As filed with the Securities and Exchange Commission on October 24, 1996
Registration No. 333-11427
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
U.S. FRANCHISE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7011 58-2190911
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
(404) 321-4045
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------
Michael A. Leven
Chairman, President and Chief Executive Officer
U.S. Franchise Systems, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
(404) 321-4045
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
-------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
Judith R. Thoyer, Esq. Patricia A. Ceruzzi, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison Sullivan & Cromwell
1285 Avenue of the Americas 125 Broad Street
New York, New York 10019-6064 New York, New York 10004
(212) 373-3000 (212) 558-4000
</TABLE>
-------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
-------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Amount Proposed Maximum Proposed Maximum
Title of Each Class to be Offering Price Aggregate Amount of
of Securities to be Registered Registered (1) Per Share Offering Price (1)(2) Registration Fee (3)
--------------------------------------------------------------------------------------------------------------
Class A Common Stock 2,673,750 shares $14.00 $37,432,500 $12,377.66
</TABLE>
<PAGE>
(1) Includes shares which may be purchased by the Underwriters solely to
cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Calculated in accordance with Rule 457(a).
-------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securitiesmay not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 24, 1996
[U.S. FRANCHISE SYSTEMS, INC. LOGO]
2,325,000 Shares
U.S. Franchise Systems, Inc.
Class A Common Stock
($0.01 par value)
Of the 2,325,000 shares of Class A Common Stock offered hereby, 1,825,000
shares are being sold by U.S. Franchise Systems, Inc. ("USFS" or the
"Company") and 500,000 shares are being sold by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of shares of Class
A Common Stock by the Selling Stockholders. See "Selling Stockholders."
Prior to this offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering
price per share will be between $12.00 and $14.00. See "Underwriting" for
information relating to the method of determining the initial public offering
price.
The Company has two classes of authorized Common Stock: Class A Common
Stock and Class B Common Stock. The holders of Class A Common Stock are
entitled to one vote per share and the holders of Class B Common Stock are
entitled to ten votes per share. Otherwise, the rights of the holders of
Class A Common Stock and the holders of Class B Common Stock are
substantially identical. Certain members of management own all of the
outstanding shares of Class B Common Stock. Upon completion of the Offering,
such members of management will control approximately 78% of the combined
voting power of the Class A Common Stock and the Class B Common Stock. Shares
of Class B Common Stock are convertible into shares of Class A Common Stock
on a share-for-share basis. Both classes will generally vote together as one
class on all matters submitted to a vote of stockholders, including the
election of directors. See "Description of Capital Stock."
The Class A Common Stock has been approved for quotation and trading on
the NASDAQ National Market System upon completion of the Offering under the
symbol "USFS."
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning on page 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1)See "Underwriting" for indemnification arrangements.
(2)Before deducting estimated expenses of $700,000 payable by the Company.
(3)The Company and the Selling Stockholders have granted to the Underwriters
a 30-day option to purchase up to an additional 273,750 and 75,000 shares
of Class A Common Stock, respectively, solely to cover over- allotments.
If this option is exercised in full, total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock offered hereby are being offered by the
several Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that the Class A Common Stock will be available for delivery on
or about , 1996, at the offices of Schroder Wertheim & Co. Incorporated, New
York, New York.
Schroder Wertheim & Co. Montgomery Securities
, 1996.
<PAGE>
[PHOTO OF MAP]
================================================================================
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, the terms "USFS" and "Company" include U.S. Franchise
Systems, Inc. and its subsidiaries and their operations. The offering of
shares of the Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock"), of U.S. Franchise Systems, Inc. is referred to herein as the
"Offering". Unless otherwise indicated, all information included in this
Prospectus (i) assumes that the Underwriters' over-allotment option will not
be exercised and (ii) has been adjusted to give effect to the
reclassification of the Company's Common Stock, par value $.10 per share (the
"Old Common Stock"), pursuant to which each share of Old Common Stock will
become 9.67 shares of Class A Common Stock, and to the exchange of 2,707,919
shares of such Class A Common Stock held by certain members of management for
the same number of shares of a newly created class of common stock to be
designated Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and together with the Class A Common Stock, the "Common Stock",
and the foregoing reclassification and exchange, the "Reclassification").
THE COMPANY
General
U.S. Franchise Systems, Inc. was formed in August 1995 to acquire, market
and expand high-quality, well- positioned brands with potential for rapid
unit growth through the sale of franchises to third-party operators. The
Company's initial brands, both of which are in the lodging industry, are the
Microtel budget brand ("Microtel") and the Hawthorn Suites upscale,
extended-stay brand ("Hawthorn Suites"). The Company acquired the rights to
these brands because of their potential for significant growth, which
reflects, among other things, their profitability for franchisees at the
property level and their positions in attractive segments of the lodging
industry.
The Company has assembled an experienced management team and sales force
led by its Chairman, President and Chief Executive Officer, Michael A. Leven,
who has 35 years of experience in the lodging industry, and its Executive
Vice President and Chief Financial Officer, Neal K. Aronson, a former
principal of the New York investment firm Odyssey Partners, L.P. Mr. Leven
most recently served as President and Chief Operating Officer of Holiday Inn
Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of
America, Inc. (1985- 90), franchisors of the two largest lodging brands in
the world. The Company has hired and trained a staff of 73 employees,
including a 28-person sales force, which management believes is the third
largest franchise sales organization in the lodging industry. Mr. Leven and
the Company's sales force have collectively sold over 2,200 hotel franchises
on behalf of other hotel chains. Since acquiring the Microtel brand in
October 1995 and establishing a sales force by January 1996, the Company has
executed 145 franchise agreements and accepted applications for an additional
74 hotels as of September 30, 1996, expanding the number of states in which
Microtels are or may be located from 10 to 44. Since acquiring the exclusive
rights to franchise hotels under the Hawthorn Suites brand in March 1996 and
establishing a sales force by July 1996, the Company has executed five
franchise agreements and accepted applications for 16 additional hotel sites
as of September 30, 1996.
As a franchisor, USFS licenses the use of its brand names to independent
hotel owners and operators (i.e., franchisees). The Company provides its
franchisees with a variety of benefits and services designed to (i) decrease
development costs, (ii) shorten the time frame and reduce the complexity of
the construction process and (iii) increase occupancy rates, revenues and
profitability of the franchised properties. The Company offers prospective
franchisees access to financing, a business format, design and construction
assistance (including architectural plans), uniform quality standards,
training programs, national reservations systems, national and local
advertising and promotional campaigns and volume purchasing discounts. The
Company does not currently build, own or manage properties.
The Company expects that its future revenues will consist primarily of (i)
franchise royalty fees, (ii) franchise application fees, (iii) reservation
and marketing fees, (iv) various fees and other revenues from third-party
financing arranged by the Company for its franchisees and (v) payments made
by vendors who supply the Company's franchisees with various products and
services. Currently, the Company derives substantially all of its revenues
from reservation and marketing fees collected from its franchisees. The
Company also receives cash from its franchisees in the form of application
fees, which are recognized as revenue only upon the opening of the
3
<PAGE>
underlying hotels. See the Consolidated Financial Statements and the related
Notes included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Microtel
The Microtel system currently includes 27 hotels operating under the
Microtel Inn and Microtel Inn & Suites brand names. In addition, the Company
has executed one franchise agreement for a hotel to be operated under the
Microtel Suites brand name. Microtel properties operate in the budget segment
of the lodging industry, which is the lowest priced segment in the industry
(with an average daily room rate in 1995 of approximately $36) and which has
experienced favorable growth in room demand relative to growth in room
supply. For the six months ended June 1996, the rate of growth in room demand
exceeded the rate of growth in room supply in the budget segment by 3.4
times, significantly higher than comparable ratios for any other segment in
the lodging industry during this period. According to an industry study, the
rate of growth in room demand relative to the rate of growth in room supply
was 2.0x in the luxury segment, 1.1x in the upscale segment, 1.3x in the
mid-price segment and 1.5x in the economy segment over the same period.
Microtels are distinctively styled hotels with a residential look that
offer travelers an attractive and consistent appearance, clean, comfortable
rooms and the safety of interior corridor access, all for a competitive room
rate. Management believes that Microtel is one of the only brands in the
budget segment that franchises only newly constructed, interior corridor
properties. In contrast, many other budget hotels are older properties with
rooms that are accessible only through outside entrances and that may have
been converted from independent hotels or other brands. Management believes
that Microtels' strict new construction and interior corridor requirements
provide travelers with a brand that is among the safest, most consistent and
highest quality in the budget segment. Evidence of the appeal of Microtels to
hotel guests is found in its "intent-to-return" rating, which measures
guests' overall satisfaction and willingness to return to a Microtel in the
future. In surveys of approximately 5,000 Microtel guests conducted by
franchisees from 1989 to 1994, more than 95% of Microtel guests expressed an
intent to return to a Microtel in the future.
The Company believes that Microtels offer franchisees significant
financial advantages. Microtels are designed to minimize construction costs
and maintenance expenses by incorporating smaller room sizes, limited common
areas, relatively smaller land requirements and built-in standardized
furniture, all of which enable franchisees to build and operate a Microtel at
a lower cost. These lower costs may reduce a franchisee's equity investment
and may broaden its debt financing alternatives, thereby expanding the appeal
of the Microtel brand to prospective franchisees. See "Business--Microtel".
Hawthorn Suites
The Hawthorn Suites system, which currently includes 18 open Hawthorn
Suites hotels, targets the upscale segment of the rapidly growing
extended-stay lodging market, which is defined as guests that stay five or
more consecutive nights. Hotels in this segment offer guests the amenities of
an apartment with the convenience and flexibility of a hotel. According to an
industry study, extended-stay rooms accounted for over 30% of all hotel room
nights sold in the United States in 1995. Another industry study indicates
that the supply of dedicated extended- stay rooms accounted for only 1.3% of
the total number of hotel rooms. Extended-stay properties offer attractive
economics to franchisees because of the relatively high occupancy rates in
this segment and the lower operating costs relative to similarly priced,
full-service hotel properties. Extended-stay hotels experienced occupancy
rates of approximately 80% in 1995 compared to approximately 65% for the
lodging industry as a whole during the same period.
Hawthorn Suites hotels offer large suites equipped with full kitchens and
work spaces, laundry facilities and exercise rooms, daily housekeeping,
24-hour front-desk service, complimentary hot breakfast and hospitality
hours. Hawthorn Suites hotels include both newly constructed properties and
conversions of pre-existing hotels and apartment buildings. The Company has
also recently developed prototypes for a mid-price, all-suite hotel brand,
called Hawthorn Suites LTD, which is designed to meet the needs of both
extended-stay and short-term guests. See "Business--Hawthorn Suites".
The agreement pursuant to which the Company acquired the exclusive
worldwide rights to franchise the Hawthorn Suites brand of hotels (the
"Hawthorn Acquisition Agreement") limits the Company's ability to franchise
4
<PAGE>
certain types of all-suite and full-service lodging brands prior to June 26,
1998 and any non-lodging brands prior to June 26, 1997. For a more complete
discussion of the terms and conditions of the Hawthorn Acquisition Agreement,
see "Risk Factors--Risks Relating to Hawthorn Acquisition Agreement",
"--Limitations on New Brands" and "Business--Acquisition of the Microtel and
Hawthorn Suites Systems".
Business Strategy
The Company's business strategy is to (i) rapidly increase the number of
open Microtels and Hawthorn Suites, (ii) operate its administrative and
franchisee support departments in order to maximize the operating leverage
inherent in the franchising business and (iii) acquire additional lodging or
other service-oriented brands that provide attractive unit economics to
franchisees and significant growth opportunities for the Company (to the
extent permitted under the Hawthorn Acquisition Agreement). See
"Business--Acquisition of the Microtel and Hawthorn Suites Systems". While
the Company currently has no agreements, commitments or formal understandings
with respect to any acquisitions, the Company may in the future acquire and
franchise brands both in and out of the lodging industry.
The Company has developed several programs designed to accelerate the
opening of new properties and expand its brands' attractiveness to
franchisees. First, in May 1996, the Company reached an agreement in
principle with Nomura Asset Capital Corporation ("NACC"), a subsidiary of The
Nomura Securities Co., Ltd., one of the world's largest investment banks
("Nomura Securities"), pursuant to which NACC would make available to
prospective Microtel and Hawthorn Suites franchisees up to $200 million in
construction and long-term mortgage financing, subject to certain terms and
conditions. This program is intended to add speed and certainty to the hotel
development process, enabling the Company's franchisees to devote more time
to identifying acceptable hotel sites and developing properties and less time
obtaining financing. There can be no assurance, however, that any loans will
be made under this program. See "Business--Special Programs--Franchisee
Financing Facility." Second, the Company has reached an understanding in
principle with a hotel developer to construct Microtels for lease to
prospective franchisees. This program, "American Dream|PS by Microtel" (the
"American Dream Program"), is designed to enable hotel operators with limited
capital resources and/or little or no building experience to operate, and
possibly to own, a Microtel and thereby increase the number of potential
Microtel franchisees. See "Business--Special Programs--American Dream
Program." Third, the Company has extended the Microtel and Hawthorn Suites
brands from two to five distinct products, which the Company believes
increases the appeal and viability of the brands to franchisees by offering
multiple formats that can be tailored to specific markets, development
requirements and guest preferences. To date, more than 50% of the Microtel
franchises sold by the Company relate to Microtel Inn & Suites or Microtel
Suites, two formats designed by the Company after its acquisition of the
Microtel brand.
The Company was formed in August 1995 as a Delaware corporation. Its
executive offices are located at 13 Corporate Square, Suite 250, Atlanta,
Georgia 30329. Its telephone number is (404) 321-4045.
5
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by:
The Company 1,825,000 shares of Class A Common Stock
The Selling Stockholders 500,000 shares of Class A Common Stock
Common Stock to be outstanding after 9,872,490 shares of Class A Common Stock
the Offering 2,707,919 shares of Class B Common Stock
---------
12,580,409 total shares of Common Stock
==========
Use of Proceeds The proceeds of the Offering will be used for working capital and
general corporate purposes, which may include (i) funding the
Company's remaining obligations (approximately $2 million) under
the agreement pursuant to which it acquired the Microtel brand
(the "Microtel Acquisition Agreement"), (ii) acquiring additional
lodging or other service-oriented brands or exclusive franchise
rights (to the extent permitted under the Hawthorn Acquisition
Agreement), (iii) making initial deposits in connection with the
American Dream Program until qualified lessees can be identified,
(iv) investing in financing programs developed by its wholly owned
subsidiary, US Funding Corp., and (v) investing in entities that
make equity investments in hotel properties built and managed by
certain franchisees with the potential for multi-unit development.
See "Use of Proceeds", "Business-- Acquisition of the Microtel and
Hawthorn Suites Systems" and "--Special Programs".
Voting Rights Shares of Class A Common Stock have one vote per share, while
shares of Class B Common Stock have ten votes per share. The Class
B Common Stock, the holders of which have effective control of the
Company, is voted only by Messrs. Leven and Aronson. Class B
Common Stock is convertible into Class A Common Stock on a
share-for-share basis and, with limited exceptions, will
automatically convert into Class A Common Stock upon transfer. The
Class B Common Stock is not being offered by this Prospectus. See
"Risk Factors--Control by Management and Anti-Takeover Effect of
Dual Classes of Stock", "Description of Capital Stock--Common
Stock" and "Principal Stockholders--Management's Shares of Common
Stock".
Nasdaq National Market symbol USFS
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The following table sets forth consolidated financial information for the
Company and its subsidiaries as of December 31, 1995 and June 30, 1996, for the
period from August 28, 1995, the date of the Company's inception, to December
31, 1995 and for the six months ended June 30, 1996. The table includes
operating data for the Company since its inception and should be read in
conjunction with the Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which are contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Period from
August 28, 1995 to Six Months Ended
December 31, 1995 June 30, 1996
------------------ ----------------
(In thousands of dollars, except
share and per share data)
<S> <C> <C>
Statement of Operations Data:
Revenues $ -- $ 395
Operating expenses 1,327 3,849
Operating loss 1,327 3,454
Interest income 195 331
Interest expense 36 72
Net loss 1,168 3,195
Loss applicable to common stockholders 1,645 4,033
Net loss applicable to common stockholders per share (1) 0.15 0.38
Weighted average number of common shares outstanding (2) 10,755,409 10,755,409
Balance Sheet Data (at period end):
Working capital $ 13,265 $ 8,029
Total assets 18,072 19,027
Total liabilities 1,845 5,992
Redeemable Preferred Stock 16,759 17,597
Redeemable Common Stock 330 330
Stockholders' deficit 862 4,892
</TABLE>
- -------------
(1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares
of Class B Common Stock outstanding after the Reclassification but before
the Offering.
(2) Includes 3,186,294 shares of Class A Common Stock that are redeemable
under certain circumstances by the Company for reasons not under the
Company's control. See "Principal Stockholders--Management's Shares of
Common Stock".
7
<PAGE>
Franchised Hotels
<TABLE>
<CAPTION>
Microtel(1) Hawthorn Suites (2)
-------------------------------------- -------------------------------------
As of As of As of As of
December 31, 1995 September 30, 1996 December 31, 1995 September 30, 1996
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Properties Open 23 27 17 18
Properties Under
Construction 0 7 0 2
Executed Franchise
Agreements 3 145 0 5
Franchise
Applications
Accepted (3) 10 74 0 16
</TABLE>
- -------------
(1) The Company will not receive royalties from the 23 Microtels open as of
December 31, 1995 and from 26 of the 27 Microtels open as of September
30, 1996, but does receive marketing fees from the franchisees of these
properties. See "Business--Microtel" and "Business--Acquisition of the
Microtel and Hawthorn Suites Systems".
(2) The Company will not receive royalties from the 17 Hawthorn Suites hotels
open as of December 31, 1995 and the 18 Hawthorn Suites hotels open as of
September 30, 1996, but does receive reservation and marketing fees from
the franchisees of these properties. See "Business--Hawthorn Suites" and
"Business-- Acquisition of the Microtel and Hawthorn Suites Systems."
(3) Represents franchise applications as to which the Company has approved
the proposed site and the prospective franchisee but has not yet executed
a franchise agreement.
Operating Data(1)
<TABLE>
<CAPTION>
Microtel
-----------------------------------------------
For the Six Months Ended
For the Year Ended ------------------------
December 31, June 30, June 30,
1995 1995 1996
------------------ -------- --------
<S> <C> <C> <C>
Average Daily Room
Rate ("ADR") $35.75 $34.32 $35.40
Average Occupancy 69.3% 66.1% 66.6%
Average Revenue Per
Available Room $24.77 $22.68 $23.57
Number of Hotels 15 15 15
</TABLE>
<TABLE>
<CAPTION>
Hawthorn Suites
-----------------------------------------------
For the Six Months Ended
For the Year Ended ------------------------
December 31, June 30, June 30,
1995 1995 1996
------------------ -------- --------
<S> <C> <C> <C>
Average Daily Room
Rate ("ADR") $78.27 $77.50 $82.02
Average Occupancy 78.1% 77.8% 80.6%
Average Revenue Per
Available Room $61.13 $60.29 $66.11
Number of Hotels 15 15 15
</TABLE>
- -------------
(1) Includes data only from those Microtels and Hawthorn Suites hotels that
have been operating as part of the applicable franchise system for two
years or more as of June 30, 1996.
8
<PAGE>
RISK FACTORS
The following risks should be carefully considered in evaluating the
Company and its business before purchasing the Class A Common Stock offered
by this Prospectus. Such risks represent all material risks associated with
an investment in the Class A Common Stock.
Limited Operating History; Dependence on Hotel Openings
The Company began operating in October 1995 and therefore has a very
limited operating history upon which investors can evaluate the Company's
performance. While the Company believes that it has a well-conceived strategy
and that it has assembled an experienced and well-qualified management team
to implement this strategy, the Company has incurred losses to date and there
can be no assurance that the Company will be profitable in the future. As of
June 30, 1996, the Company had an accumulated deficit of $4,970,000.
The Company expects that in the future a principal source of revenues will
be royalty fees received from its franchisees. However, the terms of the
Microtel Acquisition Agreement and the Hawthorn Acquisition Agreement
expressly provide that the Company is not entitled to royalties with respect
to Microtels and Hawthorn Suites hotels that were open or under construction,
or with respect to which franchise agreements had been executed or
applications accepted, at the time of the acquisition by the Company of the
right to franchise these brands. Similarly, the Company is not entitled to
royalties with respect to the 23 additional Microtels and the 10 Microtel
all-suites hotels that Hudson Hotels Corporation, the entity from which the
Company acquired the Microtel brand ("Hudson"), its affiliates and certain
other persons are entitled to franchise pursuant to the terms of the Microtel
Acquisition Agreement. Of the existing Microtel and Hawthorn Suites
properties, the Company is entitled to receive royalty fees from one
Microtel. Accordingly, the Company is dependent upon future hotel openings to
recognize franchise application fees as revenue and to generate franchise
royalty fees. There can be no assurance that accepted franchise applications
will result in executed franchise agreements or that executed franchise
agreements will result in open properties. See "Business--Acquisition of the
Microtel and Hawthorn Suites Systems".
Management, By Virtue of Ownership of Supervoting Class B Common Stock,
Will Control the Company Following the Offering
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Each share of Class B Common Stock is convertible at any
time into one share of Class A Common Stock and, with limited exceptions,
converts automatically upon any transfer thereof. Immediately after the
Offering, Mr. Leven and Mr. Aronson will have the right to vote all of the
outstanding shares of Class B Common Stock, which, together with their shares
of Class A Common Stock, will represent approximately 78% of the combined
voting power of the Company's outstanding Common Stock after the Offering. By
reason of their right to vote the Class B Common Stock, Messrs. Leven and
Aronson will be able to (i) elect all of the Company's directors, (ii) amend
the Charter with respect to most matters, (iii) effect a merger, sale of
assets or other major corporate transaction, (iv) defeat an unsolicited
takeover attempt and (v) generally direct the affairs of the Company.
However, Mr. Leven and Mr. Aronson do not have any agreements or other
obligations to vote together on matters involving the Company (although Mr.
Aronson has granted Mr. Leven the right to vote some of his shares of Class A
Common Stock and some of his shares of Class B Common Stock). See
"Description of Capital Stock", "Principal Stockholders", and "Certain
Relationships and Related Transactions".
Management of Growth
The Company has experienced rapid growth in the number of its employees
and the scope of its operations since its inception. This growth has resulted
in, and is expected to continue to create, new and increased responsibilities
for management personnel, as well as added demands on the Company's operating
and financial systems. The Company's continued growth will depend on its
ability to manage this growth while implementing its strategy. The efforts of
key management personnel and the Company's ability to attract or develop new
management personnel and to integrate these new employees into its overall
operations will be crucial to continued growth. If the Company is unable to
manage growth effectively, the Company's business and results of operations
could be materially and adversely affected. See "Management".
Dependence on Senior Management
The success of the Company is largely dependent on the efforts and
abilities of its senior management and certain other key personnel,
particularly Mr. Leven, Chairman, President and Chief Executive Officer, Mr.
Aronson,
9
<PAGE>
Executive Vice President and Chief Financial Officer, and Steven Romaniello,
Executive Vice President, Franchise Sales and Development. The Company's
success will depend in large part on its ability to retain these individuals
and other current members of its senior management team and to attract and
retain qualified personnel in the future. The loss of members of senior
management or of certain other key employees or the Company's inability to
retain other qualified employees could have an adverse impact on the
Company's business and results of operations. Currently, except with respect
to Mr. Leven, the Company does not maintain key person life insurance on
behalf of the lives of any of its officers or employees. See "Management".
The terms of the Company's 10% Cumulative Redeemable Exchangeable
Preferred Stock (the "Redeemable Preferred Stock") expressly require the
Company to redeem any shares of Redeemable Preferred Stock outstanding in the
event the employment of Mr. Leven is terminated by the Company for any reason
(including resignation) at a redemption price per share equal to $100 plus
all accrued and unpaid dividends thereon. As of June 30, 1996, the aggregate
redemption price for all outstanding shares of Redeemable Preferred Stock,
including accrued but unpaid dividends thereon, was $17,597,000. In addition,
the Hawthorn Acquisition Agreement, by its terms, may be terminated by HSA
Properties, L.L.C. ("HSA"), the entity from which the Company acquired the
exclusive rights to franchise the Hawthorn Suites brand, if Mr. Leven is no
longer employed by the Company, or upon his death or disability, at any time
prior to a permitted transfer of the Company's rights thereunder or, if
earlier, the satisfaction by the Company of certain hotel development levels
set forth in such agreement. See "Risk Factors--Mandatory Redemption of
Redeemable Preferred Stock", "Description of Capital Stock--Preferred Stock"
and "Business-- Acquisition of the Microtel and Hawthorn Suites Systems".
Management's Discretion With Respect to Proceeds of the Offering
Although the Company intends to apply the net proceeds of the Offering in
the manner described under "Use of Proceeds", the Company's management has
broad discretion as to the precise allocation of the net proceeds, the timing
of expenditures and all other aspects of the use thereof. As a result, the
success of the Company will be substantially dependent upon the discretion
and judgment of the management of the Company with respect to the application
and allocation of the net proceeds. See "Use of Proceeds".
Risks Relating to Microtel Acquisition Agreement
The Microtel Acquisition Agreement obligates the Company to execute new
franchise agreements and have open or under construction a specified number
of Microtels each year. Specifically, the Microtel Acquisition Agreement
requires that there are, on a cumulative basis, at least 50 new Microtels
open or under construction by December 1997, 100 by December 1998, 175 by
December 1999, and 250 by December 2000. The Microtel Acquisition Agreement
further provides that if the Company is unable to comply with the development
schedule for two consecutive years but opens or has under construction at
least 75% of the number of Microtels required by such schedule, the Company
may cure the default by paying a $1 million penalty within 30 days of notice
of such default. If the Company fails to comply with this development
schedule and to make the requisite cure payment or payments, all rights to
the Microtel system automatically revert to Hudson. There can be no assurance
that the Company will comply with the foregoing development schedule, and the
Company's failure to meet such schedule or to pay the requisite cure payments
would have a material adverse effect on the Company. See
"Business--Acquisition of the Microtel and Hawthorn Suites Systems".
Risks Relating to Hawthorn Acquisition Agreement
Under the Hawthorn Acquisition Agreement, the Company is obligated to
execute a minimum number of Qualified License Agreements (as defined below)
for new Hawthorn Suites by certain dates (the "Termination Standard").
Specifically, the Hawthorn Acquisition Agreement requires that the Company
have executed, on a cumulative basis, a minimum of 10 Qualified License
Agreements by June 26, 1997, 20 by June 26, 1998, 40 by June 26, 1999, 60 by
June 26, 2000, 80 by June 26, 2001, and 100 by June 26, 2002. The term
"Qualified License Agreement" is generally defined in the Hawthorn
Acquisition Agreement as any license agreement granted by the Company for the
use of the Hawthorn Suites brand, provided that (i) the hotel to which such
agreement relates is an all-suites hotel (i.e., a hotel in which greater than
50% of the available rooms are suites) with more than 40 suites, (ii) all
application fees required to be paid by the franchisee to the Company have
been paid, (iii) the licensee owns or controls through long-term lease the
land on which the hotel is located or is to be constructed and (iv) the
average number of suites in hotels covered by Qualified License Agreements is
greater than 50. If the Company fails to meet any of these development
milestones and the default has not been cured prior to the delivery of a
default notice, HSA may terminate the Hawthorn Acquisition Agreement.
10
<PAGE>
If the Company meets the Termination Standard, but fails to achieve
specified higher development goals (the "Royalty Reduction Standard"), the
percentage of franchise royalties payable to HSA will increase. The Hawthorn
Acquisition Agreement may also be terminated, at the election of HSA, on the
death, disability, retirement, resignation or termination of employment of
Mr. Leven as Chief Executive Officer of the Company prior to such time as the
Royalty Reduction Standard has been met or such time as there are 75 new
Hawthorn Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn
Brand Saturation"). See "Business--Acquisition of the Microtel and Hawthorn
Suites Systems".
Limitations on New Brands
Under the Hawthorn Acquisition Agreement, the Company and its affiliates
are generally restricted until June 26, 1998 from franchising any lodging
brands other than (i) Hawthorn Suites brand hotels, (ii) Microtel brand
hotels and (iii) other limited-service, non-suite hotel brands with an ADR of
$49 and under. Until June 26, 1997, the Company must also refrain from
franchising any brands outside of the lodging industry. In addition, until
such time as Hawthorn Brand Saturation has been achieved or, if Hawthorn
Brand Saturation is not achieved, for the duration of the term (unless
earlier terminated) of the Hawthorn Acquisition Agreement and for six months
thereafter, the Company may not franchise another all-suite hotel brand
(other than Microtels costing under a certain amount to construct). If the
Company decides to franchise another all-suite hotel brand after Hawthorn
Brand Saturation has been achieved, HSA has the option to sell its interest
in the Hawthorn Suites brand and system of operation to the Company for a sum
equal to 10 times the portion of franchise royalty fees earned or accrued by
HSA in the 12 months prior to such sale. See "Business--Acquisition of the
Microtel and Hawthorn Suites Systems".
Competition for New Franchise Properties and Hotel Guests
Competition among national brand franchisors and smaller chains in the
lodging industry to grow their franchise systems is intense. The Company
believes that competition for the sale of lodging franchises is based
principally upon (i) the perceived value and quality of the brand, (ii) the
nature and quality of services provided to franchisees, (iii) the
franchisees' view of the relationship of building or conversion costs and
operating expenses to the potential for revenues and profitability during
operation and upon sale and (iv) the franchisee's ability to finance and sell
the property. The Company's franchisees are generally in intense competition
for guests with franchisees of other hotel chains, independent properties and
owner-operated chains. The success of the Company's franchisees affects the
profitability of the Company, as the Company's receipt of royalty fees under
its franchise agreements is tied directly to the gross room revenues earned
by its franchisees.
In choosing a particular hotel or motel, consumers consider differences in
room rates, quality and condition of accommodations, name recognition,
availability of alternative lodging (including short-term lease apartments),
service levels, reputation, safety, reservation systems and convenience of
location.
Both among consumers and potential franchisees, Microtel competes with
budget and economy hotels such as Comfort Inn, Days Inn, Econo Lodge,
Fairfield Inn, Sleep Inn, Red Roof Inn, Budgetel Inn, Super 8, Ramada
Limited, Motel 6, Jameson Inns, Travelodge, Thriftlodge, Knights Inn, Red
Carpet Inn and Scottish Inns. In the upscale, extended-stay sector, Hawthorn
Suites hotels compete for consumers and potential franchisees with Residence
Inn, Homewood Suites, Summerfield Suites and Woodfin Suites. In the transient
suites sector of the lodging industry, where the Company will be competing
through its Hawthorn Suites LTD brand, the Company's principal competitors
will include AmeriSuites, Hampton Inn and Suites, Fairfield SuitesSM,
MainStaySM, CandlewoodSM, Wingate InnSM, Towne PlaceSM and Courtyard by
Marriott, among others. Many of the Company's competitors are affiliated with
larger chains with substantially more properties, greater marketing budgets
and greater brand identity than the Company. There can be no assurance that
the Company can franchise a sufficient number of properties to generate
operating efficiencies that will enable it to compete with these larger
chains.
General Risks of the Lodging Industry
Although the Company does not currently own hotel properties, because the
Company's revenues vary directly with its franchisees' gross room revenues,
the Company's business is impacted by the effects of risks experienced by
hotel operators generally. The budget, extended-stay and transient suite
segments of the lodging industry, the segments in which hotels franchised
under the Company's brands currently operate or plan to operate, may be
adversely affected by changes in national or local economic conditions and
other local market conditions, such as an oversupply of or a reduction in
demand for lodging or a scarcity of potential sites in a geographic area,
changes
11
<PAGE>
in travel patterns, extreme weather conditions, changes in governmental
regulations that influence or determine wages, prices, construction costs or
methods of operation, changes in interest rates, the availability of
financing for operating or capital needs and changes in real estate tax rates
and other operating expenses. In addition, due in part to the strong
correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues
and profits. These risks may be exacerbated by the relatively illiquid nature
of real estate holdings. Downturns or prolonged adverse conditions in real
estate or capital markets or in national or local economies could have a
material adverse impact on the Company's ability to locate new franchisees.
As a hotel franchisor, the Company expects to experience seasonal revenue
patterns similar to those experienced by participants in the lodging industry
generally. Accordingly, the summer months, because of increases in leisure
travel, are expected to produce higher franchise royalty revenues for the
Company than other periods during the year. In addition, developers of new
hotels typically attempt, whenever feasible, to schedule the opening of a new
property to occur prior to the spring and summer seasons. This may have a
seasonal impact on the Company's revenues, a significant portion of which is
not recognized until the opening of a property. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.
Development Risk
Although the Company does not currently own hotel properties, because its
revenues are dependent on the revenues of its franchisees, the Company is
subject to risks associated with developing hotel properties. These risks,
which are applicable to Microtels as new construction properties and Hawthorn
Suites as both new construction and conversion properties, include delays in
completion of construction, failure to obtain all necessary zoning and
construction permits, discovery of environmental hazards, unavailability of
financing on favorable terms, if at all, the failure of developed properties
to achieve desired revenue or profitability levels once opened, competition
for suitable development sites from competing franchise chains, the risk of
incurring substantial costs in the event a development project must be
abandoned prior to completion, changes in governmental rules, regulations and
interpretations and general economic and business conditions. The Company's
revenues may also be adversely affected by increases in interest rates, which
could increase the costs of financing new hotel construction or the
conversion of existing hotels. Any one of these risks could discourage or
prohibit potential franchisees from beginning or completing hotel projects.
In addition, in connection with the American Dream Program, the Company may
in the future lease and, ultimately, own Microtels. To the extent the Company
leases and/or owns hotel properties it would be subject to risks experienced
by hotel operators generally.
Risks Relating to the Franchisee Financing Facility
In May 1996, the Company reached an agreement in principle with NACC,
pursuant to which NACC would make available to the Company's franchisees over
a two-year period up to $200 million in construction and long-term mortgage
financing, subject to certain terms and conditions (the "Franchisee Financing
Facility"). Under the Franchisee Financing Facility, the ultimate decision
regarding the provision of loans to franchisees will be made by NACC. There
can be no assurance that any loans will be made in connection with the
Franchisee Financing Facility or any other financing facility. See
"Business--Special Programs--Franchisee Financing Facility".
The Company generally does not make construction or mortgage loans to its
franchisees. However, in connection with the Franchisee Financing Facility,
the Company may in the future participate in construction loans and long-term
mortgage loans made to franchisees, including through direct subordinated
loans to such franchisees. In such cases, the Company would be subject to the
risks experienced by lenders generally, including risks of
franchisee/borrower defaults and bankruptcies. In the event of a default
under such loans, the Company, as a subordinated lender, would bear the risk
of loss of principal to the extent the value of the collateral was not
sufficient to pay both the senior lender and the Company, as subordinated
lender. See "Risk Factors--Regulation" and "Business--Special
Programs--Franchisee Financing Facility".
Regulation
The sale of franchises is regulated by various state laws, as well as by
the Federal Trade Commission (the "FTC"). The FTC requires that franchisors
make extensive disclosure to prospective franchisees, although it does not
require registration of offers to prospective franchisees. A number of states
require registration and disclosure in connection with franchise offers and
sales. In addition, several states have "franchise relationship laws" that
limit the ability of
12
<PAGE>
franchisors to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While the Company's franchising
operations currently are not materially adversely affected by such
regulations, the Company cannot predict the effect any future legislation or
regulation may have on its business operations or financial condition.
Additionally, various national, state and local laws and regulations may
affect activities undertaken by the Company in connection with the Franchisee
Financing Facility and under an agreement with PMC Commercial Trust ("PMC"),
pursuant to which the Company has agreed to, among other things, make
available to potential Microtel franchisees information regarding PMC's
financing programs for land acquisition and construction costs (the "PMC
Agreement"). In particular, the Company may be required to obtain a license
or to register in certain states in order to arrange loans to be made by NACC
or PMC, as the case may be, under such programs or in the event the Company
determines to make loans itself under the Franchisee Financing Facility. See
"Business--Special Programs-- Franchisee Financing Facility" and "--PMC
Agreement".
Mandatory Redemption of Redeemable Preferred Stock
As of June 30, 1996, there were 163,500 shares of the Company's Redeemable
Preferred Stock outstanding. Pursuant to the terms of the Company's Amended
and Restated Certificate of Incorporation (the "Charter"), the Company is
required, upon the earlier of (i) September 29, 2007 or (ii) a Change of
Control (as defined below) of the Company, to redeem each outstanding share
of Redeemable Preferred Stock at a cash price per share equal to $100 plus
all accrued and unpaid dividends thereon. A "Change of Control" is defined
generally as (A) the sale of all or substantially all of the Company's
assets, (B) the transfer of more than 50% of its Common Stock to persons who
are not employees of the Company and were not stockholders prior to the
Offering or (C) the termination of the employment of Mr. Leven for any reason
by the Company (including resignation). If Mr. Leven's employment were to be
terminated by the Company for any reason or the Company were to otherwise
experience a Change of Control, the Company would be obligated to redeem all
outstanding shares of Redeemable Preferred Stock at a cost, as of June 30,
1996, of $17,597,000. See "Description of Capital Stock--Preferred Stock".
No Prior Market for Class A Common Stock; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that a regular trading market for
the Class A Common Stock will develop after the Offering or that, if
developed, it will be sustained. The initial public offering price of the
Class A Common Stock will be determined by negotiation between the Company
and the Underwriters based on several factors and will not necessarily
reflect the market price of the Class A Common Stock after the Offering or
the price at which the Class A Common Stock may be sold in the public market
after the Offering.
The market price for the Class A Common Stock may be significantly
affected by such factors as the Company's operating results, changes in any
earnings estimates publicly announced by the Company or by analysts,
announcements of new brands acquired by the Company or its competitors,
seasonal effects on revenues and various factors affecting the economy in
general. In addition, the stock market has experienced a high level of price
and volume volatility, and market prices for the stock of many companies,
especially newly public companies, have experienced wide price fluctuations
not necessarily related to the fundamentals or operating performance of such
companies.
Dilution
The amount by which the initial public offering price per share of Class A
Common Stock exceeds the pro forma net tangible book value per share of
Common Stock after the Offering constitutes dilution to investors in the
Offering. Based on an assumed initial public offering price of $13.00 per
share (the midpoint of the range of prices set forth on the cover of this
Prospectus), purchasers of shares of Class A Common Stock in the Offering
would experience an immediate and substantial dilution of net tangible book
value of $12.06 per share. See "Dilution".
Absence of Dividends
The Company intends to retain any earnings to finance its growth and for
general corporate purposes and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the terms of the Company's
Redeemable Preferred Stock contain, and future financing agreements may
contain, limitations on the payment of cash dividends or other distributions
of assets to the holders of Common Stock. See "Dividend Policy".
13
<PAGE>
Anti-Takeover Devices
Certain provisions of the Charter and the Company's Amended and Restated
By-Laws (the "By-laws") that will become operative prior to or simultaneously
with the closing of the Offering may be deemed to have anti-takeover effects
and may delay, deter or prevent a change in control of the Company that
stockholders might otherwise consider in their best interests. These
provisions (i) allow only the Board of Directors, the Chairman of the Board
of Directors or the Chief Executive Officer of the Company to call special
meetings of the stockholders, (ii) eliminate the ability of stockholders to
take any action without a meeting, (iii) establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings, (iv)
generally authorize the issuance of one or more classes of "blank check"
preferred stock (in addition to the Redeemable Preferred Stock), with such
designations, rights and preferences as may be determined from time to time
by the Board of Directors, (v) require approval of holders of 75% of the
outstanding Class B Common Stock for the Board of Directors to create a
series of Preferred Stock with general voting rights or with the right to
elect a majority of directors under any circumstances and (vi) require
approval of holders of 75% of the outstanding voting power to amend or repeal
items (i), (ii), (v) and (vi) above. See "Description of Capital
Stock--Delaware Law and Certain Charter and By-Law Provisions".
Shares Eligible for Future Sale
Upon the consummation of the Offering, the Company will have 9,872,490
shares of Class A Common Stock outstanding and 2,707,919 shares of Class B
Common Stock outstanding. Of these shares, the 2,325,000 shares of Class A
Common Stock offered hereby will be freely tradeable by persons other than
affiliates of the Company, without restriction under the Securities Act of
1933, as amended (the "Securities Act"). In addition, approximately 9,425,000
shares of Class A Common Stock (including shares of Class A Common Stock into
which the Class B Common Stock is convertible) will be eligible for sale
under Rule 144 beginning on September 29, 1997 (subject to certain volume
limitations and other restrictions prescribed by Rule 144). At such time as
at least 20% of the outstanding Common Stock has been registered for public
sale, certain holders of Common Stock (who, following the Offering, will own
in the aggregate 7,547,490 shares of Class A Common Stock and 2,707,919
shares of Class B Common Stock) will have "piggyback" registration rights
permitting such holders to include a portion of their shares (including, in
the case of Class B Common Stock, the shares of Class A Common Stock into
which such shares are convertible), at the Company's expense, in certain
registration statements filed by the Company (the "piggyback shares"). The
maximum number of shares of Class A Common Stock that may be included in such
registration by such holders is determined by multiplying all of the
piggyback shares by a fraction, the numerator of which is the number of
shares being registered by the Company and the denominator of which is the
number of shares to be outstanding after such registration (excluding the
piggyback shares). In addition, subsequent to September 29, 2000, holders of
a majority of such shares will have the right to request on one occasion
(subject to certain limitations) that such shares (including, in the case of
Class B Common Stock, the shares of Class A Common Stock into which such
shares are convertible) be registered for resale under the Securities Act at
the Company's expense. See "Certain Relationships and Related Transactions"
and "Description of Capital Stock--Registration Rights". No prediction can be
made as to the effect, if any, that sales of shares of Class A Common Stock
or the availability of such shares for sale will have on the market prices
prevailing from time to time. The Company, its officers and directors and
certain of its other stockholders have agreed with the Underwriters not to
sell or otherwise dispose of any of their shares of Class A Common Stock or
Class B Common Stock for a period of 180 days from the date of this
Prospectus without the prior written consent of the representatives of the
Underwriters. Nevertheless, the possibility that substantial amounts of Class
A Common Stock (including those shares into which the Class B Common Stock is
convertible) may be sold in the public market may adversely affect prevailing
market prices for the Class A Common Stock and could impair the Company's
ability to raise equity capital in the future.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Class A
Common Stock offered hereby are estimated to be approximately $21,364,000
($24,673,887 if the Underwriters' over-allotment option is exercised in
full), based on an initial public offering price of $13.00 per share (the
midpoint of the range of prices set forth on the cover of this Prospectus),
after deducting the underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company.
The proceeds of the Offering will be used for working capital and general
corporate purposes, which may include (i) funding the Company's remaining
obligations (approximately $2 million) under the Microtel Acquisition
Agreement , (ii) acquiring additional lodging or other service-oriented
brands or exclusive franchise rights (to the extent permitted under the
Hawthorn Acquisition Agreement), (iii) making initial deposits in connection
with the American Dream Program until qualified lessees can be identified,
(iv) investing in financing programs developed by its wholly owned
subsidiary, US Funding Corp., and (v) investing in entities that make equity
investments in hotel properties built and managed by certain franchisees with
the potential for multi-unit development. The Company currently has no
agreements, commitments or formal understandings with respect to any
acquisitions and, accordingly, is unable to estimate the aggregate amount of
the net proceeds that may be used for any such purposes. Pending such uses,
the Company intends to invest such funds in cash and marketable securities;
provided that the Company intends to invest and to use the net proceeds of
the Offering so as not to be considered an investment company within the
meaning of the Investment Company Act of 1940. See "Business--Acquisition of
the Microtel and Hawthorn Suites Systems", "--Business
Strategy--Acquisitions" and "--Special Programs".
The Offering is also intended to increase the Company's equity base,
provide a public market for the Company's Class A Common Stock, facilitate
future access by the Company to the public equity markets and possibly
provide an additional form of currency for future acquisitions.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain its earnings to provide funds for the
operation and expansion of its business and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. The terms of
the Company's Redeemable Preferred Stock prohibit the Company from declaring
or paying dividends on its Common Stock at any time when dividends have not
been paid in full with respect to its Redeemable Preferred Stock (although
dividends are payable in additional shares of Redeemable Preferred Stock).
Any payment of future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other relevant
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of
Capital Stock--Preferred Stock".
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 on a historical basis and on a pro forma basis reflecting the
Reclassification, certain amendments (collectively, the "1996 Amendment") to
be made to the agreements pursuant to which Messrs. Leven and Aronson
purchased shares of Old Common Stock (the "Old Stock Purchase Agreements"),
and the Offering (including the application of the proceeds therefrom),
assuming an initial public offering price per share of $13.00 (the midpoint
of the range of prices set forth on the cover of this Prospectus). The table
should be read in conjunction with the Selected Financial Data and the
Consolidated Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. See "Selected Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Principal Stockholders--Management's Shares of Common
Stock".
<TABLE>
<CAPTION>
June 30, 1996
--------------------------
Historical Pro Forma
----------- ---------
<S> <C> <C>
Long Term Debt
Due to Hudson $ 731,000 $ 731,000
Redeemable Stock
10% Cumulative Redeemable Exchangeable Preferred Stock, par
value $.01 per share; up to 525,000 authorized; 163,500
shares issued and outstanding as of June 30, 1996 17,597,000 17,597,000
Redeemable shares of Class A Common Stock, par value $.01
per share; 3,186,294 shares issued and outstanding as of
June 30, 1996 (1) 330,000
Redeemable shares of Class A Common Stock, par value $0.01
per share; 2,006,559 shares issued and outstanding after
the Reclassification, the 1996 Amendment and the Offering (1) -- 208,000
Stockholders' Equity (Deficit)
Common Stock, par value $.01 per share; 7,569,115 shares of
Class A Common Stock issued and outstanding as of June
30, 1996 78,000
Common Stock, par value $0.01 per share; 30,000,000
shares of Class A Common Stock and 5,000,000 shares of
Class B Common Stock authorized; 7,865,931 shares of
Class A Common Stock and 2,707,919 shares of Class B
Common Stock issued and outstanding after the
Reclassification, the 1996 Amendment and the Offering (2) 106,000
Capital in excess of par 21,458,000
Accumulated Deficit (4,970,000) (4,970,000)
----------- -----------
Total Stockholders' Equity (Deficit) (4,892,000) 16,594,000
----------- -----------
Total Capitalization $13,766,000 $35,130,000
=========== ===========
</TABLE>
- -------------
(1) These shares are redeemable under certain conditions by the Company for
reasons not under the Company's control. See "Principal
Stockholders--Management's Shares of Common Stock".
(2) Excludes 325,000 shares of Class A Common Stock reserved for issuance
under the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the
"Option Plan") and 125,000 shares of Class A Common Stock reserved for
issuance under the U.S. Franchise Systems, Inc. 1996 Stock Option Plan
for Non-Employee Directors ("The Directors Plan").
16
<PAGE>
DILUTION
At June 30, 1996, the net tangible book value of the Company was a deficit
of $9,569,000 or ($0.89) per share of outstanding Common Stock (taking into
account the Reclassification). After giving effect to the Reclassification
and to the sale of the 1,825,000 shares of Class A Common Stock being offered
by the Company hereby at an assumed initial offering price of $13.00 per
share (the midpoint of the range of prices set forth on the cover page of
this Prospectus) and the application of the net proceeds therefrom (after
deducting estimated offering expenses and underwriting discounts and
commissions), the pro forma net tangible book value of the Company at June
30, 1996 would have been $11,795,000, or $0.94 per share, representing an
immediate increase in net tangible book value of $1.83 per share to existing
stockholders and an immediate dilution of $12.06 per share to persons
purchasing shares of Class A Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share (1) $13.00
Net tangible book value per share of
Common Stock at June 30, 1996
(adjusted for the Reclassification
but excluding the Offering) $(0.89)
Increase in net tangible book value per
share of Common Stock attributable to
new investors in the Offering 1.83
------
Pro forma net tangible book value per share
of Common Stock after the Offering 0.94
------
Dilution per share to purchasers of Class A
Common Stock in the Offering $12.06
------
</TABLE>
- -------------
(1) Before deduction of underwriting discounts and commissions and offering
expenses.
The following table sets forth, as of June 30, 1996, and after giving
effect to the Reclassification and the Offering, the number of shares of
Common Stock issued by the Company, the total consideration paid and the
average price per share paid by existing stockholders and to be paid by
purchasers of shares in the Offering, assuming that shares purchased in the
Offering are sold at $13.00 per share (the midpoint of the range of prices
set forth on the cover page of this Prospectus) and before deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- --------------------- Price
Number Percent Amount Percent Per Share
--------------- --------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 10,755,409 85.0% $ 1,112,000 5.0% $ 0.10
New Investors 1,825,000 (1) 15.0 23,725,000 95.0 $13.00
--------------- --------- -------------- --------- ---------
12,580,409 100.0% $24,837,000 100.0%
=============== ========= ============== =========
</TABLE>
- -------------
(1) Does not include shares of Class A Common Stock to be purchased in the
Offering from the Selling Stockholders, as the Company will not receive
any proceeds from the sale of such shares.
17
<PAGE>
SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated historical financial
information of the Company and its subsidiaries as of December 31, 1995 and
June 30, 1996, for the period from August 28, 1995, the date of the Company's
inception, to December 31, 1995 and the six months ended June 30, 1996. Such
information has been derived from the Company's Consolidated Financial
Statements and related Notes thereto as of such dates and with respect to
such periods, which financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Their report on the Company's financial
statements as of such dates and for such periods is included elsewhere in
this Prospectus. See the Consolidated Financial Statements and related Notes
included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Period from
August 28, 1995 to Six Months Ended
December 31, 1995 June 30, 1996
------------------ ----------------
(in thousands of dollars, except
share and per share data)
<S> <C> <C>
Statement of Operations Data:
Revenues $ -- $ 395
Operating expenses 1,327 3,849
Operating loss 1,327 3,454
Interest income 195 331
Interest expense 36 72
Net loss 1,168 3,195
Loss applicable to common stockholders 1,645 4,033
Net loss applicable to common stockholders per share (1) 0.15 0.38
Weighted average number of common shares
outstanding (2) 10,755,409 10,755,409
Balance Sheet Data (at period end):
Working capital $ 13,265 $ 8,029
Total assets 18,072 19,027
Total liabilities 1,845 5,992
Redeemable Preferred Stock 16,759 17,597
Redeemable Common Stock 330 330
Stockholders' deficit 862 4,892
</TABLE>
- -------------
(1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares of
Class B Common Stock outstanding after the Reclassification but before the
Offering.
(2) Includes 3,186,294 shares of Class A Common Stock that are redeemable under
certain circumstances by the Company for reasons not under the Company's
control. See "Principal Stockholders--Management's Shares of Common Stock".
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed in August 1995 to acquire, market and expand
high-quality, well-positioned brands with potential for rapid unit growth
through the sale of franchises to third-party operators. The Company
commenced operations in October 1995 and has since focused on acquiring
brands and developing the infrastructure necessary to increase the size and
scope of each brand.
Since October 1995, the Company has acquired two lodging brands--Microtel
(October 1995) and Hawthorn Suites (March 1996). The Company has hired and
trained a staff of 73 employees, including a franchise sales force of 28,
which management believes is the third largest franchise sales organization
in the lodging industry. In addition, the Company has hired executive and
other management employees to head its marketing, administration,
construction and design, finance, training, personnel, national accounts
purchasing and public relations departments. As a result of these hirings,
the Company believes that it has established the infrastructure sufficient to
support significant growth of its brands without further large increases in
its senior management team. Most of the Company's employees have extensive
experience with franchise companies in general and lodging companies
specifically.
In addition, the Company has prepared documentation required under various
federal and state laws for the sale of new franchises under both the Microtel
and Hawthorn Suites brands, including a Uniform Franchise Offering Circular
(a "UFOC"), a form of Franchise Agreement and an application form for each
brand. Subsidiaries of the Company are currently registered to sell Microtels
and Hawthorn Suites hotels in all 50 states. The Company has also developed
the marketing materials, architectural and construction plans, training
programs, reservation systems and franchisee assistance programs to support
the sale of Microtel and Hawthorn Suites franchises.
In order to support its franchise sales effort, the Company has arranged
for a third party to make financing available to its franchisees. In May
1996, the Company reached an agreement in principle with NACC with respect to
the Franchisee Financing Facility, pursuant to which NACC would make
available to the Company's franchisees, over a two-year period, up to $200
million in construction and long-term mortgage financing, subject to certain
terms and conditions. Under the Franchisee Financing Facility, the ultimate
decision regarding the provision of loans to franchisees will be made by
NACC. See "Business--Special Programs--Franchisee Financing Facility".
Results of Operations
Comparison of the four month period ended December 31, 1995 to the six
month period ended June 30, 1996
General. Although the Company was formed in August 1995, it did not begin
operations until October 1995, making the period from August 28, 1995
(inception) to December 31, 1995 (the "1995 Period") effectively a three
month time period from an operations perspective. During the 1995 Period, the
Company's primary focus was the hiring of its executive staff and the
acquisition of the Microtel brand. The Company experienced a three to four
month period between the closing of its acquisition of the exclusive
worldwide franchising rights of the Microtel hotel system (the "Microtel
Acquisition") and the beginning of significant franchise sales activities,
during which time the Company (i) hired and trained its key executive staff
and franchise sales personnel, (ii) developed sales materials, prototypical
architectural drawings and various employee and franchisee training manuals
and (iii) completed legal documentation and filings necessary to allow the
Company to sell franchises in all states. The Company experienced a similar
three to four month lag period between the closing of its acquisition of the
exclusive worldwide rights to franchise hotels under the Hawthorn Suites
brand (the "Hawthorn Acquisition") and the beginning of significant franchise
sales activities. Accordingly, the full-time franchise sales efforts for the
Microtel and Hawthorn Suites brands did not begin until January 1996 and July
1996, respectively. The Company did not acquire the rights to royalties
related to properties that were open or under development at the time of the
Microtel Acquisition or the Hawthorn Acquisition, although the Company will
receive reservation and marketing fees from the franchisees of such
properties. See "Business--Acquisition of the Microtel and Hawthorn Suites
Systems".
19
<PAGE>
The table below summarizes the results of the Company's franchise sales
efforts as of the dates below.
<TABLE>
<CAPTION>
Executed Franchise Properties
Franchise Applications Under
Microtel Agreements Accepted (1) Construction
-------- ---------- ------------ ------------
<S> <C> <C> <C>
December 31, 1995 3 10 0
March 31, 1996 47 32 1
June 30, 1996 93 63 1
September 30, 1996 145 74 7
Hawthorn Suites
---------------
June 30, 1996 0 1 0
September 30, 1996 5 16 2
</TABLE>
- -------------
(1) Represents franchise applications as to which the Company has approved the
proposed site and the prospective franchisee but has not yet executed a
franchise agreement.
Revenue. The Company generated $395,000 of revenues, representing
reservation and marketing fees collected from franchisees, during the six
months ended June 30, 1996. The Company began collecting such fees from
Microtel and Hawthorn Suites franchisees in February 1996 and April 1996,
respectively, and, accordingly, no such revenues were earned during the 1995
Period. While the Company recognizes reservation and marketing fees as
revenues, such fees are intended to reimburse the Company for the expenses
associated with providing support services to its franchisees and do not
produce any profit for the Company. The Company also received franchise
application fees of $2,722,000 for the six months ended June 30, 1996,
compared to $120,000 for the 1995 Period. However, such fees are recognized
as revenue only when the applicable hotel opens, and therefore, the Company
did not recognize revenues related to such fees during the applicable
periods.
Expenses. Reservation and marketing costs were $13,000 for the 1995 Period
and $490,000 for the six months ended June 30, 1996. The increase in
marketing and reservation costs in the latter period reflects the
availability of reservation and marketing fees paid to the Company by
franchisees, as well as additional spending by the Company to promote the
Microtel brand to travelers. In the second half of 1996 and through 1997 as
well, the Company expects to spend more on marketing and reservations than it
receives from its franchisees, as it continues its efforts to build
recognition and acceptance of its newly-acquired brands among the traveling
public. Sales commissions of $41,000 were paid during the 1995 Period for the
three license agreements executed during such period compared to commissions
of $1,241,000 which were paid with respect to the 90 license agreements
executed during the six months ended June 30, 1996, reflecting the higher
level of sales activity in the latter period. Such payments will not be
recognized as expenses until the applicable hotel opens and the related
application fee is recognized as revenue. Other franchise sales and
advertising costs, which are costs related to the Company's franchise sales
effort, were $550,000 for the 1995 Period and $1,263,000 for the six months
ended June 30, 1996. This increase primarily relates to the addition of six
sales people in connection with the Hawthorn Acquisition. Corporate salaries,
wages and benefits, which are non-selling personnel costs, were $423,000
during the 1995 Period and $993,000 for the six months ended June 30, 1996.
Approximately $120,000 of this increase was the result of 11 hirings made
necessary by the Hawthorn Acquisition. The remainder reflects the comparison
of the six months ended June 30, 1996 with the 1995 Period, which was
effectively a three-month operating period. Other general and administrative
expenses were $215,000 during the 1995 Period compared to $835,000 (including
a $200,000 non- recurring charge related to the anticipated termination of
the Company's corporate office lease) for the six months ended June 30, 1996.
In addition to the $200,000 non-recurring charge, the difference reflects the
increased activity experienced by the Company during the first six months of
1996 as compared to the last three months of 1995, when it was in its
start-up phase. Depreciation and amortization expense includes depreciation
of equipment for the corporate and regional sales offices, amortization of
the cost of acquiring the Microtel brand and the exclusive rights to
franchise the Hawthorn Suites brand, amortization of consulting payments made
to Hudson under the Microtel Acquisition Agreement and amortization of costs
related to the formation of the Company. Such costs were $126,000 in the 1995
Period and $268,000 in the six months ended June 30, 1996.
Other Income/Expense. During the 1995 Period and the six months ended June
30, 1996, interest expense of $36,000 and $72,000, respectively, was accrued
on the remaining portion of the purchase price of the Microtel
20
<PAGE>
brand. Interest income of $195,000 in the 1995 Period and $331,000 in the six
months ended June 30, 1996 resulted from investments in cash and marketable
securities held by the Company.
Net Loss. The Company had a net loss of $1,168,000 and net loss applicable
to common stockholders of $1,645,000 (including $477,000 of accumulated but
undeclared and unpaid dividends on Redeemable Preferred Stock) for the 1995
Period. For the six months ended June 30, 1996, the net loss was $3,195,000
and the loss applicable to common stockholders was $4,033,000 (including
$838,000 of accumulated but undeclared and unpaid dividends on the Redeemable
Preferred Stock). The Company had a net operating loss carryforward for
income tax purposes on December 31, 1995 and June 30, 1996 of $1,037,000 and
$2,792,000, respectively. Given the limited operating history of the Company,
management has recorded a valuation allowance for the full amount of the
deferred tax asset on December 31, 1995 and June 30, 1996 .
Liquidity and Capital Resources
The Company has financed its operations since its inception primarily
through a private placement of securities, franchise application fees and
interest income. In October 1995, the Company raised approximately $17.5
million in gross proceeds through sales of shares of Old Common Stock and
Redeemable Preferred Stock. Franchise application fees and interest income
generated cash of $120,000 and $195,000, respectively, for the 1995 Period
and $2,306,000 and $331,000, respectively, for the six months ended June 30,
1996. In the 1995 Period, the Company invested $3,720,000, of which
$3,428,000 related to the Microtel Acquisition, $137,000 went toward the
acquisition of equipment and $155,000 was for organization costs. Of the
approximately $3.4 million spent to acquire the Microtel brand, $1,437,000
was paid in the form of a note, with the remainder paid in cash. In the six
months ended June 30, 1996, the Company spent a total of $388,000, $271,000
of which was used to purchase equipment and $117,000 was spent primarily on
legal costs relating to the Hawthorn Acquisition.
In the future, the Company will support the American Dream Program by
committing to make initial deposits under such program until qualified
lessees can be identified. In the event a qualified lessee is not identified
for a particular property, the Company may become the lessee under the
program. If the Company becomes the lessee with respect to a particular
property, it may also acquire the Microtel from the franchisee under the
terms of the American Dream Program. See "Business--Special
Programs--American Dream Program". The Company anticipates that the net
proceeds of the Offering, together with cash on hand and interest thereon,
will be sufficient to fund the Company's working capital requirements and to
carry out part of the Company's business strategy. See "Business--Business
Strategy". The Company may fund its future cash needs through additional
equity or debt offerings, although there can be no assurance that the Company
will be able to do so. The Company had outstanding indebtedness related to
the Microtel Acquisition of $1,437,000 as of both December 31, 1996 and June
30, 1996.
As of June 30, 1996, there were 163,500 shares of the Company's Redeemable
Preferred Stock outstanding. Pursuant to the terms of the Charter, the
Company is required, upon the earlier of (i) September 29, 2007 or (ii) a
Change of Control of the Company, to redeem each outstanding share of
Redeemable Preferred Stock at a cash price per share equal to $100 plus all
accrued and unpaid dividends thereon. If Mr. Leven's employment were to be
terminated by the Company for any reason (including resignation) or the
Company were to otherwise experience a Change of Control, the Company would
be obligated to redeem all outstanding shares of Redeemable Preferred Stock
at a cost, as of June 30, 1996, of $17,597,000. See "Risk Factors--Mandatory
Redemption of Redeemable Preferred Stock" and "Description of Capital
Stock--Preferred Stock".
Seasonality
As a hotel franchisor, the Company expects to experience seasonal revenue
patterns similar to those experienced by participants in the lodging industry
generally. Accordingly, the summer months, because of increases in leisure
travel, are expected to produce higher franchise royalty revenues for the
Company than other periods during the year. In addition, developers of new
hotels typically attempt, whenever feasible, to schedule the opening of a new
property to occur prior to the spring and summer seasons. This may have a
seasonal impact on the Company's revenues, a significant portion of which is
not recognized until the opening of a property. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.
Inflation
The rate of inflation has not had a material effect on the revenues or
operating results of the Company since its inception.
21
<PAGE>
BUSINESS
Overview
U.S. Franchise Systems, Inc. ("USFS" or the "Company") was formed in
August 1995 to acquire, market and expand high-quality, well-positioned
brands with potential for rapid unit growth through the sale of franchises to
third- party operators. The Company's initial brands, which are in the
lodging industry, are the Microtel budget hotel brand ("Microtel") and the
Hawthorn Suites upscale, extended-stay hotel brand ("Hawthorn Suites"). The
Company acquired the rights to these brands because of their potential for
significant growth, which reflects, among other things, their profitability
for franchisees at the property level and their positions in attractive
segments of the lodging industry.
The Company has assembled an experienced management team and sales force
led by its Chairman, President and Chief Executive Officer, Michael A. Leven,
who has 35 years of experience in the lodging industry, and its Executive
Vice President and Chief Financial Officer, Neal K. Aronson, a former
principal of the New York investment firm Odyssey Partners, L.P. Mr. Leven
most recently served as President and Chief Operating Officer of Holiday Inn
Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of
America, Inc. (1985-90), franchisors of the two largest lodging brands in the
world. The Company has hired and trained a staff of 73 employees, including a
28-person sales force, which management believes is the third largest
franchise sales organization in the lodging industry. Mr. Leven and the
Company's sales force have collectively sold over 2,200 hotel franchises on
behalf of other hotel chains. Since acquiring the Microtel brand in October
1995 and establishing a sales force by January 1996, the Company has executed
145 franchise agreements and accepted applications for an additional 74
hotels as of September 30, 1996, expanding the number of states in which
Microtels are or may be located from 10 to 44. Since acquiring the exclusive
rights to franchise the Hawthorn Suites brand in March 1996 and establishing
a sales force by July 1996, the Company has executed five franchise
agreements and accepted applications for 16 additional hotel sites as of
September 30, 1996.
As a franchisor, USFS licenses the use of its brand names to independent
hotel owners and operators (i.e., franchisees). The Company provides its
franchisees with a variety of benefits and services designed to (i) decrease
development costs, (ii) shorten the time frame and reduce the complexity of
the construction process and (iii) increase the occupancy rates, revenues and
profitability of the franchised properties. The Company offers prospective
franchisees access to financing, a business format, design and construction
assistance (including architectural plans), uniform quality standards,
training programs, national reservations systems, national and local
advertising and promotional campaigns and volume purchasing discounts. The
Company does not currently build, own or manage properties.
The Company expects that its future revenues will consist primarily of (i)
franchise royalty fees, (ii) franchise application fees, (iii) reservation
and marketing fees, (iv) various fees and other revenues from third-party
financing arranged by the Company for its franchisees and (v) payments made
by vendors who supply the Company's franchisees with various products and
services. Currently, the Company derives substantially all of its revenues
from reservation and marketing fees collected from its franchisees. The
Company also receives cash from its franchisees in the form of application
fees, which are recognized as revenue only upon the opening of the underlying
hotels. See the Consolidated Financial Statements and the related Notes
included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Business Strategy
The Company's business strategy is to (i) rapidly increase the number of
open Microtels and Hawthorn Suites, (ii) operate its administrative and
franchisee support departments in order to maximize the operating leverage
inherent in the franchising business and (iii) acquire additional lodging or
other service-oriented brands that provide attractive unit economics to
franchisees and significant growth opportunities for the Company (to the
extent permitted under the Hawthorn Acquisition Agreement). See
"--Acquisition of the Microtel and Hawthorn Suites Systems".
Growth of the Franchise Systems. The Company is focused on accelerating
the growth of the Microtel and Hawthorn Suites franchise systems through the
sale of franchises to third-party owners and operators. To this end, the
Company has hired a 28-person sales force (which the Company believes is the
third largest in the lodging industry) whose members have sold 150 franchises
and secured an additional 90 franchise applications on behalf of the Company
since its inception. The Company also benefits from the extensive experience
of Mr. Leven, who has served as President and Chief Operating Officer of the
franchisors of the world's two largest lodging brands. The sales force
targets a broad
22
<PAGE>
pool of potential franchisees, including both franchisees with experience
developing and operating multiple hotel properties and single-unit
franchisees, including first-time hotel owners.
In addition to direct sales, management is actively developing programs
designed to accelerate the growth of the Microtel and Hawthorn Suites
systems. For example, the Company has developed a financing program through
which NACC would make construction and long-term mortgage financing available
to franchisees. This program is intended to add speed and certainty to the
hotel development process, enabling franchisees to spend more time
identifying hotel locations and developing properties and less time obtaining
financing. The Company has also created the American Dream Program, which is
designed to enable first-time hotel owners to lease and own a Microtel with a
low initial investment and thereby increase the number of potential Microtel
franchisees. The Company expects to participate in the American Dream Program
by committing to make initial deposits on and to lease Microtels under this
program until qualified lessees can be identified. See "--Special Programs".
Finally, the Company has extended the Microtel and Hawthorn Suites brands
from two products at the time of their respective acquisitions (Microtel Inn
and Hawthorn Suites) to five products currently (including Microtel Inn &
Suites, Microtel Suites and Hawthorn Suites LTD). The Company believes that
brand extensions allow it to capitalize on the recognition of its brands
among consumers and franchisees and to compete in new markets without the
costs associated with acquiring an existing brand. Of the 145 Microtel
franchise agreements executed by the Company since the Microtel Acquisition,
over 50% relate to Microtel Inn & Suites or Microtel Suites, two of the
products that the Company developed since acquiring the Microtel brand.
Operating Leverage. The Company expects to benefit in the future from the
operating leverage inherent in its cost structure. As new Microtels and
Hawthorn Suites open, the Company expects that recurring royalty revenues
(derived from its franchisees' gross room revenues) will represent an
increasing percentage of the Company's total revenues. At the same time, the
Company expects to incur relatively limited incremental expenses associated
with these royalty revenues because the Company (i) has hired and trained the
sales force and has staffed teams of marketing, franchise administration,
construction and design, reservations and other professionals at levels it
believes are necessary to support the intended expansion of the Microtel and
Hawthorn Suites brands and (ii) earns reservation and marketing fees from
franchisees to offset a large portion of its expenditures on these
activities. At the same time, the Company, as a franchisor, does not incur
the significant capital costs and operating expenses associated with owning
hotels.
Acquisitions. A principal focus of the Company's business strategy is on
the acquisition of additional lodging and other service-oriented franchise
brands. In evaluating potential acquisitions, the Company seeks brands that
have clear market positions and significant multi-unit expansion potential,
are profitable and relatively easy to manage at the unit level and, at the
same time, can be integrated on a cost-effective basis into the Company's
franchise sales and franchisee support organization. From time to time, the
Company engages in discussions with owners of various lodging and non-lodging
brands. However, under the terms of the Hawthorn Acquisition Agreement, the
Company is generally prohibited until June 26, 1998 from franchising any
lodging brand other than (i) Hawthorn Suites brand hotels, (ii) Microtel
brand hotels and (iii) other limited-service, non-suite hotel brands with an
ADR of $49 and under. In addition, until June 26, 1997, the Company generally
may not franchise any non-lodging brands. Also, until 175 Hawthorn Suites
with 11,375 rooms have been developed, the Company may not franchise another
all-suite hotel brand (other than Microtels costing under a certain amount to
construct). As of September 30, 1996, the Company did not have any
agreements, commitments or formal understandings with third parties regarding
possible acquisitions. See "--Acquisition of the Microtel and Hawthorn Suites
Systems".
The Hotel Franchising and Lodging Industries
Hotel Franchising. In recent years, owners of hotels not affiliated with
regional or national lodging companies have increasingly chosen to join hotel
franchise chains. The Company and other hotel franchise chains provide a
number of services designed to directly or indirectly increase hotel
occupancy rates, revenues and profitability. The Company believes that hotel
operators often view franchise chain membership as an important means of
remaining competitive with hotels that are either owned by or affiliated with
national or regional lodging companies. In determining whether to affiliate
with a franchise chain, hotel operators will compare costs of affiliation
with the incremental revenues anticipated to be derived from chain
membership. Costs of affiliation include capital expenditures and operating
costs required to meet a chain's quality and operating standards, plus the
ongoing payment of franchise royalties and assessments for the reservations
system and marketing programs maintained by the franchisor.
23
<PAGE>
Lodging Industry. The lodging industry has traditionally been divided into
five segments, each of which is identified by the average daily room rate
generally charged by hotel operators in the segment (the "ADR"). According to
an industry study, in 1995 the various segments and their respective ADRs
were: budget (approximately $36), economy (approximately $47), mid-price
(approximately $61), upscale (approximately $80) and luxury (approximately
$118). Hotels are further segmented into limited-service and full-service,
depending on the degree of food and beverage and other services offered, and
hotels are also segmented into transient hotels, which serve short-term
guests, and extended-stay hotels, which serve guests on multiple night or
multiple week stays. The Company's franchised properties operate in the
budget segment of the limited-service sector through its Microtel brand and
the extended-stay segment through its Hawthorn Suites brand.
The lodging industry as a whole has shown significant improvement in
recent years. Industry reports indicate that the lodging industry marked its
third consecutive year of profitability in 1995, resulting from a favorable
supply/ demand relationship, with increases in room demand exceeding
increases in room supply in 1992, 1993, 1994 and 1995. According to a study
prepared in January 1996, these trends are expected to continue, with demand
projected to increase at 2.5% annually from 1996 to 1998 compared to
projected supply growth of 2.0% for this same period. However, demand
historically has been sensitive to shifts in economic activity, which has
resulted in cyclical changes in room and occupancy rates, and there can be no
assurance that industry projections will be met.
The Company believes that the budget and the extended-stay segments of the
lodging industry offer particularly attractive industry dynamics relative to
other segments of the lodging industry, for the reasons set forth below.
Budget Segment.
Room supply growth in the budget segment has been and is expected to
continue to be lower than in the other segments of the market. Growth since
1994 in the numbers of rooms in the various segments, according to an
industry report, was as follows:
Annual Room Supply Growth (in %)
<TABLE>
<CAPTION>
1996
Segment 1994 1995 (through June)
- ------- ---- ---- --------------
<S> <C> <C> <C>
Luxury 1.0% 0.9% 1.4%
Upscale 2.0 1.9 2.7
Mid-price 2.0 2.4 2.7
Economy 1.1 2.0 1.7
Budget 0.3 0.6 0.5
</TABLE>
Another study indicates that room supply growth in the budget segment through
1998 is expected to be the lowest of all five segments. The industry report
referred to above also shows that the relationship between growth in room
demand and room supply in the budget segment continues to be favorable
relative to other segments of the lodging industry. The following table
compiled from such report compares the ratio of room demand growth to room
supply growth since 1994.
<TABLE>
<CAPTION>
Ratio of Change in Room Demand to
Change in Room Supply
1996
Segment 1994 1995 (through June)
- ------- ---- ---- --------------
<S> <C> <C> <C>
Luxury 4.4x 2.4x 2.0x
Upscale 1.9 1.4 1.1
Mid-price 2.1 1.6 1.3
Economy 2.4 1.5 1.5
Budget 4.0 2.2 3.4
</TABLE>
Extended-Stay Segment.
The extended-stay segment consists of hotels that offer rooms with full
kitchen facilities and that target travelers staying five or more consecutive
nights. This segment is a growing segment of the lodging industry, as
travelers' demand for better value and for environments that feel more like
home have contributed to increased demand for extended-stay rooms. Corporate
downsizing has resulted in an increasing need for consultants, long-term
project work and growth in corporate training programs. Moreover, with
extensive corporate relocations each year, more people are away from home on
longer trips. Leisure and vacation travelers are also discovering the value
of extended-
24
<PAGE>
stay hotels. According to lodging consultant D.K. Shifflet & Associates Ltd.,
approximately 292 million extended-stay room nights were sold in the United
States in 1995, representing over 30% of all hotel room nights sold in the
United States during the year. However, dedicated extended-stay rooms
constituted only 1.3% of the lodging industry's total rooms at the end of
1995. While growth in room supply in the extended-stay sector is expected to
outpace room supply growth in other segments of the lodging industry in the
next several years, management believes that the projected growth in supply
will be insufficient to meet demand for extended-stay rooms.
Extended-stay properties offer attractive economics to franchisees because
of the relatively high occupancy rates in this segment and the lower
operating costs relative to similarly priced, full-service hotel properties.
According to an industry survey, in 1995, extended-stay properties
experienced an average occupancy rate of 80.8%, compared to an overall
average occupancy rate for the lodging industry of 65.5%. Due to the longer
average stay of the extended-stay guest and lower guest turnover, operators
of extended-stay hotels enjoy reduced staffing needs, both at the front desk
and in housekeeping, relative to operators of transient hotels. At the same
time, reduced guest turnover contributes to lower supply costs, as hotel
operators are not required to replenish amenities such as soap and shampoo on
a daily basis. These factors, combined with the elimination of the high costs
of operating full service restaurants, allow extended-stay hotels to realize
higher profit margins than typical full-service hotels.
Microtel
Microtels include three types of properties: Microtel Inns, which have
single and double rooms; Microtel Suites, which are all-suite properties; and
Microtel Inn & Suites, which contain singles, doubles and suites. All
Microtels operate in the budget segment of the lodging industry, which is the
lowest priced segment in the industry with an average daily room rate in 1995
of approximately $36. Microtels are distinctively styled hotels with a
residential look that offer travelers an attractive and consistent
appearance, clean, comfortable rooms and the safety of interior corridor room
access, all for a competitive room rate. Management believes that the
Microtel system is one of the only brands in the budget segment that
franchises only newly constructed, interior corridor properties. In contrast,
many other budget hotels are older properties with rooms that are accessible
only through outside entrances and that may have been converted from
independent hotels or other brands. Management believes that Microtels'
strict new construction and interior corridor requirements provide travelers
with a brand that is among the safest, most consistent and highest quality in
the budget segment.
The Company believes that Microtels offer financial advantages to
franchisees. Microtels feature a distinctive architectural design that
minimizes construction costs and maintenance expenses through smaller room
sizes, limited common areas, smaller land requirements and built-in
standardized furniture, all of which enable franchisees to own and operate a
Microtel at a lower cost. These lower costs may reduce a franchisee's equity
investment and may broaden its debt financing alternatives, thereby expanding
the appeal of the Microtel brand to prospective franchisees.
Today's security conscious, value oriented travelers have shown their
approval of Microtels. Although there were no national advertising or
significant promotional campaigns prior to the Company's acquisition of the
Microtel brand, the 15 properties open more than two years as of June 30,
1996 achieved a 69.3% occupancy rate in 1995 compared to an approximately
61.9% occupancy rate for the budget sector as a whole. Further evidence of
the appeal of Microtels is found in its "intent-to-return" rating, which
measures customers' overall satisfaction and willingness to return to a
Microtel in the future. Based on surveys of approximately 5,000 Microtel
guests conducted by franchisees from 1989 to 1994, more than 95% of Microtel
guests expressed an intent to return to a Microtel in the future.
Since acquiring the Microtel brand in October 1995 and establishing its
sales force by January 1996, the Company has realized franchise sales growth
as follows:
<TABLE>
<CAPTION>
As of As of
December 31, 1995 September 30, 1996
----------------- ------------------
<S> <C> <C>
Microtel Franchise Data (1)
Properties Open 23 27
Properties Under Construction 0 7
Executed Franchise Agreements 3 145
Franchise Applications Accepted 10 74
</TABLE>
- -------------
(1) The Company will not receive royalties from the 23 Microtels open as of
December 31, 1995 and from 26 of the 27 Microtels open as of September
30, 1996, but does receive reservation and marketing fees from the
franchisees of these properties. See "--Acquisition of the Microtel and
Hawthorn Suites Systems".
25
<PAGE>
Microtels are designed to offer the following advantages to franchisees:
Lower Construction Costs. Compact and consistently designed rooms, vinyl
exteriors, minimal public space and the elimination of low profit margin
areas such as kitchen and restaurant facilities, exercise rooms and expansive
lobbies combine to lower total development costs. As a result, a Microtel can
be completed for as little as $23,000 per room (including soft costs,
furniture, fixtures and equipment, but excluding land costs). These lower
construction costs may reduce a franchisee's equity investment and may
broaden its debt financing alternatives, thereby expanding the appeal of the
Microtel brand to prospective franchisees.
Lower Land Costs/More Available Sites. Microtels' innovative architectural
designs, particularly their smaller room size, built-in standardized
furniture and limited public areas, eliminate wasted space, enabling
Microtels to be built on as little as one acre of land. In addition to
minimizing development costs, the ability to build a Microtel on smaller
parcels of land significantly increases the number of available sites, some
of which have traditionally been unsuitable for hotel projects.
Shorter Construction Time. The Company provides Microtel franchisees with
a detailed construction prototype (including mechanical and electrical
working drawings) that requires a local architect only to make changes
related to site adaptation and local zoning codes. Microtel franchisees may
choose from among several different prototypes depending upon the size of the
property and the number and type of rooms. The Company also provides its
franchisees with ongoing construction and design assistance during the
building phase. The result is a shorter construction period (estimated at a
total of 120 to 151 days), which reduces construction period interest costs
and accelerates market entry and the growth of the Microtel system.
Lower Operating Costs. Compact rooms, built-in standardized furniture and
minimal public space lower the number of people required to clean and
maintain a Microtel, reduce heat, light and power consumption, minimize
repair and maintenance costs and reduce capital expenditures.
Lower Reservation Costs. The Company maintains a toll-free referral system
on behalf of its franchisees, which is designed to generate guest
reservations at a lower cost. The toll-free number connects callers to an
operator who refers callers directly to the appropriate Microtel. By reducing
the need for complex and high-cost computer hardware, software and training
at the property level, less of the franchisees' reservation and marketing
fees must be dedicated to maintaining a reservation system, allowing a
greater portion of such fees to fund brand marketing expenditures to end
consumers.
For the hotel guest, Microtel provides a high quality, aesthetically
appealing, safe and secure property at a competitive room rate, as described
in greater detail below:
Strong Price/Value Relationship. A Microtel has a residential-looking
exterior, attractive landscaping and interior corridor design,
differentiating it from other budget properties, many of which are older and
have exterior guest room entrances. As one of the only 100% interior
corridor, new construction brands in the budget segment, Microtel provides
the safety and price conscious customer with an appealing alternative to
other budget hotels.
High Quality/Consistent Product. All Microtels are newly constructed in
accordance with working drawings provided by the Company. The Company does
not allow conversions from existing properties, as is permitted by many of
its competitors. Strict adherence to these construction standards is
monitored by Microtel's in-house design and construction department, which
must approve all franchisee building plans. Management believes that the
result is one of the most consistent chains in the budget segment.
Focus on Safety and Security. Microtels are designed with security in
mind, featuring interior corridors, well-lit lobbies, hallways and parking
areas and a single general access entrance through the lobby to all guest
rooms. All Microtels that have been built subsequent to the Microtel
Acquisition contain, and all Microtels built in the future will contain,
electronic door-locking systems as an additional security feature. These
features, particularly popular with women travelers, combine to provide
enhanced safety for Microtel guests.
Hawthorn Suites
As an upscale, extended-stay hotel, Hawthorn Suites provide the traveler
with the convenience of a hotel and the amenities typically found in an
apartment. Hawthorn Suites' hotel rooms contain full-service kitchens with
appliances,
26
<PAGE>
cookware and utensils, video cassette players, modem ports, exercise
facilities and valet service. Hawthorn Suites hotels also offer a hot
breakfast buffet every morning and guests are invited to an evening social
hour held four times a week. A center courtyard, an outdoor pool, a multi-use
sport court, a barbecue area and a retail store selling sundry and meal
items, snacks and beverages, will also be part of newly constructed Hawthorn
Suites hotels.
In addition to participating in the upscale, extended-stay segment through
its Hawthorn Suites brand, the Company has recently developed a prototype
called Hawthorn Suites LTD. Hawthorn Suites LTD is a mid-price, all- suites
hotel brand that is designed to meet the needs of both the extended-stay and
transient guests. The prototype developed by the Company for Hawthorn Suites
LTD targets development costs and average daily rates approximately 20% below
those for Hawthorn Suites hotels.
Hotels that are part of the Hawthorn Suites system use the Spirit
Reservation System ("Spirit"), a system operated by Regency Systems Solutions
("Regency"), which receives and processes calls made to a toll-free number
dedicated to Hawthorn Suites. The Spirit system is directly linked by
computer to all Hawthorn Suites hotels. Regency, which is owned by Hyatt
Hotel Corporation ("Hyatt"), also currently operates the reservation system
for Hyatt hotels. The Company benefits from a unique relationship with Hyatt.
Persons calling the Hyatt toll-free number who experience a sold out Hyatt or
no Hyatt in their desired market are automatically referred to the closest
Hawthorn Suites hotel. Revenue generated from reservations made through the
Spirit system accounted for 25% of Hawthorn Suites' total room sales in 1995.
Management believes its franchisees derive substantial benefits from use of
the Spirit system at a low cost. As and when Hawthorn Suites LTD properties
are opened, these properties will also be linked to the Spirit system and
will benefit in the manner described above from any overflow at Hyatt hotels.
There can be no assurance, however, that Regency will continue to service the
Company's or Hyatt's reservation needs in the future or that the Company will
continue to use the reservation services of Regency.
Operations
The following departments of the Company are responsible for identifying
potential franchisees and locations, obtaining franchise applications,
executing franchise agreements, assisting franchisees in building and opening
properties and providing ongoing support, training and services:
Franchise Sales. The Company employs a national franchise sales force
consisting of 28 people who, collectively with Mr. Leven, have sold over
2,200 hotel franchises as employees of other hotel chains. The primary
objectives of the Company's franchise sales strategy are to identify
potential franchisees and possible locations for each of the Company's brands
and to create an awareness and general acceptance of its products with
numerous participants in the hospitality industry, including hotel owners,
lodging consultants, vendors, operators and educational institutions. The
sales force seeks to achieve these objectives through the implementation of a
multi- faceted sales strategy, which includes cold calling, telemarketing,
direct mail, trade advertising and public relations. The compensation program
is structured so that each franchise salesperson is expected to earn at least
50% of his or her annual income in sales commissions.
Design and Construction. The Company's design and construction department
provides development expertise in the disciplines associated with new
construction and renovation, with emphasis on low development costs, low
maintenance expense, quality construction and profit maximization for its
franchisees. The Company provides detailed architectural plans, CAD-CAM
computer files, specifications, system standards and manuals, and makes the
services of the department available to franchisees at various stages of the
development process. In addition, in order to maintain consistent product
quality and brand identity, the design and construction department approves,
among other things, all architectural plans of Microtel and Hawthorn Suites
franchisees.
Quality Assurance. Quality control is essential to maintaining and
increasing the value of the Company's brands and in generating repeat
business among travelers. Franchise quality control is accomplished through
inspections prior to a franchisee's entry into the system and on an ongoing
basis. Quality assurance programs promote uniform standards throughout each
of the Company's franchise systems, an important factor in increasing
consumer demand for lodging facilities. The Company inspects each property
two times per year. Hotels that fail to meet certain franchise standards are
notified and are generally given 30 days to either correct the conditions
that led to the failure or to implement a plan to correct the failure. If
they do not correct the deficiencies, the Company can rescind the franchise.
Since the Company acquired the Microtel brand, one property has been
terminated from the Microtel system due to quality deficiencies.
27
<PAGE>
Marketing. The Company's marketing strategy is designed to increase brand
awareness among potential franchisees and consumers. In the franchise
community, the Company's marketing campaign is focused on publications that
target the hospitality industry, direct mail and attendance at industry trade
shows. In targeting the end consumer, the Company supplies franchise
properties with a marketing guide, local radio spots, print advertising,
outdoor billboard designs and rack cards. In addition, national directories
are published for each brand and made available to hotel guests at the
property level, through advertising and via the Internet. In 1996, the
primary vehicles for advertising the Microtel brand to end consumers and
reinforcing Microtel's national message that "There's Room for Everyone" have
been USA Today, the Internet and billboards at 20 major airports in the
communities where Microtels are located (including two prominently displayed
billboards at Atlanta's Hartsfield Airport during the 1996 Olympic games).
Microtel's Internet address is http://www.microtelinn.com. Due to the nature
of the extended-stay market, direct sales (i.e. sales and marketing efforts
by the hotel operator targeted at local demand generators) plays a major role
in marketing for Hawthorn Suites. Specialized pre-opening and post-opening
collateral material is targeted to travel agents, travel planners and buyers
of extended-stay rooms, instead of the end consumer. Hawthorn Suites'
Internet address is http://www.hawthorn.com.
Public Relations. A targeted public relations program supports both the
marketing and franchise sales efforts by promoting awareness of the Company
generally. Since its inception, the Company has been featured in such
national publications as in USA Today, Business Week and National Business
Employment Weekly (a subsidiary of The Wall Street Journal), as well as
industry trade publications such as Hotel & Motel Management, Hotel Business,
Lodging, Lodging Hospitality, Hotels, Travel Weekly and Real Estate Forum.
Training. The Company maintains mandatory training programs for its
franchisees that are designed to teach franchisees how to best utilize the
Company's reservations system and marketing programs, as well as the
fundamentals of hotel operations, such as recruiting, housekeeping, repairs
and maintenance and personnel policies. The Company also provides special
on-site training upon request. The Company has developed and maintains a
library of training videos, cassettes and tapes, as well as printed training
material, which are available to franchisees. In addition, each franchise
sales person must complete a structured initial training program and regular
retraining.
Franchise Services. The franchise services department functions as a
single point of contact for all franchisees to call for support on all issues
prior to, during and after construction. Franchise services acts as a liaison
between the franchisee and all departments of the Company. The Company
recognizes the personal service aspect of the franchising business and
intends to assign a designated member of the franchise service department to
each franchisee.
Purchasing. The Company provides its franchisees with volume purchasing
discounts for products, services, furnishings and equipment used in
construction and ongoing operations. The Company has established
relationships with vendors to the lodging industry and negotiates discounts
for purchases by its customers. In certain cases, the Company receives
payments from the vendors as well. Currently, the Company does not maintain
inventory, directly supply any of the products or extend credit to
franchisees for such purchases.
Franchise Agreements
The Company's franchise agreements grant hotel owners the right to utilize
one of the brand names associated with the Microtel or Hawthorn Suites hotel
systems under long-term franchise agreements. In order to qualify for a
franchise from the Company, a candidate must undergo a screening process,
which typically includes a review of the potential franchisee's operational
ability and financial condition and the proposed lodging location. A
representative of the Company conducts a site inspection to determine whether
the location meets standards and whether the brand name selected is
appropriate at that location. The Company considers such factors as
accessibility, visibility, location, economics, demographics, the extent of
commercial development and, in the case of Hawthorn Suites conversions,
facility condition. When executed, both Microtel and Hawthorn Suites
franchise agreements offer an area of exclusivity to each location, the
degree of which is negotiated individually with each franchisee.
The Company's current standard agreements are for 20-year terms for new
construction properties and 10-year terms for conversion properties (in the
case of Hawthorn Suites only). The standard franchise agreements generally
require franchisees to satisfy certain development milestones, including a
requirement that construction begin within six to nine months of execution of
the franchise agreement, although generally there exists a 30-day cure
period. Franchisees are required to pay royalty fees to the Company based
upon the gross room revenues of the franchised
28
<PAGE>
hotel during the term of the agreement and an application fee. Franchise
application fees are non-refundable and are generally collected from
potential franchisees by the time the franchise agreement is executed.
Franchise fees are comprised of two components: a royalty portion and a
reservation and marketing portion, both of which are based upon a percentage
of the franchisee's gross room revenues. The royalty portion of the franchise
fee is intended to cover the operating expenses of the franchisor, such as
costs incurred in providing quality assurance, administrative support and
other franchise services, and to provide the Company with operating profits.
The reservation and marketing portion of the franchise fee is intended to
reimburse the Company for the expenses associated with providing such
franchise services as a reservation system, national advertising and certain
promotional programs. Marketing and reservation fees do not produce any
profit for the Company, but mitigate a significant cost of business for
franchisees and are an important consideration for potential franchisees when
evaluating competing brands. The Company does not receive royalty fees from
those Microtels and those Hawthorn Suites hotels that were open or under
development at the time the Company acquired the right to franchise the
respective brands. The Company does, however, receive reservation and
marketing fees from the franchisees of these properties.
The terms of the Company's current standard forms of franchise agreements
state that, by year of operation, franchisees are required to pay the
following ongoing royalty fees and reservation and marketing fees (each, as a
percentage of gross room revenues), although the actual fees may vary:
<TABLE>
<CAPTION>
Microtel Hawthorn Suites
------------- ---------------------
<S> <C> <C>
Franchise Royalty Fees
- ----------------------
Year 1 4.0% 5.0%
Year 2 5.0% 5.0%
Year 3 and thereafter 6.0% 5.0%
Reservation and Marketing Fees
- ------------------------------
Year 1 3.0% 2.5%
Year 2 2.5% 2.5%
Year 3 and thereafter 2.0% 2.5%
Total Franchise Fees
- --------------------
Year 1 7.0% 7.5%
Year 2 7.5% 7.5%
Year 3 and thereafter 8.0% 7.5%
</TABLE>
During the first quarter of 1996, when the Company began its full-time
franchise sales efforts, prospective Microtel franchisees were offered a
three month royalty-free period during Year 1 as an inducement to join the
Company's franchise system. The Company is no longer offering this discount
and currently has no intention to do so in the future. With respect to
Hawthorn Suites, two franchisees have received discounts from the Company's
standard fee structure. Discounts were granted in these two instances due to
the unique property size and accelerated opening schedule of these
franchises. With respect to both Microtel and Hawthorn Suites, the Company
also has agreed in certain situations to dedicate a portion of a particular
franchisee's marketing fees to local (as opposed to national) promotion of
the applicable brand.
The Company has modified its standard forms of license agreements in an
attempt to reduce negotiations with potential franchisees, modifications that
the Company believes have reduced the burden on its sales force and
administrative staff. The Company believes that these changes make the
Company's franchise agreements more attractive to potential franchisees
without sacrificing the protection typically afforded to franchisors under
franchise agreements. The Company's standard form of franchise agreement is
terminable by the Company if the franchisee fails to maintain certain quality
standards or to pay royalties, reservation and marketing fees or other
charges. In the event of termination, the Company is generally entitled to
liquidated damages.
Special Programs
American Dream Program. American Dream by Microtel is a unique program
that the Company has developed to enable potential first-time hotel owners
with limited financial resources and/or little or no building experience to
lease and ultimately acquire a Microtel (the "American Dream Program"). Under
the American Dream Program, qualified potential Microtel franchisees would
lease a Microtel for an initial deposit and, at the lessees' option, acquire
the hotel for additional payments over a fixed period. The American Dream
Program is designed to accelerate the
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<PAGE>
growth of the Microtel system by permitting those who otherwise could not
afford to build a Microtel an opportunity to become a hotel owner. Although
the Company did not begin marketing this program until August 1996, five
franchise agreements were executed under this program by September 30, 1996.
The Company has reached an understanding in principle with TAD Properties,
L.L.C. ("TAD"), an affiliate of Motels of America, Inc. ("MOA"), pursuant to
which TAD or one of its affiliates will be the exclusive developer,
franchisee and owner-lessor of properties under the American Dream Program.
MOA owns and manages more than 140 hotels, making it one of the largest
owners of limited-service hotel properties in the United States. The Company
will support the American Dream Program by committing to make initial
deposits on individual properties and to lease the hotels until qualified
lessees can be identified. In the event a qualified lessee is not identified
for a particular property, the Company may become the lessee under the
program. If the Company becomes the lessee with respect to a particular
property, it may also acquire the Microtel from the franchisee under the
terms of the American Dream Program. However, no specific amount of capital
has been committed to this program. The Company's UFOC is being amended to
describe the American Dream Program. See "--Regulation".
Franchisee Financing Facility. In May 1996, the Company reached an
agreement in principle with NACC, pursuant to which NACC would make available
to the Company's franchisees, over a two year period, up to $200 million in
construction and long-term mortgage financing, subject to certain terms and
conditions (the "Franchisee Financing Facility"). The Company believes that
the Franchisee Financing Facility can add speed and certainty to the
development process by enabling the Company's franchisees to devote more time
to identifying acceptable hotel locations and constructing properties and
less time obtaining financing. The Company is currently revising its UFOC to
describe the Franchisee Financing Facility. See "--Regulation".
Under the Franchisee Financing Facility, neither the Company nor the
subsidiary through which the Company operates the program, US Funding Corp.,
is obligated to provide any credit or credit support. Rather, it is expected
that US Funding Corp. will provide the Company's franchisees with access to
financing from NACC. Under the Franchisee Financing Facility, NACC is
expected to provide eligible franchisees with 27-to-30 month construction
loans, which convert into 10-year mortgage loans at maturity or earlier under
certain circumstances. The program is expected to be subject to a
comprehensive underwriting process, which will be conducted by US Funding
Corp. and NACC and which will be separate from the franchise application
process. The ultimate decision as to whether to make any loan will be made by
NACC. There can be no assurance that applications preliminarily approved by
US Funding Corp. under this program will ultimately result in loans being
made. To date, no loans have been made to franchisees under the Franchisee
Financing Facility. Franchisees will be required to contribute at least 30%
of the development cost (through the contribution of cash or other assets),
financing the remaining portion from the facility. During the construction
phase, interest will accrue and principal payments will be deferred. The
loans will become secured by the hotel property and will be non-recourse to
the franchisee once the franchisee has received a certificate of occupancy
for the property.
In addition to facilitating the development process, the Company expects
to earn revenues when its franchisees borrow under the Franchisee Financing
Facility. Specifically, the Company expects to receive to a portion of
certain upfront fees payable by the franchisee to NACC, plus a portion of
certain ongoing interest charges payable by the franchisee during the
construction phase. For many reasons, a loan preliminarily approved under
this program may not be made, including if NACC does not approve the loan or
if conditions to lending are not satisfied.
Although the Company generally does not make construction or mortgage
loans to its franchisees, the Company is considering becoming a participant
in both the construction loans and the long-term mortgage loans made to
franchisees under this program, including by making direct subordinated loans
to franchisees. In such cases, the Company would be subject to the risks
ordinarily experienced by lenders, including risks of franchisee/borrower
defaults and bankruptcies. In the event of a default in construction and/or
long-term mortgage loans, the Company, as a subordinated lender, would bear
the risk of loss of principal to the extent the value of the collateral was
not sufficient to pay both the senior lender and the Company, as subordinated
lender. If the Company were to make loans directly, its UFOC would have to be
further amended before any such loans could be offered or made. See
"--Regulation".
PMC Agreement. Under an agreement with PMC Commercial Trust, a Texas real
estate investment trust ("PMC"), the Company has also agreed to make
available to potential Microtel franchisees information regarding PMC's
financing programs for land acquisition and construction costs (the "PMC
Agreement"). The Company earns a marketing fee based on the average principal
amount of the outstanding and performing loans extended by PMC to Microtel
franchisees. The Company and PMC jointly agree as to which franchisee loan
applications will be covered by the PMC Agreement, but the Company may not
participate in the approval or underwriting of any loan applications, and
PMC, in its sole discretion,
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<PAGE>
determines whether and the terms under which loans will be made. The PMC
Agreement may be terminated by either party upon 30 days' notice. The Company
is currently updating its UFOC to describe this program. See "--Regulation".
Acquisition of the Microtel and Hawthorn Suites Systems
Microtel Acquisition. On September 7, 1995, the Company entered into the
Microtel Acquisition Agreement with Hudson, a public company then called
Microtel Franchise and Development Corporation, to acquire the exclusive
worldwide franchising rights and operating assets of the Microtel hotel
system. The purchase price for these franchise rights and operating assets
was $3,037,000, of which the Company paid $1,600,000 at the closing on
October 5, 1995 and agreed to pay a total of $1,437,000 over the following
three years, plus interest at 10% (for a total payment of approximately
$1,700,000). In addition, royalties are payable to Hudson, as described
below, for the right to all trade names, trademarks, service marks and other
intellectual property used in connection with the Microtel business,
including the Microtel name (the "Proprietary Marks").
The operating assets of the Microtel system acquired from Hudson included
(i) all prototype architectural plans and designs used in connection with the
Microtel business and (ii) the Microtel reservation referral system,
directories, manuals and marketing materials.
Pursuant to the Microtel Acquisition, the Company also acquired Hudson's
rights under then existing Microtel franchising agreements relating to the 27
Microtels open or under development at the time of the acquisition. Although
the Company acquired the existing franchises from Hudson and is obligated to
fulfill all of the obligations of the franchisor thereunder, Hudson retained
the right to receive all franchise royalties and franchise renewal fees
payable by the existing franchisees under such agreements. The Microtel
Acquisition Agreement does, however, permit the Company to retain any
reservation and marketing fees and any other one-time or non-recurring fees
or charges payable to the franchisor under the applicable franchise
agreement, such as those relating to the initial placement, substitution,
amendment, organization, termination or transfer of the franchise.
The Microtel Acquisition Agreement also grants Hudson, its affiliates and
certain other persons the right to acquire from the Company up to an
additional 23 Microtel hotel franchises and up to an additional 10 Microtel
all-suites hotels and to retain the franchise application fees and the
franchise royalties from such franchises (provided Hudson, its affiliates or
such other persons own and operate the hotels covered by such franchises).
Since the closing of the Microtel Acquisition, Hudson, its affiliates or such
other persons have executed franchise agreements for eight additional
Microtels, which, when opened, will be included in the 23 Microtel franchises
referred to above.
In consideration for the transfer of the Proprietary Marks, the Microtel
Acquisition Agreement provides that, for each new Microtel or Microtel
all-suites hotel (collectively, the "Microtel Properties") opened after the
closing of the Microtel Acquisition, other than the additional franchises
referred to in the preceding paragraph, the Company is required to pay
monthly royalties to Hudson as follows: 1.0% of the "revenues subject to
royalties" on the first 100 Microtels opened after the closing, 0.75% of such
revenues for the next 150 Microtels opened, and 0.50% of such revenues for
each Microtel opened after the first 250 have opened. "Revenues subject to
royalties" generally are those payable by the franchisees to the Company
based on gross room revenues, as well as other royalty payments payable by
such franchisees under the applicable franchise agreement. The Company is
entitled to all other fees (other than termination fees, which must be shared
with Hudson) payable by the Microtel franchisees, including the franchise
application fees, all of the remaining royalties, reservation and marketing
fees and fees applicable to any financing arranged through the Company.
The Microtel Acquisition Agreement requires the Company to satisfy a
development schedule, which requires that new Microtel Properties be opened
or under construction in the following numbers, on a cumulative basis, by
December of each of the following years:
<TABLE>
<CAPTION>
Number of
Year Microtel Properties (1)
- ---- -----------------------
<S> <C>
1996 0
1997 50
1998 100
1999 175
2000 250
</TABLE>
- -------------
(1) Excluding (i) the 27 Microtels that were open or under construction or
with respect to which franchise agreements had been executed or
applications accepted at the time of the Microtel Acquisition and (ii)
the 23 additional Microtels
31
<PAGE>
(with respect to which eight franchise agreements have been executed
since the closing of the Microtel Acquisition) and the 10 Microtel
all-suites hotels that Hudson, its affiliates and certain other persons
are entitled to franchise under the Microtel Acquisition Agreement.
Under the Microtel Acquisition Agreement, the development schedule is
deemed to have been complied with unless such schedule has not been met for
two consecutive years (including 1996, where applicable). That is, the
Company will not violate its development obligations under the Microtel
Acquisition Agreement unless it has failed to meet the targets for two
consecutive years. If, however, at the end of any two year period, at least
75% (but less than 100%) of the number of Microtel Properties scheduled to
have been opened by such date have been opened, the Microtel Acquisition
Agreement permits the Company to cure the default by paying a fee of $1
million. Upon such payment, the Company will be deemed to have fully complied
with the development schedule for such two year period (including when
determining whether it complies with such schedule in future periods).
The Microtel Acquisition Agreement further provides that, in the event the
Company fails to satisfy the development schedule, fails to pay any monies
due to Hudson or otherwise fails to fulfill its material obligations under
the Microtel Acquisition Agreement, in each case subject to the Company's
right to cure such breach within the applicable notice and cure periods, all
of the rights to the Microtel system and all operating assets associated
therewith will revert to Hudson. In such instance, the Company will, however,
retain the rights to any franchise royalty payments due to it under franchise
agreements entered into by the Company after the closing of the Microtel
Acquisition, less a servicing fee payable to Hudson in an amount equal to
0.75% of all revenues subject to royalties under such agreements.
Also in connection with the Microtel Acquisition, Hudson agreed to provide
consulting services to the Company over the three-year period beginning
October 5, 1995, for which the Company agreed to pay Hudson a total of
$700,000 ($400,000 of which was paid at the closing of the Microtel
Acquisition). The Company also received warrants to purchase 100,000 common
shares of Hudson at an exercise price of $8.375 per share. The warrants
expire on September 1, 2000.
Hawthorn Acquisition. On March 27, 1996, the Company entered into the
Hawthorn Acquisition Agreement with HSA, an entity indirectly controlled by
the Pritzker family, pursuant to which the Company acquired the exclusive,
worldwide rights to franchise and to control the development and operation of
the Hawthorn Suites brand of hotels (the "Hawthorn Acquisition"). In
connection with the Hawthorn Acquisition, HSA also assigned to the Company
all of HSA's rights in the licenses (other than the right to receive royalty
payments) for the then existing Hawthorn Suites brand hotels (the "Existing
Hawthorn Hotels"), HSA's agreement with Regency to provide reservation
support services and certain other agreements relating to the operation of
the Hawthorn Suites brand hotels. No money was paid by the Company at the
closing of the Hawthorn Acquisition. The Company is, however, required to
make royalty payments to HSA under circumstances described below.
Under the Hawthorn Acquisition Agreement, the Company remits to HSA all
franchise royalty fees paid to the Company by franchisees of the Existing
Hawthorn Hotels, with the Company and HSA generally dividing royalty fees
paid with respect to any Hawthorn Suites brand hotels opened subsequent to
the Hawthorn Acquisition (the "New Hotels"), as described below. All other
fees and other charges payable under the licenses for the Existing Hawthorn
Hotels or New Hotels, including marketing and advertising fees and
origination or initial franchise application fees, will be retained by the
Company. Pursuant to the Hawthorn Acquisition Agreement, as indicated on the
chart below, the percentage of such royalties payable to HSA will decrease as
the aggregate number of rooms in New Hotels increases.
Division of Franchise Royalties
-------------------------------
<TABLE>
<CAPTION>
Rooms (1) HSA Company
- --------- ------ -------
<S> <C> <C>
First 3,600 Rooms: 66.7% 33.3%
Next 3,150 Rooms: 50.0% 50.0%
Next 2,160 Rooms: 37.5% 62.5%
Next 4,410 Rooms: 33.3% 66.7%
Above 13,320 Rooms: 25.0% 75.0%
</TABLE>
- -------------
(1) For this purpose, a suite is considered to be one "room".
32
<PAGE>
In the event, however, that the Company fails to achieve certain specified
development milestones (the "Royalty Reduction Standard"), the royalty fees
payable to HSA will increase. Specifically, the amount of additional royalty
fees payable to HSA during the period that the Company fails to comply with
the Royalty Reduction Standard is determined by multiplying the Company's
share of royalty fees (in dollars) for the calendar quarter in which the
default occurs by a fraction, the numerator of which is the number of
additional Qualified License Agreements required in order for the Company to
comply with the Royalty Reduction Standard and the denominator of which is
the minimum number of Qualified License Agreements required in order for the
Company to have complied with the Royalty Reduction Standard. The Hawthorn
Acquisition Agreement further provides that if the franchise royalty payable
by a New Hotel is less than 4% of that hotel's gross room revenue, the
percentage of the royalty payable to HSA for that particular hotel will
increase.
The Hawthorn Acquisition Agreement also restricts the Company's ability to
franchise other hotel brands for certain periods if the Company fails to meet
certain development targets. Specifically, the agreement provides that unless
and until such time as the Company's franchisees have opened 175 Hawthorn
Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn Brand
Saturation"), the Company generally may not franchise another all-suite hotel
brand. The Company's new combined extended-stay/transient all-suite hotel
property, Hawthorn Suites LTD, may be counted toward Hawthorn Brand
Saturation so long as they are "all suite" hotels, as defined below. The
Company may, however, franchise Microtel Suites at any time so long as they
cost $40,000 (subject to adjustment for inflation) or less per suite to
build, excluding the cost of land. For purposes of the Hawthorn Acquisition
Agreement, a hotel that is at least 50% suites or uses "suites" in its name
is an "all-suite" hotel. If the Company decides to franchise or license
another all-suite hotel brand after Hawthorn Brand Saturation is achieved,
HSA retains the option within a limited period to sell its right and interest
in the Hawthorn Suites brand and system of operation, including the relevant
intellectual property and the royalty stream, to the Company for a sum equal
to 10 times the franchise royalty fees earned or accrued by HSA in the 12
months prior to such sale.
Until the earlier of June 26, 1998 and the date on which Hawthorn Brand
Saturation is achieved, the Company is restricted from franchising any
lodging brand other than (i) Hawthorn Suites hotels, (ii) Microtel hotels and
(iii) other limited- service, non-suite hotels with an ADR of $49 and under.
In addition, until June 26, 1997, the Company must also refrain from
franchising any non-lodging brands.
Until Hawthorn Brand Saturation is achieved, the Company is obligated to
receive HSA's approval for any material changes in its approved standard form
franchise agreement, and all UFOCs and related materials delivered to
prospective franchisees. The Hawthorn Acquisition Agreement also requires
that the Company have a total of at least 15 full-time sales persons selling
licenses for the Hawthorn Suites and Microtel brands and that the Company
spend more than $100,000 in each of 1996 and 1997 to promote the Hawthorn
Suites brand.
The Hawthorn Acquisition Agreement requires that the Company adhere to a
development schedule under which a minimum number of Qualified License
Agreements must be executed as of certain dates (the "Termination Standard").
The term Qualified License Agreements is defined in the Hawthorn Acquisition
Agreement to mean a license granted by the Company to use the Hawthorn brand,
provided that (i) the licensed hotel is an all-suites hotel (i.e., a hotel in
which at least 50% of the rooms are suites or that uses "suites" in its name)
with more than 40 suites, (ii) the Company has received all application fees
from the licensee and (iii) the licensee either owns or controls through
long-term lease the land on which the hotel is located or to be constructed.
If any of these development milestones are not met and the default has not
been cured prior to the delivery of a default notice, HSA may elect to
terminate the Hawthorn Acquisition Agreement. If HSA opts to terminate the
Hawthorn Acquisition Agreement, the Company may only retain a percentage of
the franchise royalties to which it would otherwise be entitled on previously
opened hotels. The portion retained by the Company ranges from 15% to 40% of
the franchise royalties it would have received but for the termination,
depending on the percentage of the Termination Standard achieved. As noted
above, in the event that the Company surpasses the Termination Standard, but
fails to meet the higher Royalty Reduction Standard, or for such time as HSA
opts not to terminate for failure to achieve the Termination Standard, the
percentage of franchise royalties payable to HSA increases.
33
<PAGE>
The minimum development requirements are as follows:
Development Schedule
--------------------
(Qualified License Agreements)
<TABLE>
<CAPTION>
Royalty Reduction
Date Standard Termination Standard
---- ----------------- --------------------
<S> <C> <C>
June 27, 1997 20 10
December 27, 1997 30 N/A
June 27, 1998 40 20
June 27, 1999 65 40
June 27, 2000 90 60
June 27, 2001 115 80
June 27, 2002 140 100
</TABLE>
The Hawthorn Acquisition Agreement may also be terminated by the mutual
agreement of the parties or in various other circumstances, including, at the
election of HSA, on the death, disability, retirement, resignation or
termination of the employment of Michael A. Leven as Chief Executive Officer
of the Company prior to a permitted transfer of the Company's rights under
such agreement or, if earlier, prior to such time as the Royalty Reduction
Standard has been met or the Hawthorn Brand Saturation achieved. If the
Hawthorn Acquisition Agreement is terminated for any reason, HSA has the
right to require the Company to continue to administer the licenses for
Hawthorn Suites brand hotels then in effect as of the date of such
termination for up to one year in exchange for a fee equal to 0.5% of the
gross room revenues of such hotels.
Seasonality
In the future, royalties generated by gross room revenues of franchised
properties are expected to be the principal source of revenue for the
Company. As a result, the Company expects to experience seasonal revenue
patterns similar to those experienced by the lodging industry generally.
Accordingly, the summer months, because of increases in leisure travel, are
expected to produce higher revenues for the Company than other periods during
the year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
Competition
Competition among national brand franchisors and smaller chains in the
lodging industry to grow their franchise systems is intense. The Company
believes that competition for the sale of lodging franchises is based
principally upon (i) the perceived value and quality of the brand, (ii) the
nature and quality of services provided to franchisees, (iii) the
franchisee's view of the relationship of building or conversion costs and
operating expenses to the potential for revenues and profitability during
operation and upon sale and (iv) the franchisee's ability to finance and sell
the property. The Company's franchisees are generally in intense competition
for guests with franchisees of other hotel chains, independent properties and
owner-operated chains. The success of the Company's franchisees affects the
profitability of the Company, as the Company's receipt of royalty fees under
its franchise agreements is tied directly to the gross room revenues earned
by its franchisees.
In choosing a particular hotel, consumers consider differences in room
rates, quality and condition of accommodations, name recognition,
availability of alternative lodging (including short-term lease apartments),
service levels, reputation, safety, reservation systems and convenience of
location.
Both among consumers and potential franchisees, Microtel competes with
budget and economy hotels such as Comfort Inn, Days Inn, Econo Lodge,
Fairfield Inn, Sleep Inn, Red Roof Inn, Budgetel Inn, Super 8, Ramada
Limited, Motel 6, Jameson Inns, Travelodge, Thriftlodge, Knights Inn, Red
Carpet Inn and Scottish Inns. In the upscale, extended-stay sector, Hawthorn
Suites hotels compete for consumers and potential franchisees with Residence
Inn, Homewood Suites, Summerfield Suites and Woodfin Suites. In the transient
suites sector of the lodging industry, where the Company will be competing
through its Hawthorn Suites LTD brand, the Company's principal competitors
will include AmeriSuites, Hampton Inn and Suites, Fairfield SuitesSM,
MainStaySM, CandlewoodSM, Wingate InnSM, Towne PlaceSM and Courtyard by
Marriott, among others. Many of the Company's competitors are affiliated with
larger chains with substantially more properties, greater marketing budgets
and greater brand identity than the Company. There can be no assurance that
the Company can franchise a sufficient number of properties to generate the
operating efficiencies to enable it to compete with these larger chains.
34
<PAGE>
Regulation
The sale of franchises is regulated by various state laws, as well as by
the FTC. The FTC requires that franchisors make extensive disclosure to
prospective franchisees, although it does not require registration of offers
to prospective franchisees. The required disclosure is made through a Uniform
Franchise Offering Circular (a "UFOC"), which must be provided to potential
franchisees at least 10 days prior to execution of a franchise agreement. A
number of states require registration and disclosure in connection with
franchise offers and sales. In addition, several states have "franchise
relationship laws" that limit the ability of franchisors to terminate
franchise agreements or to withhold consent to the renewal or transfer of
these agreements. While the Company's franchising operations currently are
not materially adversely affected by such regulations, the Company cannot
predict the effect any future legislation or regulation may have on its
business operations or financial condition.
Additionally, various national, state and local laws and regulations may
affect activities undertaken by the Company in connection with the Franchisee
Financing Facility and the PMC Agreement. In particular, the Company may be
required to obtain a license or to register in certain states in order to
underwrite or promote loans to be made by NACC and PMC under such programs or
in the event the Company determines to make loans itself under the Franchisee
Financing Facility. See "--Special Programs--Franchisee Financing Facility"
and "--PMC Agreement."
Trademarks and Licenses
The Company owns and uses certain trademarks and service marks, including,
among others, US FRANCHISE SYSTEMS, USFS, US FUNDING CORP., MICROTEL,
MICROTEL with design, MICROTEL INN, MICROTEL SUITES, MICROTEL INN & SUITES,
AMERICAN DREAM, AMERICAN DREAM with design, "FIRST THE HOTEL, THEN THE MOTEL,
NOW MICROTEL" and "SAVINGS YOU CAN SLEEP ON". The Company's rights to such
trademarks and service marks will last indefinitely so long as the Company
continues to use and police the marks and, with respect to registered marks,
to renew filings with the applicable government agencies. Pursuant to the
Hawthorn Acquisition Agreement, the Company is the exclusive licensee of the
Hawthorn Suites brand of hotels. Pursuant to such right, the Company uses
certain other marks, including, among others, HAWTHORN SUITES, the tree logo,
HAWTHORN SUITES with the tree logo and the Company's newly created brand,
HAWTHORN SUITES LTD. Upon the expiration of the 99-year term of the Hawthorn
Acquisition Agreement (unless sooner terminated), HSA will transfer all of
its right, interest and title in those marks to the Company. The Company
considers the foregoing marks to be material to its business and certain of
such marks are registered with or applications for registration are pending
in the United States Patent and Trademark Office. Certain of the marks are
also registered with or applications for registration are pending with
various state and foreign government agencies. The Company is not aware of
any adverse claim concerning its owned or licensed marks.
Employees
As of October 7, 1996, the Company had 73 employees. None of the Company's
employees are represented by unions. The Company considers its employee
relations to be satisfactory.
Properties
The principal executive and administrative offices of the Company are
located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. The
Company currently leases 10,083 square feet of office space at the foregoing
address, pursuant to a lease that expires September 30, 2000. The Company
expects to leave its current office space due to its growth and therefore is
in the process of discussing with its landlord the possibility of leasing
additional space in the office park in which its current office is located.
Legal Proceedings
The Company is not a party to any material litigation. However, claims and
litigation may arise in the normal course of business.
35
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of the Company and their ages as of October
1, 1996.
<TABLE>
<CAPTION>
Name Age Office or Position Held
---- --- -----------------------
<S> <C> <C>
Michael A. Leven 58 Chairman, President and Chief Executive Officer
Neal K. Aronson 31 Executive Vice President, Chief Financial Officer and Director
David E. Shaw, Sr. 53 Executive Vice President--Administration
Steven Romaniello 29 Executive Vice President--Franchise Sales and Development
Dean S. Adler 39 Director
Irwin Chafetz 60 Director
Richard D. Goldstein 44 Director
Jeffrey A. Sonnenfeld 42 Director
Barry S. Sternlicht 35 Director
</TABLE>
- -------------
Each director is elected to serve until a successor is elected and
qualified or, if earlier, until the director's death, resignation or removal.
Officers, subject to the terms of their respective employment agreements,
serve at the pleasure of the Board of Directors. See "--Employment
Agreements". Each of the directors of the Company, other than Dean Adler and
Jeffrey A. Sonnenfeld, has served as such since September 30, 1995. Messrs.
Adler and Sonnenfeld were elected to the Board of Directors on October 11,
1996, effective as of the effective date of the Registration Statement of
which this Prospectus is a part.
Certain additional information concerning the persons listed above is set
forth below.
Michael A. Leven, Chairman, President and Chief Executive Officer. Mr.
Leven has been Chairman, President and Chief Executive Officer of the Company
since October 1995. From October 1990 to September 1995, Mr. Leven was
President and Chief Operating Officer for Holiday Inn Worldwide in Atlanta,
Georgia. From April 1985 to May 1990, he was President and Chief Operating
Officer of Days Inn of America, Inc. in Atlanta, Georgia. Mr. Leven is a
director of Starwood Lodging Trust, the nation's largest hotel REIT. Mr.
Leven is also a member of the Board of Governors of the American Red Cross, a
Director of the Biomedical Services Board of the American Red Cross and a
Trustee of National Realty Trust, the largest franchisee of Coldwell Banker
Corporation, a subsidiary of HFS Incorporated. On September 27, 1991,
approximately 16 months after Mr. Leven resigned from Days Inn, Days Inn
filed a voluntary petition under Chapter 11 of Title 11 of the United States
Bankruptcy Code. Mr. Leven is an uncle of Mr. Aronson.
Neal K. Aronson, Executive Vice President, Chief Financial Officer and
Director. Mr. Aronson has been Executive Vice President and Chief Financial
Officer of the Company since October 1995. Mr. Aronson was the founding
partner of Growth Capital Partners in New York, New York, and was with the
partnership from September 1994 to October 1995. From December 1993 to
September 1994, he was Managing Director of Rosecliff, Inc., a private equity
investment group in New York, New York. From January 1992 to December 1993,
he was a principal of Odyssey Partners, L.P. in New York, New York. From June
1989 to December 1991, Mr. Aronson was a principal of Acadia Partners, L.P.
in New York, New York. Mr. Aronson is a nephew of Michael A. Leven.
David E. Shaw, Sr., Executive Vice President, Administration. Mr. Shaw has
been Executive Vice President, Administration of the Company since October
1995. From January 1991 to September 1995 he was Vice President of Operations
Administration for Holiday Inn Worldwide in Atlanta, Georgia. From July 1990
to January 1991, Mr. Shaw was Executive Vice President, Administration for
Hospitality Franchise Systems, Inc. (now known as HFS Incorporated) in Wayne,
New Jersey.
Steven Romaniello, Executive Vice President, Franchise Sales and
Development. Mr. Romaniello has been Executive Vice President, Franchise
Sales and Development of the Company since August 1996. From October 1995
through July 1996, he served as Senior Vice President, Franchise Sales and
Development of the Company. From March 1991 through September 1995, Mr.
Romaniello was Vice President, Franchise Sales and Services for Holiday Inn
Worldwide in Atlanta, Georgia. From December 1988 to March 1991 he was
Regional Vice President, Franchise Sales for Days Inn of America, Inc. in
Atlanta, Georgia and in Boston, Massachusetts.
36
<PAGE>
Dean S. Adler, Director. Since 1988, Mr. Adler has been a principal and
Managing Director of private equity investments for CMS Companies ("CMS"), a
Philadelphia based investment firm that manages approximately $1.7 billion of
assets. Mr. Adler is a member of the Board of Directors of the Lane Company,
which specializes in the management and development of multifamily housing,
Jacoby Development, Inc., which specializes in shopping center development,
and RMS Technologies, a leading provider of information technology services
to federal and other governmental institutions.
Irwin Chafetz, Director. Since 1990, Mr. Chafetz has been the President
and a Director of Interface Group- Massachusetts, Inc., a privately held
company that owns and operates GWV International, New England's largest tour
operator. From 1990 until April 1995, Mr. Chafetz was a Vice President and
Director of the Interface Group- Nevada, Inc., which owned and operated
COMDEX, a computer trade show that is the largest American trade show. From
1989 to 1995, Mr. Chafetz was also a Vice President and a director of Las
Vegas Sands, Inc., which owned the Sands Hotel and Casino in Las Vegas and
the adjacent Sands Expo and Convention Center. Mr. Chafetz is a member of the
Board of Directors of Syratech Corporation, a New York Stock Exchange listed
company, and of Back Bay Restaurants Group, Inc., a Nasdaq company.
Richard D. Goldstein, Director. Since 1990, Mr. Goldstein has been a
Managing Director of Alpine Capital Group Inc., a specialized investment
banking firm located in New York. Prior to joining Alpine, Mr. Goldstein was
a partner at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr.
Goldstein serves as Trustee, member of the Executive Committee and Treasurer
of the Queens College Foundation, Trustee of the North Shore Hospital System
and a member of the Corporate Advisory Board of the State University of New
York at Stony Brook.
Jeffrey A. Sonnenfeld, Director. Since 1989, Mr. Sonnenfeld has been a
Professor of Organization and Management at the Goizueta Business School of
Emory University in Atlanta, Georgia, where Mr. Sonnenfeld is currently the
Director of the Center for Leadership & Career Studies. Mr. Sonnenfeld has
published five books and numerous articles in the areas of career management,
executive training and development, and the management of corporate social
performance. Mr. Sonnenfeld serves on the Board of Directors of the American
Association of Retired Persons, Moseley Securities Corporation, National
Council on the Aging, Transmedia-CBS, Inc., and the Hyatt Executive Travel
Council.
Barry S. Sternlicht, Director. Since 1993, Mr. Sternlicht has been the
President and Chief Executive Officer of Starwood Capital Group, L.P.
("Starwood Capital"), a real estate investment firm that he founded in 1993.
From 1991 to 1993, Mr. Sternlicht was the President of Starwood Capital
Partners, L.P., predecessor of Starwood Capital. Mr. Sternlicht is the
Chairman of the Board of Starwood Lodging Trust, the nation's largest hotel
REIT, in which Starwood Capital controls 30% of the stock. He is the
co-Chairman of the Board of Westin Hotel & Resorts Company, which Starwood
purchased in 1995 for $537 million. Mr. Sternlicht is also a trustee of
Equity Residential Properties Trust, a multi-family REIT, and of Angeles
Participating Mortgage Trust, which is also a REIT.
Agreements Regarding Board Positions
Pursuant to the terms of a Stockholders' Agreement entered into in
connection with the initial capitalization of the Company (the "Old
Stockholders' Agreement"), the original investors in the Company (the
"Original Investors"), which included Messrs. Leven and Aronson, agreed to
cause the Board of Directors to consist of five members and to vote their
shares of Old Common Stock to elect as a director the stockholder of the
Company or his nominee (other than Messrs. Leven and Aronson) holding,
together with his immediate family members, the largest number of shares of
Old Common Stock. Irwin Chafetz, together with his two sons, has been the
largest stockholder of the Company (other than Messrs. Leven and Aronson)
since the initial capitalization of the Company and was elected to the Board
pursuant to this provision. Pursuant to the Old Stockholders' Agreement, the
Original Investors also agreed to vote their shares of Old Common Stock in
favor of the election of Messrs. Leven and Aronson as directors of the
Company and granted Mr. Leven the right to nominate persons to fill the
remaining two board positions. Pursuant to this provision, Mr. Leven
nominated Messrs. Goldstein and Sternlicht to serve as directors, who were
then elected to serve as such by the Original Investors. The foregoing
governance provisions were deleted as part of amendments to the Old
Stockholders' Agreement that will become effective simultaneously with the
completion of the Offering. See "Certain Relationships and Related
Transactions--Transactions Entered into in Connection with the Offering--
Restated Stockholders' Agreement".
37
<PAGE>
Compensation of Directors
In 1995, directors of the Company were not paid any cash compensation for
their services but were reimbursed for their out-of-pocket expenses. The
Company recently adopted a stock option plan for its non-employee directors,
the material terms of which are described in "--Stock Option Plans--Directors
Plan" below, and authorized the payment of $5,000 annually to each director
as compensation for services provided. Messrs. Leven and Aronson, as
employees of the Company, are not eligible to participate in the Directors
Plan (as defined below), and accordingly, will receive no compensation as
directors other than $5,000 in annual compensation and reimbursement for
out-of- pocket expenses incurred in connection with their service as
directors.
Executive Compensation
The following table sets forth information with respect to the
compensation of Michael A. Leven, the Company's Chairman, President and Chief
Executive Officer, and Neal K. Aronson, Executive Vice President and Chief
Financial Officer of the Company. No other executive officers of the Company
received salary and bonus in excess of $100,000 for the period from August
28, 1995, the date of the Company's inception, through December 31, 1995. The
Company anticipates that during 1996, its most highly compensated officers
and their estimated salaries will be: Mr. Leven ($375,000), Mr. Aronson
($200,000), Steven Romaniello ($100,000) and David Shaw, Sr. ($150,000). In
addition to their respective base salaries, Messrs. Leven, Aronson and
Romaniello will each receive a bonus based on the number of franchises sold
during 1996. See "--Employment Agreements". The Company may also pay
discretionary bonuses.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Awards Payouts
1995 ----------------------- ---------
Annual Compensation
------------------------------------------
Name and Other Restricted All
Principal Annual Stock Options/ LTIP Other
Position Salary Bonus Compensation Awards SARs Payouts Compensation
--------- -------- --------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Leven
Chairman, President
and Chief Executive
Officer $93,750 $ 153,000(1)(2) $0 -- -- -- --
Neal K. Aronson
Executive Vice
President and Chief
Financial Officer $50,000 $ 151,500(1)(2) $0 -- -- -- --
</TABLE>
- -------------
(1) Mr. Leven and Mr. Aronson each received a transaction bonus of $150,000
for their efforts in organizing the Company and successfully negotiating
and completing the Microtel Acquisition on behalf of the Company.
(2) Mr. Leven and Mr. Aronson, pursuant to the terms of their respective
employment agreements with the Company, are each entitled to receive
bonuses based upon the number of franchises sold each year. See
"--Employment Agreements". During 1995, neither Mr. Leven nor Mr. Aronson
received a bonus for the three franchises sold during 1995, although the
Company accrued $3,000 and $1,500 for bonuses owed to Mr. Leven and Mr.
Aronson, respectively, with respect to such franchise agreements.
Employment Agreements
The Company has entered into employment agreements with Messrs. Leven and
Aronson, the material terms of which are described below.
Michael A. Leven. Mr. Leven's employment agreement with the Company
provides for his employment as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company for a 10-year term expiring on
September 30, 2005. Mr. Leven is entitled to a base salary of at least
$375,000 per year, subject to annual cost of living increases and other
annual increases determined by the Company based on the performance of Mr.
Leven and the Company and on prevailing economic circumstances.
Certain insurance benefits, if available on commercially reasonable terms,
are to be provided to Mr. Leven under his Employment Agreement, including
term life insurance in the amount of $1,500,000, executive health, dental and
medical insurance, long term disability and long term home care. The Company
has obtained all of the foregoing benefits for Mr. Leven. In addition, Mr.
Leven is entitled to a monthly automobile allowance in the amount of $1,000.
38
<PAGE>
Mr. Leven's employment agreement provides for a performance bonus of (i)
$1,000 for each franchise agreement executed in a given Year (defined as each
12 month period commencing October 1st and ending on September 30th of each
year during the term of such agreement) up to 150 franchise agreements and
(ii) $2,000 for each franchise agreement above the first 150 franchise
agreements entered into in a given Year.
Mr. Leven's employment agreement also contains confidentiality provisions
that prohibit him from disclosing company trade secrets at any time in the
future and from disclosing any confidential information relating to the
Company for a period extending five years after the termination of his
employment agreement. In addition, the agreement contains non-competition
provisions that prohibit Mr. Leven from competing in the franchising business
generally and in the business of franchising, operating or managing of hotels
and motels for a period of five years following the termination of his
employment for "cause" or his resignation without "good reason". The
enforceability of these non-disclosure and non-competition provisions under
Georgia law, which governs Mr. Leven's agreement, is uncertain.
In addition to allowing Mr. Leven to resign at any time for "good reason",
his employment agreement provides that, after the first five years of such
agreement and provided the Redeemable Preferred Stock has been redeemed, Mr.
Leven may resign at any time upon six months notice. If his resignation is
without "good reason", the Company is required to pay Mr. Leven only his base
salary, unused vacation time, and performance bonus actually earned through
the effective date of resignation. The employment agreement further provides
that if Mr. Leven resigns without good reason during the first five years, he
will not be liable for any consequential damages or damages for loss of
economic opportunity or profits to the Company. If Mr. Leven resigns for
"good reason", or if his employment is terminated "without cause", he is
entitled to severance pay in accordance with the terms of his employment
agreement. For the purpose of Mr. Leven's employment agreement, "good reason"
includes, but is not limited to, the failure to elect and continue Mr.
Leven's membership on the Board of Directors of the Company or his
involuntary relocation outside of Atlanta, Georgia. In addition, pursuant to
the Company's By-Laws, Mr. Leven's employment agreement may not be terminated
without the approval of 75% of the Board of Directors (excluding Mr. Leven).
Neal K. Aronson. Mr. Aronson's employment agreement, pursuant to which he
is to serve as Chief Financial Officer of the Company, is substantially
similar to Mr. Leven's agreement, except that (i) his base salary is $200,000
per year, (ii) the term life insurance benefit is $500,000, (iii) his
automobile allowance is $750 per month, (iv) the bonus is $500 for each
franchise agreement executed within a Year (as defined above) up to 150
franchise agreements, and $1,000 for each agreement executed in any Year in
excess of 150 and (v) Mr. Aronson is not entitled to receive long-term
disability or long-term home care insurance coverage from the Company.
Pursuant to the Company's By- Laws, Mr. Aronson's employment agreement may
not be terminated without the approval of 75% of the Board of Directors
(excluding Mr. Aronson).
See "Principal Stockholders--Management's Shares of Common Stock" as to
the effect of termination of employment on the Class A Common Stock held by
Messrs. Leven and Aronson.
Stock Option Plans
1996 Stock Option Plan. On September 27, 1996, the Board of Directors of
the Company (the "Board") adopted, subject to the approval of the Company's
stockholders, the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the
"Option Plan"). The Company's stockholders approved the Option Plan on
October 11, 1996. The following is a summary of the material features of the
Option Plan.
The purpose of the Option Plan is to promote the interests of the Company
and its stockholders by (i) attracting and retaining exceptional officers and
other key employees of the Company and its subsidiaries, and consultants,
advisors and others whose skills would be an asset to the Company or any of
its subsidiaries; (ii) motivating such individuals by means of
performance-related incentives to achieve long-range performance goals and
(iii) enabling such individuals to participate in the long-term growth and
financial success of the Company. Any officer or other key employee of the
Company or any of its subsidiaries who is not a member of the committee that
administers the Option Plan (the "Option Committee") shall be eligible to
participate under the Option Plan.
The Option Committee consists of two or more members of the Board
designated by the Board to administer the Option Plan, each of whom is
intended to be a "Non-Employee Director" (within the meaning of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) and an "outside director"
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<PAGE>
(within the meaning of Internal Revenue Code (the "Code") section 162(m)) to
the extent Rule 16b-3 and section 162(m), respectively, are applicable to the
Company.
The Option Plan authorizes the grant of awards to participants of a
maximum of 325,000 shares of the Company's Class A Common Stock ("Shares"),
which maximum number is subject to adjustment in certain circumstances to
prevent dilution or enlargement. Awards under the Option Plan may be made in
the form of (i) nonqualified stock options and (ii) stock options intended to
qualify as incentive stock options under section 422 of the Code; provided
that the maximum number of Shares with respect to which stock options may be
granted to any participant in the Option Plan in any calendar year may not
exceed 250,000. If, after the effective date of the Option Plan, any Shares
covered by an award granted under the Option Plan, or to which such an award
relates, are forfeited, or if an award has expired, terminated or been
canceled for any reason whatsoever (other than by reason of exercise), then
the Shares covered by such award shall again be, or shall become, Shares with
respect to which awards may be granted under the Option Plan.
Non-qualified and incentive stock options granted under the Option Plan
shall be subject to such terms, including exercise price and timing of
exercise, and conditions as may be determined by the Option Plan Committee
and specified in the applicable award agreement or thereafter; provided that
stock options that are intended to qualify as incentive stock options will be
subject to terms and conditions that comply with such rules as may be
prescribed by section 422 of the Code. Payment in respect of the exercise of
an option granted under the Option Plan may be made in cash, or its
equivalent, or if, and to the extent permitted by the Option Plan Committee,
(i) by exchanging Shares owned by the optionee (which are not the subject of
any pledge or other security interest and which have been owned by such
optionee for at least six months) or (ii) subject to such rules as may be
established by the Committee, through delivery of irrevocable instructions to
a broker to sell the Shares being acquired upon exercise of the option and to
deliver promptly to the Company an amount equal to the aggregate exercise
price, or by a combination of the foregoing.
The Board may amend, alter, suspend, discontinue or terminate the Option
Plan or any portion thereof at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be made without
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement, including for these purposes any approval requirement
which is a prerequisite for exemptive relief from section 16(b) of the
Exchange Act or Code section 162(m) (provided that the Company is subject to
the requirements of section 16 of the Exchange Act or Code section 162(m), as
the case may be, as of the date of such action).
Directors Plan. On September 27, 1996, the Board of Directors adopted,
subject to the approval of the Company's stockholders, the U.S. Franchise
Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors (the
"Directors Plan"). The Directors Plan was approved by the Company's
stockholders on October 11, 1996.
The purpose of the Directors Plan is to secure for the Company the
benefits of the additional incentive inherent in the ownership of Shares by
non-employee directors of the Company and to help the Company secure and
retain the services of such non-employee directors. The Directors Plan is
intended to be a self-governing formula plan. To this end, the Directors Plan
requires minimal discretionary action by any administrative body with regard
to any transaction under the Directors Plan. To the extent, if any, that
questions of administration arise, such issues will be resolved by the Board
of Directors. Eligible persons under the Directors Plan are directors of the
Company who are not employees of the Company or any affiliate of the Company
("Outside Directors").
A maximum of 125,000 Shares has been reserved by the Company for issuance
pursuant to options under the Directors Plan, which number is subject to
adjustment in certain circumstances in order to prevent dilution or
enlargement. If, after the effective date of the Directors Plan, any Shares
covered by an award granted under the Directors Plan, or to which such an
award relates, are forfeited, or if an award has expired, terminated or been
canceled for any reason whatsoever (other than by reason of exercise), then
the Shares covered by such award shall again be, or shall become, Shares with
respect to which awards may be granted under the Directors Plan.
As of the effective date of the Offering, each Outside Director will be
granted an option to purchase 2,000 shares of Class A Common Stock.
Thereafter, each person who is an Outside Director as of January 1st of each
calendar year during the term of the Directors Plan shall receive an option
to purchase 2,000 shares of Class A Common Stock as of such date. All options
granted under the Directors Plan shall be "nonqualified" stock options
subject to the provisions of section 83 of the Code.
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<PAGE>
Options shall become exercisable on the first anniversary of the date of
grant provided that the optionee shall continue to serve as a director of the
Company on such date, and shall terminate on the earliest of the following:
(i) the expiration of ten years from the date of grant, (ii) the expiration
of one year from the termination of the optionee's service as an Outside
Director due to death or disability, (iii) the date the optionee's service as
an Outside Director terminates for cause (as defined in the Directors Plan)
and (iv) the expiration of three months from the date the optionee's service
as an Outside Director terminates other than by reason of death, disability
or cause.
The exercise price per share of Class A Common Stock purchasable under
each option granted upon the consummation of the Offering shall be the
initial public offering price per share, and the exercise price per share of
Class A Common Stock purchasable under all other options granted under the
Directors Plan shall be the Fair Market Value (as defined in the Directors
Plan) of a share of Class A Common Stock on the date the option is granted.
Shares of Class A Common Stock purchased upon the exercise of an option are
to be paid for in cash, check or money order or by shares of Class A Common
Stock owned by the optionee for at least six months prior to exercise.
The Directors Plan may be terminated or amended at any time by the Board
of Directors; provided that (i) such amendment complies with all applicable
laws and applicable stock exchange listing requirements, (ii) the provisions
of the Directors Plan with respect to eligibility for participation or the
timing or amount of grants of awards and the option price shall not be
amended more than once every six months (other than to comport with changes
in the Code or the Employee Retirement Income Security Act of 1974, as
amended) and (iii) any amendment for which stockholder approval is necessary
to comply with any tax or regulatory requirement, including for these
purposes any approval requirement which is a prerequisite for exemptive
relief from section 16(b) of the Exchange Act (provided that the Company is
subject to the requirements of such section as of the date of such action),
shall not be effective until such approval has been obtained.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Entered into in Connection with the Offering
Reclassification. In connection with the Offering, the Company intends to
effect the Reclassification. Pursuant to the Reclassification, each share of
Old Common Stock will be converted into 9.67 shares of Class A Common Stock.
Also in connection with the Offering, pursuant to the 1996 Amendment (see
"Principal Stockholders-- Management's Shares of Common Stock"), Mr. Leven,
his wife, Andrea Leven, and Mr. Aronson will exchange 2,707,919 shares of
Class A Common Stock held directly by them (which shares do not include those
shares of Class A Common Stock that will continue to be held as Restricted
Shares (as defined herein) pursuant to the 1996 Amendment) for the same
number of shares of Class B Common Stock. See "Description of Capital
Stock--Common Stock" for a description of the relative rights of holders of
Class A Common Stock and Class B Common Stock.
Voting. Simultaneously with the completion of the Offering, Mr. Leven will
enter into a voting agreement with his wife, Andrea, pursuant to which she
will grant him the right to vote all of the 233,032 shares of Class A Common
Stock and all of the 770,801 shares of Class B Common Stock to be owned by
her following the Offering. At the same time, Mr. Leven will enter into a
voting agreement with Mr. Aronson, pursuant to which Mr. Aronson will grant
Mr. Leven the right to vote 111,347 shares of his Class A Common Stock and
311,007 shares of his Class B Common Stock. Mr. Aronson will continue to vote
the remaining 1,198,466 shares of his Class B Common Stock. As a result of
these agreements, Mr. Leven will vote a total of 942,440 shares of Class A
Common Stock and 1,509,453 shares of Class B Common Stock, which shares
together represent approximately 43.4% of the total outstanding voting power
of the Company immediately following the Offering.
Immediately following the Offering, Messrs. Leven and Aronson will have
the right to vote a total of 1,773,533 shares of Class A Common Stock and
2,707,919 shares of Class B Common Stock, which will represent approximately
78% of the outstanding voting power of the Common Stock after the Offering.
Accordingly, Messrs. Leven and Aronson will be able to (i) elect all of the
Company's directors, (ii) amend the Charter with respect to most matters,
(iii) effect a merger, sale of assets or other major corporate transaction,
(iv) defeat an unsolicited takeover attempt and (v) generally direct the
affairs of the Company. However, Mr. Leven and Mr. Aronson do not have any
agreements or other obligations to vote together on matters involving the
Company. See "Risk Factors-- Management, By Virtue of Ownership of
Supervoting Class B Common Stock, Will Control the Company Following the
Offering" and "Principal Stockholders--Management's Shares of Common Stock".
Restated Stockholders' Agreement. Effective simultaneously with the
closing of the Offering, the Company will amend and restate the Old
Stockholders' Agreement that was entered into with the Original Investors in
connection with the initial capitalization of the Company (the "Restated
Stockholders' Agreement"). The purpose of the amendment is to remove certain
voting and corporate governance provisions that were determined to be more
suitable for a private company, including provisions (i) restricting the
transfer of shares of Old Common Stock, (ii) authorizing each of the Original
Investors to cause the Company's remaining stockholders to sell their
interests in the Company in certain circumstances, (iii) fixing the size of
the Board of Directors at five, (iv) pursuant to which the Original Investors
agreed to vote for Messrs. Leven and Aronson and the Original Investor (other
than Messrs. Leven and Aronson) owning the most shares of Old Common Stock
(or his nominee) as directors of the Company, (v) that generally prohibited
Messrs. Leven and Aronson from transferring their shares of Old Common Stock
for a three-year period ending in September 1998 and (vi) granting the
Original Investors preemptive rights in certain circumstances. The Restated
Stockholders' Agreement continues only to grant the Original Investors
certain piggy-back registration rights, although such rights are not
exercisable until 20% of the Company's outstanding Common Stock has been
registered under the Securities Act, and the right to cause the Company to
file a registration statement under the Securities Act on one occasion,
commencing September 29, 2000. See "Shares Eligible for Future Sale" and
"Description of Capital Stock--Registration Rights".
1996 Amendment. See "Principal Stockholders--Management's Shares of Common
Stock--1996 Amendment" for a description of amendments to Messrs. Leven's and
Aronson's Old Stock Purchase Agreements and those of certain other executive
officers of the Company.
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<PAGE>
Miscellaneous
In consideration for their efforts in organizing the Company and
negotiating and consummating the Microtel Acquisition, Messrs. Leven and
Aronson each received a bonus of $150,000 from the Company.
The Company has obtained $15 million of key man life insurance on the life
of Mr. Leven.
Howard and Lawrence Chafetz, sons of Irwin Chafetz, a director of the
Company, have established a limited liability company to acquire and operate
Microtels. To date, the limited liability company has not acquired any
Microtel franchises or entered into any agreements with the Company regarding
the same.
The Company expects to invest from time to time in entities that make
investments in Microtel and Hawthorn Suites franchisees with a successful
track record of multi-unit development. The Company will receive management
fees and other fees based on the total investments made by these entities. To
date, no investments have been made by these entities.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth (i) as of October 1, 1996 and (ii) as
adjusted for the Reclassification and the 1996 Amendment and for the sale by
the Company of the shares of Class A Common Stock pursuant to the Offering,
certain information regarding the beneficial ownership of the Class A Common
Stock and the Class B Common Stock by each person known by the Company to be
the beneficial owner of 5% or more of the outstanding Class A Common Stock or
Class B Common Stock, by each of the Company's directors and by all directors
and executive officers of the Company as a group. Unless otherwise indicated,
the persons listed below have sole investment and sole voting power with
respect to the shares of Class A Common Stock and Class B Common Stock listed
across from their names in the table below. See "--Management's Shares of
Common Stock" for a discussion of restrictions on certain shares of Class A
Common Stock held by Mr. Leven and Mr. Aronson.
<TABLE>
<CAPTION>
Beneficial Ownership
Prior
to the Offering and Beneficial Ownership Subsequent
the Reclassification to the Offering
--------------------- ------------------------------------------------
Shares of Shares Shares Total
Name and Address of Common of of Total Voting
Beneficial Owner Stock % Class A Class B Equity** Power
- ------------------- ----------- ------- --------- --------- ---------- -------
(Class A and Class B)
<S> <C> <C> <C> <C> <C> <C>
Michael A. Leven
13 Corporate Square
Suite 250
Atlanta, Georgia 30329 185,031 (1) 16.6% 942,440 (2) 1,509,453 (3) 19.5% 43.4%
Neal K. Aronson
13 Corporate Square
Suite 250
Atlanta, Georgia 30329 233,223 (4) 21.0% 942,440 (5) 1,509,453 (6) 19.5% 34.7%
Dean Adler
CMS Companies
1926 Arch Street
Philadelphia, PA 19103 0 * 0 0 * *
Irwin Chafetz (7)
c/o The Interface Group
300 First Avenue
Needham, MA 02194 30,000 2.7% 290,100 0 * *
Richard D. Goldstein (8)
c/o Alpine Microtel LLC
1285 Avenue of the
Americas
New York, NY 10019 16,500 1.5% 159,555 0 * *
Andrea Leven
c/o U.S. Franchise Systems,
Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329 103,809 (9) 9.3% 233,032(10) 770,801(11) 8.0% *
Jeffrey A. Sonnenfeld
1602 Mizell Drive
Room 310
Atlanta, Georgia 30322 0 * 0 0 * *
Barry Sternlicht (12)
c/o Starwood Capital Group
3 Pickwick Plaza
Greenwich, CT 06830 31,000 2.8% 299,770 0 * *
All officers and
directors as a group
(9 persons)** 526,340 47.3% 2,818,725 2,707,919 43.9% 80.9%
</TABLE>
- -------------
* Represents less than 1% of the outstanding Common Stock, both in number
and in terms of voting power.
** Duplications eliminated.
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<PAGE>
(1) Consists of (i) 31,422 shares held directly by Mr. Leven as Unrestricted
Shares under his Old Stock Purchase Agreement, over which Mr. Leven has
sole voting and investment power, (ii) 55,612 shares held by Mr. Leven's
wife as Unrestricted Shares, (iii) 24,192 shares that were designated as
Unrestricted Shares under the Old Stock Purchase Agreement, which have
been reallocated to other members of management and are voted by them in
the same manner that Mr. Leven votes his Unrestricted Shares, (iv) 25,608
shares that were designated as Restricted Shares under Mr. Leven's Old
Stock Purchase Agreement, which are voted by Mr. Leven in the same
proportion as the Original Investors (other than Messrs. Leven and
Aronson) vote their shares and (v) 48,197 shares that were designated as
Restricted Shares under Mr. Leven's Old Stock Purchase Agreement, which
were given by Mr. Leven to his wife and are voted in the same proportion
as the Original Investors (other than Messrs. Leven and Aronson) vote
their shares. Mr. Leven disclaims beneficial ownership of the shares
owned by his wife. The number shown in the table does not include 103,806
shares that have been transferred by Mr. Leven to his adult sons.
(2) Consists of (i) 123,815 shares held directly by Mr. Leven, which will
continue as Restricted Shares following the 1996 Amendment and as to
which Mr. Leven has sole voting power, (ii) 233,032 Restricted Shares
held by Mr. Leven's wife, which are voted by Mr. Leven, (iii) 365,012
Unrestricted Shares, which have been reallocated to other members of
management and are voted in the same manner that Mr. Leven votes his
shares, (iv) 109,234 shares that were designated as Restricted Shares
pursuant to Mr. Leven's Old Stock Purchase Agreement, which have been
reallocated to other members of management and by virtue of the 1996
Amendment are voted in the same manner that Mr. Leven votes his
Unrestricted Shares, and (v) 111,347 Restricted Shares owned by Mr.
Aronson, which are voted by Mr. Leven.
(3) Consists of (i) 427,665 Unrestricted Shares, as to which Mr. Leven has
sole voting power, (ii) 770,801 shares held by Mr. Leven's wife as
Unrestricted Shares, which are voted by Mr. Leven, and (iii) 311,007
Unrestricted Shares owned by Mr. Aronson, which are voted by Mr. Leven.
(4) Consists of (i) 95,097 shares held directly by Mr. Aronson as
Unrestricted Shares under his Old Stock Purchase Agreement, over which
Mr. Aronson has sole voting and investment power, (ii) 16,127 shares that
were designated as Unrestricted Shares under the Old Stock Purchase
Agreements, which have been reallocated to other members of management
and are voted by them in the same manner that Mr. Aronson votes his
Unrestricted Shares and (iii) 121,999 shares that were designated as
Restricted Shares under Mr. Aronson's Old Stock Purchase Agreement, which
are voted by Mr. Aronson in the same proportion as the Original Investors
(other than Messrs. Leven and Aronson) vote their shares.
(5) Consists of (i) 589,865 shares held directly by Mr. Aronson, which will
continue as Restricted Shares following the 1996 Amendment and as to
which Mr. Aronson has sole voting power, (ii) 109,234 shares that were
designated as Restricted Shares pursuant to Mr. Aronson's Old Stock
Purchase Agreement, which have been reallocated to other members of
management and by virtue of the 1996 Amendment are voted by them in the
same manner that Mr. Aronson votes his shares and (iii) 243,341 shares
that were designated as Unrestricted Shares under the Old Stock Purchase
Agreements, which have been reallocated to other members of management
and are voted by them in the same manner that Mr. Aronson votes his
shares. Mr. Aronson has transferred voting power to Mr. Leven with
respect to 111,347 of such shares.
(6) Consists of 1,509,453 shares designated as Unrestricted Shares, of which
Mr. Aronson has sole voting power as to 1,198,466 shares and has
transferred voting power to Mr. Leven as to 311,007 shares.
(7) Prior to the 1996 Amendment, Mr. Chafetz, by virtue of provisions in the
Old Stock Purchase Agreements that required Messrs. Aronson and Leven to
vote their Restricted Shares in the same manner and the same proportion
as the Original Investors (other than Messrs. Leven and Aronson),
effectively had the right to vote a portion of such Restricted Shares.
These provisions were eliminated in the 1996 Amendment.
(8) Such shares are owned by G(2) Investment Partners, an investment
partnership of which Mr. Goldstein is a general partner. Mr. Goldstein
shares voting and investment power with respect to such shares. Prior to
the 1996 Amendment, G(2) Investment Partners, by virtue of provisions in
the Old Stock Purchase Agreements that required Messrs. Aronson and Leven
to vote their Restricted Shares in the same manner and the same
proportion as the Original Investors (other than Messrs. Leven and
Aronson), effectively had the right to vote a portion of such Restricted
Shares. These provisions were eliminated in the 1996 Amendment.
(9) Consists of (i) 55,612 Unrestricted Shares of Old Common Stock received
from Mr. Leven and (ii) 48,197 Restricted Shares of Old Common Stock
received from Mr. Leven.
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<PAGE>
(10) Represents shares that were designated under Mr. Leven's Old Stock
Purchase Agreement as Restricted Shares, which will continue as the same
following the 1996 Amendment and which have been transferred to Mrs.
Leven. Pursuant to a voting agreement to be entered into simultaneously
with the closing of the Offering, Mrs. Leven has transferred voting power
with respect to these shares to Mr. Leven.
(11) Represents shares of Class B Common Stock that were originally designated
as Unrestricted Shares under Mr. Leven's Old Stock Purchase Agreement,
which were subsequently transferred to Mrs. Leven and which, pursuant to
a voting agreement to be entered into simultaneously with the closing of
the Offering, are voted by Mr. Leven.
(12) Such shares are owned by Starwood Opportunity Fund II, L.P., a Delaware
limited partnership whose general partner is Starwood Capital, which is
indirectly controlled by Mr. Sternlicht. Prior to the 1996 Amendment, the
holder of such shares, by virtue of provisions in the Old Stock Purchase
Agreements that required Messrs. Aronson and Leven to vote their
Restricted Shares in the same manner and the same proportion as the
Original Investors (other than Messrs. Leven and Aronson), effectively
had the right to vote a portion of such Restricted Shares. These
provisions were eliminated in the 1996 Amendment.
Personal Holding Company Tax. Under section 541 of the Code, a personal
holding company is subject to a 39.6% tax on its undistributed personal
holding company income (the "PHC Tax"). In order to be considered a personal
holding company in any taxable year, a corporation must satisfy two tests.
First, at any time during the last half of the taxable year more than 50% in
value of its outstanding stock must be owned, directly or indirectly, by or
for not more than five individuals (the "Stock Ownership Test"). Second, at
least 60% of its adjusted ordinary gross income for the taxable year must be
personal holding company income, which generally consists of passive forms of
income such as dividends, interest, rents and royalties, as defined for tax
purposes, but generally does not include income from the provision of
services (the "Income Test"). Certain attribution rules that are included as
part of the Stock Ownership Test could be interpreted in such a manner as to
result in the Stock Ownership Test being satisfied in the case of the
Company. While there can be no assurance that the Company will not satisfy
both the Stock Ownership Test and the Income Test, the Company believes that
the nature of its activities and its expected sources of income will be such
that the PHC Tax will not apply.
Management's Shares of Common Stock
Background. On October 5, 1995, simultaneously with the closing of the
Microtel Acquisition, Messrs. Leven and Aronson purchased 5,485,259 shares or
51% of the then outstanding Class A Common Stock for an aggregate purchase
price of $567,245 or $.1034 per share (the Original Issue Price). Twenty-five
percent (25%) of the then outstanding Class A Common Stock was acquired by
Messrs. Leven and Aronson outright (i.e., without restriction on their
ability to vote or receive dividends with respect to such shares and free of
any risk of forfeiture), although a limited number of such shares could be
repurchased from Messrs. Leven and Aronson and reissued to other employees
under certain circumstances described below (the "Unrestricted Shares").
Immediately following such acquisition, Mr. Leven owned 15% and Mr. Aronson
owned 10% of the then outstanding Class A Common Stock in the form of
Unrestricted Shares.
The remaining shares of Class A Common Stock acquired by Messrs. Leven and
Aronson, representing 26% of the then outstanding Class A Common Stock, were
subject to significant restrictions with respect to voting and dividend
rights and substantial risks of forfeiture (the "Restricted Shares"), as
described below. Mr. Leven and Mr. Aronson each acquired 13% of the then
outstanding Class A Common Stock in the form of Restricted Shares. Messrs.
Leven and Aronson elected to be taxed on such shares pursuant to section
83(b) of the Code and therefore the Company will not be entitled to a
deduction if the fair market value of such shares at the time the
restrictions or the risks of forfeiture lapse is greater than the Original
Issue Price.
On August 23, 1996, the Board of Directors voted to amend the respective
Employee Stock Purchase Agreements pursuant to which Messrs. Leven and
Aronson purchased the Class A Common Stock (the "Old Stock Purchase
Agreements") to eliminate the restrictions with respect to one-half of the
Restricted Shares, so that an additional 13% of the pre-Offering outstanding
Class A Common Stock will become Unrestricted Shares, effective as of the
completion of the Offering (the "1996 Amendment"). See "--1996 Amendment"
below for a description of the amendment.
Resale of Shares to Other Management. The Old Stock Purchase Agreements
provide that Unrestricted Shares representing 5% of the Class A Common Stock
then outstanding and Restricted Shares representing 6%
46
<PAGE>
of the Class A Common Stock then outstanding could be repurchased by the
Company from Messrs. Leven and Aronson at $.1034 per share and then reissued
to other members of the Company's management at fair market value. Such
agreements further provide for the appointment of a Compensation Committee
(which has subsequently been renamed the Stock Allocation Committee) to
determine the timing and the number of shares to be repurchased from Messrs.
Leven and Aronson and reissued to other members of the Company's management.
The Stock Allocation Committee, which will continue in effect following the
Offering, currently consists of Messrs. Leven, Aronson and Chafetz. By virtue
of the 1996 Amendment, no other shares will be repurchased for resale to
other management.
To date, a total of approximately 7.7% of the pre-Offering outstanding
Class A Common Stock (approximately 3.6% from the Unrestricted Shares and
approximately 4.1% from the Restricted Shares) has been repurchased from
Messrs. Leven and Aronson and reissued to other members of management.
Specifically, on February 7, 1996 (the "February Transaction"), Messrs. Leven
and Aronson sold a total of 826,833 shares of Class A Common Stock to the
Company for $85,505 or $.1034 per share. The Company in turn immediately
reissued these 826,833 shares to other members of the Company's management at
the same price of $.1034 per share. In April 1996 (the "April Transaction"),
the Company redeemed 322,669 shares of Class A Common Stock from certain
members of management for $.1034 per share. The Company subsequently reissued
these 322,669 shares to members of the Company's management at the price of
$.1137 per share. The April Transaction occurred at $.1137 per share instead
of $.1034 per share due to the increase in the value of the Company from
February 7, 1996 to April 1996 resulting from the beginning of the Company's
franchise sales activities and the execution of the Hawthorn Acquisition
Agreement. By virtue of the 1996 Amendment, members of management who
acquired these shares are required to vote those shares that are Restricted
Shares, on a one vote per share basis, one-half in the same manner as Mr.
Leven votes his shares and one-half as Mr. Aronson votes his shares (prior to
the 1996 Amendment, such management members were required to vote those
shares that were Restricted Shares in the same manner and the same
proportions as the Original Investors in the Company (other than Messrs.
Leven and Aronson) voted their shares of Class A Common Stock). With respect
to those shares that are Unrestricted Shares, the management holders continue
to be required to vote 60% of such shares in the manner that Mr. Leven votes
his shares and 40% in the manner that Mr. Aronson votes his shares. The
Company's right to cause the redemption and reissuance of the remaining
shares (approximately 3.3% of the pre-Offering Class A Common Stock) was
eliminated by the 1996 Amendment. All shares which have been repurchased from
Messrs. Leven and Aronson and reissued to other members of management
pursuant to the Old Stock Purchase Agreements are subject to a vesting
schedule, which provides that Unrestricted Shares vest over a five year
period and Restricted Shares vest over a 10 year period, in each case
provided that the management employee remains employed by the Company (and
with Restricted Shares subject to further vesting requirements based on the
Company's performance). Any unvested shares that are forfeited upon the
termination of such employment are to be repurchased by the Company and
resold to Mr. Leven or Mr. Aronson, as the case may be (depending on who
owned the shares originally), at the Original Issue Price. In the event any
of such shares are forfeited and reissued to Messrs. Leven or Aronson at the
Original Issue Price, the Company will recognize compensation expense for the
difference between the Original Issue Price and the market value of the stock
on the date such shares are reoffered to Messrs. Leven and Aronson. Upon such
resale, the shares will continue as Unrestricted Shares or Restricted Shares
in the same manner as had they not been so forfeited.
Unrestricted Shares. Following the 1996 Amendment, there will be no
restrictions on the Unrestricted Shares and such shares may not be
repurchased from Messrs. Leven and Aronson and reissued to other members of
management.
Restricted Shares. The Old Stock Purchase Agreements imposed, and the Old
Stock Purchase Agreements as amended by the 1996 Amendment (the "Amended
Stock Purchase Agreements") will impose, substantial risks of forfeiture on
Restricted Shares. Prior to the 1996 Amendment, the Old Stock Purchase
Agreements provided that, until such shares became "Earned Shares", there
were substantial limitations on the holders' right to vote and to receive
dividends with respect to such shares. For example, Messrs. Leven and Aronson
and their permitted transferees were required to vote their Restricted Shares
(other than those that become Earned Shares) in the same manner and the same
proportions as the Original Investors (excluding Messrs. Leven and Aronson)
voted their shares, and were generally not entitled to receive dividends with
respect to Restricted Shares. Such limitations will be removed by the 1996
Amendment, so that Messrs. Leven and Aronson will be entitled to vote all
Restricted Shares (on a one vote per share basis), including Restricted
Shares which have been reallocated to other members of management as provided
above, prior to such shares being "earned" by the holders thereof, and to
receive dividends thereon. See "--1996 Amendment".
47
<PAGE>
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, Restricted Shares become Earned Shares upon the
Company's attaining certain performance criteria. However, notwithstanding
that they have been "earned", Earned Shares (other than the 13% of the
pre-Offering outstanding Class A Common Stock that is deemed to have been
earned by virtue of the 1996 Amendment) will be forfeited if the management
holder of such shares (including either of Messrs. Leven or Aronson) resigns
from his or her employment with the Company without "good reason" or is
terminated for "cause" prior to the tenth anniversary of the date such shares
were acquired by the holder thereof from the Company ("Termination
Forfeiture"). See "--1996 Amendment".
The performance criteria that had to be achieved under the Old Stock
Purchase Agreements in order for Restricted Shares to become Earned Shares
were as follows:
(1) 1/26 of the Restricted Shares would become Earned Shares for every
$1,000,000 of annual "Adjusted EBITDA" of the Company (defined as
earnings before interest, taxes, depreciation, amortization and other
non-cash charges, adjusted to exclude one-time or non-recurring
expenses or credits), although no Restricted Shares would become
Earned Shares until Adjusted EBITDA for a fiscal year reached or
exceeded $3,000,000.
(2) The amount of Restricted Shares that could become Earned Shares was
based on the highest annual Adjusted EBITDA at any time and from time
to time. In all calculations, increments less than $1,000,000 were
ignored. For example, if Adjusted EBITDA in a fiscal year was
$3,000,000 to $3,999,999.99, then 3/26 of the Restricted Shares would
become Earned Shares; if, thereafter, Adjusted EBITDA for a fiscal
year was $10,100,000, then 10/26 (i.e., an additional 7/26) would
become Earned Shares. Accordingly, all of the Restricted Shares would
become Earned Shares only at such time as the Company had Adjusted
EBITDA of $26,000,000 or more in a fiscal year.
(3) Once Restricted Shares become Earned Shares, such shares are not
affected by a decline in annual Adjusted EBITDA in subsequent fiscal
years. However, once Adjusted EBITDA of $3,000,000 or more had been
attained, if the annual Adjusted EBITDA declined in a subsequent
fiscal year from the highest level at which Restricted Shares had
become Earned Shares, additional Restricted Shares would not become
Earned Shares until the average annual Adjusted EBITDA for the fiscal
years including and following the year of such decline in annual
Adjusted EBITDA was greater than the level of annual Adjusted EBITDA
at which Restricted Shares were last earned.
As of the date hereof, except pursuant to the 1996 Amendment, as described
below, no Restricted Shares had become Earned Shares. Pursuant to the 1996
Amendment, one-half (i.e., 13/26) of the Restricted Shares will be deemed to
be Unrestricted Shares and will no longer be subject to the risk of
Termination Forfeiture.
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, Earned Shares (other than the 13% referred to above that
were deemed to have been earned by virtue of the 1996 Amendment) will be
permanently vested (i.e., they will no longer be subject to Termination
Forfeiture) on September 29, 2005. Any Restricted Shares that have not become
Earned Shares by September 29, 2005 will be redeemed by the Company at the
Original Issue Price and offered to the Original Investors (other than
Messrs. Leven and Aronson) pro rata at the Original Issue Price based on
their original holdings of Old Common Stock.
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, in the event that all or substantially all of the
Company's stock or all or substantially all assets are transferred or sold,
or upon a merger or other business combination, Earned Shares automatically
become Unrestricted Shares. In addition, under both the Old Stock Purchase
Agreements and the Amended Stock Purchase Agreements, any remaining
Restricted Shares will automatically become Unrestricted Shares to the extent
that value for the entire Company indicated by the gross sale price in such
transaction results in an internal rate of return to the Original Investors
of at least 40% on a compounded annual basis (after taking into account the
amount and timing of all distributions and payments received by such Original
Investors from the Company, after considering Unrestricted and Earned Shares
then held by Messrs. Leven and Aronson, and after giving effect to Restricted
Shares that become Unrestricted Shares as a result of such transaction).
48
<PAGE>
1996 Amendment. The Company and Messrs. Leven and Aronson have agreed to
amend their respective Old Stock Purchase Agreements, effective upon the
completion of the Offering. The 1996 Amendment provides that (i) one-half of
their Restricted Shares (representing approximately 11% of the Class A Common
Stock outstanding before the Offering) will be deemed to be Unrestricted
Shares, notwithstanding the fact that performance criteria relating to
Adjusted EBITDA have not been met, (ii) their remaining Restricted Shares
(which constitute, in the aggregate, approximately 9% of the Class A Common
Stock outstanding before the Offering) will become Earned Shares at the rate
of 1/13 of all of the remaining number of Restricted Shares (including the
approximately 4% held by other members of management) for every $1,000,000 of
annual Adjusted EBITDA, but only after Adjusted EBITDA for a fiscal year
equals or exceeds $14,000,000, (iii) the Unrestricted Shares referred to in
clause (i) above, will be vested and not subject to Termination Forfeiture,
(iv) the Unrestricted Shares held by Messrs. Leven and Aronson and by Mr.
Leven's wife, including the Unrestricted Shares referred to in clause (i)
above, will be shares of Class B Common Stock (with ten votes per share), (v)
the remaining Restricted Shares held by Messrs. Leven and Aronson will be
Class A Common Stock (with one vote per share), including if and when such
shares become Earned Shares, and will continue to be subject to Termination
Forfeiture, (vi) Messrs. Leven and Aronson will have the right to vote their
Restricted Shares and to receive dividends, if any, declared thereon before
they become Earned Shares, (vii) no additional shares will be repurchased
from Messrs. Leven and Aronson and reissued to other members of management
and (viii) in calculating Adjusted EBITDA for any given year, there generally
shall be subtracted 10% of the consideration paid by the Company in
connection with any future acquisitions by the Company and/or its
subsidiaries of another corporation or other entity.As part of the 1996
Amendment, one-half of the Restricted Shares previously allocated to other
members of management will also be deemed to be Unrestricted Shares. Such
shares, representing approximately 2% of the Class A Common Stock outstanding
before the Offering, will be voted by the management holders thereof 60% in
the same manner that Mr. Leven votes his shares, and 40% in the same manner
that Mr. Aronson votes his shares. As to any Restricted Shares still held by
such management holders, 50% of such shares will be voted by the management
holders thereof in the same manner that Mr. Leven votes his shares and 50%
will be voted in the same manner Mr. Aronson votes his shares.
Current Ownership. The following table sets forth, as of August 1, 1996,
the ownership of the Unrestricted Shares and Restricted Shares, as a
percentage of the then outstanding Common Stock prior to the Offering, and
adjusted to take into account the 1996 Amendment.
<TABLE>
<CAPTION>
Prior to the As Adjusted for the
1996 Amendment 1996 Amendment
----------------------------- -----------------------------
Unrestricted Restricted Unrestricted Restricted Total
--------------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Michael A. Leven (1) 12.825% 10.969% 18.310% 5.480% 23.794%
Neal K. Aronson 8.550 10.969 14.030 5.480 19.518
Other Members of
Management (2) 3.625 4.062 5.660 2.040 7.688
--------------- ------------- --------------- ------------- ----------
25.000% 26.000% 38.000% 13.000% 51.000%
=============== ============= =============== ============= ==========
</TABLE>
- -------------
(1) Includes shares transferred from Mr. Leven to members of his immediate
family in transactions permitted under his Old Stock Purchase Agreement.
(2) Includes certain shares that were not included in the numbers referenced
in note 1 above and that have been reallocated to Jonathan Leven and
Robert Leven (employees of the Company and sons of Mr. Leven), as members
of the Company's management, in accordance with the terms of Mr. Leven's
Old Stock Purchase Agreement.
See "Principal Stockholders" for details regarding the beneficial ownership
of the foregoing shares, as adjusted for the Reclassification, the 1996
Amendment and the Offering.
49
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding (i) the
beneficial ownership of Class A Common Stock by the Selling Stockholders as
of October 1, 1996 (adjusted for the Reclassification), (ii) the number of
shares of Class A Common Stock being offered hereby by each Selling
Stockholder and (iii) their beneficial ownership of the Class A Common Stock
after the Offering. Unless otherwise indicated, each Selling Stockholder
listed below has sole voting and investment power with respect to the shares
listed across from its name in the table.
No members of the Company's management or its Board of Directors will be
selling shares pursuant to the Offering.
<TABLE>
<CAPTION>
Beneficial Ownership
Prior Beneficial Ownership
to the Offering After the Offering
-------------------- ------------------------------------
Shares of
Shares Class A Shares %
of Class A Common Stock of Class A % of Total
Name Common Stock % Being Sold Common Stock Equity Voting Power
- ------------------------------- ------------ ---- -------------- -------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald N. Beck 48,350 * 15,797 32,553 * *
H. Pierre Eilian, M.D. 9,670 * 3,195 6,475 * *
Jonathan D. Eilian 9,670 * 3,195 6,475 * *
Nancy B. and Howard Feinglass 38,680 * 3,362 35,318 * *
Goolock Associates 299,770 2.8% 65,130 234,640 1.9% *
Lotte Bravmann & Carol Bravmann
Berlin as Trustees FBO
Alyssa Michelle Berlin 49,955 * 14,347 35,608 * *
Lotte Bravmann & Carol Bravmann
Berlin as Trustees FBO
Elana Danielle Berlin 49,964 * 14,348 35,616 * *
Lotte Bravmann & Carol Bravmann
Berlin as Trustees FBO
Nicole Amy Berlin 49,964 * 14,348 85,616 * *
Lotte Bravmann & Judith Kaufthal
as Trustees FBO
Jeremy J. Kaufthal 49,964 * 14,348 35,616 * *
Lotte Bravmann & Judith Kaufthal
as Trustees FBO
Jonathan S. Kaufthal 49,964 * 14,348 35,616 * *
Lotte Bravmann & Judith Kaufthal
as Trustees FBO
Joshua M. Kaufthal 49,955 * 14,348 37,382 * *
Marc Lasry 38,680 * 12,637 37,318 * *
Leon Levy 145,050 1.4% 39,110 105,940 * *
Microtopp Associates 328,780 3.1% 71,304 257,476 2.0% *
David A. Mintz 19,340 * 3,363 15,977 * *
Nash Grandchildren 1986 Trust 299,770 2.8% 86,957 212,813 1.7% *
Schwartz Microtel Investors,
L.L.C. 336,266 3.1% 109,863 226,403 1.8% *
-------
Total 500,000
=======
</TABLE>
- -------------
* Represents less than 1% of the outstanding Common Stock, both in number and
in terms of voting power.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and
to the provisions of the Company's Charter and By-laws, as amended, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, par value $0.01 per share, of which 30,000,000 shares have
been designated as Class A Common Stock and 5,000,000 shares have been
designated as Class B Common Stock, and 1,000,000 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock"), of which up to 525,000 have
been designated as Redeemable Preferred Stock. Immediately after the
completion of the Offering, 9,872,490 shares of Class A Common Stock will be
outstanding and 2,707,919 shares of Class B Common Stock will be outstanding.
In addition, 450,000 shares of Class A Common Stock will be reserved for
issuance under the Option Plans and 2,707,919 shares of Class A Common Stock
will be reserved for issuance upon conversion of Class B Common Stock.
Currently, 163,500 shares of Redeemable Preferred Stock are outstanding.
Common Stock
Holders of the Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted upon by the stockholders. Holders of Class A Common Stock
and Class B Common Stock do not have cumulative voting rights and, therefore,
holders of shares possessing a majority of the voting power can elect all of
the directors. In such event, the holders of the remaining shares will not be
able to elect any directors.
Holders of Class A Common Stock and Class B Common Stock are entitled to
share ratably such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefor, subject to the
terms of the Redeemable Preferred Stock and of agreements governing the
Company's indebtedness. The Company does not anticipate paying cash dividends
in the foreseeable future. See "Dividend Policy". In the event of the
liquidation, dissolution or winding up of the Company, the holders of Class A
Common Stock and Class B Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference
and any accrued but unpaid dividends with respect to any then outstanding
Preferred Stock.
In the event of any merger or consolidation of the Company with or into
any other corporation pursuant to which shares of Class A Common Stock and
Class B Common Stock are converted into other securities, cash or other
property, shares of Class A Common Stock and shares of Class B Common Stock
shall be converted into the identical consideration at the same rate per
share, except that any voting securities into which Class B Common Stock
shall be converted shall have ten times the voting power of any otherwise
identical securities into which Class A Common Stock is converted, unless the
holders of a majority of the shares of each such class shall have approved
such merger or consolidation.
Shares of Class B Common Stock are convertible 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 automatically convert into shares of
Class A Common Stock upon any transfer thereof, other than a transfer by a
holder of Class B Common Stock to (i) an immediate family member of such
holder or (ii) any trust or partnership of which all of the beneficiaries or
partners, as the case may be, are such holder and/or immediate family members
of such holder, so long as the transferee authorizes Mr. Leven or Mr. Aronson
to vote such transferred shares. Holders of Class A Common Stock and Class B
Common Stock have no preemptive or redemption rights and are not subject to
further calls or assessments by the Company, except as otherwise provided in
the Amended Stock Purchase Agreements.
The Class A Common Stock has been approved for quotation and trading on
the National Market System of The Nasdaq Stock Market ("Nasdaq") upon
completion of the Offering under the symbol "USFS".
The Transfer Agent and Registrar for the Class A Common Stock is Wachovia
Bank of North Carolina, N.A.
Preferred Stock
The Board of Directors has the authority, without any vote or action by
the stockholders, to issue Preferred Stock in one or more series and to fix
the designations, preferences, rights, qualifications, limitations and
restrictions thereof, including the voting rights, dividend rights, dividend
rate, conversion rights, terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series;
51
<PAGE>
provided, however, that the Board of Directors may not create a series of
Preferred Stock with general voting rights or with the right to elect more
than 50% of the Board under any circumstances without the approval of holders
of 75% of the outstanding Class B Common Stock.
On September 29, 1995, pursuant to the "blank-check" authority vested in
the Board by the Company's Charter, the Board of Directors adopted a
resolution creating the Redeemable Preferred Stock, consisting of up to
525,000 shares (which number may be decreased, but not increased, by the
Board without a vote of the stockholders). By its terms, the Redeemable
Preferred Stock ranks prior to the Common Stock and all other classes of the
Company's capital stock with respect to dividend rights and rights upon the
liquidation, dissolution or winding up of the Company. Shares of Redeemable
Preferred Stock accrue dividends cumulatively in additional shares of
Redeemable Preferred Stock at an annual rate of 10% on the $100 liquidation
preference. The Company may redeem the Redeemable Preferred Stock in whole or
in part at its discretion at any time and must redeem any outstanding shares
of the Redeemable Preferred Stock on September 29, 2007 or within 10 business
days of a Change of Control (as defined below) of the Company, at a
redemption price per share equal to $100 plus all accrued but unpaid
dividends thereon. A Change of Control is defined generally as (i) the sale
or transfer of all or substantially all of the Company's assets to any person
that is not an affiliate of the Company, (ii) the sale or transfer (whether
by merger, consolidation or otherwise) of a majority of the Common Stock, in
the aggregate to persons who (a) were not Original Investors, (b) are not
employees of the Company or (c) are not members of the immediate family or of
a trust or partnership for the benefit of any person described in clauses (a)
or (b) above or an affiliate of any of the foregoing or (iii) the termination
of employment for any reason by the Company (including by way of resignation)
of Mr. Leven. In addition, the Company may, at any time, elect to require the
holders of shares of Redeemable Preferred Stock to exchange all or part of
their shares of Redeemable Preferred Stock for Subordinated Debentures due
September 29, 2007 in the aggregate principal amount per share equal to $100
plus all accrued but unpaid dividends thereon. Interest on the Subordinated
Debentures is payable one-half in cash and one-half through the issuance of
additional Subordinated Debentures.
Certain Effects of Authorized but Unissued Stock
Authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval, except as may
otherwise be required under Nasdaq rules. These additional shares may be
utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management, which could render more difficult or
discourage an attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger, or otherwise, and thereby protect the
continuity of the Company's management.
Registration Rights
Pursuant to the terms of the Restated Stockholders' Agreement, the Company
has granted the Original Investors piggyback and demand registration rights,
which permit such persons to cause the Company to register their shares of
Class A Common Stock (including shares of Class A Common Stock into which
shares of Class B Common Stock are convertible) under the Securities Act in
certain circumstances. The demand registration rights generally provide that,
at any time after September 29, 2000, the holders of a majority of the shares
of Class A Common Stock (including the shares of Class B Common Stock
referred to above) registrable under such Agreement have the right to cause
the Company to file one registration statement under the Securities Act
covering all or part of such shares of Class A Common Stock (including the
shares into which the shares of Class B Common Stock are convertible) and
that the Company will use its best efforts to effect such registration. With
respect to piggyback registration rights, at any time following such time
that greater than 20% of the outstanding Common Stock has been registered
under the Securities Act, the Company is required to notify the holders of
Common Stock registrable under such Agreement that the Company intends to
register some of its securities and, if requested by such holder, to include
a portion of their shares of Common Stock in such registration ("piggyback
shares"). The maximum number of shares of Class A Common Stock that may be
included in such registration is determined by multiplying all of the
piggyback shares by a fraction, the numerator of which is the number of
shares being registered by the Company and the denominator of which is the
number of shares to be outstanding after such registration (excluding the
piggyback shares). The Company generally is obligated to bear the expenses,
other than underwriting discounts, sales commissions and
52
<PAGE>
transfer taxes, if any, of the registration of such shares. Any exercise by
the holders of such registration rights may hinder efforts by the Company to
arrange future financings and may have an adverse impact on the market price
of the Class A Common Stock.
Delaware Law and Certain Charter and By-Law Provisions
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more
of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in such section) with a Delaware corporation for
three years following the date such person became an interested stockholder
unless (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares owned by
persons who are both officers and directors of the corporation, and held by
certain employee stock ownership plans) or (iii) following the transaction in
which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. Messrs. Leven and Aronson are interested
stockholders under the DGCL. However, since their acquisition of the
Company's securities was approved in advance by the Company's Board of
Directors, they would not be prohibited from engaging in a business
combination with the Company.
In addition, certain provisions of the Company's Charter and By-laws
summarized in the following paragraphs will become operative prior to or
simultaneously with the completion of the Offering and may be deemed to have
an anti-takeover effect and may delay, defer or prevent an attempt to obtain
control of the Company by means of a proxy contest, tender offer, merger or
other transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Special Meeting of Stockholders. The Charter provides that special
meetings of stockholders of the Company may be called only by the Board of
Directors, the Chairman of the Board of Directors or the Chief Executive
Officer. This provision will make it more difficult for stockholders to take
actions opposed by the Board of Directors. This provision may not be amended
or repealed without the approval of holders of at least 75% of the
outstanding voting power of the Company. This provision of the Charter may
not be amended or repealed without the approval of holders of at least 75% of
the outstanding voting power of the Company.
Stockholder Action by Written Consent. The Charter provides that no action
required or permitted to be taken at any annual or special meeting of the
stockholders of the Company may be taken without a meeting, and the power of
stockholders of the Company to consent in writing, without a meeting, to the
taking of any action is specifically denied. This provision may not be
amended or repealed without the approval of holders of at least 75% of the
outstanding voting power of the Company. This provision of the Charter may
not be amended or repealed without the approval of holders of at least 75% of
the outstanding voting power of the Company.
Prohibition on Issuance of Voting Preferred Stock. The Charter provides
that the Board of Directors cannot create a series of Preferred Stock with
general voting rights or with the right to elect more than 50% of the Board
under any circumstances without the approval of holders of 75% of the
outstanding Class B Common Stock. This provision may not be amended or
repealed without the approval of holders of at least 75% of the outstanding
voting power of the Company.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Company not less than 70 days nor more than 90 days prior to
the meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 20 days or delayed by more than 70 days from
such anniversary date, notice by the stockholder to be timely must be
received no earlier than the close of business on the ninetieth day prior to
such annual meeting and not later than the close of business on the later of
the seventieth day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of
53
<PAGE>
such meeting is first made. The By-laws also specify certain requirements for
a stockholder's notice to be in proper written form. These provisions may
preclude some stockholders from bringing matters before the stockholders at
an annual or special meeting or from making nominations for directors at an
annual or special meeting.
Termination of Employment Agreements. The By-laws provide that approval of
75% of the Board of Directors is required to terminate the employment
agreements of Messrs. Leven or Aronson.
Limitation of Liability and Indemnification Agreements
The Charter provides that to the fullest extent permitted by the DGCL, a
director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Under current Delaware law, liability of a director may not be limited (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provision of the Charter is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in
the situations described in clauses (i) through (iv) above. This provision
does not limit or eliminate the rights of the Company or any stockholder to
seek nonmonetary relief such as an injunction or rescission in the event of a
breach of a director's duty of care. In addition, the Charter provides that
the Company shall indemnify its directors, officers, employees and agents to
the extent not prohibited by Delaware law.
In addition, prior to the completion of the Offering, the Company intends
to enter into agreements (the "Indemnification Agreements") with each of the
directors of the Company pursuant to which the Company will agree to
indemnify each such director against claims, liabilities, damages, expenses,
losses, costs, penalties or amounts paid in settlement (collectively,
"Losses") incurred by such director and arising out of his capacity as a
director, executive officer, employee and/or agent of the Company to the
maximum extent permitted by applicable law. In addition, such director or
officer shall be entitled to an advance of expenses to the maximum extent
authorized or permitted by law to meet the obligations indemnified against.
The Indemnification Agreements also obligate the Company to purchase and
maintain insurance for the benefit and on behalf of its directors insuring
against all liabilities that may be incurred by such director in or arising
out of his capacity as a director, officer, employee and/or agent of the
Company.
To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company
to indemnify directors, such repeal or limitation may not be effective as to
directors who are currently parties to the Indemnification Agreements,
because their rights to full protection are contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and with executive
officers of the Company.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below, and each of the Underwriters for whom Schroder
Wertheim & Co. Incorporated and Montgomery Securities are acting as
representatives (the "Representatives"), has severally agreed to purchase
from the Company and the Selling Stockholders an aggregate of 2,325,000
shares of Class A Common Stock at the Price to Public less the underwriting
discounts and commissions set forth on the cover page of this Prospectus, in
the amounts set forth below opposite their respective names.
<TABLE>
<CAPTION>
Number of
Shares of
Underwriter Class A Common Stock
- ----------- --------------------
<S> <C>
Schroder Wertheim & Co. Incorporated
Montgomery Securities
---------
Total 2,325,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligation to
pay for and accept delivery of the shares of Class A Common Stock offered
hereby is subject to certain conditions precedent and that the Underwriters
will be obligated to purchase all such shares, excluding shares covered by
the over-allotment option, if any are purchased. The Underwriters have
informed the Company and the Selling Stockholders that no sales of Class A
Common Stock will be confirmed to discretionary accounts.
The Company and the Selling Stockholders have been advised by the
Underwriters that they propose initially to offer the Class A Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price, less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
brokers and dealers. After the Offering, the public offering price, the
concession and reallowances to dealers and other selling terms may be changed
by the Underwriters.
At the request of the Company, the Underwriters have reserved shares of
Class A Common Stock for sale, at the public offering price, to directors,
officers and employees of the Company and certain other persons. Such
directors, officers, employees and other persons will purchase, in the
aggregate, less than 10% of the Class A Common Stock offered in the Offering.
The number of shares available for sale to the general public will be reduced
to the extent such persons purchase such 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.
The Company and the Selling Stockholders have granted to the Underwriters
an option exercisable for 30 days after the date of this Prospectus to
purchase up to an aggregate of 348,750 additional shares of Class A Common
Stock to cover overallotments, if any, at the same price per share to be paid
by the Underwriters for the other shares of Class A Common Stock offered
hereby. If the Underwriters purchase any such additional shares pursuant to
the overallotment option, each Underwriter will be committed, subject to
certain conditions, to purchase a number of the additional shares of Class A
Common Stock proportionate to such Underwriter's initial commitment.
The Company, its directors and executive officers, and certain other
stockholders have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus, not to issue, sell, offer to sell, grant
any options for the sale of, or otherwise dispose of any shares of Class A
Common Stock or Class B Common Stock or any rights to purchase shares of the
same (other than stock issued or options granted pursuant to the Company's
stock incentive plans), without the prior written consent of the
Representatives. See "Shares Eligible for Future Sale."
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with the sale of the Class A Common Stock, including liabilities arising
under the Securities Act, and to contribute to payments that the Underwriters
may be required to make with respect thereto.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation among the Company, the Selling Stockholders
55
<PAGE>
and the Representatives. Among other factors considered in determining the
Price to Public will be prevailing market and economic conditions, projected
revenues and earnings of the Company, the state of the Company's business
operations, an assessment of the Company's management, and consideration of
the above factors in relation to market valuation of companies in related
businesses and other factors deemed relevant. There can be no assurance,
however, that the prices at which the Class A Common Stock will sell in the
public market after the Offering will not be lower than the Price to Public.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 9,872,490 shares of Class A Common Stock
will be outstanding and 2,707,919 shares of Class B Common Stock will be
outstanding. Of these shares, the 2,325,000 shares of Class A Common Stock
sold in the Offering will be freely tradeable by persons other than
"affiliates" of the Company, without restriction under the Securities Act.
Further, 8,047,490 shares of Class A Common Stock and all 2,706,557 shares of
Class B Common Stock will be "restricted" securities within the meaning of
Rule 144 and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
the exemptions contained in Rule 144. However, approximately 9,425,000 shares
of Class A Common Stock (including 2,707,919 shares of Class A Common Stock
into which the Class B Common Stock is convertible) will be eligible for sale
under Rule 144 beginning on September 29, 1997 (subject to certain volume and
other restrictions prescribed by Rule 144). As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an "affiliate" as that term is
defined below, who has paid for shares is entitled, beginning two years from
the later of the date of acquisition of the shares from the Company or from
an affiliate of the Company, to sell within any three- month period up to
that number of shares that does not exceed the greater of 1% of the then
outstanding shares or the average weekly trading volume of the then
outstanding shares during the four calendar weeks preceding each such sale. A
person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company and who has paid for his shares is entitled,
beginning three years from the later of the date of the acquisition from the
Company or from an affiliate of the Company, to sell such shares under Rule
144(k) without regard to the volume limitations described above. Affiliates
continue to be subject to such volume limitations after the three-year
holding period.
The Company, its officers and directors and certain of its other current
stockholders, who collectively hold 2,818,725 shares of Class A Common Stock
and 2,707,919 shares of Class B Common Stock, have agreed that they will not
dispose of any shares of Class A Common Stock or Class B Common Stock, or any
securities convertible or exchangeable for shares of Class A Common Stock,
for a period of 180 days after the date of this Prospectus without the
written consent of the Representatives of the Underwriters. After the
Offering, certain holders of shares of Common Stock will be entitled to have
shares included in certain registration statements filed by the Company. See
"Description of Common Stock--Registration Rights".
Following the Offering, the Company intends to file a registration
statement on Form S-8 under the Securities Act to register 450,000 shares of
Class A Common Stock issuable upon the exercise of stock options granted
under the Option Plans. Shares of Class A Common Stock issued upon the
exercise of stock options after the effective date of such registration
statement generally will be available for sale in the open market.
Immediately following the Offering, however, no options to purchase Class A
Common Stock will be exercisable under the Option Plans.
VALIDITY OF THE CLASS A COMMON STOCK
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New
York, New York, and for the Underwriters by Sullivan & Cromwell, New York,
New York.
EXPERTS
The Consolidated Financial Statements included in this Prospectus and the
Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
56
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under
the Securities Act. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted
in accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each such instance
reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. As a result of the Offering, the Company will
become subject to the informational requirements of the Exchange Act, and in
accordance therewith will file reports, proxy statements and other
information with the Commission. The Registration Statement, as well as all
periodic reports and other information filed by the Company pursuant to the
Exchange Act, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, 7th Floor, New York, New York 10048 and Citicorp Center, 500 Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from the World Wide Web site that the Commission maintains at
http://www.sec.gov. and from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
57
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND
JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996:
Consolidated Statements of Financial Position F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Deficit F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
and Stockholders of U.S. Franchise Systems, Inc.:
We have audited the accompanying consolidated statements of financial
position of U.S. Franchise Systems, Inc. and subsidiaries (the "Company") as
of December 31, 1995 and June 30, 1996 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the
periods from August 28, 1995 (inception) to December 31, 1995 and the six
months ended June 30, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and June 30, 1996 and the results of its operations and its cash flows
for the periods from August 28, 1995 (inception) to December 31, 1995 and the
six months ended June 30, 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
August 9, 1996
(October 23, 1996 as to Note 11)
F-2
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ------------
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and temporary cash investments $13,893,000 $12,732,000
Accounts receivable 122,000
Deposits 87,000 87,000
Prepaid expenses 399,000 349,000
------------ -----------
Total current assets 14,379,000 13,290,000
PROMISSORY NOTES RECEIVABLE 416,000
EQUIPMENT--Net 134,000 389,000
FRANCHISE RIGHTS 3,371,000 3,369,000
DEFERRED COMMISSIONS 41,000 1,282,000
OTHER ASSETS 147,000 281,000
------------ -----------
$18,072,000 $19,027,000
============ ===========
Liabilities and Stockholders' Deficit
CURRENT LIABILITIES:
Accounts payable $ 201,000 $ 375,000
Commissions payable 22,000 572,000
Deferred application fees 120,000 2,842,000
Accrued expenses 65,000 376,000
Royalties due to HSA Properties 390,000
Due to Hudson Hotels Corporation 706,000 706,000
------------ -----------
Total current liabilities 1,114,000 5,261,000
DUE TO HUDSON HOTELS CORPORATION 731,000 731,000
------------ -----------
Total liabilities 1,845,000 5,992,000
------------ -----------
REDEEMABLE STOCK:
Preferred shares, par value $0.01 per share; authorized 525,000
shares; issued and outstanding 163,500 shares; cumulative,
exchangeable (entitled in redemption to $16,759,000 and $17,597,000
at December 31, 1995 and June 30, 1996, respectively) 16,759,000 17,597,000
------------ -----------
Common shares, par value $0.01 per share; issued and outstanding
3,186,294 Class A shares (see Note 11) entitled in redemption
(under certain conditions) to $330,000 at December 31, 1995 and
June 30, 1996 330,000 330,000
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common shares, par value $0.01 per share; authorized 30,000,000
shares of Class A Common Stock and 5,000,000 shares of Class B
Common Stock; issued and outstanding 4,861,196 Class A shares and
2,707,919 Class B shares (see Note 11) 78,000 78,000
Capital in excess of par 228,000
Accumulated deficit (1,168,000) (4,970,000)
------------ -----------
Total stockholders' deficit (862,000) (4,892,000)
------------ -----------
$18,072,000 $19,027,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
August 28, 1995 Six Months
(Inception) to Ended
December 31, June 30,
1995 1996
--------------- ------------
<S> <C> <C>
REVENUES $ -- $ 395,000
-------------- ----------
EXPENSES:
Marketing and reservations 13,000 490,000
Other franchise sales and advertising 550,000 1,263,000
Corporate salaries, wages, and benefits 423,000 993,000
Other general and administrative 215,000 835,000
Depreciation and amortization 126,000 268,000
-------------- ----------
1,327,000 3,849,000
-------------- ----------
LOSS FROM OPERATIONS 1,327,000 3,454,000
OTHER INCOME (EXPENSE):
Interest income 195,000 331,000
Interest expense (36,000) (72,000)
-------------- ----------
NET LOSS $ 1,168,000 $ 3,195,000
============== ==========
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 1,645,000 $ 4,033,000
============== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,755,409 10,755,409
============== ==========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE $ 0.15 $ 0.38
============== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Common Stock Capital in Total
---------------------- Excess of Accumulated Stockholders'
Shares Amount Par Deficit Deficit
----------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE--August 28, 1995 -- $ -- $ -- $ -- $ --
Issuance of capital stock 7,569,115 78,000 705,000 783,000
Undeclared dividends on
redeemable preferred stock (477,000) (477,000)
Net loss (1,168,000) (1,168,000)
---------- -------- -------- ----------- ----------
BALANCE--December 31, 1995 7,569,115 78,000 228,000 (1,168,000) (862,000)
Redemption of capital stock (1,149,502) (11,000) (108,000) (119,000)
Issuance of capital stock 1,149,502 11,000 111,000 122,000
Undeclared dividends on
redeemable preferred stock (231,000) (607,000) (838,000)
Net loss (3,195,000) (3,195,000)
---------- -------- -------- ----------- -----------
BALANCE--June 30, 1996 7,569,115 $ 78,000 $ -- $(4,970,000) $(4,892,000)
========== ======== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Six Months
August 28, 1995 Ended
(Inception) to June 30,
December 31,
1995 1996
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,168,000) $(3,195,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 126,000 268,000
Increase in accounts receivable, prepaid expenses and deposits (699,000) (189,000)
Increase in promissory notes receivable (416,000)
Increase in deferred commissions (41,000) (1,241,000)
Increase in other assets (150,000)
Increase in accounts payable and accrued expenses 266,000 485,000
Increase in commissions payable 22,000 550,000
Increase in deferred application fees 120,000 2,722,000
Increase in royalties due to HSA Properties 390,000
------------ -----------
Net cash used in operating activities (1,374,000) (776,000)
------------ -----------
INVESTING ACTIVITIES:
Acquisition of equipment (137,000) (271,000)
Acquisition of franchise rights (1,991,000) (117,000)
------------ -----------
Net cash used in investing activities (2,128,000) (388,000)
------------ -----------
FINANCING ACTIVITIES:
Issuance of redeemable preferred stock (net of $67,000 issuance cost) 16,283,000
Issuance of capital stock 1,112,000 122,000
Redemption of capital stock (119,000)
------------ -----------
Net cash provided by financing activities 17,395,000 3,000
------------ -----------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS 13,893,000 (1,161,000)
CASH AND TEMPORARY CASH INVESTMENTS--Beginning of period -- 13,893,000
------------ -----------
CASH AND TEMPORARY CASH INVESTMENTS--End of period $13,893,000 $12,732,000
============ ===========
NONCASH ACTIVITIES:
Undeclared dividends accrued on redeemable preferred stock $ 477,000 $ 838,000
============ ===========
Portion of purchase price due to Hudson Hotels Corporation
in future years, discounted at 10% $ 1,437,000 $ --
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
1. BASIS OF PRESENTATION AND ORGANIZATION
U.S. Franchise Systems, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on August 28, 1995 to acquire, market, and
license distinct franchise brands principally within the United States. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries: Microtel Inns and Suites Franchising, Inc. (and
its wholly owned subsidiary Microtel International, Inc.); Hawthorn Suites
Franchising, Inc. ("HSF"); and US Funding Corp. ("US Funding"). The
consolidated financial statements also include the accounts of the marketing
and reservation funds of the Microtel and Hawthorn hotel systems. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Microtel Inns and Suites Franchising, Inc.
On October 5, 1995, the Company entered into an agreement (the "Microtel
Agreement") with Hudson Hotels Corporation ("Hudson") to acquire the
exclusive worldwide franchising rights and operating assets of the Microtel
hotel system (the "Microtel Acquisition") for $3,037,000. The Company paid
$1,600,000 at closing and agreed to pay $1,437,000 (see Note 6) over the next
three years with interest at 10%. The Company also agreed to pay $700,000 for
consulting services, $400,000 of which was paid at closing, with the
remainder payable over two years. As part of the Microtel Agreement, the
Company received warrants to purchase 100,000 common shares of Hudson through
September 1, 2000 at an exercise price of $8.375 per share. The Microtel
Agreement requires the Company to pay a royalty for the right to use, and
license others to use, certain trademarks, service marks, and trade names
(the "Microtel Proprietary Marks") associated with the Microtel hotel system
(see Note 10). This acquisition was accounted for as a purchase of franchise
rights.
The Company did not acquire physical facilities, employee base, sales
force, production techniques or an existing customer base in conjunction with
the acquisition of the worldwide franchising rights.
Pursuant to a Trademark, Service Mark, and System License Agreement (the
"Microtel License Agreement"), the Company granted to Microtel Inns and
Suites Franchising, Inc. the exclusive right to use, and to license others to
use, the Microtel Proprietary Marks and Microtel hotel system in connection
with the operation of hotels under the Microtel hotel system.
Hawthorn Suites Franchising, Inc.
On March 27, 1996, the Company entered into an agreement with HSA
Properties, L.L.C. ("HSA") to acquire the exclusive worldwide franchising
rights with respect to the Hawthorn hotel system (the "Hawthorn Agreement").
The Company made no payment to HSA at closing but agreed to remit to HSA a
portion of the royalties the Company actually receives from future Hawthorn
franchisees.
The Company did not acquire physical facilities, employee base, sales
force, production techniques or an existing customer base in conjunction with
the acquisition of the worldwide franchising rights.
Pursuant to a Trademark, Service Mark, and System License Agreement which
expires in April 1998 (the "Hawthorn License Agreement"), the Company granted
to HSF, its wholly owned subsidiary, the exclusive right to use, and to
license others to use, the Hawthorn proprietary marks in connection with the
Hawthorn hotel system (see Note 10).
Marketing and Reservation Funds
The Company collects reservation and marketing fees from its franchisees
and uses such funds at its discretion to develop, support and enhance the
reservation systems and marketing programs of the Microtel and Hawthorn hotel
systems. The related revenues and expenses are reported gross in the
accompanying financial statements.
F-7
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Application Fee Revenue and Related Costs--Initial franchise fee revenue
consists of application fees received by the Company's subsidiaries from
prospective franchisees. Such fees are recognized in income when the
underlying hotels open for business. Related franchise sales commissions are
also deferred until the underlying hotels open for business, at which time
such costs are charged to expense.
Cash and Temporary Cash Investments--The Company considers its investments
with an original maturity of three months or less to be cash equivalents.
Included in "cash and temporary cash investments" are the following:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Cash in bank deposit accounts $ 518,000 $ 1,792,000
Money market funds 13,375,000 10,940,000
----------- -----------
$13,893,000 $12,732,000
=========== ===========
</TABLE>
Franchise Rights--Franchise rights represent the cost of acquiring such
rights and are amortized on a straight-line basis over 15 years. Accumulated
amortization was $57,000 at December 31, 1995 and $176,000 at June 30, 1996.
Impairment of Long-Lived Assets--The Company has adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of" ("SFAS 121"), as
of January 1, 1996. The adoption of SFAS 121 in 1996 did not have a material
effect on the financial condition or operations of the Company. Long-lived
assets, principally intangibles, are evaluated annually and written down to
fair value when management believes that the unamortized balance cannot be
recovered through future undiscounted cash flows.
Income Taxes--The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the asset and liability approach in accounting for income
taxes.
Stock Plans--The Company has elected to account for stock plans in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, compensation expense will likely result from the award of stock
options, restricted stock and similar awards to employees.
Per Share Amounts--Per share amounts are determined by dividing loss
applicable to common stockholders by weighted average shares outstanding.
Weighted average shares include redeemable common shares outstanding. Loss
applicable to common stockholders represents net loss adjusted for accrued
dividends on the redeemable preferred stock.
All references in the financial statements to the number of shares and per
share amounts of the Company's common stock have been retroactively restated
to reflect the increased number of common shares outstanding resulting from a
stock split (See Note 11).
Management 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.
F-8
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
3. REDEEMABLE PREFERRED STOCK
The cumulative redeemable exchangeable preferred stock (the "redeemable
preferred stock") earns cumulative dividends at an annual dividend rate of
10%, payable in additional shares of redeemable preferred stock when
declared. The redeemable preferred stock is, at the Company's option,
redeemable or exchangeable into 10% subordinated debentures due September 29,
2007 at $100 per share plus accrued and unpaid dividends (the "Liquidation
Value") at any time before September 29, 2007. If issued, 50% of the interest
due on the debentures may be paid partially in kind by the issuance of
additional debentures at the option of the Company, with the balance of
interest payable in cash. On September 29, 2007, the redeemable preferred
stock is required to be redeemed at the Liquidation Value.
4. EQUIPMENT
Equipment is recorded at historical cost and consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Furniture and fixtures $ 25,000 $ 56,000
Computer equipment and software 16,000 69,000
Office equipment 21,000 32,000
Architectural plans and renderings 75,000 251,000
-------- --------
137,000 408,000
Accumulated depreciation (3,000) (19,000)
-------- --------
$134,000 $389,000
======== ========
</TABLE>
Architectural plans and renderings are depreciated on a straight-line
basis over a period of 15 years. Computer software is depreciated on a
straight-line basis over a period of 3 years. Computer equipment is
depreciated using the 200% declining-balance method over a period of 5 years.
The remaining fixed assets are depreciated using the 200% declining-balance
method over a period of 7 years.
5. LEASES
The Company leases certain equipment and office space used in its
operations. Rental expense under operating leases was $41,000 for the period
from August 28, 1995 to December 31, 1995 and $111,000 for the six months
ended June 30, 1996. The future minimum rental commitments under
noncancelable operating leases at June 30, 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $131,000
1997 259,000
1998 203,000
1999 207,000
2000 146,000
--------
Total minimum payments $946,000
========
</TABLE>
F-9
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
6. DUE TO HUDSON HOTELS CORPORATION
The Company is required to pay Hudson $1,437,000 ($1,700,000 discounted at
a rate of 10%), which represents the balance due for the assets of the
Microtel hotel system (see Note 1), payable on October 5, annually, as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 706,000
1997 277,000
1998 454,000
----------
1,437,000
Less current portion (706,000)
----------
$ 731,000
==========
</TABLE>
7. PREPAID EXPENSES
Pursuant to the Microtel Agreement, Hudson is required, for a period of
three years, to consult with and assist in establishing the Company as an
operating entity in the business of selling and administering franchises
utilizing the Microtel hotel system. An initial payment in the amount of
$400,000 was made to Hudson in October 1995 and recorded as a prepaid
expense. The Company is obligated to pay an additional $150,000 in each of
1996 and 1997 in connection with such consulting arrangements. Such amounts
are being amortized over the term of the Microtel Agreement. Amortization
expense of $58,000 and $117,000 was charged to expense for the period ended
December 31, 1995 and for the six months ended June 30, 1996, respectively.
8. STOCK PURCHASED BY EMPLOYEES
On October 5, 1995, as part of the initial capitalization of the Company,
two of its officers (the "Original Management Investors") purchased 5,485,259
shares of common stock (51% of the total issued) pursuant to "Stock Purchase
Agreements" for an aggregate purchase price of $567,245 or $.1034 per share.
Of such shares, 2,688,850 were unrestricted (the "Unrestricted Shares") and
the remaining shares were restricted (the "Restricted Shares") as to voting
rights and the ability to receive dividends as well as being subject to a
ten-year vesting and an earnings test. Included in the shares issued pursuant
to the Stock Purchase Agreements were Unrestricted Shares representing 5% of
the then outstanding common stock and Restricted Shares representing 6% of
the then outstanding common stock (the "Transferable Shares"), which could be
redeemed from the Original Management Investors by the Company at $.1034 per
share and reissued to other members of the Company's management at the
discretion of the Stock Reallocation Committee of the Board of Directors.
In February 1996, the Company redeemed 826,833 of the Transferable Shares
from the Original Management Investors at $.1034 per share and resold such
shares to other members of management at the estimated fair value at that
time of $.1034 per share. In April 1996, the Company redeemed 322,669
Transferable Shares from other management at $.1034 per share and
subsequently resold such shares to other management at the estimated fair
value at that time of $.1137 per share.
All Transferable Shares are subject to a vesting schedule, so that
unrestricted Transferable Shares vest over a five-year period and restricted
Transferable Shares vest over a ten-year period, in each case provided that
the management employee who purchased the shares remains employed by the
Company. Any Transferable Shares which are forfeited will be repurchased by
the Company and will be reoffered to the Original Management Investors at
$.1034 per share. Compensation expense will be recorded to the extent the
fair value of the reoffered shares exceeds $.1034.
Restricted Shares are earned using a formula based upon increases in the
Company's earnings before interest, taxes, and depreciation. Earned shares
would generally be forfeited if the holder's employment ceases before
September 29, 2005. Any Restricted Shares that have not been earned by
September 29, 2005 will be redeemed
F-10
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
8. STOCK PURCHASED BY EMPLOYEES (Continued) (Continued)
by the Company and reissued to the original stockholders of the Company
(other than the Original Management Investors) pro rata based on their
original holdings of common stock. Restricted Shares held by the Original
Management Investors and all Transferable Shares held by other members of
management have been classified as redeemable common stock in the balance
sheet because they are redeemable by the Company in certain circumstances for
reasons not under the Company's control.
In the event that substantially all of the Company's stock or assets are
transferred or sold, or upon a business combination, earned shares
automatically become unrestricted. In addition, any remaining Restricted
Shares at the time of a merger or sale of the Company become unrestricted to
the extent that the then value of the Company results in an internal rate of
return to the original stockholders of the Company of 40% compounded
annually.
The Company accounts for stock plans under the provisions of FASB
Statement 123, "Accounting for Stock--Based Compensation." As the fair value
of the stock purchased by officers and other employees described above
approximated the purchase price, no compensation has been recorded. The Stock
Purchase Agreements were amended in 1996 (see Note 11).
9. INCOME TAXES
Deferred income taxes in the accompanying consolidated statement of
financial position includes the following amounts of deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Deferred tax liability $ (487,000)
Deferred tax asset 441,000 2,125,000
Valuation allowance (441,000) (1,638,000)
-------- ----------
Net deferred income taxes $ -- $ --
======== ==========
</TABLE>
The deferred tax liability results primarily from the deferral of
franchise sales commissions for financial reporting purposes. The deferred
tax asset results from tax net operating loss carryforwards and the deferral
of initial franchise fees for financial reporting purposes.
For income tax purposes, as of June 30, 1996, the Company had accumulated
net operating loss carryforwards of $2,792,000 which expire through the year
2011.
The following is a reconciliation of the statutory rate to the effective
rate of the Company:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Statutory federal rate 34.0% 34.0%
Statutory state rate less federal effect 4.0 4.0
Other -- (1.0)
Change in valuation allowance (38.0) (37.0)
----- -----
Effective tax rate --% --%
----- -----
</TABLE>
F-11
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
10. COMMITMENTS
The Company, as part of the Microtel Agreement, is required to fulfill
certain obligations under such Agreement. These include the following:
To execute franchise agreements and to have open or under development the
following number of Microtel hotels each December annually:
<TABLE>
<CAPTION>
Number
Year of Hotels
- ---- ---------
<S> <C>
1997 50
1998 100
1999 175
2000 250
</TABLE>
The above development schedule is considered to have been complied with
unless such schedule is not met for two consecutive years. If 75% of the
development level has been met, a fee of $1,000,000 may be paid and upon such
payment, the Company will be deemed to be in compliance with such schedule.
Hudson will retain the right to receive franchise application fees and all
franchise royalty payments under existing agreements at October 5, 1995 or
under agreements for which franchise applications had been received as of
October 5, 1995, except for the reservation and marketing fees, which are
retained by the Company.
As part of the Microtel Acquisition, Hudson retained the right to
franchise and to receive royalties on 60 franchises either issued or which
may be issued in the future to Hudson, its affiliates and certain other
persons. For each new franchise other than the 60 issued or which may be
issued to Hudson, its affiliates and such other persons, the Company is
required to remit to Hudson a continuing monthly royalty equal to 1.0% of the
revenues subject to royalties on the first 100 properties opened by the
Company, 0.75% for the next 150 properties, and 0.5% for each new property
after the first 250 properties.
If any of the above obligations are not met, including the payment of
amounts due to Hudson (see Note 6), all of the rights to the Microtel system
may, at Hudson's discretion, revert back to Hudson. In the event Hudson
exercises its right to the Microtel system, the Company, through Microtel
Inns and Suites Franchising, Inc., will retain the rights to any franchise
royalty payments due under franchises granted by the Company and its
subsidiary, less certain processing fees due to Hudson.
The Company, as part of the Hawthorn Agreement, is required to fulfill
certain obligations under such agreement. These include the following:
To execute qualified franchise agreements, as defined in the Hawthorn
Agreement, for the operation of the following number of Hawthorn hotels (the
"Termination Standard") on June 27, annually:
<TABLE>
<CAPTION>
Number of
Year Hotels
- ---- ---------
<S> <C>
1997 10
1998 20
1999 40
2000 60
2001 80
2002 100
</TABLE>
F-12
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
10. COMMITMENTS (Continued)
If the above franchising schedule is not met, HSA has the right to
terminate the Hawthorn Agreement, at which time the Company would lose its
right to franchise the Hawthorn brand. The Company will retain the rights to
a percentage of the franchise royalty payments received from new franchises
in existence as of the effective date of the termination based on the level
of achievement of the Termination Standard.
For franchises open or under construction or with respect to which
franchise agreements had been executed as of March 27, 1996, the date on
which the Company acquired the rights to franchise the Hawthorn brand (the
"Existing Hawthorn Hotels"), the Company is required to remit to HSA a
continuing royalty of 100% of franchise royalty and termination fees
received.
For each new franchise (i.e., other than Existing Hawthorn Hotels) the
Company is required to remit to HSA a continuing royalty ranging from 25.3%
to 67.3% (based on the number of hotel rooms) of franchise royalty fees
collected. The Company owns a 1% interest in HSA which entitles the Company
to receive 1% of the gross revenues received by HSA from the Company with
respect to all new franchises. Royalties due to HSA on new Hawthorn hotels
are subject to increase if the royalties required to be paid under franchise
agreements are less than 4% of gross room revenues or if the number of
qualified franchise agreements for new Hawthorn hotels on new franchises is
less than the following:
<TABLE>
<CAPTION>
Number of
Date Hotels
---- ------
<S> <C>
June 27, 1997 20
December 27, 1997 30
June 27, 1998 40
June 27, 1999 65
June 27, 2000 90
June 27, 2001 115
June 27, 2002 140
</TABLE>
The Company is required to employ at least 15 persons devoted to the sales
and promotion of the Hawthorn and Microtel brands and is required to spend
not less than $100,000 on marketing during 1996 and 1997 promoting the
Hawthorn brand.
The Company is required to reimburse HSA for amounts previously advanced
by HSA to a reservation and advertising fund in connection with the Existing
Hawthorn Hotels in an amount not to exceed $179,000.
Under the Hawthorn Acquisition Agreement, the Company and its affiliates
are generally restricted until June 27, 1998 from franchising any lodging
brands other than (i) Hawthorn brand hotels, (ii) Microtel brand hotels, and
(iii) other limited-service non-suite hotels with an average daily rate of
$49 and under. Until June 27, 1997, the Company generally must also refrain
from franchising any brands outside of the lodging industry.
11. SUBSEQUENT EVENTS
On October 11, 1996, the stockholders approved the creation of two classes
of common stock: Class A Common Stock, par value $.01 per share and Class B
Common Stock, par value $.01 per share, and to split and reclassify each
share of its existing common stock, par value $.10 per share, into 9.67
shares of Class A Common Stock. In connection with the reclassification,
certain members of management and related stockholders holding 2,707,919
shares of Class A Common Stock will exchange such shares for the same number
of shares of Class B Common Stock. Shares of Class A Common Stock and Class B
Common Stock will be identical in all respects except that (i) holders of
Class B Common Stock shall be entitled to ten votes per share and holders of
Class A Common Stock will be entitled to one vote per share and (ii) the
Class B Common Stock will be convertible into Class A Common
F-13
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
11. SUBSEQUENT EVENTS (Continued)
Stock at the option of the holder and, with limited exceptions, upon the
transfer thereof. Following the reclassification, there will be 30 million
shares of Class A Common Stock and 5 million shares of Class B Common Stock
authorized for issuance. All references in the financial statements to the
number of shares and per share amounts of the Company's common stock have
been retroactively restated to reflect the increased number of common shares
outstanding.
In addition, prior to and contingent upon the completion of the proposed
public offering, the Stock Purchase Agreements described in Note 8 were
amended to revise the vesting requirements with respect to 50% of the
Restricted Shares (approximately 13% of the Common Stock outstanding before
the offering). Such shares will be deemed to be earned and vested shares
notwithstanding the fact that performance criteria have not been met by the
Company. Remaining Restricted Shares will be Class A Common Stock when earned
under the Agreements. No effect has been given in the historical financial
statements for the change in vesting requirements.
On October 11, 1996, the Company's stockholders approved two stock option
plans, one for officers, employees, consultants and advisors of the Company
(the "Employee Plan") and one for its non-employee directors (the "Directors
Plan" and together with the Employee Plan, the "Option Plans"). The Employee
Plan authorizes the grant of awards to eligible participants of a maximum of
325,000 shares of the Company's Class A Common Stock, subject to terms,
including exercise price and timing of exercise, which are determinable by
the Board of Directors. The Directors Plan provides for the issuance of 2,000
shares of Class A Common Stock each year to each non-employee director.
Options vest and become exercisable under the Directors Plan one year from
the date of grant. Immediately prior to the proposed public offering, the
Board of Directors intends to award options to purchase a total of 10,000
shares of Class A Common Stock to its five non-employee directors and to
award to eligible participants under the Employee Plan options to purchase
168,100 shares of Class A Common Stock at the public offering price. The
options issued under the Employee Plan will vest over a four year period and
will expire 10 years from the date of grant. Compensation expense will be
recorded in accordance with FASB Statement 123, "Accounting for Stock Based
Compensation" for the fair value of the options awarded under the Option
Plans.
F-14
<PAGE>
================================================================================
No dealer, salesman or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
in connection with the Offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Class
A Common Stock in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has not been any change in the facts set forth in
this Prospectus or affairs of the Company since the date hereof.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 3
Risk Factors 9
Use of Proceeds 15
Dividend Policy 15
Capitalization 16
Dilution 17
Selected Financial Data 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Business 22
Management 36
Certain Relationships and Related Transactions 42
Principal Stockholders 44
Selling Stockholders 50
Description of Capital Stock 51
Underwriting 55
Shares Eligible for Future Sale 56
Validity of Class A Common Stock 56
Experts 56
Available Information 57
Index to Consolidated Financial Statements F-1
</TABLE>
-------------
Until , 1996 (25 days after the commencement of the
Offering), all dealers effecting transactions in the Class A Common Stock,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
- ---=============================================================================
2,325,000 Shares
[US FRANCHISE LOGO]
U.S. Franchise
Systems, Inc.
Class A Common Stock
($0.01 par value)
Schroder Wertheim & Co.
Montgomery Securities
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution
of the securities registered hereby. All the amounts shown are estimates,
except for the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market listing fee. All of the following
fees and expenses will be paid by the Company.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $ 12,377.66
NASD filing fee 4,243.25
Nasdaq National Market listing fee 43,280.00
Printing and engraving expenses 110,000.00
Legal fees and expenses 400,000.00
Accounting fees and expenses 300,000.00
Blue Sky fees and expenses (including counsel fees and expenses) 20,000.00
Transfer Agent and Registrar fees and expenses 4,000.00
Miscellaneous 50,000.00
-----------
Total $943,900.91
===========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which such action
or suit was brought shall determine that despite the adjudication of
liability, such person is fairly and reasonably entitled to be indemnified
for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue, or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of
any other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under such Section 145.
Section 102(b)(7) of the General Corporation Law provides that a
corporation in its original certificate of incorporation or an amendment
thereto validly approved by stockholders may eliminate or limit personal
liability of
II-1
<PAGE>
members of its board of directors or governing body for breach of a
director's fiduciary duty. However, no such provision may eliminate or limit
the liability of a director for breaching his duty of loyalty, failing to act
in good faith, engaging in intentional misconduct or knowingly violating a
law, paying a dividend or approving a stock repurchase which was illegal, or
obtaining an improper personal benefit. A provision of this type has no
effect on the availability of equitable remedies, such as injunction or
rescission, for breach of fiduciary duty. The Company's Charter contains such
a provision.
The Company's Charter further provides that the Company shall indemnify
its officers and directors and, to the extent authorized by the Board of
Directors, employees and agents of the Company, to the fullest extent
permitted by and in the manner permissible under the laws of the State of
Delaware.
In addition, prior to the completion of the Offering, the Company intends
to enter into agreements (the "Indemnification Agreements") with each of the
directors of the Company pursuant to which the Company will agree to
indemnify each director against claims, liabilities, damages, expenses,
losses, costs, penalties or amounts paid in settlement (collectively,
"Losses") incurred by such director and arising out of his capacity as a
director, officer, employee and/or agent of the Company to the maximum extent
permitted by applicable law. In addition, each director shall be entitled to
an advance of expenses to the maximum extent authorized or permitted by law
to meet the obligations indemnified against. The Indemnification Agreements
also obligate the Company to purchase and maintain insurance for the benefit
and on behalf of each of its directors insuring such director in or arising
out of his capacity as a director, officer, employee and/or agent of the
Company.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Company has issued the following
securities, none of which have been registered under the Securities Act.
On September 29, 1995, as part of the initial capitalization of the
Company, the Company issued a total of 1,112,245 shares of Old Common Stock
to the Original Investors, for an aggregate purchase price of $1,112,245 or
$1.00 per share. The offer and sale of such securities was made pursuant to
the exemption provided by Section 4(2) of the Securities Act.
On September 29, 1995, simultaneously with the issuances of Old Common
Stock described above, the Company also issued a total of 163,500 shares of
Redeemable Preferred Stock to the Original Investors, for an aggregate
consideration of $16,350,000 or $100 per share. The offer and sale of such
securities was made pursuant to the exemption provided by Section 4(2) of the
Securities Act.
In addition, since September 29, 1995 the Company has from time to time
issued shares of Old Common Stock to members of management. Specifically, on
February 7, 1996 (the "February Transaction"), Messrs. Leven and Aronson sold
a total of 85,505 shares of Old Common Stock to the Company for $85,505 or
$1.00 per share. The Company in turn immediately reissued these 85,505 shares
to other members of the Company's management at the same price of $1.00 per
share. In April 1996 (the "April Transaction"), the Company redeemed 33,368
shares of Old Common Stock from certain management holders at $1.00 per
share. The Company subsequently reissued these 33,368 shares to members of
the Company's management at a price of $1.10 per share. The April Transaction
occurred at $1.10 per share instead of $1.00 per share due to the increase in
the value of the Company from February 7, 1996 resulting from the beginning
of the Company's franchise sales activities and the execution of the Hawthorn
Acquisition Agreement. See "Principal Stockholders--Management's Shares of
Common Stock".
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
- ------- -----------------------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of U.S. Franchise Systems, Inc.
3.2** Amended and Restated Bylaws of U.S. Franchise Systems, Inc.
II-2
<PAGE>
4.1** Specimen Common Stock Certificate of U.S. Franchise Systems, Inc.
5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1** Form of License Agreement for Microtels.
10.2** Form of License Agreement for Hawthorn Suites hotels.
10.3** Joint Venture Agreement between Microtel Franchise and Development Corporation and U.S. Franchise Systems, Inc.,
dated as of September 7, 1995. The Registrant agrees to furnish a copy of any omitted schedule supplementally
to the Commission upon request.
10.4** Master Franchise Agreement between HSA Properties, L.L.C. and U.S. Franchise Systems, Inc., dated as of March
27, 1996. The Registrant agrees to furnish a copy of any omitted schedule supplementally to the Commission upon
request.
10.5** Amended and Restated Stockholders' Agreement, dated as of September 29, 1995, as amended on October 11, 1996,
among the Company and the Original Investors.
10.6 Amended and Restated Employee Stock Purchase Agreement between U.S. Franchise Systems, Inc. and Michael A. Leven,
entered into as of September 29, 1995, as amended effective simultaneously with the closing of the Offering.
10.7 Amended and Restated Employee Stock Purchase Agreement between U.S. Franchise Systems, Inc. and Neal K. Aronson,
entered into as of September 29, 1995, as amended effective simultaneously with the closing of the Offering.
10.8** Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of October 1,
1995.
10.9** Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of October 1,
1995.
10.10 Voting Agreement between Michael A. Leven and Andrea Leven, to be entered into simultaneously with the closing
of the Offering.
10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to be entered into simultaneously with the closing
of the Offering.
10.12** Office Lease Agreement between Hallwood Real Estate Investors Fund XV and U.S. Franchise Systems, Inc., dated
September 25, 1995.
10.13** First Amendment to Office Lease between Hallwood 95, L.P. and U.S. Franchise Systems, Inc., dated May 20, 1996.
10.14 U.S. Franchise Systems, Inc. 1996 Stock Option Plan.
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors.
10.16** Term Sheet, dated May 14, 1996, between the Company and NACC regarding the Franchisee Financing Facility.
21.1** List of Subsidiaries of U.S. Franchise Systems, Inc.
23.1 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3** Consent of Dean S. Adler.
23.4** Consent of Jeffrey A. Sonnenfeld.
24.1** Power of Attorney from officers and directors (contained on signature page).
27.1** Financial Data Schedule.
</TABLE>
- -------------
** Previously Filed.
(b) Financial Statement Schedules. none required.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, 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 Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification for 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
II-3
<PAGE>
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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 agreements certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on October 21, 1996.
By: /s/ Michael A. Leven
-----------------------------------
Michael A. Leven
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons on
October 21, 1996 in the capacities indicated.
<TABLE>
<CAPTION>
Signatures Title or Capacities
- ---------------------------- --------------------------------
<S> <C>
* Chairman, President, Chief
--------------------------- Executive Officer and
Michael A. Leven Director (Principal Executive
Officer)
*
---------------------------
Irwin Chafetz Director
*
---------------------------
Richard D. Goldstein Director
*
---------------------------
Barry Sternlicht Director
By /s/ Neal K. Aronson Executive Vice President,
------------------------- Chief Financial Officer and
Neal K. Aronson Director (Principal Financial
Attorney-in-Fact and Accounting Officer)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ------------------------------------------------------------------------------------------------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of U.S. Franchise Systems, Inc.
3.2** Amended and Restated Bylaws of U.S. Franchise Systems, Inc.
4.1** Specimen Common Stock Certificate of U.S. Franchise Systems, Inc.
5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1** Form of License Agreement for Microtels.
10.2** Form of License Agreement for Hawthorn Suites hotels.
10.3** Joint Venture Agreement between Microtel Franchise and Development Corporation and U.S. Franchise
Systems, Inc., dated as of September 7, 1995. The Registrant agrees to furnish a copy of any
omitted schedule supplementally to the Commission upon request.
10.4** Master Franchise Agreement between HSA Properties, L.L.C. and U.S. Franchise Systems, Inc.,
dated as of March 27, 1996. The Registrant agrees to furnish a copy of any omitted schedule
supplementally to the Commission upon request.
10.5** Amended and Restated Stockholders' Agreement, dated as of September 29, 1995, as amended on
October 11, 1996, among the Company and the Original Investors.
10.6 Amended and Restated Employee Stock Purchase Agreement between U.S. Franchise Systems, Inc.
and Michael A. Leven, entered into as of September 29, 1995, as amended effective simultaneously
with the closing of the Offering.
10.7 Amended and Restated Employee Stock Purchase Agreement between U.S. Franchise Systems, Inc.
and Neal K. Aronson, entered into as of September 29, 1995, as amended effective simultaneously
with the closing of the Offering.
10.8** Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated
as of October 1, 1995.
10.9** Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated
as of October 1, 1995.
10.10 Voting Agreement between Michael A. Leven and Andrea Leven, to be entered into simultaneously
with the closing of the Offering.
10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to be entered into simultaneously
with the closing of the Offering.
10.12** Office Lease Agreement between Hallwood Real Estate Investors Fund XV and U.S. Franchise Systems,
Inc., dated September 25, 1995.
10.13** First Amendment to Office Lease between Hallwood 95, L.P. and U.S. Franchise Systems, Inc.,
dated May 20, 1996.
10.14 U.S. Franchise Systems, Inc. 1996 Stock Option Plan.
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors.
10.16** Term Sheet, dated May 14, 1996, between the Company and NACC regarding the Franchisee Financing
Facility.
21.1** List of Subsidiaries of U.S. Franchise Systems, Inc.
23.1 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion filed as Exhibit
5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3** Consent of Dean S. Adler.
23.4** Consent of Jeffrey A. Sonnenfeld.
24.1** Power of Attorney from officers and directors (contained on signature page).
27.1** Financial Data Schedule.
</TABLE>
- -------------
** Previously Filed.
Draft 10/24/96
U.S. Franchise Systems, Inc.
------------
Class A Common Stock
(par value $0.01 per share)
Underwriting Agreement
New York, New York
October __, 1996
Schroder Wertheim & Co. Incorporated
Montgomery Securities
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Schroder Wertheim & Co. Incorporated
Equitable Center,
787 Seventh Avenue,
New York, New York 10019-6016.
Ladies and Gentlemen:
U.S. Franchise Systems, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 1,825,000 shares of Class A Common Stock, par value $0.01 per share
("Stock"), of the Company, and the persons named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 500,000 shares of Stock. The
2,325,000 shares of Common Stock to be sold by the Company and the Selling
Stockholders are herein referred to as the "Firm Shares." In addition, the
Company and the Selling Shareholders propose to grant to the Underwriters an
option to purchase up to an additional 348,750 shares of Stock (the "Optional
Shares"), on the terms and for the purposes set forth in Section 2 hereof. (The
Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof are herein collectively called the "Shares").
<PAGE>
1. (a) The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-11427)
(the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document with
respect to the Initial Registration Statement has heretofore been filed
with the Commission; and no stop order suspending the effectiveness of
the Initial Registration Statement, any post-effective amendment
thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in
the Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the Commission
under the Act, is hereinafter called a "Preliminary Prospectus"; the
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus
filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the
time it was declared effective or such part of the Rule 462(b)
Registration Statement, if any, at the time it became or hereafter
becomes effective, each as amended at the time such part of the
registration statement became effective, is hereinafter collectively
called the "Registration Statement"; and such final prospectus, in the
form first filed pursuant to Rule 424(b) under the Act, is hereinafter
called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder, 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;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Schroder Wertheim & Co. Incorporated expressly for
use therein;
(iii) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto, and as of
-2-
<PAGE>
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, 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 not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Schroder Wertheim & Co. Incorporated expressly for use therein;
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries, or any
material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity, results of
operations or prospects of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, except to the extent the
failure to be so qualified in any such jurisdiction would not have a
material adverse effect on the general affairs, management, financial
position, stockholders' equity, results of operations or prospects of
the Company and its subsidiaries considered as a whole; and each
subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth in
the Prospectus under the caption "Description of Capital Stock"; all of
the issued shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid
-3-
<PAGE>
and non-assessable, are free of any preemptive rights, rights of first
refusal or similar rights (except as provided in the Old Stockholders'
Agreement (as defined in the Prospectus)), were issued and sold in
compliance with the applicable Federal and state securities laws and
conform to the description of the Stock contained in the Prospectus;
except as described in the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and
there are no commitments to issue, any shares of capital stock of the
Company or any security convertible or exchangeable or exercisable for
capital stock of the Company; there are no holders of securities of the
Company who, by reasons of the filing of the Registration Statement,
have the right (and have not waived such right) to request the Company
to include in the Registration Statement securities owned by them;
(viii) All of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and (except for directors' qualifying
shares) are owned directly or indirectly by the Company, free and clear
of all liens, encumbrances, equities or claims; and there are no
outstanding options, warrants or other rights calling for the issuance
of, and there are no commitments to issue, any shares of capital stock
of any subsidiary or any security convertible or exchangeable or
exercisable for capital stock of any subsidiary; except for the shares
of stock of each subsidiary owned by the Company and the equity
interests in Equity Partners, L.P., USFS Equity, L.L.C. and Pure
Lodging, Inc. owned by the Company, neither the Company nor any
subsidiary owns, directly or indirectly, any shares of capital stock of
any corporation or has any equity interest in any firm, partnership,
joint venture, association or other entity;
(ix) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and non-assessable and
will conform to the description of the Stock contained in the
Prospectus;
(x) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument, in each
case as in effect at the applicable Time of Delivery, to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject nor will
such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company, in each case as
in effect at the applicable Time of Delivery, or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the
-4-
<PAGE>
Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(xi) Each of the Joint Venture Agreement between the Company and
Microtel Franchise and Development Corporation dated as of September 7,
1995 and the Master Franchise Agreement between the Company and HSA
Properties, L.L.C. dated as of March 27, 1996 (the "Acquisition
Agreements") has been duly authorized, executed and delivered by the
Company and constitutes the legal, valid and binding agreement of the
Company, enforceable in accordance with its terms except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally and
by general principles of equity; and the execution and delivery of such
agreement and the performance of the actions contemplated therein by
the Company, are within the power and authority of the Company, do not
and will not result in a breach or violation of any of the terms or
provisions of, or constitute a default under any other agreement or
instrument to which the Company is a party or by which the Company is
bound, and do not require the consent, approval, authorization or order
of any court or governmental agency or body or other third party;
(xii) Each of the Company and Microtel Inns and Suites
Franchising, Inc. and Hawthorn Suites Franchising (together, the
"Franchising Subsidiaries") is duly registered or authorized as a
franchisor in all jurisdictions where it is required to be so
registered or authorized to conduct its business as described in the
Prospectus; and the procedures of each of the Company and the
Franchising Subsidiaries comply with the requirements of all applicable
federal, state and local laws and any applicable rules and regulations
thereunder governing the offer and sale of franchises and the
relationships between franchisors and franchisees and has filed all
notices, reports, documents and other information required to be filed
thereunder, except to the extent any failure so to comply would not
have a material adverse effect on the general affairs, management,
financial position, stockholders' equity, results of operations or
prospects of the Company and its subsidiaries considered as a whole;
(xiii) The consolidated financial statements and schedules of the
Company and its subsidiaries included in the Registration Statement and
the Prospectus present fairly the financial condition, the results of
operations and the cash flows of the Company and its subsidiaries as of
the dates and for the periods therein specified in conformity with
generally accepted accounting principles consistently applied
throughout the periods involved, except as otherwise stated therein;
and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus are accurately
presented and, to the extent such information and data are derived from
the financial statements and books and records of the Company and its
subsidiaries, are prepared on a basis consistent with such financial
statements and the books and records of the Company and its
subsidiaries; no other financial statements or schedules are required
to be included in the Registration Statement and the Prospectus;
(xiv) There are no statutes or governmental regulations, or any
contracts or other documents that are required to be described in or
filed as exhibits to the Registration
-5-
<PAGE>
Statement which are not described therein or filed as exhibits thereto;
and all contracts described in or filed as exhibits to the Registration
Statement to which the Company or any subsidiary is a party have been
duly authorized, executed and delivered by the Company or such
subsidiary, constitute valid and binding agreements of the Company or
such subsidiary and are enforceable against the Company or subsidiary
in accordance with the terms thereof except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally and by
general principles of equity;
(xv) The Company and its subsidiaries own or possess adequate
patent rights or licenses or other rights to use patent rights,
inventions, trademarks, service marks, trade names, copyrights,
technology and know-how necessary to conduct the general business
operated or proposed to be operated by them as described in the
Prospectus; neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights
of others with respect to any patent, patent rights, inventions,
trademarks, service marks, trade names, copyrights, technology or
know-how which individually or in the aggregate could have a material
adverse effect on the general affairs, management, financial position,
stockholders' equity, results of operations or prospects of the Company
and its subsidiaries considered as a whole;
(xvi) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other material agreement or material
instrument to which it is a party or by which it or any of its
properties may be bound;
(xvii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, are accurate and complete;
(xviii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a material adverse effect on the current or
future consolidated financial position, stockholders' equity or results
of operations of the Company and its subsidiaries; and, to the best of
the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xix) The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (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
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences;
-6-
<PAGE>
(xx) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be required to be registered or
regulated as an "investment company" or an entity "controlled" by an
"investment company", as such terms are defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act");
(xxi) None of the Company, any of its subsidiaries, nor any of
their officers, directors, employees or agents has used any corporate
funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity,
or made any unlawful payment of funds of the Company or any subsidiary
or received or retained any funds in violation of any law, rule or
regulation;
(xxii) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes; and
(xxiii) Deloitte & Touche, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) Each Selling Stockholder, severally and not jointly, represents and
warrants to, and agrees with, each of the Underwriters that:
(i) Such Selling Stockholder has, and at the Time of Delivery
(as defined in Section 4 hereof) will have, good and valid title to the
Shares to be sold by such Selling Stockholder hereunder, free and clear
of any liens, encumbrances, equities, security interests, claims and
other restrictions of any nature whatsoever, and such Selling
Stockholder has the full legal, right, power and authority, and any
approval required by law, to enter into this Agreement and to sell,
assign, transfer and deliver the Shares being sold by such Selling
Stockholder hereunder and to make the representations, warranties,
covenants and agreements made by it in this Agreement; and upon the
delivery of and payment for such Shares as herein provided, the several
Underwriters will acquire good and valid title thereto, free and clear
of all liens, encumbrances, equities, security interests, claims and
other restrictions of any nature whatsoever; if applicable, such
Selling Stockholder has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation;
(ii) Such Selling Stockholder has duly executed and delivered
a power of attorney (with respect to such Selling Stockholder, the
"Power-of-Attorney"), in the form heretofore delivered to the
Representatives, appointing Neal K. Aronson, Judith R. Thoyer and Craig
C. Albert, each acting individually, as such Selling Stockholder's
attorney-in-fact (each, the "Attorney-in-Fact") with authority to
execute, deliver and perform this Agreement and the Custody Agreement
(as defined below) on behalf of such Selling Stockholder and such
Selling Stockholder, through its Attorney-in-Fact, has duly executed
and delivered a custody agreement (with respect to such Selling
Stockholder, the "Custody Agreement" and, together with the
Power-of-Attorney, the "Agreement and Power-of-Attorney"),in the form
heretofore delivered to the Representatives, appointing Wachovia Bank
of North Carolina, N.A., as custodian thereunder (the "Custodian").
Certificates in negotiable form, endorsed in blank or accompanied by
blank stock powers duly executed, with signatures appropriately
guaranteed, representing the Shares to be sold by such Selling
Stockholder hereunder have been deposited with the Custodian pursuant
to the Agreement and Power-of-Attorney for the purpose of delivery
pursuant to this Agreement. Such Selling Stockholder has full power
(corporate and other) to enter into the Agreement and Power-of-Attorney
and
-7-
<PAGE>
to perform its obligations thereunder. The execution and delivery of
the Agreement and Power-of-Attorney have been duly authorized by all
necessary corporate action of such Selling Stockholder; the Agreement
and the Power-of-Attorney have been duly executed and delivered by such
Selling Stockholder and, assuming due authorization, execution and
delivery by the Custodian, constitute the legal, valid and binding
instruments of such Selling Stockholder, enforceable in accordance with
their terms except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally and by general
principles of equity. Such Selling Stockholder agrees that each of the
Shares represented by the certificates on deposit with the Custodian
(up to and including the number of Shares to be sold by the Selling
Stockholder hereunder) is subject to the interests of the Underwriters,
the Company and the other Selling Stockholders hereunder, that the
arrangements made for such custody, the appointment of the
Attorney-in-Fact and the right, power and authority of the
Attorney-in-Fact to execute and deliver this Agreement and to carry out
the terms of this Agreement, are to that extent irrevocable and that
the obligations of such Selling Stockholder hereunder shall not be
terminated, except as provided in this Agreement or the Agreement and
Power- of-Attorney, by any act of such Selling Stockholder, by
operation of law or otherwise, whether in the case of any individual
Selling Stockholder by the death or incapacity of such Selling
Stockholder, or in the case of a corporate or partnership Selling
Stockholder by its liquidation or dissolution or by the occurrence of
any other event. If any individual Selling Stockholder should die or
become incapacitated, or if any corporate or partnership Selling
Stockholder shall liquidate or dissolve, or if any other event should
occur, before the delivery of such Shares hereunder, the certificates
for such Shares deposited with the Custodian shall be delivered by the
Custodian in accordance with the respective terms and conditions of
this Agreement as if such death, incapacity, termination, liquidation
or dissolution or other event had not occurred, regardless of whether
or not the Custodian or the Attorney-in-Fact shall have received notice
thereof;
(iii) Neither the execution and delivery or performance of this
Agreement or the Agreement and Power-of-Attorney or the consummation of
the transactions herein or therein contemplated nor the compliance with
the terms hereof or thereof by such Selling Stockholder will conflict
with, or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, or result in the creation
or imposition of any lien, charge, claim or encumbrance on any property
of the Company or any of its subsidiaries under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling
Stockholder's property is bound, or the charter documents or by-laws of
such Selling Stockholder or any statute, ruling, judgment, decree,
order, or regulation of any court or other governmental authority or
any arbitrator applicable to such Selling Stockholder; and no consent,
approval, authorization, order, registration or qualification of or
with any governmental authority, except such as have been obtained,
such as may be required under state or foreign securities or Blue Sky
laws or by the by-laws and rules of the National Association of
Securities Dealers, Inc. and, if the registration statement filed with
respect to the Shares is not effective under the Act as of the time
-8-
<PAGE>
of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act;
(iv) Such Selling Stockholder has not taken, directly or
indirectly, any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(v) The sale by such Selling Stockholder of Shares pursuant
hereto is not prompted by any adverse information concerning the
Company that is not set forth in the Registration Statement or the
Prospectus;
(vi) Such Selling Stockholder has reviewed the Prospectus and the
Registration Statement, and the information regarding such Selling
Stockholder set forth therein under the caption "Selling Stockholders"
is complete and accurate; and
(vii) At the Time of Delivery, all stock transfer or other taxes
(other than income taxes) which are required to be paid in connection
with the sale and transfer of the Shares to be sold by such Selling
Stockholder to the several Underwriters hereunder will have been fully
paid or provided for by such Selling Stockholder and all laws imposing
such taxes will have been fully complied with.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to issue and sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company and each of the
Selling Stockholders, at a purchase price per share of $....., the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by the
Company and each of the Selling Stockholders as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which is
the aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company and all of the Selling Stockholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the Company
and each of the Selling Stockholders agree, severally and not jointly, to issue
and sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Optional Shares by a
fraction, the numerator of which is the maximum number of Optional Shares which
such Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company and the Selling Stockholders, as and to the extent indicated in
Schedule II hereto, hereby grant severally and not jointly, to the Underwriters
the right to purchase at their election up to 348,750 Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole purpose
of covering overallotments in the sale of the Firm
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<PAGE>
Shares. Any such election to purchase Optional Shares shall be made in
proportion to the maximum number of Optional Shares to be sold by the Company
and each Selling Stockholder as set forth in Schedule II hereto. Any such
election to purchase Optional Shares may be exercised only by 48 hours' prior
written or telephonic notice (subsequently confirmed in writing) from you to the
Company and the Attorneys-in-Fact, given within 30 calendar days after the date
of this Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company and the
Attorneys-in-Fact otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Schroder Wertheim & Co. Incorporated may request upon at least
forty-eight hours' prior notice to the Company and the Custodian, shall be
delivered by or on behalf of the Company and the Selling Stockholders to
Schroder Wertheim & Co. Incorporated, for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of federal (same day) funds to a bank account
designated by the Company and the Custodian on at least twenty-four hours' prior
notice to Schroder Wertheim & Co. Incorporated, or by certified or official bank
check or checks, payable in federal (same day) funds, to the order of the
Company, for the purchase price of the Firm Shares being sold by the Company,
and to the order of the Custodian for the purchase price of the Firm Shares
being sold by the Selling Stockholders. The Company and the Selling Stockholders
will cause the certificates representing the Shares to be made available for
checking and packaging at least twenty-four hours prior to the Time of Delivery
(as defined below) with respect thereto at the office of Schroder Wertheim & Co.
Incorporated, Equitable Center, 787 Seventh Avenue, New York, New York
10019-6016 (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City
time, on ............., 1996 or such other time and date as Schroder Wertheim &
Co. Incorporated and the Company may agree upon in writing, and, with respect to
the Optional Shares, 9:30 a.m., New York time, on the date specified by Schroder
Wertheim & Co. Incorporated in the written notice given by Schroder Wertheim &
Co. Incorporated of the Underwriters' election to purchase such Optional Shares,
or such other time and date as Schroder Wertheim & Co. Incorporated and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery", such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "Second Time of Delivery", and each such time and date for delivery
is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Sullivan & Cromwell, 125 Broad Street, New York, New York 10004 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such
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<PAGE>
Time of Delivery. A meeting will be held at the Closing Location at .......p.m.,
New York City time, on the New York Business Day next preceding such Time of
Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. (a) The Company agrees with each of the Underwriters:
(i) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus prior to the last Time of Delivery
which shall be disapproved by you promptly after reasonable notice
thereof; to advise you, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you and counsel for
the Underwriters, without charge, signed copies of the registration
statement originally filed with respect to the Shares and each
amendment thereto (in each case including all exhibits thereto) and to
each other Underwriter, without charge, a conformed copy of such
registration statement and each amendment thereto (in each case without
exhibits thereto); to advise you, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening
of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration
Statement or Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
(ii) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(iii) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and, if
the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection
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<PAGE>
with the offering or sale of the Shares and if at such time any event shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Prospectus in order to comply with the Act, to
notify you and upon your request to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may from time
to time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Shares at any time nine months or more after
the time of issue of the Prospectus, upon your request but at the expense of
such Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(iv) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158); (v) During the period beginning from
the date hereof and continuing to and including the date 180 days after
the date of the Prospectus, not to offer, sell, contract to sell or
otherwise dispose of, except as provided hereunder any securities of
the Company that are substantially similar to the Shares, including but
not limited to any securities that are convertible into or exchangeable
for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee or
non-employee director stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement), without your prior
written consent;
(vi) During a period of three years from the effective date of
the Registration Statement, to furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report
(including a balance sheet and statements of income, stockholders'
equity and cash flows of the Company and its consolidated subsidiaries
certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), unaudited consolidated
summary financial information of the Company and its subsidiaries for
such quarter in reasonable detail;
(vii) During a period of three years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission
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<PAGE>
or any national securities exchange on which any class of securities of
the Company is listed; and (ii) such additional information concerning
the business and financial condition of the Company as you may from
time to time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally or to the Commission);
(viii) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(ix) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations
National Market System
("NASDAQ");
(x) To file promptly all documents required to be filed with the
Commission pursuant to Section 13, 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the Effective Date and
during any period when the Prospectus is required to be delivered; and
(xi) To file with the Commission such reports on Form SR as may
be required by Rule 463 under the Act.
(b) Each Selling Stockholder, severally and not jointly, covenants and
agrees with each of the Underwriters that:
(i) Such Selling Stockholder will not, directly or indirectly,
take any action designed to cause or result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares;
(ii) As soon as any Selling Stockholder is advised thereof, such
Selling Stockholder will advise the Representatives and confirm such
advice in writing, (A) of receipt by the Selling Stockholder or by any
representative or agent of such Selling Stockholder, of any
communication from the Commission relating to the Registration
Statement, the Prospectus or any Preliminary Prospectus, or any notice
or order of the Commission relating to the Company or any of the
Selling Stockholders in connection with the transactions contemplated
by this Agreement and (B) of the happening of any event which makes or
may make any statement made in the Registration Statement, the
Prospectus or any Preliminary Prospectus untrue or that requires the
making of any change in the Registration Statement, Prospectus or
Preliminary Prospectus, as the case may be, in order to make such
statement, in light of the circumstances in which it was made, not
misleading; and
(iii) Such Selling Stockholder will deliver to the Representatives
prior to the Time of Delivery a properly completed and executed United
States Treasury Department Form W-9.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's and the Selling Stockholders'
counsel and accountants in connection with
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<PAGE>
the registration of the Shares under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) the cost of printing any Agreement among
Underwriters, this Agreement, the Blue Sky Memorandum and any other documents in
connection with the offering, purchase, sale and delivery of the Shares; (iii)
all expenses in connection with the qualification of the Shares for offering and
sale under state securities laws as provided in Section 5(b) hereof, including
the fees and disbursements of counsel for the Underwriters in connection with
such qualification and in connection with the Blue Sky survey; (iv) all fees and
expenses in connection with listing the Shares on NASDAQ; (iv) the filing fees
incident to, and the fees and disbursements of counsel for the Underwriters in
connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (v) the cost of
preparing stock certificates; (vi) the cost and charges of any transfer agent or
registrar; and (vii) all other costs and expenses incident to the performance of
its obligations hereunder which are not otherwise specifically provided for in
this Section, including the cost of any stock issue or transfer taxes on sale of
the Shares to the Underwriters (whether such Shares are sold by the Company or
the Selling Shareholders), the cost of the Company's personnel and other
internal costs, and all other taxes incident to the sale and delivery of the
Shares to be sold by the Company and the Selling Stockholders to the
Underwriters hereunder. It is understood, however, that, except as provided in
this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of
their own costs and expenses, including their travel costs, the roadshow costs
(other than the lodging expenses of the officers of the Company), the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and the Selling Stockholders herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of their obligations hereunder theretofore
to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; no stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to you such opinion or opinions, dated such Time of Delivery, with
respect to the validity of the Shares being delivered at such Time of Delivery,
the Registration Statement, the Prospectus and such other related matters as you
may reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
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<PAGE>
(c) Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the Company,
shall have furnished to you their written opinion, dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
to which the Company or any of its subsidiaries or any of their
respective officers or directors is a party or of which any property of
the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position, stockholders' equity
or results of operations of the Company and its subsidiaries; and, to
the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others;
(iv) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming the due authorization, execution
and delivery by the Underwriters and assuming further that the
Registration Statement and the Prospectus do not contain any material
misstatements or omissions, this Agreement is a legal, valid and
binding agreement of the Company enforceable in accordance with its
terms, except as enforcement of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and subject, as to
enforceability of those provisions relating to indemnity, to the
Federal securities laws and principles of public policy;
(v) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement
or other material agreement or material instrument known to such
counsel, in each case as in effect at such Time of Delivery, to which
the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject
nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company, in each case as
in effect at such Time of Delivery, or any statute or any order, rule
or regulation known to such counsel of any court or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries
or any of their properties;
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<PAGE>
(vi) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement, except
the registration under the Act of the Shares, and such consents,
approvals, authorizations, registrations or qualifications as have been
obtained or as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of the Shares by the
Underwriters;
(vii) To such counsel's knowledge, neither the Company nor any of
its subsidiaries is in violation of its Certificate of Incorporation or
By-laws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
material agreement or material instrument that is filed as an exhibit
to the Registration Statement, in each case as in effect at such Time
of Delivery;
(viii) Except as described in the Prospectus and except as
provided herein and in the Old Stockholders' Agreement, there are no
preemptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any Shares pursuant to the
Company's Certificate of Incorporation or By-laws, in each case as
amended to the date hereof, or any agreement or other instrument known
to such counsel; and no holders of securities of the Company have
rights to the registration thereof under the Registration Statement or,
if any such holders have such rights, such holders have waived such
rights;
(ix) To the extent summarized therein, all contracts and
agreements summarized in the Registration Statement and the Prospectus
are fairly summarized therein, conform in all material respects to the
descriptions thereof contained therein and, to the extent such
contracts or agreements are required under the Act or the rules and
regulations thereunder to be filed as exhibits to the Registration
Statement, they are so filed; and such counsel does not know of any
contracts or other documents or any other material agreements required
to be summarized or disclosed in the Prospectus or to be so filed as an
exhibit to the Registration Statement, which have not been so
summarized or disclosed, or so filed;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, are accurate and complete;
(xi) The Company is not required to be registered and is not
regulated as an "investment company" or an entity "controlled" by an
"investment company", as such terms are defined in the Investment
Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and lodging industry data prepared by third-party sources
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act and the
rules and regulations thereunder.
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<PAGE>
In addition, such counsel shall state that they have participated in the
preparation of the Registration Statement and the Prospectus and, although they
do not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the Prospectus, except
for those referred to in the opinion in subsection (x) of this section 7(c),
nothing has come to their attention to cause them to believe that, as of its
effective date, the Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the financial
statements and related schedules and lodging industry data prepared by
third-party sources therein, as to which such counsel need express no opinion)
contained an 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 or that, as of its date, the Prospectus or any further amendment
or supplement thereto made by the Company prior to such Time of Delivery (other
than the financial statements and related schedules and lodging industry data
prepared by third-party sources therein, as to which such counsel need express
no opinion) contained an untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the Prospectus or any
further amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules and
lodging industry data prepared by third-party sources therein, as to which such
counsel need express no opinion) contains an untrue statement of a material fact
or omits to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
they do not know of any amendment to the Registration Statement required to be
filed in the Registration Statement or the Prospectus which has not been filed;
(d) Bodker, Ramsey & Andrews, counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification or is subject
to no material liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being entitled to rely
in respect of matters of fact upon certificates of officers of the
Company, provided that such counsel shall state that they believe that
both you and they are justified in relying upon such certificates); and
(ii) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and all of the issued shares
of capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except
for directors' qualifying shares) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or
claims (such counsel being entitled to rely in respect of matters of
fact upon certificates of officers of the
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<PAGE>
Company or its subsidiaries, provided that such counsel shall state
that they believe that both you and they are justified in relying upon
such certificates).
(e) Rudnick, Wolfe, Epstein & Zeidman, special counsel for the Company,
shall have furnished to you their written opinion, dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that, to the best of
such counsel's knowledge, and other than as set forth in the Prospectus, each of
the Company and the Franchising Subsidiaries is duly registered or authorized as
a franchisor in all jurisdictions where it is required to be so registered or
authorized as a franchisor to conduct its business as described in the
Prospectus; and the procedures of each of the Company and the Franchising
Subsidiaries comply with the requirements of all applicable federal, state and
local laws and any applicable rules and regulations thereunder governing the
offer and sale of franchises and the relationships between franchisors and
franchisees, except to the extent any failure so to comply would not be expected
to have a material adverse effect on the business or financial condition of the
Company and its subsidiaries considered as a whole;
(f) The respective counsel for each of the Selling Stockholders, which
counsel shall be satisfactory to you, shall have furnished to you their written
opinion, dated the Time of Delivery, in form and substance satisfactory to you
to the effect that:
(i) The Selling Stockholder has full legal right, power and
authority to enter into this Agreement, the Agreement and
Power-of-Attorney and to sell, transfer and deliver the Shares being
sold by such Selling Stockholder hereunder in the manner provided in
this Agreement and to perform its obligations under the Agreement and
Power-of-Attorney; the execution and delivery of this Agreement, and
the Agreement and Power-of-Attorney have been duly authorized by all
necessary corporate action of the Selling Stockholder; this Agreement,
the Agreement and Power-of-Attorney have been duly executed and
delivered by the Selling Stockholder; assuming due authorization,
execution and delivery by the Custodian, the Agreement and Power-of-
Attorney are legal, valid and binding agreements of the Selling
Stockholder, enforceable in accordance with their terms, except as
enforcement of the same may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law);
(ii) Upon delivery of and payment for the Shares being sold by
the Selling Stockholder, the several Underwriters will receive good and
valid title to such Shares, free and clear of all liens, encumbrances,
equities, security interests, claims or other defects;
(iii) The sale of the Shares to the Underwriters by the Selling
Stockholder pursuant to this Agreement, the compliance by the Selling
Stockholder with the other provisions of this Agreement, the Agreement
and Power-of-Attorney and the consummation of the other transactions
herein contemplated do not (A) conflict with, or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, or encumbrance on any property of the Selling
Stockholder under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Selling Stockholder is a
party or by which the Selling
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Stockholder or any of the Selling Stockholder's property is bound, or
the charter documents or by-laws of the Selling Stockholder or any
statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable to the
Selling Stockholder, or (B) require the consent, approval,
authorization, order, registration or qualification of or with any
governmental authority, except such as have been obtained and such as
may be required under state or foreign securities or Blue Sky laws; and
(iv) There are no transfer or other taxes (other than income
taxes) known to such counsel payable in connection with the sale and
delivery of the Shares by the Selling Stockholder to the several
Underwriters or all such taxes have been fully paid in connection with
such sale and delivery.
In rendering such opinion, such counsel may rely, to the extent deemed
advisable by such counsel, as to factual matters, upon certificates of public
officials and the Selling Stockholders.
(g) On the date of the Prospectus at a time prior to the
execution of this Agreement; at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, Deloitte & Touche shall have furnished to you a
letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in
Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a
draft of the form of letter to bedelivered on the effective date of any
post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto);
(h)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries, or any change, or any development involving a prospective change,
in or affecting the general affairs, management, financial position,
stockholders' equity, results of operations or prospects of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in Clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(i) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ or the establishment of
minimum or maximum prices on such exchange or market; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York State authorities; or (iv) a material adverse change in the
political, financial or economic conditions in the United States or the outbreak
or escalation of hostilities
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<PAGE>
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
Clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(j) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(k) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of each Selling Stockholder or the Attorney-in-Fact on behalf
of each Selling Stockholder satisfactory to you as to (i) the accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein at and as of such Time of Delivery, (ii) the performance by the Company
and each of the Selling Stockholders of all of its respective obligations
hereunder to be performed at or prior to such Time of Delivery, (iii) the
matters set forth in subsections (a) and (h) of this Section 7; (iv) the fact
that they have carefully examined the Registration Statement and Prospectus and,
(A) as of the Effective Date, the statements contained in the Registration
Statement and the Prospectus were true and correct and neither the Registration
Statement nor the Prospectus omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) since the Effective Date, no event has occurred that is required by the Act
or the rules and regulations of the Commission thereunder to be set forth in an
amendment of, or a supplement to, the Prospectus that has not been set forth in
such an amendment or supplement; and (v) as to such other matters as you may
reasonably request;
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or in any
Blue Sky application or other document executed by the Company specifically for
that purpose or based upon written information furnished by the Company filed in
any state or other jurisdiction in order to qualify any or all of the Securities
under the security laws thereof or filed with the Commission or any securities
association or securities exchange (each, an "Application"), or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement made by the
Company in Section 1(a) of this Agreement, or (iii) the employment by the
Company of any device, scheme or artifice to defraud, or the engaging by the
Company in any act, practice or course of business which operates or would
operate as a fraud or deceit, or any conspiracy with respect thereto, in which
the Company shall participate, in connection with the issuance and sale of any
of the Shares, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is
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<PAGE>
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Schroder Wertheim & Co. Incorporated expressly for use therein.
(b) Each Selling Stockholder, severally and not jointly, will indemnify
and hold harmless each Underwriter, the Company and the other Selling
Stockholders against any losses, claims, damages or liabilities to which such
Underwriter, the Company or such Selling Stockholder may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Preliminary Prospectus, the Registration Statement, or the Prospectus, or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements made therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Preliminary Prospectus, the Registration
Statement, the Prospectus or such amendment or supplement in reliance upon and
in conformity with information furnished to such Underwriter or the Company by
such Selling Stockholder expressly for use therein, or (ii) any untrue statement
or alleged untrue statement made by such Selling Stockholder in Section 1(b) of
this Agreement, and will reimburse such Underwriter, the Company or such Selling
Stockholder for any legal or other expenses incurred by such Underwriter, the
Company or such Selling Stockholder in connection with investigating, preparing
to defend, defending or appearing as a third-party witness in connection with
any such action or claim.
(c) In addition to any obligations of the Company and the Selling
Stockholders under Section 8(a) and Section 8(b), the Company and each of the
Selling Stockholders agree that
they shall perform their indemnification obligations under Section 8(a) and
Section 8(b) (as modified by Section 8(h)) with respect to counsel fees and
expenses and other expenses reasonably incurred by making payments within 45
days to the Underwriter in the amount of the statements of the Underwriter's
counsel or other statements which shall be forwarded by the Underwriter, and
that they shall make such payments notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court and a court orders
return of such payments.
(d) Each Underwriter will indemnify and hold harmless the Company and
the Selling Stockholders against any losses, claims, damages or liabilities to
which the Company and the Selling Stockholders may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
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<PAGE>
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company and the Selling Stockholders by such Underwriter
through Schroder Wertheim & Co. Incorporated expressly for use therein; and will
reimburse the Company and the Selling Stockholders for any legal or other
expenses reasonably incurred by the Company and the Selling Stockholders in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(e) Promptly after receipt by an indemnified party under subsection (a),
(b) or (d) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party which it may have to any indemnified party under Section
8(a), 8(b) or 8(d) except to the extent it was unaware of such action and has
been prejudiced in any material respect by such failure or from any liability
which it may have to any indemnified party otherwise than under such Section
8(a), 8(b) or 8(d). In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party in any such action),
and, after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. If, however, (i) the indemnifying party has authorized
the employment of counsel for the indemnified party at the expense of the
indemnifying party or (ii) an indemnified party shall have reasonably concluded
that representation of such indemnified party and the indemnifying party by the
same counselwould be inappropriate under applicable standards of professional
conduct due to actual or potential differing interests between them and the
indemnified party so notifies the indemnifying party, then the indemnified party
shall be entitled to employ counsel different from counsel for the indemnifying
party at the expense of the indemnifying party and the indemnifying party shall
not have the right to assume the defense of such indemnified party. In no event
shall the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to local counsel) for all indemnified parties in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same set of allegations or circumstances. The
counsel with respect to which fees and expenses shall be so reimbursed shall be
designated in writing by Schroder Wertheim & Co. Incorporated in the case of
parties indemnified pursuant to Section 8(a) and Section 8(b) and by the Company
in the case of parties indemnified pursuant to Section 8(d).
If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by Section 8(c), the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than
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<PAGE>
30 days after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim 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 any indemnified party.
(f) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (d) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault 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 and the Selling Stockholders on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, each of the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (f) 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 above in this subsection (f). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (f) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (f), no Underwriter shall be
required to contribute any amount in excess of the
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<PAGE>
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 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 in
this subsection (f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) Promptly after receipt by any party to this Agreement of notice of
the commencement of any action, suit or proceeding, such party will, if a claim
for contribution in respect thereof is to be made against another party (the
"contributing party"), notify the contributing party of the commencement
thereof; but the omission so to notify the contributing party will not relieve
it from any liability which it may have to any other party for contribution
under the Act except to the extent it was unaware of such action and has been
prejudiced in any material respect by such failure or from any liability which
it may have to any other party other than for contribution under the Act. In
case any such action, suit or proceeding is brought against any party, and such
party notifies a contributing party of the commencement thereof, the
contributing party will be entitled to participate therein with the notifying
party and any other contributing party similarly notified.
(h) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and the Selling Stockholders (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company and the Selling Stockholders within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms containedherein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholders shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notifies you that it has so
arranged for the purchase of such Shares, you or the Company shall have the
right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as
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<PAGE>
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you or the Company and the
Selling Stockholders or both as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you or the Company and the
Selling Stockholders as provided in subsection (a) above, the aggregate number
of such Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, or if the
Company and the Selling Stockholders shall not exercise the right described in
subsection (b) above to require non-defaulting Underwriters to purchase Shares
of a defaulting Underwriter or Underwriters, then this Agreement (or, with
respect to the Second Time of Delivery, the obligations of the Underwriters to
purchase and of the Company to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter or
the Company, except for the expenses to be borne by the Company and the Selling
Stockholders and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, each of the Selling Stockholders and the
several Underwriters, as set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or any officer or director or controlling
person of the Company, or any of the Selling Stockholders, or any controlling
person of any of the Selling Stockholders, and shall survive delivery of and
payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company and the Selling Stockholders shall not then be under any liability
to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for
any other reason, any Shares are not delivered by or on behalf of the Company or
any of the Selling Stockholders as provided herein, the Company will reimburse
the Underwriters through you for all out-of-pocket expenses approved in writing
by you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall then
be under no further liability to any Underwriter except as provided in Sections
6 and 8 hereof.
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<PAGE>
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Schroder Wertheim & Co. Incorporated on behalf of you
as the representatives, and in all dealings with the Selling Stockholders
hereunder, you and the Company shall be entitled to act and rely upon any
statement, request, notice or agreement furnished in writing by or on behalf of
such Selling Stockholder or made or given by the Attorney-in-Fact for such
Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Schroder
Wertheim & Co. Incorporated, Equitable Center, 787 Seventh Avenue, New York, New
York 10019-6016, Attention: Registration Department; and if to the Company or
the Selling Stockholders shall be delivered or sent by mail to the address of
the Company set forth in the Registration Statement, Attention: Chief Financial
Officer; provided, however, that any notice to an Underwriter pursuant to
Section 8(d) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company, each of the Selling Stockholders and,
to the extent provided in Sections 8 and 10 hereof, the officers and directors
of the Company and each person who controls the Company, any Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to the principles of
conflicts of law.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
26
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us five counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters, the Company and
each of the Selling Stockholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company for examination upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
U.S. FRANCHISE SYSTEMS, INC.
By: __________________________________
Name:
Title:
SELLING STOCKHOLDERS
By: ___________________________________
As Attorney-in-Fact for each of the
Selling Stockholders listed in
Schedule II
Accepted as of the date hereof:
SCHRODER WERTHEIM & CO. INCORPORATED
MONTGOMERY SECURITIES
By: SCHRODER WERTHEIM & CO. INCORPORATED
By: ______________________________________
Managing Director
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
Number of Optional
Shares to be
Number of Firm Purchased if
Shares to be Maximum Option
Underwriter Purchased Exercised
----------- -------------- ------------------
<S> <C> <C>
Schroder Wertheim & Co.
Incorporated
Montgomery Securities
Total................................ 1,825,000 273,750
========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
Number of Optional
Number of Firm Shares to be Sold if
Shares to be Maximum Option
Selling Stockholder Sold Exercised
- ------------------- -------------- --------------------
<S> <C> <C>
Ronald N. Beck 15,797 2,370
H. Pierre Eilian, M.D. 3,195 479
Jonathan D. Eilian 3,195 479
Nancy and Howard Feinglass 3,362 504
Goolock Associates 65,130 9,770
Lotte Bravmann & Carol
Bravmann Berlin
as Trustees FBO
Alyssa Michelle Berlin 14,347 2,152
Lotte Bravmann & Carol
Bravmann Berlin
as Trustees FBO
Elana Danielle Berlin 14,348 2,152
Lotte Bravmann & Carol
Bravmann Berlin
as Trustees FBO
Nicole Amy Berlin 14,348 2,152
Lotte Bravmann & Judith Kaufthal
as Trustees FBO
Jeremy J. Kaufthal 14,348 2,152
Lotte Bravmann & Judith Kaufthal
as Trustees FBO
Jonathan S. Kaufthal 14,348 2,152
Lotte Bravmann & Judith Kaufthal
as Trustees FBO
Joshua M. Kaufthal 14,348 2,152
Marc Lasry 12,637 1,896
Leon Levy 39,110 5,867
Microtopp Associates 71,304 10,696
David A. Mintz 3,363 504
Nash Grandchildren 1986 Trust 86,957 13,044
Schwartz Microtel
Investors, L.L.C. 109,863 16,479
------- ------
Total................................ 500,000 75,000
======= ======
</TABLE>
<PAGE>
ANNEX I
DESCRIPTION OF COMFORT LETTER
Pursuant to Section 7(g) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been furnished to the representatives of
the Underwriters (the "Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon copies
of which are attached hereto and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility
for financial and accounting matters regarding whether the unaudited
condensed consolidated financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that cause them
to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with
respect to the consolidated results of operations and financial
position of the Company for the five most recent fiscal years included
in the Prospectus agrees with the corresponding amounts (after
restatements where applicable) in the audited consolidated financial
statements for such five fiscal years;
(v) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation
S-K and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing procedures
that caused them to believe that this information does not conform in
all material respects with the disclosure requirements of Items 301,
302, 402 and 503(d), respectively, of Regulation S-K;
I-1
<PAGE>
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do
not comply as to form in all material respects with the
applicable accounting requirements of the Act and the
related published rules and regulations, or (ii) any
material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows
included in the Prospectus for them to be in conformity
with generally accepted accounting principles;
(B) any other unaudited income statement data
and balance sheet items included in the Prospectus do not
agree with the corresponding items in the unaudited
consolidated financial statements from which such data
and items were derived, and any such unaudited data and
items were not determined on a basis substantially
consistent with the basis for the corresponding amounts
in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which
were not included in the Prospectus but from which were
derived any unaudited condensed financial statements
referred to in Clause (A) and any unaudited income
statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not
determined on a basis substantially consistent with the
basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated
condensed financial statements included in the Prospectus
do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the
historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five
days prior to the date of such letter, there have been
any changes in the consolidated capital stock (other than
issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the
latest financial statements included
I-2
<PAGE>
in the Prospectus) or any increase in the consolidated
long-term debt of the Company and its subsidiaries, or
any decreases in consolidated net current assets or
stockholders' equity or other items specified by the
Representatives, or any increases in any items specified
by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating
profit or the total or per share amounts of consolidated
net income or other items specified by the
Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the
comparable period of the preceding year and with any
other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found
them to be in agreement.
I-3
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
October 23, 1996
U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
U.S. Franchise Systems, Inc.
Registration Statement on Form S-1
Registration No. 333-11427
--------------------------
Ladies and Gentlemen:
In connection with the above-captioned Registration Statement,
as the same may be amended from time to time (the "Registration Statement"),
filed with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), and the Rules and Regulations promulgated
thereunder (the "Rules"), we have been requested by U.S. Franchise Systems,
Inc., a Delaware corporation (the "Company"), to furnish our opinion as to the
legality of 575,000 shares (the "Stockholder Shares") of the Company's Class A
Common Stock, par
<PAGE>
U.S. Franchise Systems, Inc. 2
value $0.01 per share (the "Class A Common Stock"), offered by certain
stockholders of the Company (the "Selling Stockholders") and 2,098,750 shares
(the "Company Shares") offered by the Company (including up to 75,000 and
273,750 shares to be sold by the Selling Stockholders and the Company,
respectively, upon exercise of the Underwriters' over-allotment option),
registered for sale thereunder.
In connection with the furnishing of this opinion, we have
reviewed the Registration Statement (including all amendments thereto), the form
of the Underwriting Agreement included as Exhibit 1.1 to the Registration
Statement (the "Underwriting Agreement"), originals, or copies certified or
otherwise identified to our satisfaction, of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws, each as in effect
on the date hereof, and records of certain of the Company's corporate
proceedings. We have also examined and relied upon representations as to factual
matters contained in certificates of officers of the Company, and have made such
other investigations of fact and law and have examined and relied upon the
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, records, certificates or other instruments, and upon such
factual information otherwise supplied to us, as in our judgment are necessary
or appropriate to render the opinion expressed below. In addition, we have
assumed, without independent investigation, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity of
<PAGE>
U.S. Franchise Systems, Inc. 3
original documents to all documents submitted to us as certified, photostatic,
reproduced or conformed copies, the authenticity of all such latter documents
and the legal capacity of all individuals who have executed any of the
documents.
Based upon the foregoing, we are of the opinion that (i) the
Company Shares, when issued, delivered and paid for as contemplated in the
Registration Statement and the Underwriting Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and (ii) the Stockholder Shares
have been duly authorized, validly issued, fully paid and nonassessable.
Our opinion expressed above is limited to the General
Corporation Law of the State of Delaware. Please be advised that no member of
this firm is admitted to practice in the State of Delaware. Our opinion is
rendered only with respect to the laws, and the rules, regulations and orders
thereunder, which are currently in effect.
We hereby consent to use of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the heading "Validity of
the Class A Common Stock" contained in the Prospectus included in the
Registration Statement. In giving this consent, we do not thereby admit that we
come within the category of persons whose consent is required by the Act or the
Rules.
Very truly yours,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
Exhibit 10.6
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
---------------------------------
Neal K. Aronson
---------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Definitions................................................................3
2. Management Equity Participation............................................9
3. Representations of Employee...............................................14
4. Representations and Warranties of the Corporation.........................15
5. Limitations on Restricted Shares..........................................16
6. Earned Shares.............................................................17
7. Redemption of Restricted Shares Not Earned................................17
8. Termination Forfeiture....................................................18
9. Termination of Employment Without Cause or by Employee
for Good Reason...........................................................19
10. Death or Total Disability of Employee.....................................19
11. Reissue of Forfeit Shares.................................................20
12. Performance Criteria......................................................20
13. Successors and Assigns....................................................23
14. Sale of All or Substantially All Stock or Assets, or Merger...............23
15. Legends...................................................................24
16. Additional Covenants......................................................24
17. Withholding Taxes; Section 83(b) Election.................................25
18. Notices...................................................................26
19. Miscellaneous.............................................................27
20. Multiple Counterparts.....................................................29
21. Record Owner..............................................................29
i
<PAGE>
THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT AND THE SECURITIES
ISSUED UPON THE TERMS HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER THIS
AGREEMENT NOR THE UNDERLYING SECURITIES MAY BE ASSIGNED, HYPOTHECATED,
ENCUMBERED, PLEDGED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED BY THE
TERMS HEREOF, IN ACCORDANCE WITH THE TERMS OF A SEPARATE STOCKHOLDERS' AGREEMENT
DATED ON OR ABOUT THE DATE HEREOF, AS THE SAME MAY BE AMENDED FROM TIME TO TIME,
AND PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
STATE OF GEORGIA
COUNTY OF FULTON
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
This Amended and Restated Employee Stock Purchase Agreement
(as amended, the "Agreement") is entered into as of the ___ day of _____________
1996, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the
"Corporation"), and NEAL K. ARONSON, an individual resident of the State of
Georgia (the "Employee").
WHEREAS, on September 29, 1995, the Employee and the
Corporation executed an Employee Stock Purchase Agreement (the "Old Agreement"),
pursuant to which the Corporation issued to the Employee and to Michael A. Leven
(together, the "Initial Management") a total of 567,245 shares of common stock,
par value $.10 per share (the "Old Common Stock"), of the Corporation,
constituting 51% of the then issued and outstanding common shares of the
Corporation;
<PAGE>
2
WHEREAS, as set forth in greater detail on Exhibit A hereto,
278,061 of such shares, or 25% of the then outstanding common shares of the
Corporation, were acquired outright by Initial Management as Unrestricted Shares
(as defined in the Old Agreement) and 289,184 of such shares, or 26% of the then
outstanding common shares, were acquired by Initial Management as Restricted
Shares (as defined in the Old Agreement), subject to the terms and conditions
and provisions as set forth in the Old Agreement;
WHEREAS, with respect to the 26% of the then outstanding
common shares that were held by Initial Management as Restricted Shares (as
defined in the Old Agreement), the Old Agreement (i) limited the rights of
Initial Management to vote and to receive dividends with respect to such shares,
(ii) imposed substantial restrictions on the transferability of such shares
until such shares were "earned" by Initial Management by reason of the
Corporation's satisfaction of certain performance criteria set forth therein and
(iii) provided that such shares were subject to forfeiture in the event the
employment of the Management holder thereof was terminated in certain
circumstances;
WHEREAS, the Corporation is considering an IPO (as defined
below) with respect to its common shares, as adjusted for the Reclassification
(as defined below);
WHEREAS, in connection with the IPO, the Corporation and the
Employee have agreed to eliminate some of the restrictions that were imposed on
Restricted Shares pursuant to the Old Agreement and to deem that certain shares
designated as Restricted Shares pursuant to the Old Agreement be redesignated as
Unrestricted Shares;
<PAGE>
3
NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which is hereby acknowledged, the parties
do hereby agree to amend and restate the Old Agreement, as so amended, as
follows:
1. Definitions. For purposes hereof, the following terms shall be
defined as follows:
(a) "Adjusted EBITDA" for any fiscal year of the Corporation
means (i) consolidated earnings of the Corporation and its subsidiaries before
consolidated interest, taxes, depreciation, amortization, and other non-cash
charges, adjusted to exclude one-time or non-recurring expenses or credits (such
exclusions to include but not be limited to the payments to Hudson Hotels
Corporation (formerly known as Microtel Franchising and Development Corporation)
in the total amount of $4 million dollars pursuant to the terms of that certain
Joint Venture Agreement dated September 7, 1995) for such fiscal year, as
determined by the Corporation in good faith in accordance with generally
accepted accounting principles consistently applied, minus (ii) 10% of the
Transaction Consideration (as defined below) actually paid by the Corporation
and/or its subsidiaries in connection with a Transaction (as defined below)
closed after the closing of the IPO (provided that such consideration has not
been deducted in determining the amount referred to in clause (i) above). In the
event of any dispute or disagreement regarding the determination of the amount
of Adjusted EBITDA, then such dispute or disagreement shall be resolved by the
accounting firm regularly engaged to and providing auditing services to the
Corporation.
<PAGE>
4
(b) "Earned Shares" means those Shares that are designated
herein as Restricted Shares and are subsequently redesignated as Earned Shares
in accordance with the terms hereof due to the attainment by the Corporation of
certain performance standards as provided for herein.
(c) "Employee Shares" means the Restricted Shares and
Unrestricted Shares held by Employee under this Agreement.
(d) "Employment Agreement" means that certain agreement
relating to the employment of Employee with the Corporation dated October 1,
1995, as the same may be amended from time to time.
(e) "Initial Management" means Employee and Michael A. Leven.
(f) "IPO" shall mean the initial public offering of Shares
pursuant to the Securities Act of 1933, as amended.
(g) "Management" means the group of individuals (including
Initial Management) who are employees of the Corporation and who have been
issued shares of Class A Common Stock pursuant to the terms of the Old Agreement
or a stock purchase agreement substantially similar to the Old Agreement, as the
same may be amended from time to time (with such changes thereto as are
authorized by the Stock Reallocation Committee).
(h) "Management Shares" means Shares issued to and acquired by
Management (or their permitted designees and successors), including Unrestricted
Shares, Restricted Shares, Earned Shares, Reallocable Shares, shares acquired
through preemptive (or similar) rights or otherwise from or through the
Corporation and such shares that are transferred to other Management.
<PAGE>
5
(i) "Original Stockholders" or "Original Investors" means
those persons who are not employees of the Corporation and who were issued
shares of Old Common Stock pursuant to the offering described in the
Confidential Investment Memorandum of the Corporation, dated August 19, 1995,
and their Permitted Transferees (as such term is used in that certain
Stockholders' Agreement among the Corporation and the Original Investors, dated
as of September 29, 1995).
(j) "Reallocable Shares" means those Restricted Shares and/or
Unrestricted Shares owned or held by Initial Management that were specifically
designated at the time of their original issue as Reallocable Shares and that,
prior to the date hereof, have been reallocated to other Management pursuant to
the Old Agreement. Such shares shall retain such designation regardless of
whether they are converted from Restricted Shares to Earned Shares (in the case
of Reallocable Restricted Shares), unless and until such shares become Forfeit
Shares and are redeemed or otherwise repurchased by the Corporation from the
Management holder (other than Initial Management) thereof.
(k) "Reclassification" means the conversion of each share of
Old Common Stock into 9.67 shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock"), of the Corporation pursuant to the Corporation's
Amended and Restated Certification of Incorporation, which is to be filed with
the State of Delaware prior to the consummation of the IPO.
(l) "Restricted Shares" means 144,592 Shares (prior to the
Reclassification), constituting 13% of the outstanding common stock of the
Corporation as of October 2, 1995), that were issued to Initial Management
pursuant to the Old Agreement and that were specifically designated at the time
of issue as Restricted Shares,
<PAGE>
6
as the same are reclassified pursuant to the Reclassification. Restricted Shares
are subject to repurchase (even if they have been converted to Earned Shares)
pursuant to a Termination Forfeiture. Restricted Shares are eligible for
conversion to Earned Shares upon attainment by the Corporation of certain
performance criteria as set forth herein. Restricted Shares that have not been
converted to Earned Shares by September 29, 2005 are subject to redemption by
the Corporation (and reissue to the Original Investors). If such shares are then
reissued to Original Investors, such shares shall automatically be converted to
and shall thereafter be deemed to be Unrestricted Shares.
(m) "Shares" means the shares of the Old Common Stock that
were authorized immediately prior to the Reclassification, as reclassified by
the Reclassification into Class A Common Stock and, to the extent set forth in
Section 2(b)(iv) hereof, exchanged for Class B Common Stock, par value $.01 per
share ("Class B Common Stock"), of the Corporation, all as the same may be
further reclassified from time to time.
(n) "Stock Reallocation Committee" means the committee
appointed by the Board of Directors of the Corporation from among its members to
administer the reallocation of Reallocable Shares hereunder.
(o) "Stockholders' Agreement" means that certain Stockholders'
Agreement dated as of September 29, 1995 by and between the Corporation and the
Stockholders named therein, as such agreement may be amended from time to time.
Employee acknowledges that all of the Shares held by Employee hereunder shall be
issued and held in accordance with the terms of the Stockholders' Agreement, in
addition to the terms and conditions hereof.
<PAGE>
7
(p) "Termination Forfeiture" means the redemption by the
Corporation from the Employee of Restricted Shares (whether or not converted to
Earned Shares) upon the occurrence of a Termination Forfeiture Event.
(q) "Termination Forfeiture Event" means the occurrence or
happening of one of the following during the period ending on September 29,
2005: (i) voluntary resignation for other than Good Reason (as defined in the
Employment Agreement) of Employee; or (ii) termination of Employee by the
Corporation for Cause (as defined in the Employment Agreement).
(r) "Transaction Consideration" means the total consideration
paid or to be paid in connection with a Transaction, including, without
limitation: (i) cash; (ii) notes, securities and other property; (iii)
indebtedness for borrowed money assumed, refinanced or extinguished; (iv)
amounts payable under consulting agreements, agreements not to compete or
similar arrangements; and (v) contingent payments (whether or not related to
future earnings or operations); provided, that in the event debt financing is
utilized to effect a Transaction, proceeds from such debt financing shall no
longer be considered as Transaction Consideration as and to the extent such
proceeds have been repaid to the lender thereof. For purposes of determining the
amount of consideration paid, non-cash consideration shall be valued as follows:
(x) publicly traded securities, including capital stock of the Corporation,
shall be valued at the average of their closing prices (as reported in The Wall
Street Journal) for the five trading days prior to the closing of the
Transaction and (y) any other non-cash consideration shall be valued at the fair
market value thereof as determined in good faith by the Board of Directors of
the Corporation.
<PAGE>
8
(s) "Transaction" means an acquisition by the Corporation
and/or its subsidiaries of another corporation or other entity, a business or a
brand, including, but not limited to, through a merger, consolidation, tender or
exchange offer, acquisition of securities or assets, or through a licensing
agreement, but excluding any investment in another corporation, joint venture or
other entity (an "entity") that represents less than 25% of the equity of such
entity.
(t) "Unrestricted Shares" means all Shares owned or held by
the Initial Management (or by other Management, in the case of Reallocable
Shares, or by the Permitted Transferees of Initial Management (as such term is
defined in the Stockholders' Agreement, prior to any amendment thereof)) that
have not been specifically designated herein as Restricted Shares, including but
not limited to Shares acquired for value from the Corporation pursuant to a
voluntary exchange (including the exchange referred to in Section 2(b)(iv)
hereof) or through preemptive (or similar) rights, stock splits or dividends
with respect to Unrestricted Shares and the like or other subsequently acquired
shares. Unrestricted Shares are held outright and subject to the terms and
conditions set forth in the Amended and Restated Certificate of Incorporation of
the Corporation, as the same may be amended from time to time, and in the
Stockholders' Agreement.
(u) Capitalized terms not defined in this Agreement shall have
the meaning and intent ascribed to them in the Stockholders' Agreement.
<PAGE>
9
2. Management Equity Participation.
(a) Stock Reallocation Committee. (i) Pursuant to the Old
Agreement, the Management Shares were initially issued, allocated, offered and
divided among Employee and Michael A. Leven in the amounts and designations set
forth in Exhibit "A" attached hereto. Following the Reclassification, the IPO
and effectiveness of this amendment in accordance with Section 19 hereof,
Management (including Initial Management) will own Shares in the amounts and
designations set forth in Exhibit "B" attached hereto. Thereafter, subsequent
offers, call options, redemptions, and the like, in each case to the extent
permitted hereunder, shall be subject to the exclusive control and authority of
the Stock Reallocation Committee of the Corporation. The Stock Reallocation
Committee shall also have the authority to cause the Corporation to act with
respect to Management Shares that are forfeited by Management to the
Corporation, subject to the rights of Initial Management to have Forfeit Shares
reoffered to them under this Agreement.
(b) Unrestricted Shares.
(i) Thirty-eight percent (38%) of the total 51% of
Shares acquired by Initial Management pursuant to the Old Agreement are hereby
designated as Unrestricted Shares. 62,911 of such shares, or approximately
5.656% of the 38% constituting Unrestricted Shares were designated as
Reallocable Shares pursuant to the Old Agreement and have heretofore been called
and repurchased from time to time at the direction of the Stock Reallocation
Committee from Initial Management (or their Permitted Transferees) and sold to
other members of Management. The Stock Reallocation Committee has had and shall
continue to have the authority to impose such
<PAGE>
10
terms, conditions, limitations and otherwise as it deems reasonable, desirable
or necessary with respect to Reallocable Shares held by Management other than
Initial Management; provided, however, that following the effectiveness of this
Agreement, no other Shares (including Shares that have been forfeited to the
Corporation and reissued to Initial Management, as contemplated by Section
2(a)(ii) hereof) shall be subject to call and repurchase from Initial Management
(or their Permitted Transferees) for offer, sale and/or transfer to other
Management; and provided further, the Stock Reallocation Committee may not
permit such Reallocable Shares to be held by other Management under terms,
conditions, limitations and otherwise which are more favorable, desirable or
beneficial than as imposed on Initial Management, other than the provisions with
respect to the duration of service after which the risk of Termination
Forfeiture may lapse. The remaining approximately 32.34% of the 38% constituting
Unrestricted Shares shall be held outright, free and clear by Initial Management
(or their Permitted Transferees), are not subject to call, purchase or
reallocation by the Stock Reallocation Committee or otherwise, shall not be
subject to the risk of Termination Forfeiture, and the holders thereof shall
enjoy all incidents of ownership to such shares (subject to any restrictions or
limitations set forth in the Stockholders' Agreement).
(ii) Notwithstanding anything to the contrary in this
Agreement, while the Employee is still employed by the Corporation, the Stock
Reallocation Committee shall offer to Employee the opportunity to repurchase any
Reallocable Shares (Restricted, Earned and/or Unrestricted) that have heretofore
been called, repurchased, reallocated from the Employee and sold by the
Corporation at the direction of the Stock Reallocation Committee to other
Management, where, thereafter, such Reallocable Shares
<PAGE>
11
are forfeited to the Corporation or repurchased or held by the Corporation for
any reason ("Forfeit Shares"). Such Forfeit Shares shall be reoffered to the
Employee at the original purchase price of $1.00 per share, as such price is
adjusted for the Reclassification (the "Adjusted Original Price"), and the right
to purchase such shares may be exercisable by Employee at any time. Forfeit
Shares reacquired by Employee shall not regain their status as Reallocable
Shares and therefore shall not be subject to call and redemption by the Stock
Reallocation Committee for purpose of reallocation to other Management.
(iii) Unless otherwise specifically set forth in this
Agreement or in a separate written agreement between the Corporation and the
Employee, any and all shares acquired by the Employee from the Corporation for
value (other than Restricted Shares), including through a voluntary exchange
(including the exchange referred to in Section 2(b)(iv) hereof (the "Exchange"))
or pursuant to the exercise of preemptive (or similar) rights, or from stock
splits or stock dividends as to Unrestricted Shares (but not acquired shares
which are attributable to Restricted Shares), shall be deemed Unrestricted
Shares.
(iv) Immediately following the effectiveness of this
Amendment, the Corporation shall issue to Initial Management and Initial
Management shall purchase from the Corporation 2,706,557 shares of the
Corporation's Class B Common Stock (which shares shall be Unrestricted Shares)
in exchange for the same number of shares of the Corporation's Class A Common
Stock.
(c) Restricted Shares.
(i) Shares designated herein as Restricted Shares are
limited as to their incidents of ownership and other rights as herein
specifically set forth (but shall
<PAGE>
12
retain all other rights including, without limitation, the right to vote and to
receive dividends with respect to such shares) until such time as the Restricted
Shares are deemed "Earned" and converted to Earned Shares in accordance with the
terms hereof.
(ii) Thirteen percent (13%), or 144,592
(pre-Reclassification), of the 51% of Shares acquired by Initial Management
pursuant to the Old Agreement are hereby designated as Restricted Shares.
Restricted Shares are subject to the substantial restrictions on transferability
and the substantial risks of forfeiture as set forth under this Agreement.
22,593 shares (pre-Reclassification) or 2.0315% of the 13% constituting
Restricted Shares were designated as Reallocable Shares pursuant to the Old
Agreement and have heretofore called and repurchased from Initial Management (or
their Permitted Transferees) and sold by the Corporation to other Management in
the same manner as the Reallocable Shares referred to in Section 2(b) hereof.
While such Reallocable Shares are held by Management other than Initial
Management, such Shares shall cease to be Reallocable (but shall remain
Restricted (subject to being "Earned")). The Stock Reallocation Committee has
had and shall continue to have the authority to impose such terms, conditions,
limitations and otherwise as it deems reasonable, desirable or necessary with
respect to such Reallocable Shares held by Management other than Initial
Management; provided, however, that following the effectiveness of this
Agreement, no other Shares (including Forfeit Shares) shall be subject to call
and repurchase from Initial Management (or their Permitted Transferees) for
offer, sale and/or transfer to other Management; and provided further, the Stock
Reallocation Committee may not permit such Reallocable Shares to be held by
other Management under terms, conditions, limitations and otherwise which are
more favorable, desirable or beneficial than as
<PAGE>
13
imposed on Initial Management, other than the provisions with respect to the
duration of service after which the risk of Termination Forfeiture may lapse.
(iii) Where certain performance criteria are attained
by the Corporation, Restricted Shares shall become Earned Shares such that the
substantial limitations on the holder's enjoyment of incidents of ownership in
the Restricted Shares will lapse and be suspended and the holder thereof will
become entitled to all incidents of ownership in the Earned Shares, subject only
to Termination Forfeiture and the restrictions on transfer hereinafter set
forth. The specific performance criteria and the related terms and conditions
whereby Restricted Shares may become Earned Shares are set forth in Sections 7
and 13 of this Agreement.
(d) Interpretation of "Percentage." Whenever this Agreement
refers to a "percentage" as to Shares, the percentage shall refer to a
percentage based on 100%, and not based on the percentage of the stated
percentage of such Shares. By way of example and not limitation, a "percentage"
of the 51%, 38% and/or 25%, respectively, refers to said 51%, 38% and/or 25%
being viewed as a total of 51, 38 and/or 25 increments of 1% each (and not to
100 increments of .51%, .38% and/or .25%), respectively. By way of further
example and not limitation, if the total of 51% of issued and outstanding
Management Shares (including all Unrestricted, Restricted and Earned Shares) is
represented by 510,000 Shares, then 38% of the 51% shall refer to 380,000
Shares, 5% of the 38% shall refer to 50,000 Shares, and so forth.
<PAGE>
14
3. Representations of Employee. Employee hereby represents and warrants
to the Corporation that:
(a) Investment Intent. The Employee Shares (including those to
be acquired pursuant to the Exchange) were or will be acquired for Employee's
own account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
any applicable state securities laws, and the Employee Shares shall not be
disposed of in contravention of the Securities Act or any applicable state
securities laws.
(b) Accredited Investor. Employee is an executive officer of
the Corporation and (i) is an "accredited investor" as defined in Rule 501(a)
under the Securities Act or (ii) by reason of Employee's business and financial
experience, and the business and financial experience of those retained by
Employee to advise Employee with respect to Employee's investment in the
Employee Shares purchased pursuant to the Old Agreement or the Exchange,
Employee, together with such advisors, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the risks and benefits of the investment in the Employee Shares.
(c) Risk of Investment. Employee is able to bear the economic
risk of the investment in the Employee Shares, including the complete loss of
such investment in the Employee Shares, for an indefinite period of time because
the Employee Shares have not been registered under the Securities Act and,
therefore, cannot be sold unless subsequently registered under the Securities
Act or an exemption from such registration is available.
<PAGE>
15
(d) Adequate Information. Employee has had an opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering of Employee Shares and has had full access to such other information
concerning the Corporation as Employee has requested.
(e) Binding Agreement. This Agreement constitutes the legal,
valid and binding obligation of Employee, enforceable against Employee in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and fair
dealing. The execution, delivery and performance of this Agreement does not
conflict with, violate or cause a breach of any agreement, contract or
instrument to which Employee is a party or any judgment, order or decree to
which Employee is subject.
4. Representations and Warranties of the Corporation. The Corporation
hereby represents and warrants to Employee that:
(a) Corporate Entity. The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
(b) Binding Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by the Corporation. This Agreement
constitutes a valid and binding obligation of the Corporation enforceable
against it in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors'
<PAGE>
16
rights generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing.
(c) Fully Paid and Non-Assessable Shares. All Shares acquired
by the Employee pursuant to the Old Agreement have been validly issued, and
Shares acquired upon the Reclassification and the Exchange will be validly
issued, and all such Shares are or will be, as the case may be, fully paid and
nonassessable when issued.
5. Limitations on Restricted Shares. Employee will be entitled to enjoy
all incidents of ownership of the Restricted Shares, except that (i) such shares
shall be subject to the risk of Termination Forfeiture and (ii) may not be sold,
transferred, pledged or otherwise disposed of until September 29, 2005 other
than to an immediate family member of such holder or any trust or partnership of
which all of the beneficiaries or partners, as the case may be, are such holder
and/or immediate family members of such holder, so long as the transferee agrees
in writing to be bound by the restrictions set forth in this Agreement. All
Restricted Shares that have become Earned Shares subsequent to the date hereof
(i.e., not including the 13% deemed Unrestricted Shares by virtue of amendments
to the Old Agreement) shall become permanently vested with Employee or his
Permitted Transferees as Unrestricted Shares and shall no longer be subject to
any Termination Forfeiture on September 29, 2005. Restricted Shares not yet
earned and redesignated as Earned Shares by September 29, 2005 shall be called
and repurchased by the Corporation as set forth in Section 7 hereof.
<PAGE>
17
6. Earned Shares.
(a) Repurchase Upon Termination Forfeiture Event. Restricted
Shares will be deemed and become Earned Shares upon the Corporation's attaining
the Performance Criteria set forth in Section 13 hereof.
(b) Incidents of Ownership. Subject to the restrictions on
transfer contained herein and the risk of Termination Forfeiture, the holder of
Earned Shares will enjoy all incidents of ownership to such shares, including
the right to receive all dividends and to vote such shares.
7. Redemption of Restricted Shares Not Earned. (a) Call and Repurchase
by Corporation. Shares that remain Restricted Shares on September 29, 2005
(i.e., which have not previously been converted to Earned Shares) (the "Unearned
Restricted Shares") shall be called and redeemed by the Corporation at the
Adjusted Original Price. The Board of Directors of the Corporation may establish
reasonable notice provisions, time frames, procedures and otherwise as it deems
reasonable or necessary to facilitate and effect the transaction contemplated by
this Section 7(a). Subject to Section 8(b), the Corporation must call and
purchase such shares from Employee within sixty (60) days of September 29, 2005.
(b) Reoffer of Restricted Shares Not Earned. Subject to
applicable federal and state securities laws, Unearned Restricted Shares so
acquired by the Corporation shall be offered by the Corporation at the Adjusted
Original Price to the Original Investors pro rata with their holdings of shares
of common stock, par value $.10 per share, prior to the IPO.
<PAGE>
18
8. Termination Forfeiture.
(a) Termination for Cause; Resignation. If a Termination
Forfeiture Event occurs, then all Restricted Shares issued to Employee (whether
or not then converted to the status of Earned Shares) shall be called and
repurchased by the Corporation at the Adjusted Original Price, subject to
Section 8(b) hereof.
(b) Deferral of Purchase by Corporation. In the event that any
payment by the Corporation under Section 7(a) or 8(a) for such shares would
constitute a default or an event of default or result in a mandatory prepayment
requirement under the terms of any agreement for indebtedness or other agreement
to which the Corporation or any of its subsidiaries is a party as of the date
for such purchase, the Corporation shall have the right, by delivery of written
notice to the Employee, to defer exercise of its call and purchase right until
such payment by the Corporation would no longer have such an effect; provided
that the Corporation's exercise of its purchase right may not be deferred for
more than six (6) months. The Corporation shall give Employee prompt written
notice of when it is no longer restricted from making such purchase, and the
procedures set forth in Section 7(a) or 8(a) hereof, as the case may be, shall
apply as though the date giving rise to the purchase right occurred on the date
such notice is given.
(c) Procedures. The Board of Directors of the Corporation may
establish reasonable notice provisions, time frames, procedures and otherwise as
it deems reasonable or necessary to facilitate and effect the transaction
contemplated by this Section; provided, the Corporation may not exercise its
option and call the Shares subject
<PAGE>
19
to the Termination Forfeiture later than ninety (90) days after the Corporation
receives written notice of the Termination Forfeiture Event.
9. Termination of Employment Without Cause or by Employee for Good
Reason. Upon termination of employment of Employee under the Employment
Agreement by the Corporation without Cause (as defined in the Employment
Agreement) or by the Employee for Good Reason (as defined in the Employment
Agreement), all limitations, restrictions, risks of forfeiture and conditions
which relate to Restricted Shares (as unearned Restricted Shares or Earned
Restricted Shares) held by Employee, including but not limited to risk of
Termination Forfeiture, limitations on transfer or risk of call by the Board for
non-conversion to Earned Shares, will automatically and permanently lapse and
all Restricted Shares and Earned Shares will permanently become Unrestricted
Shares held by Employee. The restrictions, terms and conditions of the
Stockholders' Agreement (or any other applicable agreement) then in effect shall
remain in full force and effect.
10. Death or Total Disability of Employee. Where termination of
Employee is due to Disability (as that term is defined in the Employee's
Employment Agreement) or death, (i) all risks of Termination Forfeiture shall
immediately lapse and terminate and (ii) as to any Restricted Shares held by
Employee as of the date of such event, the Disabled or deceased Employee (or his
duly authorized successors) will receive the benefit of the Corporation's
performance over the two (2) fiscal year ends immediately following such
termination as to the Corporation attaining the Performance Criteria such that
Restricted Shares may become Earned Shares and Unrestricted Shares. By way of
clarification, restrictions and risks of forfeiture as to Restricted Shares held
by the
<PAGE>
20
Disabled or deceased Employee (or his successors) shall permanently lapse and
Restricted Shares shall become Earned (and therefore Unrestricted Shares) to the
extent that the Corporation attains the Adjusted EBITDA Performance Criteria set
forth herein at such two (2) fiscal year ends.
11. Reissue of Forfeit Shares. Forfeit Shares shall be reoffered by the
Corporation to Initial Management, pro rata based on their relative percentage
ownership of shares of common stock, par value $.10 per share, immediately
following the initial capitalization of the Company, at the Adjusted Original
Price per share, as the same may be further readjusted from time to time.
12. Performance Criteria. Restricted Shares may be earned and become
Earned Shares upon attainment by the Corporation of the following performance
criteria (the "Performance Criteria"):
(a) Adjusted EBITDA Threshold. One thirteenth (1/13) of the
Restricted Shares (allocated pro rata among Restricted Shares also designated
Reallocable and other Restricted Shares) will be redesignated as (and deemed to
be earned as) "Earned Shares" for every one million dollars ($1,000,000) of
annual Adjusted EBITDA earned by the Corporation, subject to the limitations set
forth in Section 12(b) hereof. Any incremental portion of Adjusted EBITDA less
than $1,000,000 will be disregarded for such calculation.
(b) Determination of Attained Thresholds and Earned Shares.
The number of Restricted Shares with respect to which restrictions and risk of
forfeiture will lapse shall be based on the highest annual Adjusted EBITDA of
the Corporation attained at any time and from time to time; provided, however,
Restricted Shares shall not be
<PAGE>
21
redesignated as Earned Shares until the Corporation's annual Adjusted EBITDA for
a fiscal year reaches or exceeds fourteen million dollars ($14,000,000). By way
of example and not limitation, where Adjusted EBITDA in a given year is
$13,300,000, then no restrictions or risk of forfeiture shall lapse and no
Restricted Shares shall become Earned Shares. If Adjusted EBITDA in a given year
is $14,000,000 (to $14,999,999.99), then Management shall be deemed to have
earned rights to 1/13 of the Restricted Shares, and such Restricted Shares
automatically shall become Earned Shares. Thereafter, if Adjusted EBITDA in a
given year is $20,000,000, then Management shall be deemed to have earned rights
to a total of 7/13 (i.e., an additional 6/13) of the Restricted Shares, and so
forth. Accordingly, Management's rights to have all Restricted Shares become
Earned Shares will not occur until such time as the Corporation realizes
Adjusted EBITDA of twenty-six million dollars ($26,000,000) or more in a given
fiscal year.
(c) Reduction in Adjusted EBITDA; Averaging. Once Restricted
Shares are earned, based upon the Corporation's annual Adjusted EBITDA for a
given fiscal year, and such Shares are redesignated as Earned Shares, such
Earned Shares shall not be affected by the fact that the Corporation's annual
Adjusted EBITDA may decline for any subsequent fiscal year. However, once
Adjusted EBITDA of $14,000,000 or more has been attained, if the Corporation's
annual Adjusted EBITDA declines in a subsequent fiscal year from the highest
level at which additional Restricted Shares become Earned Shares, additional
Restricted Shares will not become Earned Shares until the Corporation's average
annual Adjusted EBITDA for the fiscal years including and following the year of
such decline in annual Adjusted EBITDA is greater than the level
<PAGE>
22
of annual Adjusted EBITDA at which Restricted Shares were last earned. For
example, no additional Restricted Shares would be earned if annual Adjusted
EBITDA in the most recent year in which Restricted Shares were earned had been
$16,000,000, such annual Adjusted EBITDA declined to $14,000,000 in the
following year and thereafter increased to $17,000,000 in the subsequent year
(the average of $14,000,000 and $17,000,000 is $15,500,000, which does not
exceed $16,000,000, the level of annual Adjusted EBITDA for the most recent year
in which Restricted Shares were earned). Additional Restricted Shares would not
be earned in this example until such average annual Adjusted EBITDA was at least
$17,000,000. As is always the case, additional Restricted Shares are not earned
as Earned Shares until annual Adjusted EBITDA increases from the prior year to
the next $1,000,000 threshold of Adjusted EBITDA (and thereafter additional
Restricted Shares are earned for each $1,000,000 threshold).
(d) Resumption of Thresholds. After the average Adjusted
EBITDA has exceeded the Adjusted EBITDA for the year of Adjusted EBITDA at which
Restricted Shares were last earned, then no averaging shall be applicable for so
long as Adjusted EBITDA does not decrease from a prior year's.
(e) Pro Rata Conversion. Upon the Corporation's attaining the
Performance Criteria from time to time, Restricted Shares held by all Management
(and their Permitted Transferees) shall be converted pro rata into Earned
Shares, based on the number of all Restricted Shares then held by all Management
(and their Permitted Transferees). Provided, nothing herein shall be construed
to limit the authority or ability of the Stock Reallocation Committee to require
or impose additional, more strict or other conditions, restrictions,
requirements or limitations as to Restricted Shares held by other
<PAGE>
23
than Initial Management, such that vesting of and/or lapse of restrictions on
such Restricted Shares may be delayed, prohibited, limited or otherwise with
respect to Management other than Initial Management.
13. Successors and Assigns. The duly authorized Permitted Transferees
(as such term is defined in the Stockholders' Agreement prior to any amendment
thereof) and holders of Restricted Shares and Reallocable Shares originally held
from or through Management, including any transferee obtaining Restricted Shares
in accordance with Section 5 hereof, shall be subject to the same restrictions,
obligations, call rights, purchase options, benefits, put options, terms and
otherwise as would be applicable if such shares were held directly by
Management. All restrictions, forfeiture and repurchase provisions and other
terms and conditions relating to Restricted Shares and Reallocable Shares shall
be binding on and inure to the benefit of the transferees, successors and
assignees of those shares.
14. Sale of All or Substantially All Stock or Assets, or Merger. In the
event that all or substantially all of the Corporation's stock or all or
substantially all assets of the Corporation are transferred or sold, or upon a
merger or other business combination, then all Restricted Shares will become
Unrestricted Shares to the extent that value for the entire Corporation
indicated by the gross sale price as determined in good faith by the Board of
Directors in such transaction results in an internal rate of return to those
Original Investors who, at the time of such transaction, continue to be
stockholders of the Corporation, of at least 40% on a compounded annual basis
based upon such persons' original holdings in the Corporation (after taking into
account the amount and timing of all distributions and payments received by
those Original Investors from the Corporation,
<PAGE>
24
after considering Unrestricted and Earned Shares then held by Management, and
after giving effect to Restricted Shares that become Unrestricted Shares as
result of such sale, transfer or merger). Restricted Shares that do not become
Unrestricted Shares as a result of such sale, transfer or merger shall retain
their characteristics and potential benefits as Restricted Shares under this
Agreement, unless such issue is expressly addressed in the documentation with
respect to such sale, transfer or merger. The Corporation may, without the
consent of Employee, modify or eliminate the Restricted Share rights and
designation as to Restricted Shares not converted to Unrestricted Shares in the
documentation with respect to such sale, transfer or merger where the
Corporation agrees in writing to such matters as part of such sale, transfer or
merger.
15. Legends. Employees agrees that all share certificates representing
Shares issued to Employee under the Agreement shall have the legend required by
the Stockholders' Agreement or as otherwise may be reasonably be imposed by the
Corporation.
16. Additional Covenants.
(a) Stockholders' Agreement. Employee hereby acknowledges that
the Shares shall be subject to the terms and conditions of the Stockholders'
Agreement. Employee has received a copy of such Stockholders' Agreement and
Employee further acknowledges that such Stockholders' Agreement contains
provisions restricting the transferability of the Shares in addition to those
set forth herein.
(b) Dilution. All Shares held by Management (including
Restricted Shares) will be diluted under the same circumstances as and pro rata
with any Shares held by an Original Investor and all other stockholders of the
Corporation.
<PAGE>
25
(c) Not an Employment Agreement. This Agreement is not an
employment contract, the terms and conditions of which shall exclusively be
controlled by the provisions of the Employment Agreement.
(d) Stock Dividends, Stock Splits and Recapitalizations. If
dividends are declared and payable in kind, and in the event of a stock split,
recapitalization or other transaction which causes shares to be issued or
exchanged, the additional, issued, successor, substituted, and/or replacement
shares shall bear the same characteristics, restrictions, rights, obligations,
options and otherwise as the shares with respect to which such additional
issued, successor, substituted and/or replacement shares arose, for all purposes
and the Adjusted Original Price shall be further adjusted on a proportional
basis to reflect such change.
(e) Preemptive Shares. If shares are acquired pursuant to
pre-emptive (or substantially similar) rights by Employee, said acquired shares
shall possess and be subject to the same characteristics, restrictions, rights
obligations, options and otherwise as the shares giving rise to the acquisition
of such additional shares.
17. Withholding Taxes; Section 83(b) Election. (a) Withholding Taxes.
Employee shall be solely responsible for paying the Corporation an amount
necessary to satisfy the withholding and payment of all applicable federal and
state income tax withholdings, if any, including but not limited to social
security (FICA) and Medicare tax, at the applicable rates in existence as of
September 29, 1995. Employee hereby authorizes the Corporation to withhold from
any amounts otherwise payable to Employee such taxes as may be required by law
in connection with the issue to Employee of the Shares. Employee agrees that if
such
<PAGE>
26
amounts are insufficient Employee will pay or make arrangements satisfactory to
the Corporation for payment of such taxes.
(b) Section 83(b) Election. Employee has filed an election
under I.R.C. Section 83(b) and the parties hereto acknowledge and agree that
withholding taxes shall be computed as an amount equal to (1) the fair market
value of the Shares issued to the Employee pursuant to the Old Agreement as of
September 29, 1995 less (2) any amount paid therefor. The Corporation shall
assist Employee at his request in the filing and perfecting of such I.R.C.
Section 83(b) election.
18. Notices. All notices permitted or required hereunder shall be in
writing and shall be deemed to have been duly and properly given as of the
earlier of the date and time of actual delivery or three (3) days following the
date the same are deposited with the United States Postal Service, postage
prepaid, to be sent certified mail with return receipt requested, and addressed
to the Corporation, as follows:
U.S. Franchise Systems, Inc.
Attention: Michael A. Leven
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
and addressed to Employee, as follows:
Mr. Neal K. Aronson
c/o U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
or at such other address as the Corporation or Employee may at any time and from
time to time specify to the other by notice as herein provided.
<PAGE>
27
19. Miscellaneous.
(a) This Amended and Restated Employee Stock Purchase
Agreement shall not be effective unless and until the closing of the IPO.
(b) Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective agents,
representatives, successors and
permitted assigns.
(c) Cooperation. The parties shall cooperate fully with each
other and their respective counsel and representatives in connection with all
steps to be taken as part of their obligations under this Agreement.
(d) Governing Law. This Agreement and the rights and duties of
the parties attendant hereto shall be construed and governed in accordance with
the internal laws (and not the conflict of laws) of the State of Georgia.
(e) No Waiver. The failure of either party to insist, in one
or more instances, on the performance by the other in strict compliance with the
terms and conditions of this Agreement, shall not be deemed a waiver or
relinquishment of any right granted hereunder or of any terms and conditions of
this Agreement unless such waiver is contained in a writing signed by the
parties.
(f) Entire Agreement. This Agreement and any amendments or
exhibits attached hereto or related documents referenced herein comprise all the
agreement, understandings, representations, conditions and warranties by and
between the parties. This Agreement may not be modified or amended except in a
writing signed by the parties to this Agreement.
<PAGE>
28
(g) Survival. All representations, warranties and covenants
contained in this Agreement shall survive the execution and delivery of this
Agreement and all documents executed in performance of this Agreement.
(h) Interpretation. Within this Agreement, the singular shall
include the plural and the plural shall include the singular, and any gender
shall include the other gender, as the meaning in the context of this Agreement
shall require. Should any provision of this Agreement require judicial
interpretation, it is agreed that the court interpreting or construing the same
shall not imply a presumption that the terms hereof shall be more strictly
construed against one party by reason of the rule of construction that a
document is to be construed more strictly against the party who itself or
through its agent prepared this Agreement, it being agreed that all parties have
had the opportunity to review and understand this Agreement.
(i) Injunctive Relief. In the event of a breach or threatened
breach by a party of any of his obligations hereunder, the parties hereby
acknowledge and agree that the parties will not have an adequate remedy at law
and shall be entitled to such equitable and injunctive relief as may be
available to restrain a threatened or actual violation. Nothing herein shall be
construed as prohibiting a party from pursuing any other remedies available for
such breach or threatened breach, including without limitation the recovery of
damages. All remedies shall be cumulative. No party shall be required to post a
bond or other surety as a condition to obtaining such injunctive relief.
<PAGE>
29
20. Multiple Counterparts. This Agreement may be simultaneously
executed in several counterparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
21. Record Owner. The Corporation shall not be required (i) to transfer
on its books any shares that shall have been sold or otherwise transferred in
violation of any of the provisions set forth in this Agreement or the
Stockholders' Agreement or (ii) to treat the improper transferee as owner of
such shares or to accord to such improper transferee the right to vote, if any,
as such owner.
<PAGE>
30
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Stock Purchase Agreement on the date first above written.
CORPORATION:
U.S. FRANCHISE SYSTEMS, INC.
By:______________________________
Michael A. Leven
Chairman, President and
Chief Executive Officer
ATTEST:
By:_____________________________
____________ Secretary
EMPLOYEE:
---------------------------
NEAL K. ARONSON
<PAGE>
EXHIBIT "A"
-----------
EMPLOYEE SHARES
---------------
(as of September 29, 1995)
<TABLE>
<CAPTION>
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
<S> <C> <C> <C>
(a) Restricted Shares
(i) Reallocable 66,735 33,367 33,368
(ii) Non-Reallocable 222,449 111,225 111,224
Total Restricted Shares: 289,184 144,592 144,592
(b) Unrestricted Shares
(i) Reallocable 55,612 33,367 22,245
(ii) Non-Reallocable 222,449 133,470 88,979
Total Unrestricted Shares: 278,061 166,837 111,224
Total Shares Issued Hereunder: 567,245 311,429 255,816
</TABLE>
<PAGE>
EXHIBIT "B"
EMPLOYEE SHARES
(as of the closing of the IPO but pre-Reclassification)
<TABLE>
<CAPTION>
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
<S> <C> <C> <C>
(a) Restricted Shares
(i) Reallocable(2) 22,592 11,296 11,296
(ii) Non-Reallocable 122,000 61,000 61,000
Total Restricted Shares: 144,592 72,296 72,296
(b) Unrestricted Shares
(i) Reallocable(2) 62,911 35,488 27,423
(ii) Non-Reallocable 359,742 203,645 156,097
Total Unrestricted Shares: 422,653 239,133 183,520
Total Shares Issued Hereunder: 567,245 311,429 255,816
EMPLOYEE SHARES
(as of the closing of the IPO)
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
(a) Restricted Shares
(i) Reallocable(2) 218,464 109,232 109,232
(ii) Non-Reallocable 1,179,740 589,870 589,870
Total Restricted Shares: 1,399,204 699,102 699,102
(b) Unrestricted Shares
(i) Reallocable(2) 608,349 343,169 265,180
(ii) Non-Reallocable 3,478,705 1,969,247 1,509,458
Total Unrestricted Shares: 4,087,054 2,312,416 1,774,638
Total Shares Issued Hereunder: 5,485,258 3,011,518 2,473,740
</TABLE>
- --------
(1) Includes shares previously transferred by Mr. Leven to his wife Andrea and
his two adult sons in accordance with Mr. Leven's Employee Stock Purchase
Agreement.
(2) Represents shares that have previously been allocated to other Management in
accordance with the Old Stock Purchase Agreement.
Exhibit 10.7
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
---------------------------------
Michael A. Leven
----------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
1. Definitions................................................................3
2. Management Equity Participation............................................9
3. Representations of Employee...............................................14
4. Representations and Warranties of the Corporation.........................15
5. Limitations on Restricted Shares..........................................16
6. Earned Shares.............................................................17
7. Redemption of Restricted Shares Not Earned................................17
8. Termination Forfeiture....................................................18
9. Termination of Employment Without Cause or by Employee
for Good Reason...........................................................19
10. Death or Total Disability of Employee.....................................19
11. Reissue of Forfeit Shares.................................................20
12. Performance Criteria......................................................20
13. Successors and Assigns....................................................23
14. Sale of All or Substantially All Stock or Assets, or Merger...............23
15. Legends...................................................................24
16. Additional Covenants......................................................24
17. Withholding Taxes; Section 83(b) Election.................................25
18. Notices...................................................................26
19. Miscellaneous.............................................................27
20. Multiple Counterparts.....................................................29
21. Record Owner..............................................................29
i
<PAGE>
THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT AND THE SECURITIES
ISSUED UPON THE TERMS HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER THIS
AGREEMENT NOR THE UNDERLYING SECURITIES MAY BE ASSIGNED, HYPOTHECATED,
ENCUMBERED, PLEDGED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED BY THE
TERMS HEREOF, IN ACCORDANCE WITH THE TERMS OF A SEPARATE STOCKHOLDERS' AGREEMENT
DATED ON OR ABOUT THE DATE HEREOF, AS THE SAME MAY BE AMENDED FROM TIME TO TIME,
AND PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
STATE OF GEORGIA
COUNTY OF FULTON
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
This Amended and Restated Employee Stock Purchase Agreement
(as amended, the "Agreement") is entered into as of the ___ day of _____________
1996, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the
"Corporation"), and MICHAEL A. LEVEN, an individual resident of the State of
Georgia (the "Employee").
WHEREAS, on September 29, 1995, the Employee and the
Corporation executed an Employee Stock Purchase Agreement (the "Old Agreement"),
pursuant to which the Corporation issued to the Employee and to Neal K. Aronson
(together, the "Initial Management") a total of 567,245 shares of common stock,
par value $.10 per share (the "Old Common Stock"), of the Corporation,
constituting 51% of the then issued and outstanding common shares of the
Corporation;
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WHEREAS, as set forth in greater detail on Exhibit A hereto,
278,061 of such shares, or 25% of the then outstanding common shares of the
Corporation, were acquired outright by Initial Management as Unrestricted Shares
(as defined in the Old Agreement) and 289,184 of such shares, or 26% of the then
outstanding common shares, were acquired by Initial Management as Restricted
Shares (as defined in the Old Agreement), subject to the terms and conditions
and provisions as set forth in the Old Agreement;
WHEREAS, with respect to the 26% of the then outstanding
common shares that were held by Initial Management as Restricted Shares (as
defined in the Old Agreement), the Old Agreement (i) limited the rights of
Initial Management to vote and to receive dividends with respect to such shares,
(ii) imposed substantial restrictions on the transferability of such shares
until such shares were "earned" by Initial Management by reason of the
Corporation's satisfaction of certain performance criteria set forth therein and
(iii) provided that such shares were subject to forfeiture in the event the
employment of the Management holder thereof was terminated in certain
circumstances;
WHEREAS, the Corporation is considering an IPO (as defined
below) with respect to its common shares, as adjusted for the Reclassification
(as defined below);
WHEREAS, in connection with the IPO, the Corporation and the
Employee have agreed to eliminate some of the restrictions that were imposed on
Restricted Shares pursuant to the Old Agreement and to deem that certain shares
designated as Restricted Shares pursuant to the Old Agreement be redesignated as
Unrestricted Shares;
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NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which is hereby acknowledged, the parties
do hereby agree to amend and restate the Old Agreement, as so amended, as
follows:
1. Definitions. For purposes hereof, the following terms shall be
defined as follows:
(a) "Adjusted EBITDA" for any fiscal year of the Corporation
means (i) consolidated earnings of the Corporation and its subsidiaries before
consolidated interest, taxes, depreciation, amortization, and other non-cash
charges, adjusted to exclude one-time or non-recurring expenses or credits (such
exclusions to include but not be limited to the payments to Hudson Hotels
Corporation (formerly known as Microtel Franchising and Development Corporation)
in the total amount of $4 million dollars pursuant to the terms of that certain
Joint Venture Agreement dated September 7, 1995) for such fiscal year, as
determined by the Corporation in good faith in accordance with generally
accepted accounting principles consistently applied, minus (ii) 10% of the
Transaction Consideration (as defined below) actually paid by the Corporation
and/or its subsidiaries in connection with a Transaction (as defined below)
closed after the closing of the IPO (provided that such consideration has not
been deducted in determining the amount referred to in clause (i) above). In the
event of any dispute or disagreement regarding the determination of the amount
of Adjusted EBITDA, then such dispute or disagreement shall be resolved by the
accounting firm regularly engaged to and providing auditing services to the
Corporation.
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(b) "Earned Shares" means those Shares that are designated
herein as Restricted Shares and are subsequently redesignated as Earned Shares
in accordance with the terms hereof due to the attainment by the Corporation of
certain performance standards as provided for herein.
(c) "Employee Shares" means the Restricted Shares and
Unrestricted Shares held by Employee under this Agreement.
(d) "Employment Agreement" means that certain agreement
relating to the employment of Employee with the Corporation dated October 1,
1995, as the same may be amended from time to time.
(e) "Initial Management" means Employee and Neal K. Aronson.
(f) "IPO" shall mean the initial public offering of Shares
pursuant to the Securities Act of 1933, as amended.
(g) "Management" means the group of individuals (including
Initial Management) who are employees of the Corporation and who have been
issued shares of Class A Common Stock pursuant to the terms of the Old Agreement
or a stock purchase agreement substantially similar to the Old Agreement, as the
same may be amended from time to time (with such changes thereto as are
authorized by the Stock Reallocation Committee).
(h) "Management Shares" means Shares issued to and acquired by
Management (or their permitted designees and successors), including Unrestricted
Shares, Restricted Shares, Earned Shares, Reallocable Shares, shares acquired
through preemptive (or similar) rights or otherwise from or through the
Corporation and such shares that are transferred to other Management.
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(i) "Original Stockholders" or "Original Investors" means
those persons who are not employees of the Corporation and who were issued
shares of Old Common Stock pursuant to the offering described in the
Confidential Investment Memorandum of the Corporation, dated August 19, 1995,
and their Permitted Transferees (as such term is used in that certain
Stockholders' Agreement among the Corporation and the Original Investors, dated
as of September 29, 1995).
(j) "Reallocable Shares" means those Restricted Shares and/or
Unrestricted Shares owned or held by Initial Management that were specifically
designated at the time of their original issue as Reallocable Shares and that,
prior to the date hereof, have been reallocated to other Management pursuant to
the Old Agreement. Such shares shall retain such designation regardless of
whether they are converted from Restricted Shares to Earned Shares (in the case
of Reallocable Restricted Shares), unless and until such shares become Forfeit
Shares and are redeemed or otherwise repurchased by the Corporation from the
Management holder (other than Initial Management) thereof.
(k) "Reclassification" means the conversion of each share of
Old Common Stock into 9.67 shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock"), of the Corporation pursuant to the Corporation's
Amended and Restated Certification of Incorporation, which is to be filed with
the State of Delaware prior to the consummation of the IPO.
(l) "Restricted Shares" means 144,592 Shares (prior to the
Reclassification), constituting 13% of the outstanding common stock of the
Corporation as of October 2, 1995), that were issued to Initial Management
pursuant to the Old Agreement and that were specifically designated at the time
of issue as Restricted Shares,
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as the same are reclassified pursuant to the Reclassification. Restricted Shares
are subject to repurchase (even if they have been converted to Earned Shares)
pursuant to a Termination Forfeiture. Restricted Shares are eligible for
conversion to Earned Shares upon attainment by the Corporation of certain
performance criteria as set forth herein. Restricted Shares that have not been
converted to Earned Shares by September 29, 2005 are subject to redemption by
the Corporation (and reissue to the Original Investors). If such shares are then
reissued to Original Investors, such shares shall automatically be converted to
and shall thereafter be deemed to be Unrestricted Shares.
(m) "Shares" means the shares of the Old Common Stock that
were authorized immediately prior to the Reclassification, as reclassified by
the Reclassification into Class A Common Stock and, to the extent set forth in
Section 2(b)(iv) hereof, exchanged for Class B Common Stock, par value $.01 per
share ("Class B Common Stock"), of the Corporation, all as the same may be
further reclassified from time to time.
(n) "Stock Reallocation Committee" means the committee
appointed by the Board of Directors of the Corporation from among its members to
administer the reallocation of Reallocable Shares hereunder.
(o) "Stockholders' Agreement" means that certain Stockholders'
Agreement dated as of September 29, 1995 by and between the Corporation and the
Stockholders named therein, as such agreement may be amended from time to time.
Employee acknowledges that all of the Shares held by Employee hereunder shall be
issued and held in accordance with the terms of the Stockholders' Agreement, in
addition to the terms and conditions hereof.
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(p) "Termination Forfeiture" means the redemption by the
Corporation from the Employee of Restricted Shares (whether or not converted to
Earned Shares) upon the occurrence of a Termination Forfeiture Event.
(q) "Termination Forfeiture Event" means the occurrence or
happening of one of the following during the period ending on September 29,
2005: (i) voluntary resignation for other than Good Reason (as defined in the
Employment Agreement) of Employee; or (ii) termination of Employee by the
Corporation for Cause (as defined in the Employment Agreement).
(r) "Transaction Consideration" means the total consideration
paid or to be paid in connection with a Transaction, including, without
limitation: (i) cash; (ii) notes, securities and other property; (iii)
indebtedness for borrowed money assumed, refinanced or extinguished; (iv)
amounts payable under consulting agreements, agreements not to compete or
similar arrangements; and (v) contingent payments (whether or not related to
future earnings or operations); provided, that in the event debt financing is
utilized to effect a Transaction, proceeds from such debt financing shall no
longer be considered as Transaction Consideration as and to the extent such
proceeds have been repaid to the lender thereof. For purposes of determining the
amount of consideration paid, non-cash consideration shall be valued as follows:
(x) publicly traded securities, including capital stock of the Corporation,
shall be valued at the average of their closing prices (as reported in The Wall
Street Journal) for the five trading days prior to the closing of the
Transaction and (y) any other non-cash consideration shall be valued at the fair
market value thereof as determined in good faith by the Board of Directors of
the Corporation.
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(s) "Transaction" means an acquisition by the Corporation
and/or its subsidiaries of another corporation or other entity, a business or a
brand, including, but not limited to, through a merger, consolidation, tender or
exchange offer, acquisition of securities or assets, or through a licensing
agreement, but excluding any investment in another corporation, joint venture or
other entity (an "entity") that represents less than 25% of the equity of such
entity.
(t) "Unrestricted Shares" means all Shares owned or held by
the Initial Management (or by other Management, in the case of Reallocable
Shares, or by the Permitted Transferees of Initial Management (as such term is
defined in the Stockholders' Agreement, prior to any amendment thereof)) that
have not been specifically designated herein as Restricted Shares, including but
not limited to Shares acquired for value from the Corporation pursuant to a
voluntary exchange (including the exchange referred to in Section 2(b)(iv)
hereof) or through preemptive (or similar) rights, stock splits or dividends
with respect to Unrestricted Shares and the like or other subsequently acquired
shares. Unrestricted Shares are held outright and subject to the terms and
conditions set forth in the Amended and Restated Certificate of Incorporation of
the Corporation, as the same may be amended from time to time, and in the
Stockholders' Agreement.
(u) Capitalized terms not defined in this Agreement shall have
the meaning and intent ascribed to them in the Stockholders' Agreement.
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2. Management Equity Participation.
(a) Stock Reallocation Committee. (i) Pursuant to the Old
Agreement, the Management Shares were initially issued, allocated, offered and
divided among Employee and Neal K. Aronson in the amounts and designations set
forth in Exhibit "A" attached hereto. Following the Reclassification, the IPO
and effectiveness of this amendment in accordance with Section 19 hereof,
Management (including Initial Management) will own Shares in the amounts and
designations set forth in Exhibit "B" attached hereto. Thereafter, subsequent
offers, call options, redemptions, and the like, in each case to the extent
permitted hereunder, shall be subject to the exclusive control and authority of
the Stock Reallocation Committee of the Corporation. The Stock Reallocation
Committee shall also have the authority to cause the Corporation to act with
respect to Management Shares that are forfeited by Management to the
Corporation, subject to the rights of Initial Management to have Forfeit Shares
reoffered to them under this Agreement.
(b) Unrestricted Shares.
(i) Thirty-eight percent (38%) of the total 51% of
Shares acquired by Initial Management pursuant to the Old Agreement are hereby
designated as Unrestricted Shares. 62,911 of such shares, or approximately
5.656% of the 38% constituting Unrestricted Shares were designated as
Reallocable Shares pursuant to the Old Agreement and have heretofore been called
and repurchased from time to time at the direction of the Stock Reallocation
Committee from Initial Management (or their Permitted Transferees) and sold to
other members of Management. The Stock Reallocation Committee has had and shall
continue to have the authority to impose such
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terms, conditions, limitations and otherwise as it deems reasonable, desirable
or necessary with respect to Reallocable Shares held by Management other than
Initial Management; provided, however, that following the effectiveness of this
Agreement, no other Shares (including Shares that have been forfeited to the
Corporation and reissued to Initial Management, as contemplated by Section
2(a)(ii) hereof) shall be subject to call and repurchase from Initial Management
(or their Permitted Transferees) for offer, sale and/or transfer to other
Management; and provided further, the Stock Reallocation Committee may not
permit such Reallocable Shares to be held by other Management under terms,
conditions, limitations and otherwise which are more favorable, desirable or
beneficial than as imposed on Initial Management, other than the provisions with
respect to the duration of service after which the risk of Termination
Forfeiture may lapse. The remaining approximately 32.34% of the 38% constituting
Unrestricted Shares shall be held outright, free and clear by Initial Management
(or their Permitted Transferees), are not subject to call, purchase or
reallocation by the Stock Reallocation Committee or otherwise, shall not be
subject to the risk of Termination Forfeiture, and the holders thereof shall
enjoy all incidents of ownership to such shares (subject to any restrictions or
limitations set forth in the Stockholders' Agreement).
(ii) Notwithstanding anything to the contrary in this
Agreement, while the Employee is still employed by the Corporation, the Stock
Reallocation Committee shall offer to Employee the opportunity to repurchase any
Reallocable Shares (Restricted, Earned and/or Unrestricted) that have heretofore
been called, repurchased, reallocated from the Employee and sold by the
Corporation at the direction of the Stock Reallocation Committee to other
Management, where, thereafter, such Reallocable Shares
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are forfeited to the Corporation or repurchased or held by the Corporation for
any reason ("Forfeit Shares"). Such Forfeit Shares shall be reoffered to the
Employee at the original purchase price of $1.00 per share, as such price is
adjusted for the Reclassification (the "Adjusted Original Price"), and the right
to purchase such shares may be exercisable by Employee at any time. Forfeit
Shares reacquired by Employee shall not regain their status as Reallocable
Shares and therefore shall not be subject to call and redemption by the Stock
Reallocation Committee for purpose of reallocation to other Management.
(iii) Unless otherwise specifically set forth in this
Agreement or in a separate written agreement between the Corporation and the
Employee, any and all shares acquired by the Employee from the Corporation for
value (other than Restricted Shares), including through a voluntary exchange
(including the exchange referred to in Section 2(b)(iv) hereof (the "Exchange"))
or pursuant to the exercise of preemptive (or similar) rights, or from stock
splits or stock dividends as to Unrestricted Shares (but not acquired shares
which are attributable to Restricted Shares), shall be deemed Unrestricted
Shares.
(iv) Immediately following the effectiveness of this
Amendment, the Corporation shall issue to Initial Management and Initial
Management shall purchase from the Corporation 2,706,557 shares of the
Corporation's Class B Common Stock (which shares shall be Unrestricted Shares)
in exchange for the same number of shares of the Corporation's Class A Common
Stock.
(c) Restricted Shares.
(i) Shares designated herein as Restricted Shares are
limited as to their incidents of ownership and other rights as herein
specifically set forth (but shall
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retain all other rights including, without limitation, the right to vote and to
receive dividends with respect to such shares) until such time as the Restricted
Shares are deemed "Earned" and converted to Earned Shares in accordance with the
terms hereof.
(ii) Thirteen percent (13%), or 144,592
(pre-Reclassification), of the 51% of Shares acquired by Initial Management
pursuant to the Old Agreement are hereby designated as Restricted Shares.
Restricted Shares are subject to the substantial restrictions on transferability
and the substantial risks of forfeiture as set forth under this Agreement.
22,593 shares (pre-Reclassification) or 2.0315% of the 13% constituting
Restricted Shares were designated as Reallocable Shares pursuant to the Old
Agreement and have heretofore called and repurchased from Initial Management (or
their Permitted Transferees) and sold by the Corporation to other Management in
the same manner as the Reallocable Shares referred to in Section 2(b) hereof.
While such Reallocable Shares are held by Management other than Initial
Management, such Shares shall cease to be Reallocable (but shall remain
Restricted (subject to being "Earned")). The Stock Reallocation Committee has
had and shall continue to have the authority to impose such terms, conditions,
limitations and otherwise as it deems reasonable, desirable or necessary with
respect to such Reallocable Shares held by Management other than Initial
Management; provided, however, that following the effectiveness of this
Agreement, no other Shares (including Forfeit Shares) shall be subject to call
and repurchase from Initial Management (or their Permitted Transferees) for
offer, sale and/or transfer to other Management; and provided further, the Stock
Reallocation Committee may not permit such Reallocable Shares to be held by
other Management under terms, conditions, limitations and otherwise which are
more favorable, desirable or beneficial than as
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imposed on Initial Management, other than the provisions with respect to the
duration of service after which the risk of Termination Forfeiture may lapse.
(iii) Where certain performance criteria are attained
by the Corporation, Restricted Shares shall become Earned Shares such that the
substantial limitations on the holder's enjoyment of incidents of ownership in
the Restricted Shares will lapse and be suspended and the holder thereof will
become entitled to all incidents of ownership in the Earned Shares, subject only
to Termination Forfeiture and the restrictions on transfer hereinafter set
forth. The specific performance criteria and the related terms and conditions
whereby Restricted Shares may become Earned Shares are set forth in Sections 7
and 13 of this Agreement.
(d) Interpretation of "Percentage." Whenever this Agreement
refers to a "percentage" as to Shares, the percentage shall refer to a
percentage based on 100%, and not based on the percentage of the stated
percentage of such Shares. By way of example and not limitation, a "percentage"
of the 51%, 38% and/or 25%, respectively, refers to said 51%, 38% and/or 25%
being viewed as a total of 51, 38 and/or 25 increments of 1% each (and not to
100 increments of .51%, .38% and/or .25%), respectively. By way of further
example and not limitation, if the total of 51% of issued and outstanding
Management Shares (including all Unrestricted, Restricted and Earned Shares) is
represented by 510,000 Shares, then 38% of the 51% shall refer to 380,000
Shares, 5% of the 38% shall refer to 50,000 Shares, and so forth.
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3. Representations of Employee. Employee hereby represents and warrants
to the Corporation that:
(a) Investment Intent. The Employee Shares (including those to
be acquired pursuant to the Exchange) were or will be acquired for Employee's
own account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
any applicable state securities laws, and the Employee Shares shall not be
disposed of in contravention of the Securities Act or any applicable state
securities laws.
(b) Accredited Investor. Employee is an executive officer of
the Corporation and (i) is an "accredited investor" as defined in Rule 501(a)
under the Securities Act or (ii) by reason of Employee's business and financial
experience, and the business and financial experience of those retained by
Employee to advise Employee with respect to Employee's investment in the
Employee Shares purchased pursuant to the Old Agreement or the Exchange,
Employee, together with such advisors, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the risks and benefits of the investment in the Employee Shares.
(c) Risk of Investment. Employee is able to bear the economic
risk of the investment in the Employee Shares, including the complete loss of
such investment in the Employee Shares, for an indefinite period of time because
the Employee Shares have not been registered under the Securities Act and,
therefore, cannot be sold unless subsequently registered under the Securities
Act or an exemption from such registration is available.
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(d) Adequate Information. Employee has had an opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering of Employee Shares and has had full access to such other information
concerning the Corporation as Employee has requested.
(e) Binding Agreement. This Agreement constitutes the legal,
valid and binding obligation of Employee, enforceable against Employee in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and fair
dealing. The execution, delivery and performance of this Agreement does not
conflict with, violate or cause a breach of any agreement, contract or
instrument to which Employee is a party or any judgment, order or decree to
which Employee is subject.
4. Representations and Warranties of the Corporation. The Corporation
hereby represents and warrants to Employee that:
(a) Corporate Entity. The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
(b) Binding Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by the Corporation. This Agreement
constitutes a valid and binding obligation of the Corporation enforceable
against it in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors'
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rights generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing.
(c) Fully Paid and Non-Assessable Shares. All Shares acquired
by the Employee pursuant to the Old Agreement have been validly issued, and
Shares acquired upon the Reclassification and the Exchange will be validly
issued, and all such Shares are or will be, as the case may be, fully paid and
nonassessable when issued.
5. Limitations on Restricted Shares. Employee will be entitled to enjoy
all incidents of ownership of the Restricted Shares, except that (i) such shares
shall be subject to the risk of Termination Forfeiture and (ii) may not be sold,
transferred, pledged or otherwise disposed of until September 29, 2005 other
than to an immediate family member of such holder or any trust or partnership of
which all of the beneficiaries or partners, as the case may be, are such holder
and/or immediate family members of such holder, so long as the transferee agrees
in writing to be bound by the restrictions set forth in this Agreement. All
Restricted Shares that have become Earned Shares subsequent to the date hereof
(i.e., not including the 13% deemed Unrestricted Shares by virtue of amendments
to the Old Agreement) shall become permanently vested with Employee or his
Permitted Transferees as Unrestricted Shares and shall no longer be subject to
any Termination Forfeiture on September 29, 2005. Restricted Shares not yet
earned and redesignated as Earned Shares by September 29, 2005 shall be called
and repurchased by the Corporation as set forth in Section 7 hereof.
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6. Earned Shares.
(a) Repurchase Upon Termination Forfeiture Event. Restricted
Shares will be deemed and become Earned Shares upon the Corporation's attaining
the Performance Criteria set forth in Section 13 hereof.
(b) Incidents of Ownership. Subject to the restrictions on
transfer contained herein and the risk of Termination Forfeiture, the holder of
Earned Shares will enjoy all incidents of ownership to such shares, including
the right to receive all dividends and to vote such shares.
7. Redemption of Restricted Shares Not Earned.
(a) Call and Repurchase by Corporation. Shares that remain
Restricted Shares on September 29, 2005 (i.e., which have not previously been
converted to Earned Shares) (the "Unearned Restricted Shares") shall be called
and redeemed by the Corporation at the Adjusted Original Price. The Board of
Directors of the Corporation may establish reasonable notice provisions, time
frames, procedures and otherwise as it deems reasonable or necessary to
facilitate and effect the transaction contemplated by this Section 7(a). Subject
to Section 8(b), the Corporation must call and purchase such shares from
Employee within sixty (60) days of September 29, 2005.
(b) Reoffer of Restricted Shares Not Earned. Subject to
applicable federal and state securities laws, Unearned Restricted Shares so
acquired by the Corporation shall be offered by the Corporation at the Adjusted
Original Price to the Original Investors pro rata with their holdings of shares
of common stock, par value $.10 per share, prior to the IPO.
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8. Termination Forfeiture.
(a) Termination for Cause; Resignation. If a Termination
Forfeiture Event occurs, then all Restricted Shares issued to Employee (whether
or not then converted to the status of Earned Shares) shall be called and
repurchased by the Corporation at the Adjusted Original Price, subject to
Section 8(b) hereof.
(b) Deferral of Purchase by Corporation. In the event that any
payment by the Corporation under Section 7(a) or 8(a) for such shares would
constitute a default or an event of default or result in a mandatory prepayment
requirement under the terms of any agreement for indebtedness or other agreement
to which the Corporation or any of its subsidiaries is a party as of the date
for such purchase, the Corporation shall have the right, by delivery of written
notice to the Employee, to defer exercise of its call and purchase right until
such payment by the Corporation would no longer have such an effect; provided
that the Corporation's exercise of its purchase right may not be deferred for
more than six (6) months. The Corporation shall give Employee prompt written
notice of when it is no longer restricted from making such purchase, and the
procedures set forth in Section 7(a) or 8(a) hereof, as the case may be, shall
apply as though the date giving rise to the purchase right occurred on the date
such notice is given.
(c) Procedures. The Board of Directors of the Corporation may
establish reasonable notice provisions, time frames, procedures and otherwise as
it deems reasonable or necessary to facilitate and effect the transaction
contemplated by this Section; provided, the Corporation may not exercise its
option and call the Shares subject
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to the Termination Forfeiture later than ninety (90) days after the Corporation
receives written notice of the Termination Forfeiture Event.
9. Termination of Employment Without Cause or by Employee for Good
Reason. Upon termination of employment of Employee under the Employment
Agreement by the Corporation without Cause (as defined in the Employment
Agreement) or by the Employee for Good Reason (as defined in the Employment
Agreement), all limitations, restrictions, risks of forfeiture and conditions
which relate to Restricted Shares (as unearned Restricted Shares or Earned
Restricted Shares) held by Employee, including but not limited to risk of
Termination Forfeiture, limitations on transfer or risk of call by the Board for
non-conversion to Earned Shares, will automatically and permanently lapse and
all Restricted Shares and Earned Shares will permanently become Unrestricted
Shares held by Employee. The restrictions, terms and conditions of the
Stockholders' Agreement (or any other applicable agreement) then in effect shall
remain in full force and effect.
10. Death or Total Disability of Employee. Where termination of
Employee is due to Disability (as that term is defined in the Employee's
Employment Agreement) or death, (i) all risks of Termination Forfeiture shall
immediately lapse and terminate and (ii) as to any Restricted Shares held by
Employee as of the date of such event, the Disabled or deceased Employee (or his
duly authorized successors) will receive the benefit of the Corporation's
performance over the two (2) fiscal year ends immediately following such
termination as to the Corporation attaining the Performance Criteria such that
Restricted Shares may become Earned Shares and Unrestricted Shares. By way of
clarification, restrictions and risks of forfeiture as to Restricted Shares held
by the
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Disabled or deceased Employee (or his successors) shall permanently lapse and
Restricted Shares shall become Earned (and therefore Unrestricted Shares) to the
extent that the Corporation attains the Adjusted EBITDA Performance Criteria set
forth herein at such two (2) fiscal year ends.
11. Reissue of Forfeit Shares. Forfeit Shares shall be reoffered by the
Corporation to Initial Management, pro rata based on their relative percentage
ownership of shares of common stock, par value $.10 per share, immediately
following the initial capitalization of the Company, at the Adjusted Original
Price per share, as the same may be further readjusted from time to time.
12. Performance Criteria. Restricted Shares may be earned and become
Earned Shares upon attainment by the Corporation of the following performance
criteria (the "Performance Criteria"):
(a) Adjusted EBITDA Threshold. One thirteenth (1/13) of the
Restricted Shares (allocated pro rata among Restricted Shares also designated
Reallocable and other Restricted Shares) will be redesignated as (and deemed to
be earned as) "Earned Shares" for every one million dollars ($1,000,000) of
annual Adjusted EBITDA earned by the Corporation, subject to the limitations set
forth in Section 12(b) hereof. Any incremental portion of Adjusted EBITDA less
than $1,000,000 will be disregarded for such calculation.
(b) Determination of Attained Thresholds and Earned Shares.
The number of Restricted Shares with respect to which restrictions and risk of
forfeiture will lapse shall be based on the highest annual Adjusted EBITDA of
the Corporation attained at any time and from time to time; provided, however,
Restricted Shares shall not be
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21
redesignated as Earned Shares until the Corporation's annual Adjusted EBITDA for
a fiscal year reaches or exceeds fourteen million dollars ($14,000,000). By way
of example and not limitation, where Adjusted EBITDA in a given year is
$13,300,000, then no restrictions or risk of forfeiture shall lapse and no
Restricted Shares shall become Earned Shares. If Adjusted EBITDA in a given year
is $14,000,000 (to $14,999,999.99), then Management shall be deemed to have
earned rights to 1/13 of the Restricted Shares, and such Restricted Shares
automatically shall become Earned Shares. Thereafter, if Adjusted EBITDA in a
given year is $20,000,000, then Management shall be deemed to have earned rights
to a total of 7/13 (i.e., an additional 6/13) of the Restricted Shares, and so
forth. Accordingly, Management's rights to have all Restricted Shares become
Earned Shares will not occur until such time as the Corporation realizes
Adjusted EBITDA of twenty-six million dollars ($26,000,000) or more in a given
fiscal year.
(c) Reduction in Adjusted EBITDA; Averaging. Once Restricted
Shares are earned, based upon the Corporation's annual Adjusted EBITDA for a
given fiscal year, and such Shares are redesignated as Earned Shares, such
Earned Shares shall not be affected by the fact that the Corporation's annual
Adjusted EBITDA may decline for any subsequent fiscal year. However, once
Adjusted EBITDA of $14,000,000 or more has been attained, if the Corporation's
annual Adjusted EBITDA declines in a subsequent fiscal year from the highest
level at which additional Restricted Shares become Earned Shares, additional
Restricted Shares will not become Earned Shares until the Corporation's average
annual Adjusted EBITDA for the fiscal years including and following the year of
such decline in annual Adjusted EBITDA is greater than the level
<PAGE>
22
of annual Adjusted EBITDA at which Restricted Shares were last earned. For
example, no additional Restricted Shares would be earned if annual Adjusted
EBITDA in the most recent year in which Restricted Shares were earned had been
$16,000,000, such annual Adjusted EBITDA declined to $14,000,000 in the
following year and thereafter increased to $17,000,000 in the subsequent year
(the average of $14,000,000 and $17,000,000 is $15,500,000, which does not
exceed $16,000,000, the level of annual Adjusted EBITDA for the most recent year
in which Restricted Shares were earned). Additional Restricted Shares would not
be earned in this example until such average annual Adjusted EBITDA was at least
$17,000,000. As is always the case, additional Restricted Shares are not earned
as Earned Shares until annual Adjusted EBITDA increases from the prior year to
the next $1,000,000 threshold of Adjusted EBITDA (and thereafter additional
Restricted Shares are earned for each $1,000,000 threshold).
(d) Resumption of Thresholds. After the average Adjusted
EBITDA has exceeded the Adjusted EBITDA for the year of Adjusted EBITDA at which
Restricted Shares were last earned, then no averaging shall be applicable for so
long as Adjusted EBITDA does not decrease from a prior year's.
(e) Pro Rata Conversion. Upon the Corporation's attaining the
Performance Criteria from time to time, Restricted Shares held by all Management
(and their Permitted Transferees) shall be converted pro rata into Earned
Shares, based on the number of all Restricted Shares then held by all Management
(and their Permitted Transferees). Provided, nothing herein shall be construed
to limit the authority or ability of the Stock Reallocation Committee to require
or impose additional, more strict or other conditions, restrictions,
requirements or limitations as to Restricted Shares held by other
<PAGE>
23
than Initial Management, such that vesting of and/or lapse of restrictions on
such Restricted Shares may be delayed, prohibited, limited or otherwise with
respect to Management other than Initial Management.
13. Successors and Assigns. The duly authorized Permitted Transferees
(as such term is defined in the Stockholders' Agreement prior to any amendment
thereof) and holders of Restricted Shares and Reallocable Shares originally held
from or through Management, including any transferee obtaining Restricted Shares
in accordance with Section 5 hereof, shall be subject to the same restrictions,
obligations, call rights, purchase options, benefits, put options, terms and
otherwise as would be applicable if such shares were held directly by
Management. All restrictions, forfeiture and repurchase provisions and other
terms and conditions relating to Restricted Shares and Reallocable Shares shall
be binding on and inure to the benefit of the transferees, successors and
assignees of those shares.
14. Sale of All or Substantially All Stock or Assets, or Merger. In the
event that all or substantially all of the Corporation's stock or all or
substantially all assets of the Corporation are transferred or sold, or upon a
merger or other business combination, then all Restricted Shares will become
Unrestricted Shares to the extent that value for the entire Corporation
indicated by the gross sale price as determined in good faith by the Board of
Directors in such transaction results in an internal rate of return to those
Original Investors who, at the time of such transaction, continue to be
stockholders of the Corporation, of at least 40% on a compounded annual basis
based upon such persons' original holdings in the Corporation (after taking into
account the amount and timing of all distributions and payments received by
those Original Investors from the Corporation,
<PAGE>
24
after considering Unrestricted and Earned Shares then held by Management, and
after giving effect to Restricted Shares that become Unrestricted Shares as
result of such sale, transfer or merger). Restricted Shares that do not become
Unrestricted Shares as a result of such sale, transfer or merger shall retain
their characteristics and potential benefits as Restricted Shares under this
Agreement, unless such issue is expressly addressed in the documentation with
respect to such sale, transfer or merger. The Corporation may, without the
consent of Employee, modify or eliminate the Restricted Share rights and
designation as to Restricted Shares not converted to Unrestricted Shares in the
documentation with respect to such sale, transfer or merger where the
Corporation agrees in writing to such matters as part of such sale, transfer or
merger.
15. Legends. Employees agrees that all share certificates representing
Shares issued to Employee under the Agreement shall have the legend required by
the Stockholders' Agreement or as otherwise may be reasonably be imposed by the
Corporation.
16. Additional Covenants.
(a) Stockholders' Agreement. Employee hereby acknowledges that
the Shares shall be subject to the terms and conditions of the Stockholders'
Agreement. Employee has received a copy of such Stockholders' Agreement and
Employee further acknowledges that such Stockholders' Agreement contains
provisions restricting the transferability of the Shares in addition to those
set forth herein.
(b) Dilution. All Shares held by Management (including
Restricted Shares) will be diluted under the same circumstances as and pro rata
with any Shares held by an Original Investor and all other stockholders of the
Corporation.
<PAGE>
25
(c) Not an Employment Agreement. This Agreement is not an
employment contract, the terms and conditions of which shall exclusively be
controlled by the provisions of the Employment Agreement.
(d) Stock Dividends, Stock Splits and Recapitalizations. If
dividends are declared and payable in kind, and in the event of a stock split,
recapitalization or other transaction which causes shares to be issued or
exchanged, the additional, issued, successor, substituted, and/or replacement
shares shall bear the same characteristics, restrictions, rights, obligations,
options and otherwise as the shares with respect to which such additional
issued, successor, substituted and/or replacement shares arose, for all purposes
and the Adjusted Original Price shall be further adjusted on a proportional
basis to reflect such change.
(e) Preemptive Shares. If shares are acquired pursuant to
pre-emptive (or substantially similar) rights by Employee, said acquired shares
shall possess and be subject to the same characteristics, restrictions, rights
obligations, options and otherwise as the shares giving rise to the acquisition
of such additional shares.
17. Withholding Taxes; Section 83(b) Election. (a) Withholding Taxes.
Employee shall be solely responsible for paying the Corporation an amount
necessary to satisfy the withholding and payment of all applicable federal and
state income tax withholdings, if any, including but not limited to social
security (FICA) and Medicare tax, at the applicable rates in existence as of
September 29, 1995. Employee hereby authorizes the Corporation to withhold from
any amounts otherwise payable to Employee such taxes as may be required by law
in connection with the issue to Employee of the Shares. Employee agrees that if
such
<PAGE>
26
amounts are insufficient Employee will pay or make arrangements satisfactory to
the Corporation for payment of such taxes.
(b) Section 83(b) Election. Employee has filed an election
under I.R.C. Section 83(b) and the parties hereto acknowledge and agree that
withholding taxes shall be computed as an amount equal to (1) the fair market
value of the Shares issued to the Employee pursuant to the Old Agreement as of
September 29, 1995 less (2) any amount paid therefor. The Corporation shall
assist Employee at his request in the filing and perfecting of such I.R.C.
Section 83(b) election.
18. Notices. All notices permitted or required hereunder shall be in
writing and shall be deemed to have been duly and properly given as of the
earlier of the date and time of actual delivery or three (3) days following the
date the same are deposited with the United States Postal Service, postage
prepaid, to be sent certified mail with return receipt requested, and addressed
to the Corporation, as follows:
U.S. Franchise Systems, Inc.
Attention: Neal Aronson
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
and addressed to Employee, as follows:
Mr. Michael A. Leven
5 West Wesley Ridge
Atlanta, Georgia 30327
or at such other address as the Corporation or Employee may at any time and from
time to time specify to the other by notice as herein provided.
<PAGE>
27
19. Miscellaneous.
(a) This Amended and Restated Employee Stock Purchase
Agreement shall not be effective unless and until the closing of the IPO.
(b) Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective agents,
representatives, successors and
permitted assigns.
(c) Cooperation. The parties shall cooperate fully with each
other and their respective counsel and representatives in connection with all
steps to be taken as part of their obligations under this Agreement.
(d) Governing Law. This Agreement and the rights and duties of
the parties attendant hereto shall be construed and governed in accordance with
the internal laws (and not the conflict of laws) of the State of Georgia. (e) No
Waiver. The failure of either party to insist, in one or more instances, on the
performance by the other in strict compliance with the terms and conditions of
this Agreement, shall not be deemed a waiver or relinquishment of any right
granted hereunder or of any terms and conditions of this Agreement unless such
waiver is contained in a writing signed by the parties.
(f) Entire Agreement. This Agreement and any amendments or
exhibits attached hereto or related documents referenced herein comprise all the
agreement, understandings, representations, conditions and warranties by and
between the parties. This Agreement may not be modified or amended except in a
writing signed by the parties to this Agreement.
<PAGE>
28
(g) Survival. All representations, warranties and covenants
contained in this Agreement shall survive the execution and delivery of this
Agreement and all documents executed in performance of this Agreement.
(h) Interpretation. Within this Agreement, the singular shall
include the plural and the plural shall include the singular, and any gender
shall include the other gender, as the meaning in the context of this Agreement
shall require. Should any provision of this Agreement require judicial
interpretation, it is agreed that the court interpreting or construing the same
shall not imply a presumption that the terms hereof shall be more strictly
construed against one party by reason of the rule of construction that a
document is to be construed more strictly against the party who itself or
through its agent prepared this Agreement, it being agreed that all parties have
had the opportunity to review and understand this Agreement.
(i) Injunctive Relief. In the event of a breach or threatened
breach by a party of any of his obligations hereunder, the parties hereby
acknowledge and agree that the parties will not have an adequate remedy at law
and shall be entitled to such equitable and injunctive relief as may be
available to restrain a threatened or actual violation. Nothing herein shall be
construed as prohibiting a party from pursuing any other remedies available for
such breach or threatened breach, including without limitation the recovery of
damages. All remedies shall be cumulative. No party shall be required to post a
bond or other surety as a condition to obtaining such injunctive relief.
<PAGE>
29
20. Multiple Counterparts. This Agreement may be simultaneously
executed in several counterparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
21. Record Owner. The Corporation shall not be required (i) to transfer
on its books any shares that shall have been sold or otherwise transferred in
violation of any of the provisions set forth in this Agreement or the
Stockholders' Agreement or (ii) to treat the improper transferee as owner of
such shares or to accord to such improper transferee the right to vote, if any,
as such owner.
<PAGE>
30
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Stock Purchase Agreement on the date first above written.
CORPORATION:
U.S. FRANCHISE SYSTEMS, INC.
By:______________________________
Neal K. Aronson
Executive Vice President and
Chief Financial Officer
ATTEST:
By:_____________________________
____________ Secretary
EMPLOYEE:
---------------------------
MICHAEL A. LEVEN
<PAGE>
EXHIBIT "A"
EMPLOYEE SHARES
(as of September 29, 1995)
<TABLE>
<CAPTION>
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
<S> <C> <C> <C>
(a) Restricted Shares
(i) Reallocable 66,735 33,367 33,368
ii) Non-Reallocable 222,449 111,225 111,224
Total Restricted Shares 289,184 144,592 144,592
(b) Unrestricted Shares
(i) Reallocable 55,612 33,367 22,245
(ii) Non-Reallocable 222,449 133,470 88,979
Total Unrestricted 278,061 166,837 111,224
Shares
Total Shares Issued 567,245 311,429 255,816
Hereunder:
</TABLE>
<PAGE>
EXHIBIT "B"
EMPLOYEE SHARES
(as of the closing of the IPO but pre-Reclassification)
<TABLE>
<CAPTION>
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
<S> <C> <C> <C>
(a) Restricted Shares
(i) Reallocable(2) 22,592 11,296 11,296
(ii) Non-Reallocable 122,000 61,000 61,000
Total Restricted Shares: 144,592 72,296 72,296
(b) Unrestricted Shares
(i) Reallocable(2) 62,911 35,488 27,423
(ii) Non-Reallocable 359,742 203,645 156,097
Total Unrestricted Shares: 422,653 239,133 183,520
Total Shares Issued Hereunder: 567,245 311,429 255,816
EMPLOYEE SHARES
(as of the closing of the IPO)
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
(a) Restricted Shares
(i) Reallocable(2) 218,464 109,232 109,232
(ii) Non-Reallocable 1,179,740 589,870 589,870
Total Restricted Shares: 1,399,204 699,102 699,102
(b) Unrestricted Shares
(i) Reallocable(2) 608,349 343,169 265,180
(ii) Non-Reallocable 3,478,705 1,969,247 1,509,458
Total Unrestricted Shares: 4,087,054 2,312,416 1,774,638
Total Shares Issued Hereunder: 5,485,258 3,011,518 2,473,740
</TABLE>
- ----------
(1) Includes shares previously transferred by Mr. Leven to his wife Andrea and
his two adult sons in accordance with Mr. Leven's Employee Stock Purchase
Agreement.
(2) Represents shares that have previously been allocated to other Management in
accordance with the Old Stock Purchase Agreement.
VOTING AGREEMENT
VOTING AGREEMENT, dated as of _____________ __, 1996 (this
"Agreement"), between MICHAEL A. LEVEN ("M. Leven") and ANDREA E. LEVEN ("A.
Leven").
WHEREAS, as of the date hereof, A. Leven owns 232,032 shares
of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"),
and 770,801 Class B Common Stock, par value $0.01 per share (the "Class B Common
Stock"), of U.S. Franchise Systems, Inc. (the "Company").
WHEREAS, in connection with the Company's proposed initial
public offering, and at the request of the Underwriters of such offering,
A. Leven has agreed to enter into this Agreement with respect to 232,032 shares
of Class A Common Stock and 700,801 shares of Class B Common Stock now owned by
A. Leven (the "Shares").
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, and intending to be legally
bound hereby, the parties hereto hereby agree as follows:
ARTICLE I
VOTING AND PROXY
Section 1.1 Voting Agreement. A. Leven hereby agrees that
during the time this Agreement is in effect, at any meeting of the stockholders
of the Company, however called, and in any action by consent of the stockholders
of the Company, A. Leven shall vote the Shares as directed by M. Leven, and, to
effectuate such agreement, to grant to M. Leven a proxy to vote the Shares
("Proxy").
Section 1.2 Proxy. Attached hereto as Exhibit A is a proxy,
granted by A. Leven to M. Leven to carry out Section 1.1.
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF A LEVEN AND M. LEVEN
A. Leven hereby represents and warrants to M. Leven as
follows:
Section 2.1 Authority Relative to This Agreement. A. Leven has
all necessary power and authority to execute and deliver this Agreement and to
perform her obligations hereunder. This Agreement has been duly executed and
delivered by A. Leven and, assuming the due authorization, execution and
delivery by M. Leven, constitutes a legal, valid and binding obligation of A.
Leven, enforceable against A. Leven in accordance with its terms except to the
extent enforceability may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting creditors' rights generally or by general
principles governing the availability of equitable remedies.
Section 2.2 No Conflict. (a) The execution and delivery of
this Agreement by A. Leven does not, and the performance of this Agreement by A.
Leven shall not, (i) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to A. Leven or by which the Shares are bound or
affected or (ii) result in any breach of or constitute a default (or an event
that with notice or lapse or time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the Shares pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which A. Leven is a party
or by which A. Leven or the Shares are bound or affected.
(b) The execution and delivery of this Agreement by
A. Leven does not, and the performance of this Agreement by A. Leven shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental entity except for applicable requirements, if
any, under the federal securities laws.
<PAGE>
Section 2.3 Title to the Shares. As of the date hereof,
A. Leven is the record and beneficial owner of the Shares. The Shares are owned
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreement, limitations on A. Leven's voting rights,
charges and other encumbrances of any nature whatsoever, except as contemplated
by that certain Amended and Restated Employee Stock Purchase Agreement,
originally dated as of September 29, 1995, between A. Leven and the Company.
Except with respect to the Proxy, the A. Leven has not appointed or granted
any proxy, which appointment or grant is still effective, with respect to the
Shares.
ARTICLE III
COVENANTS OF A. LEVEN
Section 3.1 No Inconsistent Agreement. A. Leven hereby agrees
that, except as contemplated by this Agreement, A. Leven shall not enter into
any voting agreement or grant a proxy or power of attorney with respect to the
Shares that is inconsistent with this Agreement.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. This Agreement shall terminate on the
earlier of (a) the fifth anniversary hereof, (b) the transfer of the Shares to a
person that is not an "affiliate" of A. Leven (as determined under the
Securities Exchange Act of 1934 and the rules promulgated thereunder), (c) the
death of M. Leven, (d) the adjudicated incompetency of M. Leven, or (3) the
death of A. Leven, unless earlier terminated in writing by the parties hereto.
Section 4.2 Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific
<PAGE>
performance of the terms hereof, in addition to any other remedy at law or in
equity.
Section 4.3 Entire Agreement. This Agreement and the Proxy
constitute the entire agreement between A. Leven and M. Leven with respect to
the subject matter hereof and thereof and supersedes all prior agreements and
understandings, both written and oral, between A. Leven and M. Leven with
respect to the subject matter hereof and thereof.
Section 4.4 Amendment. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 4.5 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law.
Section 4.6 Assignability. This Agreement may not be assigned
by either party without the prior written consent of the other party.
IN WITNESS WHEREOF, M. Leven and A. Leven have executed this
Agreement on the date hereof.
------------------------------------
Michael A. Leven
------------------------------------
Andrea E. Leven
<PAGE>
5
EXHIBIT A
IRREVOCABLE PROXY
The undersigned hereby appoints MICHAEL A. LEVEN or any
nominee of MR. LEVEN, with full power of substitution (the "Proxy Holder"), as
proxy for the undersigned, to vote 232,032 shares of Class A Common Stock, par
value $0.01 per share, and ;770,801 shares of Class B Common Stock, par value
$0.01 per share, of U.S. Franchise Systems, Inc., a Delaware corporation (the
"Corporation") of the undersigned (such number of shares to be automatically
reduced by the number of any such shares sold by the undersigned after the date
hereof) (the "Shares"), for and in the name, place and stead of the undersigned
at any annual or special meeting of stockholders of the Corporation, and any
adjournment(s) thereof in any manner as such Proxy Holder sees fit, and to
execute written consents in lieu of any such meeting, until the earlier of (a)
the fifth anniversary hereof, (b) the transfer of the Shares to a person who is
not an "Affiliate" of the undersigned (within the meaning of the Securities
Exchange Act of 1934, as amended) (but only with respect to the number of Shares
so transferred) and (c) the earlier termination hereof by A. Leven.
This proxy is being granted in connection with the execution
of a Voting Agreement, dated the date hereof, between the undersigned and Mr.
Leven.
Dated: ______________ __, 1996
------------------------------------
Andrea E. Leven
VOTING AGREEMENT
VOTING AGREEMENT, dated as of _____________ __, 1996 (this
"Agreement"), between MICHAEL A. LEVEN ("Leven") and NEAL K. ARONSON
("Aronson").
WHEREAS, as of the date hereof, Aronson owns 942,440 shares of
Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"),
and 1,509,453 Class B Common Stock, par value $0.01 per share, of U.S. Franchise
Systems, Inc. (the "Company").
WHEREAS, in connection with the Company's proposed initial
public offering, and at the request of the Underwriters of such offering,
Aronson has agreed to enter into this Agreement with respect to 111,347 shares
of Class A Common Stock and 311,007 shares of Class B Common Stock now owned by
Aronson (the "Shares").
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, and intending to be legally
bound hereby, the parties hereto hereby agree as follows:
ARTICLE I
VOTING AND PROXY
Section 1.1 Voting Agreement. Aronson hereby agrees that
during the time this Agreement is in effect, at any meeting of the stockholders
of the Company, however called, and in any action by consent of the stockholders
of the Company, Aronson shall vote the Shares as directed by Leven, and, to
effectuate such agreement, to grant to Leven a proxy to vote the Shares
("Proxy").
Section 1.2 Proxy. Attached hereto as Exhibit A is a proxy,
which is coupled with an interest, granted by Aronson to Leven to carry out
Section 1.1.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ARONSON AND LEVEN
Aronson hereby represents and warrants to Leven as follows:
Section 2.1 Authority Relative to This Agreement. Aronson has
all necessary power and authority to execute and deliver this Agreement and to
perform his obligations hereunder. This Agreement has been duly executed and
delivered by
<PAGE>
2
Aronson and, assuming the due authorization, execution and delivery by Leven,
constitutes a legal, valid and binding obligation of Aronson, enforceable
against Aronson in accordance with its terms except to the extent enforceability
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting creditors' rights generally or by general principles governing the
availability of equitable remedies.
Section 2.2 No Conflict. (a) The execution and delivery of
this Agreement by Aronson does not, and the performance of this Agreement by
Aronson shall not, (i) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Aronson or by which the Shares are bound
or affected or (ii) result in any breach of or constitute a default (or an event
that with notice or lapse or time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the Shares pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Aronson is a party
or by which Aronson or the Shares are bound or affected.
(b) The execution and delivery of this Agreement by
Aronson does not, and the performance of this Agreement by Aronson shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental entity except for applicable requirements, if
any, under the federal securities laws.
Section 2.3 Title to the Shares. As of the date hereof,
Aronson is the record and beneficial owner of the Shares. The Shares are owned
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreement, limitations on Aronson's voting rights,
charges and other encumbrances of any nature whatsoever, except as contemplated
by that certain Amended and Restated Employee Stock Purchase Agreement,
originally dated as of September 29, 1995, between Aronson and the Company.
Except with respect to the Proxy, the Stockholder has not appointed or granted
any proxy, which appointment or grant is still effective, with respect to the
Shares.
ARTICLE III
COVENANTS OF ARONSON
Section 3.1 No Inconsistent Agreement. Aronson hereby agrees
that, except as contemplated by this Agreement, Aronson shall not enter into any
voting agreement or grant a proxy or power of attorney with respect to the
Shares that is inconsistent with this Agreement.
<PAGE>
3
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. This Agreement shall terminate on the
earlier of (a) the fifth anniversary hereof or (b) the transfer of the Shares to
a person that is not an "affiliate" of Aronson (as determined under the
Securities Exchange Act of 1934 and the rules promulgated thereunder), unless
earlier terminated in writing by the parties hereto.
Section 4.2 Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or in equity.
Section 4.3 Entire Agreement. This Agreement and the Proxy
constitute the entire agreement between Aronson and Leven with respect to the
subject matter hereof and thereof and supersedes all prior agreements and
understandings, both written and oral, between Aronson and Leven with respect to
the subject matter hereof and thereof.
Section 4.4 Amendment. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 4.5 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law.
Section 4.6 Assignability. This Agreement may not be assigned
by either party without the prior written consent of the other party.
<PAGE>
4
IN WITNESS WHEREOF, Leven and Aronson have executed this
Agreement on the date hereof.
------------------------------------
Michael A. Leven
------------------------------------
Neal K. Aronson
<PAGE>
5
EXHIBIT A
IRREVOCABLE PROXY
The undersigned hereby appoints MICHAEL A. LEVEN or any
nominee of MR. LEVEN, with full power of substitution (the "Proxy Holder"), as
proxy for the undersigned, to vote 111,347 shares of Class A Common Stock, par
value $0.01 per share, and 311,007 shares of Class B Common Stock, par value
$0.01 per share, of U.S. Franchise Systems, Inc., a Delaware corporation (the
"Corporation") of the undersigned (such number of shares to be automatically
reduced by the number of any such shares sold by the undersigned after the date
hereof) (the "Shares"), for and in the name, place and stead of the undersigned
at any annual or special meeting of stockholders of the Corporation, and any
adjournment(s) thereof in any manner as such Proxy Holder sees fit, and to
execute written consents in lieu of any such meeting, until the earlier of (a)
the fifth anniversary hereof, (b) the transfer of the Shares to a person who is
not an "Affiliate" of the undersigned (within the meaning of the Securities
Exchange Act of 1934, as amended) (but only with respect to the number of Shares
so transferred) and (c) the earlier termination hereof by Aronson.
This proxy is being granted in connection with the execution
of a Voting Agreement, dated the date hereof, between the undersigned and Mr.
Leven.
Dated: ______________ __, 1996
------------------------------------
Neal K. Aronson
U.S. FRANCHISE SYSTEMS, INC.
1996 Stock Option Plan
SECTION 1. Purpose. The purposes of this U.S. Franchise
Systems, Inc. 1996 Stock Option Plan are to promote the interests of U.S.
Franchise Systems, Inc. and its stockholders by (i) attracting and retaining
exceptional officers and other key employees of the Company and its
Subsidiaries, and consultants, advisors and others whom the Committee determines
possess skills that would be an asset to the Company or any of its Subsidiaries;
(ii) motivating such individuals by means of performance-related incentives to
achieve longer-range performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.
SECTION 2. Definitions. As used in the Plan, the following
terms shall have the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or
indirectly, is controlled by or controls the Company and (ii) any entity in
which the Company has a significant equity interest, in either case as
determined by the Committee.
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean the occurrence of any of the
following: (i) the sale, lease, t"nsfer, conveyance or other disposition, in one
or a series of related transactions, of all or substantially all of the assets
of the Company to any "person" or "group" (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) other than the Permitted Holders,
(ii) any person or group, other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the voting stock of
the Company, including by way of merger, consolidation or otherwise or (iii)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board (together with any new directors whose
election by such Board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors of the Company
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
<PAGE>
2
"Committee" shall mean (i) a committee of the Board designated
by the Br"ard tn administer the Plan and comoosed of not less two directors,
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 Rule 16b-3 and Code section 162(m), respectively, are applicable
to the Company or (ii) if at any time such a committee has not been so
designated by the Board, the Board or any authorized committee thereof.
"Company" shall mean U.S. Franchise Systems, Inc., together
with any successor thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Fair Market Value" shall mean, (A) with respect to any
property other than Shares, the fair market value of such property determined by
such methods or procedures as shall be established from time to time by the
Committee and (B) with respect to the Shares, as of any date, (i) the mean
between the high and low sales prices of the Shares as reported on the composite
tape for securities traded on the New York Stock Exchange for such date (or if
not then trading on the New York Stock Exchange, the mean between the high and
low sales price of the Shares on the stock exchange or over-the-counter market
on which the Shares are principally trading on such date), or if, there were no
sales on such date, on the closest preceding date on which there were sales of
Shares or (ii) in the event there shall be no public market for the Shares on
such date, the fair market value of the Shares as determined in good faith by
the Committee.
"Incentive Stock Option" shall mean a right to purchase Shares
from the Company that is granted under Section 6 of the Plan and that is
intended to meet the requirements of Section 422 of the Code or any successor
provision thereto.
"Non-Qualified Stock Option" shall mean a right to purchase
Shares from the Company that is granted under Section 6 of the Plan and that is
not intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option.
"Option Agreement" shall mean any written agreement, contract,
or other instrument or document evidencing any Option, which may, but need not,
be executed or acknowledged by a Participant.
"Participant" shall mean any officer or other key employee
(including any prospective officer or key employee) of the Company or its
Subsidiaries, and any consultant,
<PAGE>
3
advisor or other person whom the Committee determines possesses skills that
would be an asset to the Company or any of its Subsidiaries, in each case who is
eligible for an Option under Section 5 and selected by the Committee to receive
an Option under the Plan.
"Permitted Holders" shall mean, as of the date of
determination, any and all of Neal K. Aronson and Michael A. Leven, their
spouses, their siblings and their siblings' spouses, their parents and
descendants of any of them (whether natural or adopted) (collectively, the
"Family Group") and (iii) any trust established and maintained primarily for the
benefit of any member of the Family Group and any entity controlled by any
member of the Family Group.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.
"Plan" shall mean this U.S. Franchise Systems, Inc. 1996 Stock
Option Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and
interpreted by the SEC under the Exchange Act, or any successor rule or
regulation thereto as in effect from time to time
"SEC" shall mean the Securities and Exchange Commission or any
successor thereto and shall include the Staff thereof.
"Shares" shall mean shares of the Class A Common Stock of the
Company, $.01 par value, or such other securities of the Company (i) into which
such common shares shall be changed by reason of a recapitalization, merger,
consolidation, split-up, combination, exchange of shares or other similar
transaction or (ii) as may be determined by the Committee pursuant to Section
4(b).
"Subsidiary" shall mean (i) any entity that, directly or
indirectly, is controlled by the Company and (ii) any entity in which the
Company has a significant equity interest, in either case as determined by the
Committee
"Substitute Awards" shall have the meaning specified in
Section 4(c).
SECTION 3. Administration. (a) The Plan shall be administered
by the Committee. Subject to the terms of the Plan and applicable law, and in
addition to other express powers and authorizations conferred on the Committee
by the Plan, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Options to be granted to a
Participant; (iii) determine the number of Shares to be covered by, or with
respect to which payments, rights, or
<PAGE>
4
other matters are to be calculated in connection with, Options; (iv) determine
the terms and conditions of any Option; (v) determine whether, to what extent,
and under what circumstances Options may be settled or exercised in cash,
Shares, other securities, or other property, or canceled, forfeited, or
suspended and the method or methods by which Options may be settled, exercised,
canceled, forfeited, or suspended; (vi) determine whether, to what extent, and
under what circumstances cash, Shares, other securities, other property, and
other amounts payable with respect to an Option shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret, administer reconcile any inconsistency, correct any default
andlor supply any omission in the Plan and any instrument or agreement relating
to, or Option made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations, and other decisions under or with
respect to the Plan or any Option shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive, and binding
upon all Persons, including the Company, any Affiliate, any Participant, any
holder or beneficiary of any Option, and any shareholder.
(c) The mere fact that a Committee member shall fail to
qualify as a "Non-Employee Director" or "outside director" within the meaning of
Rule 16b-3 and Code section 162(m), respectively, shall not invalidate any
Option granted by the Committee which Option is otherwise validly made under the
Plan.
(d) No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Option
granted hereunder.
SECTION 4. Shares Available for Options.
(a) Shares Available. Subject to adjustment as provided in
Section 4(b), the aggregate number of Shares with respect to which Options may
be granted under the Plan shall be 325,000 and the maximum number of Shares with
respect to which Options may be granted to any Participant in any fiscal year
shall be 250,000. If, after the effective date of the Plan, any Shares covered
by an Option granted under the Plan, or to which such an Option relates, are
forfeited, or if an Option has expired, terminated or been canceled for any
reason whatsoever (other than by reason of exercise or vesting) and in either
such case a Participant has received no benefits of ownership with respect to
the forfeited Shares or the Shares to which such expired, terminated or canceled
Option relates (other than voting rights
<PAGE>
5
and dividends that were forfeited in connection with such forfeiture,
expiration, termination or cancellation), then the Shares covered by such Option
shall, to the maximum extent permitted under Section 162(m) of the Code during
any period when Section 162(m) is applicable to the Company, again be, or shall
become, Shares with respect to which Options may be granted hereunder.
(b) Adjustments. In the event that the Committee determines
that any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Shares or other securities of the
Company, issuance of warrants or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction or event
affects the Shares such that an adjustment is determined by the Committee in its
discretion to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee shall, in such manner as it may deem equitable, adjust any or
all of (i) the number of Shares or other securities of the Company (or number
and kind of other securities or property) with respect to which Options may be
granted, (ii) the number of Shares or other securities of the Company (or number
and kind of other securities or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any Option or, if deemed
appropriate, make provision for a cash payment to the holder of an outstanding
Option in consideration for the cancellation of such Option.
(c) Substitute Awards. Options may, in the discretion of the
Committee, be made under the Plan in assumption of, or in substitution for,
outstanding awards previously granted by the Company or its Affiliates or a
company acquired by the Company or with which the Company combines ("Substitute
Awards"). The number of Shares underlying any Substitute Awards shall be counted
against the aggregate number of Shares available for Options under the Plan.
(d) Sources of Shares Deliverable Under Options. Any Shares
delivered pursuant to an Option may consist, in whole or in part, of authorized
and unissued Shares or of treasury Shares.
SECTION 5. Eligibility.
Any officer or other key employee of the Company or any of its
Subsidiaries (including any prospective officer or key employee), and any
consultant, advisor or other person whom the Committee determines possesses
skills that would be an asset to the Company or any of its Subsidiaries who is
not a member of the Committee, shall be eligible to be designated a Participant.
<PAGE>
6
SECTION 6. Stock Options.
(a) Grant. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the Participants
to whom Options shall be granted, the number of Shares to be covered by each
Option, the exercise price therefor and the conditions and limitations
applicable to the exercise of the Option. The Committee shall have the authority
to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to
grant both types of Options. In the case of Incentive Stock Options, the terms
and conditions of such grants shall be subject to and comply with such rules as
may be prescribed by Section 422 of the Code, as from time to time amended, and
any regulations implementing such statute. All Options when granted under the
Plan are intended to be Non-Qualified Stock Options, unless the applicable
Option Agreement expressly states that the Option is intended to be an Incentive
Stock Option. If an Option is intended to be an Incentive Stock Option, and if
for any reason such Option (or any portion thereof) shall not qualify as an
Incentive Stock Option, then, to the extent of such nonqualification, such
Option (or portion thereof) shall be regarded as a Non-Qualified Stock Option
appropriately granted unda the Plan; provided that such Option (or portion
thereof) otherwise complies with the Plan's requirements relating to
Non-Qualified Stock Options.
(b) Exercise Price. The Committee shall establish the exercise
price at the time each Option is granted, which exercise price shall be set
forth in the anolicable Option Agreement.
(c) Exercise. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Option Agreement or thereafter. The
Committee may impose such conditions with respect to the exercise of Options,
including without limitation, any relating to the application of federal or
state securities laws, as it may deem necessary or advisable;
(d) Payment. No Shares shall be delivered pursuant to any
exercise of an Option until payment in full of the aggregate exercise price
therefor is received by the Company. Such payment may be made in cash, or its
equivalent, or, if and to the extent permitted by the Committee, (i) by
exchanging Shares owned by the optionee (which are not the subject of any pledge
or other security interest and which have been owned by such optionee for at
least six months) or (ii) if permitted by and subject to such rules as may be
established by the Committee, through delivery of irrevocable instructions to a
broker to sell such Shares and deliva promptly to the Company an amount equal to
the aggregate exercise price, or by a combination of the foregoing, provided
that the combined value of all cash and cash equivalents and the Fair Market
Value of any such Shares so tendered to the Company as of the date of such
tender is at least equal to such aggregate exercise price.
<PAGE>
7
SECTION 7. Amendment and Termination.
(a) Amendments to the Plan. The Board may amend, alter,
suspend, discontinue, or terminate the Plan or any portion thereof at any time;
provided that no such amendment, alteration, suspension, discontinuation or
termination shall be made without shareholder approval if such approval is
necessary to comply with any tax or regulatory requirement, including for these
purposes any approval requirement which is a prerequisite for exemptive relief
from Section 16(b) of the Exchange Act or necessary to qualify the options
granted hereunder as performance based compensation for purposes of Code Section
162(m) (provided that the Company is subject to the requirements of Section 16
of the Exchange Act or Code Section 162(m), as the case may be, as of the date
of such action).
(b) Amendments to Options. The Committee may waive any
conditions or rights under, amend any terms of, or alter, suspend, discontinue,
cancel or terminate, any Option theretofore granted, prospectively or
retroactively; provided that any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination that would impair the rights of any
Participant or any holder or beneficiary of any Option theretofore granted shall
not to that extent be effective without the consent of the affected Participant,
holder or beneficiary.
(c) Adjustment of Options Upon the Occurrence of Certain
Unusual or Nonrecurring Events. The Committee is hereby authorized to make
adjustments in the terms and conditions of, and the criteria included in,
Options in recognition of unusual or nonrecurring events (including, without
limitation, the events described in Section 4(b) hereof) affecting the Company,
any Affiliate, or the financial statements of the Company or any Affiliate, or
of changes in applicable laws, regulations, or accounting principles, whenever
the Committee determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan.
SECTION 8. Change of Control.
In the event of a Change of Control after the date of the
adoption of this Plan, any outstanding Options then held by Participants which
are unexercisable or otherwise unvested shall automatically be deemed
exercisable or otherwise vested, as the case may be, as of immediately prior to
such Change of Control.
SECTION 9. General Provisions.
(a) Nontransferability. Each Option and each right under any
Option shall be exercisable only by the Participant during the Participant's
lifetime, or, if permissible under applicable law, by the Participant's legal
guardian or representative. No Option may be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by a Participant otherwise
than by will or by the laws of
<PAGE>
8
descent and distribution and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company or any Affiliate; provided that the designation of a
beneficiary shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance.
(b) No Rights to Options. No Participant or other Person shall
have any claim to be granted any Option, and there is no obligation for
uniformity of treatment of Participants, or holders or beneficiaries of Options.
The terms and conditions of Options and the Committee's determinations and
interpretations with respect thereto need not be the same with respect to each
Participant (whether or not such Participants are similarly situated).
(c) Share Certificates. All certificates for Shares or other
securities of the Company or any Affiliate delivered under the Plan pursuant to
any Option or the exercise thereof shall be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which such Shares or other securities are
then listed, and any applicable Federal or state laws, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(d) Withholding. A Participant may be required to pay to the
Company or any Affiliate and the Company or any Affiliate shall have the right
and is hereby authorized to withhold from any Option, from any payment due or
transfer made under any Option or under the Plan or from any compensation or
other amount owing to a Participant the amount (in cash, Shares, other
securities, or other property) of any applicable withholding taxes in respect of
an Option, its exercise, or any payment or transfer under an Option or under the
Plan and to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes.
(e) Option Agreements. Each Option hereunder shall be
evidenced by an Option Agreement which shall be delivered to the Participant and
shall specify the terms and conditions of the Option and any rules applicable
thereto, including but not limited to the effect on such Option of the death,
disability or termination of employment or service of a Participant and the
effect, if any, of such other events as may be determined by the Committee.
(f) No Limit on Other Compensation Arrangements. Nothing
contained in the Plan shall prevent the Company or any Affiliate from adopting
or continuing in effect other compensation arrangements, which may, but need
not, provide for the grant of options (subject to shareholder approval if such
approval is
<PAGE>
9
required), and such arrangements may be either generally applicable
or applicable only in specific cases.
(g) No Right to Employment. The grant of an Option shall not
be construed as giving a Participant the right to be retained in the employ of,
or in any consulting relationship to, the Company or any Affiliate. Further, the
Company or an Affiliate may at any time dismiss a Participant from employment or
discontinue any consulting relationship, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Option
Agreement.
(h) No Rights as Stockholder. Subject to the provisions of the
applicable Option, no Participant or holder or beneficiary of any Option shall
have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares.
(i) Governing Law. The validity, construction, and effect of
the Plan and any rules and regulations relating to the Plan and any Option
Agreement shall be determined in accordance with the laws of the State of
Delaware.
(j) "everability. If any provision of the Plan or any Option
is or becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Option, or would disqualify the Plan or any
Option under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform the applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Option, such provision shall
be stricken as to such jurisdiction, Person or Option and the remainder of the
Plan and any such Option shall remain in full force and effect.
(k) Other Laws. The Committee may refuse to issue or transfer
any Shares or other consideration under an Option if, acting in its sole
discretion, it determines that the issuance or transfer of such Shares or such
other consideration might violate any applicable law or regulation or entitle
the Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Option shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Option granted hereunder shall be construed as an offer to
sell securities of the Company, and no such offer shall be outstanding, unless
and until the Committee in its sole discretion has determined that any such
offer, if made, would be in compliance with all applicable requirements of the
U.S. federal and any other applicable securities laws.
(1) No Trust or Fund Created. Neither the Plan nor any Option
shall create or be construed to create a trust or separate fund of any kind or a
fiduciary
<PAGE>
9
relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Option, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(m) No Fractional Shares. No fractional Shares shall be issued
or delivered pursuant to the Plan or any Option, and the Committee shall
deternune whether cash, other securities, or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractiQna1 Shares
or any rights thereto shall be canceled. terminated, or otherwise eliminated.
(n) Headings. Headings are given to the Sections and
subsections of the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
SECTION 16. Term of the Plan.
(a) Effective Date. The Plan shall be effective as of the date
of its approval by the shareholders of the Company.
(b) Expiration Date. No Option shall be granted under the Plan
after December 31, 2006. Unless otherwise expressly provided in the Plan or in
an applicable Option Agreement, any Option granted hereunder may, and the
authority of the Board or the Committee to amend, alter, adjust, suspend,
discontinue, or terminate any such Option or to waive any conditions or rights
under any such Option shall, continue after December 31, 2006.
U.S. FRANCHISE SYSTEMS, INC.
1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
U.S. Franchise Systems, Inc., a Delaware corporation (the
"Company"), hereby formulates and adopts the following 1996 Stock Option Plan
(the "Plan") for Non-Employee Directors of the Company.
1. Purpose. The purpose of the Plan is to secure for the
Company the benefits of the additional incentive inherent in the ownership of
Class A Common Stock, par value $.01 per share, of the Company ("Class A Common
Stock") by non-employee directors of the Company and to help the Company secure
and retain the services of such non-employee directors.
2. Administration. The Plan is intended to be a self-governing
formula plan. To this end, the Plan requires minimal discretionary action by any
administrative body with regard to any transaction under the Plan. To the
extent, if any, that questions of administration arise, these shall be resolved
by the Board of Directors of the Company (the "Board of Directors").
Subject to the express provisions of the Plan, the Board of
Directors shall have plenary authority to interpret the Plan, to prescribe,
amend and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary and advisable for the administration of the
Plan. The determination of the Board of Directors shall be conclusive.
3. Class A Common Stock Subject to Options. Subject to the
adjustment provisions of Section 13 below, a maximum of 125,000 shares of Class
A Common Stock may be made subject to options granted under the Plan. If, and to
the extent that, options granted under the Plan shall terminate, expire or be
canceled for any reason without having been exercised, new options may be
granted in respect of the shares covered by such terminated, expired or canceled
options. The granting and terms of such new options shall comply in all respects
with the provisions of the Plan.
Shares sold upon the exercise of any option granted under the
Plan may be shares of authorized and unissued Class A Common Stock, shares of
issued Class A Common Stock held in the Company's treasury or both.
There shall be reserved at all times for sale under the Plan a
number of shares, of either authorized and unissued shares of Class A Common
Stock, shares of Class A Common Stock held in the Company's treasury, or both,
equal to the maximum number of shares that may be purchased pursuant to options
granted or that may be granted under the Plan.
<PAGE>
4. Grant of Options.
(a) IPO Awards. Each person who is an Eligible Director (as
defined in Section 5) on the effective date of the initial public offering of
the shares of Class A Common Stock pursuant to an effective registration
statement under the Securities Act of 1933 (the "IPO Effective Date") shall
receive an option to receive 2,000 shares of Class A Common Stock on the IPO
Effective Date.
(b) Initial Awards. Each person who is first elected,
appointed or otherwise first becomes an Eligible Director after the IPO
Effective Date shall receive an option to purchase 2,000 shares of Class A
Common Stock as of the date on which such person first becomes an Eligible
Director.
(c) Subsequent Awards. On January 1st of each year, each
person who is an Eligible Director on such date will automatically receive an
option to purchase 2,000 shares of Class A Common Stock for service as a
director of the Company.
(d) Type of Options. All options granted under the Plan shall
be "nonqualified" stock options subject to the provisions of section 83 of the
Internal Revenue Code of 1986, as amended (the "Code").
5. Individuals Eligible. Only directors of the Company who are not
employees of the Company or any affiliate of the Company ("Eligible Directors")
shall participate in the Plan. A director receiving an option pursuant to the
Plan is hereinafter referred to as an "Optionee."
6. Price.
(a) The option price of each share of Class A Common Stock
purchasable under any option granted pursuant to the Plan on the IPO Effective
Date shall be equal to the offering price per share of Class A Common Stock in
connection with the registered initial public offering of the Class A Common
Stock.
(b) The option price of each share of Class A Common Stock
purchasable under any option granted pursuant to the Plan after the IPO
Effective Date shall be the Fair Market Value (as defined below) thereof at the
time the option is granted.
(c) For purposes of the Plan, "Fair Market Value" of a share
of Class A Common Stock shall mean:
(i) the mean between the high and low sales prices of
the shares of Class A Common Stock as reported on the composite tape for
securities traded on the New York Stock Exchange for the immediately preceding
trading date (or if not then trading on the New York Stock Exchange, the mean
between the high and low sales price of the shares of Class A Common Stock on
the stock exchange or
2
<PAGE>
over-the-counter market on which the shares of Class A Common Stock are
principally trading on such date), or if, there were no sales on such date, on
the closest preceding date on which there were sales of shares of Class A Common
Stock; or
(ii) in the event there shall be no public market for
the shares of Class A Common Stock on such date, the fair market value of the
shares of Class A Common Stock as determined in good faith by the Board of
Directors based upon the valuation of an independent appraiser.
7. Duration of Options.
(a) Each option granted hereunder shall vest and become
exercisable in full on the one year anniversary of the date such option is
granted; provided that the Optionee is in the service of the Company as a
director on such date. In the event of the termination of the Optionee's service
as a director of the Company prior to the one year anniversary of the date such
option is granted, such option shall automatically and without notice terminate
and become null and void.
(b) Notwithstanding any provision of the Plan to the contrary
(other than Section 7(a)), the unexercised portion of any option granted under
the Plan shall automatically and without notice terminate and become null and
void at the time of the earliest to occur of the following:
(i) The expiration of 10 years from the date on which
such option was granted;
(ii) The expiration of one year from the date the
Optionee's service with the Company shall terminate by reason of "Disability".
Termination by reason of "Disability" shall mean termination by reason of the
Optionee's becoming physically or mentally incapacitated and consequent
inability for a period of six months in any eighteen consecutive month period to
perform his services as a director to the Company;
(iii) The expiration of one year from the date of the
Optionee's death, if such death occurs during service as a director;
(iv) The date the Optionee's service with the Company
shall terminate by reason of "Cause". Termination by reason of "Cause" shall
mean termination by reason of participation and conduct during the performance
of services consisting of fraud, felony, willful misconduct or commission of any
act that causes or may reasonably be expected to cause substantial damage to the
Company or any of its affiliates; and
(v) The expiration of three months from the date the
Optionee's service with the Company terminates other than by reason of death,
Disability or termination for Cause.
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8. Exercise of Options.
(a) An option granted under the Plan shall be deemed
exercised when the person entitled to exercise the option:
(i) Delivers written notice to the Company at its
principal business office, directed to the attention of its Chief Financial
Officer, of the decision to exercise; and
(ii) concurrently tenders to the Company full payment
for the shares to be purchased pursuant to such exercise.
(b) Payment for shares with respect to which an option is
exercised may be made in cash, check or money order or by Class A Common Stock
owned by the Optionee for at least six months prior to exercise.
9. Nontransferability of Options. No option or any right evidenced
thereby shall be transferable in any manner other than by will or the laws of
descent and distribution, and, during the lifetime of an Optionee, only the
Optionee (or the Optionee's court-appointed legal representative) may exercise
an option.
10. Rights of Optionee. Neither the Optionee nor the Optionee's
executor or administrator shall have any of the rights of a stockholder of the
Company with respect to the shares subject to an option until certificates for
such shares shall actually have been issued upon the due exercise of such
option. No adjustment shall be made for any regular cash dividend for which the
record date is prior to the date of such due exercise and full payment for such
shares has been made therefor.
11. Right to Terminate Service. Nothing in the Plan or in any option
shall confer upon any Optionee the right to continue in the services of the
Company or affect the right of the Company to terminate the Optionee's service
at any time, subject, however, to the provisions of any agreement between the
Company and the Optionee.
12. Nonalienation of Benefits. No right or benefit under the Plan shall
be subject to anticipation, alienation, sale, assignment, hypothecation, pledge,
exchange, transfer, encumbrance or charge, and any attempt to anticipate,
alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or
charge the same shall be void. To the extent permitted by applicable law, no
right or benefit hereunder shall in any manner be liable for or subject to the
debts, contracts, liabilities or torts of the person entitled to such benefits.
13. Adjustment Upon Changes in Capitalization, etc. In the event that
the Board of Directors determines that any dividend or other distribution
(whether in the form of cash, shares of Class A Common Stock, other securities,
or other property), recapitalization, stock split, reverse stock split,
reorganization, merger,
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consolidation, split-up, spin-off, combination, repurchase, or exchange of
shares of Class A Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase shares of Class A Common Stock or other
securities of the Company, or other similar corporate transaction or event
affects the shares of Class A Common Stock such that an adjustment is determined
by the Board of Directors in its discretion to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Board of Directors shall, in such
manner as it may deem equitable, adjust any or all of (i) the number of shares
of Class A Common Stock or other securities of the Company (or number and kind
of other securities or property) with respect to which options may be granted,
(ii) the number of shares of Class A Common Stock or other securities of the
Company (or number and kind of other securities or property) subject to
outstanding options, and (iii) the grant or exercise price with respect to any
option or, if deemed appropriate, make provision for a cash payment to the
holder of an outstanding option in consideration for the cancellation of such
option.
14. Form of Agreements with Optionees. Each option granted pursuant to
the Plan shall be in writing and shall have such form, terms and provisions, not
inconsistent with the provisions of the Plan, as the Board of Directors shall
provide for such option.
15. Purchase for Investment. Whether or not the options and shares
covered by the Plan have been registered under the Securities Act of 1933, as
amended, each person exercising an option under the Plan may be required by the
Company to give a representation in writing that such person is acquiring such
shares for investment and not with a view to, or for sale in connection with,
the distribution of any part thereof. The Company will endorse any necessary
legend referring to the foregoing restriction upon the certificate or
certificates representing any shares issued or transferred to the Optionee upon
the exercise of any option granted under the Plan.
16. Termination and Amendment of Plan and Options.
(a) Unless the Plan shall theretofore have been terminated as
hereinafter provided, options may be granted under the Plan, as provided in
Section 4 hereof, prior to the tenth anniversary of the Effective Date (as
defined in Section 17) on which date the Plan will expire, except as to options
then outstanding under the Plan. Such options shall remain in effect until they
have been exercised, have expired or have been canceled.
(b) The Plan may be terminated or amended at any time by the
Board of Directors; provided, however, that (i) any such amendment shall comply
with all applicable laws and applicable stock exchange listing requirements,
(ii) the provisions of the Plan with respect to eligibility for participation or
the timing or amount of grants of awards and the option price shall not be
amended more than once every six months (other than to comport with changes in
the Code or the Employee Retirement Income Security Act of 1974, as amended, or
the regulations thereunder) and (iii) any amendment for which stockholder
approval is necessary to comply with
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any tax or regulatory requirement, including for theses purposes any approval
requirement which is a prerequisite for exemptive relief from section 16(b) of
the Securities Exchange Act of 1934 (provided that the Company is subject to the
requirements of such section as of the date of such action), shall not be
effective until such approval has been obtained.
(c) No termination, modification or amendment of the Plan,
without the consent of the Optionee, may adversely affect the rights of such
person with respect to any option previously granted under the Plan.
17. Effective Date of Plan. The Plan shall become effective upon
approval of the Plan by the Company's stockholders (the "Effective Date").
18. Government and Other Regulations. The obligation of the Company
with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations and such approvals by any governmental
agency as may be required, including, without limitation, the effectiveness of
any registration statement required under the Securities Act of 1933, as
amended, and the rules and regulations of any securities exchange on which the
Class A Common Stock may be listed.
19. Withholding. The Company's obligation to deliver shares of Class A
Common Stock in respect of any option granted under the Plan shall be subject to
any applicable federal, state and local tax withholding requirements. Federal,
state and local withholding tax, if any, due upon the exercise of any option,
may be paid in shares of Class A Common Stock (including the withholding of
shares subject to an option).
20. Separability. If any part of the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any portion of the Plan not declared to be
unlawful or invalid. Any Section or part of a Section so declared to be unlawful
or invalid shall, if possible, be construed in a manner which will give effect
to the terms of such Section or part of a Section to the fullest extent possible
while remaining lawful and valid.
21. Non-Exclusivity of the Plan. Neither the adoption of the Plan by
the Board of Directors nor the submission of the Plan to the stockholders of the
Company for approval shall be construed as creating any limitation on the power
of the Board of Directors to adopt such other incentive arrangements as it may
deem desirable, including, without limitation, the granting of stock options and
the awarding of stock and cash otherwise than under the Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
22. Exclusion from Pension and Profit-Sharing Computation. By
acceptance of an option, each Optionee shall be deemed to have agreed that such
grant is special incentive compensation that will not be taken into account, in
any manner, as salary, compensation or bonus in determining the amount of any
payment
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under any pension, retirement or other employee benefit plan of the Company or
any of its affiliates. In addition, such option will not affect the amount of
any life insurance coverage, if any, provided by the Company on the life of the
Optionee.
23. Governing Law. The Plan shall be governed by, and
construed in accordance with, the laws of the State of Delaware
7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statment No.
333-11427 of U.S. Franchise Systems, Inc. of our report dated August 9, 1996
(October 23, 1996 as to Note 11) appearing in the Prospectus which is a part of
such Registration Statement, and to the reference to us under the headings
"Selected Financial Data" and "Experts" in such Prosepectus.
DELOITTE & TOUCHE LLP
October 23, 1996
