<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000
REGISTRATION NO. 333-90601
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
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)
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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:
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<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. / /
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 -- FEBRUARY 7, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
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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 8.
- --------------------------------------------------------------------------------
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>
Description of graphics on inside front and gatefold page of prospectus:
Inside Front Cover:
[Hotel Reservations Network Logo]
The picture in the center of the page depicts an example of a screen that
visitors to our website, www.hoteldiscount.com, would see when booking a travel
reservation.
Gatefold Page:
The four pictures on this page, from the upper left corner in a succession to
the lower right corner, depict the various screens that a visitor to our
website, www.hoteldiscount.com, would see when booking a travel reservation.
There are explanatory captions beneath each picture.
The caption beneath the first picture on the upper left corner reads: "1. Go to
Hotel Reservations Network's Home Page: Customers select a travel destination
from HRN's list of markets."
The caption beneath the second picture in the upper middle left of the page
reads: "2. Indicate dates of stay: HRN's booking process is presented in a
simple, customer-friendly format."
The caption beneath the third picture in the lower middle right of the page
reads: "3. Select a hotel: HRN's booking engine provides customers with a list
of available hotels based on the customer's information."
The caption beneath the fourth picture on the lower right corner reads: "4. Book
a reservation: Customers can book their hotel reservation online or by phone. If
booked online customers receive a prompt e-mail confirmation."
The bottom left of the page sets forth a list of the domestic and international
cities that we serve.
The text on the upper right of the page reads: "Our services". Beneath this text
is the Hotel Reservations Network logo.
<PAGE>
TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 1
Risk Factors........................... 8
Special Note Regarding Forward-Looking
Statements........................... 18
Use of Proceeds........................ 18
Dividend Policy........................ 18
Capitalization......................... 19
Dilution............................... 20
Selected Financial Data................ 21
Unaudited Pro Forma Combined Condensed
Statement of Operations.............. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 27
</TABLE>
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Business............................... 37
Management............................. 46
Certain Transactions................... 52
Principal Stockholders................. 55
Description of Capital Stock........... 59
Shares Eligible for Future Sale........ 64
Underwriting........................... 66
Legal Matters.......................... 68
Experts................................ 68
Available Information.................. 68
Reports to Security Holders............ 68
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.
------------------------
i
<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
December 31, 1999, we had room supply agreements with approximately 1,500 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 affiliated 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 Inc.),
TravelWeb (operated by Pegasus Systems), Cheap Tickets, Yupi.com, GetThere.com
and over 1,600 other affiliate websites. We also are prominently featured on and
directly linked to most of the leading Internet search engines and online
communities, including America Online, Lycos, Yahoo!, 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 $161.8 million in
1999, representing a compound annual growth rate of 90.8%. Internet generated
bookings accounted for 44% of our revenues in 1998 and 81% in 1999. On a pro
forma basis, our net loss for the year ended December 31, 1999 was
$8.5 million, which reflects pro forma amortization of $34.1 million. As a
result of the acquisition of substantially all the assets of TMF, Inc. and HRN
Marketing Corp. on May 10, 1999, $200.3 million of goodwill was created. This
goodwill is being amortized over ten years and, as of December 31, 1999,
goodwill represented approximately 91.8% of the book value of our assets. The
amount of goodwill and related amortization will increase by approximately
$140.4 million due to the issuance of an estimated 11,699,900 shares of our
class A common stock to an assignee of TMF, Inc.
1
<PAGE>
and HRN Marketing Corp. immediately prior to the closing of this offering. It
may also increase if we are required to make a future contingent payment 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."
2
<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. Consequently, 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 was paid on January 31, 2000. Under
the purchase agreement, we were required to pay TMF, Inc. and HRN Marketing
Corp. up to $12.5 million at the end of each of the last three fiscal quarters
in 1999 and for the year ended December 31, 1999 if specified financial targets
were met in each of those quarters and for the year. As a result, we have paid a
total of $25.0 million to an assignee of TMF, Inc. and HRN Marketing Corp. for
the fiscal quarters ended June 30, 1999 and September 30, 1999. We have accrued
for a $12.5 million payment for our year ended December 31, 1999 that we expect
to make in the first fiscal quarter of 2000. This payment will be funded by a
capital contribution from USAi.
TMF, Inc. and HRN Marketing Corp. are entitled to a contingent cash payment
based on our performance for the twelve-month period ending March 31, 2000. This
additional payment will be based upon the greater of:
- 2.5 times the total growth in our adjusted earnings for the period; or
- 1.44 times the total growth in our adjusted gross profit for the period
(provided this growth in adjusted gross profit exceeds 50%).
In addition to being a guarantor of our obligations, USAi has agreed to make
this contingent payment on our behalf.
We have entered into an amended and restated asset purchase agreement that
eliminates contingent cash payments based on performance for the twelve-month
periods ending March 31, 2001 and March 31, 2002. In exchange for the
elimination of these cash payments, we will issue to an assignee of TMF, Inc.
and HRN Marketing Corp. $81.6 million of class A common stock (an estimated
6,800,000 shares of class A common stock, assuming an initial public offering
price of $12.00 per share). See "Certain Transactions."
We also are required to issue to an assignee of TMF, Inc. and HRN Marketing
Corp. shares of our class A common stock equal to 10% of the number of shares of
our common stock outstanding immediately prior to the closing of this offering
or 4,899,900 shares. See "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, (800) 96-hotel and
(800) 715-7666. 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.
3
<PAGE>
THE OFFERING
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Class A common stock offered(1)............................. 5,400,000 shares
Common stock to be outstanding after this offering:
Class A common stock(1)(2)................................ 17,099,900 shares
Class B common stock...................................... 37,299,100 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 an estimated 11,699,900 shares of class A common stock to be issued
to an assignee of TMF, Inc. and HRN Marketing Corp. immediately prior to the
closing of this offering. See "Certain Transactions." Excludes 5,500,000
shares of class A common stock reserved for issuance under our stock option
plans as described in "Management--Employee Benefit Plans" and
"Management--Directors' Stock Option Plan"; and an estimated 4,197,955
shares (assuming an initial public offering price of $12.00 per share) of
class A common stock to be reserved for issuance under warrants we have
agreed to issue to a number of our third-party website affiliates upon the
closing of this offering, of which warrants to purchase an estimated 1.75
million shares will be immediately exercisable and a performance warrant to
purchase 2,447,955 shares will be subject to specified vesting criteria. See
"Description of Capital Stock--Warrants to Purchase Common Stock."
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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 68.6% of our
outstanding common stock, representing approximately
97.0% of the total voting power of our common stock. See
"Risk Factors--Our
</TABLE>
4
<PAGE>
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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."
Use of proceeds........................... We estimate that the net proceeds from this offering
will be approximately $59.5 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.
See "Use of Proceeds."
Nasdaq National Market Symbol............. "ROOM"
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary financial data of our company and our
predecessor business. The data was derived from our audited financial statements
and our predecessor business' audited 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 as of and for the
year ended December 31, 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, 1999. 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 December 31, 1999. Pro forma earnings per share data is presented
based on 37,299,100 shares of class B common stock to be issued to USAi,
11,699,900 shares of class A common stock to be issued to an assignee of TMF,
Inc. and HRN Marketing Corp. immediately prior to the public offering (see
"Prospectus Summary--Our History"), and 5,400,000 shares of class A common stock
issued in this offering, assuming an initial public offering price of $12.00 per
share and 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 Statement of Operations."
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
-------------------------------------------------- ------------
ACTUAL ACTUAL PRO FORMA
-------------------------------------------------- ------------ ------------
PERIOD
YEAR ENDED DECEMBER 31, PERIOD MAY 11 TO YEAR ENDED
---------------------------------- JANUARY 1 TO DECEMBER 31, DECEMBER 31,
1996 1997 1998 MAY 10, 1999 1999 1999 (1)
-------- -------- -------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
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STATEMENTS OF OPERATIONS DATA:
Net revenues.............................. $23,275 $34,758 $66,472 $ 37,701 $ 124,113 $ 161,814
Operating costs and expenses:
Cost of sales........................... 16,003 23,284 45,818 26,538 89,385 115,923
Selling, general and administrative
(2)................................... 3,857 5,782 9,770 5,669 16,177 22,022
Officers' distributions (2)............. 3,618 6,160 10,126 -- -- --
Non-recurring acquisition-related costs
(3)................................... -- -- -- 19,277 -- --
Amortization of goodwill (4)............ -- -- -- -- 12,897 34,071
------- ------- ------- ----------- ----------- -----------
Total operating costs and expenses.... 23,478 35,226 65,714 51,484 118,459 172,016
------- ------- ------- ----------- ----------- -----------
Operating profit (loss)................. (203) (468) 758 (13,783) 5,654 (10,202)
Other income (expense):
Interest and other, net................. 257 447 911 429 889 1,234
Gain on sale of securities.............. 71 13 74 471 -- 471
------- ------- ------- ----------- ----------- -----------
328 460 985 900 889 1,705
------- ------- ------- ----------- ----------- -----------
Earnings (loss) before income taxes....... 125 (8) 1,743 (12,883) 6,543 (8,497)
Income tax expense (5).................... 38 2 5 -- 2,421 --
------- ------- ------- ----------- ----------- -----------
Net earnings (loss)..................... $ 87 $ (10) $ 1,738 $ (12,883) $ 4,122 $ (8,497)
======= ======= ======= =========== =========== ===========
Basic and diluted earnings (loss) per
share................................. $ (0.16)
===========
Basic and diluted weighted average
shares outstanding.................... 54,399,000
===========
</TABLE>
6
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED (6)
------------- ------------- ---------------
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,257 $ 6,257 $ 65,746
Deferred revenue............................................ 16,447 16,447 16,447
Net working capital (deficit) (7)........................... (44,754) (32,254) 27,235
Goodwill, net............................................... 187,411 327,810 327,810
Total assets................................................ 204,250 344,649 404,138
Current liability for amounts due under purchase
agreement (7)............................................. 17,500 5,000 5,000
Net stockholders' equity (7)................................ 146,347 299,246 358,735
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR REGISTRANT
---------------------------------- ------------ -------------
ACTUAL ACTUAL ACTUAL PRO FORMA
---------------------------------- ------------ ------------- ------------
PERIOD
YEAR ENDED DECEMBER 31, PERIOD MAY 11 TO YEAR ENDED
---------------------------------- JANUARY 1 TO DECEMBER 31, DECEMBER 31,
1996 1997 1998 MAY 10, 1999 1999 1999 (1)
-------- -------- -------- ------------ ------------- ------------
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OTHER DATA:
Total room nights sold................... 183,000 224,000 442,000 295,000 934,000 1,229,000
Cities served (during the period)........ 15 16 27 34 40 40
Internet generated sales (8)............. 6% 21% 44% 70% 86% 81%
CASH FLOW DATA:
Operating activities..................... $ 3,040 $ 647 $ 8,849 $ 17,223 $ 23,763
Investing activities..................... (390) (897) (4,214) 3,006 (159,819)(9)
Financing activities..................... -- -- (2,499) -- 142,313 (9)
EBITDA (10).............................. $ (150) $ (384) $ 990 $ (13,664) $ 18,891
</TABLE>
- ------------------------------
(1) Pro forma statements of operations data gives effect to the elimination of
officers' distributions and non-recurring acquisition-related costs,
amortization of 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 Statement 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 $0.4 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. Our
predecessor business recorded a compensation charge of $18.7 million related
to an agreement that the principal owners of our predecessor business had
with an employee of TMF, Inc. See "Certain Transactions."
(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. Furthermore, the amount of goodwill and
related amortization will increase by approximately $140.4 million due to
the issuance of an estimated 11,699,900 shares of class A common stock to an
assignee of TMF, Inc. and HRN Marketing Corp. immediately prior to the
closing of this offering. The pro forma information reflects the incremental
amount of goodwill amortization as if the acquisition and offering 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. 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) 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 as part of
USAi's consolidated group until the completion of this offering.
(6) Balance sheet data is adjusted to give effect to the issuance of 5,400,000
shares of class A common stock in this offering assuming an initial public
offering price of $12.00 per share, which is the midpoint of the range,
assuming no exercise of the overallotment option.
(7) As of December 31, 1999, we reflect a $17.5 million current liability
related to additional consideration in connection with the acquisition of
our predecessor business. Of that amount, $5.0 million was paid on
January 31, 2000 and $12.5 million will be funded by a capital contribution
from USAi in our first fiscal quarter of 2000. The pro forma balance sheet
data reflects the elimination of $12.5 million of this liability.
(8) Reflects the percentage of revenues earned from hotel room bookings
generated through our websites or our third-party affiliated websites.
(9) For the period May 11 to December 31, 1999, cash flows used in investing
activities includes $158.0 million of cash used in connection with our
acquisition of our predecessor business. Cash flows from financing
activities includes $142.3 million of net capital contributions by USAi.
(10) 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, 1998 and the periods January 1
to May 10, 1999 and May 11 to December 31, 1999 was $53, $84, $232, $119 and
$340, respectively.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE DECIDING WHETHER TO
INVEST IN OUR CLASS A COMMON STOCK. 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
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 because we would not have the necessary supply of hotel rooms to
satisfy the needs of our customers or our affiliates. Consequently, we would not
be able to successfully compete for customers. 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 they may do so 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, if at all.
This failure could harm the growth of our business and, consequently, our stock
price. See "Business--Competition."
IF HOTELS ARE NOT ABLE TO PROVIDE US WITH AN ADEQUATE SUPPLY OF HOTEL ROOMS, OUR
BUSINESS MAY SUFFER.
If we do not have an adequate supply of hotel rooms, we would not be able to
meet the needs of our customers and our business could be harmed. From time to
time, hotels may not have a sufficient number of hotel rooms to sell to us.
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 also may 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 offer their own hotel accommodations or if they
develop relationships with our competitors, we would face increased competition
for customers. A loss of online exposure also could 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 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 because we
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would lose access to customers and face increased competition and, consequently,
the profitability of our business could suffer.
OUR OPERATING RESULTS FLUCTUATE BECAUSE OF SEASONALITY AND OUR RELIANCE UPON
LEISURE TRAVEL. THESE FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO DECLINE.
Our operating results fluctuate because our business is seasonal and because
we rely significantly upon revenues from leisure travelers. Therefore, there are
numerous factors beyond our control that affect our operating results. For any
of the reasons listed below, 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.
The failure to meet market expectations would have a material and adverse effect
on the price of our class A common stock.
Because of the travel patterns of our customers, we often have higher sales
and gross profits in the fourth quarter during the heavy holiday travel season.
Leisure travelers are sensitive to discretionary spending levels, tend to
curtail travel during general economic downturns and are affected by other
trends or events that may include:
- bad weather or natural disasters;
- fuel price increases;
- travel-related accidents;
- hotel, airline or other travel-related strikes; or
- terrorism.
Other factors that may adversely affect our quarterly operating results
include, but are
not limited to:
- the number of rooms we are able to sell;
- our ability to expand into new markets;
- our ability to develop strong brand recognition and customer loyalty;
- 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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Seasonality."
WE MAY SUFFER LOSSES BECAUSE OF OUR INABILITY TO PREDICT THE NUMBER OF ROOMS WE
WILL NEED TO PURCHASE.
We contract for hotel rooms based on our predictions for the travel market
in the cities we serve. However, 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. To
date, however, we have not incurred material losses due to lack of demand for
rooms we have committed to purchase.
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. We also compete with traditional travel agencies and hotels. We may
face more competition, directly or indirectly, from hotels as hotels enter
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the discount rate market or book discount accommodations through travel agents.
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. Announcements of technological innovations,
new services, business relationships or acquisitions by our competitors could
cause our stock price to decline. Increased competition could reduce our
operating margins and profitability, result in loss of market share and diminish
our brand recognition.
Some of our actual and potential competitors may have competitive
advantages, such as:
- longer operating histories;
- larger customer bases;
- potential to offer greater selection at better prices;
- greater brand recognition;
- more website traffic; or
- significantly greater financial, marketing or other resources.
We cannot assure you that we will be able to successfully compete against
current or future competitors. See "Business--Competition" for a more complete
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. We began
operations in 1991, and since then, 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. In addition, we entered into our first
Internet marketing arrangement in 1995, and implemented our first proprietary
website in 1997. 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 limit our future growth and hamper our business strategy.
THE AMORTIZATION OF DEFERRED DISTRIBUTION AND MARKETING EXPENSES RESULTING FROM
THE ISSUANCE OF THE PERFORMANCE WARRANT TO TRAVELOCITY UPON COMPLETION OF THIS
OFFERING WILL HAVE AN ADVERSE IMPACT ON OUR FUTURE OPERATING RESULTS AND THE
MAGNITUDE OF SUCH IMPACT, IN SOME CASES, IS DIFFICULT TO PREDICT.
The value of the performance warrant we will issue to Travelocity upon
completion of this offering, to the extent earned, will be recorded as a
non-cash deferred distribution and marketing expense to be amortized over the
term of our relationship with Travelocity and will decrease our net income and
negatively impact our future operating results during that time.
The performance warrant will be subject to vesting based on our achievement
of performance targets, as described in "Description of Capital Stock--Warrants
to Purchase Common Stock." If this performance warrant becomes fully
exercisable, it will entitle the holder to purchase up to 2,447,955 shares of
our class A common stock. We will record an additional non-cash deferred
distribution and marketing expense related to the vested portion of this
warrant. The amount of this non-cash deferred distribution and marketing expense
cannot be determined at this time because it is dependent on the portion of the
performance warrant that vests and the value of the vested portion of the
performance warrant at the vesting date. The value of the vested portion may be
large if our stock price rises significantly during the term of our relationship
with Travelocity. If the amount of the deferred distribution and marketing
expenses associated with the performance warrant is large, it will have an
adverse effect on our net income and operating results. If we are forced to
expense the entire performance warrant in one year, the effect on our net income
and operating results for that year will be even more adverse.
For a more detailed description of the potential financial impact of the
warrants, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
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GOODWILL AMORTIZATION WILL, AND CONTINGENT PAYMENTS MAY, HAVE AN ADVERSE IMPACT
ON OUR FUTURE OPERATING RESULTS.
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 ten years. The amount of goodwill and related amortization will
increase by approximately $140.4 million due to the issuance of an estimated
11,699,900 shares of class A common stock to an assignee of TMF, Inc. and HRN
Marketing Corp. immediately prior to the closing of the offering. We also may be
required to make a cash payment to an assignee of TMF, Inc. and HRN Marketing
Corp. for the twelve-month period ending March 31, 2000 if we meet specified
financial targets. The contingent cash payment, if made, also will increase our
goodwill and future amortization. As of December 31, 1999, goodwill represented
91.8% of the book value of our company's assets, and we will amortize
approximately $187.4 million in goodwill ratably through May 2009. 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,
Robert Diener, our President, and some other key personnel. The loss of 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 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
negatively impact the day-to-day operations of our business and impair our
growth strategy by decreasing our ability to compete effectively with our
competition and implement expansion initiatives.
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 through acquisitions. Although we are not currently committed
to any particular acquisitions, our management regularly evaluates acquisition
opportunities as a way for us to remain competitive. See "Business--Our Growth
Strategy." Our failure to successfully complete acquisitions could adversely
affect our ability to compete in the online travel services market. If we are
successful in acquiring and integrating businesses, the acquisitions may be
time-consuming, costly or unwise, which may cause our acquisitions not to have
the desired or predicted effects on our operating results and may adversely
affect our growth strategies. Acquisitions that are completed in the future
would expose us to potential risks. These include risks associated with the:
- assimilation of new operations, sites and personnel;
- unforeseen liabilities;
- 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;
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- 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.
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 an estimated 37,299,100 shares of our class B common stock, which
has 15 votes per share. Consequently, USAi will have approximately 97.0% of the
total voting power of our common stock and, therefore, 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.
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 because the change in control may result in a
change in management decisions, business policy and our attractiveness to future
investors. 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
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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 also could 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 could 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 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 through erosion of our brand name or the misappropriation of our proprietary
technologies by our competitors, thereby hindering our ability to compete
effectively. Some of our trade names are not eligible to receive trademark
protection in every country where our products and services are available.
In addition, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear and subject
to change. Consequently, we may not be able to maintain domain names in all of
the locations where we conduct business or prevent others from acquiring domain
names that decrease the value of our domain names.
We also may be required to incur significant expenses to protect our rights
or to defend claims by others of alleged infringement of trademarks and other
intellectual property rights of third parties by us. 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 OR BECOME OBSOLETE ARE DAMAGED OR OTHERWISE FAIL.
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 to avoid obsolescence; or
- successfully integrate any newly developed or purchased technology with
our existing systems.
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Upgrading or expanding our systems would likely be expensive and
time-consuming and could harm our operating results. 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, the attention of our management may be diverted by dealing with these
and other operational issues as we grow.
Our call center and substantially all of our computer and communications
systems are located at a single facility in Dallas and, therefore, are
vulnerable to damage or interruption from human error, computer viruses, fire,
flood, power loss, telecommunications failure, physical or electronic 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. 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 and
"Business--Operations" for a discussion of our Internet and call center
operations.
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, on 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. 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. 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, we will be unable to gain access to a significant number of
new customers and, in turn, the growth of our business and our profitability may
decline significantly.
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.
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
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other online services do not become a viable commercial marketplace, our future
profitability 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.
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. In addition, 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 remove a significant competitive advantage of online commerce versus
standard forms of commerce and, therefore, the growth of 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. Additional taxes could
negatively affect our cash flows and results of operations. See
"Business--Government Regulation."
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 under, for example, consumer protection laws and
unfair and deceptive trade practice regulations. The laws could result in
substantial compliance costs and could interfere with the conduct of our
business. See "Business--Government Regulation."
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 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.
15
<PAGE>
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.
Providing our customers with international destinations to choose from 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 increased sales from our international operations, our
profitability could suffer because of the investment we expect to make in this
effort.
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 some
factors beyond our control. See "Shares Eligible for Future Sale" for a more
complete description of the factors affecting our stock price.
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 experience a
material decline thereafter.
In the past, securities class action litigation often has been brought
against companies following periods of volatility in the market price of their
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 also 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 in the public market after this
offering, including shares issued upon the conversion of our class B common
stock, 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 estimate that we will have 17,099,900
shares of our class A common stock outstanding, assuming no exercise of the
underwriters' overallotment option, and 37,299,100 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.
16
<PAGE>
In addition, upon completion of this offering, we have agreed to issue
warrants to purchase at the initial public offering price an estimated 4,197,955
shares (assuming an initial public offering price of $12.00 per share) of
class A common stock to a number of our third-party website affiliates, of which
warrants to purchase an estimated 1.75 million shares will be immediately
exercisable and a performance warrant to purchase 2,447,955 shares will be
subject to specified vesting criteria. Once they are issued upon the exercise of
the performance warrant, the shares underlying the performance warrant will be
entitled to two demand registration rights exercisable after the initial closing
of this offering, subject to customary limitations, although the Travelocity
performance warrant itself will not (absent a waiver from us) be exercisable
prior to the third anniversary of the closing of this offering. See "Description
of Capital Stock--Warrants to Purchase Common Stock" and "Shares Eligible for
Future Sale" for a more complete description.
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 these transfers, sales or distributions could occur, could
adversely affect the prevailing market prices for our class A common stock.
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 $11.43 per
share. See "Dilution."
17
<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
- the ability to obtain and retain 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.
USE OF PROCEEDS
Assuming an initial public offering price of $12.00 per share, we estimate
that we will receive approximately $59,489,000 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 will receive approximately
$68,528,600. 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.
18
<PAGE>
CAPITALIZATION
The following table gives effect to the recapitalization of our capital
stock and to the issuance of an estimated 11,699,900 shares of our class A
common stock to an assignee of TMF, Inc. and HRN Marketing Corp. immediately
prior to this offering. See "Certain Transactions." The table shows our actual
and unaudited pro forma capitalization as of December 31, 1999 and our adjusted
capitalization as of December 31, 1999 as if the offering had occurred as of
December 31, 1999 and assuming an initial public offering price of $12.00 per
share and no exercise of the underwriters' overallotment option. 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 DECEMBER 31, 1999
-------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash....................................................... $ 6,257 $ 6,257 $ 65,746
======== ======== ========
Long-term obligations, less current portion................ $ -- $ -- $ --
Stockholders' equity:
Preferred stock, $0.01 par value; 20,000,000 shares
authorized; none outstanding........................... -- -- --
Common stock:
Common stock, $0.01 par value; 1,000 shares authorized,
100 shares issued and outstanding...................... -- -- --
Class A common stock, $0.01 par value; 600,000,000 shares
authorized; none, 11,699,900, 17,099,900 actual, pro
forma and as adjusted shares, respectively, issued and
outstanding (2)........................................ -- 117 171
Class B common stock, $0.01 par value; 150,000,000 shares
authorized; none actual, 37,299,100 pro forma and as
adjusted shares issued and outstanding................. -- 373 373
Additional paid-in capital................................. 142,313 294,722 354,157
Accumulated other comprehensive loss....................... (88) (88) (88)
Retained earnings.......................................... 4,122 4,122 4,122
-------- -------- --------
Total stockholders' equity................................. 146,347 299,246 358,735
-------- -------- --------
Total capitalization................................... $146,347 $299,246 $358,735
======== ======== ========
</TABLE>
- ------------------------
(1) Pro forma capitalization reflects a capital contribution that will be made
by USAi in the first fiscal quarter of 2000 to pay a $12.5 million liability
to an assignee of TMF, Inc. and HRN Marketing Corp. based on the attainment
of specified financial targets during our year ended December 31, 1999. It
also reflects the proposed recapitalization, whereby USAi will exchange its
common stock for 37,299,100 shares of class B common stock, and the
estimated 11,699,900 shares of class A common stock to be issued to an
assignee of TMF, Inc. and HRN Marketing Corp. immediately prior to the
initial public offering. See "Certain Transactions."
(2) Excludes 810,000 shares of class A common stock issuable upon exercise of
the overallotment option described in "Underwriting," 5,500,000 shares of
class A common stock reserved for issuance under our stock option plans as
described in "Management--Employee Benefit Plans" and an estimated 4,197,955
shares of class A common stock (assuming an initial public offering price of
$12.00 per share) to be reserved for issuance under warrants we have agreed
to issue upon the closing of this offering to a number of our third-party
website affiliates as described in "Description of Capital Stock--Warrants
to Purchase Common Stock."
19
<PAGE>
DILUTION
As of December 31, 1999, our pro forma net tangible book value was
approximately $(28.6) million, or $(0.58) 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 an estimated 11,699,900 shares of our
class A common stock to an assignee of TMF, Inc. and HRN Marketing Corp.
immediately prior to this offering (based on an initial public offering price of
$12.00 per share), which will result in additional goodwill of approximately
$140.4 million. Without taking into account any changes in net tangible book
value after December 31, 1999, other than to give effect to this offering, the
adjusted pro forma net tangible book value of the common stock as of
December 31, 1999 would have been approximately $30.9 million, or $0.57 per
share. The following table shows the effect of the offering as if it had
occurred at December 31, 1999 and illustrates the immediate increase in pro
forma net tangible book value of $1.15 per share to existing shareholders and
the immediate dilution of $11.43 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
December 31, 1999....................................... $(0.58)
Increase in pro forma net tangible book value per share
attributable to the offering............................ $ 1.15
------
Pro forma net tangible book value per share as adjusted
for this offering....................................... $ 0.57
------
Dilution per share to new investors in this offering........ $11.43
======
</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.................... 11,699,900 21.5% -- -- $ --
Class B common stock (1)................ 37,299,100 68.6% $154,813,000 70.5% 4.15
New investors (2).........................
Class A common stock.................... 5,400,000 9.9% $ 64,800,000 29.5% 12.00
----------- ----- ------------ -----
Total............................... 54,399,000 100.0% $219,613,000 100.0%
=========== ===== ============ =====
</TABLE>
- ------------------------
(1) The total consideration paid by the class B shareholder, USAi, is based on
$194.8 million of net cash paid 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.
20
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data of our company and our
predecessor business. The data was derived from our audited financial statements
and our predecessor business' audited 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
combined financial statements for the period January 1 to May 10, 1999
(Predecessor) and the financial statements as of December 31, 1999 and for the
period May 11 to December 31, 1999 (Registrant) were audited by Ernst &
Young LLP, independent auditors. 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 the liabilities of our predecessor business. We accounted for
this acquisition using the purchase method of accounting.
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
---------------------------------------------- ------------
PERIOD PERIOD
YEAR ENDED DECEMBER 31, JANUARY 1 MAY 11 TO
---------------------------------- TO MAY 10, DECEMBER 31,
1995 1996 1997 1998 1999 1999
(IN THOUSANDS, EXCEPT SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............. $17,121 $23,275 $34,758 $66,472 $ 37,701 $ 124,113
Operating costs and
expenses:
Cost of sales.......... 12,358 16,003 23,284 45,818 26,538 89,385
Selling, general and
administrative (1)... 2,986 3,857 5,782 9,770 5,669 16,177
Officers' distributions
(1).................. 1,996 3,618 6,160 10,126 -- --
Non-recurring
acquisition-related
costs (2)............ -- -- -- -- 19,277 --
Amortization of
goodwill (3) -- -- -- -- -- 12,897
------- ------- ------- ------- -------- -----------
Total operating costs and
expenses............... 17,340 23,478 35,226 65,714 51,484 118,459
------- ------- ------- ------- -------- -----------
Operating profit
(loss)................. (219) (203) (468) 758 (13,783) 5,654
Other income (expense):
Interest and other,
net.................. 186 257 447 911 429 889
Gain on sale of
securities........... -- 71 13 74 471 --
------- ------- ------- ------- -------- -----------
186 328 460 985 900 889
------- ------- ------- ------- -------- -----------
Earnings (loss) before
income taxes........... (33) 125 (8) 1,743 (12,883) 6,543
Income tax (expense)
benefit (4)............ 9 (38) (2) (5) -- (2,421)
------- ------- ------- ------- -------- -----------
Net earnings (loss)...... $ (24) $ 87 $ (10) $ 1,738 $(12,883) $ 4,122
======= ======= ======= ======= ======== ===========
Pro forma tax information
(4):
Historical earnings
(loss) before income
tax expense.......... $ 1,743 $(12,883)
Pro forma income tax
benefit (expense).... (645) 4,767
------- --------
Pro forma net earnings
(loss)............... $ 1,098 $ (8,116)
======= ========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
----------------------------------------------- ------------
YEAR ENDED DECEMBER 31, JANUARY 1 MAY 11 TO
---------------------------------- TO MAY 10, DECEMBER 31,
1995 1996 1997 1998 1999 1999
(IN THOUSANDS, EXCEPT SHARE AND OTHER DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 428 $ 3,078 $ 2,828 $ 4,964 $25,193 $ 6,257
Deferred revenue......... 1,305 1,470 3,278 7,299 19,293 16,447
Net working capital
(deficit) (5).......... (483) (463) (532) (1,856) (3,311) (44,754)
Goodwill, net............ -- -- -- -- -- 187,411
Total assets............. 4,013 7,105 7,958 14,544 32,127 204,250
Current liability for
amounts due under
purchase agreement
(5).................... -- 17,500
Net stockholders' equity
(deficit).............. (384) (295) (54) (852) (2,129) 146,347
OTHER DATA:
Total room nights sold... 171,000 183,000 224,000 442,000 295,000 934,000
Cities served (during the
period) 21 15 16 27 34 40
Internet generated sales
(6).................... -- 6% 21% 44% 70% 86%
CASH FLOW DATA:
Operating activities..... $ 1,795 $ 3,040 $ 647 $ 8,849 $17,223 $ 23,763
Investing activities..... (1,718) (390) (897) (4,214) 3,006 (159,819)
Financing activities..... -- -- -- (2,499) -- 142,313
EBITDA (7)............... $ (193) $ (150) $ (384) $ 990 $(13,664) $ 18,891
</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 $0.4 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. Our
predecessor business recorded a compensation charge of $18.7 million related
to an agreement that the principal owners of our predecessor business had
with an employee of TMF, Inc. See "Certain Transactions."
(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. Furthermore, the amount of goodwill and
related amortization will increase by approximately $140.4 million due to
the issuance of an estimated 11,699,900 shares of class A common stock to be
issued to an assignee of TMF, Inc. and HRN Marketing Corp. immediately prior
to the closing of this offering. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
(4) 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 as part of
USAi's consolidated group until the completion of this offering.
(5) As of December 31, 1999, we reflect a $17.5 million current liability
related to additional consideration in connection with the acquisition of
our predecessor business. Of that amount, $5.0 million was paid on
January 31, 2000 and $12.5 million will be funded by a capital contribution
from USAi in our first fiscal quarter of 2000.
(6) Reflects the percentage of revenues earned from hotel room bookings
generated through our websites or our third-party 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, 1995, 1996, 1997, 1998 and the periods
January 1 to May 10, 1999 and May 11 to December 31, 1999 was $26, $53, $84,
$232, $119 and $340, respectively.
22
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
The following unaudited pro forma combined condensed statement of operations
has 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 an estimated 11,699,900 shares of our class A common
stock to an assignee of 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 statement of operations reflects some
assumptions regarding these transactions and the acquisition and is based on the
historical statement of operations of our company and the historical combined
statements of operations of our predecessor business. The combined condensed
statement of operations, including the notes accompanying it, is qualified in
its 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 year ended
December 31, 1999 reflects the audited combined statement of operations of our
predecessor business for the period January 1 to May 10, 1999 and the audited
statement of operations of our company for the period May 11 to December 31,
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, 1999.
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 statement of operations is presented for
illustrative purposes only. It is not necessarily indicative of the results of
operations which actually would have been reported had these transactions
occurred as of January 1, 1999, nor are they necessarily indicative of our
future financial results of operations.
23
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PREDECESSOR REGISTRANT
------------ -----------------
JANUARY 1 TO MAY 11 TO PRO FORMA PRO FORMA
YEAR ENDED DECEMBER 31, 1999 MAY 10, 1999 DECEMBER 31, 1999 ADJUSTMENTS COMBINED
- ---------------------------- ------------ ----------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.............................. $ 37,701 $124,113 $ 161,814
Operating costs and expenses:
Cost of sales........................... 26,538 89,385 115,923
Selling, general and administrative..... 5,669 16,177 $ 176 (1) 22,022
Non-recurring acquisition-related
costs................................. 19,277 -- (19,277)(2) --
Amortization of goodwill................ -- 12,897 21,174 (3) 34,071
-------- -------- -------- -----------
Total operating costs and expenses........ 51,484 118,459 2,073 172,016
-------- -------- -------- -----------
Operating profit (loss)................... (13,783) 5,654 (2,073) (10,202)
Interest and other, net................... 429 889 (84)(4) 1,234
Gain on sale of securities................ 471 -- -- 471
-------- -------- -------- -----------
900 889 (84) 1,705
-------- -------- -------- -----------
Earnings (loss) before income taxes....... (12,883) 6,543 (2,157) (8,497)
Income tax benefit (expense).............. -- (2,421) 2,421(5) --
-------- -------- -------- -----------
Net earnings (loss)....................... $(12,883) $ 4,122 $ 264 $ (8,497)
======== ======== ======== ===========
Basic and diluted loss per share.......... $ (0.16)
===========
Basic and diluted weighted average shares
outstanding(6).......................... 54,399,000
===========
</TABLE>
(NOTES FOLLOW)
24
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT
(in thousands, except share data)
(1) We have 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>
YEAR ENDED
DECEMBER 31,
1999
-------------
<S> <C>
Historical compensation................................. $ 74
Compensation under new arrangements..................... 250
-----
Net pro forma income (expense) adjustment............. $(176)
=====
</TABLE>
(2) Represents elimination of discretionary compensation and bonuses of
$0.4 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. In connection with the sale of substantially all the assets of
TMF, Inc. and HRN Marketing Corp., the principal owners entered into an
agreement to pay an executive of TMF, Inc., for past services, 5% of all net
sales proceeds, including all contingent payments, received by the principal
owners in connection with the sale. During the period January 1 to May 10,
1999, the predecessor business recorded a charge of $18.7 million in
connection with this obligation.
(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
Issuance of an estimated 11,699,900 shares of class A
common stock to sellers................................. 140,399
--------
Total preliminary allocation of goodwill.................. $340,707
========
</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, (b) the year ended December 31, 1999 and (c) the
twelve-month period ended March 31, 2000. Through December 31, 1999, we have
paid a total of $25.0 million for the amounts due for the fiscal quarters
ended June 30, 1999 and September 30, 1999. Our management has determined
that, based on our operating performance, the remaining $12.5 million of the
1999 contingent payment will be due to an assignee of TMF, Inc. and HRN
Marketing Corp. during the first fiscal quarter of 2000. This payment will
be made during the first
25
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT (CONTINUED)
(in thousands, except share data)
fiscal quarter of 2000 and will be funded by a $12.5 million capital
contribution from USAi. See "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 by USAi for the twelve-month period ended March 31,
2000. Based on currently available financial information, management
believes that the additional payment will total between $30 million and
$40 million.
(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 37,299,100 shares of our class B common stock
owned by USAi; an estimated 11,699,900 shares of our class A common stock to
be issued to an assignee of 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 an initial public
offering price of $12.00 per share and no exercise of the overallotment
option.
26
<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, third-party affiliated websites and our
toll-free call center. At December 31, 1999, we had room supply agreements with
approximately 1,500 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 sixteen additional markets through 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
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
eleven new markets in 1998. As of December 31, 1999, we have entered another
thirteen 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 81% of our sales in 1997, 1998 and
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. Consequently,
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
27
<PAGE>
typically realize higher gross margins on rooms sold during peak periods and
rooms sold directly by us (rather than by travel agents or our Internet
affiliates).
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 costs 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.
We will record non-cash deferred distribution and marketing expenses of up
to $16.0 million upon consummation of this offering related to fully
exercisable, non-forfeitable warrants to acquire up to an estimated
1.75 million shares of class A common stock (assuming an initial public offering
price of $12.00 per share) that we will issue to a number of third-party
affiliate website companies upon completion of this offering, as described in
"Description of Capital Stock--Warrants to Purchase Common Stock." We will
amortize these non-cash distribution and marketing expenses over the term of the
related affiliation agreements, resulting in amortization expense of
approximately $5.3 million per year over the next three years.
The performance warrant that we will issue to Travelocity upon completion of
this offering will be subject to vesting based upon achieving performance
targets, as described in "Description of Capital Stock--Warrants to Purchase
Common Stock." If this performance warrant becomes fully exercisable it will
entitle the holder to acquire approximately 2,447,955 shares of our class A
common stock. We will record an additional non-cash deferred distribution and
marketing expense related to the vested portion of this warrant. The amount of
this non-cash deferred distribution and marketing expense cannot be determined
at this time because it is dependent on the amount of the performance warrant
that vests and the value of the vested portion of the performance warrant at the
vesting date.
The amount of this non-cash deferred distribution and marketing expense
resulting from the performance warrant could be significant. For example, if the
performance warrant were to fully vest and if the price of our class A common
stock were to appreciate by 5% each year over the next three years, the
aggregate amount of non-cash deferred distribution and marketing expense would
be approximately $27.2 million. The aggregate amount of non-cash deferred
distribution and marketing expense would instead be approximately $41.8 million
if the price of our class A common stock appreciated by 25% each year over the
next three years, approximately $102.8 million if that appreciation were 75% per
year over the next three years and approximately $270.9 million if that
appreciation were 150% each year over the next three years. Of course, these
examples are solely for illustrative purposes and we cannot assure you about the
trading price of our class A common stock or the actual amount of non-cash
deferred distribution and marketing expense we will record.
The timing of our recognition of this non-cash deferred distribution and
marketing expense depends on a number of factors that could result in the
expense being recognized over a three-year period or a shorter period, including
the possibility that the entire amount could be expensed in a single year.
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.
28
<PAGE>
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 was paid on January 31, 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 were
required to pay TMF, Inc. and HRN Marketing Corp. up to $12.5 million at the end
of each of the last three fiscal quarters in 1999 and for the year ended
December 31, 1999 if specified financial targets were met in each of those
quarters and for the year. As a result, we have paid a total of $25.0 million to
TMF, Inc. and HRN Marketing Corp. for the fiscal quarters ended June 30, 1999
and September 30, 1999. A final $12.5 million payment for our year ended
December 31, 1999 will be made in the first fiscal quarter of 2000, and will be
funded by a capital contribution from USAi.
TMF, Inc. and HRN Marketing Corp. are entitled to a contingent cash payment
based on our performance for the twelve-month period ending March 31, 2000. In
addition to being a guarantor of our obligations, USAi has agreed to make this
contingent payment on our behalf. See "--Financial position, liquidity and
capital resources" and "Certain Transactions."
For the period May 11 to December 31, 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 obligation will increase goodwill by the same amount and will
result in an increase in related amortization 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, 2000 it is
expected that such amounts will not be reasonably estimable until that date, 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.
29
<PAGE>
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 REGISTRANT
-------------------------------------------- ------------
ACTUAL PRO FORMA
----------------------------------------------------------- ------------
PERIOD
JANUARY 1 PERIOD YEAR
YEAR ENDED DECEMBER 31, TO MAY 11 TO ENDED
------------------------------ MAY 10, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................................... 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% 70.4% 72.0% 71.6%
Selling, general and administrative.............. 16.6% 16.6% 14.7% 15.0% 13.0% 13.6%
Officers' distributions.......................... 15.5% 17.7% 15.2% -- -- --
Non-recurring acquisition-related costs.......... -- -- -- 51.1% -- --
Amortization of goodwill......................... -- -- -- -- 10.4% 21.1%
------ ------ ------ ------ ------ ------
Total operating costs and expenses............. 100.9% 101.3% 98.9% 136.6% 95.4% 106.3%
------ ------ ------ ------ ------ ------
Operating profit (loss)........................ (0.9%) (1.3%) 1.1% (36.6%) 4.6% (6.3%)
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1999 VS. TWELVE MONTHS ENDED DECEMBER 31, 1998
We compare the twelve months ended December 31, 1998 to the sum of the
periods January 1 to May 10, 1999 and May 11 to December 31, 1999 for revenues,
cost of sales and selling, general and administrative costs, as we believe this
is the most meaningful presentation.
Revenues for the twelve months ended December 31, 1999 increased by
$95.3 million, or 143.4%, to $161.8 million compared to $66.5 million for the
twelve months ended December 31, 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 twelve
months ended December 31, 1999 increased by $103.0 million, or 357.2%, to
$131.8 million compared to $28.8 million for the twelve months ended
December 31, 1998. As a percentage of total revenues, Internet generated sales
increased to 81% for the twelve months ended December 31, 1999 from 44% for the
twelve months ended December 31, 1998. Non-Internet generated and other sales
for the twelve months ended December 31, 1999 decreased by $7.7 million, or
20.5%, to $29.9 million compared to $37.6 million for the twelve months ended
December 31, 1998.
Cost of sales for the twelve months ended December 31, 1999 increased by
$70.1 million, or 153.0%, to $115.9 million compared to $45.8 million for the
twelve months ended December 31, 1998. As a percentage of total revenues, cost
of sales increased to 71.6% for the twelve months ended December 31, 1999 from
68.9% for the twelve months ended December 31, 1998. The increase in cost of
sales is 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 twelve months ended
December 31, 1999 increased by $12.1 million, or 123.6%, to $21.9 million
compared to $9.8 million for the twelve months ended December 31, 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 twelve months ended
December 31, 1999 from 14.7% for the twelve months ended December 31, 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.
30
<PAGE>
Our predecessor business paid discretionary compensation and bonuses of
$0.4 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. In connection with the sale of substantially all the assets of TMF,
Inc. and HRN Marketing Corp., the principal owners entered into an agreement to
pay an executive of TMF, Inc., for past services, 5% of all net sales proceeds,
including all contingent payments, received by the principal owners in
connection with the sale. During the period January 1 to May 10, 1999, the
predecessor business recorded a charge of $18.7 million in connection with this
obligation.
On a pro forma basis, operating loss for the twelve months ended
December 31, 1999 decreased by $13.3 million to a loss of $10.2 million compared
to a loss of $23.5 million for the twelve months ended December 31, 1998. Pro
forma operating loss for the twelve months ended December 31, 1998 of
$23.5 million is calculated as historical operating profit ($0.8 million) plus
pro forma adjustments for goodwill amortization expense ($34.1 million),
officers' salary expense ($0.3 million) and the elimination of historical
officers' distributions ($10.1 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.
Historical amortization expense of $12.9 million in the period May 11 to
December 31, 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 twelve months ended December 31, 1999 increased
by $0.8 million to $1.8 million compared to $1.0 million for the twelve months
ended December 31, 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 December 31, 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 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
31
<PAGE>
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 25.4%, to a loss of
$23.5 million compared to a loss of $28.7 million for the twelve months ended
December 31, 1997. The pro forma operating loss for the year ended December 31,
1997 of $28.7 million is calculated as historical operating loss ($0.5 million)
plus pro forma adjustments for goodwill amortization expense ($34.1 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
$34.1 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.
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 eight quarters ended
December 31, 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
32
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSOR (UNAUDITED)
------------------------------------------------------------------------
PERIOD
THREE MONTHS ENDED ----------
----------------------------------------------------------- APRIL 1
MARCH 31, JUNE 30, SEPTEMBER 30, DEC. 31, MARCH 31, TO MAY 10,
1998 1998 1998 1998 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues........... $9,051 $14,281 $17,462 $25,678 $22,921 $ 14,780
Operating costs and
expenses:
Cost of sales........ 6,100 10,048 12,268 17,402 15,852 10,686
Selling, general and
administrative..... 1,650 2,410 2,520 3,190 3,657 2,012
Officers'
distributions...... 556 482 780 8,308 -- --
Non-recurring
acquisition-related
costs.............. -- -- -- -- -- 19,277
Amortization of
goodwill........... -- -- -- -- -- --
------ ------- ------- ------- ------- --------
Total operating
costs and
expenses......... 8,306 12,940 15,568 28,900 19,509 31,975
------ ------- ------- ------- ------- --------
Operating profit
(loss)........... 745 1,341 1,894 (3,222) 3,412 (17,195)
Other income (expense):
Interest and other,
net................ 99 166 211 435 243 186
Gain on sale of
securities......... -- -- -- 74 -- 471
------ ------- ------- ------- ------- --------
99 166 211 509 243 657
Earnings (loss) before
income taxes......... 844 1,507 2,105 (2,713) 3,655 (16,538)
Income tax expense..... -- -- -- 5 -- --
------ ------- ------- ------- ------- --------
Net earnings
(loss)............. $ 844 $ 1,507 $ 2,105 $(2,718) $ 3,655 $(16,538)
====== ======= ======= ======= ======= ========
<CAPTION>
REGISTRANT (UNAUDITED)
------------------------------------------
PERIOD
----------- THREE MONTHS ENDED
MAY 11 ----------------------------
TO JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues........... $23,018 $47,652 $53,443
Operating costs and
expenses:
Cost of sales........ 16,774 34,950 37,661
Selling, general and
administrative..... 2,580 6,389 7,208
Officers'
distributions...... -- -- --
Non-recurring
acquisition-related
costs.............. -- -- --
Amortization of
goodwill........... 2,809 5,025 5,063
------- ------- -------
Total operating
costs and
expenses......... 22,163 46,364 49,932
------- ------- -------
Operating profit
(loss)........... 855 1,288 3,511
Other income (expense):
Interest and other,
net................ 172 582 135
Gain on sale of
securities......... -- -- --
------- ------- -------
172 582 135
Earnings (loss) before
income taxes......... 1,027 1,870 3,646
Income tax expense..... 380 692 1,349
------- ------- -------
Net earnings
(loss)............. $ 647 $ 1,178 $ 2,297
======= ======= =======
</TABLE>
33
<PAGE>
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 because of seasonality and our reliance
upon leisure travel. These fluctuations may cause our stock price to decline."
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 was paid on January 31, 2000. The purchase
price was subject to a working capital adjustment and TMF, Inc. and 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 for our
attainment of financial targets during the year ended December 31, 1999 that we
expect to make in the first fiscal quarter of 2000 with funds contributed by
USAi.
In addition, TMF, Inc. and HRN Marketing Corp. are entitled to a contingent
cash payment based on our performance for the twelve-month period ending
March 31, 2000.
This additional payment will be based upon the greater of:
- 2.5 times the total growth in our adjusted earnings for the period; or
- 1.44 times the total growth in our adjusted gross profit for the period
(provided this growth in adjusted gross profit exceeds 50%).
Under an assumption agreement, USAi has agreed to make this contingent payment
on our behalf. See "Risk Factors--Goodwill amortization will, and contingent
payments may, have an adverse impact on our future operating results" and
"Certain Transactions."
Net cash provided by operating activities was $17.2 million and
$23.8 million for the period January 1 to May 10, 1999 and the period May 11 to
December 31, 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 $3.6 million, $6.2 million and $10.1 million in
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 (other than Messrs. Litman and Diener)
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 as deferred revenue until check-out. Accordingly, to
the extent customers do not cancel their reservations, prepaid bookings
represent payments received for
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revenue to be recognized in the future. Net cash provided by prepaid bookings
was $12.0 million for the period January 1 to May 10, 1999, and $0.2 million,
$1.8 million and $4.0 million for the years ended December 31, 1996, 1997 and
1998, respectively. Net cash used in reducing prepaid bookings was $2.8 million
for the period May 11 to December 31, 1999.
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 ($3.2) million and $0.5 million for the
periods January 1 to May 10, 1999 and May 11 to December 31, 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 $0.2 million and $1.1 million in the periods
January 1 to May 10, 1999 and May 11 to December 31, 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. Our company anticipates that cash on hand and cash provided by
operating activities will be sufficient to fund our operations for the next
twelve months. Additional funds could be necessary, however, to complete
strategic acquisitions or other business combinations in 2000 or beyond.
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 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 was
approximately $75,000, substantially all of which has been spent through the
date of this offering. As of the date of this prospectus, we have not
experienced any significant Year 2000 problems and, therefore, the risk that any
Year 2000 problems will occur in the future has diminished significantly.
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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 still might prove not to be 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 as of the date of this prospectus we have not
experienced any material disruptions in our operations, an undiscovered failure
to achieve Year 2000 compliance by third-party systems could result in complete
failure or inaccessibility of our services and could adversely affect our
business, financial condition and results of operations.
Although, as of the date of this prospectus, we have not experienced any
material disruptions in our operations from Year 2000 related issues, Year 2000
compliance problems potentially could 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, therefore, could adversely impact our business,
financial condition and results of operations.
TAX MATTERS
Prior to the completion of this offering, we were included in the
consolidated federal income tax return of USAi. Under a tax sharing agreement
with USAi, we paid our parent amounts equal to the taxes that we would otherwise
have paid if we had filed a separate federal income tax return. We also were
included in certain state and local tax returns of USAi. Upon the completion of
this offering, because USAi's equity ownership in our company will fall below
80%, we will no longer be included in the consolidated federal income tax return
of USAi or any of its state and local returns. Thus, following completion of
this offering, we will be required to file our own federal, state and local
income tax returns on a stand-alone basis and will make all of our tax payments
directly to the relevant taxing authorities. We also will have no further rights
or obligations under the tax sharing agreement with USAi, except with respect to
periods ending on or before the completion of this offering.
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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.
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, third-party 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 1,500 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. At December 31, 1999, we
offered 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 81% of our total bookings in 1997, 1998 and 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 1,600 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
exchange for a commission we pay based on bookings we receive through them. In
some instances, our website is positioned as the preferred hotel accommodations
option on our third-party 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, and we are in the process of integrating our hotel accommodation
offerings with Travelocity's network. We also are prominently featured on most
of the leading Internet search engines and online communities, including America
Online, Lycos, Yahoo!, 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 third-party affiliated websites.
For 1998, 16% of our Internet generated bookings were made through our
online affiliations. For 1999, 40% 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 sales were
generated through travel agencies and for 1999, 3% of our sales 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
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revenue management and reservation systems software which assists us in
enhancing our revenues. Our 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, 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 one new
market in 1997, eleven new markets in 1998 and thirteen 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, a small
percentage 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 1,600 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 81% of our total bookings
in 1997, 1998 and 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 numbers (1-800-96-hotel and 1-800-715-7666) 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 numbers 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 19% in 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 1,500 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 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 700,000 at December 31, 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 also are 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 in the future or that they will
continue to be beneficial to our business and we may find ourselves in
competition with these affiliates. See "Risk Factors--If we are unable to
maintain our affiliations or obtain new affiliations with other travel service
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providers, we may lose access to customers and face increased competition." As
the market for online travel services grows, we believe 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 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.
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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 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 Internet access (unless these taxes were in effect
prior to October 1, 1998) but only where these taxes are multiple or
discriminatory on electronic commerce. 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 December 31, 1999, we had approximately 268 employees. Of the total,
93 people were employed in sales; 32 in reservation services; 41 in customer
service; six in sales support; 42 in finance and accounting; six in revenue
management; nine in programming and technical support; and 14 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 $31,400 per month, which 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 February 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
David Litman.............................. 42 Chief Executive Officer and Director
Robert Diener............................. 41 President, Treasurer and Director
Jack Rubin................................ 48 Chief Financial and Strategic Officer
Shauna Martin............................. 28 General Counsel and Secretary
Sandra D'Arcy............................. 52 Executive Vice President
Barry Baker............................... 47 Director
Beverly A. Harms.......................... 64 Director, Nominee
Victor A. Kaufman......................... 56 Director
Dara Khosrowshahi......................... 30 Director
Eli J. Segal.............................. 57 Director, Nominee
Michael Sileck............................ 40 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. Rubin has served as the Chief Financial and Strategic Officer of our
company since December 28, 1999. Prior to then, he served as a Senior Vice
President for NCH Corporation in Irving, Texas and from 1981 to 1991 he served
as a Vice President of the same corporation. While at NCH Corporation,
Mr. Rubin served as the Chief Executive Officer of various subsidiaries in five
different industries. Mr. Rubin is a CPA and a CVA.
Ms. Martin serves as our General Counsel and Secretary. Ms. Martin has
served as our General Counsel since January 24, 2000 and as our Secretary since
February 1, 2000. From 1998 to 2000, Ms. Martin served as General Counsel and
Secretary to TriStar Aerospace Co., a distributor of aerospace hardware, which
was publicly traded on the New York Stock Exchange. Prior to February 1998,
Ms. Martin was an attorney with the law firm of Husch & Eppenberger in
Springfield, Missouri.
Ms. D'Arcy has served as the Executive Vice President of our company since
1998. From 1994 to 1998, she served as a Vice President of our predecessor
business. Prior to that time, she held management positions at various corporate
travel companies including Maritz Travel, formerly The Travel, BTI, formerly IVI
Travel, and XTS Travel.
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
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acquired by Sinclair Broadcasting. Mr. Baker serves as a director of
Ticketmaster Online-CitySearch, Inc. and USAi.
Ms. Harms has been nominated to serve as a director of our company effective
immediately upon the closing of this offering. Since 1990, she has been Senior
Vice President of Managed Investments for Communications Equity Associates
(CEA), a Tampa based firm with offices worldwide, where she sponsors investments
in start up companies funded through CEA partnerships. Prior to that, she was
President of Gulfstream Cablevision, a cable system in the Tampa, Florida area,
and was the owner and CEO of cable systems in suburban Syracuse, New York. She
was President and CEO of TeleCable Sale, Inc., one of the cable industry's first
successful advertising interconnects. She also owned and operated AM/FM radio
stations in New York and New Hampshire. Ms. Harms served on the advisory board
of River City Broadcasting and currently sits on the Board of Directors of
AccentHEALTH, a media company that delivers health information to patients and
doctors nationwide.
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. 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.
Mr. Segal has been nominated to serve as a director of our company effective
immediately upon the closing of this offering. He currently serves as President
and CEO of The Welfare to Work Partnership. He also serves as the Chair of the
University of Michigan Center for Learning through Community Service and
Co-Chair of the National Alliance to End Homelessness. Mr. Segal has served as
Chairman of the Board of School Sports, Inc., an online network and high school
sports magazine celebrating the world of high school sports, since December
1996. Mr. Segal previously served as Assistant to the President of the United
States from January 1993 to February 1996. In October 1993, Mr. Segal was
confirmed by the United States Senate to the additional position as the first
Chief Executive Officer of the Corporation for National Service. Prior to that,
Mr. Segal served as President of Bits & Pieces, Inc., a direct mail consumer
product company, from 1984 to January 1993, and publisher of GAMES magazine, a
monthly publication from 1990 to January 1993. Mr. Segal also serves as a
director of Fannie Mae, Citizens Financial Group, Tower Air, City Year and the
Board of Overseers of the Heller School of Brandeis University.
Mr. Sileck has served as a director of our company since December 23, 1999.
Since October 12, 1999, Mr. Sileck has served as Chief Financial Officer of USA
Networks, Inc. Prior to that time, Mr. Sileck had served as CFO for USA
Networks, a division of USA Networks, Inc., since September 1999. Before joining
USA Networks, Mr. Sileck served as Vice President of Finance at
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Sinclair Broadcast Group from June 1996 to August 1999. Prior to that, he served
as Director of Finance at River City Broadcasting from July 1990 to June 1996.
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 initially consisting of
Mr. Baker and Mr. Kaufman. 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
Mr. Baker and Mr. Kaufman 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 and compensation committees.
DIRECTOR COMPENSATION
Mr. Segal and Ms. Harms will receive options to purchase 5,000 shares of our
class A common stock under the Directors' Stock Option Plan at an exercise price
equal to the initial public offering price per share upon election to our board
of directors. See "-- Directors' Stock Option Plan." Upon completion of this
offering and election to our board of directors, Mr. Segal and Ms. Harms each
will receive 5,000 additional discretionary stock options under the 2000 Stock
Plan. See "--Employee Benefits Plans." In addition, Mr. Khoshrowshahi will
receive options to purchase 100,000 shares of our class A common stock under the
2000 Stock Plan at an exercise price equal to the initial public offering price
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has a compensation committee, comprised of Mr. Baker
and Mr. Kaufman. No interlocking relationship exists between our board of
directors or the compensation committee and the board of directors or
compensation committee of any company other than USAi.
Each of our directors who is not an employee of our company or one of our
affiliates receives an annual retainer of $20,000 per year. We also pay each of
our non-employee directors $1,000 for each board meeting and each board
committee meeting attended, plus reimbursement for all reasonable expenses
incurred as a result of attendance at any of these meetings.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation awarded to, earned by or paid for services rendered during the
years ended December 31, 1998 and 1999 by our Chief Executive Officer and our
other executive officers and during the year ended December 31, 1999 by our
Chief Financial and Strategic Officer, all of whom earned in excess of $100,000
in compensation during those years (the "Named Executive Officers").
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
David Litman, Chief Executive Officer........... 1998(1) $4,966,078 -- $8,093
1999 $ 125,000(2)
Robert Diener, President and Treasurer.......... 1998(1) $4,966,078 -- $8,093
1999 $ 125,000(2)
Jack Rubin, Chief Financial and Strategic $ 180,000(3) -- --
Officer....................................... 1999
Sandra D'Arcy, Executive Vice President......... 1998 $ 140,000 -- --
1999 $ 160,000 61,481 --
</TABLE>
- --------------------------
(1) From January 1, 1997 until May 10, 1999, our predecessor business was a
subchapter S corporation, and substantially all 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.
(2) Reflects annualized compensation for 1999. Actual compensation was $37,000
for the period May 11 to December 31, 1999.
(3) Reflects annualized amount of compensation under Mr. Rubin's employment
agreement. As Mr. Rubin began his employment on December 28, 1999, he earned
only a portion of that amount.
Messrs. Litman and Diener are not parties to an employment agreement with our
company.
Mr. Rubin is party to an employment agreement, dated December 12, 1999, under
which he agrees to serve as the Chief Financial and Strategic Officer of our
company in return for an annual salary, discretionary bonus and incentive or
non-qualified stock options to purchase an aggregate of 100,000 shares of our
class A common stock.
EMPLOYEE BENEFIT PLANS
2000 STOCK PLAN. We have adopted the 2000 Stock Plan, subject to the
approval of our stockholders, and reserved 5,400,000 shares of class A common
stock for issuance under the plan. The 2000 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, and employees of
our affiliates. Unless terminated sooner, the 2000 Stock Plan will terminate
automatically on February 21, 2010.
The administrator of the 2000 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 2000 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 the duration of the 2000 Stock Plan is 80% of the
total number of shares authorized for issuance under the 2000 Stock Plan.
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 2000 Stock Plan generally must be exercised
within 90 days 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.
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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 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 2000
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 2000 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 2000 Stock
Plan may not exceed ten years. Options and SPRs granted under the 2000 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 2000 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.
DIRECTORS' STOCK OPTION PLAN
We have adopted the Directors' Stock Option Plan, subject to the approval of
our stockholders, and reserved 100,000 shares of class A common stock for
issuance under the plan. The Directors' Stock Option Plan provides for the grant
of nonstatutory stock options to members of our Board of Directors who are not,
at the time of grant, employees of our company and/or any of our affiliates.
Unless terminated sooner, the plan will terminate automatically on February 21,
2010.
The administrator of the plan has the power to interpret the plan, to
prescribe, amend and rescind rules and regulations relating to the plan, and to
make all determinations necessary or advisable for the administration of the
plan.
The terms and conditions of options granted to directors will be set forth
in individual option agreements between our company and the director. Options
will be automatically granted with respect to 5,000 shares of class A common
stock upon a director's election to office, and thereafter annually on the date
of the annual meeting of stockholders of the company at which such director is
re-elected to office, at an exercise price equal to the fair market value of
such shares on the trading date immediately preceding the date of grant. The
options will vest ratably over three years.
The term of options granted under the plan is ten years; HOWEVER, unless
otherwise provided by our Board of Directors or the Committee at the time of
grant, or thereafter, options granted under the
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plan generally must be exercised within 120 days following a director's
termination of service. Options granted under the plan are generally not
transferable by the optionee, and each option is exercisable only by the
optionee during his or her lifetime.
The plan generally provides that in the event of a reorganization, merger,
liquidation, sale or disposition of substantially all of the assets of our
company or an acquisition by an individual, entity or group of the majority of
the voting equity of our company, all options shall become exercisable, and
during the 60-day period following such event, each director shall have the
right to elect to receive a cash-out of each option, in an amount equal to the
per share "change of control price" over the exercise price, multiplied by the
number of shares with respect to which this cash-out treatment has been elected.
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 was paid on
January 31, 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 were required to pay TMF, Inc. and
HRN Marketing Corp. up to $12.5 million at the end of each of the last three
fiscal quarters in 1999 and for the year ended December 31, 1999 if specified
financial targets were met by us in each of those quarters and for the year. As
a result, we have paid a total of $25.0 million to an assignee of 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 for our year ended December 31, 1999 that we expect to
make in the first fiscal quarter of 2000. This payment will be funded by a
capital contribution from USAi.
Under the asset purchase agreement, TMF, Inc. and HRN Marketing Corp. were
entitled to contingent cash payments over the next three years. The amount of
these contingent payments would have depended on our performance for the
twelve-month periods ending March 31, 2000, 2001 and 2002, respectively. These
additional payments would have been 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.
Under an assumption agreement, USAi has agreed to pay, on our behalf, the
contingent payment for the twelve-month period ending March 31, 2000. See "Risk
Factors--Goodwill amortization will, and contingent payments may, have an
adverse impact on our future operating results."
As of February 2, 2000, we entered into an amended and restated asset
purchase agreement under which our contingent cash payment obligations for the
twelve-month periods ending March 31, 2001 and 2002 were extinguished in
exchange for our agreement to issue to an assignee of TMF, Inc. and HRN
Marketing Corp. additional shares of our class A common stock immediately prior
to the closing of this offering. The number of shares to be so issued will be
determined by dividing $81.6 million by the initial public offering price in
this offering (6,800,000 shares, assuming an initial public offering price of
$12.00 per share), except that no more than 7,418,182 shares and no less than
5,021,538 shares will be so issued. In addition, under the amended and restated
asset purchase agreement, we are obligated to issue to an assignee of TMF, Inc.
and HRN Marketing Corp. a number of shares of class A common stock equal to 10%
of our outstanding common stock immediately prior to the completion
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<PAGE>
of this offering. As a result, under the amended and restated asset purchase
agreement, we will issue to TMF Liquidating Trust, as assignee of TMF, Inc. and
HRN Marketing Corp., an estimated 11,699,900 shares of class A common stock
immediately prior to the closing of this offering.
The shares of class A common stock to be issued to TMF Liquidating Trust
will be subject to a four year restriction on transferability, except as
described below. After the first anniversary of our initial public offering, TMF
Liquidating Trust may transfer all or any portion of these shares to Messrs.
Litman or Diener or an immediate family member of either, or trusts for their
benefit. Also, the Trust may transfer up to 5% of the number of shares
originally issued to it to a former executive of TMF, Inc. who agrees to be
bound by the transfer restrictions. After the first anniversary of the initial
closing of this offering, the Trust may transfer approximately 1,920,000 shares
of class A common stock and may transfer an additional 480,000 shares of class A
common stock after the second anniversary and the third anniversary.
Furthermore, upon the death, permanent disability or termination of employment
without cause of Mr. Litman or Mr. Diener, the shares held by the deceased,
disabled or terminated person or his family members or trusts for their benefit,
shall become freely transferable subject to a limitation on the number of shares
that may be sold on any one day. After the first anniversary of the initial
closing of this offering, the trust and its permitted transferees shall be
entitled to tag along on specified sales of common stock made by USAi and its
affiliates. Finally, after the fourth anniversary, holders of these shares shall
be entitled to one demand registration right on customary terms and conditions.
The issuance to TMF Liquidating Trust of the estimated 11,699,900 shares of
class A common stock immediately prior to this offering will require compliance
with the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976. If the waiting period for that issuance specified under the
Hart-Scott-Rodino Act has not expired or been earlier terminated on the date
scheduled for the closing of this offering, then, instead of issuing the
11,699,900 shares of class A common stock to the Trust, we will issue to the
Trust an equivalent number of shares of class A preferred stock, par value $0.01
per share. Each share of class A preferred stock will automatically convert into
one share of class A common stock upon the expiration or early termination of
the waiting period under the Hart-Scott-Rodino Act. The class A preferred stock
will be in all respects identical to the class A common stock except that the
class A preferred stock will have no voting rights.
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 for the period; or
- 1.44 times the total growth in our adjusted gross profit for the period
(provided this growth in adjusted gross profit exceeds 50%).
Under the terms of the purchase agreement, each of Messrs. Litman and
Diener, 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.
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<PAGE>
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 arrangement with Ticketmaster
regarding sales in Nashville, New Orleans, Dallas, Houston, Las Vegas and
San Antonio, which 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 arrangement 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. Each
of these three arrangements is terminable at will.
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 our relationships with
Ticketmaster, TMCS, Home Shopping Network, USA Network, The Sci-Fi Channel and
other USAi affiliates. In particular we are exploring a relationship with the
Electronic Commerce and Services Division of USAi, which provides integrated
electronic services to businesses including teleservices, customer care and
systems development.
USAI. Prior to the completion of this offering, we were included in the
consolidated federal income tax return of USAi. Under a tax sharing agreement
with USAi, we paid our parent amounts equal to the taxes that we would otherwise
have paid if we had filed a separate federal income tax return. We also were
included in certain state and local tax returns of USAi. Upon the completion of
this offering, because USAi's equity ownership in our company will fall below
80%, we will no longer be included in the consolidated federal income tax return
of USAi or any of its state and local returns. Thus, following completion of
this offering, we will be required to file our own federal, state and local
income tax returns on a stand-alone basis and will make all of our tax payments
directly to the relevant taxing authorities. We will also have no further rights
or obligations under the tax sharing agreement with USAi, except with respect to
periods ending on or before the completion of this offering.
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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 the date of this prospectus, certain
information regarding the beneficial ownership of our class A common stock
giving effect to our recapitalization 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..................... 37,299,100 68.6% 98.0% 97.0%
152 West 57th Street, 42nd Floor
New York, NY 10019
David Litman (3)(4)................... 11,699,900 21.5% 2.0% 2.0%
Robert Diener (3)(4).................. 11,699,900 21.5% 2.0% 2.0%
Jack Rubin (3)........................ -- -- -- --
Barry Baker (5)....................... -- -- -- --
Victor A. Kaufman (5)................. -- -- -- --
Dara Khosrowshahi (5)................. -- -- -- --
Michael Sileck (5).................... -- -- -- --
All executive officers and directors
as a group (9 persons).............. 11,699,000 21.5% 2.0% 2.0%
</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 are 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. Percentage 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, Diener and Rubin is c/o Hotel Reservations
Network, Inc., 8140 Walnut Hill Lane, Suite 203, Dallas, TX 75231.
(4) HRN Marketing Corp. is in the process of liquidating its business and has
transferred all of its assets to TMF, Inc., which also is in the process of
liquidation and has formed TMF Liquidating Trust, a liquidating trust. The
liquidating trust holds the remaining assets of TMF, Inc. Messrs. Litman and
Diener are the trustees of that liquidating trust and, along with their
spouses and minor children, are the sole shareholders of TMF, Inc. and the
beneficiaries of the liquidating trust. Messrs. Litman and Diener disclaim
beneficial ownership of each other's shares and each other's family members'
shares. They also each disclaim beneficial ownership of the other's shares.
(5) The address of Ms. Harms and Messrs. Baker, Kaufman, Khosrowshahi, Segal and
Sileck 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 the date of this prospectus, certain
information regarding the beneficial ownership of our class B common stock
giving effect to our recapitalization 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........................................... 37,299,100 100%
152 West 57th Street, 42nd Floor
New York, NY 10019
David Litman (2)............................................ -- --
Robert Diener (2)........................................... -- --
Jack Rubin (2).............................................. -- --
Barry Baker (3)............................................. -- --
Victor A. Kaufman (3)....................................... -- --
Dara Khosrowshahi (3)....................................... -- --
Michael Sileck (3).......................................... -- --
All executive officers and directors as a group (9 -- --
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 December 31, 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, Diener and Rubin is c/o Hotel Reservations
Network, Inc., 8140 Walnut Hill Lane, Suite 203, Dallas, TX 75231.
(3) The address of Ms. Harms and Messrs. Baker, Kaufman, Khosrowshahi, Segal and
Sileck is c/o USA Networks, Inc., 152 West 57th Street, 42nd Floor, New
York, NY 10019.
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<PAGE>
USAI COMMON STOCK
The following table sets forth, as of December 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)..................................... -- -- --
Jack Rubin (3)........................................ -- -- --
Barry Baker (4)(5).................................... 305,300 * *
Victor A. Kaufman (4)(6).............................. 453,000 -- --
Dara Khosrowshahi (4)(7).............................. 30,000 * *
Michael Sileck (4).................................... -- -- --
All executive officers and directors as a group (9 71,178,582 37.7% 75.1%
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, Diener and Rubin is c/o Hotel Reservations
Network, Inc., 8140 Walnut Hill Lane, Suite 203, Dallas, TX 75231.
(4) The address of Ms. Harms Messrs. Baker, Kaufman, Khosrowshahi, Segal and
Sileck is c/o USA Networks, Inc., 152 West 57th Street, 42nd Floor, New
York, NY 10019.
(5) Includes 5,300 shares of common stock and options to purchase 300,000 shares
of common stock granted under USAi's stock option plans.
(6) Includes options to purchase 453,000 shares of common stock granted under
USAi's stock option plans.
(7) 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 December 31, 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 Media Corporation or The Seagram Company Ltd.
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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 17,099,900 shares of
class A common stock outstanding and 37,299,100 shares of class B common stock
outstanding, and we will be authorized to issue an additional 582,900,100 shares
of class A common stock and 112,700,900 shares of class B common stock. Stock
options covering up to 5,400,000 shares of class A common stock are available
for grant under the 2000 Stock Plan, and options covering an estimated aggregate
of 1,666,667 shares of class A common stock will be granted but will not have
been exercised. See "Management--Employee Benefit Plans--2000 Stock Plan." Stock
options covering up to 100,000 shares of class A common stock are available for
grant under our Directors' Stock Option Plan, and options covering an aggregate
of 20,000 shares will be granted upon completion of this offering but will not
have been exercised. See "Management--Employee Benefit Plans." 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;
- prior to a spin-off transaction that is on a tax-free basis ("Tax-Free
Spin-Off"), shares of class B common stock automatically will be 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 Tax-Free Spin-Off;
- 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, each share of
class B common stock automatically will convert into one share of class A
common stock immediately prior to the Tax-Free Spin-Off, unless and to the
extent that, the class B common stockholder delivers to us an opinion of
counsel that we find reasonably satisfactory to the effect that the
conversion provision is likely to create a significant risk of material
adverse tax consequence to USAi, its affiliates or their stockholders;
- except as provided below, after the Tax-Free Spin-Off, 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
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<PAGE>
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.
WARRANTS TO PURCHASE COMMON STOCK
COMMON STOCK PURCHASE WARRANTS. We have agreed to issue, upon completion of
this offering, warrants to purchase, in the aggregate, up to an estimated 1.75
million shares of class A common stock (assuming an initial public offering
price of $12.00 per share) to a number of companies that operate websites that
provide links to our websites. These warrants will be exercisable for a
three-year period at a price per share equal to the initial public offering
price in this offering and are subject to customary anti-dilution protections.
Neither these warrants nor the underlying shares of class A common stock are
transferable until after the first anniversary of this offering.
PERFORMANCE WARRANT. In addition, immediately upon completion of the
initial closing of this offering, we will issue to Travelocity a performance
warrant to purchase up to 2,447,955 shares of our class A common stock at an
exercise price equal to the initial public offering price per share in this
offering, subject to customary anti-dilution protections. This warrant will be
earned over a three-year period if performance targets are met, as described
below, and will be exercisable for one year after the third anniversary of the
initial closing of this offering, except as described below. As set forth below,
one-third of this warrant will be earned if we receive the targeted amount of
bookings from Travelocity and Preview Travel in the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JANUARY 29,
------------------------------------------
2001 2002 2003
---- ---- ----
<S> <C> <C> <C>
Target.............................. $140 million $218 million $298 million
Minimum............................. $ 55 million $ 80 million $110 million
</TABLE>
If the bookings are less than the target but more than the minimum in any
period, a proportionate part of the one-third of the warrant eligible to be
earned during the period will be earned. The proportionate part that will be
earned will be equal to the percentage of the target represented by the actual
results, multiplied by the number of warrant shares eligible to be earned during
that period. If the bookings are less than the target but more than the minimum
less $10 million in any period, bookings in the next twelve-month period will be
used to earn the unearned portion of the warrant from the last period. In
addition, in order for any portion of this warrant to be earned, we must
generate at least $40 million of aggregate bookings from Travelocity and Preview
Travel in each of the two twelve-month periods ending January 29, 2002 and 2003.
We may decide to waive the requirements for earning portions of the warrant
in order to prevent the termination of various aspects of Travelocity's
relationship with us. Under the performance warrant, if Travelocity has not
earned a portion of the warrant entitling it to acquire at least 1,060,699
warrant shares by July 29, 2001, 1,632,052 warrant shares by January 29, 2002 or
1,904,019 warrant shares by July 29, 2003, it will be permitted to display the
hotel offerings of our competitors and/or hotel offerings arranged by
Travelocity or its affiliates for cities covered by the relationship on the
Travelocity network. If we were to waive these requirements, all warrant shares
deemed earned because of the waiver would be exercisable on the date of the
waiver for a period that will end on the earlier of the second anniversary of
the date of the waiver and the fourth anniversary of the initial closing of this
offering.
Under the performance warrant, Travelocity also will be permitted to
terminate its relationship with us if we materially fail to comply with
specified standards concerning the management and operations of our online
services or our other obligations to Travelocity or if we fail to account for
more than 10% of Travelocity's hotel bookings during the twelve-month period
after our services are integrated into the Travelocity network. In the case of
this type of termination, the portion of the
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<PAGE>
warrant that has already been earned as of the date of termination will become
exercisable on the date of termination, but Travelocity will forfeit the
opportunity to earn any further portion of the performance warrant.
Travelocity also will have two demand registration rights with respect to
the shares underlying the performance warrant. The two demand registration
rights will be exercisable, subject to customary limitations, after the initial
closing of this offering, although the performance warrant itself will not
(absent a waiver from us) be exercisable prior to the third anniversary of the
initial closing of this offering.
PREFERRED STOCK
At the completion of this offering, we will be authorized to issue 20
million 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
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 also is 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;
- 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; and
- in the event that an officer of our company who is also a director of USA
Networks is expressly offered a potential transaction or matter which may
be a corporate opportunity for both our company and USA Networks, the
corporate opportunity offered to the officer of our company belongs to our
company.
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
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<PAGE>
company under the restated bylaws of our company), unless that person is
a full-time employee of our company;
(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, 20 million 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
62
<PAGE>
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 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 ChaseMellon
Shareholder Services, L.L.C.
LISTING
An application has been made for quotation of our class A common stock on
the Nasdaq National Market under the trading symbol "ROOM."
63
<PAGE>
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. The market price of our stock
could be subject to fluctuations resulting from 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.
Upon completion of this offering, we estimate that we will have 17,099,900
shares of our class A common stock outstanding, assuming no exercise of the
underwriters' overallotment option, and 37,299,100 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 an
assignee of 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.
The estimated 11,699,900 shares to be issued to an assignee of TMF, Inc. and
HRN Marketing Corp. will be subject to a four year restriction on transfer,
except that after the first anniversary of the initial closing of this offering,
that assignee may transfer approximately 1,920,000 shares of class A common
stock and may transfer an additional 480,000 shares of class A common stock
after the second anniversary and the third anniversary. The four year
restriction on transfer is also subject to other exceptions as described in
"Certain Transactions." The holder of a majority of those estimated 11,699,900
shares will have one demand registration right exercisable after the fourth
anniversary of the initial closing of this offering. See "Certain Transactions."
In addition, upon completion of this offering, we have agreed to issue to a
number of third-party affiliate website companies warrants to acquire up to an
estimated 1.75 million shares of our class A common stock (assuming an initial
public offering price of $12.00). Neither the warrant nor the underlying shares
of class A common stock will be transferable until after the first anniversary
of this offering. Upon completion of this offering, we also will issue a
performance warrant to purchase up to 2,447,955 shares of our class A common
stock. The holder of this warrant also will have two demand registration rights
with respect to the shares underlying the warrant that will be exercisable,
subject to
64
<PAGE>
customary limitations, after the closing of this offering. The warrant may not
be transferred except that a transfer after the first anniversary of the date it
is issued to an affiliate of the entity to which it was issued is permitted. The
warrant (absent a waiver by us) will not be exercisable until the third
anniversary of the date it is issued. See "Description of Capital Stock--Common
Stock Purchase Warrants."
There also are 5,500,000 shares of class A common stock reserved for
issuance upon the exercise of stock options under our 2000 Stock Plan and our
Directors' Stock Option Plan. See "Management--Employee Benefit Plans."
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, none of
them will, 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 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.
65
<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, 810,000 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 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.
66
<PAGE>
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 also have 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 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 110 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
67
<PAGE>
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.
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999, and for the period from May 11, 1999 to
December 31, 1999, and the combined financial statements of TMF, Inc. and HRN
Marketing Corp. (Predecessor) for the period January 1, 1999 to May 10, 1999 as
set forth in their reports. We have included these financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports 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.
68
<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.
Reports of Independent Auditors........................... F-11
Balance Sheet at December 31, 1999........................ F-13
Combined Statement of Operations TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp.
(Predecessor) for the period from January 1 to May 10,
1999.................................................... F-14
Statement of Operations for the period from May 11 to
December 31, 1999....................................... F-14
Statement of Stockholders' Deficit TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp.
(Predecessor) for the period from January 1 to May 10,
1999.................................................... F-15
Statement of Stockholders' Equity for the period from
May 11 to December 31, 1999............................. F-15
Statement of Cash Flows TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp.
(Predecessor) for the period from January 1 to May 10,
1999.................................................... F-16
Statement of Cash Flows for the period from May 11 to
December 31, 1999....................................... F-16
Notes to Financial Statements............................. F-17
</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.
The Company offers rooms that are contracted for in advance or are prepaid.
Unsold contracted rooms may be returned by the Company based on a cancellation
period, which generally expires before the date the customer may cancel the
hotel reservation. Customers are subject to a penalty for all cancellation or
changes to the reservation. To date the Company has not incurred significant
losses under the room contracts with hotels.
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>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
TMF, Inc. and HRN Marketing Corp.
We have audited the accompanying combined statements of operations,
stockholders' equity, and cash flows of TMF, Inc. (d/b/a Hotel Reservations
Network) and HRN Marketing Corp. for the period January 1, 1999 through May 10,
1999. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of operations and cash flows of TMF,
Inc. (d/b/a Hotel Reservations Network) and HRN Marketing Corp. for the period
January 1, 1999 through May 10, 1999 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
November 22, 1999
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Hotel Reservations Network, Inc.
We have audited the accompanying balance sheet of Hotel Reservations Network,
Inc. as of December 31, 1999, and the related statements of operations,
stockholders' equity, and cash flows for the period May 11, 1999 through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hotel Reservations Network,
Inc. at December 31, 1999, and the results of its operations and its cash flows
for the period May 11, 1999 through December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
January 28, 2000
F-12
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 6,257
Marketable securities....................................... 4,906
Accounts and notes receivable............................... 78
Prepaid hotel rooms......................................... 938
Due from USAi............................................... 85
Other current assets........................................ 885
--------
Total current assets.................................... 13,149
PROPERTY AND EQUIPMENT
Computer equipment.......................................... 1,642
Buildings and leasehold improvements........................ 233
Furniture and other equipment............................... 453
--------
2,328
Less accumulated depreciation and amortization............ (340)
--------
1,988
OTHER ASSETS
Intangible assets, net of amortization of $12,897........... 187,411
Deferred tax asset.......................................... 1,638
Other assets................................................ 64
--------
$204,250
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade..................................... $ 16,252
Deferred revenue............................................ 16,447
Amounts due under acquisition agreement..................... 17,500
Due to USAi for income taxes................................ 4,008
Other accrued liabilities................................... 3,696
--------
Total current liabilities............................... 57,903
COMMITMENTS AND CONTINGENCIES............................... --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 1,000 shares authorized, 100
shares outstanding........................................ --
Additional paid-in capital.................................. 142,313
Accumulated other comprehensive loss........................ (88)
Retained earnings........................................... 4,122
--------
Total stockholders' equity................................ 146,347
--------
$204,250
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD PERIOD
JANUARY 1 MAY 11
TO MAY 10, TO DECEMBER 31,
1999 1999
------------- ----------------
(PREDECESSOR)
-------------
<S> <C> <C>
Net revenues................................................ $ 37,701 $ 124,113
Operating costs and expenses
Cost of sales............................................. 26,538 89,385
Selling, general and administrative....................... 5,669 16,177
Non-recurring acquisition related costs................... 19,277 --
Amortization of goodwill.................................. -- 12,897
-------- ----------
Total operating costs and expenses...................... 51,484 118,459
-------- ----------
Operating profit (loss)................................. (13,783) 5,654
Other income (expense):
Interest income......................................... 434 1,054
Interest expense........................................ (5) (165)
Gain on sale of marketable securities................... 471 --
-------- ----------
900 889
-------- ----------
Earnings (loss) before income taxes....................... (12,883) 6,543
Income tax expense........................................ -- (2,421)
-------- ----------
NET EARNINGS (LOSS)......................................... $(12,883) $ 4,122
======== ==========
</TABLE>
<TABLE>
<CAPTION>
PERIOD
JANUARY 1
TO MAY 10,
1999
-----------
<S> <C> <C>
Pro forma information:
Historical loss before income taxes benefit................. $(12,883)
Pro forma income tax benefit................................ 4,767
--------
Pro forma net loss.......................................... $ (8,116)
--------
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TMF AND
HRN
TOTAL HRN MARKETING RETAINED
STOCKHOLDERS' TMF MARKETING ADDITIONAL ADDITIONAL EARNINGS
EQUITY COMMON COMMON COMMON PAID-IN PAID-IN (ACCUMULATED
(DEFICIT) STOCK STOCK STOCK CAPITAL CAPITAL DEFICIT)
------------- -------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
BALANCE AT JANUARY 1, 1999......... $ (852) $ -- $ -- $ 2 $ (1,168)
Capital Contribution............. 11,920 11,920
Comprehensive income:
Net loss for the period
January 1, 1999 to May 10,
1999........................... (12,883) -- -- -- (12,883)
Less: reclassification adjustment
for gains included in net
loss........................... (314) -- -- -- --
--------
Comprehensive loss............. (13,197) --
-------- ------ ------ ---- -------- --------
Deficit of Predecessor Company as
of May 10, 1999 prior to the
change in capitalization due to
the Acquisition................ $ (2,129) $ -- $ 2 $ 11,920 $(14,051)
======== ====== ====== ==== ======== ========
SUCCESSOR
Initial capitalization of Company
in conjunction with the
Acquisition.................... $157,313 $ -- $157,313 $ --
Net earnings for the period May
11 to December 31, 1999........ 4,122 4,122
Unrealized losses on available
for sale securities............ (88) --
--------
Comprehensive income........... 4,034
--------
Capital contributions by USAi
related to the payment of
contingent purchase price........ 25,000 25,000 --
Dividend distribution to USAi...... (40,000) (40,000) --
-------- ------ -------- --------
BALANCE AT DECEMBER 31, 1999....... $146,347 $ -- $142,313 $ 4,122
======== ====== ======== ========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
--------------
<S> <C>
PREDECESSOR
BALANCE AT JANUARY 1, 1999......... $ 314
Capital Contribution.............
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................ $ --
=====
SUCCESSOR
Initial capitalization of Company
in conjunction with the
Acquisition.................... $ --
Net earnings for the period May
11 to December 31, 1999........ --
Unrealized losses on available
for sale securities............ (88)
Comprehensive income...........
Capital contributions by USAi
related to the payment of
contingent purchase price........ --
Dividend distribution to USAi...... --
-----
BALANCE AT DECEMBER 31, 1999....... $ (88)
=====
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1 PERIOD MAY 11
TO MAY 10, TO DECEMBER 31,
------------ ---------------
1999 1999
------------ ---------------
(PREDECESSOR
COMPANY)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................... $(12,883) $ 4,122
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation.............................................. 119 340
Amortization of goodwill.................................. -- 12,897
Gain on sale of marketable securities..................... (471) --
Non-cash compensation charge.............................. 11,920 --
Deferred income taxes..................................... -- (1,587)
Changes in current assets and liabilities:
Accounts and notes receivable........................... 20 (16)
Prepaid hotel rooms..................................... (179) (418)
Accounts payable........................................ 7,123 4,759
Deferred revenue........................................ 11,994 (2,846)
Other accrued liabilities............................... (371) 6,990
Other, net.............................................. (49) (478)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 17,223 23,763
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of TMF and Marketing, net of cash acquired.... -- (157,985)
Capital expenditures...................................... (222) (1,092)
Purchase of marketable securities......................... (8,434) (1,500)
Proceeds from sale of marketable securities............... 11,631 996
Other, net................................................ 31 (238)
-------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 3,006 (159,819)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions by USAi............................. -- 182,313
Dividend distribution to USAi............................. -- (40,000)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. -- 142,313
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 20,229 6,257
Cash and cash equivalents at beginning of period............ 4,964 --
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 25,193 $ 6,257
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
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 December 31, 1999 and the statements of
operations, cash flows and stockholders' equity for the period May 11 to
December 31, 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.
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.
The Company offers rooms that are contracted for in advance or are prepaid.
Unsold contracted rooms may be returned by the Company based on a cancellation
period, which generally expires before the date the customer may cancel the
hotel reservation. Customers are subject to a penalty for all cancellations or
changes to the reservation. To date, the Company has not incurred significant
losses under the room contracts with hotels.
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, net of related
income tax, are recorded as a component of accumulated other comprehensive
income in stockholders' equity until realized. Realized gains and
F-17
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
December 31, 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 to 5 years
Leasehold improvements............................ 4 to 7 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 period January 1 to May 10, 1999 and the period
May 11 to December 31, 1999 was $1,375 and $5,205, 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
December 31, 1999, capitalized advertising is $182. Other advertising costs are
expensed in the period incurred.
F-18
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
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
December 31, 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 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
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 either for the Company or 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.
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 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 (See Note 11 for
information about an amendment to this obligation). 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 December 31, 1999 on the
promissory note was $153.
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.
F-19
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 3--BUSINESS ACQUISITION (CONTINUED)
The initial contingent payments total $50.0 million, of which $37.5 million
has been paid through December 31, 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
attainment of the operating performance targets for the year ended December 31,
1999, and will be paid with funds contributed by USAi. 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 year ended December 31, 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. See Note 11.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1998 1999
-------- ---------
(UNAUDITED)
<S> <C> <C>
Net revenues............................................ $66,472 $161,814
Net earnings (loss)..................................... (8,649) 3,493
</TABLE>
NOTE 4--MARKETABLE SECURITIES--AVAILABLE FOR SALE
Investments in marketable securities--available for sale consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------
PRE-TAX
UNREALIZED
COST MARKET LOSS
-------- -------- ----------
<S> <C> <C> <C>
Government bonds...................................... $2,189 $2,087 $102
Medium term notes..................................... 2,856 2,819 37
------ ------ ----
$5,045 $4,906 $139
====== ====== ====
</TABLE>
The marketable securities have an aggregate face value of $5,045. Maturities
of marketable securities--available for sale are $1,500, $200, $100 and $3,245
in 2000, 2003, 2004 and 2005 and thereafter, respectively. The unrealized loss
of $139 is shown as a component of comprehensive loss net of income tax benefits
of $51.
F-20
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
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 December 31, 1999 is shown as follows:
<TABLE>
<S> <C>
Income tax expense at the federal statutory rate of 34%..... $ 2,225
State income taxes, net of effect of federal tax benefit.... 196
--------
Income tax expense.......................................... $ 2,421
========
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<S> <C>
Current income tax expense:
Federal................................................... $ 3,520
State..................................................... 488
--------
Current income tax expense:............................. 4,008
--------
Deferred income tax benefit:
Federal................................................... 1,393
State..................................................... 194
--------
Deferred income tax benefit............................. 1,587
--------
Total net income tax expense............................ $ 2,421
========
</TABLE>
The deferred tax benefit of $1,587 as of December 31, 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-21
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
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 $2,036 and are $607, $601, $590 and $238 in the
years 2000, 2001, 2002 and 2003, respectively.
Expenses charged to operations under these agreements were $108 and $382 for
the period from January 1 to May 10, 1999 and the period May 11 to December 31,
1999, respectively.
At December 31, 1999, the Company has $1,769 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.
As of December 31, 1999, the Company has non-cancelable commitments for
hotel rooms totalling $4,612, which relate to the period January 1, 2000 to
December 31, 2000. Furthermore, the Company has non-cancelable commitments under
advertising contracts with third party Internet websites totalling $4,028 as of
December 31, 1999.
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 December 31, 1999, the Company incurred fees
of $93 under these arrangements.
The Company entered into an arrangement with Ticketmaster Online-CitySearch,
Inc. ("TMCS"), an indirect subsidiary of USAi which operates CitySearch's
Reservation Center. Under the arrangement, 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 December 31, 1999 was not material.
The Company has certain arrangements for cable television commercial
advertisements with USAi affiliates. Under the agreements, the Company receives
promotional advertising in return for a 5% commission on total booking price on
all orders resulting from the advertising. The commission paid for the period
May 11 to December 31, 1999 was not material.
NOTE 9--NON-RECURRING ACQUISITION RELATED COSTS
During the period January 1 to May 10, 1999, the Predecessor paid
discretionary compensation and bonuses of $398 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-22
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 9--NON-RECURRING ACQUISITION RELATED COSTS (CONTINUED)
In connection with the sale of substantially all the assets of TMF and
Marketing, the principal owners entered into an agreement to pay an executive of
TMF for past services 5% of all net sales proceeds, including all contingent
payments, received by the principal owners in connection with the sale. During
the period January 1 to May 10, 1999, the Predecessor recorded a charge of
$18,720 in connection with this obligation.
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 period
January 1 to May 10, 1999 and the period May 11 to December 31, 1999 was $6 and
$11, respectively.
NOTE 11--SUBSEQUENT EVENT (UNAUDITED)
The Company plans to complete an initial public offering in the first fiscal
quarter of 2000. Prior to the offering the Company plans to recapitalize its
common stock into class A common stock having one vote per share and class B
common stock having 15 votes per share. USAi will be issued shares of class B
common stock in exchange for its shares of common stock. The Company will
authorize 600,000,000 shares of class A common stock, 150,000,000 shares of
class B common stock and 20,000,000 shares of preferred stock. Shares of
class A common stock will be sold to the public in the offering. Under the asset
purchase agreement, the Company is required to issue to the sellers of the
predecessor business, shares of class A common stock equal to 10% of the
aggregate value of the equity of the Company immediately prior to the offering.
Immediately prior to the offering the Company will have 11,699,900 shares of
class A common stock and 37,299,100 shares of class B common stock outstanding.
Pursuant to an amendment to the asset purchase agreement, the Company has
agreed to issue class A common stock to the sellers in exchange for releasing
the obligation of the Company to make additional performance-based payments
covering the twelve months ending March 31, 2001 and 2002. The number of shares
to be issued will be determined by dividing $81.6 million by the initial public
offering price per share (6,800,000 shares assuming an initial public offering
price of $12.00 per share). This will result in additional goodwill that will be
amortized over the remaining ten-year life assigned to the goodwill.
In January 2000, the Company entered into an affiliation agreement with
Travelocity and will issue to Travelocity a performance warrant upon the
completion of the public offering. The performance warrants will be subject to
vesting based on achieving certain performance targets. If the performance
warrants are fully vested and exercisable it will entitle the holder to acquire
approximately 2,447,955 shares of class A common stock. The Company also entered
into other affiliation agreements and has agreed to issue approximately
1.75 million warrants at the initial offering price upon completion of the
offering.
F-23
<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.......................................... 1,000
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 to an assignee of TMF, Inc. and HRN Marketing
Corp. an estimated 11,699,900 shares of Class A Common Stock as part of the
consideration for the sale by TMF, Inc. and HRN Marketing Corp. of
substantially all their assets to the Registrant.
(4) Immediately upon completion of this offering, we have agreed to issue
warrants to purchase at the initial public offering price an estimated
4,197,955 shares of class A common stock (assuming a public offering price
of $12.00 per share) to a number of our third-party website affiliates.
Warrants to purchase an estimated 1.75 million shares will be immediately
exercisable, but neither these warrants nor the shares underlying them will
be transferable until after the first anniversary of the initial closing of
this offering. A performance warrant to purchase 2,447,955 shares will be
subject to specified vesting criteria. The performance warrant is not
transferable (except that it may be transferred to an affiliate of the
holder after the first anniversary of the initial closing of this offering)
and will not be exercisable until the third anniversary of the initial
closing of this offering unless the vesting criteria are waived.
The original issuance of shares to USAi, the issuance of shares to the
assignee of TMF, Inc. and HRN Marketing Corp. and the issuance of the warrants
are transactions 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 Restated 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* 2000 Stock Option Plan
10.4* Directors' Stock Option Plan
10.5* Amended and Restated Asset Purchase Agreement by and among
Hotel Reservations Network, Inc., USA Networks, Inc., TMF,
Inc., HRN Marketing Corp., David Litman and Robert Diener
10.6* Form of Warrant
10.7* Form of Performance Warrant
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
<C> <S>
10.8*** Employment Agreement with Jack Rubin
10.9* Form of Employment Agreement with Sandra D'Arcy
12.1*** Statement regarding computation of EBITDA
23.1* Consent of Grant Thornton LLP
23.2* Consent of Ernst & Young LLP
23.3*** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in Exhibit 5.1)
24.1*** Powers of Attorney
24.2*** Powers of Attorney for Michael Sileck and Jack Rubin
27.1*** Financial Data Schedule (for SEC use only)
27.2*** Financial Data Schedule (for SEC use only)
99.1* Nominee Directors' Consents
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Previously filed
(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 February 7, 2000.
<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 February 7, 2000
David Litman (Principal Executive Officer)
*
--------------------------------- President, Treasurer and Director February 7, 2000
Robert Diener (Principal Accounting Officer)
*
--------------------------------- Chief Financial and Strategic Officer February 7, 2000
Jack Rubin (Principal Financial Officer)
*
--------------------------------- Director February 7, 2000
Barry Baker
*
--------------------------------- Director February 7, 2000
Victor A. Kaufman
*
--------------------------------- Director February 7, 2000
Dara Khosrowshahi
*
--------------------------------- Director February 7, 2000
Michael Sileck
</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 Restated 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* 2000 Stock Option Plan
10.4* Directors' Stock Option Plan
10.5* Amended and Restated Asset Purchase Agreement by and among
Hotel Reservations Network, Inc., USA Networks, Inc., TMF,
Inc., HRN Marketing Corp., David Litman and Robert Diener
10.6* Form of Warrant
10.7* Form of Performance Warrant
10.8*** Employment Agreement with Jack Rubin
10.9* Form of Employment Agreement with Sandra D'Arcy
12.1*** Statement regarding computation of EBITDA
23.1* Consent of Grant Thornton LLP
23.2* Consent of Ernst & Young LLP
23.3*** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in Exhibit 5.1)
24.1*** Powers of Attorney
24.2*** Powers of Attorney for Michael Sileck and Jack Rubin
27.1*** Financial Data Schedule (for SEC use only)
27.2*** Financial Data Schedule (for SEC use only)
99.1* Nominee Directors' Consents
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Previously filed
(b) Financial Statement Schedules
None
<PAGE>
Exhibit 1.1
5,400,000 SHARES
HOTEL RESERVATIONS NETWORK, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
________, 2000
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALLEN & COMPANY INCORPORATED
BEAR, STEARNS & CO., INC.
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities
Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Hotel Reservations Network, Inc., a Delaware corporation (the
"COMPANY"), proposes to issue and sell 5,400,000 shares of its class A common
stock, par value $.01 per share (the "FIRM SHARES") to the several underwriters
named in Schedule I hereto (the "UNDERWRITERS"). The Company also proposes to
issue and sell to the several Underwriters not more than an additional 810,000
shares of its class A common stock, par value $.01 per share (the "ADDITIONAL
SHARES"), if requested by the Underwriters as provided in Section 2 hereof. The
Firm Shares and the Additional Shares are hereinafter referred to collectively
as the "SHARES". The shares of class A common stock of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "CLASS A COMMON STOCK".
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
<PAGE>
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Class A Common
Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise
specified, any reference herein to the term "REGISTRATION STATEMENT" shall be
deemed to include such Rule 462(b) Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 810,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
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The Company and USA Networks, Inc. hereby agree not to (i) 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, 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 (ii) 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 (regardless of whether
any of the transactions described in clause (i) or (ii) is to be settled by the
delivery of Class A Common Stock, or such other securities, in cash or
otherwise), except to the Underwriters pursuant to this Agreement, for a period
of 180 days after the date of the Prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the
foregoing, during such period (i) the Company may grant stock options pursuant
to the stock option plan described in the Prospectus and (ii) the Company may
issue shares of Class A Common Stock upon the exercise of an option or warrant
or the conversion of a security outstanding on the date hereof or to be issued
on the date hereof as described in the Prospectus or to be issued on the date
hereof as described in the Prospectus; (iii) the Company may issue shares of
Class A Common Stock or securities convertible into, or exercisable for Class A
Common Stock, as consideration in the acquisition of businesses (whether by
merger, consolidation, purchase or otherwise), including the shares to be issued
to the Company's predecessor business as described in the Prospectus; (iv) the
Company may issue shares of Class A Common Stock or securities convertible into,
or exercisable for, Class A Common Stock in connection with agreements entered
into with persons that operate websites providing links to the Company's
website, provided that, in the case of transfer pursuant to clauses (iii) and
(iv) of this sentence, the transferee shall have agreed to be bound by the
restrictions on transfer contained in this paragraph, and such transfer is not
effective until the agreement to be bound by the restrictions on transfer is
executed by the transferee and a copy of such agreement is received by DLJ and
Davis Polk & Wardwell. The Company also agrees not to file any registration
statement with respect to any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, except for a
registration statement on Form S-8. The Company shall, prior to or concurrently
with the execution of this Agreement, deliver an agreement executed by (i) each
of the directors and officers of the Company and (ii) each stockholder listed on
Annex I hereto to the effect that such person will not, during the period
commencing on the date such person signs such agreement and ending 180 days
after the date of the Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Corporation, (A) engage in any of the transactions
described in the first sentence of this paragraph or (B) make
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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, except that such agreement shall
provide that such individuals may nonetheless (i) transfer shares by way of
testate or intestate succession or by operation of law, (ii) transfer shares to
members of the individual's immediate family or to a trust, partnership, limited
liability company or other entity, all of the beneficial interests of which are
held by such individual, and (iii) transfer shares to charitable organizations;
PROVIDED that, in the case of transfers pursuant to clauses (i), (ii) and (iii)
of this sentence, the transferee shall have agreed to be bound by the
restrictions on transfer contained in this paragraph and such transfer is not
effective until the agreement to be bound by the restrictions on transfer is
executed by the transferee and a copy of such agreement is received by DLJ and
Davis Polk & Wardwell.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request not later than two full business days prior to the Closing Date or
the applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the Company, to Donaldson, Lufkin & Jenrette Securities Corporation through the
facilities of The Depository Trust Company ("DTC"), for the respective accounts
of the several Underwriters, against payment to the Company of the Purchase
Price therefor by wire transfer of Federal or other funds immediately available
in New York City. The certificates representing the Shares shall be made
available for inspection not later than 9:30 A.M., New York City time, on the
business day prior to the Closing Date or the applicable Option Closing Date, as
the case may be, at the office of DTC or its designated custodian (the
"DESIGNATED OFFICE"). The time and date of delivery and payment for the Firm
Shares shall be 9:00 A.M., New York City time, on __________ , 2000 or such
other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of delivery and payment for the Firm Shares are hereinafter referred to as the
"CLOSING DATE." The time and date of delivery and payment for any Additional
Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City
time, on the date specified in the applicable exercise notice given by you
pursuant to Section 2 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities
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Corporation and the Company shall agree in writing. The time and date of
delivery and payment for any Additional Shares are hereinafter referred to as an
"OPTION CLOSING DATE."
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017 and the Shares shall be delivered at the
Designated Office, all on the Closing Date or such Option Closing Date, as the
case may be.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly, (i) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements
to the Prospectus or for additional information, (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation of
any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is
required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the Rule 462(b) Registration
Statement has become effective and (v) of the happening of any event
during the period referred to in Section 5(d) below which makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires any additions to or changes in the
Registration Statement or the Prospectus in order to make the
statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you four signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration
Statement as so filed and of each amendment to it, without exhibits, as
you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with
the Commission within the applicable period specified in Rule 424(b)
under the Act; during the period specified in Section 5(d) below, not
to file
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any further amendment to the Registration Statement and not to
make any amendment or supplement to the Prospectus of which you shall
not previously have been advised or to which you shall reasonably
object after being so advised; and, during such period, to prepare and
file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to
the Prospectus which may be necessary or advisable in connection with
the distribution of the Shares by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become
promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for
such period as in the opinion of counsel for the Underwriters a
prospectus is required by law to be delivered in connection with sales
by an Underwriter or a dealer, to furnish in New York City to each
Underwriter and any dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or
dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so
that the statements in the Prospectus, as so amended or supplemented,
will not in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with applicable law,
and to furnish to each Underwriter and to any dealer as many copies
thereof as such Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several
Underwriters and by dealers under the state securities or Blue Sky laws
of such jurisdictions as you may request (or obtain exemptions from the
application thereof), to continue such registration or qualification in
effect so long as required for distribution of the Shares and to file
such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification;
PROVIDED, HOWEVER, that the
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Company shall not be required in connection therewith to qualify as a
foreign corporation in any jurisdiction in which it is not now so
qualified or to take any action that would subject it to general
consent to service of process or taxation other than as to matters and
transactions relating to the Prospectus, the Registration Statement,
any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To make generally available to its stockholders as soon as
practicable an earnings statement (which need not be audited) covering
the twelve-month period ending March 31, 2001 that shall satisfy the
provisions of Section 11(a) of the Act, and to advise you in writing
when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as practicable copies of all reports or other
communications furnished generally to the record holders of Class A
Common Stock or furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement, including: (i) the fees, disbursements and expenses of
the Company's counsel and the Company's accountants in connection with
the registration and delivery of the Shares under the Act and all
other fees and expenses in connection with the preparation, printing,
filing and distribution of the Registration Statement (including
financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing,
including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all
costs and expenses related to the transfer and delivery of the Shares
to the Underwriters, including any transfer or other taxes payable
thereon, (iii) all expenses in connection with the registration or
qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (iv)
the filing fees and reasonable disbursements of counsel for the
Underwriters in connection with the review and clearance of the
offering of the Shares by
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the National Association of Securities Dealers, Inc., (v) all fees and
expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Class A Common
Stock and all costs and expenses incident to the listing of the Shares
on the Nasdaq National Market, (vi) the cost of printing certificates
representing the Shares, (vii) the costs and charges of any transfer
agent, registrar and/or depositary, (viii) the costs and expenses of
the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the
Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations
with the prior approval of the Company, travel and lodging expenses of
the representatives and officers of the Company and any such
consultants, and 50% of the cost of any aircraft chartered in
connection with the road show, and (ix) all other costs and expenses
incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section
5(i). Except as provided in this Section 5, the Underwriters shall pay
their own costs and expenses, including the fees and disbursements of
their counsel.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to use best efforts to maintain the listing
of the Shares on the Nasdaq National Market for a period of three years
after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or an Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the
Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not
so covered in compliance with Rule 462(b) by 10:00 P.M., New York City
time, on the date of this Agreement and to pay to the Commission the
filing fee for such Rule 462(b) Registration Statement at the time of
the filing thereof or to give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
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(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration
Statement filed after the effectiveness of this Agreement will become
effective no later than 10:00 P.M., New York City time, on the date of
this Agreement; and no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such
purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the
effectiveness of this Agreement), when it became effective, did not
contain and, as amended, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus when filed,
complied and, as amended or supplemented, if applicable, will comply in
all material respects with the Act, (iii) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of
this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (B) will comply in all material respects
with the Act and (iv) the Prospectus as of its date does not contain
and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
the representations and warranties set forth in this paragraph do not
apply to statements or omissions in the Registration Statement, the
Prospectus, the Rule 462(b) Registration Statement, or any amendments
or supplements to any of the foregoing based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter expressly for use therein.
(c) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the Act, and did not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
except that the
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representations and warranties set forth in this paragraph do not
apply to statements or omissions in any preliminary prospectus based
upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter expressly for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its
business as described in the Prospectus and to own, lease and operate
its properties, and is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company.
(e) As of the date hereof, there are no subsidiaries of the Company in
existence.
(f) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or
issued by the Company relating to or entitling any person to purchase
or otherwise to acquire any shares of the capital stock of the Company,
except as otherwise disclosed in the Registration Statement.
(g) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights; and
the Shares have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive or
similar rights.
(h) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof
contained in the Prospectus.
(i) The Company is not in violation of its charter or by-laws or in
default in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement, mortgage, lease
or other agreement or instrument to which the Company is a party or by
which the Company's property is bound except for such defaults as would
not have a material adverse effect on the business, prospects,
financial
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condition or results of operations of the Company (a "MATERIAL ADVERSE
EFFECT").
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not
(i) require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except
such as have been obtained or made by the Company or such as may be
required under the securities or Blue Sky laws of the various states
or the NASD), (ii) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the charter or by-laws of
the Company or any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company, to which the
Company is a party or by which the Company or any of its property is
bound, (iii) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company, or property, or
(iv) result in the suspension, termination or revocation of any
Authorization (as defined below) of the Company or any other
impairment of the rights of the holder of any such Authorization
except for such as would not have a Material Adverse Effect.
(k) There are no legal or governmental proceedings pending or, to the
best of the Company's knowledge, threatened to which the Company is or
could be a party or to which any of its property is or could be subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described; nor are there any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not so
described or filed as required.
(l) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is
acquired by the Act to be described in the Registration Statement or
the Prospectus which is not so described.
(m) The Company owns or possesses, or can acquire on reasonable terms,
all licenses, inventions, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), ("INTELLECTUAL PROPERTY")
currently employed by it in connection with the business now
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operated by it except where the failure to own or possess or otherwise
be able to acquire such intellectual property would not, singly or in
the aggregate, have a Material Adverse Effect; and the Company has not
received any written notice of infringement of or conflict with
asserted rights of others with respect to any of such intellectual
property which, singly or in the aggregate, which could reasonably be
expected to have a Material Adverse Effect.
(n) All material tax returns required to be filed by the Company in
any jurisdiction have been filed, other than those filings being
contested in good faith, and all material taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges due
pursuant to such returns or pursuant to any assessment received by the
Company have been paid, other than those being contested in good faith
and for which adequate reserves have been provided, if required by
GAAP.
(o) The Company has not violated any foreign, federal, state or local
law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the
Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the
aggregate, would not have a Material Adverse Effect.
(p) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary
to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly
or in the aggregate, have a Material Adverse Effect. Each such
Authorization is valid and in full force and effect and the Company is
in compliance with all the terms and conditions thereof and with the
rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and the Company is not aware that
any event has occurred (including, without limitation, the receipt of
any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or,
after notice or lapse of time or both, would result in any other
impairment of the
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rights of the holder of any such Authorization; except where such
failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any
such restriction would not, singly or in the aggregate, have a
Material Adverse Effect.
(q) To the best of the Company's knowledge, there are no costs or
liabilities associated with Environmental Laws (including, without
limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws
or any Authorization, any related constraints on operating activities
and any potential liabilities to third parties) which would, singly or
in the aggregate, have a Material Adverse Effect.
(r) This Agreement has been duly authorized, executed and delivered by
the Company.
(s) Ernst & Young LLP and Grant Thornton LLP are each independent
certified public accountants with respect to the Company as required by
the Act.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(u) The combined financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
together with related schedules and notes, present fairly in all
material respects the combined financial position, results of
operations and changes in financial position of the Company on the
basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as disclosed therein; the supporting schedules, if
any, included in the Registration Statement present fairly in all
material respects in accordance with generally accepted accounting
principles the information required to be
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stated therein; and the other financial and statistical information
and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) present fairly in all
material respects the information set forth therein and are prepared
on a basis consistent with such financial statements and the books and
records of the Company.
(v) The Company is not, and after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus will not be, required to register as an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(w) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(x) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), (i) there has not occurred any material adverse change or
any development involving a prospective material adverse change in the
condition, financial or otherwise, or the earnings, business,
management or operations of the Company, (ii) there has not been any
material adverse change or any development involving a prospective
material adverse change in the capital stock or in the long-term debt
of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
(y) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
SECTION 7. INDEMNIFICATION. (a) The Company agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that
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could give rise to any such losses, claims, damages, liabilities or judgments)
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished in writing to the Company by such Underwriter through you
expressly for use therein; provided that, with respect to any preliminary
prospectus, the foregoing indemnity shall not inure to the benefit of any
Underwriter from whom the person asserting any loss, claim, damage, liability or
expense purchased Shares, or the directors, officers and any person controlling
such Underwriter, if a copy of the Prospectus was not sent or given by or on
behalf of such Underwriter to such person, if required by law to have been so
delivered, at or prior to the written confirmation of such sale and if the
Prospectus would have cured the defect giving rise to such loss, claim, damage,
liability or expense, unless such failure is a result of noncompliance by the
Company of Section 5(e) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to such Underwriter but
only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter expressly for use in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all reasonable fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be
required to assume the defense of such action pursuant to this Section 7(c), but
may employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of such Underwriter). Any indemnified party shall have the right to employ
separate
15
<PAGE>
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
except the reasonable fees and expenses of such counsel will be the expenses of
the indemnifying party if (i) the employment of such counsel shall have been
specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party within a
reasonable time after it has received notice of commencement of the action or
(iii) the named parties to any such action (including any impleaded parties)
include both the indemnified party and the indemnifying party, and the
indemnified party shall have been advised by such counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified parties
and all such fees and expenses shall be reimbursed as they are incurred. Such
firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, in the case of parties indemnified pursuant to Section 7(a), and by
the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with the indemnifying
party's written consent or (ii) effected without the indemnifying party's
written consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the indemnified
party for reimbursement for the fees and expenses of counsel (in any case where
such fees and expenses are at the expense of the indemnifying party) and, prior
to the date of such settlement, the indemnifying party shall have failed to
comply with such reimbursement request unless the indemnifying party is
disputing in good faith the reasonableness of such fees and expenses. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
16
<PAGE>
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(I) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(I) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by
17
<PAGE>
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7(d) are several in
proportion to the respective number of Shares purchased by each of the
Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New
York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
commenced or shall be pending before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Robert Diener and David Litman, in their
capacities as the President and Chief Executive Officer, respectively,
of the Company, confirming the matters set forth in Sections 6(x), 8(a)
and 8(b) and that the Company has complied in all material respects
with all of the agreements and satisfied in all material respects all
of the conditions herein contained and required to be complied with or
satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), (i) there shall not have occurred any change or any
development involving a prospective change in the condition, financial
or otherwise, or the earnings, business, management or operations of
the Company, (ii) there shall not have been any change or any
development
18
<PAGE>
involving a prospective change in the capital stock or in the
long-term debt of the Company and (iii) the Company shall not have
incurred any liability or obligation, direct or contingent, the effect
of which, in any such case described in clause 8(d)(i), 8(d)(ii) or
8(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the
Closing Date, of Paul, Weiss, Rifkind, Wharton & Garrison counsel for
the Company, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of
its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as described in the
Prospectus and to own and hold its properties;
(ii) based solely on certificates of public officials in
the respective jurisdictions delivered to you by the Company,
the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in the states of
Texas and Florida;
(iii) all the issued and outstanding shares of capital
stock of the Company have been duly authorized and are validly
issued and outstanding and are fully paid, non-assessable;
(iv) the Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor as
provided by this Agreement, will be validly issued, fully paid
and non-assessable;
(v) except as described in the Prospectus, there are no
preemptive or other similar rights to subscribe for or to
purchase shares of common stock in the Company's certificate
of incorporation or by-laws or in any agreement or other
outstanding instrument known to such counsel to which the
Company is a party or under the General Corporation Law of the
State of Delaware;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
19
<PAGE>
(vii) the authorized capital stock of the Company conforms
as to legal matters in all material respects to the
description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(viii) the Commission has advised such counsel that the
Registration Statement has become effective under the Act, no
stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such
counsel's knowledge after due inquiry, pending before or are
overtly threatened by the Commission;
(ix) the statements under the captions "Risk Factors -
Changing government regulations and legal uncertainties may
impair our future growth and harm our business", "Business -
Government Regulations", "Certain Transactions" and
"Description of Capital Stock" in the Prospectus, insofar as
such statements constitute a summary of the United States
federal or New York or Delaware statutes, rules and
regulations, or portions thereof, are accurate in all material
respects. The statements in the Prospectus under the heading
"Risk Factors - 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,"
to the extent that they constitute summaries of United States
federal law or regulation or legal conclusions, have been
reviewed by us and fairly summarize the matters described
under that heading in all material respects.
(x) the issuance and sale of the Shares by the Company,
the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions
contemplated thereby will not (i) result in a violation of the
Company's certificate of incorporation, (ii) breach or result
in a default under any agreement, indenture or instrument
listed as an exhibit to the Registration Statement or
otherwise referred to in the Registration Statement to which
the Company is a party or is bound or to which any of the
properties or assets of the Company is subject or (iii)
violate Applicable Law or any judgment, order or decree of any
court or arbitrator known to us, except where the breach or
violation would not have a Material Adverse Effect. For
purposes of this opinion, the term "APPLICABLE LAW" means the
General Corporation Law of the State of Delaware, the laws,
rules and
20
<PAGE>
regulations of the State of New York and those laws, rules
and regulations of the United States of America, in each
case which in such counsel's experience are normally
applicable to the transactions of the type contemplated by
the Underwriting Agreement;
(xi) no consent, approval, authorization or order of, or
filing, registration or qualification with, any Governmental
Authority, which as not been obtained, taken or made (other
than as required by any state securities laws, as to which
we express no opinion) is required under Applicable Law for
the issuance or sale of the Shares or the performance by the
company of it obligations under this Agreement. For purposes
of this opinion, the term "GOVERNMENTAL AUTHORITY" means any
executive, legislative, judicial, administrative or
regulatory body of the State of Delaware or the United
States of America.;
(xii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or overtly
threatened against the Company or to which any of its property
is subject which if determined adversely to the Company would
have a Material Adverse Effect or would materially impair the
Company's ability to perform its obligations under this
Agreement, or of any contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed as required;
(xiii) the Company is not, and after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus will not be,
required to register as an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended;
(xiv) except as described in the Registration Statement, to
the best of such counsel's knowledge after due inquiry, there
are no contracts, agreements or understandings between the
Company and any person granting such person the right to
require the Company to file a registration statement under the
Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement; and
21
<PAGE>
(xv) (A) the Registration Statement and the Prospectus and
any supplement or amendment thereto (except for the financial
statements, financial statement schedules and other financial
and statistical data included therein or omitted therefrom as
to which no opinion need be expressed) appear on its face to
be appropriately responsive in all material respects to the
requirements of the Securities Act and the rules and
regulations of the Commission under the Securities Act; (B)
such counsel has no reason to believe that at the time the
Registration Statement became effective or on the date of this
Agreement, the Registration Statement and the prospectus
included therein (except for the financial statements,
financial statement schedules and other financial and
statistical data as to which such counsel need not express any
belief) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading;
and (C) such counsel has no reason to believe that the
Prospectus, as amended or supplemented, if applicable (except
for the financial statements, financial statement schedules
and other financial and statistical data, as aforesaid)
contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
The opinion of Paul, Weiss, Rifkind, Wharton & Garrison described in
Section 8(e) above shall be rendered to you at the request of the Company and
shall so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Davis Polk & Wardwell, counsel for the Underwriters,
as to the matters referred to in Sections 8(e)(iv), 8(e)(vi), 8(e)(ix)
(but only with respect to the statements under the caption "Description
of Capital Stock" and "Underwriting") and 8(e)(xv).
In giving such opinions with respect to the matters covered by
Section 8(e)(xv), Paul, Weiss, Rifkind, Wharton & Garrison and Davis
Polk & Wardwell may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check
or verification except as specified.
22
<PAGE>
(g) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as
the case may be, in form and substance satisfactory to you, from Ernst
& Young LLP and Grant Thornton LLP, independent certified public
accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect
on the Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply in any material respect with any of the agreements
herein contained and required to be performed or complied with by the
Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of such Additional
Shares and other matters related to the issuance of such Additional Shares.
SECTION 9. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
23
<PAGE>
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; PROVIDED that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more
24
<PAGE>
than one-tenth of the aggregate number of Additional Shares to be purchased on
such date, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase such Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase on such date in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
SECTION 10. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Hotel
Reservations Network, Inc., 8140 Walnut Lane, Suite 203, Dallas, Texas 75231 and
to USA Networks, Inc. 152 West 57th Street, 42nd floor, New York, NY 10019 and
(ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette
Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention:
Syndicate Department, or in any case to such other address as the person to be
notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the reasonable fees and
disbursements of counsel) incurred by them in connection with the proposed
offering. Notwithstanding any termination of this Agreement, the Company shall
be liable for all expenses which it has agreed to pay pursuant to Section 5(i)
hereof. agrees to reimburse the several Underwriters, their directors and
officers and any persons controlling any of the Underwriters for any and all
fees and expenses (including, without limitation, the reasonable fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the
25
<PAGE>
Underwriters' directors and officers, any controlling persons referred to
herein, the Company's directors and the Company's officers who sign the
Registration Statement and their respective successors and assigns, all as and
to the extent provided in this Agreement, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "SUCCESSORS AND
ASSIGNS" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
The invalidity or unenforceability of any section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, paragraph or provision hereof.
26
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
HOTEL RESERVATIONS
NETWORK, INC.
By:_____________________________
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALLEN & COMPANY
BEAR, STEARNS & CO., INC.
THOMAS WEISEL PARTNERS LLC
DLJDIRECT INC..
Acting severally on behalf of themselves and the
several Underwriters named in Schedule I
hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:_____________________________
Title:
27
<PAGE>
SCHEDULE I
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
------------ ---------------
Donaldson, Lufkin & Jenrette Securities
Corporation
Allen & Company Incorporated
Bear, Stearns & Co., Inc.
Thomas Weisel Partners LLC
DLJDIRECT Inc.
---------------------
Total
<PAGE>
ANNEX I
USA Networks, Inc.
Travelocity
Robert Diener
David Litman
Barry Baker
Victor A. Kaufman
Dara Khosrowshahi
Michael Sileck
Jack Rubin
[others]
<PAGE>
Exhibit 3.2
RESTATED
CERTIFICATE OF INCORPORATION
of
HOTEL RESERVATIONS NETWORK, INC.
Hotel Reservations Network, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify as follows:
FIRST: The Corporation was originally incorporated under the
name of "HRN, Inc." and its original Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware (the "Secretary of State") on
March 25, 1999. A Certificate of Amendment to the Certificate of Incorporation
changing the name of the Corporation from HRN, Inc. to Hotel Reservations
Network, Inc. was filed with the Secretary of State on November 8, 1999.
SECOND: This Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of sections 242 and 245 of the
General Corporation Law of the State of Delaware by the Board of Directors of
the Corporation (the "Board of Directors").
THIRD: This Restated Certificate of Incorporation was approved
by written consent of the sole stockholder pursuant to section 228 of the
General Corporation Law of the State of Delaware.
FOURTH: Upon the filing (the "Effective Time") of this
Restated Certificate of Incorporation, the one hundred (100) shares of the
Corporation's common stock, par value $0.01 per share (the "Old Common Stock"),
issued and
<PAGE>
outstanding immediately prior to the Effective Time shall be reclassified into
37,299,100 shares of validly issued, fully paid and non-assessable Class B
Common Stock authorized by Article FOUR of this Restated Certificate of
Incorporation. The certificate that theretofore represented the one hundred
(100) shares of issued and outstanding Old Common Stock shall thereafter
represent and be exchanged for a certificate representing the number of shares
of Class B Common Stock indicated above.
FIFTH: This Restated Certificate of Incorporation is amended
and restated in its entirety to read as follows:
I.
NAME
The name of the corporation is Hotel Reservations Network, Inc.
II.
ADDRESS; REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office is 9 East
Loockerman Street, Suite 214, City of Dover, County of Kent, State of Delaware.
The name of its registered agent at such address is National Corporate Research,
Ltd.
2
<PAGE>
III.
PURPOSES
Subject to the provisions of Article V hereof, the purpose of
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
IV.
CAPITAL STOCK
The Corporation is authorized to issue three classes of
stock to be designated "Class A Common Stock," "Class B Common Stock" (the
Class A Common Stock and Class B Common Stock are sometimes referred to
collectively hereinafter as the "Common Stock"), and "Preferred Stock," all
of which shall have a par value of $0.01 per share. The total number of
shares that the Corporation is authorized to issue is: seven hundred and
seventy million (770,70000,000) shares, of which six hundred million
(600,000,000) shall be shares of Class A Common Stock, one hundred and fifty
million (150,000,000) shall be shares of Class B Common Stock, and twenty
million (20,000,000) shall be shares of Preferred Stock.
A. COMMON STOCK.
The rights, preferences, restrictions and other matters
relating to the Common Stock are as follows:
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1. DIVIDENDS. The holders of the Class A Common Stock and the
Class B Common Stock shall be entitled to receive, on a share-for-share basis,
such dividends if, as and when declared from time to time by the Board of
Directors of the Corporation.
2. LIQUIDATION. In the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets or winding-up of the
Corporation, the holders of the Class A Common Stock and the Class B Common
Stock shall be entitled to receive, on a share-for-share basis, all of the
assets of the Corporation of whatever kind available for distribution to
stockholders.
3. VOTING RIGHTS. Except as otherwise provided herein or
required by applicable law, (i) each holder of Class A Common Stock shall be
entitled to one (1) vote for each share of Class A Common Stock held as of
the applicable record date on any matter that is submitted to a vote or for
the consent of the stockholders of the Corporation, and (ii) each holder of
Class B Common Stock shall be entitled to fifteen (15) votes for each share
of Class B Common Stock held as of the applicable record date on any matter
that is submitted to a vote or for the consent of the stockholders of the
Corporation. Holders of Common Stock shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation.
Except as otherwise required by applicable law, the Class A Common Stock and
the Class B Common Stock shall vote together as a single class on all matters
submitted to a vote or for the consent
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of the stockholders of the Corporation. Holders of Common Stock shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders.
4. CONVERSION. (a) Prior to a Tax-Free Spin-Off (as defined
below), each share of Class B Common Stock shall be convertible into one fully
paid and non-assessable share of Class A Common Stock at the option of the
holder thereof at any time.
(b) Prior to a Tax-Free Spin-Off, each share of Class B
Common Stock shall automatically be converted into one fully paid and
non-assessable share of Class A Common Stock upon any sale, conveyance,
foreclosure upon, assignment or other transfer (a "Transfer") of such share,
whether or not for value, by the holder thereof, other than any such Transfer by
such holder to USA Networks, Inc., a Delaware corporation ("USAi"), or any of
its Affiliates (as defined below).
(c) To the extent that USAi beneficially owns 80% or
more of the economic value of the Corporation immediately prior to the Tax
Free Spin-Off, each share of Class B Common Stock shall automatically convert
into one fully paid and nonassessable share of Class A Common Stock
immediately prior to the Tax-Free Spin-Off unless, prior to such Tax-Free
Spin-Off, USAi (or its Affiliates) delivers to the Corporation an opinion of
counsel reasonably satisfactory to the Corporation to the effect that such
conversion is likely to prevent or materially
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delay obtaining a favorable ruling from the Internal Revenue Service that the
Tax- Free Spin-Off would qualify as a tax-free transaction under the Code (as
defined below) or will otherwise create a significant risk of material
adverse tax consequences to USAi, its affiliates or their respective
stockholders. Following the Tax- Free Spin-Off, outstanding shares of Class B
Common Stock shall no longer be convertible into shares of Class A Common
Stock; PROVIDED, HOWEVER, such outstanding shares of Class B Common Stock
shall be automatically converted into shares of Class A Common Stock on the
fifth anniversary of the Tax-Free Spin-Off, unless before such Tax-Free
Spin-Off, USAi (or its Affiliates) delivers to the Corporation an opinion of
counsel reasonably satisfactory to the Corporation to the effect that the
conversion could adversely affect the ability of USAi or its affiliates to
obtain a favorable ruling from the Internal Revenue Service that the transfer
would be a Tax-Free Spin-Off.
(d) The one-to-one conversion ratio for the conversion of
the Class B Common Stock into Class A Common Stock in accordance with Sections
4(a), 4(b) and 4(c) above shall in all events be equitably preserved in the
event of any merger, consolidation or other reorganization of the Corporation.
(e) The Corporation shall at all times reserve and keep
available, and free from any preemptive rights, out of its authorized but
unissued shares of Class A Common Stock, solely for the purpose of effecting
conversions of shares of
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the Class B Common Stock, such number of its shares of Class A Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Class B Common Stock.
(f) Any conversion of shares of Class B Common Stock
into shares of Class A Common Stock shall be deemed to have been effected at
the close of business on the date when such shares the number of authorized
are delivered to the Corporation or the transfer agent of the shares to be
converted.
(g) If any shares of Class B Common Stock shall be
converted pursuant to this Section 4, the shares so converted shall be canceled
and shall not be subject to reissue by the Corporation. From time to time, this
Restated Certificate of Incorporation shall be appropriately revised to reflect
the corresponding reduction in the Corporation's authorized capital stock. The
secretary of the Corporation shall be, and hereby is, authorized and directed to
file with the Secretary of State of the State of Delaware one or more
certificates to record any such decrease in designated shares of Class B Common
Stock.
(h) As used in this Restated Certificate of
Incorporation, the following terms shall have the following meaning:
(1) "Tax-Free Spin-Off" shall mean any transfer effected
in connection with the distribution of Class A Common Stock and/or Class B
Common Stock to security holders of USAi (including any distribution in exchange
for shares of capital stock or securities of USAi) intended to qualify as a
tax-free distribution
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under Section 355 of the Internal Revenue Code of 1986, as amended from time to
time (the "Code").
(2) "AFFILIATE" shall mean any Person controlling,
controlled by or under common control with such Person. For the purposes of
this definition of "Affiliate," "control," when used with respect to any
specified Person, shall mean the power to direct or cause the direction of
the management and policies of such Person, directly or indirectly, whether
through ownership of voting securities or partnership or other ownership
interests, by contract or otherwise; and the terms "controlling" and
"controlled" shall have correlative meanings.
(3) "Person" shall mean any individual corporation,
partnership, firm, group (as such term is used in Section 13(d)(3) of the
Exchange Act of 1934, as amended), joint venture, association, trust, limited
liability company, unincorporated organization, estate, trust or other entity.
5. STOCK DIVIDENDS OR STOCK SPLITS OR COMBINATIONS. In no
event shall any stock dividends or stock splits or combinations of stock be
declared or made in Class A Common Stock or Class B Common Stock unless all
shares of Class A Common Stock and Class B Common Stock then outstanding are
treated equally and identically.
B. PREFERRED STOCK.
The 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 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. The 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. In case any shares of Preferred Stock shall be redeemed or
converted pursuant to the terms thereof, the shares so converted or redeemed
shall be canceled and shall not be issuable by the Corporation. From time to
time this Restated Certificate of Incorporation shall be appropriately revised
to reflect the corresponding reduction in the Corporation's authorized capital
stock.
V.
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CONDUCT OF CERTAIN AFFAIRS OF THE CORPORATION
A. DEFINITIONS. As used in this Article V, the following terms
shall have the following meanings:
1. "CORPORATE OPPORTUNITY" shall mean an investment or
business opportunity or prospective economic advantage in which the Corporation
could, but for the provisions of this Article V, have an interest or expectancy.
2. "PARENT" shall mean USAi and any of its Affiliates.
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3. "SUBSIDIARY" shall mean any corporation, partnership, joint
venture or other legal entity of which such Person (either directly or through
or together with any other Subsidiary of such Person), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holders of
which are generally entitled to vote for the election of the board of directors
or similar governing body of such corporation, partnership, joint venture or
other legal entity.
B. COMPETING ACTIVITIES. Except as otherwise expressly provided
in an agreement between the Corporation and any stockholder or among the
Corporation and any two or more stockholders, (i) the stockholders of the
Corporation, including, without limitation, Parent and its officers directors,
agents, stockholders, members, partners and Affiliates, may engage or invest in,
independently or with others, any business activity of any type or description,
including without limitation those that might be the same as or similar to the
Corporation's business or the business of any Subsidiary of the Corporation;
(ii) neither the Corporation, any Subsidiary of the Corporation nor any
stockholder of the Corporation shall have any right in or to such business
activities or ventures or to receive or share in any income or proceeds derived
therefrom; and (iii) to the extent required by applicable law in order to
effectuate the purpose of this provision, the Corporation shall have no interest
or expectancy, and
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specifically renounces any interest or expectancy, in any such business
activities or ventures.
C. CORPORATE OPPORTUNITIES.
1. If Parent (or, as set forth below, any of its officers,
directors, agents, stockholders, members, partners or Affiliates) acquires
knowledge of a potential transaction or matter which may be a Corporate
Opportunity or otherwise is then exploiting any Corporate Opportunity, the
Corporation shall have no interest in such Corporate Opportunity and no
expectancy that such Corporate Opportunity be offered to the Corporation, any
such interest or expectancy being hereby renounced, so that, as a result of such
renunciation, and for the avoidance of doubt, such Person (i) shall have no duty
to communicate or present such Corporate Opportunity to the Corporation, (ii)
shall have the right to hold any such Corporate Opportunity for its (and/or its
officers', directors', agents', stockholders', members', partners' or
Affiliates') own account or to recommend, sell, assign or transfer such
Corporate Opportunity to Persons other than the Corporation or any Subsidiary of
the Corporation, and (iii) shall not breach any fiduciary duty to the
Corporation, in such Person's capacity as a stockholder of the Corporation or
otherwise, by reason of the fact that such Person pursues or acquires such
Corporate Opportunity for itself, directs, sells, assigns or transfers such
Corporate Opportunity to another Person, or does not communicate information
regarding such Corporate Opportunity to the Corporation.
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2. Notwithstanding the provisions of clause (c)(1) of this
Article (V), the Corporation does not renounce any interest or expectancy it may
have in any Corporate Opportunity that is offered to any person (i) who is an
officer of the Corporation and who is also a director, but not an officer or
employee, of Parent if such opportunity is expressly offered to such person in
his or her capacity as an officer of the Corporation.
3. For purposes of this Article V only, (i) a director of the
Corporation who is Chairman of the Board of Directors of the Corporation or of a
committee thereof shall not be deemed to be an officer of the Corporation by
reason of holding such position (without regard to whether such position is
deemed an office of the corporation under the Bylaws of the Corporation), unless
such person is a full-time employee of the Corporation; and (ii) the term
"Corporation" shall mean the Corporation and all corporations, partnerships,
joint ventures, associations and other entities in which the Corporation
beneficially owns (directly or indirectly) 50% or more of the outstanding voting
stock, voting power, partnership interests or similar voting interests.
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4. Anything in this Restated Certificate of Incorporation to
the contrary notwithstanding, (i) clause C of this Article V shall expire on the
date that Parent ceases to beneficially own Common Stock representing at least
20% of the total voting power of all classes of outstanding capital stock of the
Corporation entitled to vote in the election of directors and no person who is a
director or officer of the Corporation is also a director or officer of Parent;
and (ii) in addition to any vote of the stockholders required by law, until the
time that Parent ceases to beneficially own Common Stock representing at least
20% of the total voting power of all classes of outstanding capital stock of the
Corporation 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 such classes of
outstanding capital stock of the Corporation shall be required to alter, amend
or repeal in a manner adverse to the interests of Parent or adopt an provision
adverse to the interests of Parent and inconsistent with, any provision of this
Article V. Neither the alteration, amendment or repeal of this Article V nor the
adoption of any provision of this Restated Certificate of Incorporation
inconsistent with this Article V shall eliminate or reduce the effect of this
Article V in respect of any matter occurring, or any cause of action, suit or
claim that, but for this Article V, would accrue or arise prior to such
alteration, amendment, repeal or adoption.
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D. NOTICE TO HOLDERS. Any person purchasing or otherwise
acquiring any interest in shares of the capital stock of the Corporation shall
be deemed to have notice of and to have consented to the provisions of this
Article V.
VI.
ELECTION OF DIRECTORS
Election of directors need not be by written ballot except and
to the extent provided in the Bylaws of the Corporation.
VII.
BYLAWS
Except as set forth in the Bylaws of the Corporation, the
Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws
of the Corporation, and the stockholders may adopt additional Bylaws and may
alter or repeal any Bylaw whether adopted by them or otherwise.
VIII.
INDEMNIFICATION
Each person who is or was or had agreed to become a director
or officer of the Corporation, or each such person who is or was serving or who
had agreed to serve at the request of the Board of Directors or an officer of
the Corporation as an employee or agent of the Corporation or as a director,
officer, employee or agent of
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another corporation, partnership, joint venture, trust or other enterprise
(including the heirs, executors, administrators or estate of such person), shall
be indemnified by the Corporation, in accordance with the Bylaws of the
Corporation, to the full extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) or any other applicable laws
as presently or hereinafter in effect. Without limiting the generality or the
effect of the foregoing, the Corporation may enter into one or more agreements
with any person that provide for indemnification greater or different than that
provided in this Article VIII. Any amendment or repeal of this Article VIII
shall not adversely affect any right or protection existing hereunder
immediately prior to such amendment or repeal.
IX.
LIMITATION OF LIABILITY
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of
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the General Corporation Law of the State of Delaware or (iv) for any transaction
from which the director derived any improper personal benefit. Any amendment or
repeal of this Article IX shall not adversely affect any right or protection of
a director of the Corporation existing immediately prior to such amendment or
repeal. The liability of a director shall be further eliminated or limited to
the full extent permitted by Delaware law, as it may hereafter be amended.
X.
AMENDMENT
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by the Delaware General Corporation Law, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
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IN WITNESS WHEREOF, Hotel Reservations Network, Inc. has
caused this Restated Certificate of Incorporation to be signed this day of
January, 2000.
HOTEL RESERVATIONS NETWORK, INC.
By:
-----------------------------------
Name: Shauna Martin
Title: Secretary
ATTESTED TO:
By:
---------------------------
Name:
Title:
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Exhibit 3.3
RESTATED BYLAWS
OF HOTEL RESERVATIONS NETWORK, INC.
ARTICLE I
DEFINITIONS
Section 1. As used in these Bylaws, unless the context otherwise
requires, the term:
1. "Assistant Secretary" means an Assistant Secretary of the
Corporation.
2. "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
3. "Board of Directors" means the Board of Directors of the
Corporation.
4. "Bylaws" means the bylaws of the Corporation, as amended or
restated from time to time.
5. "Certificate of Incorporation" means the certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
6. "Chairman" means the Chairman of the Board of Directors.
7. "Chief Executive Officer" means the chief executive officer of the
Corporation.
8. "Common Stock" means all shares of common stock collectively,
regardless of class or series.
9. "Corporation" means Hotel Reservations Network, Inc.
10. "Directors" means directors of the Corporation.
11. "General Corporation Law" means the General Corporation
Law of the State of Delaware, as amended from time to time.
<PAGE>
12. "office of the Corporation" means the executive office of
the Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
13. "President" means the President of the Corporation.
14. "Secretary" means the Secretary of the Corporation.
15. "Stockholders" means stockholders of the Corporation.
16. "Treasurer" means the Treasurer of the Corporation.
17. "Vice President" means a Vice President of the Corporation.
ARTICLE II
OFFICES
Section 1. PRINCIPAL OFFICE. The registered office of the
Corporation shall be located at 9 East Loockerman Street, Suite 214, City of
Dover, County of Kent, State of Delaware.
Section 2. OTHER OFFICES. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE III
STOCKHOLDERS
Section 1. PLACE OF MEETING. Meetings of stockholders may be held
at such place, either within or without the State of Delaware, as may be
designated by the Board of Directors.
If no designation is made, the place of the meeting shall be the
principal office of the Corporation.
Section 2. ANNUAL MEETING. The annual meeting of the stockholders
shall be held at such date and time as may be fixed by resolution of the
Board of Directors.
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Section 3. SPECIAL MEETINGS. Special meetings of the stockholders
may be called by the Chairman or a majority of the Board of Directors.
Section 4. NOTICE. Written notice stating the date, time and place
of the meeting, and in case of a special meeting, the purpose or purposes
thereof, shall be given to each stockholder entitled to vote thereat not less
than ten (10) nor more than sixty (60) days prior thereto, either personally
or by mail or facsimile, addressed to each stockholder at his address as it
appears on the records of the Corporation.
If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail so addressed, with postage thereon prepaid. If notice
be by facsimile or personally, such notice shall be deemed to be delivered when
confirmation of receipt is received by the sender. Such further notice shall be
given as may be required by law. Meetings may be held without notice if all
stockholders entitled to vote are present, or if notice is waived by those not
present. Any previously scheduled meeting of the stockholders may be postponed,
and (unless the Certificate of Incorporation otherwise provides) any special
meeting of the stockholders may be canceled, by resolution of the Board of
Directors upon public notice given prior to the date previously scheduled for
such meeting of stockholders.
Section 5. ADJOURNED MEETINGS. The Chairman or a majority of the
voting power of the shares so represented may adjourn the meeting from time
to time, whether or not there is a quorum. When a meeting is adjourned to
another time or place, except as required by law, notice of the adjourned
meeting need not be given if the time and place thereof are announced at the
meeting at which the adjournment is taken, if the adjournment is for not more
than thirty (30) days, and if no new record date is fixed for the adjourned
meeting. At the adjourned meeting, the Corporation may transact any business
that might have been transacted at the original meeting.
Section 6. QUORUM. The holders of a majority of the voting power
of the Corporation entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for
the transaction of business; provided, however, if the Certificate of
Incorporation or the General Corporation Law provides that any matter shall
be decided by a vote of a certain class or classes of stock, then the holders
of a majority of the voting power entitled to vote thereon, present in person
or represented by proxy shall constitute a quorum for the transaction of
business on such matter. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have the power
to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented.
If at such adjourned meeting, a quorum shall be present or represented, any
business may be transacted that might have been transacted at the meeting as
originally notified. When a quorum is present at any
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meeting, the affirmative vote of a majority of the voting power of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the matter shall be the act of the stockholders, unless the question is one upon
which by express provision of the General Corporation Law or of the Certificate
of Incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of such matter.
Section 7. VOTING. Each stockholder shall at every meeting of the
stockholders be entitled to vote in person or by proxy each share of the
class of capital stock having voting power held by such stockholder.
Section 8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE.
Election of Directors at all meetings of the stockholders at which Directors
are to be elected shall be by ballot, and, subject to the rights of the
holders of shares of Common Stock to elect Directors under specified
circumstances, a plurality of the votes cast thereat shall elect Directors.
In connection with any election of Directors, nominations for such office
shall be made in accordance with the Certificate of Incorporation.
Section 9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
The Board of Directors by resolution shall appoint one or more inspectors,
which inspector or inspectors may include individuals who serve the
Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives, to act at the meetings of stockholders
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate has been appointed to act or is able to act at a
meeting of stockholders, the Chairman shall appoint one or more inspectors to
act at the meeting. Each inspector, before discharging the duties of an
inspector, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of the
inspector's ability. The inspectors shall have the duties prescribed by law.
The Chairman shall fix and announce at the meeting the date and time of
the opening and the closing of the polls for each matter upon which the
stockholders will vote at a meeting.
Section 10. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, is signed by the
holders of outstanding stock having not less than the minimum voting power
that would be necessary to authorize or take such action at a meeting at
which all of the shares entitled to vote thereon were present and voted,
provided that prompt notice of such action shall be given to those
stockholders who have not so consented in writing to such action without a
meeting.
<PAGE>
ARTICLE IV
DIRECTORS
Section 1. NUMBER AND TENURE. The business and affairs of the
Corporation shall be managed by the Board of Directors. The Board of
Directors shall consist of up to twelve (12) members. The number of Directors
may be changed by an amendment to these Bylaws, duly adopted by the Board of
Directors or by the stockholders, or by a duly adopted amendment to the
Certificate of Incorporation. Each Director shall serve for a term of one
year from the date of his election and until his successor is elected.
Directors need not be stockholders.
Section 2. RESIGNATION OR REMOVAL. Any Director may at any time
resign by delivering to the Board of Directors his resignation in writing, to
take effect no later than ten days thereafter. Any Director or the entire
Board of Directors may at any time be removed effective immediately, with or
without cause, by the vote, either in person or represented by proxy, of a
majority of the voting power of shares of stock issued and outstanding and
entitled to vote at a special meeting held for such purpose or by the written
consent of a majority of the voting power of shares of stock issued and
outstanding.
Section 3. VACANCIES. Vacancies and newly created directorships
occurring on the Board of Directors shall be filled in accordance with the
Certificate of Incorporation and the General Corporation Law. The Directors
so chosen shall hold office until the next annual election and until their
respective successors are duly elected.
Section 4. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such dates, times and places as may be designated
by the Chairman, and shall be held at least quarterly.
Section 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the Chairman or any two
Directors. The person or persons calling a special meeting of the Board of
Directors may fix a place and time within or without the State of Delaware
for holding such meeting.
Section 6. NOTICE. Notice of any regular meeting or a special
meeting shall be given to each Director, either orally, by facsimile or by
hand delivery, addressed to each Director at his address as it appears on the
records of the Corporation. Notice of any meeting of the Board of Directors
shall set out a detailed agenda of the matters to be discussed, but any
subject properly brought before the meeting may be addressed.
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If notice be by facsimile, such notice shall be deemed to be
adequately delivered when the notice is transmitted at least 72 hours before
such meeting. If by telephone or by hand delivery, the notice shall be given
at least 72 hours prior to the time set for the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of
the Board of Directors need be specified in the notice of such meeting. A
meeting may be held at any time without notice if all the Directors are
present or if those not present waive notice of the meeting in accordance
with Article X of these Bylaws.
Section 7. QUORUM. At all meetings of the Board of Directors, a
majority of the total number of Directors shall constitute a quorum for the
transaction of business. Unless otherwise provided in the Certificate of
Incorporation or these Bylaws, the act of a majority of the Directors present
at any meeting at which there is a quorum shall be an act of the Board of
Directors. If a quorum is not present at any meeting of the Board of
Directors, the Directors present may adjourn the meeting from time to time,
without notice, until a quorum shall be present. The Directors present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough Directors to leave less than a
quorum. A Director present at a meeting shall be counted in determining the
presence of a quorum, regardless of whether a contract or transaction between
the Corporation and any other Corporation, partnership, association, or other
reorganization in which such Director is a director or officer or has a
financial interest, is authorized or considered at such meeting.
Section 8. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board
of Directors or such committee, as the case may be, consent thereto in
writing and such written consent is filed with the minutes of proceedings of
the Board of Directors or committee.
Section 9. ACTION BY CONFERENCE TELEPHONE. Members of the Board of
Directors or any committee thereof may participate in a meeting of such Board
of Directors or committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 10. CHAIRMAN OF THE BOARD. The Chairman shall be chosen
from among the Directors. The Chairman shall preside at all meetings of the
stockholders and of the Board of Directors, except that, in his absence, he
may designate another member of the Board of Directors to so preside. Unless
otherwise provided by resolution of the Board of Directors, the Chairman
shall not be an officer of the Corporation. The Chairman shall perform all
duties incidental to his office which may be required by law and all such
other duties properly required of him by the Board of Directors. He shall
<PAGE>
make reports to the Board of Directors and the stockholders and, together with
the Chief Executive Officer of the Corporation, shall see that all orders and
resolutions of the Board of Directors and any committee thereof are carried into
effect.
Section 11. COMMITTEES. The Board of Directors, by resolution
adopted by a majority of the whole Board of Directors, may designate one (1)
or more committees, each committee to consist of two (2) or more Directors.
The Board of Directors may designate one (1) or more Directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee. In the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in such resolution, shall have and
may exercise all of the powers of the Board of Directors in the management of
the business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers that may require it, except that no
committee shall have the power or authority to amend the Certificate of
Incorporation, to adopt an agreement of merger or consolidation, to recommend
to the stockholders the sale, lease or exchange of all or substantially all
of the Corporation's property and assets, to recommend to the stockholders a
dissolution, to amend the Bylaws, to declare a dividend or to authorize the
issuance of stock.
Section 12. COMPENSATION OF DIRECTORS. The Directors may be paid
their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as Director. No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of committees may be allowed like
compensation for attending committee meetings.
ARTICLE V
OFFICERS
Section 1. NUMBER AND SALARIES. The officers of the Corporation
shall consist of a Chief Executive Officer (the "CEO"), a President, a
Secretary, a Treasurer, and such other officers and assistant officers and
agents as may be deemed necessary by the Board of Directors. Any two (2) or
more offices may be held by the same person.
Section 2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected by the Board of Directors at the first meeting
of the Board of Directors following the stockholders' annual meeting, and
shall serve for a term of one (1) year
<PAGE>
and until a successor is elected by the Board of Directors. Unless otherwise
provided in the Certificate of Incorporation or these Bylaws, any officer
appointed by the Board of Directors may be removed, with or without cause, at
any time by the CEO or by the Board of Directors. Each officer shall hold his
office until his successor is appointed or until his earlier resignation,
removal from office, or death. All officers elected by the Board of Directors
shall each have such powers and duties as generally pertain to their respective
offices, subject to the specific provisions of this Article V.
Such officers shall also have such powers and duties as from time to
time may be conferred by the Board of Directors or by any committee thereof. The
Board of Directors or any committee thereof may from time to time elect, or the
CEO may appoint, such other officers (including a President, one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant
Controllers) and such agents, as may be necessary or desirable for the conduct
of the business of the Corporation. Such other officers and agents shall have
such duties and shall hold their offices for such terms as shall be provided in
these Bylaws or as may be prescribed by the Board of Directors or such committee
or by the CEO, as the case may be.
Section 3. CHIEF EXECUTIVE OFFICER. The CEO shall be responsible
for the general management of the affairs of the Corporation and shall
perform all duties incidental to his office. The CEO shall be empowered to
sign all certificates, contracts and other instruments of the Corporation,
and to do all acts that are authorized by the Board of Directors, and shall,
in general, have such other duties and responsibilities as are assigned
consistent with the authority of a chief executive officer of a corporation.
Section 4. PRESIDENT. The Board of Directors or the CEO may elect
a President to have such duties and responsibilities as from time to time may
be assigned to him by the CEO or the Board of Directors. The President shall
be empowered to sign all certificates, contracts and other instruments of the
Corporation, and to do all acts which are authorized by the CEO or the Board
of Directors, and shall, in general, have such other duties and
responsibilities as are assigned consistent with the authority of a president
of a corporation.
Section 5. VICE PRESIDENTS. The Board of Directors or the CEO may
from time to time name one or more Vice Presidents that may include the
designation of Executive Vice Presidents and Senior Vice Presidents all of
whom shall perform such duties as from time to time may be assigned to him by
the CEO or the Board of Directors.
Section 6. SECRETARY. The Secretary shall keep the minutes of the
proceedings of the stockholders and the Board of Directors; the Secretary
shall give, or cause to be given, all notices in accordance with the
provisions of these Bylaws or as required by law, shall be custodian of the
corporate records and of the seal of the Corporation, and,
<PAGE>
in general, shall perform such other duties as may from time to time be
assigned by the CEO or the Board of Directors.
Section 7. TREASURER. The Treasurer or, if one is designated by
the Board of Directors, the Chief Financial Officer of the Corporation, shall
act as the chief financial officer of the Corporation, shall have the custody
of the corporate funds and securities, shall keep, or cause to be kept,
correct and complete books and records of account, including full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation, shall deposit all monies and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors, and in general shall perform all duties
incident to the office of Treasurer and such other duties as from time to
time may be assigned to him by the CEO or the Board of Directors.
Section 8. ASSISTANT SECRETARIES. The Assistant Secretaries, if
any, in general shall perform such duties as from time to time may be
assigned to them by the Secretary or by the Board of Directors, and shall in
the absence or incapacity of the Secretary, perform his functions.
Section 9. ASSISTANT TREASURERS. The Assistant Treasurers, if any,
in general shall perform such duties as from time to time may be assigned to
them by the Treasurer or by the Board of Directors, and shall in the absence
or incapacity of the Treasurer perform his functions.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. SIGNATURE BY OFFICERS. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by or in the name
of the Corporation by the CEO, the Chairman or President, if any, or any Vice
President, and the Secretary (or an Assistant Secretary), certifying the
number of shares owned by the stockholder in the Corporation.
Section 2. FACSIMILE SIGNATURES. The signature of the CEO,
Chairman, President, Vice President, Treasurer or Assistant Treasurer,
Secretary or Assistant Secretary may be a facsimile. In case any officer or
officers who have signed, or whose facsimile signature or signatures have
been used on any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation
or otherwise, before such certificate or certificates have been delivered by
the Corporation, such certificate or certificates may nevertheless be adopted
by the Corporation and be issued and delivered as though the person or
<PAGE>
persons who signed such certificate or certificates or whose facsimile signature
or signatures have been used thereon had not ceased to be such officer or
officers of the Corporation.
Section 3. LOST CERTIFICATES. The Board of Directors may direct a
new certificate(s) to be issued by the Corporation to replace any
certificate(s) alleged to have been lost or destroyed, upon its receipt of an
affidavit of that fact by the person claiming the certificate(s) of stock to
be lost or destroyed. When authorizing such issue of a new certificate(s),
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost or destroyed
certificate(s), or such owner's legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate(s) alleged to have
been lost or destroyed.
Section 4. TRANSFER OF STOCK. Upon surrender to the Corporation or
its transfer agent of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Board of Directors may close the stock transfer books of the Corporation for
a period of not more than sixty (60) nor less than ten (10) days preceding
the date of any meeting of stockholders, or the date for payment of any
dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect or for
a period of not more than sixty (60) nor less than ten (10) days in
connection with obtaining the consent of stockholders for any purpose. In
lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date of not more than sixty (60) nor less than ten (10) days
preceding the date of any dividend, or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock shall
go into effect, or a date in connection with obtaining such consent, as a
record date for the determination of the stockholders entitled to notice of,
and to vote at, any such meeting, and any adjournment thereof, or entitled to
receive payment of any such dividend, or to any such allotment of rights, or
to exercise the rights in respect of any change, conversion or exchange of
capital stock, or to give such consent. In such case and notwithstanding any
transfer of any stock on the books of the Corporation after any such record
date, such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to such notice of, and to vote at, such meeting and
any adjournment thereof, or to receive payment of such dividend, or to
receive such allotment of rights, or to exercise such rights, or to give such
consent, as the case may be.
<PAGE>
Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends and to vote as such owner. Except
as otherwise provided by law, the Corporation shall not be bound to recognize
any equitable or other claim to or interest in such shares on the part of any
other person whether or not it shall have express or other notice thereof.
ARTICLE VII
CONTRACT, LOANS, CHECKS, AND DEPOSITS
Section 1. CONTRACTS. When the execution of any contract or other
instrument has been authorized by the Board of Directors without
specification of the executing officers, the CEO, the President, any Vice
President, the Treasurer or Assistant Treasurer and the Secretary, or any
Assistant Secretary, may execute the same in the name of and on behalf of the
Corporation and may affix the corporate seal thereto.
Section 2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name
unless authorized by a resolution of the Board of Directors.
Section 3. CHECKS. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 4. ACCOUNTS. Bank accounts of the Corporation shall be
opened, and deposits made thereto, by such officers or other persons as the
Board of Directors may from time to time designate.
ARTICLE VIII
DIVIDENDS
Section 1. DECLARATION OF DIVIDENDS. Subject to the provisions, if
any, of the Certificate of Incorporation, dividends upon the capital stock of
the Corporation may be declared by the Board of Directors at any regular or
special meeting, pursuant to law. Dividends may be paid in cash, in property
or contractual rights, or in shares of the Corporation's capital stock.
Section 2. RESERVES. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends such
sum or sums as the Board
<PAGE>
of Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Board of Directors shall think conducive to the interests of the
Corporation, and the Board of Directors may modify or abolish any such reserve
in the manner in which it was created.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be established by the Board of
Directors.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice is required to be given by law, the Certificate of
Incorporation or these Bylaws, a written waiver thereof, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting.
ARTICLE XI
SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
<PAGE>
ARTICLE XII
AMENDMENTS
Except as expressly provided otherwise by the General Corporation Law,
the Certificate of Incorporation, or other provisions of these Bylaws, these
Bylaws may be altered, amended or repealed and new Bylaws adopted at any regular
or special meeting of the Board of Directors by an affirmative vote of a
majority of all Directors.
ARTICLE XIII
INDEMNIFICATION AND INSURANCE
Section 1. INDEMNIFICATION. The Corporation shall, to the fullest
extent authorized by the General Corporation Law as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide
prior to such amendment), indemnify and hold harmless any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit, investigation or proceeding, whether civil, criminal
or administrative by reason of the fact that he or a person of whom he is the
legal representative is or was a Director or officer of the Corporation, or
is or was a Director or officer of the Corporation serving at the request of
the Corporation as a director, officer or employee of another Corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
(whether the basis of such proceeding is alleged action in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer) against all expenses, liability and loss (including
attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by him in
connection therewith; PROVIDED, HOWEVER, that except as provided in this
Bylaw, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated
by such person only if such proceeding (or part thereof) was authorized by
the Board of Directors. The right to indemnification conferred in this Bylaw
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance
of its final disposition, such advances to be paid by the Corporation within
20 days after the receipt by the Corporation of a statement or statements
from the claimant requesting such advance or advances from time to time;
PROVIDED, HOWEVER, that if the General Corporation Law requires, the payment
of such expenses incurred by a Director or officer in his capacity as a
Director or officer (and not in any other capacity in which service was or is
rendered by such person while a Director or officer,
<PAGE>
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking by or on behalf of such Director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
Director or officer is not entitled to be indemnified under this Bylaw or
otherwise.
To obtain indemnification under this Bylaw, a claimant shall submit to
the Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to the claimant and is
reasonably necessary to determine whether and to what extent the claimant is
entitled to indemnification. Any indemnification (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the Director or officer is proper in the
circumstances because he has met the applicable standard of conduct. Upon
written request by a claimant for indemnification pursuant to the preceding
sentence, a determination, if required by applicable law, with respect to a
claimant's entitlement thereto shall be made as follows: (i) by the Board of
Directors by a majority vote of a quorum consisting of Directors who were not
parties to such action, suit, investigation or proceeding, or (ii) if such a
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
Directors so directs, by independent legal counsel in a written opinion, or
(iii) by the stockholders of the Corporation. If it is so determined that the
claimant is entitled to indemnification, payment to the claimant shall be made
within 10 days after such determination.
If a claim under this Bylaw is not paid in full by the Corporation
within 20 days after a written claim pursuant to this Bylaw has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standard of conduct which makes it permissible under the General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors or
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the General
Corporation Law, nor an actual determination by the Corporation (including its
Board of Directors or stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
<PAGE>
If a determination shall have been made pursuant to this Bylaw that the
claimant is entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding commenced pursuant to this Bylaw.
Furthermore, the Corporation shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Bylaw that the procedures and
presumptions of this Bylaw are not valid, binding and enforceable and shall
stipulate in such proceeding that the Corporation is bound by all the provisions
of this Bylaw.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Bylaw shall not be exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any Bylaw,
agreement, contract, vote of stockholders or disinterested Directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, it being the policy of the
Corporation that indemnification shall be made to the fullest extent permitted
by law. No repeal or modification of this Bylaw shall in any way diminish or
adversely affect the rights of any Director or officer of the Corporation (or
employee or agent of the Corporation to which rights to indemnification have
been granted) hereunder in respect of any occurrence or matter arising prior to
any such repeal or modification.
The indemnification and advancement of expenses shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a Director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and rights to be paid by
the Corporation the expenses incurred in defending any proceeding in advance of
its final disposition, to any employee or agent of the Corporation to the
fullest extent of the provisions of this Bylaw with respect to the
indemnification and advancement of expenses to Directors and officers of the
Corporation.
If any provision or provisions of this Bylaw shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
legality and enforceability of the remaining provisions of this Bylaw
(including, without limitation, each portion of any paragraph of this Bylaw
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself held to be invalid, illegal or unenforceable) shall not in any way
be affected or impaired thereby; and (2) to the fullest extent possible, the
provisions of this Bylaw (including, without limitation, each such portion of
any paragraph of this Bylaw containing any such provision held to be
<PAGE>
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested by the provision held invalid, illegal or unenforceable.
Any notice, request or other communication required or permitted to be
given to the Corporation under this Bylaw shall be in writing and either
delivered in person or sent by facsimile, overnight mail or courier service, or
certified or registered mail, postage prepaid, return receipt requested, to the
Secretary and shall be effective only upon receipt by the Secretary.
Section 2. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or will be a Director, officer,
employee or agent of the Corporation, or is or will be a Director or officer
of the Corporation serving at the request of the Corporation as a director,
officer, employee or agent of another Corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under
the General Corporation Law. To the extent that the Corporation maintains any
policy or policies providing such insurance, each such Director or officer,
and each such agent or employee to which rights to indemnification have been
granted, shall be covered by such policy or policies in accordance with its
or their terms to the maximum extent of the coverage thereunder for any such
Director, officer, employee or agent.
<PAGE>
EXHIBIT 10.1
ASSUMPTION AGREEMENT
ASSUMPTION AGREEMENT, dated as of February 2, 2000, (the
"Assumption Agreement") between Hotel Reservations Network, Inc., a Delaware
corporation (the "HRN"), and USA Networks, Inc., a Delaware corporation
("USAi").
W I T N E S S E T H:
WHEREAS, HRN and USAi are parties, along with other parties
named therein, to an Amended and Restated Asset Purchase Agreement, dated as of
February 2, 2000 (as amended or otherwise modified from time to time, the "Asset
Purchase Agreement");
WHEREAS, pursuant to Sections 7.9.2, 7.9.5 (with respect to
Section 7.9.2 only), 7.10.1 (with respect to the payment for the fiscal quarter
ended December 31, 1999), and 7.10.2 of the Asset Purchase Agreement, HRN is
obligated to make certain contingent payments (collectively the "Obligations")
to TMF Liquidating Trust, a Texas Trust, TMF, Inc., a Texas corporation, and HRN
Marketing Corp., a Florida corporation (collectively, the "Sellers").
WHEREAS, HRN is currently a wholly-owned subsidiary of USAi;
WHEREAS, HRN is considering a possible initial public offering
("IPO") of its Class A common stock; and
WHEREAS, USAi desires to assume the total amount of the
Obligations.
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
USAi and HRN mutually covenant and agree:
ARTICLE I
ASSIGNMENT AND ASSUMPTION
Section 1.1. ASSIGNMENT AND ASSUMPTION. USAi hereby agrees to
assume, pay and perform the total amount of the Obligations of HRN; PROVIDED,
HOWEVER, USAi shall have no liability to HRN whatsoever for any other
obligations, liabilities or payments due under the Asset Purchase Agreement
except as expressly agreed to herein.
<PAGE>
2
Section 1.2. FURTHER ASSURANCES. Each of HRN and USAi shall
execute such additional documents and instruments and take such further action
as may be reasonably required or desirable to carry out the provisions hereof.
Section 1.3. EFFECTIVE TIME. This Assumption Agreement shall
only become effective upon the closing of HRN's IPO (the "Effective Time").
Prior to the Effective Time USAi may terminate this Assumption Agreement at any
time in its sole discretion and upon such termination USAi shall have no
obligation whatsoever hereunder.
ARTICLE II
MISCELLANEOUS
Section 2.1. GOVERNING LAW. This Assumption Agreement shall be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the laws of another jurisdiction would be
required thereby.
Section 2.2. MULTIPLE ORIGINALS. The parties may sign any
number of copies of this Assumption Agreement. Each signed copy shall be an
original, but all of them together represent the same agreement.
Section 2.3. SUCCESSORS AND ASSIGNS. This Assumption Agreement
shall inure to the benefit of and be binding upon the successors of USAi and
HRN.
Section 2.4. THIRD PARTY BENEFICIARIES. This Assumption
Agreement is solely for the benefit of USAi and HRN and no provisions of this
Assumption Agreement shall be deemed to confer upon any third parties any
remedy, claim, liability, reimbursement, or action in excess of those existing
without reference to this Assumption Agreement.
Section 2.5. HEADINGS. The Article and Section headings herein
have been inserted for convenience of reference only, are not intended to be
considered a party hereof and shall not modify or restrict any of the terms or
provisions hereof.
<PAGE>
3
IN WITNESS WHEREOF, the parties hereto have caused this
Assumption Agreement to be duly executed as of the date first written above.
HRN, INC.
By:____________________________
Name:
Title:
USA NETWORKS, INC.
By:_____________________________
Name:
Title:
<PAGE>
Exhibit 10.2
TAX SHARING AGREEMENT
TAX SHARING AGREEMENT (the "Agreement") entered into as of May
10, 1999, by and among USA NETWORKS, INC., a Delaware corporation ("Parent") and
HOTEL RESERVATIONS, INC., a Delaware corporation ("HRN"). Parent and its
Subsidiaries are hereinafter referred to as the "Parent Group."
WHEREAS Parent and HRN desire, to the extent permitted by the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder (the "Treasury Regulations"), to be included in the
filing of consolidated Federal income tax returns on behalf of the Parent Group;
WHEREAS Parent and HRN wish to allocate and settle among
themselves in an equitable manner their sharing of the consolidated Federal
income tax liability of the Parent Group; and
WHEREAS, HRN desires to be indemnified by Parent with respect
to certain taxes and Parent is willing to so indemnify HRN.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following
terms shall be defined as follows:
"TAXABLE PERIOD" shall mean any taxable year or portion
thereof of HRN beginning on or after May 10, 1999, with respect to which a
consolidated Federal income tax return is filed on behalf of the Parent Group
which includes HRN.
<PAGE>
2
"HRN'S FEDERAL TAXABLE INCOME" for a Taxable Period shall mean
the Federal taxable income (including, for all purposes of this Agreement,
alternative minimum taxable income) for such Taxable Period that HRN would have
reported if it had not been included in the consolidated Federal income tax
return filed for the Parent Group for such Taxable Period but instead had filed
its own return for such Taxable Period; PROVIDED, HOWEVER, that in computing
such taxable income, HRN shall not take into account any amounts paid or payable
by Parent to HRN under Paragraphs 2, 5, or 7 hereof, nor, except as provided in
Paragraph 2(b) hereof, shall HRN be entitled to take into account deductions and
credits attributable to the carryover or carryback of any losses of HRN arising
in any taxable year. Such taxable income of HRN shall be determined in a manner
consistent with the method of computation of the taxable income of the Parent
Group.
"HRN'S FEDERAL TAX" for a Taxable Period shall mean the
Federal income tax liability or, if applicable, the Federal alternative minimum
tax liability for such Taxable Period that HRN would have incurred if it had not
been included in a consolidated Federal income tax return filed for the Parent
Group for such Taxable Period but instead had filed its own return for such
Taxable Period; PROVIDED that in computing such tax liability for any Taxable
Period HRN shall not take into account any amounts paid or payable by HRN
hereunder or any amounts paid or payable to HRN under Paragraphs 2, 5 and 7
hereof, nor, except as provided in Paragraph 2(b) hereof, shall HRN be entitled
to take into account deductions. and credits attributable to the carryover or
carryback of any losses or credits of HRN arising in any taxable
<PAGE>
3
year. Such tax liability of HRN shall be determined in a manner consistent with
the method of computation of the tax liability of the Parent Group.
"ESTIMATED TAX PAYMENTS" shall mean for a Taxable Period the
aggregate payments for such Taxable Period provided in Paragraph 3 hereof.
"FINAL DETERMINATION" shall mean a closing agreement (or other
agreement finally settling a tax liability) with the Internal Revenue Service, a
claim for refund which has been allowed, a deficiency notice with respect to
which the period for filing a petition with the Tax Court has expired, or a
decision of any court of competent jurisdiction that is not subject to appeal or
as to which the time for appeal has expired.
"SUBSIDIARY" as to any entity (the parent corporation) shall
mean a corporation that would be an includible corporation in an affiliated
group of corporations of which such parent corporation would be the common
parent, all within the meaning attributable to such terms in Section 1504 of the
Code and Treasury Regulations thereunder.
2. PAYMENTS BETWEEN HRN AND PARENT.
(a) For each Taxable Period, subject to Paragraph
2(b) hereof, HRN shall pay to Parent an amount equal to the excess, if any, of
HRN's Federal Tax for such Taxable Period over the aggregate amount of HRN's
Estimated Tax Payments actually made to Parent with respect to Federal income
taxes for such Taxable Period. If the aggregate amount of HRN's Estimated Tax
Payments actually made to Parent with respect to Federal income taxes for such
Taxable Period exceed
<PAGE>
4
HRN's Federal Tax for such Taxable Period, Parent shall pay to HRN an amount
equal to such excess.
(b) (i) In the event that the calculation of HRN's
Federal Taxable Income for any Taxable Period results in a loss, to the extent
that the utilization of such loss by the Parent Group, whether in the current
Taxable Period or by means of a carryback or carryforward to one or more Taxable
Periods, results in a reduction of federal income taxes (or state and local
income taxes) otherwise payable by the Parent Group for a Taxable Period or in a
refund of federal income taxes (or state and local income taxes) previously paid
by the Parent Group for a Taxable Period, Parent shall pay to HRN the amount of
such reduction or refund.
(ii) For purposes of the foregoing, (x) any
reduction of federal income taxes otherwise payable by the Parent Group for a
Taxable Period shall be deemed to be attributable to a loss incurred by HRN to
the extent of the amount of such loss utilized, determined in accordance with
Paragraph 2(b)(iii) hereof, multiplied by the rate of tax used to calculate
HRN's Federal Tax for such Taxable Period, and (y) any refund of federal income
taxes paid by the Parent Group with respect to a prior Taxable Period shall be
deemed attributable to a loss incurred by HRN to the extent of the amount of
such loss utilized, determined in accordance with Paragraph 2(b)(iii) hereof,
multiplied by the rate of tax used to calculate HRN's Federal Tax for such
Taxable Period.
(iii) For purposes of the foregoing, losses
of HRN shall be deemed to be utilized by the Parent Group in accordance with the
rules
<PAGE>
5
generally applicable to the carryback and carryforward of losses under the
provisions of the Code and the regulations thereunder (or under the
corresponding provisions of state law, where applicable), including, without
limitation, Treasury Regulations sections 1.1502-11, 1.1502-12, 1.1502-21 and
1.1502-79.
(iv) For purposes of the foregoing, excess
credits for any Taxable Period shall be applied, whether as a carryback for the
current Taxable Period or as a carryforward to subsequent Taxable Periods, in a
manner consistent with the provisions of this Paragraph 2(b).
(v) Notwithstanding the provisions of
Paragraph 2(a) hereof, amounts payable by Parent to HRN pursuant to this
Paragraph 2(b) for a Taxable Period (other than amounts payable with respect to
carrybacks) shall be set off against amounts otherwise payable by HRN to Parent
for such Taxable Period pursuant to Paragraph 2(a), such that only the net
amount shall be payable by Parent or HRN, as the case may be.
3. ESTIMATED TAX PAYMENTS.
For every Taxable Period, HRN shall pay to Parent, no
later than the fifth day prior to the date an estimated Federal income tax
payment is due, the amount of estimated Federal income taxes that HRN would have
been required to pay for each such payment period if HRN were filing a Federal
income tax return for such Taxable Period. Such estimated Federal income tax
liability shall be determined in a manner consistent with the calculation of
HRN's Federal Tax and shall reflect estimated taxable income projected for the
relevant payment period; PROVIDED,
<PAGE>
HOWEVER, that there shall be taken into account any estimated reduction for
such payment period in the amount otherwise payable by HRN for the Taxable
Period with respect to HRN's Federal Tax determined in accordance with the
principles of Paragraph 2(b) hereof to the extent attributable to the
carryforward of a loss or credit of HRN from a prior Taxable Period.
4. TIME AND FORM OF PAYMENT.
(a) Except as provided in Paragraph 4(b) hereof,
payments by HRN or Parent pursuant to Paragraph 2 hereof for a Taxable Period
shall be made no later than the fifth day prior to the due date of the Parent
Group's consolidated Federal income tax return for the period in question. If
the due date for any such return is extended, any payments to be made at the
time of filing a request for extension of time to file shall be made on an
estimated basis. No later than five (5) days prior to the extended due date for
such return, HRN's and/or Parent's payment shall be recalculated and any
difference between the net liability of HRN or Parent hereunder and all of HRN's
prior estimated payments with respect to the relevant Taxable Period shall be
paid by such fifth day to the party entitled thereto, with interest from the
original due date at the relevant statutory rate.
(b) Payments by Parent to HRN pursuant to Paragraph
2(b) hereof with respect to a refund attributable to the carryback of a loss or
credit of HRN shall be made no later than the fifth day after receipt of such
refund by Parent.
5. REDETERMINATIONS OF TAX LIABILITY. In the event of any
redetermination of the consolidated Federal income tax liability of the Parent
Group for
<PAGE>
7
any Taxable Period as a result of audit by the Internal Revenue Service, a claim
for refund or otherwise, HRN's Federal Tax and any amount payable by Parent
under Paragraph 2 hereof shall be recomputed for such Taxable Period and any
subsequent Taxable Periods to take into account such redetermination and the
payments pursuant to Paragraph 2 hereof shall be appropriately adjusted
(including if necessary by means of a refund of an amount previously paid
hereunder). Any payment between Parent and HRN required by such adjustment shall
be paid within five (5) days after the date of a Final Determination with
respect to such redetermination, or as soon as such adjustment can practicably
be calculated, if later, together with interest for the period at the rate
provided for in the relevant statute. This Paragraph 5 shall not apply to
initial refund claims based upon the carryback of losses or credits of HRN,
which shall be governed exclusively by Paragraphs 2 and 4 hereof.
6. INTEREST ON UNPAID AMOUNTS. In the event that any party
fails to pay any amount owed pursuant to this Agreement within ten (10) days
after the date when due, interest shall accrue on any unpaid amount at the
"designated rate" from the due date until such amounts are fully paid. For
purposes of this Agreement, the "designated rate" shall mean the applicable rate
of interest on underpayments or overpayments of tax, as the case may be, as
provided in the Code or Treasury Regulations.
7. INDEMNIFICATION. Parent shall indemnify HRN on an after-tax
basis (taking into account, when realized, any tax detriment or tax benefit to
HRN of
<PAGE>
8
(i) a payment hereunder or (ii) the liability to the Internal Revenue Service
giving rise to such a payment), with respect to and in the amount of:
(a) any liability for Federal income tax incurred by
HRN for any Taxable Period with respect to which HRN is included in a
consolidated Federal income tax return filed on behalf of the Parent Group;
(b) any liability for Federal income tax incurred by
HRN to the extent attributable to any member of the Parent Group (other than
HRN) and for which HRN is liable as a result of being included in a consolidated
Federal income tax return of the Parent Group; and
(c) interest, penalties and additions to tax, and
costs and expenses (including costs, expenses and attorneys' fees relating to
any contested interest, penalties and additions to tax) in connection with any
liabilities described in Paragraphs 7(a) and (b) above.
Parent shall pay to HRN amounts due under Paragraphs 7(a) and
(b) and Paragraph 7(c) (to the extent such amounts are related to amounts under
Paragraphs 7(a) and (b)) no later than seven days after the date of a Final
Determination with respect thereto.
8. FILING OF RETURNS, PAYMENT OF TAX.
(a) AGENT. HRN hereby appoints Parent as its agent,
so long as HRN is a member of the Parent Group, for the purpose of filing
consolidated Federal income tax returns and making any election or application
or taking any action in connection therewith on behalf of HRN. Parent hereby
agrees to timely file such
<PAGE>
9
consolidated Federal income tax returns and to include HRN in such returns for
all years with respect to which HRN is eligible to be so included. HRN hereby
consents to the filing of such returns, and the making of such elections and
applications.
(b) COOPERATION. HRN shall cooperate with Parent in
the filing, to the extent permitted by law, of a consolidated Federal income tax
return for members of the Parent Group by maintaining such books and records and
providing such information as may be necessary or useful in the filing of such
returns and executing any documents and taking any actions which Parent may
reasonably request in connection therewith. Parent will provide HRN, upon
request, with copies of any such returns which include HRN promptly after such
returns are filed. Parent and HRN shall provide one another with such
information concerning such returns and the application of payments made under
this Agreement as Parent or HRN may reasonably request of one another.
(c) PAYMENT OF TAX. For each Taxable Period, Parent
shall timely pay or discharge, or cause to be timely paid or discharged, the
consolidated Federal income tax liability of the Parent Group for such Taxable
Period.
9. RESOLUTION OF DISPUTES. Any dispute concerning the
calculation or basis of determination of any payment provided for hereunder
shall be resolved in a reasonable manner consistent with the intent and purposes
of this Agreement by the independent certified public accountants for Parent,
whose judgment shall be conclusive and binding upon the parties, in the absence
of manifest error.
<PAGE>
10
10. ADJUDICATIONS. In any audit, conference, or other
proceeding with the Internal Revenue Service, or in any judicial proceedings
concerning the determination of the Federal income tax liabilities of the Parent
Group or HRN, the relevant taxpayer(s) shall be represented by persons selected
by Parent. The settlement and terms of settlement of any issues relating to such
proceeding shall be determined by Parent in a reasonable manner, and HRN hereby
appoints Parent as its agent for the purpose of proposing and concluding any
such settlement.
11. BINDING EFFECT; SUCCESSORS. This Agreement shall be
binding upon Parent and HRN. This Agreement shall inure to the benefit of and be
binding upon any successors or assigns of the parties hereto. Parent may assign
its right to receive payments under this Agreement but may not assign or
delegate its obligations.
12. INTERPRETATION. This Agreement is intended to allocate
certain Federal income tax liabilities of the Parent Group, and any situation or
circumstance concerning such allocation that is not specifically contemplated
hereby or provided for herein shall be dealt with in a manner consistent with
the underlying principles of allocation in this Agreement.
13. LEGAL AND ACCOUNTING FEES. Any fees or expenses for legal,
accounting or other professional services rendered in connection with (i) the
preparation of a consolidated Federal income tax return for the Parent Group (to
the extent that such services reasonably pertain to the tax liability of HRN
rather than any other members of the Parent Group) or HRN, (ii) the application
of the provisions of this Agreement or (iii) the conduct of any audit,
conference or proceeding of the
<PAGE>
11
Internal Revenue Service or judicial proceedings relevant to any determination
required to be made hereunder shall be allocated between Parent and HRN in the
manner resulting in HRN bearing a reasonable approximation of the actual amount
of such fees or expenses hereunder reasonably related to, and for the benefit
of, HRN, rather than to or for other members of the Parent Group.
14. EFFECT OF THE AGREEMENT. This Agreement shall determine
the liability of Parent and HRN to each other as to the matters provided for
herein, whether or not such determination is effective for purposes of the Code,
financial reporting purposes or other purposes.
15. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement embodies the
entire understanding among the parties relating to its subject matter and,
except as provided in the following sentence, supersedes and terminates all
prior agreements and understandings among the parties with respect to such
subject matter; any and all prior correspondence, conversations and memoranda
are merged herein and shall be without effect hereon. In furtherance of the
foregoing, Parent and HRN shall cause all other tax sharing or tax indemnity
agreements to which HRN is a party to be terminated with respect to HRN prior to
the effective date of this Agreement. No promises, covenants or representations
of any kind, other than those expressly stated herein, have been made to induce
either party to enter into this Agreement. This Agreement, including this
provision against oral modification, shall not be modified or terminated except
by a writing duly signed by each of the parties hereto, and no waiver
<PAGE>
12
of any provisions of this Agreement shall be effective unless in a writing duly
signed by the party sought to be bound.
16. CODE REFERENCES. Any references to the Code or Treasury
Regulations shall be deemed to refer to the relevant provisions of any successor
statute or regulation and shall refer to such provisions as in effect from time
to time.
17. NOTICES. Any payment, notice or communication required or
permitted to be given under this Agreement shall be in writing (including
telegraphic, telecopy, telex or cable communication) and mailed, telegraphed,
telecopied, telexed, cabled or delivered:
If to the Parent:
USA Networks, Inc.
152 West 57th Street
42nd Floor
New York, New York 10019
Attention: Eric DeGraw
Facsimile No.: (212) 314-7439
If to HRN:
Hotel Reservations Network, Inc.
8140 Walnut Hill Lane
Suite 203
Dallas, Texas 75231
Attention: Robert Diener
Facsimile No.: (305) 892-4443
or to such other address as a party shall furnish in writing to the other party.
All such notices and communications shall be effective (i) when received, if
mailed or delivered
<PAGE>
13
or (ii) when delivered to the telegraph company, transmitted by telecopier,
confirmed by telex answerback or delivered to the cable company, respectively.
18. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
19. TERMINATION. This Agreement shall terminate at such time
as all obligations and liabilities of the parties hereto have been satisfied.
None of the parties hereto shall have any obligations or liabilities under this
Agreement with respect to any Taxable Period during which HRN is not a member of
the Parent Group; PROVIDED, HOWEVER, that the indemnification obligations and
liabilities of Parent under Paragraph 7 shall continue and shall not terminate.
The obligations and liabilities of the parties arising under this Agreement with
respect to any Taxable Period during which HRN is a member of the Parent Group
and the indemnification obligations and liabilities of Parent arising under
Paragraph 7 shall continue in full force and effect until all such obligations
have been met and such liabilities have been paid in full,
<PAGE>
14
whether by expiration of time, operation of law, or otherwise. The obligations
and liabilities of each party are made for the benefit of, and shall be
enforceable by, the other parties and their successors and permitted assigns.
<PAGE>
15
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed by its respective duly authorized officer as of the
date first set forth above.
USA NETWORKS, INC.
By:
---------------------------------
HOTEL RESERVATIONS, INC.
By:
---------------------------------
<PAGE>
EXHIBIT 10.3
HOTEL RESERVATIONS NETWORK, INC.
2000 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Hotel
Reservations Network, Inc. 2000 Stock Plan are: to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to Employees, Directors and Consultants, and to promote the
success of the Company's business. Options granted under the Plan may be
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant. Stock Purchase Rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions
shall apply:
(a) "ADMINISTRATOR" means the Board or any of
its Committees as shall be administering the Plan, in accordance with Section 4
of the Plan.
(b) "APPLICABLE LAWS" means the requirements
relating to the administration of stock option plans under U.S. state corporate
laws, U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options or Stock
Purchase Rights are, or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the
Company.
<PAGE>
2
(d) "CAUSE" means termination of an Optionee's
employment by the Company for such reasons as may be defined as "Cause" in any
applicable employment agreement, or, if an Optionee is not party to a valid
employment agreement at the time of his or her termination, shall mean (i) the
plea of guilty or nolo contendere to, or conviction for, the commission of a
felony offense by an Optionee, (ii) a material breach by an Optionee of a
fiduciary duty owed to the Company or any of its subsidiaries; (iii) a breach by
an Optionee of any non-disclosure, non-solicitation or non-competition
obligation owed to the Company or any of its subsidiaries; (iv) the willful or
gross neglect by an Optionee of his or her employment duties; and (v) such other
events as shall be determined by the Board or the Committee.
(e) "CODE" means the Internal Revenue Code of
1986, as amended.
(f) "COMMITTEE" means a committee of Directors
appointed by the Board in accordance with Section 4 of the Plan.
(g) "COMMON STOCK" means the Class A Common
Stock of the Company.
(h) "COMPANY" means Hotel Reservations Network,
Inc., a Delaware corporation.
(i) "CONSULTANT" means any person, including an
advisor, engaged by the Company or a Parent or Subsidiary to render services to
such entity.
(j) "DIRECTOR" means a member of the Board.
<PAGE>
3
(k) "DISABILITY" means total and permanent
disability as defined in Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person, including
Officers and Directors, employed by the Company or any Parent or Subsidiary or
other affiliate of the Company. A Service Provider shall not cease to be an
Employee in the case of (i) any leave of absence approved by the Company or (ii)
transfers between locations of the Company or between the Company, its Parent,
any Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, on the 181st day
of such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment" by
the Company.
(m) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
(n) "FAIR MARKET VALUE" means, as of any date,
the value of Common Stock determined as follows:
(i) If the Common Stock is listed on
any established stock exchange or a national market system, including
without limitation the Nasdaq National Market or The Nasdaq SmallCap
Market of The Nasdaq Stock
<PAGE>
4
Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or system for the last market trading day prior to
the day of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly
quoted by a recognized securities dealer but selling prices are not
reported, the Fair Market Value of a Share of Common Stock shall be
the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable; or
(iii) In the absence of an established
market for the Common Stock, the Fair Market Value shall be determined
in good faith by the Administrator.
(o) "INCENTIVE STOCK OPTION" means an Option
intended to qualify as an incentive stock option within the meaning of Section
422 of the Code and the regulations promulgated thereunder.
(p) "NONSTATUTORY STOCK OPTION" means an Option
not intended to qualify as an Incentive Stock Option.
(q) "NOTICE OF GRANT" means a written or
electronic notice evidencing certain terms and conditions of an individual
Option or Stock Purchase Right grant. The Notice of Grant is part of the Option
Agreement.
<PAGE>
5
(r) "OFFICER" means a person who is an officer
of the Company within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(s) "OPTION" means a stock option granted
pursuant to the Plan.
(t) "OPTION AGREEMENT" means an agreement
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(u) "OPTION EXCHANGE PROGRAM" means a program
whereby outstanding Options are surrendered in exchange for Options with a lower
exercise price.
(v) "OPTIONED STOCK" means the Common Stock
subject to an Option or Stock Purchase Right.
(w) "OPTIONEE" means the holder of an
outstanding Option or Stock Purchase Right granted under the Plan.
(x) "PARENT" means a "parent corporation,"
whether now or hereafter existing, as defined in Section 424(e) of the Code.
(y) "PLAN" means this 2000 Stock Plan.
(z) "RESTRICTED STOCK" means shares of Common
Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of
the Plan.
(aa) "RESTRICTED STOCK PURCHASE AGREEMENT" means
a written agreement between the Company and the Optionee evidencing the terms
and
`
<PAGE>
6
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(bb) "RULE 16b-3" means Rule 16b-3 of the
Exchange Act or any successor to Rule 16b-3, as in effect when discretion is
being exercised with respect to the Plan.
(cc) "SECTION 16(b)" means Section 16(b) of the
Exchange Act.
(dd) "SERVICE PROVIDER" means an Employee,
Director or Consultant.
(ee) "SHARE" means a share of the Common Stock,
as adjusted in accordance with Section 13 of the Plan.
(ff) "STOCK PURCHASE RIGHT" means the right to
purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a
Notice of Grant.
(gg) "SUBSIDIARY" means a "subsidiary
corporation," whether now or hereafter existing, as defined in Section 424(f) of
the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 13 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 5,400,000 Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become
<PAGE>
7
available for future grant or sale under the Plan (unless the Plan has
terminated); PROVIDED, HOWEVER, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE- IN GENERAL. The Plan shall be
administered by(i) the Committee, which shall be comprised of not less than two
directors appointed by the Board, each of whom is intended to be a "Non-Employee
Director" (within the meaning of Rule 16b-3) and an "outside director" (within
the meaning of Code Section 162(m)) to the extent that Rule 16b-3 and Code
Section 162(m), respectively are applicable to the Company and to Options and
Stock Purchase Rights granted under the Plan; or (ii) if at any time such a
committee has not been so designated by the Board, the Board.
(b) SPECIAL PRE-IPO RULE. If deemed necessary
or advisable by the Company for purposes of complying with Section 162(m) of the
Code, with respect to Options granted prior to the initial public offering of
the stock of the Company, which shall occur no later than April 30, 2000, all
such Options shall be granted and approved by:
(i) the Performance-Based Compensation
Committee of USA Networks, Inc.;
<PAGE>
8
(ii) the Compensation Committee of the
Company (whether or not then-comprised of qualifying "outside directors" under
ss. 162(m) of the Code), and
(iii) the full Board of the Company.
Notwithstanding any of the above provisions, no Options may be granted by any
committee other than one complying with Section 4(a) of this Plan after the IPO
is effective.
(c) POWERS OF THE ADMINISTRATOR. Subject to the
provisions of the Plan, and in the case of a Committee, subject to the specific
duties delegated by the Board to such Committee, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to
whom Options and Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of
Common Stock to be covered by each Option and Stock Purchase Right
granted hereunder;
(iv) to approve forms of agreement for
use under the Plan;
(v) to determine the terms and
conditions, not inconsistent with the terms of the Plan, of any Option
or Stock Purchase Right granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times
when Options or Stock Purchase Rights
<PAGE>
9
may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right
or the shares of Common Stock relating thereto, based in each case on
such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any
Option or Stock Purchase Right to the then current Fair Market Value
if the Fair Market Value of the Common Stock covered by such Option or
Stock Purchase Right shall have declined since the date the Option or
Stock Purchase Right was granted;
(vii) to institute an Option Exchange
Program;
(viii) to construe and interpret
the terms of the Plan and awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind
rules and regulations relating to the Plan, including rules and
regulations relating to sub-plans established for the purpose of
qualifying for preferred tax treatment under foreign tax laws;
(x) to modify or amend each Option or
Stock Purchase Right (subject to Section 15(c) of the Plan), including
the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for
in the Plan;
(xi) to allow Optionees to satisfy
withholding tax obligations by electing to have the Company withhold
from the Shares to be
<PAGE>
10
issued upon exercise of an Option or Stock Purchase Right that number
of Shares having a Fair Market Value equal to the amount required to
be withheld. The Fair Market Value of the Shares to be withheld shall
be determined on the date that the amount of tax to be withheld is to
be determined. All elections by an Optionee to have Shares withheld
for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute
on behalf of the Company any instrument required to effect the grant
of an Option or Stock Purchase Right previously granted by the
Administrator;
(xiii) to make all other determinations
deemed necessary or advisable for administering the Plan.
(d) EFFECT OF ADMINISTRATOR'S DECISION. The
Administrator's decisions, determinations and interpretations shall be final and
binding on all Optionees and any other holders of Options or Stock Purchase
Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase
Rights may be granted to Service Providers. Incentive Stock Options may be
granted only to Employees.
Except as may specifically be provided by the
Administrator from time to time with respect to specific Service Providers or
specific Employees, in order to be eligible to receive any stock options
under the Plan, a Service Provider must agree not to solicit employees of the
Company and not to reveal confidential information of the Company, and an
Employee must agree to similar provisions as well as a non-competition
provision. The terms, conditions, and provisions relating to these
non-solicitation, confidentiality and non-competition provisions shall be
determined by the Administrator.
6. LIMITATIONS.
(a) Each Option shall be designated in the
Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of
<PAGE>
11
the Shares with respect to which Incentive Stock Options are exercisable for
the first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock
Purchase Right shall confer upon an Optionee any right with respect to
continuing the Optionee's relationship as a Service Provider with the Company,
nor shall they interfere in any way with the Optionee's right or the Company's
right to terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to
grants of Options:
(i) No Service Provider shall be
granted, during the life of this Plan, Options to purchase more than
80% of the Shares authorized for issuance hereunder.
(ii) The foregoing limitations shall be
adjusted proportionately in connection with any change in the
Company's capitalization as described in Section 13.
(iii) If an Option is canceled in the same
fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 13), the canceled
Option will be counted against
<PAGE>
12
the limits set forth in subsections (i) and (ii) above. For this
purpose, if the exercise price of an Option is reduced, the
transaction will be treated as a cancellation of the Option and the
grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan
shall become effective upon its adoption by the Board. It shall continue in
effect for a term of ten (10) years unless terminated earlier under Section 15
of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in
the Option Agreement. In the case of an Incentive Stock Option, the term shall
be ten (10) years from the date of grant or such shorter term as may be provided
in the Option Agreement. Moreover, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the date of
grant or such shorter term as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise
price for the Shares to be issued pursuant to exercise of an Option shall be
determined by the Administrator, subject to the following:
(i) In the case of an Incentive Stock
Option
(A) granted to an Employee who,
at the time the Incentive Stock Option is granted, owns stock
representing more than ten
<PAGE>
13
percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on the
date of grant.
(B) granted to any Employee
other than an Employee described in paragraph (A) immediately above,
the per Share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock
Option, the per Share exercise price shall be determined by the
Administrator. In the case of a Nonstatutory Stock Option intended to
qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of
grant.
(iii) Notwithstanding the foregoing,
Options may be granted with a per Share exercise price of less than
100% of the Fair Market Value per Share on the date of grant pursuant
to a merger or other corporate transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the
time an Option is granted, the Administrator shall fix the period within which
the Option may be exercised and shall determine any conditions which must be
satisfied before the Option may be exercised.
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14
(c) FORM OF CONSIDERATION. The Administrator
shall determine the acceptable form of consideration for exercising an Option,
including the method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the time
of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case
of Shares acquired upon exercise of an option, have been owned by the
Optionee for more than six months on the date of surrender or which
were acquired in the open market, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised;
(v) consideration received by the
Company under a cashless exercise program implemented by the Company
in connection with the Plan;
(vi) any combination of the foregoing
methods of payment; or
(vii) such other consideration and method
of payment for the issuance of Shares to the extent permitted by
Applicable Laws.
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15
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A
STOCKHOLDER. Any Option granted hereunder shall be exercisable according to the
terms of the Plan and at such times and under such conditions as determined by
the Administrator and set forth in the Option Agreement. Unless the
Administrator provides otherwise, vesting of Options granted hereunder shall be
tolled during any unpaid leave of absence. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
<PAGE>
16
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE
PROVIDER. If an Optionee ceases to be a Service Provider, other than upon the
Optionee's death or Disability, the Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for 90 days following the Optionee's termination, unless such
termination is for "Cause", in which case the Option will immediately terminate
and expire. If, on the date of termination, the Optionee is not vested as to his
or her entire Option, the Shares covered by the unvested portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified by the Administrator, the Option
shall terminate, and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee
ceases to be a Service Provider as a result of the Optionee's Disability, the
Optionee may exercise his or her Option within such period of time as is
specified in the Option Agreement to the extent the Option is vested on the date
of termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain
<PAGE>
17
exercisable for twelve (12) months following the Optionee's termination. If, on
the date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies
while a Service Provider, the Option may be exercised within such period of time
as is specified in the Option Agreement (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant), by
the Optionee's estate or by a person who acquires the right to exercise the
Option by bequest or inheritance, but only to the extent that the Option is
vested on the date of death. In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, at the time of death, the Optionee is not vested
as to his or her entire Option, the Shares covered by the unvested portion of
the Option shall immediately revert to the Plan. The Option may be exercised by
the executor or administrator of the Optionee's estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee's will or the laws
of descent or distribution. If the Option is not so exercised within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at
any time offer to buy out for a payment in cash or Shares an Option previously
granted based on
<PAGE>
18
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights
may be issued either alone, in addition to, or in tandem with other awards
granted under the Plan and/or cash awards made outside of the Plan. After the
Administrator determines that it will offer Stock Purchase Rights under the
Plan, it shall advise the offeree in writing or electronically, by means of a
Notice of Grant, of the terms, conditions and restrictions related to the offer,
including the number of Shares that the offeree shall be entitled to purchase,
the price to be paid, and the time within which the offeree must accept such
offer. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's service with the Company for any reason
(including death or Disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Administrator.
<PAGE>
19
(c) OTHER PROVISIONS. The Restricted Stock
Purchase Agreement shall contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock
Purchase Right is exercised, the purchaser shall have the rights equivalent to
those of a stockholder, and shall be a stockholder when his or her purchase is
entered upon the records of the duly authorized transfer agent of the Company.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS.
Unless determined otherwise by the Administrator, an Option or Stock Purchase
Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed
of in any manner other than by will or by the laws of descent or distribution
and may be exercised, during the lifetime of the Optionee, only by the Optionee.
If the Administrator makes an Option or Stock Purchase Right transferable, such
Option or Stock Purchase Right shall contain such additional terms and
conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option and Stock Purchase Right, and
the number of shares of
<PAGE>
20
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; PROVIDED, HOWEVER, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of
the proposed dissolution or liquidation of the Company, the Administrator shall
notify each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until ten (10) days
prior to such transaction as to all of the
<PAGE>
21
Optioned Stock covered thereby, including Shares as to which the Option would
not otherwise be exercisable. In addition, the Administrator may provide that
any Company repurchase option applicable to any Shares purchased upon exercise
of an Option or Stock Purchase Right shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a
merger of the Company with or into another corporation, or the sale of
substantially all of the assets of the Company, each outstanding Option and
Stock Purchase Right shall be assumed or an equivalent option or right
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option or Stock Purchase Right, the Optionee shall
fully vest in and have the right to exercise the Option or Stock Purchase Right
as to all of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes
fully vested and exercisable in lieu of assumption or substitution in the event
of a merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be fully
vested and exercisable for a period of fifteen (15) days from the date of such
notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following the
<PAGE>
22
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); PROVIDED, HOWEVER, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. DATE OF GRANT. The date of grant of an Option or Stock
Purchase Right shall be, for all purposes, the date on which the Administrator
makes the determination granting such Option or Stock Purchase Right, or such
other later date as is determined by the Administrator. Notice of the
determination shall be provided to each Optionee within a reasonable time after
the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at
any time amend, alter, suspend or terminate the Plan.
<PAGE>
23
(b) STOCKHOLDER APPROVAL. The Company shall
obtain stockholder approval of any Plan amendment to the extent necessary and
desirable to comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No
amendment, alteration, suspension or termination of the Plan shall impair the
rights of any Optionee, unless mutually agreed otherwise between the Optionee
and the Company, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to Options
granted under the Plan prior to the date of such termination.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be
issued pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares shall comply with Applicable Laws and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition
to the exercise of an Option or Stock Purchase Right, the Company may require
the person exercising such Option or Stock Purchase Right to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
<PAGE>
24
17. INABILITY TO OBTAIN AUTHORITY. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of
this Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
19. STOCKHOLDER APPROVAL. The Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months after the
date the Plan is adopted. Such stockholder approval shall be obtained in the
manner and to the degree required under Applicable Laws.
20. GOVERNING LAW. The terms of this Plan shall be governed by
the Laws of the State of Delaware without reference to principles of conflict of
laws, as applied to contracts executed in and performed wholly within the State
of Delaware.
<PAGE>
EXHIBIT 10.4
HOTEL RESERVATIONS NETWORK, INC.
DIRECTORS' STOCK OPTION PLAN
(Effective February __, 2000)
SECTION 1. PURPOSES OF THE PLAN
The Hotel Reservations Network, Inc. Directors Stock Option Plan (the
"Plan") is intended to enable Hotel Reservations Network, Inc. (the "Company")
to attract and retain persons of outstanding competence to serve as members of
the Board of Directors of the Company and to provide a direct link between
Directors' compensation and stockholder value.
SECTION 2. ADMINISTRATION OF THE PLAN
A. COMMITTEE -- The Plan shall be administered by the
Compensation/Benefits Committee of the Board of Directors of the Company (the
"Committee"), which shall consist of not less than two members of the Board of
Directors, each of whom shall be a "disinterested person" as that term is used
in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Grants of stock options ("Options") to eligible participants
under the Plan and the amount, nature and timing of the grants shall be
automatically determined as described in Sections 4 and 5 and shall not be
subject to the determination of the Committee.
B. AUTHORITY OF THE COMMITTEE -- Subject to certain specific
limitations and restrictions set forth in the Plan, the Committee shall have
full and final authority to interpret the Plan; to prescribe, amend and rescind
rules and regulations, if any, relating to the Plan; and to make all
determinations necessary or advisable for the administration of the Plan. No
member of the Committee shall be liable for anything done or omitted to be done
by him or by any other member of the Committee in connection with the Plan,
except for his own willful misconduct or gross negligence. All decisions which
are made by the Committee with respect to interpretation of the terms of the
Plan and with respect to any questions or disputes arising under the Plan shall
be final and binding on the Company and the participants, their heirs or
beneficiaries. The Committee shall not be empowered to take any action, whether
or not otherwise authorized under the Plan, which would result in any Director
failing to qualify as a "disinterested person".
C. ACTS OF THE COMMITTEE -- A majority of the Committee will constitute
a quorum and the acts of a majority of the members present at any meeting at
which a quorum is
<PAGE>
2
present, or acts approved in writing by all members of the Committee without a
meeting, will be the acts of the Committee.
<PAGE>
3
SECTION 3. STOCK SUBJECT TO THE PLAN
A. COMMON STOCK -- The stock which is the subject of grants of Options
under the Plan shall be the Company's Common Stock, par value $.01 per share
("Common Stock"), which grants shall be subject to the terms, conditions and
restrictions described in the Plan.
B. MAXIMUM NUMBER OF SHARES THAT MAY BE GRANTED -- There may be granted
under the Plan an aggregate of not more than 100,000 shares of Common Stock,
subject to adjustment as provided in Section 7 hereof. If any Option expires or
terminates prior to being fully exercised, any shares allocable to the
unexercised portion of such Option shall thereafter be made subject to the terms
of the Plan. Shares of Common Stock granted pursuant to the Plan may be either
authorized, but unissued, shares or reacquired shares, or both.
SECTION 4. PARTICIPATION
A. DIRECTORS -- Participation in the Plan shall be limited to persons
who serve as members of the Board of Directors of the Company and who, at the
time of grant, are not "employees" of the Company and/or any of its affiliates,
within the meaning of the Employee Retirement Income Security Act of 1974
("ERISA"). A Director who is an employee and who retires or resigns from
employment with the Company and/or any of its affiliates, but remains a Director
of the Company, shall become eligible to participate in the Plan at the time of
such termination of employment.
B. GRANTS -- Each Director shall receive upon initial election to
office and thereafter annually on the date of the Company's Annual Meeting of
Stockholders at which such Director is re-elected to office (provided such date
is at least 12 months following such Director's initial election to office) (in
each case, the "Grant Date") an Option to acquire 5,000 shares of Common Stock
at a price equal to the Fair Market Value of the shares of Common Stock subject
to such Option on the trading day immediately preceding the Grant Date. "Fair
Market Value" means the mean of the highest and lowest sale price for the Common
Stock as reported on any securities exchange on which the Common Stock is listed
or the mean of the highest and lowest bid price on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"); or if the Common
Stock is not so reported or listed, as determined in good faith by the Board of
Directors.
<PAGE>
4
SECTION 5. TERMS AND CONDITIONS OF STOCK GRANTS
A. VESTING -- Except as provided in paragraph D of this Section V, the
Options shall vest and become exercisable as follows: with respect to 1,667
shares of Common Stock, on each of the first two anniversaries of the Grant
Date; and with respect to the remaining 1,666 shares of Common Stock, on the
third anniversary of the Grant Date. Except as provided by the Board of
Directors or the Committee at the time of grant or thereafter, in the event a
Director's service to the Company terminates before the Options have vested, the
any Option granted to such Director which has not vested shall be cancelled with
the Director having no further right or interest in such forfeited Option.
B. EXERCISE PERIOD -- Each Option shall remain outstanding until the
tenth anniversary of the Grant Date. Except as provided by the Board of
Directors or the Committee at the time of grant or thereafter, in the event a
Director's service to the Company terminates, any vested Option then held by a
Director shall be cancelled 120 days after such termination of service.
C. RESTRICTIONS ON TRANSFER -- An Option may not be assigned,
transferred, pledged, hypothecated or otherwise disposed of, except by will or
the laws of descent or distribution.
D. CHANGE OF CONTROL -- Upon a Change of Control, all Options that have
not previously become exercisable or been terminated shall become exercisable.
For purposes of the Plan, a "Change of Control" shall mean the occurrence of any
of the following:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other
than Barry Diller, Liberty Media Corporation and their respective
affiliates (within the meaning of Rule 12b-2 promulgated under the
Exchange Act) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of equity securities
of the Company representing a majority of the voting power of the then
outstanding equity securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(a), the following acquisitions shall not constitute a Change of
Control: (i) any acquisition by the Company, (ii) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company, or (iii) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (i) and (ii) of subsection (b); or
<PAGE>
5
(b) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of
the individuals and entities who were the beneficial owners of the
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 50% of the then outstanding combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding
Company Voting Securities, and (ii) no Person (excluding any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 30% or more of the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination; or
(c) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
E. Cash-Out Rights -- During the 60-day period from and after a Change
of Control (the "Exercise Period"), a Director shall have the right (the
"LSAR"), in lieu of the payment of the exercise price of the shares of Common
Stock being purchased under the Option and by giving notice to the Company, to
elect (within the Exercise Period) to surrender all or part of the Option to the
Company and to receive in cash, within 10 days of such notice, an amount equal
to the amount by which the Change of Control Price per share shall exceed the
exercise price per share of Common Stock under the Option multiplied by the
number of shares of Common Stock granted under the Option; provided, however,
that if the Change of Control is within six months of the Grant Date no such
election shall be made by such Director with respect to such Option prior to six
months from the Grant Date. "Change of Control Price" shall mean the higher of
(i) the highest reported sales price, regular way, of a share of Common Stock in
any transaction reported on the New York Stock Exchange Composite Tape or other
national exchange on which such shares are listed or on NASDAQ during the 60-day
period prior to and including the date of a Change of Control or (ii) if the
Change of Control is the result of a tender or exchange offer or a Business
Combination, the highest price per share of Common Stock paid in such tender or
exchange offer or Business Combination; provided, however, that in the case of
an Option which was granted within six months of the Change of Control, the
Change of Control Price for such Option shall be the
<PAGE>
6
Fair Market Value of the Common Stock on the date such Option is exercised or
deemed exercised. To the extent that the consideration paid in any such
transaction described above consists all or in part of securities or other
non-cash consideration, the value of such securities or other non-cash
consideration shall be determined in the sole discretion of the Board.
SECTION 6. COMPLIANCE WITH LAW AND OTHER CONDITIONS
A. RESTRICTIONS UPON COMMON STOCK -- The listing upon a stock exchange
or the registration or qualification under any federal or state law of any
shares of Common Stock subject to Options pursuant to the Plan may be necessary
or desirable as a condition of, or in connection with, such grant and, in any
such event, delivery of the certificates for such shares of Common Stock shall,
if the Committee, in its sole discretion, shall determine, not be made until
such listing, registration or qualification shall have been completed.
B. RESTRICTIONS UPON RESALE OF UNREGISTERED STOCK -- If the issuances
of the shares of Common Stock upon exercise of an Option are not registered
under the Securities Act of 1933, as amended, pursuant to an effective
registration statement, such Director, if the Committee shall deem it advisable,
may be required to represent and agree in writing:
(i) that any shares of Common Stock acquired by such Director pursuant
to the Plan will not be sold, except pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or
pursuant to an exemption from registration under such Act, and
(ii) that such Director is acquiring such shares of Common Stock for
his own account and not with a view to the distribution thereof.
SECTION 7. ADJUSTMENTS
The number of shares of Common Stock of the Company reserved for grants
under the Plan shall be subject to appropriate adjustment by the Committee, as
necessary, to reflect any stock split, stock dividend, recapitalization,
reclassification, merger, consolidation, reorganization, combination or exchange
of shares or similar event.
SECTION 8. MISCELLANEOUS PROVISIONS
A. Nothing in the Plan shall be construed to give any Director of the
Company any right to a grant of an Option under the Plan unless all conditions
described within the Plan are met as determined in the sole discretion of the
Committee.
<PAGE>
7
B. Neither the Plan, nor the granting of an Option nor any other action
taken pursuant to the Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that the Company will retain a Director for
any period of time. Nothing in the Plan shall in any manner be construed to
limit in any way the right of the Company or its stockholders to reelect or not
reelect or renominate or not renominate a participating Director.
C. The costs and expenses of administering the Plan shall be borne by
the Company and not charged to any grant of an Option nor to any participating
Director.
D. The Company may make such provisions and take such steps as it may
deem necessary or appropriate for the withholding of any taxes which the Company
is required by any law or regulation of any governmental authority, whether
federal, state or local, to withhold in connection with any event or action
under the Plan.
SECTION 9. TERM, AMENDMENT AND TERMINATION
A. The Plan will terminate on February 21, 2010. Under the Plan,
Options outstanding as of February 21, 2010 shall not be affected or impaired by
the termination of the Plan.
B. The Board may amend, alter, or discontinue the Plan, but no
amendment, alteration or discontinuation shall be made which would (i) impair
the rights of an optionee under an Option theretofore granted without the
optionee's consent, except such an amendment made to cause the Plan to qualify
for the exemption provided by Rule 16b-3, as promulgated by the Securities and
Exchange Commissioner any successor agency under Section 16(b) of the Exchange
Act, as amended from time to time ("Rule 16b-3"), or (ii) disqualify the Plan
from the exemption provided by Rule 16b-3. In addition, no such amendment shall
be made without the approval of the Company's stockholders to the extent such
approval is required by law or agreement.
C. Subject to the above provisions, the Board shall have authority to
amend the Plan to take into account changes in law and tax and accounting rules,
as well as other developments and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
D. No amendment to Sections 4 or 5 of the Plan may be made more than
once every six months, other than to comport with changes in the Internal
Revenue Code, ERISA, or the rules thereunder.
SECTION 10. GOVERNING LAW
<PAGE>
8
The Plan and all determinations made and actions taken pursuant thereto
shall be governed by the laws of the State of Delaware and construed
accordingly.
SECTION 11. APPROVAL BY STOCKHOLDERS
The Plan shall become effective only upon approval by the stockholders
of the Company.
<PAGE>
EXIHIBIT 10.5
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
by and among
HRN, INC.,
USA NETWORKS, INC.,
TMF, INC.,
HRN MARKETING CORP.,
ROBERT DIENER
and
DAVID LITMAN
-------------------
February 2, 2000
-------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
1. Sale of Assets..................................................................................2
1.1 Assets to be Sold......................................................................2
1.2 Excluded Assets........................................................................3
2. Assumption of Liabilities.......................................................................4
2.1 Liabilities Assumed by the Buyer.......................................................4
2.2 Liabilities Not Assumed by the Buyer...................................................4
3. Purchase Price and Payment......................................................................6
3.1 Purchase Price.........................................................................6
3.2 Payment of Purchase Price..............................................................6
3.3 Purchase Price Adjustment..............................................................7
3.4 Purchase Price Allocation..............................................................9
4. Closing........................................................................................10
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..................................................................15
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.....................................................................20
5.13 Intangible Property...................................................................21
5.14 Liens.................................................................................21
5.15 Indebtedness..........................................................................22
5.16 Liabilities...........................................................................22
5.17 Suppliers and Customers...............................................................23
5.18 Pension and Benefit Plans and Compliance with ERISA...................................23
5.19 Insurance.............................................................................26
5.20 Officers, Directors and Employees.....................................................26
5.21 Operations of the Seller..............................................................27
5.22 Potential Conflicts of Interest.......................................................29
5.23 Environmental.........................................................................30
5.24 Investments...........................................................................30
5.25 Projections...........................................................................30
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
5.26 Entire Investment in the Business; No Other Businesses................................31
5.27 Full Disclosure.......................................................................31
5.28 No Broker.............................................................................31
5.29 Representations and Warranties on Closing Date........................................32
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........................................33
7. Covenants and Agreements.......................................................................33
7.1 Conduct of Business...................................................................33
7.2 Insurance.............................................................................33
7.3 Preservation of Business..............................................................33
7.4 Litigation............................................................................34
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....................................................................36
7.9 Additional Purchase Price.............................................................36
7.10 Quarterly Deferred Payment............................................................40
7.11 Participation Payment.................................................................42
7.12 USAi Guaranty.........................................................................47
7.14 Obligations Regarding Acquired Businesses.............................................48
7.15 2000 Initial Public Offering..........................................................49
8. Conditions Precedent to the Obligation of the Buyer to Close...................................57
8.1 Representations and Covenants.........................................................57
8.2 Governmental Permits and Approvals....................................................58
8.3 Third Party Consents..................................................................58
8.4 Opinion of Counsel to the Sellers.....................................................58
8.5 Litigation............................................................................58
8.6 Escrow Agreement......................................................................59
8.7 Hart-Scott-Rodino.....................................................................59
8.8 Landlord Estoppel Certificate.........................................................59
8.9 Assignment of Lease...................................................................60
8.10 Tax Returns...........................................................................60
8.11 FIRPTA Affidavit......................................................................60
9. Conditions Precedent to the Obligation of the Sellers to Close.................................60
9.1 Representations.......................................................................60
9.2 Opinion of Counsel to the Buyer.......................................................61
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
9.3 Litigation............................................................................61
9.4 Hart-Scott-Rodino.....................................................................61
10. Covenants of Robert Diener and David Litman....................................................61
10.1 Covenants Against Competition.........................................................61
10.2 Rights and Remedies Upon Breach.......................................................64
10.3 Severability of Covenants.............................................................64
10.4 Blue-Pencilling.......................................................................65
10.5 Enforceability in Jurisdictions.......................................................65
10.6 Shareholder Guaranty..................................................................65
11. Survival of Representations and Warranties of the Sellers......................................66
12. Indemnification................................................................................68
12.1 Obligation of the Sellers and Diener and Litman to Indemnify..........................68
12.2 Obligation of Buyer to Indemnify......................................................69
12.3 Notice to Indemnifying Party..........................................................69
12.4 Escrow Fund...........................................................................70
12.5 Limitation on Indemnification.........................................................71
12.6 Set-Off Rights........................................................................71
13. Termination of Agreement.......................................................................72
13.1 Termination...........................................................................72
13.2 Survival After Termination............................................................74
14. Miscellaneous..................................................................................74
14.1 Certain Definitions...................................................................74
14.2 Publicity.............................................................................82
14.3 Notices...............................................................................82
14.4 Entire Agreement......................................................................84
14.5 Waivers and Amendments................................................................84
14.6 Governing Law.........................................................................85
14.7 Consent to Jurisdiction and Service of Process........................................85
14.8 No Assignment.........................................................................86
14.9 Usage.................................................................................86
14.10 Counterparts..........................................................................87
14.11 Exhibits and Schedules................................................................87
14.12 Headings..............................................................................87
</TABLE>
iii
<PAGE>
EXHIBITS
Exhibit A Bill of Sale
Exhibit B Purchase Note
Exhibit C Escrow Agreement
Exhibit D Receipt and Release of Claims
Exhibit E Letter of Representations
SCHEDULES
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
iv
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
AGREEMENT dated as of February 2, 2000, by and among HRN,
Inc., a Delaware corporation (the "BUYER"), USA Networks, Inc., a Delaware
corporation ("USAI"), TMF LIQUIDATING TRUST, a Texas Trust (the "Trust"), 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, USAi, the Sellers and the Shareholders are parties
to an Asset Purchase Agreement, dated as of April 13, 1999 (the "ASSET PURCHASE
AGREEMENT").
On May 10, 1999, the Sellers assigned all of their rights
under the Asset Purchase Agreement to the Trust and the Trust assumed all of the
Sellers' obligations under the Asset Purchase Agreement.
The Buyer, USAi, the Trust, the Sellers and the Shareholders
wish to hereby amend and restate the Asset Purchase Agreement, with the
understanding that the effective dates of the provisions hereof (other than
Section 7.15) shall be as of April 13, 1999.
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
<PAGE>
2
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 (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
<PAGE>
3
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, 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.
<PAGE>
4
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, 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:
<PAGE>
5
(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 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
<PAGE>
6
(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; (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
<PAGE>
7
(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.
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.
<PAGE>
8
(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 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
<PAGE>
9
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 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
<PAGE>
10
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 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,
<PAGE>
11
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. 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
<PAGE>
12
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.")
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
<PAGE>
13
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 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 Section 1.1502-1,
and (b) neither Seller's relevant
<PAGE>
14
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 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
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15
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 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
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16
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.
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)
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17
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; (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
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18
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 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
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19
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 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.
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20
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 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
<PAGE>
21
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 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
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22
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.
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,
<PAGE>
23
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 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
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24
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.
(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.
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25
(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.
(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
<PAGE>
26
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 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;
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27
(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;
(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;
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(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, 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.
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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 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
<PAGE>
30
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 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
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31
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 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.
<PAGE>
32
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 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.
<PAGE>
33
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 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
<PAGE>
34
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 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,
<PAGE>
35
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, 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
<PAGE>
36
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.
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
<PAGE>
37
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 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
<PAGE>
38
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 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
<PAGE>
39
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.
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.
<PAGE>
40
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.
(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
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41
(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 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
<PAGE>
42
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.
(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
<PAGE>
43
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 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.
<PAGE>
44
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 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.
<PAGE>
45
(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.
(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 (which shall
include the shares issued under Section 7.15 simultaneous with 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
<PAGE>
46
reasonably requested by the underwriters in connection with an IPO.
Simultaneously with the issuance of the shares to be issued to the Sellers
pursuant to this Section 7.11.3, the Sellers shall execute and deliver to the
Buyer a Representations Letter (substantially in the form attached hereto as
Exhibit E) with respect to such shares.
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 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
<PAGE>
47
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.
(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
<PAGE>
48
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 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.
7.15 2000 INITIAL PUBLIC OFFERING. If the initial closing
of the proposed initial public offering (the "2000 IPO") of the Class A Common
Stock, par value $0.01 per share (the "CLASS A COMMON STOCK"), of the Buyer
occurs prior to March 31, 2000, the following provisions shall apply:
7.15.1 Simultaneously with the initial closing of
the 2000 IPO:
(i) In full satisfaction of its
obligations under Sections 7.9.3 and 7.9.4, the Buyer shall issue to the Trust
the number of shares (the "SECTION 7.15 SHARES") of Class A Common Stock equal
to the number that can be
<PAGE>
49
found by dividing (x) $81.6 million dollars by (y) the price at which each share
of Class A Common Stock is initially sold to the public in the 2000 IPO (the
"IPO PRICE"); PROVIDED THAT, (i) if the IPO Price is less than $11.00 per share,
the price used for purposes of this clause (y) shall be $11.00 and (ii) if the
IPO Price is greater than $16.25 per share, the price used for purposes of this
clause (y) shall be $16.25. The issuance of the Section 7.15 Shares shall result
in a share-for-share reduction in the number of Class B Common Stock, par value
$0.01 per share (the "CLASS B COMMON STOCK"), of the Buyer to be issued to USAi
in the recapitalization of the Buyer that will occur immediately prior to the
completion of the 2000 IPO.
(ii) The Sellers and the Trust shall
execute and deliver to the Buyer a written Receipt and Release of Claims
substantially in the form attached hereto as EXHIBIT D;
(iii) The obligations of USAi under
Section 7.12 hereof (as such section relates to USAi's guaranty of the Buyer's
obligations) shall be deemed to be of no further force or effect upon (i) the
issuance of the Section 7.15 Shares, (ii) the issuance of the Section 7.11.3
Shares, (iii) the payment of all amounts due under Section 7.9.2, if any, in
respect of the twelve month period ended March 31, 2000, and (iv) the payment of
all amounts due under Section 7.10 in respect of the quarter ended December 31,
1999 and the fiscal year ended December 31, 1999;
(iv) For purposes of the calculation of
the number of shares of Class A Common Stock that the Trust will receive
pursuant to Section 7.11.3 hereof (the "SECTION 7.11.3 SHARES," and together
with the Section 7.15 Shares, the "2000 IPO SHARES"), the reference in Section
7.11.3 hereof to "the total issued and
<PAGE>
50
outstanding shares of the Buyer immediately prior to the IPO" shall include in
such issued and outstanding shares of the Buyer the number of Section 7.15
Shares provided above; and
(v) The Trust shall execute and deliver
to the Buyer a written Representations Letter with respect to the 2000 IPO
Shares substantially in the form attached hereto as EXHIBIT E.
17.5.2 Without the advance written consent of Buyer
(to be given or withheld in its sole discretion and, approved by its board of
directors), the Trust shall not directly or indirectly sell, assign, transfer,
gift, exchange or otherwise dispose of, or grant a lien, encumbrance, pledge or
other security interest in (each, a "TRANSFER") any of the 2000 IPO Shares until
after the fourth anniversary of the initial closing of the 2000 IPO, subject to
the following exceptions:
(vi) The Trust may Transfer (i) after
the first anniversary of the initial closing of the 2000 IPO, all or any portion
of the 2000 IPO Shares to (x) a Shareholder, an immediate family member of a
Shareholder, which shall include only the spouse (except for a spouse with whom
such Shareholder has entered into any divorce or separation agreement), or a
child of such Shareholder (collectively, the "FAMILY"), or (y) a trust, all of
the beneficial interests in which shall be held by such Shareholder or one or
more members of such Shareholder's Family, and (ii) up to 5% of the number of
Section 7.11.3 Shares and 5% of the number of Section 7.15 shares originally
issued to the Trust to a former executive of the Sellers consistent with the
terms of a letter agreement dated May 7, 1999, from TMF, Inc. to that former
executive (a copy of which the Trust has delivered to the Buyer) in each case
provided
<PAGE>
51
that such transferee delivers a written instrument, reasonably acceptable to the
Buyer, agreeing to be bound by the terms of this Agreement to the same extent as
the transferor. All persons and entities to whom the Trust may Transfer Class A
Stock under this Section 7.15.2(a) are hereinafter referred to as "PERMITTED
TRANSFEREES."
(vii) The Trust (and its Permitted
Transferees) may Transfer in the aggregate a number of Section 7.11.3 Shares
not to exceed the following percentages of the number of Section 7.11.3
Shares originally issued to the Trust (adjusted for any stock splits, stock
dividends, or similar recapitalization), after the dates indicated:
<TABLE>
<CAPTION>
<S> <C>
After first anniversary of the 2000 IPO 40%
After second anniversary of the 2000 IPO An additional 10%
After third anniversary of the 2000 IPO An additional 10%
After fourth anniversary of the 2000 IPO All remaining Section
7.11.3 Shares
</TABLE>
(viii) After the first anniversary of the
initial closing of the 2000 IPO, if USAi or any of its affiliates (which for
this purpose shall not include any officer or director of USAi or the Buyer)
desire to Transfer to an unaffiliated third party in a single transaction or
series of related transactions more than 7.5% of the number of shares of the
Buyer's common stock owned by USAi and its affiliates on the date of the initial
closing of the 2000 IPO, the Trust and its Permitted Transferees shall have the
right, in the aggregate, to include in such Transfer, on the same terms and
conditions as the transferring stockholder, a number of shares of the Buyer's
common stock equal to the product of (x) the aggregate number of shares of
common stock
<PAGE>
52
proposed to be transferred and (y) a fraction, the numerator of which is equal
to the total number of shares of common stock owned at that time by the Trust
and its Permitted Transferees and the denominator of which is the number of
shares owned at that time by the Trust and its Permitted Transferees and by USAi
and its affiliates. If such Transfer by a transferring stockholder is to be made
under an effective registration statement filed by the Buyer with the Securities
and Exchange Commission, the Buyer shall offer the Trust and its Permitted
Transferees the opportunity to participate in such registration in the same
manner as the transferring stockholder to the extent necessary to permit such
persons to exercise their tag along rights hereunder.
(ix) (i) The restrictions on Transfers
described above shall terminate on the death or permanent disability or
termination of employment by the Buyer without "cause" (each of which is
referred to as a "restriction terminating event") of either Shareholder as to a
number of shares held by that Shareholder and his Permitted Transferees equal to
the lesser of (x) the total number of shares then held by that Shareholder and
that Shareholder's Permitted Transferees and (y) fifty percent (50%) of the
total number of 2000 IPO shares originally issued to the Trust; PROVIDED,
HOWEVER, that (a) in the case of a restriction terminating event, the
restriction on sale or transfers shall not be eliminated prior to the first
anniversary of the 2000 IPO and (b) such Shareholder and his Permitted
Transferees shall not Transfer shares released by reason of a restriction
terminating event on any day a number of shares in excess of twenty-five percent
(25%) of the trailing thirty day average daily trading volume of the Buyer's
common stock.
<PAGE>
53
(ii) Notwithstanding the foregoing
25% limitation, upon a restriction terminating event caused by the death of a
Shareholder, the estate and the Family Permitted Transferees of such Shareholder
shall be permitted to sell in a single block trade transaction at the then
current market price such number of shares as the estate represents and warrants
in writing to the Buyer are necessary to be sold in order to result in net
proceeds sufficient to pay the applicable estate taxes resulting from such death
(provided the net proceeds from such sale are used solely to pay such estate
taxes). If requested by the holders of the shares to be sold under the
circumstances described in the previous sentence, the Buyer shall effect a
demand registration covering the sale of such shares in the manner described in
Section 7.15.3.
(iii) "Cause" shall mean: (A) the
plea of guilty or nolo contendre to, or conviction for, the commission of a
felony or any other offense involving moral turpitude by such Shareholder; (B) a
material breach by such Shareholder of a fiduciary duty owed to the Buyer; (C) a
material breach by such Shareholder of any of the covenants made by him in any
agreement with the Buyer; or (D) the willful or gross neglect by such
Shareholder in the performance of his duties or responsibilities consistent with
his position with the Buyer at such time.
7.15.3 The Trust and its Permitted Transferees,
acting by a written request of a majority in interest, shall have the one time
right after the fourth anniversary of the initial public offering, to cause the
Buyer to register all, or such lessor portion as requested, of the shares of
Buyer held by the Trust or its Permitted Transferees, under the Securities Act
of 1933, as amended, at the expense of the Buyer and upon customary terms and
conditions. The foregoing right shall be subject to the
<PAGE>
54
right of the Buyer to select the underwriter, if any, to be used and the
agreement by the holders of shares included in such registration pursuant to a
demand under this Section 7.15.3 to enter into any customary lockup agreement
requested by the underwriter. Upon the receipt of such a request, Buyer shall
take such steps as are reasonably necessary to register such shares for sale in
accordance with applicable federal securities laws (i) subject to the right of
the Buyer to suspend or delay a registration demanded hereunder for any period
because of material developments the disclosure of which the Board of Directors
of the Buyer determines in good faith would be detrimental or (b) due to
regulatory reasons and (ii) the limitation that no demand right shall be
exercisable during a period when the Buyer is subject to an underwriter's
lockup. The Buyer shall not be obligated to so effect a demand registration if
in the opinion of counsel to the Buyer the selling stockholder otherwise is able
to effect a sale of the shares under Rule 144(k).
7.15.4 All Transfers shall be made in full
compliance with applicable law. Except as otherwise permitted by Section 7.15.5,
each stock certificate for 2000 IPO Shares and each stock certificate issued
upon the direct or indirect Transfer of any such 2000 IPO Shares shall be
stamped or otherwise imprinted with the following legends:
(i) THE SECURITIES REPRESENTED HEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE
<PAGE>
55
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
SUCH LAWS.
(ii) HRN, INC. (THE "COMPANY"), IS A
DELAWARE CORPORATION, AND THE SHARES REPRESENTED BY THIS CERTIFICATE
MAY NOT BE DIRECTLY OR INDIRECTLY, SOLD, GIVEN, TRANSFERRED, ASSIGNED,
CHARGED, MORTGAGED, HYPOTHECATED, PLEDGED OR ENCUMBERED OR OTHERWISE
DISPOSED OF (WHETHER BY OPERATION OF LAW OR OTHERWISE) WITHOUT
COMPLIANCE WITH THE PROVISIONS OF THAT CERTAIN ASSET PURCHASE AGREEMENT
DATED AS OF APRIL 13, 1999, AMONG THE COMPANY AND CERTAIN OTHER
PARTIES, AS AMENDED. COPIES OF THE ABOVE-REFERENCED AGREEMENT AND
AMENDMENT ARE ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. THE
COMPANY WILL NOT REGISTER THE TRANSFER OF SUCH SHARES ON THE REGISTER
OF STOCKHOLDERS OF THE COMPANY UNLESS AND UNTIL THE TRANSFER HAS BEEN
MADE IN COMPLIANCE WITH THE TERMS OF SUCH ASSET PURCHASE AGREEMENT.
7.15.5 Notwithstanding the foregoing, the Trust or
Permitted Transferee may require the Buyer to issue stock certificates for 2000
IPO Shares, in each case:
(i) without the legend required under
Section 7.15.4(a) hereof if either (i) such 2000 IPO Shares have been registered
for resale under the Securities Act of 1933 (the "Securities Act") or (ii) the
Trust or Permitted Transferee has delivered to the Buyer an opinion of legal
counsel (from a firm reasonably satisfactory to the Buyer) which opinion shall
be addressed to the Buyer and be reasonably satisfactory in form and substance
to the Buyer's counsel, to the effect that such registration is not required
with respect to such 2000 IPO Shares; and
(ii) without the legend required under
Section 7.15.4(b) hereof if either (i) the Trust and the Permitted Transferees
Transfer
<PAGE>
56
such 2000 IPO Shares pursuant to Section 7.15.2(b) hereof or (ii) the fourth
anniversary of the initial closing of the 2000 IPO has passed.
7.15.6 The Trust (and each Permitted Transferee by
accepting the shares to be held by it) acknowledge and agree that the transfer
restrictions set forth in Section 7.15.2 prohibiting the Transfer of any
interest in the 2000 IPO Shares unless such Transfer is expressly permitted
hereunder, are an integral part of the Buyer's willingness to issue the 2000 IPO
Shares on the terms described herein and that the Buyer would be irreparably
harmed if such provisions were not strictly complied with by the Trust and its
Permitted Transferees. Without limiting the foregoing, the Trust (and each
Permitted Transferee) agrees that it shall not take any action to circumvent
such restrictions on Transfer, including, without limitation, by reducing or
transferring in any manner its economic interest in any portion of the 2000 IPO
Shares through means of any hedging, derivative or other synthetic transaction
or through any other means. The Trust (and each Permitted Transferee)
acknowledge that damages are inadequate to compensate the Buyer for the Trust's
(or a Permitted Transferee's) breach of this Agreement and therefore the Buyer
shall be entitled to specific performance of this Agreement. If the Buyer elects
to institute any action specifically to enforce the Trust's (or a Permitted
Transferee's) performance, the Trust (and such Permitted Transferee) agrees to
waive any claim or defense that the Buyer has an adequate remedy at law, and
agrees not to interpose any opposition legally or otherwise to the propriety of
specific performance.
7.15.7 As soon as practicable after February 1,
2000, the Trust and the parent company of the Buyer will file a notification and
report form under the
<PAGE>
57
HSR Act with respect to the acquisition of the 2000 IPO Shares and shall request
early termination of the waiting period under the HSR Act. In the event that the
initial closing of the 2000 IPO occurs prior to the expiration or earlier
termination of the waiting period under the HSR Act, the 2000 IPO Shares shall
consist of a class of non-voting capital stock of the Buyer that is in all other
respects (other than voting rights) the same as the Class A Common Stock and
shall automatically convert into shares of Class A Common Stock upon the
expiration or early termination of the HSR Act waiting period. In consideration
of Section 7.15, the Sellers and the Trust agree to promptly reimburse the Buyer
for one-half of the fees associated with any filings under the HSR Act;
PROVIDED, THAT, if the 2000 IPO does not occur by March 31, 2000, the Sellers
and the Trust shall promptly reimburse the Buyer for the full amount of any such
fees.
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
<PAGE>
58
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.
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
<PAGE>
59
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.
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
<PAGE>
60
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.
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
<PAGE>
61
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.
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
<PAGE>
62
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. 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
<PAGE>
63
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 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.
<PAGE>
64
(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 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.
<PAGE>
65
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.
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
<PAGE>
66
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 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.
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
Notwithstanding 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
<PAGE>
67
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.
(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
<PAGE>
68
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:
(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
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69
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 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
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70
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 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
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71
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 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
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72
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 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:
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73
(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;
(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
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74
(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 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
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75
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
(A) subject to paragraph (B) below, 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, (d) to exclude interest earned on the proceeds of any equity issued by
the Company, (e) to exclude interest paid to the Sellers by the Company under
the Purchase Note, (f) to exclude salary expenses in excess of $37,500 payable
to either Diener or Litman during any fiscal year, (g) to exclude additional
charges incurred in connection with the attempted public offering (including in
connection with the preparation and filing of the SEC registration statement
filed on November 9, 1999) of the stock of HRN, such as filing fees, blue sky
expenses, attorneys' fees, accounting fees, printing expenses and road show
expenses. and (h) 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
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76
Base Cost of Capital shall not include any Acquired Business acquired during
such period.
(B) Notwithstanding paragraph (A)
above, if HRN issues warrants or other similar convertible securities to third
parties in connection with the provision of goods and services ("THIRD PARTY
WARRANTS"), then for purposes of determining the effect of the Third Party
Warrants on Adjusted EBT, notwithstanding anything to the contrary contained in
this Agreement, the following principles shall apply:
(i) for the purposes of calculating
Adjusted EBT, the charge to earnings attributable to the Third Party Warrants
shall equal 50% of the actual accounting charges taken by HRN in accordance with
GAAP in respect of such Third Party Warrants; and
(ii) following the point at which the
product of (x) 50% of the actual accounting charges taken by HRN in accordance
with GAAP in respect of such Third Party Warrants and (y) the applicable
multiplier of the growth in Adjusted EBT for the relevant period pursuant to
clause (c) of Section 7.9.2, 7.9.3 and/or 7.9.4 of this Agreement as to any
years regarding which a payment is made based on Adjusted EBT rather than
Adjusted Gross Profit, EQUALS or exceeds $1 million, then for purposes of
Adjusted EBT, the charges to earnings attributable to the Third Party Warrants
shall be determined by HRN in accordance with GAAP.
The term "Third Party Warrants" shall not include any options
or other securities issued to officers, directors, employees and/or advisors of
HRN pursuant to plans adopted by HRN.
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77
(v) "ADJUSTED GROSS PROFIT" means Gross
Profit for a period of time, adjusted to exclude any Acquired Gross Profit.
(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.
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78
(xi) "CONTRACTS AND OTHER AGREEMENTS"
means and includes all contracts, agreements, indentures, bonds, leases,
mortgages, franchises, licenses, commitments or binding arrangements, express or
implied.
(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. Expenses incurred, directly or indirectly, by the
Company as a result of its being a public company, to the extent provided by
GAAP, shall be included in the determination of EBT.
(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
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79
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.
(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,
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80
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.
(xx) "IMPUTED INTEREST" means an amount
equal to the interest rate USAi earns on its short term cash deposits, as
adjusted quarterly, applied to (a) the amount of any cash dividends,
distributions or advances by the Buyer, and (b) the amount of any payments made
to the Sellers under Section 7.9 and 7.10 and pursuant to the Purchase Note
which are paid by the Company in each case, 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.
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81
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.
(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
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82
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, 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:
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83
(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
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
<PAGE>
84
8877 Collins Avenue
PHA
Surfside, Florida 33154
Facsimile: (305) 868-4922
with a copy to:
Sayles & Lidji
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
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85
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 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.
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86
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.
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"
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87
and "including" do not limit the preceding words or terms and shall be deemed to
be followed by the words "without limitation."
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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88
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
HRN, INC.
By /s/ David Litman
----------------------------------------
Name: David Litman
Title: Chief Executive Officer
USA NETWORKS, INC.
By /s/ Deirdre Stanley
----------------------------------------
Name: Deirdre Stanley
Title: Assistant Secretary and
Deputy General Counsel
TMF LIQUIDATING TRUST
By /s/ David Litman
----------------------------------------
Name: David Litman
Title: Trustee
TMF, INC.
By /s/ David Litman
----------------------------------------
Name: David Litman
Title: Chief Executive Officer
HRN MARKETING CORP.
By /s/ David Litman
----------------------------------------
Name: David Litman
Title: Vice-President
<PAGE>
89
/s/ David Litman
----------------------------------------
David Litman
/s/ Malia Litman
----------------------------------------
Malia Litman
/s/ Robert Diener
----------------------------------------
Robert Diener
/s/ Michelle Diener
----------------------------------------
Michelle Diener
The Zachary Charles Litman Exempt
G-S Trust
By /s/ Frank D. Connery
----------------------------------------
Name: Frank D. Connery
Title: Trustee
The Katherine Elizabeth Litman Exempt
G-S Trust
By /s/ Frank D. Connery
----------------------------------------
Name: Frank D. Connery
Title: Trustee
The Anna Marie Litman Exempt
G-S Trust
By /s/ Frank D. Connery
----------------------------------------
Name: Frank D. Connery
Title: Trustee
<PAGE>
90
The Allison Diener Exempt G-S Trust
By /s/ David Litman
----------------------------------------
Name: David Litman
Title: Trustee
The Brianna Diener Exempt G-S Trust
By /s/ David Litman
----------------------------------------
Name: David Litman
Title: Trustee
<PAGE>
EXHIBIT D
RECEIPT AND RELEASE OF CLAIMS
Reference herein is made to the Amended and Restated Asset
Purchase Agreement (the "Asset Purchase Agreement") dated as of April 13, 1999,
as amended (as further amended on February 2, 2000) among HRN, Inc., a Delaware
corporation (the "Buyer"), USA Networks, Inc., a Delaware corporation, TMF,
INC., a Texas corporation, HRN Marketing Corp., a Florida corporation, TMF
Liquidating Trust, a __________ trust (the "Trust"), Robert Diener and David
Litman. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Asset Purchase Agreement.
In consideration of the Buyer's performance of its obligations
under Section 7.11.3 and Section 7.15 of the Asset Purchase Agreement, the
undersigned hereby agree and acknowledge that all of the payment and other
obligations of the Buyer under Sections 7.9.3, 7.9.4 and 7.11 of the Asset
Purchase Agreement have been fulfilled. The undersigned hereby release (a) the
Buyer from all claims, suits and other causes of action arising from, in
connection with or relating to, Sections 7.9.3, 7.9.4 and 7.11 and (b) USAi from
all claims, suits and other causes of action arising from, in connection with or
relating to Section 7.12 of the Asset Purchase Agreement (as such Section
relates to its guaranty of the Buyer's obligations under Sections 7.9.3, 7.9.4
and 7.11),
Upon payment by the Buyer of the amounts, if any, due under Section 7.10 in
respect of the quarter ended December 31, 1999 and 7.9.2 in respect of the
twelve months ended March 31, 2000, the undersigned shall execute and deliver a
release substantially in this form with respect to the Buyer's obligations under
Section 7.9.2, 7.10, 7.13 and 7.14 and USAi's obligations under Section 7.12 (as
such section relates to its guaranty the Buyer's obligations under Sections
7.9.2, 7.10, 7.13 and 7.14).
The undersigned hereby acknowledge the Trust's receipt from the Buyer
of:
15. ________________ shares of Class A Common Stock of the
Buyer, par value $0.01 per share.
Dated this ___ day of ____________, _____
TMF, INC.
By _________________________
Name:
Title:
<PAGE>
HRN MARKETING CORP.
By _________________________
Name:
Title:
TMF LIQUIDATING TRUST
By __________________________
Name:
Title:
---------------------------
Robert Diener
---------------------------
David Litman
<PAGE>
EXHIBIT E
LETTER OF REPRESENTATIONS
[Date]
HRN, Inc.
c/o USA Networks, Inc.
152 West 57th Street
42nd Floor
New York, New York 10019
Attention: General Counsel
To whom it may concern:
Reference herein is made to the Amended and Restated Asset
Purchase Agreement (the "Asset Purchase Agreement") dated as of April 13, 1999,
as amended (as further amended on February 2, 2000) among HRN, Inc., a Delaware
corporation, USA Networks, Inc., a Delaware corporation, TMF, INC., a Texas
corporation, HRN Marketing Corp., a Florida corporation, TMF Liquidating Trust,
a _________ trust, Robert Diener and David Litman. Capitalized terms used but
not otherwise defined herein shall have the meanings ascribed to them in the
Asset Purchase Agreement.
In consideration of the issuance of [describe shares being
issued by Buyer] (the "Subject Shares"), the undersigned hereby:
1. Acknowledges that the undersigned or the
undersigned's representative has had access to the same kind of information
concerning the Buyer that is required by Schedule A of the Securities Act, to
the extent that the Buyer possesses such information;
2. Represents and warrants that the undersigned has such
knowledge and experience in financial and business matters that the undersigned
is capable of utilizing the information that is available to the undersigned
concerning the Buyer to evaluate the risks of investment in the Buyer;
3. Represents and warrants that it qualifies as an
"accredited investor" under Rule 501(a)(7) under the Securities Act.
4. Acknowledges that the undersigned has been advised
that the Subject Shares have not been registered under the Securities Act and,
accordingly, that the undersigned may not be able to sell or otherwise dispose
of the Subject Shares when the undersigned wishes to do so;
<PAGE>
5. Represents and warrants that the Subject Shares are
being purchased by the undersigned for the undersigned's own sole benefit and
account for investment and not with a view to, or for resale in connection with,
a public offering or distribution thereof;
6. Agrees that the Subject Shares will not be resold (a)
without registration thereof under the Securities Act (unless an exemption from
such registration is available) or (b) in violation of any law;
7. Consents that the certificate or certificates
representing the Subject Shares may be impressed with a legend indicating that
the Subject Shares are not registered under the Securities Act and reciting that
transfer thereof is restricted; and
8. Consents that stop transfer instructions in respect
of the Subject Shares may be issued to any transfer agent, transfer clerk or
other agent at any time acting for the Buyer.
Yours sincerely,
TMF LIQUIDATING TRUST
By _________________________
Name:
Title:
<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>
SCHEDULE 14.1(XVII)
GROSS PROFIT
<TABLE>
<CAPTION>
<S> <C>
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
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>
<CAPTION>
12/31/98 CLOSING
-------- -------
<S> <C> <C>
CURRENT ASSETS:
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>
EXHIBIT 10.6
FORM OF WARRANT
(A) NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE
EXERCISE OF THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT
AND SUCH LAWS.
(B) THIS WARRANT IS ALSO SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFER AS SET FORTH HEREIN.
-----------------------------------------------------------------------
HOTEL RESERVATIONS NETWORK, INC.
CLASS A COMMON STOCK PURCHASE WARRANT
-----------------------------------------------------------------------
This certifies that, for good and valuable consideration,
Hotel Reservations Network, a Delaware corporation ("HRN"), grants to [ ] (the
"Warrantholder"), the right to subscribe for and purchase from HRN [ ] validly
issued, fully paid and nonassessable shares (the "Warrant Shares") of HRN's
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), at
a purchase price per share of $[ ] (the "Exercise Price"), at any time prior to
5:00 p.m. Eastern Time, on the third anniversary of the date hereof (the
"Expiration Date"), all subject to the terms, conditions and adjustments herein
set forth.
This Warrant was issued in connection with and pursuant to the
terms of the Letter Agreement, dated as of [ ] the ("Letter Agreement"), among
HRN and the Warrantholder, and is subject to the terms thereof.
1. EXERCISE OF WARRANT.
1.1 EXERCISE OF WARRANT. This Warrant may be
exercised, in whole or in part, at any time or from time to time prior to the
Expiration Date, by surrendering to HRN at its principal office this Warrant,
with an Exercise Form (as defined herein) duly executed by the Warrantholder and
accompanied by payment of
<PAGE>
2
the Exercise Price for the number of shares of Class A Common Stock specified in
such Exercise Form.
1.2 CASHLESS EXERCISE. In lieu of the payment of the
Exercise Price, the Warrantholder shall have the right (but not the obligation)
to require HRN to convert this Warrant, in whole or in part, into shares of
Class A Common Stock (the "Conversion Right") as provided for in this Section
1.2. Upon exercise of the Conversion Right, HRN shall deliver to the
Warrantholder (without payment by the Warrantholder of any of the Exercise
Price) that number of shares of Class A Common Stock equal to the quotient
obtained by dividing (x) the value of the Warrant at the time the Conversion
Right is exercised (determined by subtracting the aggregate Exercise Price in
effect immediately prior to the exercise of the Conversion Right from the
aggregate Current Market Price (as defined herein) of the shares of Class A
Common Stock issuable upon exercise of the Warrant immediately prior to the
exercise of the Conversion Right) by (y) the Current Market Price of one share
of Class A Common Stock immediately prior to the exercise of the Conversion
Right. The Conversion Right may be exercised at any time or from time to time by
surrendering to HRN at its principal office this Warrant, with an Exercise Form
duly executed by the Warrantholder and indicating that the Warrantholder wishes
to exercise the Conversion Right and specifying the total number of shares of
Class A Common Stock that the Warrantholder will be issued pursuant to such
Conversion Right.
1.3 DELIVERY OF WARRANT SHARES; EFFECTIVENESS OF
EXERCISE.
(a) DELIVERY OF WARRANT SHARES. A stock
certificate or certificates for the Warrant Shares specified in the Exercise
Form along with a check for the amount of cash to be paid in lieu of fractional
shares, if any, shall be delivered to the Warrantholder within three Business
Days after the Exercise Date (as defined herein). If this Warrant shall have
been exercised only in part, HRN shall, at the time of delivery of the stock
certificate or certificates and cash in lieu of fractional shares, if any,
deliver to the Warrantholder a new Warrant evidencing the rights to purchase the
remaining Warrant Shares, which new Warrant shall in all other respects be
identical with this Warrant.
(b) EFFECTIVENESS OF EXERCISE. The exercise of
this Warrant shall be deemed to have been effective immediately prior to the
close of business on the Business Day on which this Warrant is exercised in
accordance with Section 1.1 (the "Exercise Date"). The Person in whose name any
certificate for shares of Class A Common Stock shall be issuable upon such
exercise shall be deemed to be the record holder of such shares of Class A
Common Stock for all purposes on the Exercise Date.
<PAGE>
3
(c) LIMITATIONS ON EXERCISE. Notwithstanding
anything to the contrary herein, this Warrant may be exercised only upon the
delivery to HRN of any certificates, legal opinions, or other documents
reasonably requested by HRN to satisfy HRN that the proposed exercise of this
Warrant may be effected without registration under the Securities Act. The
Warrantholder shall not be entitled to exercise this Warrant, or any part
thereof, unless and until such certificates, legal opinions or other documents
are reasonably acceptable to HRN.
1.4 PAYMENT OF TAXES. The issuance of certificates
for Warrant Shares shall be made without charge to the Warrantholder for any
stock transfer or other issuance tax in respect thereof; PROVIDED, HOWEVER, that
the Warrantholder shall be required to pay any and all taxes that may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the then Warrantholder as reflected
upon the books of HRN.
2. RESTRICTIONS ON TRANSFER.
2.1 In addition to the restrictions in Section 11.3,
the Warrantholder shall not Transfer (as defined in Section 11.3) any Warrant
Shares prior to the first anniversary of the date hereof. This Section 2.1 shall
survive the exercise of the Warrants.
3. RESTRICTIVE LEGENDS.
3.1 WARRANTS. Except as otherwise permitted by this
Sec tion 3, each Warrant (and each Warrant issued in substitution for any
Warrant pursu ant to Section 5) shall be stamped or otherwise imprinted with a
legend in substan tially the following form:
(A) NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE
EXERCISE OF THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS.
<PAGE>
4
(B) THIS WARRANT IS ALSO SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFER AS SET FORTH HEREIN.
3.2 WARRANT SHARES. Except as otherwise permitted by
this Section 3, each stock certificate for Warrant Shares issued upon the
exercise of any Warrant and each stock certificate issued upon the direct or
indirect transfer of any such Warrant Shares shall be stamped or otherwise
imprinted with a legend in substantially the following form:
(A) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS.
(B) THE SALE, ASSIGNMENT, PLEDGE, ENCUMBRANCE OR OTHER
DISPOSITION (EACH A "TRANSFER") OF ANY OF THE SECURITIES REPRESENTED BY
THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE WARRANT DATED [ ],
2000, AMONG THE COMPANY AND THE WARRANTHOLDER NAMED THEREIN, A COPY OF
WHICH MAY BE INSPECTED AT THE COMPANY'S PRINCIPAL OFFICE. THE COMPANY
WILL NOT REGISTER THE TRANSFER OF SUCH SECURITIES ON THE BOOKS OF THE
COMPANY UNLESS AND UNTIL THE TRANSFER HAS BEEN MADE IN COMPLIANCE WITH
THE TERMS OF THE WARRANT AGREEMENT.
3.3 REMOVAL OF LEGENDS. Notwithstanding the
foregoing, the Warrantholder may require HRN to issue a Warrant or a stock
certificate for Warrant Shares, in each case without the legend required by
Section 3.1(A) or 3.2(A), as applicable, if either (i) such Warrant or such
Warrant Shares, as the case may be, have been registered for resale under the
Securities Act or (ii) the Warrantholder has delivered to HRN an opinion of
legal counsel (from a firm reasonably satisfactory to HRN) which opinion shall
be addressed to HRN and be reasonably satisfactory in form and substance to
HRN's counsel, to the effect that such registration is not required with respect
to such Warrant or such Warrant Shares, as the case may be.
<PAGE>
5
4. RESERVATION OF SHARES, ETC.
HRN covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the
exercise of this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all taxes,
liens, security interests, charges, and other encumbrances with respect to the
issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue and the restrictions on transfer contained in
this Warrant.
(b) During the period within which this Warrant
may be exercised, HRN will at all times have authorized and reserved, and keep
available free from preemptive rights a sufficient number of shares of Class A
Common Stock to provide for the exercise of the rights represented by this
Warrant.
(c) HRN will, from time to time, take all such
action as may be required to assure that the par value per share of the Warrant
Shares is at all times equal to or less than the then Effective Exercise Price.
5. LOSS OR DESTRUCTION OF WARRANT.
Subject to the terms and conditions hereof, upon receipt by
HRN of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, of
such bond or indemnification as HRN may reasonably require, and, in the case of
mutilation, upon surrender and cancellation of this Warrant, HRN will execute
and deliver a new Warrant of like tenor.
6. OWNERSHIP OF WARRANT.
HRN may deem and treat the Person in whose name this Warrant
is registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than HRN) for all purposes and
shall not be affected by any notice to the contrary, until presentation of this
Warrant for registra tion of transfer.
7. CERTAIN ADJUSTMENTS.
7.1 The number of Warrant Shares purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:
<PAGE>
6
(a) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF CLASS A COMMON STOCK. If at any time after the date of the
issuance of this Warrant HRN shall (i) declare a stock dividend on the Class A
Common Stock payable in shares of its capital stock (including Class A Common
Stock), (ii) increase the number of shares of Class A Common Stock outstanding
by a subdivision or split-up of shares of Class A Common Stock, (iii) decrease
the number of shares of Class A Common Stock outstanding by a combination of
shares of Class A Common Stock or (iv) issue any shares of its capital stock in
a reclassification of the Class A Common Stock, then, on the record date for
such dividend or the effective date of such subdivision or split-up, combination
or reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the
Warrantholder will be entitled to receive the number and kind of shares of
capital stock that such Warrantholder would have owned or been entitled to
receive upon or by reason of such event had this Warrant been exercised
immediately prior thereto, and the Exercise Price will be adjusted as provided
below in paragraph (g).
(b) REORGANIZATION, ETC. If at any time after
the date of issuance of this Warrant any consolidation of HRN with or merger of
HRN with or into any other Person (other than a merger or consolidation in which
HRN is the surviving or continuing corporation and which does not result in any
reclassification of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as a result of a
subdivision or combination in, outstanding shares of Class A Common Stock) or
any sale, lease or other transfer of all or sub stantially all of the assets of
HRN to any other Person (each a "Reorganization Event"), shall be effected in
such a way that the holders of Class A Common Stock shall be entitled to receive
stock, other securities or assets (whether such stock, other securities or
assets are issued or distributed by HRN or another Person) with respect to or in
exchange for Class A Common Stock, then, with respect to any unexercised
Warrant, the Board of Directors of HRN or any surviving or acquiring corporation
or entity (the "Relevant Entity") shall take such action as is equitable and
appropriate to substitute a new warrant for such Warrant or to assume such
Warrant in order to make such new or assumed warrant as nearly as may be
practicable, equivalent to the old Warrant (the "Reorganization Action").
Notwithstanding the foregoing, in lieu of taking any such action, the Relevant
Entity may pay to the Warrantholder the Value of the Warrant (as defined below)
in cancellation of the Warrant. The "Value of the Warrant" shall be the value of
the consideration received less the Exercise Price as determined in good faith
by HRN's Board of Directors. The Value of the Warrant shall be payable either,
at the election of the Relevant Entity, in cash or in the form of consideration
paid to holders of shares of Class A Common Stock pursuant to the Reorganization
Event.
(c) EXTRAORDINARY DISTRIBUTIONS. If at any time
after the date of issuance of this Warrant HRN shall distribute to all holders
of its Class A
<PAGE>
7
Common Stock (including any such distribution made in connection with a
consolidation or merger in which HRN is the continuing or surviving corporation
and the Class A Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course
quarterly cash dividends and (ii) dividends payable in shares of capital stock
for which adjustment is made under Section 7.1(a)) or rights, options or
warrants to subscribe for or purchase securities of HRN, then the number of
shares of Class A Common Stock to be delivered to such Warrantholder upon
exercise of this Warrant shall be increased so that the Warrantholder thereafter
shall be entitled to receive the number of shares of Class A Common Stock
determined by multiplying the number of shares such Warrantholder would have
been entitled to receive immediately before such record date by a fraction, the
denominator of which shall be the Current Market Price per share of Class A
Common Stock on such record date minus the then fair market value (as reasonably
determined by the Board of Directors of HRN in good faith) of the portion of the
cash, evidences of indebtedness, securities or other assets so distributed or of
such rights or warrants applicable to one share of Class A Common Stock
(provided that such denominator shall in no event be less than $.01 and the
numerator of which shall be the Current Market Price per share of the Class A
Common Stock, and the Exercise Price shall be adjusted as provided below in
paragraph (g).
(d) PRO RATA REPURCHASES. If at any time after
the date of issuance of this Warrant, HRN or any subsidiary thereof shall make a
Pro Rata Repurchase, then the number of shares of Class A Common Stock to be
delivered to such Warrantholder upon exercise of this Warrant shall be increased
so that the Warrantholder thereafter shall be entitled to receive the number of
shares of Class A Common Stock determined by multiplying the number of shares of
Class A Common Stock such Warrantholder would have been entitled to receive
immediately before such Pro Rata Repurchase by a fraction (which in no event
shall be less than one) the denominator of which shall be (i) the product of (x)
the number of shares of Class A Common Stock outstanding immediately before such
Pro Rata Repurchase and (y) the Current Market Price of the Class A Common Stock
as of the day immediately preceding the first public announcement by HRN of the
intent to effect such Pro Rata Repurchase minus (ii) the aggregate purchase
price of the Pro Rata Repurchase (provided that such denominator shall never be
less than $.01, and the numerator of which shall be the product of (i) the
number of shares of Class A Common Stock outstanding immediately before such Pro
Rata Repurchase minus the number of shares of Class A Common Stock repurchased
in such Pro Rata Repurchase and (ii) the Current Market Price of the Class A
Common Stock as of the day immediately preceding the first public announcement
by HRN of the intent to effect such Pro Rata Repurchase.
(e) FRACTIONAL SHARES. No fractional shares of
Class A Common Stock or scrip shall be issued to any Warrantholder in connection
with the
<PAGE>
8
exercise of this Warrant. Instead of any fractional shares of Class A Common
Stock that would otherwise be issuable to such Warrantholder, HRN will pay to
such Warrantholder a cash adjustment in respect of such fractional interest in
an amount equal to that fractional interest of the then Current Market Price per
share of Class A Common Stock.
(f) CARRYOVER. Notwithstanding any other
provision of this Section 7.1, no adjustment shall be made to the number of
shares of Class A Common Stock to be delivered to the Warrantholder (or to the
Exercise Price) if such adjustment represents less than 1% of the number of
shares to be so delivered, but any lesser adjustment shall be carried forward
and shall be made at the time and together with the next subsequent adjustment
that together with any adjustments so carried forward shall amount to 1% or more
of the number of shares to be so delivered.
(g) EXERCISE PRICE ADJUSTMENT. Whenever the
number of Warrant Shares purchasable upon the exercise of the Warrant is
adjusted as provided pursuant to this Section 7.1, the Exercise Price per share
payable upon the exercise of this Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Warrant Shares purchasable upon the exercise of
the Warrant immediately prior to such adjustment, and of which the denominator
shall be the number of Warrant Shares purchasable immediately thereafter;
PROVIDED, HOWEVER, that the Exercise Price for each Warrant Share shall in no
event be less than the par value of such Warrant Share.
(h) MULTIPLE ADJUSTMENTS. If any action or
transaction would require adjustment of the number of shares of Class A Common
Stock to be delivered to the Warrantholder upon exercise of this Warrant
pursuant to more than one paragraph of this Section 7.1, only one adjustment
shall be made and each such adjustment shall be the amount of adjustment that
has the highest absolute value.
7.2 NOTICE OF ADJUSTMENT. Whenever the number of
Warrant Shares or the Exercise Price of such Warrant Shares is adjusted, as
herein provided, HRN shall promptly mail by overnight courier or by first class
mail, postage prepaid, to the Warrantholder, notice of such adjustment or
adjustments setting forth the number of Warrant Shares and the Exercise Price of
such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
such adjustment was made.
7.3 NOTICES OF CORPORATE ACTION. So long as this
Warrant has not been exercised in full, in the event of:
<PAGE>
9
(a) any action that would trigger an adjustment
to the number of shares of Class A Common Stock to be delivered to the
Warrantholder upon exercise of this Warrant,
(b) any consolidation or merger involving HRN
and any other party or any transfer of all or substantially all the assets of
HRN to any other party, or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of HRN,
HRN will deliver, by overnight courier or by first class mail, postage prepaid,
to the Warrantholder a notice specifying (i) the date or expected date on which
any such record is to be taken for the purpose of a dividend, distribution or
right and the amount and character of any such dividend, distribution or right
and (ii) the date or expected date on which a reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Class A Common Stock (or other securities) shall
be entitled to exchange their shares of Class A Common Stock (or other
securities) for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up. Such notice shall be delivered
at least 20 days prior to the date therein specified in the case of any date
referred to in the foregoing subdivisions (i) and (ii).
7.4 EFFECT OF FAILURE TO NOTIFY. Failure to file any
certificate or notice or to mail any notice, or any defect in any certificate or
notice, pursuant to Section 7.3 shall not affect the legality or validity of the
adjustment to the Exercise Price, the number of shares purchasable upon exercise
of this Warrant, or any transaction giving rise thereto.
8. AMENDMENTS. Any provision of this Warrant may be amended
and the observance thereof waived only with the written consent of HRN and the
Warrantholder.
9. EXPIRATION OF THE WARRANT. The obligations of HRN pursuant
to this Warrant shall terminate on the Expiration Date.
10. DEFINITIONS.
As used herein, unless the context otherwise requires, the
following terms have the following meanings:
<PAGE>
10
"BUSINESS DAY" means any day other than a Saturday, Sunday or
a day on which national banks are authorized by law or executive order to close
in the State of Texas or New York.
"CLOSING PRICE" of the Class A Common Stock as of any day,
means (a) the average of the closing bid and asked prices, in either case as
reported on the principal national securities exchange on which the Class A
Common Stock is listed or admitted to trading or (b) if the Class A Common Stock
is not listed or admitted to trading on any national securities exchange, the
average of the highest reported bid and lowest reported asked quotation for the
Class A Common Stock, in either case reported on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), or a similar
service if NASDAQ is no longer reporting such information.
"CLASS A COMMON STOCK" has the meaning specified on the cover
of this Warrant.
"HRN" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" means, with respect to each share of
Class A Common Stock as of any date, the average of the daily Closing Prices per
share of Class A Common Stock for the 10 consecutive trading days prior to such
date; provided that if on any such date the shares of Class A Common Stock are
not listed or admitted for trading on any national securities exchange or quoted
by NASDAQ or a similar service, the Current Market Price for a share of Class A
Common Stock shall be the fair market value of such share as determined in good
faith by the Board of Directors of HRN or, if requested by the Warrantholder, an
Independent Financial Expert selected jointly by the Board of Directors and such
Warrantholder. If HRN and the Warrantholder are unable to agree upon an
Independent Financial Expert within 15 days after the request by the
Warrantholder, each of HRN and the Warrantholder shall select an Independent
Financial Expert within 5 days following the expiration of such 15-day period
and these two Independent Financial Experts shall select a third Independent
Financial Expert and the determination of the fair market value of a share of
Class A Common Stock by such third Independent Financial Expert shall be final
and binding on HRN and the Warrantholder. If either HRN or the Warrantholder
shall fail to select an Independent Financial Expert within such 5-day period,
then the fair market value of a share of Class A Common Stock shall be
determined by the Independent Financial Expert selected by the other party. The
fees and expenses of any of the Independent Financial Experts retained in
accordance with the foregoing shall be borne by HRN.
"EXERCISE FORM" means an Exercise Form in the form annexed
hereto as Exhibit A.
<PAGE>
11
"EXERCISE PRICE" has the meaning specified on the cover of
this Warrant.
"EXPIRATION DATE" has the meaning specified on the cover of
this Warrant.
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"PERSON" means any individual, corporation, partnership, joint
venture, association, trust, limited liability company or other entity.
"PRO RATA REPURCHASE" means any purchase of shares of Class A
Common Stock by HRN or by any of its subsidiaries whether for cash, shares of
capital stock of HRN, other securities of HRN, evidences of indebtedness of HRN
or any other Person or any other property (including, without limitation, shares
of capital stock, other securities or evidences of indebtedness of a subsidiary
of HRN), or any combination thereof, which purchase is subject to Section 13(e)
of the Securities Exchange Act of 1934, as amended, or is made pursuant to an
offer made available to all holders of Class A Common Stock.
"SECURITIES ACT" has the meaning specified on the cover of
this Warrant.
"WARRANTHOLDER" has the meaning specified on the cover of this
Warrant.
"WARRANT SHARES" has the meaning specified on the cover of
this Warrant.
11. MISCELLANEOUS.
11.1 ENTIRE AGREEMENT. This Warrant together with the
Letter Agreement and constitute the entire agreement between HRN and the
Warrantholder with respect to the Warrants.
11.2 BINDING EFFECT; BENEFITS. This Warrant shall
inure to the benefit of and shall be binding upon HRN and the Warrantholder and
their respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any Person other than HRN and the
Warrantholder, or their respective successors or assigns, any rights, remedies,
obligations or liabilities under or by reason of this Warrant.
11.3 TRANSFER; ASSIGNMENT. The Warrantholder may not
sell, assign, transfer, gift, exchange or otherwise dispose of, or grant a lien,
encumbrance, pledge or other security interest in (each a "Transfer") this
Warrant, except that after the
<PAGE>
12
first anniversary of the date hereof the Warrantholder may Transfer this Warrant
to an affiliate of the Warrantholder.
11.4 SECTION AND OTHER HEADINGS. The section and
other headings contained in this Warrant are for reference purposes only and
shall not be deemed to be a part of this Warrant or to affect the meaning or
interpretation of this Warrant.
11.5 NOTICES. All notices and other communications
required or permitted hereunder shall be in writing and shall be delivered
personally, telecopied or sent by certified, registered or express mail, postage
prepaid. Any such notice shall be deemed given when so delivered personally,
telecopied or sent by certified, registered or express mail, as follows:
(a) if to HRN, addressed to:
Hotel Reservations Network
8140 Walnut Hill Lane
Suite 203
Dallas, TX 75231
Attention: Robert Diener
Telecopy: (305) 892-4443
with a copy to:
USA Networks, Inc.
Carnegie Hall Tower
152 W. 57th St.,
42nd Floor
New York, NY 10019
Attention: General Counsel
Telecopy: (212) 314-7309
(b) if to the Warrantholder, addressed to:
Attention:
Any party may by notice given in accordance with this Section 11.5 designate
another address or person for receipt of notices hereunder.
11.6 SEVERABILITY. Any term or provision of this
Warrant which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the terms and
provisions of this Warrant or affecting the validity or enforceability of any of
the terms or provisions of this Warrant in any other jurisdiction.
11.7 GOVERNING LAW. This Warrant shall be deemed to
be a contract made under the laws of the State of Delaware and for all purposes
shall be governed by and construed in accordance with the laws of such State
applicable to such agreements made and to be performed entirely within such
State.
<PAGE>
13
11.8 CERTAIN REMEDIES. The Warrantholder shall be
entitled to an injunction or injunctions to prevent breaches of the provisions
of this Warrant and to enforce specifically the terms and provisions of this
Warrant in any court of the United States or any court of any state having
jurisdiction, this being in addition to any other remedy to which the
Warrantholder may be entitled at law or in equity.
11.9 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing
contained in this Warrant shall be deemed to confer upon the Warrantholder any
rights as a stockholder of HRN or as imposing any liabilities on the
Warrantholder to purchase any securities whether such liabilities are asserted
by HRN or by creditors or stockholders of HRN or otherwise.
11.10 FURTHER ASSURANCES. Each of HRN and the
Warrantholder shall do and perform all such further acts and things and execute
and deliver all such certificates, instruments and documents as HRN or the
Warrantholder may, at any time and from time to time, reasonably request in
connection with the performance of any of the provisions of this Agreement.
IN WITNESS WHEREOF, HRN has caused this Warrant to be signed
by its duly authorized officer.
HOTEL RESERVATIONS NETWORK
By:
----------------------------------
Robert Diener
President
Dated: [ ]
<PAGE>
14
EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant, to purchase __________ of the Warrant Shares
and herewith tenders payment for such Warrant Shares to the order of Hotel
Reservations Network in the amount of $__________ in accordance with the terms
of this Warrant. The undersigned requests that a certificate for such Warrant
Shares be registered in the name of the undersigned and that such certificates
be delivered to the undersigned's address below.
Dated:
----------------------------------
Signature
------------------------------
----------------------------
(Print Name)
----------------------------
(Street Address)
----------------------------
(City) (State) (Zip Code)
<PAGE>
Exhibit 10.7
EXHIBIT B
FORM OF WARRANT
(A) NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE
EXERCISE OF THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT
AND SUCH LAWS.
(B) THIS WARRANT IS ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER
AS SET FORTH HEREIN.
------------------------------------------------
HOTEL RESERVATIONS NETWORK, INC.
CLASS A COMMON STOCK PURCHASE WARRANT
------------------------------------------------
This certifies that, for good and valuable consideration, Hotel
Reservations Network, a Delaware corporation ("HRN"), grants to Travelocity.com
LP, a Delaware limited partnership (the "Warrantholder"), subject to the vesting
conditions set forth in Section 1, the right to subscribe for and purchase from
HRN [ ]1/ validly issued, fully paid and nonassessable shares (the "Warrant
Shares") of HRN's Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), at a
- ----------
1/ The number of shares shall equal the greater of (A) 4.50% of the total
number of shares of stock outstanding following the initial closing of the
IPO, or (B) 4.275% of the sum of the total number of shares of stock
outstanding immediately following the initial closing of the IPO plus the
total number of shares issuable upon exercise or conversion of all
warrants, options, and other convertible securities outstanding
immediately following consummation of the IPO or which HRN is obligated
(as of the time immediately following consummation of the IPO) to issue
(but excluding warrants issued to Travelocity LP).
<PAGE>
2
purchase price per share of $[ ]2/ (the "Exercise Price"), at any time from and
after January [ ], 2003 (subject to Sections 1.6, 1.7, 1.8 and 2), the
"Exercisability Date") but prior to 5:00 p.m. Eastern Time, on January [ ],
2004 (the "Expiration Date"), all subject to the terms, conditions and
adjustments herein set forth.
This Warrant was issued in connection with and pursuant to the terms
of the Letter Agreement, dated as of January ___, 2000 (the "Letter Agreement"),
between HRN, Sabre Inc., through its Travelocity.com division ("Travelocity"),
and Travelocity.com LP, a Delaware limited partnership ("Travelocity LP") and is
subject to the terms thereof. Reference in this Warrant is made to the
Affiliation Agreement (the "Affiliation Agreement), dated January __, 2000 (the
"Effective Date"), between HRN and Travelocity.
1. PERFORMANCE VESTING. The Warrantholder's right to exercise all or
any part of this Warrant shall be subject to the following:
<TABLE>
<CAPTION>
Twelve Months Ended [January,]
2001 2002 2003
<S> <C> <C> <C>
Target $140 million $218 million $298 million
Minimum $ 55 million $ 80 million $110 million
</TABLE>
1.1 Subject to Section 1.6 below, one-third of this Warrant
shall be deemed earned for each specified twelve month period during which the
amount of Travelocity Bookings for such period equals or exceeds the applicable
Target amount for such period. For example, if the amounts of Travelocity
Bookings during each of such three twelve month periods exceed the applicable
Target amounts for such periods, this Warrant shall be earned in full and the
Warrantholder shall be entitled to exercise this Warrant as provided herein for
all of the Warrant Shares. Notwithstanding that portions of this Warrant may be
deemed earned after each of the specified twelve month periods, no portion of
this Warrant shall be exercisable until the Exercisability Date. For purposes of
this Section 1, "Travelocity Bookings" means the gross sales amount before tax
of all orders placed and consumed (i.e., by staying at the hotel pursuant to the
booked order or, if full payment for the stay (other than a $50 cancellation
fee) is not refunded to the customer) either: (a) online through the Travelocity
Network, (b) through the Travelocity-exclusive telephone number(s) or (c)
through Travelocity customer service. Travelocity Bookings shall include, in the
event the merger of Travelocity and Preview Travel, Inc. is consummated, any
bookings,
- ----------
2/ The IPO price.
<PAGE>
3
after the date of such merger, made pursuant to that certain Interactive Product
Marketing Agreement dated October 26, 1999 between Preview Travel, Inc. and HRN.
1.2 If the amount of Travelocity Bookings does not equal or
exceed the applicable Target amount for a specified period but does exceed the
applicable Minimum amount for such period, then, subject to Section 1.6 below, a
proportionate part of the one-third of this Warrant available to be earned
during such period shall be deemed earned during such period and shall become
exercisable on the Exercisability Date. The number of shares so earned and
exercisable for such period shall be equal to the product of (A) [insert number
that is one-third of total Warrant Shares] and (B) a fraction, the numerator of
which is the amount of Travelocity Bookings for such period and the denominator
of which is the specified Target amount for such period.
1.3 To the extent that the amount of Travelocity Bookings
during any specified twelve month period exceeds the applicable Target amount
for such period, the excess amount shall be carried forward and applied in
determining the amount of Travelocity Bookings during the next succeeding twelve
month period.
1.4 If the amount of Travelocity Bookings during a specified
twelve month period is less than the applicable Target amount but greater than
an amount equal to the applicable Minimum amount minus $10 million, then the
amount of Travelocity Bookings in the next succeeding twelve month period or
periods shall first be applied to earn the remaining unearned portion of this
Warrant in respect of the prior period. Any amounts so applied shall be
disregarded in determining the amount of Travelocity Bookings for any other
twelve month period (except with respect to determining whether the conditions
of the first sentence of this paragraph 1.4 have been met or whether the $40
Million Minimum (as defined in Section 1.6) has been met). For example, if the
Travelocity Bookings for the three twelve-month periods equals $100 million,
$200 million, and $300 million, respectively, then warrants for [100/140 *1/3 *
the total number of Warrant Shares] would be earned in year 1, warrants for
[(40/140 * 1/3 * the total number of Warrant Shares) plus (160/218 * 1/3 * the
total number of Warrant Shares)] would be earned in year 2 (the first $40
million in year 2 bookings being applied to complete the earning of the year 1
Warrant Shares that were unearned in Year 1), and warrants for [(58/218 * 1/3 *
the total number of Warrant Shares) plus (242/298 * 1/3 * the total number of
Warrant Shares)] would be earned in year 3 (the first $58 million in year 3
bookings being applied to complete the earning of the year 2 Warrant Shares that
were unearned in year 2). For further example, if the Travelocity Bookings for
the three twelve month periods equals $50 million, $100 million, and $300
million, respectively, then $90 million in year 2 bookings would be applied
to earn the year 1 warrants in full ($50 million in year 1 bookings plus $90
million of the year 2 bookings), and, $208 million in Year 3 bookings would be
applied
<PAGE>
4
to earn the year 2 warrants in full (the remaining $10 million in year 2
bookings plus $208 million of the year 3 bookings), but the remaining $92
million in year 3 bookings would not meet the year 3 Minimum amount and would
therefore earn no year 3 warrants.
1.5 Within 30 days after the end of each of the specified
twelve month periods, HRN shall deliver to Travelocity and the Warrantholder a
written statement setting forth the amount of Travelocity Bookings during such
twelve month period and a computation of the amount of this Warrant, if any,
that has been earned in respect of such period.
1.6 Notwithstanding anything to the contrary contained in
Section 1.1, 1.2, 1.3. or 1.4, no portion of this Warrant shall be deemed earned
if the amount of Travelocity Bookings during the second and third twelve month
periods of the term of the Affiliation Agreement (without regard to the
application of Travelocity Bookings from or to other periods under Sections 1.3
or 1.4 above) does not equal or exceed $40 million (this condition being
referred to herein as the "$40 Million Minimum") (e.g. a portion earned under
section 1.1 for year 1 shall not be deemed earned if Travelocity Bookings for
year 2 are less than $40 million, but a portion earned under section 1.1 for
year 2 shall be deemed earned if Travelocity Bookings for year 1 are less than
$40 million so long as Travelocity Bookings for years 2 and 3 are each greater
than $40 million, thus meeting the $40 million Minimum). Notwithstanding the
previous sentence, HRN may by written notice to the Warrantholder and
Travelocity waive the applicability of the $40 Million Minimum in which case (i)
the portions of the Warrant specified in such notice shall be deemed to be
earned irrevocably; (ii) the Exercisability Date for such portion shall be
accelerated to the date three business days after such notice is sent; and (iii)
such portions shall remain exercisable until the earlier of (x) the second
anniversary of such accelerated Exercisability Date and (y) the fourth
anniversary of the Effective Date.
1.7 Under the terms of the Affiliation Agreement: HRN has
agreed to comply with the performance standards (the "Performance Standards")
set forth in ANNEX A.3/ In the event HRN has not complied in any material
respect with a Performance Standard with respect to which it has received notice
of noncompliance from Travelocity under the Affiliation Agreement at the end of
the notice and cure period under the Affiliation Agreement, then upon written
notice to HRN, Travelocity may terminate the Exclusivity (as defined in Section
2.1), and upon such termination, notwithstanding Section 1.6, the Exercisability
Date with respect to the entire portion of this Warrant previously earned by the
Warrantholder shall be accelerated to the date of such termination (such portion
of this Warrant remaining exercisable until the earlier
- ----------
3/ This Annex will be the same as Exhibit B to the Affiliation Agreement.
<PAGE>
5
of (x) the second anniversary of such accelerated Exercisability Date and (y)
the fourth anniversary of the Effective Date) without any further performance
requirements or conditions. If Travelocity determines, in its reasonable
discretion, that a failure by HRN to meet a Performance Standard may have a
material adverse effect upon the operation, functionality or user experience of
the Travelocity Network, or any portion thereof, Travelocity may decrease or
cease the promotion of the HRN Hotel Product until the deficiency has been
corrected.
1.8 (a) Under Section 3.1 of the Affiliation Agreement,
Travelocity has agreed to integrate the HRN hotel properties into the
Travelocity Network module that is primarily designed for booking hotels,
currently "Find/Reserve Hotel" ("Integration") no later than the date that a
full integration of Previewtravel.com and Travelocity.com is completed.
(b) Under the Affiliation Agreement, in addition to
the notice and termination provisions described in Section 1.7 hereof (which
govern breaches by HRN of Performance Standards), either HRN or Travelocity may
terminate the Affiliation Agreement upon a material breach thereof by the other
party that remains uncured by the breaching party 30 days after written notice
of such breach. Under the Affiliation Agreement, Travelocity also has the right
to terminate the Affiliation Agreement within 90 days after the first
anniversary of Integration if HRN does not account for at least 10% of
Travelocity's hotel bookings during the period from the date of Integration
until the first anniversary thereof; PROVIDED however, that Travelocity shall
lose such right if it has been in material breach of section 3 (which pertains
to, among other things, Integration and Travelocity's positioning and promotion
of the HRN Hotel Product) or section 6 (which pertains to Exclusivity) of the
Affiliation Agreement, for one or more periods of time since the date of
Integration whose aggregate length is more than 30 days after written notice is
given by HRN of each such breach. In the case of a termination described in this
Section 1.8(b), the Exercisability Date for that portion of this Warrant which
was previously earned shall be accelerated to the date of such termination (and
shall be exercisable for one year thereafter) without any further performance
requirements or conditions after the date of such termination.
2. EXCLUSIVITY.
2.1 Under the Affiliation Agreement, Travelocity has agreed,
with certain exceptions, not to display on the Travelocity Network any
consolidator hotel offering with respect to any HRN City of any competitor of
HRN listed in an exhibit to the Affiliation Agreement (such restriction being
referred to herein as "Third Party Exclusivity"). Travelocity has also agreed,
with certain exceptions, not to display in the Travelocity Network any wholesale
hotel rates arranged by the
<PAGE>
6
Travelocity.com division or its subsidiaries with respect to any HRN City (such
restriction being referred to herein as "Travelocity Exclusivity"). The original
HRN Cities are identified in the Affiliation Agreement, and cities may be added
or deleted based on meeting a target number of HRN hotels and a target
percentage of bookings as specified in the Affiliation Agreement. Travelocity
Exclusivity and Third Party Exclusivity are referred to together herein as
"Exclusivity."
2.2 Under the terms of the Affiliation Agreement, Travelocity
Exclusivity will terminate and be of no further force and effect if:
(a) on the date 18 months after the Effective Date,
the cumulative number of Warrant Shares earned to date pursuant to this Warrant
is less than 0.4333 x the total number of Warrant Shares;
(b) on the date 24 months after the Effective Date,
the cumulative number of Warrant Shares earned to date pursuant to this Warrant
is less than 0.6667 x the total number of Warrant Shares; or
(c) on the date 30 months after the Effective Date,
the cumulative number of Warrant Shares earned to date pursuant to this Warrant
is less than 0.7778 x the total number of Warrant Shares, in which case the
Third Party Exclusivity will also terminate at such time.
2.3 Notwithstanding that the performance targets described in
Section 1.1 shall not have been met, HRN in its sole discretion may waive in
writing such requirements in full or in part so that all or any part of this
Warrant that otherwise would not vest does (notwithstanding Section 1.6) vest,
in order to avoid the termination of Travelocity Exclusivity pursuant to Section
2.2 or Third Party Exclusivity pursuant to Section 2.2(c) (in which case the
Exercisability Date for the portion of this Warrant that vests as a result of
the waiver shall be accelerated to the date of such waiver, and such portion
shall be exercisable until the earlier of (x) the second anniversary of such
accelerated Exercisability Date and (y) the fourth anniversary of the Effective
Date).
2.4 Notwithstanding the waivers described in Section 2.3,
under the terms of the Affiliation Agreement, Travelocity has the right to
terminate the Travelocity Exclusivity at any time after the date 18 months after
the Effective Date; PROVIDED, however, that Travelocity may not exercise such
right during the six month period following the exercise by the Warrantholder of
any portion of this Warrant made exercisable pursuant to a waiver under Section
1.6 or 2.3. If Travelocity exercises such right to terminate the Travelocity
Exclusivity as described in this Section
<PAGE>
7
2.4, all portions of this Warrant that are already exercisable at such time
shall remain exercisable, and no portion of this Warrant that is not already
exercisable at such time shall be deemed earned.
3. EXERCISE OF WARRANT.
3.1 EXERCISE OF WARRANT. To the extent earned in accordance
with Section 1, this Warrant may be exercised, in whole or in part, at any time
or from time to time following the Exercisability Date but prior to the
Expiration Date, by surrendering to HRN at its principal office this Warrant,
with an Exercise Form (as defined herein) duly executed by the Warrantholder and
accompanied by payment of the Exercise Price for the number of shares of Class A
Common Stock specified in such Exercise Form.
3.2 CASHLESS EXERCISE. In lieu of the payment of the Exercise
Price, the Warrantholder shall have the right (but not the obligation) to
require HRN to convert this Warrant, in whole or in part, into shares of Class A
Common Stock (the "Conversion Right") as provided for in this Section 3.2. Upon
exercise of the Conversion Right, HRN shall deliver to the Warrantholder
(without payment by the Warrantholder of any of the Exercise Price) that number
of shares of Class A Common Stock equal to the quotient obtained by dividing (x)
the value of the Warrant at the time the Conversion Right is exercised
(determined by subtracting the aggregate Exercise Price in effect immediately
prior to the exercise of the Conversion Right from the aggregate Current Market
Price (as defined herein) of the shares of Class A Common Stock issuable upon
exercise of the Warrant immediately prior to the exercise of the Conversion
Right) by (y) the Current Market Price of one share of Class A Common Stock
immediately prior to the exercise of the Conversion Right. The Conversion Right
may be exercised at any time or from time to time by surrendering to HRN at its
principal office this Warrant, with an Exercise Form duly executed by the
Warrantholder and indicating that the Warrantholder wishes to exercise the
Conversion Right and specifying the total number of shares of Class A Common
Stock that the Warrantholder will be issued pursuant to such Conversion Right.
3.3 DELIVERY OF WARRANT SHARES; EFFECTIVENESS OF EXERCISE.
(a) DELIVERY OF WARRANT SHARES. A stock certificate
or certificates for the Warrant Shares specified in the Exercise Form along with
a check for the amount of cash to be paid in lieu of fractional shares, if any,
shall be delivered to the Warrantholder within three Business Days after the
Exercise Date (as defined herein). If this Warrant shall have been exercised
only in part, HRN shall, at the time of delivery of the stock certificate or
certificates and cash in lieu of fractional shares, if any, deliver to the
Warrantholder a new Warrant evidencing the rights to purchase the
<PAGE>
8
remaining Warrant Shares, which new Warrant shall in all other respects be
identical with this Warrant.
(b) EFFECTIVENESS OF EXERCISE. The exercise of this
Warrant shall be deemed to have been effective immediately prior to the close of
business on the Business Day on which this Warrant is exercised in accordance
with Section 3.1 (the "Exercise Date"). The Person in whose name any certificate
for shares of Class A Common Stock shall be issuable upon such exercise shall be
deemed to be the record holder of such shares of Class A Common Stock for all
purposes on the Exercise Date.
(c) LIMITATIONS ON EXERCISE. Notwithstanding anything to
the contrary herein, this Warrant may be exercised only upon the delivery to HRN
of any certificates, legal opinions, or other documents reasonably requested by
HRN to satisfy HRN that the proposed exercise of this Warrant may be effected
without registration under the Securities Act. The Warrantholder shall not be
entitled to exercise this Warrant, or any part thereof, unless and until such
certificates, legal opinions or other documents are reasonably acceptable to
HRN.
3.4 PAYMENT OF TAXES. The issuance of certificates for Warrant
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereof; PROVIDED, HOWEVER, that the
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of HRN.
4. RESTRICTIVE LEGENDS.
4.1 WARRANTS. Except as otherwise permitted by this Section 4,
each Warrant (and each Warrant issued in substitution for any Warrant pursuant
to Section 8) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
(A) NEITHER THIS WARRANT NOR ANY SECURITIES ACQUIRED UPON THE
EXERCISE OF THIS WARRANT (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN AVAILABLE
<PAGE>
9
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS.
(B) THIS WARRANT IS ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER
AS SET FORTH HEREIN.
4.2 WARRANT SHARES. Except as otherwise permitted by this
Section 4, each stock certificate for Warrant Shares issued upon the exercise of
any Warrant and each stock certificate issued upon the direct or indirect
transfer of any such Warrant Shares shall be stamped or otherwise imprinted with
a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DIS POSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT AND SUCH LAWS.
4.3 REMOVAL OF LEGENDS. Notwithstanding the foregoing, the
Warrantholder may require HRN to issue a Warrant or a stock certificate for
Warrant Shares, in each case without a legend required under Section 4.1(A) or
4.2, as applicable, if either (i) such Warrant or such Warrant Shares, as the
case may be, have been registered for resale under the Securities Act or (ii)
the Warrantholder has delivered to HRN an opinion of legal counsel (from a firm
reasonably satisfactory to HRN) which opinion shall be addressed to HRN and be
reasonably satisfactory in form and substance to HRN's counsel, to the effect
that such registration is not required with respect to such Warrant or such
Warrant Shares, as the case may be.
5. RESERVATION OF SHARES, ETC.
HRN covenants and agrees as follows:
5.1 All Warrant Shares that are issued upon the exercise of
this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all taxes,
liens, security interests, charges, and other encumbrances with respect to the
issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue and the restrictions on transfer contained in
this Warrant.
<PAGE>
10
5.2 During the period within which this Warrant may be
exercised, HRN will at all times have authorized and reserved, and keep
available free from preemptive rights a sufficient number of shares of Class A
Common Stock to provide for the exercise of the rights represented by this
Warrant.
5.3 HRN will, from time to time, take all such action as may
be required to assure that the par value per share of the Warrant Shares is at
all times equal to or less than the then effective Exercise Price.
6. LOSS OR DESTRUCTION OF WARRANT.
Subject to the terms and conditions hereof, upon receipt by HRN of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, of
such bond or indemnification as HRN may reasonably require, and, in the case of
mutilation, upon surrender and cancellation of this Warrant, HRN will execute
and deliver a new Warrant of like tenor.
7. OWNERSHIP OF WARRANT.
HRN may deem and treat the Person in whose name this Warrant is
registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than HRN) for all purposes and
shall not be affected by any notice to the contrary, until presentation of this
Warrant for registra tion of transfer.
8. CERTAIN ADJUSTMENTS.
8.1 The number of Warrant Shares purchasable upon the exercise
of this Warrant and the Exercise Price shall be subject to adjustment as
follows:
(a) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF CLASS A COMMON STOCK. If at any time after the date of the
issuance of this Warrant HRN shall (i) declare a stock dividend on the Class A
Common Stock payable in shares of its capital stock (including Class A Common
Stock), (ii) increase the number of shares of Class A Common Stock outstanding
by a subdivision or split-up of shares of Class A Common Stock, (iii) decrease
the number of shares of Class A Common Stock outstanding by a combination of
shares of Class A Common Stock or (iv) issue any shares of its capital stock in
a reclassification of the Class A Common Stock, then, on the record date for
such dividend or the effective date of such subdivision or split-up, combination
or reclassification, as the case may be, the number
<PAGE>
11
and kind of shares to be delivered upon exercise of this Warrant will be
adjusted so that the Warrantholder will be entitled to receive the number and
kind of shares of capital stock that such Warrantholder would have owned or been
entitled to receive upon or by reason of such event had this Warrant been
exercised immediately prior thereto, and the Exercise Price will be adjusted as
provided below in paragraph (g).
(b) REORGANIZATION, ETC. If at any time after the date
of issuance of this Warrant any consolidation of HRN with or merger of HRN with
or into any other Person (other than a merger or consolidation in which HRN is
the surviving or continuing corporation and which does not result in any
reclassification of, or change in the Class A Common Stock) or any sale, lease
or other transfer of all or substantially all of the assets of HRN to any other
Person (each a "Reorganization Event"), shall be effected in such a way that the
holders of Class A Common Stock shall be entitled to receive stock, other
securities or assets (whether such stock, other securities or assets are issued
or distributed by HRN or another Person) with respect to or in exchange for
Class A Common Stock, then, with respect to any unexercised Warrant, the Board
of Directors of HRN or any surviving or acquiring corporation or entity (the
"Relevant Entity") shall take such action as is equitable and appropriate to
substitute a new warrant for such Warrant or to assume such Warrant in order to
make such new or assumed warrant as nearly as may be practicable, equivalent to
the old Warrant (the "Reorganization Action"). Notwithstanding the foregoing, in
lieu of taking any such action, the Relevant Entity may pay to the Warrantholder
the Value of the Warrant (as defined below) in cancellation of the Warrant. The
"Value of the Warrant" shall be the value of the consideration received less the
Exercise Price as determined in good faith by HRN's Board of Directors. The
Value of the Warrant shall be payable either, at the election of the Relevant
Entity, in cash or in the form of consideration paid to holders of shares of
Class A Common Stock pursuant to the Reorganization Event.
(c) EXTRAORDINARY DISTRIBUTIONS. If at any time after
the date of issuance of this Warrant HRN shall distribute to all holders of its
Class A Common Stock (including any such distribution made in connection with a
consolidation or merger in which HRN is the continuing or surviving corporation
and the Class A Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course
quarterly cash dividends and (ii) dividends payable in shares of capital stock
for which adjustment is made under Section 8.1(a)) or rights, options or
warrants to subscribe for or purchase securities of HRN, then the number of
shares of Class A Common Stock to be delivered to such Warrantholder upon
exercise of this Warrant shall be increased so that the Warrantholder thereafter
shall be entitled to receive the number of shares of Class A Common Stock
determined by multiplying the number of shares such Warrantholder would have
been entitled to receive immediately before such record date by a fraction, the
denominator of which shall be the Current Market Price per share of Class A
Common Stock on such record
<PAGE>
12
date minus the then fair market value (as reasonably determined by the Board of
Directors of HRN in good faith) of the portion of the cash, evidences of
indebtedness, securities or other assets so distributed or of such rights or
warrants applicable to one share of Class A Common Stock (provided that such
denominator shall in no event be less than $.01 and the numerator of which shall
be the Current Market Price per share of the Class A Common Stock, and the
Exercise Price shall be adjusted as provided below in paragraph (g).
(d) PRO RATA REPURCHASES. If at any time after the date
of issuance of this Warrant, HRN or any subsidiary thereof shall make a Pro Rata
Repurchase, then the number of shares of Class A Common Stock to be delivered to
such Warrantholder upon exercise of this Warrant shall be increased so that the
Warrantholder thereafter shall be entitled to receive the number of shares of
Class A Common Stock determined by multiplying the number of shares of Class A
Common Stock such Warrantholder would have been entitled to receive immediately
before such Pro Rata Repurchase by a fraction (which in no event shall be less
than one) the denominator of which shall be (i) the product of (x) the number of
shares of Class A Common Stock outstanding immediately before such Pro Rata
Repurchase and (y) the Current Market Price of the Class A Common Stock as of
the day immediately preceding the first public announcement by HRN of the intent
to effect such Pro Rata Repurchase minus (ii) the aggregate purchase price of
the Pro Rata Repurchase (provided that such denominator shall never be less than
$.01, and the numerator of which shall be the product of (i) the number of
shares of Class A Common Stock outstanding immediately before such Pro Rata
Repurchase minus the number of shares of Class A Common Stock repurchased in
such Pro Rata Repurchase and (ii) the Current Market Price of the Class A Common
Stock as of the day immediately preceding the first public announcement by HRN
of the intent to effect such Pro Rata Repurchase.
(e) FRACTIONAL SHARES. No fractional shares of Class A
Common Stock or scrip shall be issued to any Warrantholder in connection with
the exercise of this Warrant. Instead of any fractional shares of Class A Common
Stock that would otherwise be issuable to such Warrantholder, HRN will pay to
such Warrantholder a cash adjustment in respect of such fractional interest in
an amount equal to that fractional interest of the then Current Market Price per
share of Class A Common Stock.
(f) CARRYOVER. Notwithstanding any other provision of
this Section 8.1, no adjustment shall be made to the number of shares of Class A
Common Stock to be delivered to the Warrantholder (or to the Exercise Price) if
such adjustment represents less than 1% of the number of shares to be so
delivered, but any lesser adjustment shall be carried forward and shall be made
at the time and together
<PAGE>
13
with the next subsequent adjustment that together with any adjustments so
carried forward shall amount to 1% or more of the number of shares to be so
delivered.
(g) EXERCISE PRICE ADJUSTMENT. Whenever the number
of Warrant Shares purchasable upon the exercise of the Warrant is adjusted as
provided pursuant to this Section 8.1, the Exercise Price per share payable upon
the exercise of this Warrant shall be adjusted by multiplying such Exercise
Price immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of Warrant Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant Shares purchasable immediately thereafter; PROVIDED,
HOWEVER, that the Exercise Price for each Warrant Share shall in no event be
less than the par value of such Warrant Share.
(h) MULTIPLE ADJUSTMENTS. If any action or transaction
would require adjustment of the number of shares of Class A Common Stock to be
delivered to the Warrantholder upon exercise of this Warrant pursuant to more
than one paragraph of this Section 8.1, only one adjustment shall be made and
each such adjustment shall be the amount of adjustment that has the highest
absolute value.
8.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant
Shares or the Exercise Price of such Warrant Shares is adjusted, as herein
provided, HRN shall promptly mail by overnight courier or by first class mail,
postage prepaid, to the Warrantholder, notice of such adjustment or adjustments
setting forth the number of Warrant Shares and the Exercise Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made.
8.3 NOTICES OF CORPORATE ACTION. So long as this Warrant has
not been exercised in full, in the event of:
(a) any action that would trigger an adjustment to the
number of shares of Class A Common Stock to be delivered to the Warrantholder
upon exercise of this Warrant,
(b) any consolidation or merger involving HRN and
any other party or any transfer of all or substantially all the assets of HRN to
any other party, or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of HRN,
<PAGE>
14
HRN will deliver, by overnight courier or by first class mail, postage prepaid,
to the Warrantholder a notice specifying (i) the date or expected date on which
any such record is to be taken for the purpose of a dividend, distribution or
right and the amount and character of any such dividend, distribution or right
and (ii) the date or expected date on which a reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Class A Common Stock (or other securities) shall
be entitled to exchange their shares of Class A Common Stock (or other
securities) for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up. Such notice shall be delivered
at least 20 days prior to the date therein specified in the case of any date
referred to in the foregoing subdivisions (i) and (ii).
8.4 EFFECT OF FAILURE TO NOTIFY. Failure to file any
certificate or notice or to mail any notice, or any defect in any certificate or
notice, pursuant to Section 8.3 shall not affect the legality or validity of the
adjustment to the Exercise Price, the number of shares purchasable upon exercise
of this Warrant, or any transaction giving rise thereto.
9. AMENDMENTS. Any provision of this Warrant may be amended and the
observance thereof waived only with the written consent of HRN and the
Warrantholder.
10. EXPIRATION OF THE WARRANT. The obligations of HRN pursuant to
this Warrant shall terminate on the Expiration Date.
11. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following meanings:
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day
on which national banks are authorized by law or executive order to close in the
State of Texas or New York.
"CLOSING PRICE" of the Class A Common Stock as of any day, means (a)
the average of the closing bid and asked prices, in either case as reported on
the principal national securities exchange on which the Class A Common Stock is
listed or admitted to trading or (b) if the Class A Common Stock is not listed
or admitted to trading on any national securities exchange, the average of the
highest reported bid and lowest reported asked quotation for the Class A Common
Stock, in either case reported
<PAGE>
15
on the National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ"), or a similar service if NASDAQ is no longer reporting such
information.
"CLASS A COMMON STOCK" has the meaning specified on the cover of
this Warrant.
"HRN" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" means, with respect to each share of Class A
Common Stock as of any date, the average of the daily Closing Prices per share
of Class A Common Stock for the 10 consecutive trading days prior to such date;
provided that if on any such date the shares of Class A Common Stock are not
listed or admitted for trading on any national securities exchange or quoted by
NASDAQ or a similar service, the Current Market Price for a share of Class A
Common Stock shall be the fair market value of such share as determined in good
faith by the Board of Directors of HRN or, if requested by the Warrantholder, an
Independent Financial Expert selected jointly by the Board of Directors and such
Warrantholder. If HRN and the Warrantholder are unable to agree upon an
Independent Financial Expert within 15 days after the request by the
Warrantholder, each of HRN and the Warrantholder shall select an Independent
Financial Expert within 5 days following the expiration of such 15-day period
and these two Independent Financial Experts shall select a third Independent
Financial Expert and the determination of the fair market value of a share of
Class A Common Stock by such third Independent Financial Expert shall be final
and binding on HRN and the Warrantholder. If either HRN or the Warrantholder
shall fail to select an Independent Financial Expert within such 5-day period,
then the fair market value of a share of Class A Common Stock shall be
determined by the Independent Financial Expert selected by the other party. The
fees and expenses of any of the Independent Financial Experts retained in
accordance with the foregoing shall be borne by HRN.
"EXERCISE FORM" means an Exercise Form in the form annexed hereto as
Exhibit A.
"EXERCISE PRICE" has the meaning specified on the cover of this
Warrant.
"EXPIRATION DATE" has the meaning specified on the cover of this
Warrant.
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"PERSON" means any individual, corporation, partnership, joint
venture, association, trust, limited liability company or other entity.
<PAGE>
16
"PRO RATA REPURCHASE" means any purchase of shares of Class A Common
Stock by HRN or by any of its subsidiaries whether for cash, shares of capital
stock of HRN, other securities of HRN, evidences of indebtedness of HRN or any
other Person or any other property (including, without limitation, shares of
capital stock, other securities or evidences of indebtedness of a subsidiary of
HRN), or any combination thereof, which purchase is subject to Section 13(e) of
the Securities Exchange Act of 1934, as amended, or is made pursuant to an offer
made available to all holders of Class A Common Stock.
"SECURITIES ACT" has the meaning specified on the cover of this
Warrant.
"WARRANTHOLDER" has the meaning specified on the cover of this
Warrant.
"WARRANT SHARES" has the meaning specified on the cover of this
Warrant.
12. MISCELLANEOUS.
12.1 ENTIRE AGREEMENT. This Warrant together with the Letter
Agreement and constitute the entire agreement between HRN and the Warrantholder
with respect to the Warrants.
12.2 BINDING EFFECT; BENEFITS. This Warrant shall inure to the
benefit of and shall be binding upon HRN and the Warrantholder and their
respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any Person other than HRN and the
Warrantholder, or their respective successors or assigns, any rights, remedies,
obligations or liabilities under or by reason of this Warrant.
12.3 TRANSFER; ASSIGNMENT. The Warrantholder may not sell,
assign, transfer, gift, exchange or otherwise dispose of, or grant a lien,
encumbrance, pledge or other security interest in (each a "Transfer") this
Warrant, except that after the first anniversary of the date hereof the
Warrantholder may Transfer this Warrant to an affiliate of the Warrantholder.
12.4 SECTION AND OTHER HEADINGS. The section and other
headings contained in this Warrant are for reference purposes only and shall not
be deemed to be a part of this Warrant or to affect the meaning or
interpretation of this Warrant.
12.5 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be
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17
deemed given when so delivered personally, telecopied or sent by certified,
registered or express mail, as follows:
(a) if to HRN, addressed to:
Hotel Reservations Network
8140 Walnut Hill Lane
Suite 203
Dallas, TX 75231
Attention: Robert Diener
Telecopy: (305) 892-4443
with a copy to:
USA Networks, Inc.
Carnegie Hall Tower
152 W 57th St.,
42nd Floor
New York, NY 10019
Attention: General Counsel
Telecopy: (212) 314-7309
(b) if to the Warrantholder, addressed to:
Travelocity.com LP
[address]
Attention:
With a copy to:
Sabre Inc., Travelocity.com division
[address]
Attention:
Any party may by notice given in accordance with this Section 11.5 designate
another address or person for receipt of notices hereunder.
12.6 SEVERABILITY. Any term or provision of this Warrant which
is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
12.7 REFERENCES TO PORTIONS OF THIS AGREEMENT. The Annexes and
Schedules are a part of this Agreement as if fully set forth herein. All
references herein to Sections, paragraphs, Annexes and Schedules shall be deemed
references to such parts of this Agreement, unless the context shall otherwise
require.
12.8 GOVERNING LAW. This Warrant shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be governed by and construed in accordance with the laws of such State
applicable to such agreements made and to be performed entirely within such
State.
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18
12.9 CERTAIN REMEDIES. The Warrantholder shall be entitled to
an injunction or injunctions to prevent breaches of the provisions of this
Warrant and to enforce specifically the terms and provisions of this Warrant in
any court of the United States or any court of any state having jurisdiction,
this being in addition to any other remedy to which the Warrantholder may be
entitled at law or in equity.
12.10 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing
contained in this Warrant shall be deemed to confer upon the Warrantholder any
rights as a stockholder of HRN or as imposing any liabilities on the
Warrantholder to purchase any securities whether such liabilities are asserted
by HRN or by creditors or stockholders of HRN or otherwise.
12.11 FURTHER ASSURANCES. Each of HRN and the Warrantholder
shall do and perform all such further acts and things and execute and deliver
all such certificates, instruments and documents as HRN or the Warrantholder
may, at any time and from time to time, reasonably request in connection with
the performance of any of the provisions of this Agreement.
IN WITNESS WHEREOF, HRN has caused this Warrant to be signed by its
duly authorized officer.
HOTEL RESERVATIONS NETWORK
By:___________________________________
Robert Diener
President
Dated: [ ]
<PAGE>
19
EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase __________ of the Warrant Shares and
herewith tenders payment for such Warrant Shares to the order of Hotel
Reservations Network in the amount of $__________ in accordance with the terms
of this Warrant. The undersigned requests that a certificate for such Warrant
Shares be registered in the name of the undersigned and that such certificates
be delivered to the undersigned's address below.
Dated:__________________________
Signature____________________________
----------------------------
(Print Name)
----------------------------
(Street Address)
----------------------------
(City) (State) (Zip Code)
<PAGE>
20
ANNEX A
PERFORMANCE STANDARDS
1. INTRODUCTION
This Annex A describes certain services, functions and responsibilities of HRN
(the "Services"). HRN shall be fully responsible for all services (including,
without limitation, for equipment and software) from the Electronic Data
Interface to the HRN online host systems (such area shall be known as the "HRN
Responsibility Area"). Included in such responsibilities, HRN shall operate and
maintain the host systems, and manage and operate the equipment, software and
any other resources within the HRN Responsibility Area. HRN shall also be fully
responsible for providing support and back-end services in connection with HRN
hotel reservations support and processing, including, without limitation, call
center operation and management services and other general support functions.
HRN anticipates that it will improve and expand the HRN Hotel Product over the
Term based on HRN's knowledge of and access to state-of-the-art resources and
technology, implementation of improved methods and procedures for providing the
HRN Hotel Product, and efficiencies arising from HRN's provision of the HRN
Hotel Product.
2. MANAGEMENT AND OPERATION SERVICES
2.1 Management and Operation of the Equipment. HRN will assume full management
and operational responsibility for the HRN Online System and HRN Electronic Data
Interface. Such responsibilities include, at a minimum, acquiring, installing,
upgrading, managing, maintaining, repairing and replacing all software, hardware
and telecommunications in order to provide the Services.
HRN shall assume full management and operational responsibility for host
processor(s) functions and services within the HRN Responsibility Area. HRN's
responsibilities during the term of the Agreement will include, without
limitation: console monitoring and operations; tape and storage management; and
all technical system support operations. HRN will maintain proper and adequate
facilities, equipment and supplies, and a properly trained and adequately
staffed operations center, including necessary management and support staff. The
normal hours of operation of the operations center will be 24 hours per day, 7
days per week (subject to regularly scheduled maintenance (currently occurring
between 2:30 a.m. and 3:30 a.m. Central time Monday through Saturday and 12:01
a.m. through 6 a.m. Central time Sunday) and events beyond HRN's control).
<PAGE>
21
HRN will assume full management and operational responsibility for network
functions and services within the HRN Responsibility Area. HRN's
responsibilities will include, without limitation, acquiring, installing,
upgrading, managing, maintaining, repairing and replacing all equipment,
software, lines and cabling, as required to perform the network services as the
network may change during the Term. HRN shall implement measures necessary to
ensure confidentiality and protect against unauthorized access and fraudulent
use.
2.2 Software Management and Maintenance. HRN will assume full management and
operational responsibility for the software within the HRN Responsibility Area,
i.e., the "Online Systems". Such responsibilities include, without limitation,
acquiring, installing, upgrading, managing, maintaining, repairing and replacing
all software in order to provide the Services. Software management and
maintenance will include, without limitation, the following:
Corrective maintenance, including correction of systems defects in accordance
with applicable specifications;
Preventative maintenance, including prevention of systems problems by, where
appropriate, improving systems documentation, source code restructuring to the
extent the code is accessible, database/index reorganization, system
re-engineering, tool construction and rewriting un-maintainable modules.
Upgrading the Back-End Systems: (i) so that the Online Systems are always kept
current, (ii) pursuant to HRN's normal maintenance practices, (ii) in a manner
that ensures continued eligibility for support and maintenance by any
third-party for such Software.
Tuning of systems to improve operational performance and minimize resource usage
to the extent practicable;
Optimizing the functionality and features provided by the Electronic Data
Interface for integration into Travelocity's online reservation system. Prior to
releasing material, new functionality or features through the HRN Electronic
Data Interface ("New Functionality"), HRN will use commercially reasonable
efforts to test the New Functionality to confirm its compatibility with
Travelocity's online reservation system;
Development and maintenance of current documentation for the Back-End Systems,
including changes to reflect any modifications to the Back-End Systems; and
Implementation of any regulatory requirements.
<PAGE>
22
2.3 Other Management and Operational Responsibilities. HRN shall be responsible
for other management and operation services related to the HRN Responsibility
Area, including, without limitation, the following:
Monitoring. HRN will ensure that the performance and availability of the HRN
Internet Site is monitored on a continuous (24 X 7) basis (subject to events
outside HRN's control) and shall provide Travelocity with a technical support
plan for 24 x 7 technical support acceptable to Travelocity. HRN will provide
Travelocity with contact information (including e-mail, phone, pager and fax
information, as applicable, for both during and after business hours) for HRN's
principal business and technical representatives, for use in cases when issues
or problems arise with respect to the HRN Internet Site. HRN will notify
Travelocity operational staff of material technical problems, and will provide
timely status reports.
HRN agrees to use commercially reasonable efforts to address material technical
problems (over which HRN exercises control) affecting use by the Travelocity
Network of the HRN Electronic Data Interface or affecting use of the offline
Travelocity toll-free telephone number(s) (an "HRN Technical Problem") promptly
following notice thereof. In the event that HRN is unable to promptly resolve an
HRN Technical Problem following notice thereof from Travelocity (including,
without limitation, infrastructure deficiencies producing user delays),
Travelocity will have the right to regulate the promotions it provides to HRN
hereunder until such time as HRN corrects the HRN Technical Problem at issue.
Disaster Recovery. HRN will assume management and operational responsibility, as
applicable, for the provision of disaster recovery services in a manner at least
consistent with industry standards. Such services include the management and
interface with third party disaster recovery service providers, and the
development, management and, as applicable, operation of a disaster recovery
plan.
Security Management. HRN will manage and monitor access to computer system
resources, including system level accounts, groups, users and passwords and will
maintain the security software. Travelocity shall have the right to perform a
and end-to-end security audit of the HRN Responsibility Area at Travelocity's
sole option and expense.
3. SUPPORT AND BACK-END SERVICES
3.1 Call Center Services. HRN shall be responsible for the management of a call
center to answer inquiries from users of the Online Reservation System related
to information and reservations on all HRN hotel reservations. HRN shall manage
and operate the Call Center, providing the resources necessary to respond
promptly to inquiries and customer support related to hotel information and
reservations. All communications (including oral
<PAGE>
23
communications) with Travelocity Users through the Call Center shall be made
under the Travelocity brand in a manner approved by Travelocity in advance.
Without limiting the generality of the foregoing, HRN's services shall include,
without limitation:
Supporting both toll free (800) voice service and online;
Providing hours of operation that will mirror periods of highest user activity
over all time zones, which, unless mutually agreed, at a minimum will be between
7:00 am to 11:00 p.m. Central Time;
Staffing the Call Center as necessary to meet or exceed customer demand for
customer support;
Acknowledging customer complaints within 48 hours of receipt (72 hours for
complaints received between 6 p.m. Friday evening and 6 p.m. Saturday evening)
of complaint and promptly making best efforts to resolve the same, within five
(5) business days after receipt, and in no case shall resolution occur later
than thirty (30) calendar days after receipt. HRN shall log all such complaints
and will note the date/time of the complaint, escalation (if any) and
resolution. HRN shall maintain files on all complaints and resolutions and shall
make such records available to Travelocity upon request.
In addition, HRN shall make commercially reasonable efforts to implement and
support any and all methods of customer communication being utilized by
Travelocity in its own customer service facilities. This may include, but is not
limited to, real-time assistance to users through instant messages and/or
interactive chat/conference functionality.
Responding to Travelocity requests for information on Call Center operations.
HRN understands that from time to time Travelocity shall make surprise test
calls to the Call Center in order to determine provision of Call Center
services. In the event that Travelocity discovers a problem with the services,
Travelocity shall notify HRN, and the Parties shall meet to discuss the problem.
HRN shall take the steps necessary to correct any problems.
4. ADDITIONAL SERVICES
4.1 Fraud. HRN shall diligently monitor the HRN online system for fraud and
abuse and shall provide adequate staffing for maintenance of both the HRN online
system and HRN's Electronic Data Interface. In the event that fraudulent
activity associated with use of the HRN online system and/or HRN Electronic Data
Interface exceeds two times Travelocity's average occurrence of fraud for a
similar time frame across its credit card transaction activities through the
Travelocity Service (as measured by Travelocity) (the "Average Fraud Level"),
then the Parties shall make such modifications to any and all
<PAGE>
24
applicable operations, systems, information flows related to fraud prevention
and billing as are necessary to reduce such fraudulent activity to no greater
than two times the Average Fraud Level. HRN shall also work with Travelocity in
developing policies (not otherwise addressed herein) that are designed to combat
any repeated customer service complaints and to prevent deceptive selling
practices.
<PAGE>
Exhibit 10.9
[LETTERHEAD OF HOTEL RESERVATONS NETWORK]
DATE:______________
1. Employer HRN Inc., a Delaware corporation, hereby employs
__________________ to the position of _______________ at a salary of
$__________. Employee shall work for a minimum of 40 hours per week
actually devoted to the business of Employer. This compensation is
subject to subsequent adjustment and modification by Employer at his
sole discretion at any time. The employment of the Employee is an
Employee at will and shall continue only as long as the services
rendered by employee are satisfactory to employer. Employer shall be
the sole judge as to whether the services of employee are satisfactory.
Employee shall not engage in any other business or employment which may
detract from Employee's full performance of Employee's duties hereunder
or which competes in any manner with Employer, and Employee shall not
directly or indirectly render any services of a business, commercial or
professional nature, to any other person or organization without the
prior written consent of Employer.
2. Employee shall be entitled to one week's paid vacation after the
completion of Employee's first year of employment with Employer and one
week's paid vacation per six months after completion of 18 months with
Employer and every six months thereafter.
3. a) The Employee agrees that he will promptly from time to time
fully inform and disclose to the Employer any and all
developments, inventions, designs, improvements and
discoveries of whatever nature which he may have or produce
during the term of his employment which pertain or relate to
the current or future business of the employer or to any
experimental work carried on by the Employer, or not conceived
during regular working hours. All such developments,
inventions, designs, improvements and discoveries shall be the
exclusive property of the Employer and shall be "works for
hire". The Employee shall assist the Employer in obtaining
patents or copyrights on all such inventions, designs,
improvements and discoveries being patentable or copyrightable
by the Employer and shall execute all documents and do all
things necessary to obtain letters of patent of copyright,
vest the Employer with full and exclusive title thereto, and
protect the same against infringement by others, and such
assistance shall be given by Employee, if needed, after he has
left the company for whatever cause or reason. Employee hereby
represents and warrants that he has no current or future
obligation with respect to the assignment or disclosure or any
or all developments, inventions, designs, improvements and
discoveries of whatever nature to any previous employer or
other person and that he does not claim any rights or interest
in or to any previous unpatented or uncopyrighted
developments, inventions designs, improvements or discoveries.
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b) Employee, during the term of employment, will have access to
and become familiar with various confidential information and
trade secrets, including without limitation, the names and
addresses of Employer's customers, certain customer lists,
other information concerning the sales and distribution
systems of employer, and other unique processes, procedures,
services and products of Employer which are regularly used in
the operation of the business of Employer. Employee shall not
disclose any of the aforesaid confidential information and
trade secrets, directly or indirectly, nor use them in any
way, either during the term of this Agreement or at any time
thereafter, except as required in the course of employment
with the Employer. All files, records, documents, drawings,
graphics, specifications, equipment and similar items relating
to the business of Employer, whether prepared by Employee or
otherwise coming into Employee's possession, shall remain the
exclusive property of Employer and shall not be removed from
the premises of Employer without the prior written consent of
Employer unless removed in relation to the performance of
Employee's duties. Any such files, records, documents,
drawings, graphics, specifications, equipment and similar
items, and any and all copies of such materials which have
been removed from the premises of Employer, shall be returned
by Employee to Employer.
c) Employee acknowledges that he will receive from Employer
highly specialized training, including without limitation
training concerning HRN proprietary systems, that employer
will expend substantial time and money for such training, and
that such training (I) is a unique and specialized nature
dealing with unique processes, techniques and information
developed by Employer for its exclusive use, and unknown to
the competitors of Employer; and (ii) will greatly enhance
Employee's market value as employee to any competitor of
Employer. In consideration for this unique and specialized
training, Employee agrees as follows:
(i) during his employment, Employee shall not, directly
or indirectly, either an employee, employer,
consultant, agent, principal, partner, stockholder,
corporate officer, director or in any other
individual or representative capacity, engage or
participate in any business that is in competition in
any manner whatsoever with the business or Employer;
and
(ii) after termination of Employee's employment, whether
by wrongful discharge or otherwise, employee shall
not, directly or indirectly, within any marketing
area of Employer in which Employee performed his
duties during the term of this Employment including
but not limited to the State of Texas enter into or
engage generally in direct competition with Employer,
either as an individual or as a partner or joint
venturer, or as an employee or agent for any person,
or as an officer, director, or shareholder or
otherwise, for a period of two (2)
2
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years after the date of termination of Employee's
employment hereunder; and
(iii) for a period of two years immediately following the
termination of the Employee's employment with the
Employer, Employee shall not either directly or
indirectly call on, solicit, or take away, or attempt
to call on solicit, or take away any of the customers
or Employer, either for himself or for any other
person, firm, or corporation. For purposes of this
paragraph, the term "customer" shall include, but not
be limited to prospective customers who have been
contacted by employees of Employer, but have not
purchased products from or entered into any agreement
with Employer.
d) Employee acknowledges that the time and geographical
restrictions set forth above are reasonable in scope and
necessary for the protection of the business and good will of
Employer. Employee agrees that should any portion of the
covenants be unenforceable because of the scope thereof or the
period covered thereby or other wise, the covenant shall be
deemed to be reduced and limited to enable it to be enforced
to the extent permissible under the laws and public polices
applied in the jurisdiction in which enforcement is sought.
e) Employee shall not, during his employment or at any time
thereafter, either directly or indirectly, enter into
agreement with, or solicit the employment of, employees of
employer for the purpose of causing them to leave the
employment of Employer or take employment with any business
that is in competition in any manner whatsoever with the
business of Employer.
f) All records of the accounts of customers and any other records
and books relating in any manner whatsoever to the customers
of Employer, whether prepared by employee or otherwise coming
into Employee's possession, shall be the exclusive property of
Employer regardless of who actually purchased the original
book or record. All such books and records shall be
immediately returned by Employee to Employer on any
termination of Employee's employment. If Employee purchases
any such original book or record, Employee shall immediately
notify Employer, who shall then immediately reimburse Employee
for the cost of such original book or record, and it shall be
deemed the exclusive property of Employer.
g) In the course of performing duties under this Agreement,
Employee may obtain or handle financial, accounting,
statistical, and personnel information concerning customers of
Employer. All such information is confidential and shall not
be disclosed, directly or indirectly, to any person other than
employees and agents of Employer, either during the term of
his employment or at any time after such term.
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h) In the event of a breach of any of the covenants contained in
this agreement, it is understood that damages will be
difficult to ascertain, and Employer may petition a court of
law or equity for injunctive relief in addition to any other
relief which Employer may have under the law, including but
not limited to reasonable attorney's fees. In the event of a
breach of any provision of this agreement, the covenants of
the Employee pursuant to paragraph 3 shall remain valid and
enforceable.
i) All of the covenants and provisions of this Paragraph 3 of
this Agreement on the part of Employee shall be construed as
an agreement independent of any other provision of this
Agreement; and he existence of any claim or cause of action of
Employee against Employer, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the
enforcement by Employer of the covenants and provisions of
Paragraph 3.
j) This Agreement may be terminated by the occurrence of any of
the following; and in the event of termination under this
Paragraph 6, all the provision of Paragraph 3 shall remain in
full force and effect.
i) Immediately upon Employer's giving oral or written
notice of termination to Employee, and Employer may
so terminate this Agreement and discharge Employee
with or without cause;
ii) Employee's giving fourteen (14) days' written notice
of termination to Employer; provided, however, that
upon Employer's receipt of Employee's written notice
of termination, Employer may, at its sole discretion,
terminate Employee immediately;
iii) The death of Employee; or
iv) Discontinuance of Employer's operation of business.
k) This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to
the employment of Employee by employer and contains all the
covenants and agreements between the parties with respect to
such employment in any manner whatsoever.
l) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, and this
Agreement shall be deemed to be in all things performable in
Dallas, Dallas County, Texas.
m) If the Employee dies prior to being terminated by Employer,
any monies that my be due him from the Employer under this
Agreement as of the date of his death be paid to his
executors, administrators, personal representative, or heirs
at law, in that order.
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n) Employee represents and warrants (a) that prior to acceptance
of employment with Employer, Employee has advised Employer of
any restrictions on Employee's employment resulting from any
previous employment; (b) that Employee has presented to
Employer for its review any previous employment agreements or
other restrictive agreements, any provisions of which may
still be in effect and may have a possible bearing on
Employee's employment with Employer (unless review of such
agreements by Employer would, in itself, be a breach of
confidence, in which case Employee's obligation shall be to
inform Employer of the same to the extent that same will not
result in a beach of confidence); (c) that Employee will not
reveal to Employer or use in Employer's work any trade secrets
or confidential information of others; and (d) that Employee
will confirm all of the above in writing, if so requested by
Employer, in such form as may be required by Employer.
Employee shall indemnify and hold harmless Employer from and
against all damages, losses, costs and expenses (including
attorneys' fees) arising from or relating to any breach of the
foregoing representations and warranties or any matters
relating thereto.
Executed in Dallas, Dallas County, Texas, as of the day and year first above
written.
"EMPLOYER" BY:
- --------------------------- --------------------------------
Name: Title:
---------------------- --------------------------
"EMPLOYEE"
- --------------------------- Social security number
---------
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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
February 3, 2000
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EXHIBIT 24.2
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Thomas J. Kuhn and Deirdre Stanley, or either one of them, with full power to
act without the other, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments, including
post-effective amendments to this registration statement and any registration
statement relating to the same offering as this registration statement that is
to be effective upon filing pursuant to Rule 462(b) of the Securities Act of
1933, and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ MICHAEL SILECK
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Michael Sileck
/s/ JACK RUBIN
--------------------------------------
Jack Rubin
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Exhibit 99.1
To whom it may concern:
The undersigned, Beverly Harms, hereby consents to being named as a
designatee to be elected as a director of Hotel Reservations Network, Inc., a
Delaware corporation, in Amendment No. 2 to its Registration Statement on Form
S-1, Registration No. 333-90601, filed on February 3, 2000, all prospectuses
related thereto and all subsequent amendments thereto.
Yours Sincerely,
/s/ Beverly Harms
------------------------
Ms. Beverly Harms
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Exhibit 99.1
To whom it may concern:
The undersigned, Eli J. Segal, hereby consents to being named as a
designatee to be elected as a director of Hotel Reservations Network, Inc., a
Delaware corporation, in Amendment No. 2 to its Registration Statement on Form
S-1, Registration No. 333-90601, filed on February 3, 2000, all prospectuses
related thereto and all subsequent amendments thereto.
Yours Sincerely,
/s/ Eli J. Segal
------------------------
Mr. Eli J. Segal
