pending claim thereunder). Such policies and binders are in full force
and effect. Neither Seller is in default with respect to any provision
contained in any such policy or binder and has not failed to give any notice
or present any claim under any such policy or binder in due and timely
fashion. Except for claims set forth on SCHEDULE 5.19, there are no
outstanding unpaid claims under any such policy or binder. Except as set
forth on Schedule 5.19 the Sellers have not made any claims under any such
policy or binder during the last two years. The Sellers have not received a
notice of cancellation or non-renewal of any such policy or binder. The
Sellers have no knowledge of any inaccuracy in any
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application for such policies or binders, any failure to pay premiums when due
or any similar state of facts which might form the basis for termination of any
such insurance.
5.20 OFFICERS, DIRECTORS AND EMPLOYEES. (a) SCHEDULE 5.20 sets
forth the name and total compensation of each officer, director, employee,
consultant or agent of each Seller who is among the top twenty (20) highest
compensated officers, directors, employees, consultants and agents of each
Seller.
(b) SCHEDULE 5.20 lists as the date hereof the
number of employees of the Sellers in the aggregate, the number of full-time
personnel and the number of contract workers of the Sellers. None of the
employees of the Sellers is represented by a union, and no union organizing
efforts have been conducted within the last five years or are now being
conducted. The Sellers have not had at any time during the last five years, nor
to the knowledge of the Sellers is there now threatened, a strike, picket, work
stoppage, work slowdown or other labor dispute.
5.21 OPERATIONS OF THE SELLERS. Except as set forth on
SCHEDULE 5.21, from the Balance Sheet Date through the date hereof the neither
Seller has:
(i) amended Articles of Incorporation or By-Laws
or merged with or into or consolidated with any other person, or changed or
agreed to change in any manner the character of business;
(ii) entered into or amended any employment
agreement, entered into any agreement with any labor union or association
representing any employee or entered into or amended any Benefit Plan;
(iii) incurred any indebtedness for borrowed
money;
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(iv) declared or paid any dividends or declared
or made any distributions of any kind or any other payments to the Shareholders;
(v) reduced its cash or short-term investments
or their equivalent, other than to meet cash needs arising in the ordinary
course of business, consistent with past practices;
(vi) waived any right of material value to its
business;
(vii) made any change in its accounting methods or
practices or made any change in depreciation or amortization policies or rates
adopted by it;
(viii) materially changed any of its business
policies, including, without limitation, advertising, marketing, pricing,
purchasing, personnel, sales, returns, budget or product acquisition policies;
(ix) other than in the ordinary course of
business and consistent with past practice, made any wage or salary increase or
bonus, or increase in any other direct or indirect compensation, for or to any
officer, director, employee, consultant or agent of either Seller, or any
accrual for or commitment or agreement to make or pay the same, other than to
persons not officers, directors or shareholders of the Sellers made in the
ordinary course of business;
(x) made any loan or advance to any of its
officers, directors, employees, consultants, agents or shareholders, other than
travel advances made in the ordinary course of business;
(xi) made any payment or commitment to pay any
severance or termination pay to any of its officers, directors, employees,
consultants or agents,
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other than to persons not officers, directors or shareholders of the Sellers
made in the ordinary course of business;
(xii) except in the ordinary course of business,
entered into any lease (as lessor or lessee); sold, abandoned or made any other
disposition of any of its assets or properties; granted or suffered any lien or
other encumbrance on any of its assets or properties; entered into or amended
any contract or other agreement to which it is a party or by or to which it or
its assets or properties are bound or subject or pursuant to which it agrees to
indemnify any party or refrain from competing with any party;
(xiii) except in the ordinary course of business,
incurred or assumed any debt, obligation or liability (whether absolute or
contingent and whether or not currently due and payable);
(xiv) except for inventory or equipment acquired
in the ordinary course of business, made any acquisition of all or any part of
the assets, properties, capital stock or business of any other person; or
(xv) except in the ordinary course of business,
entered into, amended, modified or canceled any other material contract or other
agreement or other material transaction.
5.22 POTENTIAL CONFLICTS OF INTEREST. Except as disclosed on
SCHEDULE 5.22, neither Shareholder, nor any Shareholder Relative (as defined
below) nor any officer or director of the Sellers nor their respective
affiliates (i) owns, directly or indirectly, any interest in (excepting not more
than 1% stock holdings for investment purposes in publicly traded securities),
or is an officer, director, employee or
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consultant of any person which is a competitor, lessor, lessee, customer or
supplier of the Sellers; (ii) owns, directly or indirectly, in whole or in part,
any copyright, trademark, trade name, service mark, franchise, patent,
invention, permit, license or secret or confidential information or any other
property which the Sellers are using or the use of which is necessary or in the
ordinary course of business useful for the business of the Sellers; or (iii) has
any cause of action or other claim whatsoever against, or owes any amount to,
the Sellers, except for claims in the ordinary course of business, such as for
accrued vacation pay, accrued benefits under Benefit Plans and similar matters
and agreements existing on the date hereof. Except as disclosed on SCHEDULE
5.22, there are no contracts, licenses, leases or other agreements of any nature
between the Sellers, on the one hand, and either of the Shareholders, or any
Shareholder Relative, on the other hand. "SHAREHOLDER RELATIVE" means any
parent, grandparent, child, grandchild, niece, nephew, or spouse or former
spouse or any of their respective affiliates of either Shareholder or any entity
controlled by, or established for the benefit of, one or more of the foregoing.
5.23 ENVIRONMENTAL. Except as disclosed on SCHEDULE 5.23, each
Seller (i) is and has been in compliance with all applicable Safety and
Environmental Laws; (ii) there is no Environmental Claim pending or threatened
against either Seller and there is no civil, criminal or administrative judgment
or notice of violation against either Seller pursuant to Safety and
Environmental Laws or principles of common law relating to pollution, protection
of the Environment or health and safety; and (iii) there are no past or present
events, conditions, circumstances, activities, practices, incidents, agreements,
actions or plans which may prevent compliance with Safety and
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Environmental Laws, or which have given rise to or will give rise to an
Environmental Claim or to environmental compliance costs.
5.24 INVESTMENTS. Set forth on SCHEDULE 5.24 hereto is a
complete and accurate list of all Investments held by the Sellers showing the
amount, obligor or issuer and maturity, if any thereof. Except as set forth on
SCHEDULE 5.24, the Sellers do not own any interest in any other person.
5.25 PROJECTIONS. The projections relating to operations of
the Sellers during the fiscal year ending December 31, 1999 (the "PROJECTIONS"),
heretofore delivered by the Sellers to the Buyer and dated March 17, 1999, have
been prepared in good faith on a reasonable basis. Nothing has come to the
attention of the Sellers or either of the Shareholders to indicate that the
Projections or the assumptions upon which they are based are not reasonable.
5.26 ENTIRE INVESTMENT IN THE BUSINESS; NO OTHER BUSINESSES.
The Purchased Assets constitute all the rights, interests and other assets
necessary to conduct the business of the Sellers in substantially the same
manner as it has been heretofore conducted. The Sellers have never been involved
in any other business other than the direct marketing of hotel rooms to
consumers through telephonic orders and internet access (the "BUSINESS") and
except for the Investments listed on SCHEDULE 5.24, has never owned any asset,
conducted any business or incurred any liability, not directly related to the
Business.
5.27 FULL DISCLOSURE. This Agreement and the Schedules hereto
and the Escrow Agreement are to the Sellers' knowledge after due inquiry true,
complete and authentic; and all contracts and other agreements or instruments
included
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thereunder are valid, subsisting and binding on the parties thereto in
accordance with their terms. This Agreement and the Schedules hereto and the
Escrow Agreement do not contain any untrue statement of a material fact and do
not omit to state any material fact necessary to make the statements made, in
the context in which made, not false or misleading. There is no fact which the
Sellers have not disclosed to the Buyer in this Agreement or the Schedules
hereto which would or could reasonably be expected to cause a Sellers Material
Adverse Effect.
5.28 NO BROKER. Except for Donaldson, Lufkin & Jenrette, whose
fees and expenses shall be the sole responsibility of the Sellers, no broker,
finder, agent or similar intermediary has acted for or on behalf of the Sellers
in connection with this Agreement or the transactions contemplated hereby, and
no broker, finder, agent or similar intermediary is entitled to any broker's,
finder's or similar fee or other commission in connection therewith based on any
agreement, arrangement or understanding with the Sellers or any action taken by
the Sellers.
5.29 REPRESENTATIONS AND WARRANTIES ON CLOSING DATE. The
representations and warranties contained in this Section 5 shall be true and
complete on and as of the Closing Date with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents
and warrants to the Sellers as follows:
6.1 DUE INCORPORATION. The Buyer is duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate
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power and lawful authority to own its assets and properties and to carry on its
business as now conducted.
6.2 CORPORATE POWER OF THE BUYER. The Buyer has the full legal
right and power and all authority and approval required to enter into, execute
and deliver this Agreement and the Escrow Agreement, and to perform fully its
obligations under this Agreement and the Escrow Agreement. Each of this
Agreement and the Escrow Agreement has been duly executed and delivered and is
the valid and binding obligation of the Buyer enforceable in accordance with its
terms.
6.3 NO BROKER. No broker, finder, agent or similar
intermediary has acted for or on behalf of the Buyer in connection with this
Agreement or the transactions contemplated hereby, and no broker, finder, agent
or similar intermediary is entitled to any broker's, finder's, or similar fee or
other commission in connection therewith based on any agreement, arrangement or
understanding with the Buyer or any action taken by the Buyer.
6.4 REPRESENTATIONS AND WARRANTIES ON CLOSING DATE. The
representations and warranties contained in this Section 6 shall be true and
complete on and as of the Closing Date with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date.
7. COVENANTS AND AGREEMENTS. The parties covenant and agree as
follows:
7.1 CONDUCT OF BUSINESS. From the date hereof through the
Closing Date, the Sellers shall conduct their business in the ordinary course
consistent with past practice and, without the prior written consent of the
Buyer, (i) shall not take or agree
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or commit to take any of the actions specified in Section 5.21 or (ii) make
(including by extension or rollover) any new Investment. Notwithstanding the
foregoing, the Sellers may declare and pay dividends to the Shareholders and the
Trusts prior to the Closing.
7.2 INSURANCE. From the date hereof through the Closing Date,
the Sellers shall maintain in force (including necessary renewals thereof) the
insurance policies listed on Schedule 5.19 hereto, except to the extent that
they may be replaced with equivalent policies appropriate to insure the assets,
properties and business of the Sellers to the same extent as currently insured
at the same or lower rates or at rates approved by the Buyer.
7.3 PRESERVATION OF BUSINESS. From the date hereof through the
Closing Date, the Sellers shall use their best efforts to preserve their
business organizations intact, keep available the services of their present
officers, employees, consultants and agents, maintain their present suppliers
and customers and preserve and enhance their goodwill and the Shareholders shall
not take any action inconsistent with the foregoing.
7.4 LITIGATION. The Sellers shall promptly notify the Buyer
of any lawsuits, claims, proceedings or investigations which after the date
hereof are threatened or commenced against the Sellers or against any officer,
director, employee, consultant, agent or shareholder with respect to the affairs
of the Sellers.
7.5 CONTINUED EFFECTIVENESS OF REPRESENTATIONS AND WARRANTIES
OF THE SELLERS. From the date hereof through the Closing Date, the Sellers shall
conduct its business in such a manner so that the representations and warranties
contained in Section 5 shall continue to be true and correct on and as of the
Closing Date as if made
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on and as of the Closing Date, and the Buyer shall promptly be given notice
of any event, condition or circumstance occurring from the date hereof
through the Closing Date which would constitute a violation or breach of this
Agreement.
7.6 CORPORATE EXAMINATIONS AND INVESTIGATIONS. Prior to the
Closing Date, the Buyer shall be entitled, through its employees and
representatives, including, without limitation, Ernst & Young LLP and Paul,
Weiss, Rifkind, Wharton & Garrison, to make such investigation of the property
and plant and such examination of the books, records and financial condition of
the Sellers as the Buyer reasonably desires. Any such investigation and
examination shall be conducted at reasonable times and under reasonable
circumstances and the Sellers shall cooperate fully therein. No investigation by
the Buyer shall, however, diminish or obviate in any way any of the
representations, warranties, covenants or agreements of the Sellers under this
Agreement. In order that the Buyer may have full opportunity to make such
business, accounting and legal review, examination or investigation as it may
wish of the business and affairs of the Sellers, the Sellers shall furnish the
representatives of the Buyer during such period with all such information
concerning the affairs of the Sellers as such representatives may reasonably
request and cause its officers, employees, consultants, agents, accountants and
attorneys to cooperate fully with such representatives in connection with such
review and examination and to make full disclosure to the Buyer of all material
facts affecting the financial condition and business operations of the Sellers.
If this Agreement terminates, the Buyer and its affiliates shall keep
confidential and shall not use in any manner any information obtained from the
Sellers concerning its assets, properties, operations and business,
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unless readily ascertainable from public or published information, or trade
sources, or already known or subsequently developed by the Buyer independently
of any investigation of the Sellers, or received from a third party not under an
obligation to the Sellers to keep such information confidential. Notwithstanding
the foregoing, the Buyer shall not contact any customers, hotels, or other
vendors of the Sellers regarding the Business without the advance approval of
the Sellers, which approval shall not be unreasonably withheld or delayed.
7.7 EXPENSES OF SALE. The Sellers and the Buyer agree that
each of them shall bear its own direct and indirect expenses incurred in
connection with the negotiation and preparation of this Agreement and the
consummation and performance of the transactions contemplated hereby. All
transfer, documentary, gross receipts, sales and use taxes and similar
liabilities, if any, resulting from the sale, assignment, transfer and delivery
hereunder of the Purchased Assets shall be paid by the Sellers.
7.8 FURTHER ASSURANCES. Each of the parties shall execute,
prior to and following the Closing, such documents and other papers and perform
such further acts as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby, including, without
limitation, notification and report forms with respect to the transactions
contemplated by this Agreement under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, and the rules and regulations promulgated thereunder
(the "HSR ACT"). Each such party shall use its reasonable best efforts to
fulfill or obtain the fulfillment of the conditions to the Closing, including,
without limitation, the execution and delivery of any documents or other papers,
the execution and delivery of which are conditions precedent to the Closing.
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7.9 ADDITIONAL PURCHASE PRICE.
7.9.1 DETERMINATION OF ADJUSTED EBT AND ADJUSTED
GROSS PROFIT. As soon as practicable, but in any event not more than ninety (90)
days after the Closing Date, with respect to the twelve-month period ending
March 31, 1999, and not more than ninety (90) days after the end of the
twelve-month period ending on each of March 31, 2000, 2001 and 2002, the Buyer
shall deliver to the Sellers a statement, setting forth the Adjusted EBT and
Adjusted Gross Profit for the Business for the year then ended (the "BUYER'S
DETERMINATION"), together with the unaudited financial statements for such
period. The Adjusted EBT of the Business for the twelve-month periods ending on
March 31, 1999, 2000, 2001 and 2002 shall be referred to herein as the "1998
ADJUSTED EBT," "1999 ADJUSTED EBT," "2000 ADJUSTED EBT" and "2001 ADJUSTED EBT,"
respectively, and the Adjusted Gross Profit of the Business for the twelve-month
periods ending on March 31, 1999, 2000, 2001 and 2002 shall be referred to
herein as the "1998 ADJUSTED GROSS PROFIT," "1999 ADJUSTED GROSS PROFIT," "2000
ADJUSTED GROSS PROFIT" and "2001 ADJUSTED GROSS PROFIT," respectively. The
Sellers and its representatives shall have the right, during normal business
hours and upon reasonable request, to review all work papers and procedures used
to prepare the Buyer's Determination and to have reasonable access to the
Buyer's financial employees and accountants involved in the preparation thereof
and shall have the right to perform reasonable procedures necessary to confirm
the accuracy thereof. The Buyer's Determination shall become final and binding
on the Sellers and the Buyer unless the Sellers give written notice of their
disagreement, including a reasonably
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detailed description of the basis for such disagreement and the Sellers'
determination (the "SELLERS' DETERMINATION") of the relevant amounts of Adjusted
EBT or Adjusted Gross Profit, as the case may be (a "NOTICE OF DISAGREEMENT"),
to the Buyer within thirty (30) days following receipt by the Sellers of the
statement setting forth the Buyer's Determination. During a period of fifteen
(15) days following the aforesaid thirty (30) day period, the Buyer and the
Sellers shall attempt to resolve any differences which they may have with
respect to any matter specified in any Notice of Disagreement. If at the end of
such fifteen (15) day period, the Buyer and the Sellers shall have failed to
reach written agreement with respect to all of such matters, the Buyer and the
Sellers shall retain PricewaterhouseCoopers or if such firm declines to act in
such capacity, any such other firm of independent nationally recognized
accountants chosen and mutually accepted by both parties (the "REFEREE") to make
a determination (the "REFEREE DETERMINATION") of the disputed Adjusted EBT or
Adjusted Gross Profit, as the case may be. The Buyer and Sellers shall request
the Referee to act promptly to prepare the Referee Determination, and in any
event to render the Referee Determination within 30 days after the commencement
of its engagement. The Buyer shall give the Referee, during normal business
hours and upon reasonable request, access to all work papers and procedures used
to prepare the Buyer's Determination and to the Buyer's financial employees and
accountants involved in the preparation thereof. The Referee shall deliver the
Referee Determination to the Buyer and the Sellers. The final amount of the
Adjusted EBT or Adjusted Gross Profit, as the case may be, for the relevant
period shall be the average of the two closest determinations between the
Buyer's Determination, the Sellers' Determination and the
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Referee Determination. In the event the difference between the Buyer's
Determination and the Referee Determination equals the difference between the
Referee Determination and the Sellers' Determination, the Referee Determination
shall be binding.
7.9.2 1999 ADDITIONAL PURCHASE PRICE PAYMENT.
Subject to Section 7.9.5 below, within fifteen (15) days following the final
determination of the 1999 Adjusted EBT and Adjusted Gross Profit in accordance
with paragraph 7.9.1 above, the Buyer shall pay to the Sellers, by wire transfer
of immediately available funds, an amount equal to the greater of (i) the
product of (x) the amount, if any, by which the 1999 Adjusted EBT exceeds 1998
Adjusted EBT times (y) 2.5, and (ii) if 1999 Adjusted Gross Profit is at least
50% greater than 1998 Adjusted Gross Profit, (x) the amount by which the 1999
Adjusted Gross Profit exceeds 1998 Adjusted Gross Profit times (y) 1.44.
7.9.3 2000 ADDITIONAL PURCHASE PRICE PAYMENT.
Subject to Section 7.9.5 below, within fifteen (15) days of the final
determination of the 2000 Adjusted EBT and Adjusted Gross Profit in accordance
with paragraph 7.9.1 above, the Buyer shall pay to the Sellers, by wire transfer
of immediately available funds, an amount equal to the greater of (i) the
product of (x) the amount, if any, by which the 2000 Adjusted EBT exceeds the
greater of (A) 1999 Adjusted EBT and (B) 1998 Adjusted EBT times (y) 2, and (ii)
if 2000 Adjusted Gross Profit is at least 35% greater than the greater of (A)
1999 Adjusted Gross Profit and (B) 1998 Adjusted Gross Profit, (x) the amount by
which the 2000 Adjusted Gross Profit exceeds the greater of (A) 1999 Adjusted
Gross Profit and (B) 1998 Adjusted Gross Profit times (y) 1.18.
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7.9.4 2001 ADDITIONAL PURCHASE PRICE PAYMENT.
Subject to Section 7.9.5 below, within fifteen (15) days of the final
determination of the 2001 Adjusted EBT and Adjusted Gross Profit in accordance
with 7.9.1 above, the Buyer shall pay to the Sellers, by wire transfer of
immediately available funds, an amount equal to the greater of (i) the product
of (x) the amount, if any, by which the 2001 Adjusted EBT exceeds the greater of
(A) 2000 Adjusted EBT, (B) 1999 Adjusted EBT and (C) 1998 Adjusted EBT times (y)
1.5, and (ii) if 2001 Adjusted Gross Profit is at least 20% greater than the
greater of (A) 2000 Adjusted Gross Profit, (B) 1999 Adjusted Gross Profit and
(C) 1998 Adjusted Gross Profit, (x) the amount by which 2001 Adjusted Gross
Profit exceeds the greater of (A) 2000 Adjusted Gross Profit, (B) 1999 Adjusted
Gross Profit and (C) 1998 Adjusted Gross Profit times (y) .87.
7.9.5 CERTAIN MATTERS EFFECTING ADDITIONAL
PURCHASE PRICE PAYMENT. In the event the amount determined by the calculation in
paragraph 7.9.2, 7.9.3 or 7.9.4 above results in a negative number, no amount
shall be paid by the Buyer to the Sellers under such paragraph. The amounts due
from Buyer to Sellers under 7.9.2, 7.9.3, and 7.9.4 shall accrue interest from
and after June 29, 2000, 2001 and 2002, respectively, at USAi's then applicable
Cost of Funds.
7.10 QUARTERLY DEFERRED PAYMENT.
7.10.1 QUARTERLY DEFERRED PAYMENT.
(a) Not more than 30 days after the end of the
fiscal quarter of the Business ended March 31, 1999, the Sellers shall prepare
and deliver to the Buyer a statement of the Adjusted Gross Profit of the
Business for such fiscal quarter.
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(b) Not more than 30 days after the end of each
of the fiscal quarters of the Business ended June 30, 1999, September 30, 1999
and December 31, 1999, the Buyer shall prepare and deliver to the Sellers a
statement of the Adjusted Gross Profit of the Business for such fiscal quarter.
(c) Within 10 days after the determination of
the Adjusted Gross Profit for each fiscal quarter pursuant to Section 7.9.1(a)
and (b) above, if the Adjusted Gross Profit for such fiscal quarter as so
determined exceeds 25% of the Target Adjusted Gross Profit for such quarter as
reflected on Schedule 7.10 attached hereto (the "TARGET ADJUSTED GROSS PROFIT"),
the Buyer shall pay to the Sellers by wire transfer of immediately available
funds, an amount equal to (x) $12.5 million times (y) the Deferred Payment
Adjuster (as defined below) (the "DEFERRED PAYMENT"). Notwithstanding the above,
in the event the Deferred Payment with respect to any fiscal quarter is due in
accordance with the provisions of Section 7.10.1(c) prior to the Closing, such
Deferred Payment shall be made, without interest, by wire transfer of
immediately available funds, at the Closing.
(d) The "DEFERRED PAYMENT ADJUSTER" shall be a
percentage (which in no event shall be greater than 100) equal to the (x) Target
Percentage (as defined below) minus (y) the lesser of (i) 100% minus the Target
Percentage and (ii) 25%. "TARGET PERCENTAGE" shall be the Adjusted Gross Profit
of the Business for the relevant period divided by the Target Adjusted Gross
Profit for such period.
7.10.2 ANNUAL DEFERRED PAYMENT RECONCILIATION.
(a) As soon as practicable, but in any event not
more than 90 days after the end of the fiscal year ending December 31, 1999,
Buyer shall prepare
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and deliver to the Sellers a statement setting forth the Adjusted Gross Profit
of the Business for the year then ended (the "ANNUAL ADJUSTED GROSS PROFIT"),
together with the unaudited financial statements of the Business for such
period. The final Annual Adjusted Gross Profit shall be determined in accordance
with the procedures set forth in Section 7.9 applicable to the determination of
the final 1999 Adjusted Gross Profit.
(b) Within 15 days after the determination of
the final Annual Adjusted Gross Profit,
(i) In the event the Total Deferred
Payment (as defined below) is less than the Annualized Deferred Payment
(as defined below), Buyer shall pay to Sellers, by wire transfer of
immediately available funds, an amount equal to the Annualized Deferred
Payment minus the Total Deferred Payment; or
(ii) In the event the Total Deferred Payment
is greater than the Annualized Deferred Payment, Sellers shall pay to
Buyer by wire transfer of immediately available funds, an amount equal
to the Total Deferred Payment minus the Annualized Deferred Payment.
(c) "TOTAL DEFERRED PAYMENT" means the sum of
the Deferred Payments made by the Buyer each quarter pursuant to Section
7.10.1(c). "ANNUALIZED DEFERRED PAYMENT" means an amount equal to (x) $50
million times (y) the Deferred Payment Adjuster.
7.11 PARTICIPATION PAYMENT.
7.11.1 2004 PAYOUT AND PARTICIPATION MULTIPLIER.
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(a) Unless a payment has been made under Section
7.11.2 or 7.11.3, as soon as practicable, but in any event not more than ninety
(90) days, after the end of the twelve-month period ending March 31, 2004, the
Buyer shall deliver to the Sellers a statement setting forth the Adjusted EBT
for the Buyer for the twelve-month periods ending March 31, 2001, 2002, 2003 and
2004 (the "2000 ADJUSTED EBT," "2001 ADJUSTED EBT," "2002 ADJUSTED EBT" and
"2003 ADJUSTED EBT," respectively), and the EBT for the twelve-month period
ending March 31, 2004 (the "2003 EBT") together with the unaudited financial
statements for such periods. The final determination of the 2000, 2001, 2002 and
2003 Adjusted EBT and 2003 EBT shall be made in accordance with the procedures
set forth in Section 7.9.1 with respect to the 2000 Adjusted EBT. Within 15 days
of the final determination of the 2000, 2001, 2002 and 2003 Adjusted EBT and
2003 EBT in accordance with the provisions of Section 7.9.1 hereof, Buyer shall
pay to the Sellers, by wire transfer of immediately available funds, an amount
equal to the product of (x) (i) The Participation Multiplier (as defined below)
times 2003 EBT minus (ii) Net Debt Capital (as defined hereafter) times (y) 10%
(the "2003 PAYOUT"). "NET DEBT CAPITAL" means an amount equal to the enterprise
value (including the net debt assumed), as reasonably determined in good faith
by the Buyer and the Sellers, of any Acquired Business, other than, with respect
to this Section 7.11.1 only, any Acquired Business acquired during the
twelve-month period ending March 31, 2004, at the time of the consummation of
such acquisition together with an amount equal to the interest on such amount
from the time of such acquisition through the calculation date, at an annual
rate of 12% compounded annually. In the event the Buyer and the Sellers are
unable to determine the enterprise
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value of any Acquired Business, either party may, by written notice to the other
party, require a nationally recognized investment bank mutually acceptable to
the Buyer and the Sellers to be retained to determine the enterprise value of
such Acquired Business. The fees and expenses of such investment bank shall be
borne equally by the Buyer and the Sellers.
(b) The Participation Multiplier shall be as
follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL ADJUSTED
EBT GROWTH (AS DEFINED PARTICIPATION
BELOW) MULTIPLIER
------ ----------
<S> <C>
20% or less 10
Greater than 20%-30% 11
Greater than 30%-40% 12
Greater than 40%-50% 13
Greater than 50%-60% 14
Greater than 60% 15
</TABLE>
"AVERAGE ANNUAL ADJUSTED EBT GROWTH" shall mean the average of the annual
percentage growth (or reduction) in Adjusted EBT during the twelve-month periods
ending March 31, 2002, 2003 and 2004.
7.11.2 SALE OF THE BUSINESS.
(a) If, prior to the payment of the 2004 Payout
by the Buyer pursuant to Section 7.11.1 above and the consummation of the IPO of
the Buyer
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referred to in Section 7.11.3, all or substantially all of the equity
interests in the Buyer are sold, or the Buyer sells all or substantially all of
its assets (including as a result of a merger, consolidation or reorganization)
(each a "SALE OF THE BUSINESS"), the Sellers shall receive a portion of the
consideration received in respect of the Sale of the Business (the "SALE
CONSIDERATION") equal to (x) (i) the total value of the Sale Consideration as
reasonably determined by the Buyer and the Sellers plus the aggregate value of
all cash dividends paid by the Buyer to its shareholders following the Closing
minus (ii) the Net Debt Capital (calculated including any Acquired Business
acquired during the twelve-month period ending March 31, 2004) multiplied by (y)
10% (the "SALE OF BUSINESS PAYMENT"). The Sale of Business Payment shall be paid
to the Sellers (i) at the same time and in the same form as the Sale
Consideration received by the Buyer or its affiliates upon the Sale of the
Business and (ii) shall be subject to the terms and conditions of the agreements
entered into with respect to the Sale of the Business, including, without
limitation, any escrow or indemnification obligations. In the event the Buyer
and the Sellers are unable to determine the total value of the Sale
Consideration, either party may, by written notice to the other party, require a
nationally recognized investment bank mutually acceptable to the Buyer and the
Sellers to be retained to determine the total value of the Sale Consideration.
The fees and expenses of such investment bank shall be borne equally by the
Buyer and the Sellers.
(b) Notwithstanding the provisions of paragraph
7.11.2(a) above, the Sellers shall not be entitled to any payment in the event
of a Sale of the Business to an affiliate of the Buyer.
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(c) The Buyer and the Sellers acknowledge that
the provisions of Section 7.11.2 shall not apply to transactions that do not
constitute a Sale of the Business including a partial sale of equity interests
in the Buyer or a partial asset sale (including as a result of a merger,
consolidation or reorganization) of the Buyer (a "NON-QUALIFYING SALE"). In the
event of a Non-Qualifying Sale (other than a Non-Qualifying Sale in the ordinary
course of business), the Sellers and the Buyer shall negotiate in good faith to
determine what, if any, arrangements should be made with respect to the Sellers'
participation in such Non-Qualifying Sale in light of the circumstances of such
Non-Qualifying Sale.
7.11.3 PARTICIPATION IN EVENT OF IPO. If, prior to
the payment of the 2004 payout by the Buyer pursuant to Section 7.11.1 or a
payment in connection with the sale of the Business of the Buyer pursuant to
Section 7.11.2 above, the Buyer consummates an initial public offering of shares
of its common stock (an "IPO"), the Buyer shall issue to the Sellers a number of
shares of common stock of the Buyer having an aggregate value (based on the
price per share in the IPO) equal to the product of (x) (i) the total issued and
outstanding shares of the Buyer immediately prior to the IPO times the IPO price
minus (ii) the Net Debt Capital multiplied by (y) 10%. Sellers hereby agree to
enter into "lock up" indemnity or other customary agreements reasonably
requested by the underwriters in connection with an IPO.
7.11.4 TERMINATION OF PARTICIPATION PAYMENT. Upon
the payment or distribution to the Sellers under any of Sections 7.11.1, 7.11.2
or 7.11.3, the other provisions of this Section 7.11 shall immediately terminate
and no further payment or obligation shall be due the Sellers thereunder;
PROVIDED THAT the payment
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provided in 7.11.1 cannot be made earlier than provided in that section without
the written consent of the Sellers.
7.11.5 CALCULATION SCHEDULE. Attached as SCHEDULE
7.11.5 is a spreadsheet outlining examples of the calculations of the Additional
Purchase Price, Quarterly Deferred Payment and Participation Payment.
7.12 USAI GUARANTY. USAi hereby irrevocably, unconditionally
and completely guarantees the full and timely payment and performance of all the
Buyer's obligations under this Agreement, subject to the provisions and
limitations set forth herein. The obligations and liabilities under this
guaranty constitute primary obligations and liabilities of USAi and shall not be
affected by the absence of any action to enforce obligations of, or proceedings
first against, the Buyer or the inability of the Buyer to pay due to bankruptcy
or otherwise.
7.13 BUYER'S ALLOCATION OF AFFILIATE OVERHEAD; AFFILIATE
TRANSACTIONS.
(a) The Buyer hereby agrees that no corporate
overhead expenses of any affiliate of the Buyer not directly related to the
Business, shall be included in the calculation of Adjusted EBT or Adjusted Gross
Profit of the Business for the purposes of determining the Adjusted EBT and
Adjusted Gross Profit of the Business pursuant to Sections 7.9, 7.10 and 7.11.
Notwithstanding the foregoing, expenses incurred by affiliates of the Buyer
directly related to the Business (i.e. employee benefits and insurance premiums)
shall be allocated to the Business for the purposes of determining the Adjusted
EBT and Adjusted Gross Profit of the Business pursuant to Sections 7.9, 7.10 and
7.11.
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(b) The Buyer hereby agrees that the cost and
expenses related to the purchase of any goods or services from any affiliate of
the Buyer (an "Affiliate Transaction") shall not, without the consent of the
Sellers, be included in the calculation of Adjusted EBT or Adjusted Gross Profit
of the Business for the purposes of determining the Adjusted EBT and Adjusted
Gross Profit of the Business pursuant to Sections 7.9, 7.10 and 7.11 unless such
Affiliate Transaction is with respect to goods and services historically used by
the Business and on arms length market terms and conditions which, in the case
of advertising services, is currently 5% of the revenues generated by such
advertising.
7.14 OBLIGATIONS REGARDING ACQUIRED BUSINESSES. (a) The Buyer
shall not acquire any person, asset or business engaged primarily in a business
other than the Company Business (as defined in Section 10.1) without the prior
consent of the Sellers; PROVIDED, HOWEVER, that the Buyer may purchase a person,
asset or business engaged primarily in a business other than the Company
Business without the prior consent of the Sellers, if the Buyer agrees at the
time of such acquisition that such Acquired Business will not be included in the
calculation of Adjusted EBT and Adjusted Gross Profit of the Business for the
purposes of determining the Adjusted EBT and Adjusted Gross Profit of the
Business pursuant to Sections 7.9, 7.10 and 7.11. The Buyer may acquire any
person, asset or business in the Company Business without the consent of the
Sellers.
(b) Notwithstanding anything in this agreement to the
contrary, the Sellers and the Shareholders agree that the Buyer and its
affiliates shall have no obligation whatsoever to purchase any person, asset or
business, whether or not such
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person, asset or business is, directly or indirectly, related to the Company
Business, and the Buyer and its affiliates shall have no obligation whatsoever
to contribute any person, asset or business, owned or purchased by any affiliate
of the Buyer, to the Buyer, including, without limitation, a person, asset or
business, directly or indirectly, related to the Company Business. Nothing in
this Agreement shall, in any way, prohibit, restrict, limit or effect in any way
the ability of any affiliate of the Buyer to make any acquisition of any person,
asset or business.
8. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE BUYER TO CLOSE. The
obligation of the Buyer to enter into and complete the Closing is subject, at
its option, to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it:
8.1 REPRESENTATIONS AND COVENANTS. The representations and
warranties of the Sellers contained in this Agreement shall be true on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date. Furthermore, the representations and warranties of the Sellers
contained in this Agreement shall be true and correct (without regard to any
Material Adverse Effect or materiality qualifier) except for all such violations
which taken together would not constitute a Sellers Material Adverse Effect. The
Sellers shall have performed and complied with all covenants and agreements
required by this Agreement to be performed or complied with by the Sellers on or
prior to the Closing Date. The Sellers shall have delivered to the Buyer a
certificate, dated the Closing Date and signed by the Sellers, to the foregoing
effect and stating that all conditions to the Buyer's obligations hereunder have
been satisfied.
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8.2 GOVERNMENTAL PERMITS AND APPROVALS. Any and all permits
and approvals from any governmental or regulatory body required for the lawful
consummation of the Closing shall have been obtained.
8.3 THIRD PARTY CONSENTS. All consents, permits and approvals
from parties to any contracts or other agreements with the Sellers (other than
contracts and agreements with hotels referred to in Section 5.9(iv)) which may
be required in connection with the performance by the Sellers of its obligations
under this Agreement or the continuance of such contracts or other agreements
after the Closing and all consents and approvals required with respect to the
contracts and agreements with hotels which are indicated on Schedule 5.9(iv) as
requiring consent or approval shall have been obtained.
8.4 OPINION OF COUNSEL TO THE SELLERS. The Buyer shall have
received the favorable opinion of Sayles & Lidji, counsel to the Sellers, dated
the Closing Date, addressed to the Buyer, in a form reasonably satisfactory to
the Buyer.
8.5 LITIGATION. No action, suit or proceeding shall have been
instituted before any court or governmental body or instituted or threatened by
any governmental agency or body to restrain or prevent the carrying out of the
transactions contemplated hereby, or which has or may have, in the opinion of
the Buyer, a materially adverse effect on the assets, properties, business or
condition, financial or otherwise, of the Sellers.
8.6 ESCROW AGREEMENT. Simultaneously with the Closing, the
Buyer and the Sellers shall enter into an Escrow Agreement in the form of
EXHIBIT C.
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8.7 HART-SCOTT-RODINO. Any person required in connection with
the transactions contemplated under this Agreement to file a notification and
report form in compliance with the HSR Act shall have filed such form and the
waiting period specified in the HSR Act, including any extensions thereof, shall
have expired.
8.8 LANDLORD ESTOPPEL CERTIFICATE. The Buyer shall have
received, at the Sellers' expense, a current estoppel certificate from the
landlord under each Lease stating (i) that such Lease is in full force and
effect and has not been amended, modified or supplemented other than as set
forth on SCHEDULE 5.10; (ii) that all rent and other sums and charges payable
under such Lease are current, and setting forth the date through which such
payments have been made; (iii) the amount of any tenant security or other
similar deposit held by or on behalf of such landlord under such Lease; (iv)
that no notice of default on the part of the Sellers, as the case may be, or
termination notice has been served under such Lease which remains outstanding;
and (v) that, to the knowledge of such landlord, no uncured default or
termination event or condition exists under such Lease, and that no event has
occurred or condition exists which, with the giving of notice or the lapse of
time or both, would constitute such a default or termination event or condition;
and (vi) that the consummation of the transactions contemplated in this
Agreement will not constitute a default under such Lease or grounds for the
termination thereof or for the exercise of any other right or remedy adverse to
the interests of the tenant thereunder.
8.9 ASSIGNMENT OF LEASE. The Buyer shall have received an
assignment of each Lease, in a form reasonably satisfactory to the Buyer.
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8.10 TAX RETURNS. Buyer shall have received any and all real
property transfer tax returns and other similar filings required by law in
connection with this Agreement, all duly and properly executed and acknowledged.
Sellers shall also execute such affidavits in connection with such filings as
shall have been required by law or reasonably requested by Buyer.
8.11 FIRPTA AFFIDAVIT. Buyer shall have received an affidavit
of an officer of each Seller sworn to under penalty of perjury, setting forth
such Seller's name, address and Federal tax identification number and stating
that such Seller is not a "FOREIGN PERSON" within the meaning of section 1445 of
the Code.
9. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE SELLERS TO CLOSE. The
obligation of the Sellers to enter into and complete the Closing is subject, at
the option of the Sellers, to the fulfillment of the following conditions, any
one or more of which may be waived:
9.1 REPRESENTATIONS. The representations and warranties of the
Buyer contained in this Agreement shall be true on and as of the Closing Date
with the same force and effect as though made on and as of the Closing Date. The
Buyer shall have performed and complied with all covenants and agreements
required by this Agreement to be performed or complied with it on or prior to
the Closing Date. The Buyer shall have delivered to the Sellers a certificate,
dated the Closing Date and signed by an officer of the Buyer, to the foregoing
effect and stating that all conditions to the Sellers' obligations hereunder
have been satisfied.
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9.2 OPINION OF COUNSEL TO THE BUYER. The Sellers shall have
received the favorable opinion of Paul, Weiss, Rifkind, Wharton & Garrison,
counsel to the Buyer, dated the Closing Date, addressed to the Sellers, in a
form reasonably satisfactory to the Sellers.
9.3 LITIGATION. No action, suit or proceeding shall have been
instituted before any court or governmental or regulatory body or instituted or
threatened by any governmental or regulatory body to restrain or prevent the
carrying out of the transactions contemplated hereby.
9.4 HART-SCOTT-RODINO. Any person required in connection with
the transactions contemplated under this Agreement to file a notification and
report form in compliance with the HSR Act shall have filed such form and the
waiting period specified in the HSR Act, including any extensions thereof, shall
have expired.
10. COVENANTS OF ROBERT DIENER AND DAVID LITMAN.
10.1 COVENANTS AGAINST COMPETITION. Each Shareholder
acknowledges that (i) the principal business of the Sellers is the direct
marketing and selling of hotel rooms to consumers through telephonic orders and
internet access (the "COMPANY BUSINESS"); (ii) he is one of the limited number
of persons who has developed such business; (iii) the business of the Sellers is
national and international in scope; (iv) his work for the Sellers has brought
him and his work for the Buyer will continue to bring him into close contact
with many confidential affairs not readily available to the public; and (v) the
Buyer would not purchase the Purchased Assets but for the agreements and
covenants of the Shareholder contained in this Section 10.
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Accordingly, as a material inducement to the Buyer to enter into this Agreement
and consummate the transactions referred to herein, each Shareholder covenants
and agrees, with respect to himself, that:
(a) NON-COMPETE. During the term of the
Shareholder's employment with the Buyer as successor in interest to the business
of the Sellers or with any affiliate of the Buyer, and for a period of five
years following the termination (whether for cause or otherwise) of the
Shareholder's employment with the Buyer or any of its affiliates (the
"RESTRICTED PERIOD"), the Shareholder shall not in the United States of America
or in any foreign country, directly or indirectly, (i) engage in the Company
Business for the Shareholder's own account; (ii) engage in any business that
constitutes part of the Buyer's, or any affiliate of the Buyer for which the
Shareholder has significant management responsibility, business at the time of
the termination of such Shareholder's employment with the Buyer; (iii) enter the
employ of, or render any services to, any person engaged in such activities; or
(iv) become interested in any such person as an individual, partner,
shareholder, officer, director, principal, agent, employee, trustee, consultant
or in any other relationship or capacity; PROVIDED, HOWEVER, the Shareholder may
own, directly or indirectly, solely as an investment, securities of any person
which are traded on any national securities exchange if the Shareholder (a) is
not an officer, director, consultant, employee or a controlling person of, or a
member of a group which controls, such person or (b) does not, directly or
indirectly, own 5% or more of any class of securities of such person.
(b) CONFIDENTIAL INFORMATION. During and after
the Restricted Period, the Shareholder shall keep secret and retain in strictest
confidence, and shall
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not use for the benefit of himself or others except in connection with the
business and affairs of the Buyer and its affiliates, all confidential matters
relating to the Company Business and to the Buyer and its affiliates, including
without limitation, trade know-how, secrets, customer lists, subscription lists,
subscription lists, details of author or consultant contracts, pricing policies,
operational methods, marketing plans or strategies, produce development
techniques or plans, business acquisition plans, new personnel acquisition
plans, methods of manufacture, technical processes, designs and design projects,
inventions and research projects and other business affairs relating to the
Company Business and to the Buyer and its affiliates learned by the Shareholder
heretofore or hereafter, and shall not disclose them to anyone outside of the
Buyer and its affiliates, either during or after employment by the Buyer or any
of its affiliates, except as required in the course of performing duties
hereunder or with the Buyer's express written consent.
(c) PROPERTY OF THE BUYER. All memoranda,
notes, lists, records and other documents (and all copies thereof) made or
compiled by the Shareholder or made available to the Shareholder concerning the
Company Business or the Buyer or any of its affiliates shall be the Buyer's
property and shall be delivered to the Buyer promptly upon the termination of
the Shareholder's employment with the Buyer or any of its affiliates or at any
other time on request.
(d) EMPLOYEES OF THE BUYER. During the
Restricted Period, the Shareholder shall not, directly or indirectly, hire,
solicit or encourage to leave the employment of the Buyer or any of its
affiliates, any employee of the Buyer or any of its affiliates or hire any such
employee who has left the employment of the Buyer or
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any of its affiliates within one year of the termination of such employee's
employment with the Buyer or any of its affiliates.
10.2 RIGHTS AND REMEDIES UPON BREACH. If the Shareholder
breaches, or threatens to commit a breach of, any of the provisions of Section
10.1 (the "RESTRICTIVE COVENANTS"), the Buyer shall have the following rights
and remedies, each of which rights and remedies shall be independent of the
other and severally enforceable, and all of which rights and remedies shall be
in addition to, and not in lieu of, any other rights and remedies available to
the Buyer under law or in equity:
(a) SPECIFIC PERFORMANCE. The right and remedy
to have the Restrictive Covenants specifically enforced by any court having
equity jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Buyer and that money
damages will not provide adequate remedy to the Buyer.
(b) ACCOUNTING. The right and remedy to require
the Shareholder to account for and pay over to the Buyer all compensation,
profits, monies, accruals, increments or other benefits (collectively,
"BENEFITS") derived or received by the Shareholder as the result of any
transactions constituting a breach of any of the Restrictive Covenants, and the
Shareholder shall account for and pay over such Benefits to the Buyer.
10.3 SEVERABILITY OF COVENANTS. If any court determines
that any of the Restrictive Covenants, or any part thereof, is invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby be
affected and shall be given full effect, without regard to the invalid portions.
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10.4 BLUE-PENCILLING. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration of such provision or the area covered thereby, such court shall have
the power to reduce the duration or area of such provision and, in its reduced
form, such provision shall then be enforceable and shall be enforced.
10.5 ENFORCEABILITY IN JURISDICTIONS. The Buyer and the
Shareholders intend to and hereby confer jurisdiction to enforce the Restrictive
Covenants upon the courts of any jurisdiction within the geographical scope of
such Covenants. If the courts of any one or more of such jurisdictions hold the
Restrictive Covenants wholly unenforceable by reason of the breadth of such
scope or otherwise, it is the intention of the Buyer and the Shareholders that
such determination not bar or in any way affect the Buyer's right to the relief
provided above in the courts of any other jurisdiction within the geographical
scope of such Covenants, as to breaches of such Covenants in such other
respective jurisdictions, such Covenants as they relate to each jurisdiction
being, for this purpose, severable into diverse and independent covenants.
10.6 SHAREHOLDER GUARANTY. The Shareholders, and their
respective spouses (Malia Litman with respect to Litman and Michelle Diener with
respect to Diener), jointly and severally, hereby irrevocably, unconditionally
and completely guarantee the full and timely payment and performance of all of
the Sellers' obligations under this Agreement, subject to the provisions and
limitations set forth herein; PROVIDED, HOWEVER, each Shareholder's, and such
Shareholder's Spouse's, liability under this Section 10.6 or Section 12 shall
not exceed 50% of the Purchase Price. Each of the Zachary Charles Litman Exempt
GS-Trust, Katherine Elizabeth Litman
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Exempt GS-Trust, the Anne Marie Litman Exempt GS-Trust, the Alison Diener Exempt
GS-Trust and the Brianna Diener Exempt GS-Trust (collectively, the "Trusts"),
jointly and severally, hereby irrevocably, unconditionally and completely
guarantee the full and timely payment and performance of all of the Sellers'
obligations under this Agreement, subject to the provisions and limitations set
forth herein; provided, however, each such Trust's liability under this Section
10.6 or Section 12 shall not exceed the percentage of the Purchase Price
distributed to such Trust, including upon liquidation, by the Sellers. The
obligations and liabilities under this guaranty constitute primary obligations
and liabilities of the Shareholders and the Trusts and shall not be affected by
the absence of any action to enforce obligations of, or proceedings first
against, the Sellers or the inability of the Sellers to pay because of the
Sellers' bankruptcy or otherwise.
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11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE SELLERS. Notwith
standing any right of the Buyer fully to investigate the affairs of the Sellers
and notwithstanding any knowledge of facts determined or determinable by the
Buyer pursuant to such investigation or right of investigation, the Buyer has
the right to rely fully upon the representations, warranties, covenants and
agreements of the Sellers contained in this Agreement or in any document
delivered to the Buyer by the Sellers or any of its representatives, in
connection with the transactions contemplated by this Agreement. All such
representations, warranties, covenants and agreements shall survive the
execution and delivery hereof and the Closing hereunder. Except for those
representations and warranties in Sections 5.1, 5.2 and 5.7 (all of which
representations and warranties shall survive without limitation), all
representations and warranties shall terminate and expire with respect to any
theretofore unasserted (i) General Claim (as herein defined), on the second
anniversary of the Closing Date, (ii) any Tax Claim (as herein defined), 30 days
after assessment of the liability to which any such Tax Claim may relate is
barred by all applicable statutes of limitations (taking into account any
applicable waivers or extensions) and (iii) any Safety and Environmental Claim
(as herein defined), on the fifth anniversary of the Closing Date and (iv) any
ERISA Claim (as herein defined) on the date upon which the liability to which
any such ERISA Claim may relate is barred by applicable statutes. As used in
this Agreement, the following terms have the following meanings:
(i) "ERISA CLAIM" means any claim based upon,
arising out of or otherwise in respect of any inaccuracy in or any breach of
representation or warranty of the Sellers contained in Section 5.18.
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(ii) "GENERAL CLAIM" means any claim arising out
of or based on otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Sellers contained in this
Agreement that is not a Tax Claim.
(iii) "SAFETY AND ENVIRONMENTAL CLAIM" means any
claim based upon, arising out of or otherwise in respect of any inaccuracy in or
any breach of any representation or warranty of the Sellers contained in this
Agreement related to Safety and Environmental Laws.
(iv) "TAX CLAIM" means any claim arising out of
or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Sellers contained in this
Agreement related to Taxes.
12. INDEMNIFICATION.
12.1 OBLIGATION OF THE SELLERS AND DIENER AND LITMAN TO
INDEMNIFY. Subject to the limitations contained in Section 12.5, the Sellers and
the Shareholders, jointly and severally, agree to indemnify, defend and hold
harmless the Buyer (and any of its officers, directors, employees, affiliates,
successors and assigns) from and against any losses, liabilities, damages,
judgments, assessments, fines, costs, expenses or deficiencies (including
interest, penalties, fees, expenses and disbursements of attorneys, experts,
personnel and consultants incurred by the indemnified party) ("LOSSES") based
upon, arising out of or due to or otherwise in respect of:
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(i) any inaccuracy in or any breach of any
representation or warranty of the Sellers or the Shareholders contained in this
Agreement or in any document or other writing delivered pursuant hereto;
(ii) any breach of any covenant or agreement of
the Sellers or the Shareholders contained in this Agreement; and
(iii) any liability or obligation not assumed by
the Buyer pursuant to Sections 2.1 and 2.2, including, without limitation, any
liability to which it may become subject as a result of the fact that the
transactions contemplated by this Agreement are being effected, at the request
of the Sellers, without compliance with the provisions of any Bulk Sales Act or
any similar statute as enacted in any jurisdiction, domestic or foreign.
12.2 OBLIGATION OF BUYER TO INDEMNIFY. The Buyer shall
indemnify, defend and hold harmless the Sellers from and against any Losses
arising out of or due to (i) any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Buyer contained in this
Agreement or in any document or other writing delivered pursuant hereto; and
(ii) any liability or obligation assumed by the Buyer pursuant to Section 2.1.
12.3 NOTICE TO INDEMNIFYING PARTY.
(a) NOTICE OF ASSERTED LIABILITY. The party
making a claim under this Article 13 is referred to as the "INDEMNITEE," and the
party against whom such claims are asserted under this Article 12 is referred to
as the "INDEMNIFYING PARTY." All claims by any Indemnitee under this Article 12
shall be asserted and resolved as follows: Promptly after receipt by the
Indemnitee of notice of any claim or
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circumstances which, with the lapse of time, would or might give rise to a claim
or the commencement (or threatened commencement) of a claim for indemnification
under this Article 12, including any action, proceeding or investigation (an
"ASSERTED LIABILITY") that may result in a Loss, the Indemnitee shall give
notice thereof (the "CLAIMS NOTICE") to the Indemnifying Party; PROVIDED, THAT,
the failure to give notice shall not effect the Indemnifying Party's obligations
hereunder except to the extent it is materially prejudiced thereby. The Claims
Notice shall describe the Asserted Liability in reasonable detail, and shall
indicate the amount (estimated, if necessary, and to the extent feasible) of the
Loss that has been or may be suffered by the Indemnitee.
(b) OPPORTUNITY TO DEFEND. The Indemnifying
Party may elect to compromise or defend, at its own expense and by its own
counsel, any Asserted Liability arising from any third party claim. If the
Indemnifying Party elects to compromise or defend such Asserted Liability, it
shall within 30 days (or sooner, if the nature of the Asserted Liability so
requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall
cooperate, at the expense of the Indemnifying Party, in the compromise of, or
defense against, such Asserted Liability. If the Indemnifying Party elects not
to compromise or defend the Asserted Liability, fails to notify the Indemnitee
of its election as herein provided or contests its obligation to indemnify under
this Agreement, the Indemnitee may pay, compromise or defend such Asserted
Liability. Notwithstanding the foregoing, neither the Indemnifying Party nor the
Indemnitee may settle or compromise any Asserted Liability over the objection of
the other; PROVIDED, HOWEVER, consent to settlement or compromise shall not be
unreasonably be withheld. In any event, the Indemnitee and the Indemnifying
Party may participate, at their own
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expense, in the defense of such Asserted Liability. If the Indemnifying Party
chooses to defend any Asserted Liability, the Indemnitee shall make available to
the Indemnifying Party any books, records or other documents within its control
that are necessary or appropriate for such defense.
12.4 ESCROW FUND. The obligation of the Sellers and the
Shareholders under Section 12.1 shall be satisfied first from the Escrow Fund
and, if the Escrow Fund is inadequate to provide indemnification to the Buyer as
provided in the Escrow Agreement, then from the Sellers and the Shareholders as
provided in Section 12.1.
12.5 LIMITATION ON INDEMNIFICATION. Anything in this Agreement
to the contrary notwithstanding, no indemnification payment shall be made to the
Buyer pursuant to this Section 12.1(i) of Agreement, except those based upon,
arising out of or otherwise in respect of Sections 5.5, 5.18 and Article 10, or
in respect of Taxes, whether from the Escrow Fund or otherwise, until the
amounts which the Buyer would otherwise be entitled to receive as
indemnification under this Agreement aggregate at least $200,000 (the "Basket
Amount"), at which time the Buyer shall be entitled to receive the amount of any
such payments in excess of the Basket Amount. Indemnification in respect of
Taxes shall include the amount of such Tax, interest, penalties, fees and
disbursements of attorneys, experts, personnel and consultants incurred by the
indemnified party but shall not include any other consequential damages.
Anything in this Agreement to the contrary notwithstanding, the liability of the
Sellers shall in no event exceed the Purchase Price received by the Sellers
pursuant to this Agreement (including any amount distributed or which may later
be distributed to the Sellers pursuant to the Escrow Agreement). Anything in
this Agreement to the
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contrary notwithstanding, the liability of each Shareholder, other than such
Shareholder's liability pursuant to Article 10, shall in no event exceed 50% of
the Purchase Price.
12.6 SET-OFF RIGHTS. Each of the Sellers and the
Shareholders agrees that the Buyer shall have the right, but not the obligation,
to set-off against any of its payment obligations hereunder or under the
Purchase Note, the full amount of any Losses required to be paid by such Sellers
pursuant to Section 12.1 if such Losses are not otherwise paid within thirty
(30) days after the Buyer has requested payment. If Buyer elects to exercise its
set-off rights hereunder against any payment obligation under this Agreement or
the Purchase Note, it will give to the Sellers written notice of such election
which includes the amount to be set off and, upon giving such notice, the amount
of the obligations under this Agreement or the Purchase Note, as the case may
be, shall automatically be reduced by the amount set forth in such Notice. In
the event there is a final determination by a court of competent jurisdiction
that the Buyer was not entitled to indemnification under this Article 12 with
respect to the set-off amount, the Buyer shall promptly thereafter pay to the
Sellers all such amounts which are so determined to have been incorrectly
set-off plus interest thereon at a rate per annum equal to USAi Cost of Funds in
effect during the period from such set-off to such repayment, which interest
shall be calculated on the basis of a 365-day year and shall accrued from the
date the Buyer exercises its right of set-off hereunder to the date of such
repayment. For purposes of this Section 12.6, a determination shall be final if
any and all appeals therefrom shall have been resolved or if thirty days shall
have
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passed from the rendering of such determination (or of any determination on
appeal therefrom) and no party shall have commenced any such appeal therefrom.
13. TERMINATION OF AGREEMENT.
13.1 TERMINATION. This Agreement may be terminated prior to
the Closing as follows:
(i) at the election of the Sellers, if the Buyer has
breached any material representation, warranty, covenant or agreement contained
in this Agreement and such breach is either not capable of being cured prior to
September 30, 1999 or, if such breach is capable of being cured, is not so cured
within a reasonable amount of time;
(ii) at the election of the Buyer, if the Sellers have
breached any material representation, warranty, covenant or agreement contained
in this Agreement and such breach is either not capable of being cured prior to
September 30, 1999 or, if such breach is capable of being cured, is not so cured
within a reasonable amount of time;
(iii) at the election of the Sellers or the Buyer, if any
legal proceeding is commenced or threatened by any governmental agency or other
person directed against the consummation of the Closing or any other transaction
contemplated under this Agreement and either the Sellers or the Buyer, as the
case may be, reasonably and in good faith deems it impractical or inadvisable to
proceed in view of such legal proceeding or threat thereof;
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(iv) at any time on or prior to the Closing Date, by mutual
written consent of the Sellers and the Buyer;
(v) at the election of the Buyer if the Closing has not
occurred by September 30, 1999 (other than a failure of the Closing to occur due
to a breach of this Agreement by the Buyer); or
(vi) at the election of the Sellers if the Closing has not
occurred by September 30, 1999 (other than a failure of the Closing to occur due
to a breach of this Agreement by the Sellers); or
13.2 SURVIVAL AFTER TERMINATION. If this Agreement terminates
pursuant to Section 13.1 and the transactions contemplated hereunder are not
consummated, this Agreement shall be null and void and have no further force or
effect, except that any such termination shall be without prejudice to the
rights of any party on account of the nonsatisfaction of the conditions set
forth in Articles 8 and 9 resulting from the intentional or willful breach or
violation of the representations, warranties, covenants or agreements of another
party under this Agreement. Notwithstanding anything in this Agreement to the
contrary, the provisions of Article 14 shall survive any termination of this
Agreement.
14. MISCELLANEOUS.
14.1 CERTAIN DEFINITIONS. As used in this Agreement, the
following terms have the following meanings unless the context otherwise
requires:
(i) "ACQUIRED BUSINESS" is any person or
business acquired by the Buyer after the Closing through a purchase of assets or
stock, or a contribution
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to the capital of the Buyer, other than the Purchased Assets and other assets or
Investments purchased in the ordinary course of business of the Buyer.
(ii) "ACQUIRED EBT" is (a) the amount of EBT of
the Acquired Business for the twelve-month period ending on the last day of the
month immediately prior to the date of the acquisition of such Acquired Business
by the Buyer divided by 52 times (b) the number of weeks (rounded to the nearest
whole) during the relevant period for which EBT is being calculated that the
Acquired Business was owned by the Buyer.
(iii) "ACQUIRED GROSS PROFIT" is the Gross Profit
attributable to, or contributed by, any Acquired Business during the relevant
period.
(iv) "ADJUSTED EBT" means EBT adjusted (a) to
exclude Acquired EBT (as defined above) for the period, (b) to exclude expenses
related to the transaction contemplated by the Agreement, any expenses incurred
by the Buyer relating to disputes under this Agreement and any amortization of
goodwill, (c) to exclude an amount equal to Base Cost of Capital and (d) to
include an amount equal to the Imputed Interest. Notwithstanding the foregoing,
for the purposes of determining the Adjusted EBT for the year ended March 31,
2004 in Section 7.11 only, all EBT attributable to, or contributed by, any
Acquired Business acquired during such period shall be excluded and the
calculation of Base Cost of Capital shall not include any Acquired Business
acquired during such period.
(v) "ADJUSTED GROSS PROFIT" means Gross Profit
for a period of time, adjusted to exclude any Acquired Gross Profit.
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(vi) "AFFILIATE," with respect to any person,
means and includes any person controlling, controlled by or under common control
with such person.
(vii) "BASE COST OF CAPITAL" shall be an amount equal
to 12% per annum applied to the enterprise value (including debt (less cash)
assumed), as reasonably determined by the Buyer and the Sellers, of any Acquired
Business, compounded annually from the date such Acquired Business was acquired
by the Buyer. As an example if an Acquired Business is purchased for $1 million
and the Buyer assumes $500,000 of the Acquired Business' debt, the enterprise
value of such Acquired Business shall be $1.5 million. In the event the Buyer
and Sellers are unable to determine the enterprise value of any Acquired
Business, a nationally recognized investment bank mutually acceptable to the
Buyer and the Sellers shall be retained to determine the enterprise value of
such Acquired Business.
(viii) "BUSINESS" means the business of the Sellers
as conducted prior to the Closing and the business of the Buyer as conducted
after the Closing.
(ix) "BUSINESS DAY," means any day which is not a
federal, state or local holiday and on which the banks generally are open in New
York, New York for the conduct of business.
(x) "CODE" shall mean the Internal Revenue code
of 1986, as amended, and the applicable Treasury regulations promulgated
thereunder.
(xi) "CONTRACTS AND OTHER AGREEMENTS" means and
includes all contracts, agreements, indentures, bonds, leases, mortgages,
franchises, licenses, commitments or binding arrangments, express or implied.
<PAGE>
(xii) "DOCUMENT OR OTHER PAPERS" means and
includes any document, agreement, instrument, certificate, notice, consent,
affidavit, letter, telegram, telex, statement, schedule (including any Schedule
to this Agreement), exhibit (including any Exhibit to this Agreement) or any
other paper whatsoever.
(xiii) "EBT" means for the relevant period, as to the
Business, the net income of such business before deduction for federal, state or
local Income Taxes, all determined in accordance with GAAP consistently applied;
PROVIDED, HOWEVER, that the 2003 EBT in Section 7.11 shall not include the EBT
attributable to, or contributed by, any Acquired Business acquired during such
period.
(xiv) "ENVIRONMENT" means navigable waters, waters of
the contiguous zone, ocean waters, natural resources, surface waters, ground
water, drinking water supply, land surface, subsurface strata, ambient air, both
inside and outside of buildings and structures, man-made buildings and
structures, and plant and animal life on earth.
(xv) "ENVIRONMENTAL CLAIMS" means any
notification, whether direct or indirect, formal or informal, written or oral,
pursuant to Safety and Environmental Laws or principles of common law relating
to pollution, protection of the Environment or health and safety, that any of
the current or past operations of the Sellers, or any by-product thereof, or any
of the property currently or formerly owned, leased or operated by the Sellers,
or the operations or property of any predecessor of the Sellers, is or may be
implicated in or subject to any claim, order, hearing, notice, agreement or
evaluation by any governmental body or any other person.
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(xvi) "GAAP" means generally accepted accounting
principles of the U.S. consistently applied.
(xvii) "GROSS PROFIT" means for the relevant period
total revenue (other than interest and dividend income, net income resulting
from the sale of marketable securities and other non-operating activity
generated income) calculated in accordance with SCHEDULE 14.1 reduced by the
Cost of Sales calculated in accordance with SCHEDULE 14.1 related to such
revenue, all in accordance with GAAP consistently applied.
(xviii) "HAZARDOUS SUBSTANCE" means any toxic waste,
pollutant, contaminant, hazardous substance, toxic substance, hazardous waste,
special waste, industrial substance or waste, petroleum or petroleum-derived
substance or waste, radioactive substance or waste, or any constituent of any
such substance or waste, or any other substance regulated under or defined by
any Safety and Environmental Law.
(xix) "INCOME TAXES" means any federal, state, local,
or foreign Tax (including any interest, penalties, or additions to Tax
attributable to such Tax) (i) based upon, measured by, or calculated with
respect to, net income or net receipts, proceeds, or profits (including, but not
limited to, any capital gains Taxes, minimum Taxes, and any Taxes on items of
Tax preference, but not including sales, use, real or personal property
transfer, or similar Taxes), or (ii) based upon, measured by, or calculated with
respect to multiple bases (including, but not limited to, corporate franchise or
occupation Taxes) if one or more of the bases on which such Tax may be based,
measured by, or calculated with respect to is described in (i) above.
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(xx) "IMPUTED INTEREST" means an amount equal to
the interest rate USAi earns on its short term cash deposits, as adjusted
quarterly, applied to the amount of any cash dividends, distributions or
advances by the Buyer, compounded annually from the date of such cash dividend
or distribution.
(xxi) "INVESTMENT" means any loan or advance to any
person, any purchase or other acquisition of any capital stock or other
ownership or profit interest, warrant, right, option, obligation or other
securities of such person, any capital contribution to such person or any other
investment in such person.
(xxii) "KNOWLEDGE" means, with respect to the Buyer
or Sellers, the actual knowledge of any officer, director or shareholder of such
person.
(xxiii) "LIEN OR OTHER ENCUMBRANCE" means and
includes any lien, pledge, mortgage, security interest, claim, lease, charge,
option, right of first refusal, easement or any other encumbrance whatsoever.
(xxiv) "NET WORKING CAPITAL" means the current
assets of the Sellers acquired by Buyer at Closing minus the current liabilities
of the Sellers assumed by Buyer at Closing, all determined in accordance with
GAAP consistently applied. Schedule 14.1 sets forth the Net Working Capital of
the Sellers as of December 31, 1998.
(xxv) "PERSON" means any individual, corporation,
partnership, firm, joint venture, association, joint-stock company, trust,
unincorporated organization or other entity.
(xxvi) "PROPERTY" means real, personal or mixed
property.
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(xxvii) "SAFETY AND ENVIRONMENTAL LAWS" means all
Laws and Orders relating to pollution, protection of the Environment, public
or worker health and safety, or the emission, discharge, release or
threatened release of Hazardous Substances into the Environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Substances including
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 ET SEQ., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 ET SEQ., the Toxic Substances Control Act, 15 U.S.C.
Section 2601 ET SEQ., the Federal Water Pollution Control Act, 33 U.S.C.
Section 1251 ET SEQ., the Clean Air Act, 42 U.S.C. Section 7401 ET SEQ., the
Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 121 ET
SEQ., the Occupational Safety and Health Act, 29 U.S.C. Section 651 ET SEQ.,
the Asbestos Hazard Emergency Response Act, 15 U.S.C. Section 2601 ET SEQ.,
the Safe Drinking Water Act, 42 U.S.C. Section 300F ET SEQ., the Oil
Pollution Act of 1990, 33 U.S.C. Section 2701 ET SEQ., and analogous state
acts.
(xxviii) "TAX RETURN" means all returns,
declarations, reports, forms, estimates, information returns, and statements
required to be filed in respect of any Taxes or to be supplied to a taxing
authority in connection with any Taxes.
(xxix) "TAXES" means all taxes of any kind,
charges, fees customs, duties, imposts, levies, or other assessments, including,
without limitation, all net income, gross receipts, ad valorem, value added,
transfer, gains, franchise, profits, inventory, net worth, capital stock, asset,
sales, use, license, estimated, withholding, payroll, transaction, capital,
employment, social security, workers compensation,
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unemployment, excise, severance, stamp, occupancy, and property taxes, together
with any interest, penalties, additions to tax, or additional amounts imposed by
any taxing authority (domestic or foreign) and shall include any transferee
liability in respect of Taxes.
(xxx) "USAI COST OF FUNDS" means the interest rate
charged USAi pursuant to its senior credit facility in existence at such time.
14.2 PUBLICITY. No publicity release or announcement
concerning this Agreement or the transactions contemplated hereby shall be
issued without advance approval of the form and substance thereof by the Sellers
and the Buyer.
14.3 NOTICES. Any notice or other communication required or
which may be given hereunder shall be in writing and shall be delivered
personally, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, or sent by facsimile transmission or, if mailed, five days
after the date of deposit in the United States mails, as follows:
(i) if to the Buyer or USAi, to it:
c/o USA Networks, Inc.
152 West 57th Street
42nd Floor
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 314-7329
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with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Robert B. Schumer, Esq.
Facsimile: (212) 757-3990
(ii) if to the Sellers, to it:
c/o Hotel Reservations Network
8140 Walnut Hill Lane
Suite 203
Dallas, Texas 75231
Attention: David Litman
Facsimile: (214) 265-0975
with a copy to:
Sayles & Lidji
1201 Elm Street
44th Floor
Dallas, Texas 75270
Attention: Brian M. Lidji, Esq.
Facsimile: (214) 939-8787
(iii)if to the Shareholders, to it:
David Litman
5001 Swiss Avenue
Dallas, Texas 75214
Facsimile: (214) 826-1917
and
Robert Diener
8877 Collins Avenue
PHA
Surfside, Florida 33154
Facsimile: (305) 868-4922
with a copy to:
Sayles & Lidji
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1201 Elm Street
44th Floor
Dallas, Texas 75270
Attention: Brian M. Lidji, Esq.
Facsimile: (214) 939-8787
14.4 ENTIRE AGREEMENT. This Agreement (including the Exhibits
and Schedules hereto) contains the entire agreement among the parties with
respect to the purchase of the Purchased Assets and related transactions and
supersedes all prior agreements, written or oral, with respect thereto.
14.5 WAIVERS AND AMENDMENTS. This Agreement may be
amended, modified, superseded canceled, renewed or extended, and the terms and
conditions hereof may be waived only by a written instrument signed by the
parties or, in the case of a waiver, the party waiving compliance. No delay on
the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder, preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have at law or
in equity. The rights and remedies of any party arising out of or otherwise in
respect of any inaccuracy in or breach of any representation, warranty, covenant
or agreement contained in this Agreement shall in no way be limited by the fact
that the act, omission, occurrence or other state of facts upon which any claim
of any such inaccuracy or breach is based may also be the subject matter of any
other
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representation, warranty, covenant or agreement contained in this Agreement (or
in any other agreement between the parties) as to which there is no inaccuracy
or breach.
14.6 GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State.
14.7 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Any claim
arising out of or relating to this Agreement, the Purchase Note or the Escrow
Agreement or the transactions contemplated hereby and thereby may be instituted
in any Federal Court of the Southern District of New York or any state court
located in New York County, State of New York, and each party agrees not to
assert, by way of motion, as a defense or otherwise, in any such claim, any
claim it is not subject personally to the jurisdiction of such Court, that the
claim is brought in an inconvenient forum, that the venue of the claim is
improper or that this Agreement, the Purchase Note or the Escrow Agreement or
the subject matter hereof or thereof may not be enforced in or by such Court.
Each party further irrevocably submits to the jurisdiction of such Court in any
such claim. Any and all service of process and any other notice of any such
claim shall be effective against the party if given personally or by registered
or certified mail, return receipt requested, or by any other means of mail that
requires a signed receipt, postage prepaid, mailed to such party as herein
provided. Nothing herein contained shall be deemed to affect the right of any
party to serve process in any matter permitted by law or to commence legal
proceedings or otherwise proceed against any other party in any other
jurisdiction.
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14.8 NO ASSIGNMENT. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns and permitted
transferees of the parties hereto. This Agreement is not assignable except by
operation of law; PROVIDED THAT Sellers may assign all or part of the Promissory
Note, Additional Purchase Payment, Deferred Payment or Participation Payment to
the Shareholders in connection with the partial or complete liquidation of the
Sellers. The Shareholders may then assign without limit or reservation any of
his or its rights (but not his or its obligations) to any family member or
trust, whether charitable or for the benefit of any family member; provided,
such family member or trust agrees in writing to be bound by the obligations of
the Shareholders hereunder, including without limitation, the indemnification
obligations pursuant to Article 12 and the guaranty obligations pursuant to
Section 10.6. Except as provided in Article 12, no other person other than the
parties hereto and their successors and permitted assigns is intended to be a
beneficiary of this Agreement.
14.9 USAGE. All pronouns and any variations thereof refer to
the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require. All terms defined in this Agreement in their
singular or plural forms have correlative meanings when used herein in their
singular or plural forms, respectively. Unless otherwise expressly provided, the
words "include," "includes" and "including" do not limit the preceding words or
terms and shall be deemed to be followed by the words "without limitation."
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14.10 COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.
14.11 EXHIBITS AND SCHEDULES. The Exhibits and Schedules to
this Agreement are hereby made a part of this Agreement as if set forth in full
herein.
14.12 HEADINGS. The headings in this Agreement are intended
solely for convenience of reference and shall be given no effect in the
interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
HRN, INC.
By
-------------------------------
Name:
Title:
USA NETWORKS, INC.
By
-------------------------------
Name:
Title:
TMF, INC.
By
-------------------------------
Name:
Title:
HRN MARKETING CORP.
By
-------------------------------
Name:
Title:
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------------------------------------
David Litman
------------------------------------
Malia Litman
------------------------------------
Robert Diener
------------------------------------
Michelle Diener
The Zachary Charles Litman Exempt
G-S Trust
By
--------------------------------
Name:
Title:
The Katherine Elizabeth Litman
Exempt G-S Trust
By
--------------------------------
Name:
Title:
The Anna Marie Litman Exempt
G-S Trust
By
--------------------------------
Name:
Title:
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The Allison Diener Exempt G-S Trust
By
--------------------------------
Name:
Title:
The Brianna Diener Exempt G-S Trust
By
--------------------------------
Name:
Title:
<PAGE>
SCHEDULE 14.1(XVII)
GROSS PROFIT
REVENUE:
Total revenue (including the items listed below) other than interest and
dividend income, net income resulting from the sale of marketable securities and
other non-operating activity generated income
<TABLE>
<S> <C>
Hotel Reservation Revenue by Source:
Call center previous customer
--------------
Call center referral
Total call center reservations
Internet - automated charge process
Internet - old site booking
Internet booking by phone
--------------
Internet travel network
Total Internet reservations
Newspaper/Magazine
Other or unknown
Travel agents
Travel clubs
--------------
Other or unknown
--------------
TOTAL HOTEL RESERVATION REVENUE
Forfeitures
Penalties
Refunds & Adjustments
Rebates
Commissions
--------------
TOTAL REVENUE
COST OF SALES
Hotel reservations (including room charges, taxes)
Add, update & delete
Travel agent commissions
Internet commissions
Other commissions
Charge backs
Uninvoiced accounts payable
--------------
TOTAL COST OF SALES
--------------
GROSS PROFIT
--------------
</TABLE>
<PAGE>
SCHEDULE 14.1(XXIV)
NET WORKING CAPITAL
<TABLE>
<S> <C> <C>
CURRENT ASSETS: 12/31/98 Closing
-------- -------
Cash & Equivalents
Investment Account (marketable securities)
Chargebacks in process
Commissions Receivable
Accrued Interest
Amounts Due From Employees
Prepaid Expenses
Prepaid Advertising
Security Deposits
Prepaid Hotel Inventory
Accounts Receivable (other)
Total Current Assets
CURRENT LIABILITIES:
Customer Deposits
Hotel Accounts Payable
Corporate (non-hotel) Accounts Payable
Commissions Payable
Accrued Payroll
Total Current Liabilities
TOTAL NET WORKING CAPITAL
</TABLE>
<PAGE>
Schedule 7.10
<TABLE>
<CAPTION>
Target
Adjusted
Fiscal Quarter Ending Gross Profit
- --------------------- ------------
(in thousandths)
<S> <C>
March 31, 1999 $ 5,938.7
June 30, 1999 8,858.2
September 30, 1999 11,555.6
December 31, 1999 18,383.7
--------
Total for 12 month period ending
December 31, 1999 $44,736.2
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 26, 1999, accompanying the combined
financial statements of TMF, Inc. and HRN Marketing Corp. contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
Dallas, Texas
December 22, 1999
